Introduction
The Arbitration and Conciliation Act, 1996 (“the Act”) was enacted in 1996 to repeal and replace the Arbitration Act, 1940 and other ancillary Acts. It was considered a pathbreaking Act since, to a great extent, it institutionalised the forum of Arbitration in India and introduced various sweeping changes based on the UNCITRAL Model Law on International Commercial Arbitration and the UNCITRAL Conciliation Rules adopted by the United Nations Commission on International Trade Law (UNCITRAL). Arbitration was considered to be the saviour to a judiciary creaking from an alarming number of cases. It was considered to be a fast-track route to dispute resolution. However, the reality has been quite contrary.
Almost 20 years later, the Government felt that the Act requires urgent changes and since Parliament was not in session, it promulgated an Ordinance titled, The Arbitration and Conciliation (Amendment) Ordinance, 2015. This Ordinance was promulgated by the President on 23rd October, 2015 and is in force from that date. The Ordinance has introduced several changes to the Act, which are intended to speed up the process and improve the quality of arbitration. Under the Constitution of India, an Ordinance must be laid before both the Houses of Parliament and shall cease to operate as an Ordinance after six weeks from the reassembly of Parliament. Thus, the Government must come out with an Amendment Act within this time or another Ordinance.
As is the case with several enactments, there is often a slip between the cup and the lip and the best of intent is set to naught! The Ordinance contains a few good amendments and a few not so good ones. Let us examine some crucial changes introduced by this Ordinance and how some of these could actually derail the process of arbitration!
Arbitrators’ Fees Capped
An extremely innovative concept introduced by the Ordinance is that of fixing the fees of the arbitrators. The High Court is empowered to frame Rules for the fees of the arbitrators after considering the rates specified in the Schedule to the Ordinance. The Schedule lays down model fees on an ad valorem basis with a cap on the maximum fees which can be charged. The sliding scale provides for a minimum fee of Rs.45,000 for a dispute in which the sum involved is up to Rs.5 lakh. The maximum slab is in case of a dispute in which the sum involved is above Rs.20 crore, in which case the fees are Rs.19.87 lakh + 0.5% of the claim above Rs.20 crore. However, the maximum fees cannot exceed Rs.30 lakh. This is probably one of the few instances of a Central Enactment laying down fees. While the lawyers and other consultants appearing before the arbitrators can charge any amount of fees, the arbitrators are constrained by the Ordinance! Moreover, what happens if the arbitrators actually spend more time and effort in hearings, gathering evidences, etc., than the fees prescribed by the Ordinance? Would this in fact not reduce the supply of good arbitrators? Fees are a matter of demand and supply and commercial negotiation between the parties to the dispute and the arbitrators. One wonders where is the need for legislative intervention in this? Would this not disincentivise good arbitrators?
The Ordinance provides an escape route by stating that the limit on fees would not apply to international commercial arbitrations and those arbitrations which are as per the rules of an arbitral institution. Thus, for instance, if parties to the dispute agree to hold the arbitration as per the Rules of the Indian Council of Arbitration, then the fee schedule prescribed by the Council would not apply.
No more Recusing oneself afterwards
The Ordinance seeks to lay down under what scenarios an arbitrator would be considered as having a conflict of interest scenario with the parties to the dispute. Thus, instead of allegations of conflict cropping up later on and the arbitrator recusing himself, the law upfront states what is a conflict.
Where there is existence of a direct or indirect past or present relationship of the arbitrator either with any of the parties to the dispute or in relation to the subject matter of the dispute, then he must disclose such interest, in writing, before accepting appointment. The interest could be financial, business, professional or any other kind which is likely to give rise to justifiable doubts as to his independence or impartiality.
While a good part of this was already contained in the Act, the Ordinance seeks to provide the grounds which shall guide in determining whether or not circumstances exist which give rise to justifiable doubts as to his independence or impartiality. A long list of 34 such circumstances has been given, classified under the following grounds:
- Arbitrator’s relationship with the parties to the dispute or their counsel
- Arbitrator’s relationship to the dispute
- Arbitrator’s direct or indirect interest in the dispute
- Previous services for one of the parties or other involvement in the case
- Relationship between an arbitrator and another arbitrator
- Relationship between an arbitrator and counsel
- Relationship between an arbitrator and parties to the dispute or their affiliates
- Other circumstances.
