30 October 2015

Reform of Dispute Resolution Processes in India

This article considers changes brought about by two Ordinances recently promulgated by the President of India: (i) the Arbitration Ordinance which amends the Indian Arbitration Act; and (ii) the Commercial Courts Ordinance, which provides for the establishment of Commercial Courts across India.  Their aim is to provide for a more efficient process for international parties to resolve their disputes with Indian entities.  However, their effect in practice remains to be seen.

One of the key frustrations for international parties who are drawn into disputes with Indian entities is the pace of the onshore dispute resolution process, both in terms of arbitrations seated in India as well as proceedings before the Indian courts.  Indeed the latest World Bank survey on Doing Business 2016 ranks India 178th on ease of enforcement of contracts, largely on account of delays.[1]  Two recent Ordinances aim to create a more efficient environment for dispute resolution in India.

On 23 October 2015, the President of India promulgated the Arbitration and Conciliation (Amendment) Ordinance, 2015 (the Arbitration Ordinance), which amends the Indian Arbitration and Conciliation Act 1996 (the 1996 Act).[2]  This follows a protracted period of discussion about potential amendments to the 1996 Act in light of confusing and often conflicting judicial interpretations.  The main thrust of the amendments is to attempt to provide for a quicker process in respect of arbitrations seated in India and to limit the scope of interference with foreign arbitration proceedings and awards.

On the same date, another ordinance – called the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Ordinance, 2015 (the Commercial Courts Ordinance) – was also promulgated.  The Commercial Courts Ordinance seeks to expedite the resolution of commercial disputes over a specified value, including matters relating to arbitrations, by setting up specialised commercial courts with an amended Code of Civil Procedure applying and experienced judges presiding.

The long-awaited amendments to the Arbitration Act and the establishment of specialised courts represent a major step in a positive direction and reflect the Government’s desire to increase confidence in dispute resolution in India.  In principle, the changes do provide for a more efficient and effective avenue for foreign investors to resolve their disputes with Indian counterparties.  As a result they are likely to be widely welcomed.  However, whether the changes are effective in practice will of course depend on the approach to implementation in India.

In this bulletin we discuss the reforms which are likely to be of interest to international parties investing in India.  We conclude by recommending that, for high value contracts in particular, it remains preferable for foreign parties to refer disputes to arbitration outside India rather than rely on the domestic dispute resolution process.

Revisions in relation to arbitrations seated in India

Measures aimed at expeditious dispute resolution

The principal revisions in relation to arbitrations seated in India (which are covered by Part I of the 1996 Act) are aimed at increasing the efficiency of the process.  There is now a requirement for Indian seated arbitrations to be concluded within 12 months of the constitution of the tribunal.  The parties can, however, extend that period by a further six months by consent.[3]  Extensions thereafter require the Court’s permission, and may only be granted upon a showing of “sufficient cause”, failing which the tribunal’s mandate shall automatically terminate.  When extending the period beyond 18 months the Court has various powers, including substituting one or all of the arbitrators.

This is a very unusual provision: there is no equivalent limitation on the duration of arbitration proceedings imposed at any of the most popular international seats (London, Paris, Hong Kong or Singapore).  Whilst on one level it may appear to be a sensible way of speeding up the onshore process, in practice it may pose practical problems, not least because a period of 12-18 months is a comparatively short timeframe, and the effect of the deadline expiring before the arbitration is concluded is that the mandate of the arbitrators expires.  In particular, there is a risk of a party seeking to delay progress in the arbitration so as to time-out the arbitration under s.29A(4) and the risk of delay whilst applications are made to court for extensions of time under s.29A(5).  It will be important for Courts to decide such applications very promptly.

The new s.29B to the Arbitration Ordinance sets out the procedure for fast track arbitration, which the parties can agree to at any point before the appointment of arbitrators: in the case of fast track arbitrations, the final award must be issued within six months of the tribunal’s constitution.  If the fast track award is not made within six months, the parties can agree to extend the period for the making of an award for not more than six months and, thereafter, extensions require the Court’s permission on the same “sufficient cause” basis as referred to above.[4]

Other sensible measures include the use of costs orders to deter dilatory conduct and frivolous applications.  For instance, a proviso to s.24 states that the tribunal “shall not grant any adjournments unless sufficient cause is made out, and may impose costs including exemplary costs on the party seeking adjournment without any sufficient cause”.  S.31A now prescribes the general rule that the unsuccessful party will be ordered to pay the costs of the successful party and sets out the circumstances which a Court or tribunal must take into account when determining costs.  The ability to recover costs against claimants pursuing unmeritorious claims is helpful and will hopefully discourage frivolous applications to the Indian Courts under Part I of the Act.  A further helpful provision is the requirement for applications to set aside awards under s.34 to be determined by the Courts within twelve months.

