The Author, Anurag Sahay is an Advocate practising in Supreme Court of India and Delhi High Court.
INTRODUCTION
The Indian Legislature has brought some sweeping changes in the Arbitration and Conciliation Act, 1996, (the Act) through the Arbitration and Conciliation (Amendment) Act, 2019 and has interalia changed the procedure for appointment of arbitrator under Section 11 of the Act. The Amendment Act replaces the authority of Courts to appoint arbitrators under Section 11 of the Act with the new envisaged Arbitral Institution (AI) that shall be designated by the Supreme Court of India or respective High Court of States. Further the AI should be graded by the Arbitration Council of India, formed under Section 43B (Part 1A) inserted by the Amendment Act of 2019. The Ministry of Law and Justice officially notified the 2019 Amendment Act on 30.08.2019, though the notification included amendment to Section 11, however Part 1A was not notified, as result AI has not yet been constituted. Therefore, rendering the aforesaid notification with regard to Section 11 effectively non est.
The Amendment Act also inserted Section 2 (1) (ca) in the Act, which provides the definition of an AI - an institution designated by the Supreme Court or High Court. Further Section 11 (3A) of the Amendment Act grants power to Supreme Court and High Court to designate an Arbitral Institution, which reads as:-
“(3A) The Supreme Court and the High Court shall have the power to designate, arbitral institutions, from time to time, which have been graded by the Council under section 43-I, for the purposes of this Act:
In the absence of the constitution of Arbitration Council of India and Arbitral Institution, Section 11 as it was prior to the 2019 amendment is still in operation and practice for appointment of arbitrators.
ANALYSIS
Arbitral Institutions have turned out of to be an effective mechanism to expedite the dispute resolution process worldwide, however establishment of AI in India has to be seen and analysed in the context of existing law for the appointment of arbitrator as well law further refined and evolved by the Supreme Court over the years. It is important to critically look at the Section 11 of the Amendment Act because of the vagueness in its applicability as well try to answer few axiomatic questions that the legislature should have cared to expound in the Amendment Act like the manner of appointment of arbitrator(s) by the AI and procedural rules to be adopted by the Institution; to remove the existing quandary.
- How many members would constitute an Arbitral Institution?
The Amended Act does not elaborate upon the frame work of the Arbitral Institution and leaves us with the mere enabling definition that it shall be designated by the courts, similarly it does not explain whether the Institution shall be a body of persons or even a single individual would suffice to constitute the Arbitral Institution in himself. Section 11 (3A) of the Amended Act of 2019 clearly provides there has to be a prior grading of an Arbitral Institution by the Arbitration Council of India and Section 43-I of the Amended Act as extracted herein below hints at general norms for the grading of the institution, based upon certain classifications:
“43-I. The Council shall make grading of arbitral institutions on the basis of criteria relating to infrastructure, quality and calibre of arbitrators, performance and compliance of time limits for disposal of domestic or international commercial arbitrations, in such manner as may be specified by the regulations”
Section 11 (3A) of the Amended Act introduces the word “graded”, so it is logical to assume that the intention of the Amended Act is to form classification within the Institution based on expertise. Though, grading of AI is a step in right direction but has to be formulated in way which eases the mechanism whereas the Amendment Act does not throw any light on the manner and procedure that the Arbitral Council shall adopt to grade the arbitrators or the Arbitral Institution shall adopt to appoint the arbitrators. So, clearly this aspect has to be better developed by the Council with the consultation of government under Section 43 (L) of the Amendment Act to make it free from complexities because the whole purpose of having an AI is to enhance the efficiency of the alternate dispute resolution process through arbitration.
- Which principles would the Arbitral Institution apply while adjudicating the applications?
Again the Amendment Act is silent about the rules and principles that the AI shall apply while deciding an application to appoint an arbitrator. The judicial courts over the time have interpreted and evolved the laws that govern the rationale behind deciding such applications today, and if the powers of adjudication are shifted to the Arbitral Institution now, it becomes paramount to know the guiding principles which the Institution shall rely upon while adjudicating the application. In essence Arbitral Institution’s only function is to decide whether the application to appoint arbitrator filed before it merits such appointment or not. Now, more often than not we have experienced that the non-applicant opposes such application for the appointment of the arbitrator and primarily pokes holes in the arbitration agreement, claiming the agreement to be unenforceable being void or intending otherwise. Here, the courts have played key role in shaping the law and setting the precedent while answering as to what objections by the opposite party could be considered valid and what ought to be rejected. The principles that Indian courts follow and apply today to decide Section 11 applications are a result of several judicial interpretation of Section 11 by the Supreme Court of India.
