Arbitration And Conciliation In Resolving Disputes Is Still A Far Cry In India

Author 1: Ms Mishika Loonker, Institute of Law, Nirma University;

Author 2: Ms Divya Mehta, Institute of Law, Nirma University

“An ounce of mediation is worth a pound of arbitration and a ton of litigation!”

-Joseph Grynbaum

Introduction

This article discusses in detail the recent amendment made under the Arbitration and Conciliation Act, 1996 and also states the impact of it towards the end of the independence of the arbitration system through political interference.

With the onset of globalization, the connection between individuals and businesses grew all over the world. This boon on our economy came with a heavy price on our already overburdened judicial system due to the rise in the number of conflicts and disputes. This reflected the need for an alternative of litigation for speedy redressal to aggrieved parties.

Arbitration is an alternative dispute resolution procedure that is opted by the parties as an alternative to litigation. It is a consensual procedure where both parties agree to resolve their dispute through arbitration. In an arbitration proceeding, the dispute is settled either through a single arbitrator or by a panel of arbitrators. The arbitrator duly acts as a judge and will give an arbitral award which would be final and binding on both parties.^[1]

Conciliation is another form of alternative dispute resolution where parties attempt to seek an amicable solution with the aid of a neutral third party knows as a conciliator. It is a voluntary process where the parties themselves agree to resolve their issue through conciliation. However, the decision given by the conciliator is not the same as the judge because it is not binding on the parties.^[2]

Background

India is one of the largest economies in Asia, with a considerable number of arbitration actions involving Indian parties. India has changed its main statute, the Arbitration and Conciliation Act, 1996, multiple times in the last five years in order to make its legal system more conducive to international arbitration. The Arbitration Act was enacted to align the Indian arbitration realm with The UNCITRAL Model Law on International Commercial Arbitration, 1985 (the “Model Law”).[3] Over time, Indians have expanded their horizons globally to the Industry and Commerce sector resulting in a major increase in commercial transactions and documentation involving laws applicable in India and other jurisdictions. This, in turn, has resulted in the rise of disputes and due to complicated and different legal systems followed in various countries makes it harder to resolve these disputes. The government was encouraged to make these changes to the current legislation to meet the interests of the nation as well as the international arbitration society, given the increased use of arbitration in the legal arena to solve such disputes.

The Arbitration and Conciliation Act, 1996 in India has been subject to intermittently revisions in an effort to make India a proficient arbitration centre and an efficacious commercial destination by establishing a comprehensive dispute resolution framework that increases the scope of conducting business in India. The 1996 Act was introduced as an Ordinance for economic reforms urged by new economic policies.^[4] In 2001 and 2010, attempts to change the 1996 Act were made, both of which were unsuccessful and did not result in the Act being modified. Afterwards the Arbitration and Conciliation (Amendment) Act, 2015 was passed by both houses and got the President’s assent. The main goals of the revisions to the Act were to make arbitration more investor-friendly, cost-efficient, and suitable for effective and speedy case resolution, as well as to assist India in becoming a major international arbitration centre.^[5]

Further, the Arbitration and Conciliation (Amendment) Act of 2019 was introduced, which made additional changes to several provisions and sections. The legislature intended to press forward with measures to make arbitration more popular, public-friendly, and a viable alternative to litigation. The Amendment also created an opportunity for diverse professionals and specialists, such as advocates, chartered accountants and others, to participate in the arbitration by establishing certain pre-conditions regarding education and experience.^[6] The Arbitration & Conciliation (Amendment) Act 2021 is the recent addition to the pro-arbitration outlook. This is the third time the Act has been amended in the last six years, demonstrating the legislative aim to make India a more arbitration-friendly jurisdiction.^[7]

Recent amendments in Arbitration & Conciliation Act and its impact

These amendments have reduced the burden of the courts while simultaneously resolving disputes in a limited time frame. The amendments in 2021 were made due to the increasing corruption in obtaining arbitral awards. These modifications focused on the more liberal approach to arbitration. However, the aftermath of this amendment cannot be said to be favourable as it can devastate the arbitration system of India.

Does the insertion of a new proviso improve the Indian seated arbitration?

