By: Zia Mody,1Zia Mody is the managing and founding partner of AZB & Partners and one of India’s foremost attorneys. She is a member of the LCIA. Ms. Mody has been nominated as one of the world’s leading practitioners by The International Who’s Who of Commercial Arbitration in 2013 and The International Who’s Who of Business Lawyers 2013. Aditya Vikram Bhat,2Aditya Vikram Bhat is a partner at AZB & Partners, Bangalore. His practice areas include litigation and arbitration. He is a member of the users council of LCIA India. and Kabir Duggal3Kabir Duggal is a senior associate in Baker & McKenzie’s International Arbitration Group (New York) and Lecturer-in-Law at Columbia Law School.
A. Legislation, Trends and Tendencies
A.1 Legislation
International arbitration in India continues to be governed by the Arbitration and Conciliation Act 1996 (the “Arbitration Act”). However, there were two significant amendments4Article 123 of the Indian Constitution empowers the president of India to promulgate an ordinance if either house of parliament is not in session and circumstances exist to justify such immediate action to be taken. Although an ordinance has the same force and effect as any other legislation passed by the Indian parliament, it must receive the approval of the parliament within a period of six weeks from the day it is tabled before the parliament at the next session. enacted in 2015, namely the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act 2015 (“Commercial Courts Act”) and the Arbitration and Conciliation (Amendment) Act 2015 (“Arbitration Amendment Act”). Both these statutes, which were initially promulgated as ordinances and were later passed by the Parliament of India, have the potential to significantly alter the arbitration landscape in India.
A.1.1 Commercial Courts Act
The Commercial Courts Act provides for the constitution of “commercial courts” at a district level (except in areas where the high court exercises ordinary civil jurisdiction, where “commercial divisions” will be constituted) and “commercial appellate divisions” in each High Court to adjudicate appeals filed against decisions of the commercial courts and the commercial divisions.5Sections 3, 4 and 5 of the Commercial Courts Act. These commercial courts or divisions will adjudicate commercial disputes6The term “commercial dispute” as defined under Section 2 (1) (c) of the Commercial Courts Act as “a dispute arising out of—(i) ordinary transactions of merchants, bankers, financiers and traders such as those relating to mercantile documents, including enforcement and interpretation of such documents; (ii) export or import of merchandise or services; (iii) issues relating to admiralty and maritime law; (iv) transactions relating to aircraft, aircraft engines, aircraft equipment and helicopters, including sales, leasing and financing of the same; (v) carriage of goods; (vi) construction and infrastructure contracts, including tenders; (vii) agreements relating to immovable property used exclusively in trade or commerce; (viii) franchising agreements; (ix) distribution and licensing agreements; (x) management and consultancy agreements; (xi) joint venture agreements; (xii) shareholders agreements; (xiii) subscription and investment agreements pertaining to the services industry including outsourcing services and financial services; (xiv) mercantile agency and mercantile usage; (xv) partnership agreements; (xvi) technology development agreements; (xvii) intellectual property rights relating to registered and unregistered trademarks, copyright, patent, design, domain names, geographical indications and semiconductor integrated circuits; (xviii) agreements for sale of goods or provision of services; (xix) exploitation of oil and gas reserves or other natural resources including electromagnetic spectrum; (xx) insurance and re-insurance; (xxi) contracts of agency relating to any of the above; and (xxii) such other commercial disputes as may be notified by the Central Government.” The Arbitration Amendment Act further clarifies that a commercial dispute shall not cease to be a commercial dispute merely because: (a) it also involves action for recovery of immovable property or for realization of monies out of immovable property given as security or involves any other relief pertaining to immovable property; and (b) one of the contracting parties is the State or any of its agencies or instrumentalities, or a private body carrying out public functions. of INR10 million (approximately US$150,000) and above, which is the current “specified value” under the Commercial Courts Act.7Section 2 (1) (c) (i) of the Commercial Courts Act.