Provision is also made in the amended s.12 to introduce a disclosure obligation on arbitrators which is in line with international standards.  There is an innovative attempt to provide a non-exhaustive list of circumstances which may give rise to justifiable doubts as to independence and impartiality in Schedule 5 and a list of circumstances which will prevent the arbitrator from being appointed in Schedule 7.  Setting aside awards under Part I - Public policy

Aside from the provisions on efficiency, the most notable substantive change in respect of arbitrations seated in India relate to the grounds on which an Indian court may set aside an award for being in violation of Indian public policy under s.34.  Prior to amendment, the scope of public policy under s.34 had been interpreted broadly by the courts.  In particular, in ONGC v Saw Pipes (2003) [5] the Supreme Court held that public policy in this context encompassed “patent illegality”.  Although the Supreme Court stated that illegality of a trivial nature would not be sufficient, the decision was widely criticised in the international community, because it opened the door for the Indian courts to review awards rendered in Indian seated arbitrations on the merits.

The amended s.34 now provides for a dual regime to deal with applications to set aside awards rendered in (i) international commercial arbitrations seated in India (including in particular arbitrations involving a foreign company) and  (ii) domestic arbitrations seated in India (i.e. arbitrations between Indian parties).

In relation to (i), the grounds on which an award rendered in an international commercial arbitration seated in India may be set aside on account of public policy have been narrowed to effectively exclude “patent illegality” and to preclude a review on the merits of the dispute.  This is in line with the scope of the public policy exception as it applies to the enforcement of foreign awards (see below) and represents a welcome change.

This change is effected by the new Explanation 1 to s.34(1) which lays down an exhaustive list for when an award may be in conflict with the public policy of India, namely if:

  1. the making of the award was induced or affected by fraud or corruption or was in violation of s.75 (relating to confidentiality in conciliation) or s.81 (relating to admissibility of evidence in conciliation) of the 1996 Act;
  2. it is in contravention with the fundamental policy of Indian law; or
  3. it is in conflict with the most basic notions of morality or justice.

A further explanation clarifies that in determining whether an award contravenes ‘the fundamental policy of Indian law’, the Indian courts shall not undertake a review of the award on the merits of the dispute.

In contrast, the new s.34(2A) provides that in domestic arbitrations (i.e. arbitrations involving only Indian parties and seated in India) awards may also be set aside on the additional ground of “patent illegality appearing on the face of the award”.  This effectively provides statutory recognition to the holding of the Supreme Court in ONGC v Saw Pipes.  However the proviso to s.34(2A) also states that “an award shall not be set aside [for patent illegality] merely on erroneous application of the law or by re-appreciation of evidence”.  This appears to be an attempt to narrow the concept of patent illegality by excluding from its application certain presumably less fundamental errors of law.  Exactly how the two parts of s.34(2A) will be interpreted together in practice will remain to be seen.

Commercial Courts

Another way in which the Arbitration Ordinance seeks to encourage efficiency is by providing that the High Court will have jurisdiction to hear applications relating to international commercial arbitrations seated in India and foreign seated arbitrations (by way of amendments to ss.2(e) and 47 of the 1996 Act).  These provisions need to be read in conjunction with the Commercial Courts Ordinance.

The Commercial Courts Ordinance seeks to reform the civil justice system by setting up specialised commercial courts to deal with commercial disputes over a certain value.Specifically, it provides for the establishment of Commercial Divisions/Courts as well as Commercial Appellate Divisions presided by judges who have experience and expertise in commercial disputes.Upon establishment of the Commercial Courts and Divisions, all ‘commercial disputes’ (as defined in the Ordinance) with a specified value in excess of INR 1 crore (approximately USD 150,000) would be decided by such courts.

Further, in order to reduce delays in disposal of commercial cases, the Ordinance amends the Code of Civil Procedure (1908) in so far as it applies to the Commercial Courts and Divisions.  Among other things the amendments to the Code of Civil Procedure provide for the Commercial Courts and Divisions to determine whether costs are payable by one party to another, with the general rule being that the unsuccessful party will be ordered to pay the costs of the successful party.They also provide that the Court shall ensure that arguments are closed not later than six months from the date of the first case management hearing.

With the procedure set out in the Commercial Courts Ordinance and the presence of a specialised judiciary, the hope is that going forward, matters referred to the Commercial Courts and Divisions will be dealt with in a more efficient and timely manner.  However, in practice there is already a significant backlog of cases pending before the High Courts in India.[6]  In addition, the effectiveness of these provisions will of course depend on the implementation, not only by the Courts, but the degree to which those participating in the process respect both the spirit and the letter of the reforms.

Revisions in relation to arbitrations seated outside India

Interim measures

Section 9 of the 1996 Act, which is contained in Part I, sets out the power of the Indian Courts to grant interim measures in support of arbitration proceedings.  Historically there have been conflicting decisions as to whether Part I of the Act applied to foreign seated arbitrations.In Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc (BALCO),[7] and decisions thereafter, the Supreme Court confirmed that Part I of the 1996 Act does not apply to foreign seated arbitrations.  As a result, a party to an arbitration seated outside India had no means to seek interim measures from the Indian Courts under s.9.