The Arbitration and Conciliation (Amendment) Act, 2021 is the third set of legislative reforms to the principal legislation. It makes two significant amendments to the act governing long-standing Indian disputes. These amendments pose two changes (I) when an unconditional stay can be granted by the court on the implementation of arbitral awards induced by fraud and corruption and (II) clarifies the criticisms on the limits imposed for being an arbitrator in India by the 2019 Arbitration (Amendment) Act.^[8]

By introducing a proviso to Section 36(3), the 2021 Act intends to clarify the stance on the question of an unconditional stay but only in circumstances of fraud or corruption. The provision is applicable with retrospective effect.^[9] This has been confirmed with the decisions in BCCI v Kochi Cricket Pvt. Ltd. and Hindustan Construction Co. v Union of India where it was made that Section 36 had to be applied retrospectively. It would apply to all court cases arising from or related to arbitral procedures, regardless of whether the arbitral or judicial proceedings commenced before or after the Amendment Act of 2015.[10]

However, due to this new proviso introduced to section 36 of the Arbitration Act, a few concerns may arise for the Court to decide in executing an arbitral award. To begin with, it is ambiguous what the “prima facie” test regarding fraud and corruption will demand.[11] Accusations of fraud and corruption can entail difficult factual and circumstantial issues that should be demonstrated through arguments and evidence. If the courts adopt a standard criterion that accepts allegations of fraud or corruption without any further proof or evidence, it may encourage parties to file such claims in order to impede enforcement efforts.

Secondly, the phrase “shall stay the award unconditionally” raises questions concerning judicial discretion. Some observers have claimed that the clause “shall stay” may be interpreted as imposing a compulsory stay in cases involving a prima facie charge of fraud or corruption, thereby removing any judicial discretion. Further, the new provision can also be interpreted as the courts’ discretion in enforcing any restrictions or conditions that has been exterminated where a case of prima facie allegation of fraud or corruption exists.^[12]

While the new Proviso is a step in the right direction, there are some key issues. Firstly, under Section 36(2) there should be an application before the court, for it to pass an order under section 36(3) and it must be impending before the court under Section 34. However, there is no provision in Section 34 for putting aside an award based on fraud or corruption. Secondly, there can be a counterargument that any agreement made under the influence of fraud or corruption will be void under the Indian Contract Act.[13]Furthermore, Section 34(2)(a)(ii) of the Arbitration and Conciliation Act mentions the provision for setting aside an award where “the arbitration agreement is not valid under the law to which the parties have subjected it” and therefore, the arbitration agreement formed under the influence of fraud or corruption will be void.

Lastly, the court can apply its judicial mind and can exercise its discretion before granting any stay order on the parties as it deems fit, therefore the command to unconditionally postpone enforcement in cases of corruption or fraud appears to be devoid of any logic or justification which ultimately leads to delay in arbitral proceedings.^[14]

Regardless of the fact that the 2021 Amendment defines the purview of the newly inserted proviso to Section 36(3) of the Act, it still has two significant problems. Firstly, when an application is pending before the court under Section 36(2) of the Act, the applicants are again required to file a fresh application in case of fraud and corruption as mentioned in the newly inserted proviso. This will involve increased costs and delay in the process. Secondly, when the Section 36(2) applications are dismissed. The applicants will not gladly submit additional petitions on a losing cause, especially in Indian courts, where it is not uncommon to find parties not attempting or devoting attention to a lost claim.

Does widening the scope of the arbitrator’s qualification proves advantageous to the arbitration and conciliation hub?

In the Arbitration and Conciliation (Amendment) Act 2019, eight schedules were introduced which established the minimal qualifications for serving as an arbitrator in India. It further laid down in detail all of the qualities needed to be certified as an arbitrator while also stating the educational requirements as well as the years of experience required for the same. Moreover, for selecting an arbitrator a list of character attributes was established as the general standards to be taken into account.