All suits and applications that involve a commercial dispute of the specified value, including applications for domestic as well as international arbitrations under the Arbitration Act, and are currently pending before: (a) a high court, will be transferred to the commercial divisions once constituted; and (b) any civil court in any district or area in respect of which a commercial court has been constituted, will be transferred to such commercial courts.8Section 15 of the Commercial Courts Act. Appeals filed from the decisions of these courts will lie before the commercial appellate divisions and will be required to be disposed within a period of six months.9Section 14 of the Commercial Courts Act.
A.1.2 Arbitration Amendment Act
The Arbitration Amendment Act was passed with the object of expediting the arbitration process and minimizing judicial intervention in arbitration. The provisions of the Arbitration Amendment Act will not apply to arbitration proceedings that have commenced prior to 23 October 2015, unless parties otherwise agree.10Section 26 of the Arbitration Amendment Act. Exclusive jurisdiction has been granted to the appropriate high courts in respect of proceedings connected with international commercial arbitrations.11Section 2 (1) (e) (ii) of the Arbitration Act (as inserted by the Arbitration Amendment Act). Pursuant to the Arbitration Amendment Act and the Commercial Courts Act, if the subject matter of the dispute is in excess of the specified value (as defined above), all applications or appeals arising out of such international commercial arbitrations will be heard and disposed of by the commercial appellate division of that high court.
The Arbitration Act is divided into two parts, which relate to arbitration in India and foreign-seated arbitrations respectively. Following the decision of the Supreme Court in the Bhatia International case,12Bhatia International v. Bulk Trading S.A. & Anr, (2002) 4 SCC 105. certain provisions of Part I of the Arbitration Act were made applicable to foreign-seated arbitrations. This position was reversed by a subsequent decision of the Supreme Court in the BALCO case13Bharat Aluminium Company Ltd. v. Kaiser Aluminium Technical Services, Inc. (2012) 9 SCC 552. in 2012, which held that for arbitration agreements executed after 6 September 2012, parties to foreign-seated arbitrations would not be entitled to any reliefs under Part I of the Arbitration Act. The Arbitration Amendment Act balances the position by making certain provisions of Part I of the Arbitration Act, such as Section 9 (interim reliefs), Section 27 (court assistance in taking evidence in an arbitration), Section 37(1)(a) (appeals against the orders granted under Section 9) and Section 37(3) (restrictions on a second appeal from an order passed under Section 37), applicable to foreign-seated arbitrations, subject to any agreement to the contrary.14Section 2(2) of the Arbitration Act (as inserted by the Arbitration Amendment Act). As the remaining provisions of Part I of the Arbitration Act will now not apply to international commercial arbitrations, parties will not be entitled to make applications to the court seeking the appointment of an arbitrator or to set aside an award.
Under Section 34 of the Arbitration Act, an award can be set aside on certain grounds, including a violation of the “public policy” of India. In the context of the expansive interpretation given to the term “public policy” by Indian courts in the past, the Arbitration Amendment Act has restricted the scope of the definition for this purpose to certain specified criteria: (i) the making of an award was induced by fraud or corruption or it violates the confidentiality of any conciliation proceedings or the provisions dealing with the admissibility of evidence submitted in the course of conciliation proceedings; (ii) it is in contravention of the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice. Additionally, the Arbitration Amendment Act now provides that an examination of whether an award contravenes the fundamental policy of Indian law will not entail a review of the merits of the dispute.15Explanation II to Section 34(2)(b) of the Arbitration Act (as amended by the Arbitration Amendment Act).
Prior to the amendments introduced by the Arbitration Amendment Act, Section 36 of the Arbitration Act provided that an award would become enforceable as a decree of the court only once the time to challenge the award had expired or if such challenge had been refused. However, as challenges to awards invariably involved a significant delay, the Arbitration Amendment Act now clarifies in Section 36 that the filing of an application to set aside an arbitral award will not prevent proceedings for enforcement even during the pendency of a challenge, in the absence of a specific stay granted by the court.16Section 36(2) of the Arbitration Act (as substituted by the Arbitration Amendment Act).
