Navigating Commercial Disputes: The Draft Arbitration and Conciliation (Amendment) Bill, 2024 – An Analysis

Watch the accompanying podcast: The Arbitration Amendment Bill, 2024, with Justice Rajiv Shakdher

Introduction

The Department of Legal Affairs, Ministry of Law & Justice, Government of India, recently unveiled the draft Arbitration and Conciliation (Amendment) Bill, 2024, and invited public feedback on its provisions. This Bill, which seeks to amend the Arbitration and Conciliation Act, 1996, proposes extensive changes aimed at transforming the arbitration framework in India. However, these transformative changes risk reversing the progress achieved over the past decade and appear reminiscent of the ONGC v. Saw Pipes arbitration framework.

Proposed Creation of an Appellate Arbitral Tribunal (AAT)

One of the most radical changes proposed is the creation of an Appellate Arbitral Tribunal (“AAT”). The Amendment Bill empowers arbitral institutions to establish an AAT, which would have the authority to entertain Section 34 applications for setting aside arbitral awards. As per the proposed amendment, “where parties have agreed to take recourse to an appellate arbitral tribunal”, no application for setting aside an arbitral award can be filed before the court. However, for ad hoc arbitrations or cases where a party has not approached the AAT, the authority to adjudicate Section 34 applications will continue to reside with the court.

This is likely to result in two distinct regimes: one governed by the AAT and another by the courts, each with unique procedures. This dual system may lead to two divergent streams of jurisprudence, potentially causing confusion and inconsistency within the legal framework.

The Unnecessity of Section 34 Amendments

In Section 34(2), minor and wholly unnecessary amendments are proposed to the language of sub-sections (iii) to (v), which risk disrupting a decade of well-established jurisprudence.

Further, a new sub-section (1A) is proposed to be added to Section 34, requiring a party filing an application under Section 34(1) to provide “a disclosure with respect to any challenge, pending or decided, in relation to all arbitral awards, if any, arising from disputes between the parties originating from a common defined legal relationship, whether contractual or not”. The purpose of such a disclosure remains unclear and appears to be entirely unnecessary.

The inclusion of sub-section (1B) is particularly curious. This provision states that “the Court or an appellate arbitral tribunal shall, prior to hearing an application under this Section, formulate specific grounds that arise, and the application may thereafter be heard based on whether the said grounds are made out or not”. However, this is immediately followed by a proviso that asserts, “…nothing in this sub-section shall be deemed to take away or abridge the power of the Court to hear subsequently, for reasons to be recorded in writing, any other grounds not formulated by it earlier” thereby effectively nullifying the main provision.

Extension of the Patent Illegality Test to ICA

Importantly, the patent illegality test has now been extended even to international commercial arbitration (ICA). In effect, this amendment reintroduces the regime established in ONGC v. Saw Pipes. Instead of advancing Indian arbitration by removing the patent illegality test from domestic arbitration and aligning it with ICA, the reverse seems to have occurred. This regressive move is likely to discourage ICA from choosing India as a seat and may also prompt larger domestic arbitrations to opt for alternative jurisdictions.

Partial Setting Aside of Awards

The Bill does include a progressive provision allowing for the partial setting aside of an arbitral award. However, it would have been prudent for the Bill to clarify that such partial setting aside is permissible only if the offending portion of the award is severable from the rest, as opined by the Delhi High Court in National Highways Authority of India vs. Trichy Thanjavur Expressway Ltd.

Increased Litigation under Section 37

An appeal from both the Court and the AAT shall lie before the court under Section 37. This raises concerns about the increased volume of litigation and the additional burden on Section 37 courts, which would need to handle two distinct types of appeals governed by different procedures.

The introduction of an appellate provision under Section 11, allowing appeals against refusals to appoint arbitrators, may also lead to significant delays in arbitrator appointments. This three-tiered process could inundate the courts with unnecessary litigation.

Seat and Jurisdiction

There is a significant change proposed to Section 2(2). According to the amendment, while maintaining that Part I shall apply when the “place” of arbitration is in India, the provisions of Sections 9, 27, and 37(1)(3) shall apply to all arbitrations, even if the “seat” is outside India, provided an arbitral award made or to be made in such “place” is enforceable and recognized under the provisions of Part II of the Act. This is a welcome amendment if used judiciously. Such an amendment could grant Indian courts jurisdiction over domestic parties that opt for arbitration outside India, a power lacking in the current framework. The substitution of the term “place” with “seat” in one part of the proviso aligns the language with India’s seat-centric arbitration framework. Notably, the decision not to amend the second reference to “place” is judicious, given that not all foreign jurisdictions adhere to a seat-centric framework.

The Bill proposes the addition of a new Section 2A and an amendment to the definition of “Court” under Section 2(1)(e). It also suggests two options for amending Section 20.

If the first option, which aligns with the recommendations of the 246th Law Commission Report, is adopted, the combined effect of these three amendments will be – in domestic arbitration and ICA (including arbitration conducted through audio-visual means) – where the parties have agreed to a seat, the court with pecuniary and territorial jurisdiction over the seat of arbitration will have supervisory jurisdiction over the arbitration. Where the parties have not agreed upon a seat, either in the arbitration agreement or before the arbitral tribunal, the court with supervisory jurisdiction will be determined in accordance with the Code of Civil Procedure, 1908, broadly embodied in Sections 16 to 20 thereof, even though the amendments do not explicitly use this language.