For example, the Supreme Court of India in a recent case of M/S Dharmaratnakara Rai & Other Charities & Ors. Vs M/S Bhaskar Raju & Brothers & Ors., Civil Appeal No. 1599 of 2020 has dealt with the proposition– “whether courts can appoint arbitrators based on arbitration agreement that is unstamped or insufficiently stamped,” Supreme Court held as under:-
“20. It can thus clearly be seen, that this Court has in unequivocal terms held, that when a lease deed or any other instrument is relied upon as containing the arbitration agreement, the Court is required to consider at the outset, whether the document is properly stamped or not. It has been held, that even when an objection in that behalf is not raised, it is the duty of the Court to consider the issue. It has further been held, that if the Court comes to the conclusion, that the instrument is not properly stamped, it should be impounded and dealt with, in the manner specified in Section 38 of the Stamp Act, 1899. It has also been held, that the Court cannot act upon such a document or the arbitration clause therein. However, if the deficit duty and penalty is paid in the manner set out in Section 35 or Section 40 of the Stamp Act, 1899, the document can be acted upon or admitted in evidence.”
Similarly, in Garware Wall Ropes Ltd. vs. Coastal Marine Constructions & Engineering Ltd, (2002) 2 SCC 388, Supreme Court has held that to appoint an arbitrator based on an agreement, it should not only full fill ingredients of a valid contract but also meet the mandate of Stamp Act, which are essential for the enforcement of any agreement, relevant portion is extracted herein below:-
“19. When an arbitration Clause is contained "in a contract", it is significant that the agreement only becomes a contract if it is enforceable by law. We have seen how, under the Indian Stamp Act, an agreement does not become a contract, namely, that it is not enforceable in law, unless it is duly stamped. Therefore, even a plain reading of Section 11(6A), when read with Section 7(2) of the 1996 Act and Section 2(h) of the Contract Act, would make it clear that an arbitration Clause in an agreement would not exist when it is not enforceable by law.”
Hence, the Arbitral Institutions will certainly have to make an adjudication upon the validity and enforceability of an arbitration agreement but such adjudications require considerations of legal arguments and precedents, therefore necessitating the Arbitral Institutions to have expertise on such and similar propositions. The greater issue which begs the attention is that – while deciding the validity of agreements, there are contentions such as which party had the liability to get the agreement stamped and whether that party failed to do so or deliberately caused delay to get it stamped, which are very relevant in deciding Section 11 applications. The contentions raised could be purely legal or factual and there is absolutely no clarity provided as to how would an Arbitral Institution deal with such contentions rendering Section 11 of the Amendment Act vague to an extent that it may become impossible in its applicability and we may witness a fleet of matters being referred to High Court for clarifications.
- Whether an appeal against the decision of the Arbitral Institution lie in Supreme Court or High Court?
Interestingly Section 11 (7) of the Act has been omitted by the Amendment Act of 2019. Now, omission of Section 11 (7) which barred any further appeal or LPA against the decision of the court deciding an application under Section 11(4), (5) and (6) of the Act and simultaneous non inclusion/addition of any parallel or revised provision to that effect, has only widened the scope of powers of judicial review of Supreme Court under Article 136 and High Court under Article 226 of the Constitution of India. Though, the Supreme Court of India by a 6:1 majority in S.B.P Co. vs Patel Engineering (AIR 2006 SC 450), had held that a decision passed by High Court being a judicial order is amenable to get challenged under Article 136 of the Constitution of India in the Supreme Court but omission of Section 11 (7) further opens the gates of judicial review under Article 226 of the Constitution of India by the High Court, because an Arbitral Institution of a State essentially shall be designated by a High Court, therefore making AI subordinate to it and amenable to review.
CONCLUSION
The Arbitral Council of India incorporated by the Amendment Act of 2019 has been reposed with the duty to observe that entire process of arbitration in India is swift, time bound and faces least interference by the courts India. But, there are certain voids in the Amendment Act which needs to be fulfilled to make the it less ambiguous to achieve the objective. The Council, after being brought into existence by the Ministry of Law and Justice will have to take care of aspects such as clarity on procedural rules, ambit and width of power to be exercised by the Arbitral Institutions especially in terms of adjudicating a legal issue, which only judicial courts have the power to adjudicate upon. Hence, it can be inferred that the establishment of Arbitral Institution in its current form is vague in its application and requires definite guidelines on the manner of adjudication and functionality lest it would potentially do more bad than good.
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