This specific list of circumstances would remove any ambiguity as to whether or not there is any conflict of interest in a given case. If the arbitrator is of the view that there exist circumstances of the type specified in the Ordinance, then the format in which the disclosure is to be made has also been laid down.
Magical Time limit for completion
Just as in the fairy tale, Cinderella had a time limit of getting home by 12 midnight, an arbitration award must now be made within a period of 12 months from the date of reference to the arbitral Tribunal! The date of reference is the date on which all the arbitrators have received written notice of their appointment. Thus, there is a maximum period of 12 months to dispose of the arbitration. If the parties consent, the 12 months period can be extended by a maximum further period of 6 months. Any extension beyond 6 months cannot be granted by the parties.
After this extended period of 18 months, only the Court would have powers to extend the period or else the mandate of the arbitrators would terminate. While the intent is to speed up the process, this may actually retard the process. Lobbing the ball back to the Court would be a step backwards.
While granting the extension, the Court may substitute one or all of the arbitrators and if such a substitution does take place, then the substituted arbitrators would be deemed to have been appointed from inception and the proceedings would continue from the stage where they ended before the earlier panel of arbitrators. Further, the new arbitrators would have deemed to have received the evidence and material already on record. Is this not an extremely strange position? What if all the arbitrators are replaced and all evidence / witnesses / submissions were already heard by the earlier panel? The new panel would be expected to pronounce its award without examining the witnesses, without hearing the submissions once again, etc. They would have to rely solely on the papers before them. All the best to the new arbitrators for jumping on to a running train.
Carrot and Stick approach for Arbitrators
Another novel concept introduced is the success fee and penalty clause for arbitrators. If the arbitrators complete an arbitration within 6 months from the date of reference (instead of the available 12 months), then they shall be entitled to such additional fees as the parties decide. Thus, there is an incentive for completing the job earlier. The law also presents a stick to the arbitrators. If the Court extends the arbitration beyond 18 months but while doing so finds that the delay is attributable to the arbitrator’s fault, then it may reduce the arbitrator’s fees by a maximum of 5% for each month of delay. Thus, if the Court is of the view that the entire delay over 12 months was due to the fault of the arbitrator, then it may deduct 5% * 6 = 30% of the fees! Who wants to be an arbitrator is going to be the name of the new game!
Fast Track Procedure
One good concept is that of a fast track arbitration. If the parties agree then they can opt for this instead of the regular procedure. In this case, there may be a sole arbitrator who shall only admit written submissions. There would not be any oral hearings unless all the parties so request or unless the arbitrator considers it necessary for certain clarifications. Technical formalities may also be disposed of by the arbitrator. However, the award must be made within a period of 6 months from the date of reference. The model fees and maximum fees would not apply in the case of a fast track procedure.
Award against Public Policy
One of the grounds for setting aside an arbitration award by a Court is, if it finds that the award is in conflict with the public policy of India. The Act provided that this was a general phrase which could have several grounds. It only stated that an award made by fraud or induced by corruption would be one of them. This gave an open field to the parties to challenge the award, thereby delaying the dispute resolution process.
The Ordinance has come out with an exhaustive and restrictive meaning of the term ‘conflict with the public policy of India’ as a ground for challenging an award. Only where making of the award was induced or affected by fraud or corruption, or it is in contravention with the fundamental policy of Indian Law or is in conflict with the most basic notions of morality or justice, the award shall be treated as against the Public Policy of India.
Conclusion
Internationally, an arbitration is usually completed within a year (even though it may not be a legal binding to do so). In India, arbitrations are nefarious for lingering on. In this scenario, when the time limit is set by law, is it helpful? While the idea behind the Ordinance is a noble one, that of speeding up and improving the quality of arbitration so as to lessen the load of the judiciary, one wonders whether the pill may in fact be worse than the ill!
Is this a knee-jerk reaction to improving India’s ease of doing business ranking or is it a well-thought out longterm strategy is something which time will tell. Has the Government unwittingly unleashed a double-edged sword, one which would speed up the arbitration process but may also reduce the number of arbitrators? It would be worthwhile to remember that those who live by the sword, often perish by it!!