This amendment, if adopted, will be a welcome amendment, as it aligns the progressive outlook of the judgement in Indus Mobile v. Datawind Innovations, and the language of Section 2(1)(e), which are currently at odds with each other.

However, it is important to note that, in the context of domestic arbitration, the seat of arbitration is generally determined at the state level rather than the district level. While there may be situations where jurisdiction falls within a specific district, contracts rarely specify jurisdiction at such a granular level. To address this, it would be prudent to sensitize and train arbitrators on this issue, which  could help mitigate potential jurisdictional disputes.

In the second option, the seat is restricted to where the contract/arbitration agreement is executed or where the cause of action has arisen. This approach is less than ideal including for the reason that it has a restrictive reading of established principles on jurisdiction. 

Deletion of Section 42

Section 42 is proposed to be deleted. However, considering the inclusion of Section 2A(1)(ii), it may not be entirely redundant. This perspective may warrant reconsideration.

Timelines and delays

The Bill introduces amendments aimed at expediting the arbitral process. For instance, Section 8 proposes that applications under sub-section (1) be disposed of within sixty days, and Section 16 requires the arbitral tribunal to decide certain pleas within thirty days or defer them with reasons recorded in writing. While such timelines are desirable, they are often impractical given the nature and volume of work involved. Rigid timelines could lead to complications, delays, and additional litigation if not adhered to, ultimately defeating their purpose. Considering that arbitration already operates within an overall timeline, imposing further rigid deadlines may be counterproductive.

Similarly, the Bill seeks to prescribe a time frame of ninety days for the commencement of arbitral proceedings following the filing of an application for any interim measure of protection under Section 9(1). An application under sub-sections (4), (5), or (6) of Section 11 must be filed within sixty days of the failure or refusal to appoint an arbitrator or arbitrators, as applicable. While the intent behind these set of timelines is understandable, it is unclear whether these time limits are intended to be absolute or if the provisions of Section 5 of the Limitation Act will be applicable.

Amendment to Section 9

Further, the Bill proposes to limit court intervention under Section 9 to interim orders issued only before the commencement of arbitration proceedings and after their completion. However, this proposal overlooks scenarios where court intervention may be crucial, such as for the preservation of assets to prevent their dissipation.

Council and Fee Regulations

The Bill proposes the establishment of a Council tasked with formulating model procedural rules or guidelines for adoption by ad hoc tribunals. Additionally, the Council will provide guidelines for conducting proceedings through audio-video electronic means and specify fees for ad hoc arbitral tribunals where parties have not agreed on fees.

However, amendments to Sections 2(1)(c) and 11(3A) dilute the mandatory requirement for arbitral institutions to be designated by the Supreme Court or High Courts, reducing it to a discretionary power. Further, the proposed amendment to Section 43C seeks to remove the consultative power of the Chief Justice of India and significantly lowers the qualifications required for the Chairperson of the Council. Coupled with the Central Government’s control over appointments.

These proposals raise serious concerns about potential conflicts of interest, given that the Government is the largest litigant in India.

Beneficial Changes

In addition to the efforts to clarify the law on seat and jurisdiction, the Bill also introduces other noteworthy changes. The definition of “arbitration” has been expanded to include audio-video electronic means, and provisions for emergency arbitration have been introduced through new Sections 2(1)(ea) and 9A. These are positive and progressive developments.

The inclusion of provisions for digital signatures and the Council’s role in framing a model arbitration agreement are welcome changes. Additionally, it has been proposed that, in cases where the fees of an ad hoc arbitral tribunal have not been agreed upon by the parties, such fees shall be determined in accordance with the specifications set by the Council. Furthermore, a new sub-section (da) under Section 17 is proposed, granting arbitral tribunals the power to confirm, modify, or vacate ad interim measures granted under Section 9 or by an emergency arbitrator under Section 9A. These changes aim to streamline procedural aspects and enhance the efficiency of arbitration proceedings.

Conciliation and Renaming the Act

The Act will be renamed as “The Arbitration Act,” with the term “Conciliation” being removed from the title, as well as all references to it within the Act, including in the preamble. In essence, the scope of the Act will be confined exclusively to arbitration.

Overlooked Reforms

While the amendments address some issues, they overlook critical reforms including third-party funding, the codifying the scope for foreign lawyers to practice in India, making fraud arbitrable and the much needed reversal of the unnecessary 2021 amendment to Section 36 regarding fraud.

Conclusion

By and large, the proposed amendments are regressive and fail to build on the progress achieved through the 2015 amendments. While a few positive changes exist, they are too minor to make a significant impact. It is crucial for the government to recognize the revenue potential and job creation opportunities that a thriving arbitration sector can offer. Strengthening the arbitration framework will not only enhance India’s economic landscape but also position the country as a competitive arbitration hub globally.

This article was originally published by Bar & Bench on 23 November 2024.