The Eight Schedule however has many drawbacks as most educational qualifications needed a minimum of 10 years of experience in the fields of law, accounting, Central Government services, and so on. As a result, young professionals with great skills and a desire to serve as an arbitrator were discouraged. Also, Section 24 of the Advocates Act, 1961 states that only citizens of India can become advocates which do not allow to appoint foreign nationals in the legal profession as an arbitrator in India.[15]

This brings out the amendments under section 43J of the 2021 Arbitration and Conciliation (Amendment) Act and deletion of  Eight Schedule to address all of the objections levelled at the appointment of arbitrators and their minimum qualification required under the 2019 Amendment Act.^[16] Furthermore, in the case of Bar Council of India v. A.K. Balaji, it was determined that overseas lawyers are not prohibited from conducting arbitration procedures in transnational business issues subject to Indian law.^[17]

By eliminating the Eighth Schedule from the 2021 amendment act, the scope of appointing arbitrators is widened and it has given us an opportunity to select arbitrators of our choice but it also has a drawback that the arbitrator can be incompetent as the eligibility criteria are removed. Further, a duty has been imposed on the parties, Council and Courts to re-verify the arbitrator’s competence and they must proceed with extreme caution when choosing arbitrators under the 2021 Amendment Act.[18]

Conclusion

The goal of the Arbitration and Conciliation Act, 1996 in India is to promote both domestic and international arbitration as stated under the principle of Model Law. The Act saw some remarkable revisions over the year, demonstrating India’s promising endeavour to promote arbitration and make India a pro-arbitration hub. The 2021 amendment act has tried to meet the current demands and solve all the issues raised against the act but India has a long way to go because there are numerous additional difficulties to be rectified and the 2021 act has certain drawbacks to look at upon.

There has been an abrupt shift from Indian courts pro-enforcement approach to allow courts to grant an unconditional stay in the prima facie cases of fraud and corruption on the execution of an arbitral award due to the introduction of the 2021 Amendment Act, consequently, there has been a rise judicial intervention in arbitral proceedings and it becomes contrary to the goal of using arbitration as a means of resolving disputes by putting significant pressure on India’s judicial system. Furthermore, this order of an unconditional stay based on the prima facie presumption of fraud or corruption may potentially damage the arbitrator’s reputation.

Moreover, United Nations Commission on International Trade Law’s 1985 Model Law on Arbitration asserts that the qualification for appointment of an arbitrator can be based on a person’s nationality.^[19] The 2021 amendment also creates a very liberal scope to become an arbitrator. However, it brings an ambiguity in the appointment of an arbitrator and their credibility is also questioned.

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^[1] Dr. (CA) Rajkumar S. Adukia, A practical guide on the concept and practice of arbitration, (1st Edn, Rishabh Academy Private Limited 2016).

^[2] Rohan Jhusiwala, Conciliation in India: An Overview, PSA, August 2010, https://psalegal.com/wp-content/uploads/2017/01/DisputeResolutionBulletin-IssueVII08092010070309PM.pdf.

^[3] UNITRAL Model on International Commercial Arbitration 1985.

^[4] Arbitration and Conciliation Act 1996.

^[5] Arbitration and Conciliation (Amendment) Act 2015.

^[6] Arbitration and Conciliation (Amendment) Act 2019.

^[7] The Arbitration & Conciliation (Amendment) Act 2021.

^[8] Arbitration and Conciliation (Amendment) Ordinance 2020.

^[9] Arbitration and Conciliation (Amendment) Act 2021, s 36(3).

[10] BCCI v. Kochi Cricket Private Limited, (2018) 6 SCC 287, Hindustan Construction Company v. Union of India, 1967 AIR 526.

[11] Subhiksh Vasudev, ‘The 2020 Amendment To The Indian Arbitration Act: Learning From The Past Lessons?’ <http://arbitrationblog.kluwerarbitration.com/2020/12/10/the-2020-amendment-to-the-indian-arbitration-act-learning-from-the-past-lessons/> accessed 15 July 2021.

^[12] Shubham Joshi, ‘IMPLICATIONS OF THE ARBITRATION AND CONCILIATION (AMENDMENT) ACT, 2021: ENSURING (UN)EASE OF DOING BUSINESS IN INDIA?’ <http://rsrr.in/2021/04/20/implications-of-the-2021-arbitration-amendment-act/> accessed 15 July 2021.

^[13] Indian Contract Act 1872.

^[14] Arbitration and Conciliation Act 1996, s 34.

[15] The Advocates Act 1961.

^[16]Arbitration and Conciliation (Amendment) Act 2021, s 43J.

^[17] Bar Council of India V. A.K. Balaji, (2018) 5 SCC 379.

[18] Arbitration and Conciliation (Amendment) Act 2021, sch 8.

^[19] UNITRAL Model on International Commercial Arbitration 1985, art. 12.