That concern has been addressed by the addition of a new proviso in the Arbitration Ordinance which expands the applicability of s.9 to foreign seated arbitrations.[8]  As a result, foreign parties who submit disputes to arbitration outside India can now seek interim measures from the Indian courts against Indian counterparties.

It is worth noting however, that in response to the case law pre-dating BALCO, it was common for contracts involving Indian parties to expressly exclude the application of Part I of the 1996 Act, even where the contract provided for foreign seated arbitration. This was done in order to minimise intervention by the Indian Courts in foreign arbitrations.Parties to such contracts will probably not be able to avail the benefit of the amendment to s.9.[9]

Enforcement of foreign awards - Public Policy

Section 48 of the 1996 Act, which is contained in Part II, sets out the grounds on which enforcement of a foreign award may be resisted, including in respect of public policy.  In the case of Shri Lal Mahal Ltd v Progetto Grano Spa[10] the Supreme Court confirmed that the scope of the public policy exception for foreign awards was narrow and did not include “patent illegality” (see above).  This approach has been incorporated in the amendments to the 1996 Act, such that the grounds for resisting enforcement are limited and do not include a review of the merits.  This is in line with international practice as well as the principles enshrined in the New York Convention.

Recognition of emergency arbitrator’s awards

One notable omission is that no express provision has been added to allow for the enforcement of awards or orders rendered by emergency arbitrators.  This was suggested by the Law Commission’s report but has not been adopted in the Arbitration Ordinance.  The rules of most international arbitral institutions (such as the LCIA, ICC, HKIAC and SIAC Rules) provide for emergency arbitration, as do the rules of some domestic Indian arbitral institutions and the increasing trend is for the arbitration laws at international seats to expressly provide for the enforcement of emergency arbitrator awards or orders.  In the absence of an express provision in the 1996 Act, it remains unclear whether Indian courts will enforce orders or awards issued by emergency arbitrators, seated in India or abroad.  As a result, foreign parties, who wish to seek interim measures against Indian counterparties before the constitution of the arbitral tribunal, may need to go to the Indian Courts under s.9 rather than rely on relief from an emergency arbitrator.

Conclusion

One of the stated objectives behind the introduction of the Arbitration Ordinance and the Commercial Courts Ordinance is to improve the ease of doing business in India and attract more foreign investment.  These reforms represent a major step in a positive direction.  There are however some potential pitfalls in terms of the amendments to the 1996 Act, as we set out above.  In terms of the new Commercial Courts, it remains to be seen how efficiently they will operate in practice.

Given the number of cases already pending before the High Courts and historic propensity for significant delay within the Indian judicial system, it is reasonable for foreign investors to remain cautious about disputes with Indian counterparties being subject to the jurisdiction of the Indian courts (whether directly, or through the supervisory jurisdiction of the Indian courts over arbitrations seated in India).  In light of the above, we recommend that for high value contracts in particular, it remains preferable for foreign parties to refer disputes to arbitration outside India rather than rely on the domestic dispute resolution process.

Note: Regulation prohibits foreign law firms from practising Indian law or from having our own office in India. Our India Group is made up of some 100 partners and associates who have a long track record of working on India-related matters. We have played a leading role advising international and Indian clients on international aspects of many high-profile deals and disputes in recent years. Our excellent working relationships with the leading Indian law firms allows us to provide a seamless and full range of legal services to clients.

 

[1]   http://www.doingbusiness.org/data/exploreeconomies/india/

[2]   In India, although the primary legislative power lies with Parliament, the President of India can promulgate Ordinances when either of the two houses of the Parliament is not in session.  An Ordinance has the same force as an Act of Parliament, save for the fact that it lapses if it is not approved by the Parliament within six weeks of its next session.  The President of India can re-promulgate an Ordinance after it has lapsed. As there is no limitation on the number times an Ordinance can be re-promulgated, an Ordinance can in theory remain in effect for an indefinite period. The 1996 Act was preceded by the Arbitration and Conciliation Ordinance 1996, which had to be promulgated twice as the Parliament could not enact the law in the required time period.

[3]   See s.29A.

[4]   See s.29B(5).

[5]   Oil and Natural Gas Corporation Limited v Saw Pipes Limited (2003) 5 SCC 705.

[6]   http://www.thehindu.com/opinion/editorial/pending-cases-pileups-at-high-courts/article7170959.ece

[7]   [2012] 9 SCC 552.

[8]   Section 2(2).

[9]   Albeit we have seen some contracts which exclude the applicability of Part I "save for s.9".

[10]  [2014] 2 SCC 4.

Frances van Eupen +852 2974 7033
Partner, Hong Kong frances.vaneupen@allenovery.com
Rishab Gupta +44 20 3088 3299
Senior Associate, London rishab.gupta@allenovery.com
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Associate, Singapore kirtan.prasad@allenovery.com

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