It is pertinent to note that the Arbitration Amendment Act now mandates that awards must be rendered by the arbitral tribunal within a period of 12 months from the date the arbitral tribunal enters upon reference.17Per Section 29A of the Arbitration Act (as inserted by the Arbitration Amendment Act), an arbitral tribunal is deemed to have entered upon reference on the date on which the arbitrator or all the arbitrators receive notice of their appointment in writing. Parties may also agree in writing to have their dispute resolved by fast-track procedures, where awards would be required to be made within a period of six months from the date the arbitral tribunal enters upon reference.18Section 29B of the Arbitration Act (as inserted by the Arbitration Amendment Act). If the court passes any interim measure under Section 9 of the Arbitration Act, the arbitral proceedings must commence within 90 days of the court passing such an order.19Section 9(2) of the Arbitration Act (as inserted by the Arbitration Amendment Act).
A.1.3 Investor – State Arbitration and 2015 Model BIT20Stop press: After this article was submitted for publication, India issued the final version of the Model BIT on December 28, 2015. This approved version of the Model BIT will be discussed in the 2017 Arbitration Yearbook in the India Chapter.
In addition to the key legislative changes discussed above, India released a revised, draft model BIT (“2015 Model BIT”) to the public in March 2015, seeking comments before submission to the Cabinet for formal approval.21See Draft Indian Model Bilateral Investment Treaty Text, Government of India website, available at https://mygov.in/group-issue/draft-indian-model-bilateral-investment-treaty-text/. The 2015 Model BIT is a radical departure from the existing treaty practices and the model BITs of other countries, and to that extent makes a timely contribution to ongoing debates relating to investor protection and state regulatory power.22See generally Grant Hanessian and Kabir Duggal, The 2015 Indian Model BIT: Is This Change the World Wishes to See?, 30 ICSID REVIEW 3 (2015).
The 2015 Model BIT seeks to recalibrate the balance between state sovereignty and investor protections in three ways. First, definitions in the 2015 Model BIT have been drafted narrowly. For example, both the definitions of an “investor” and “investment” have been carefully circumscribed to ensure that only entities with “real and substantial business operations” in the home state would be protected.23See Article 1 of the 2015 Model BIT. Further, several categories of investments have been excluded from the definition of “investment”, including a holding/investment company, goodwill, pre-investment expenditures, and judicial or arbitral proceedings.24See Article 1.7(i) to (viii) of the 2015 Model BIT.
Second, the 2015 Model BIT has restricted the scope of substantive protections available to qualifying investors. It does not provide for protections commonly found in other BITs, for example, the full protection and security clause, the most-favored-nation clause, or the umbrella clause, which have been deleted altogether. In addition, the 2015 Model BIT also replaces the common “fair and equitable treatment” guarantee with a narrower “standards of treatment” clause.25See Article 2.6(iv) of the 2015 Model BIT.
Third, the 2015 Model BIT provides for “exceptions” to certain matters that fall outside the scope of the BIT. These exceptions fall into two categories: (i) nine categories of general exceptions; and (ii) a wide range of security exceptions (e.g., protecting public order or morals, protecting national treasures, essential security interests, etc.)26See Articles 16 and 17 of the 2015 Model BIT. Importantly, all of these exceptions have been made “self-judging,” thereby effectively barring a tribunal from evaluating the merits of any of these exceptions.
The 2015 Model BIT does, however, provide for investor-state dispute resolution, but lays down several prerequisites that an investor must meet before a matter can be heard by an arbitral tribunal. These prerequisites include detailed provisions relating to exhaustion of local remedies, filing of a “notice of dispute,” and meeting several conditions precedent.
A.2 Trends and Tendencies
As discussed in Sections A and B, the trend to reduce judicial intervention in arbitrations (especially foreign-seated arbitrations) and restrict the grounds of challenge to arbitral awards within the legislature and the judiciary continues predominantly. However, as the Arbitration Amendment Act now extends certain provisions of the Arbitration Act to international commercial arbitrations as well, there is an increased possibility that court intervention in such arbitrations may see a corresponding increase.
Regrettably, on 15 January 2016 the LCIA announced the closure of its Indian operation, as Indian parties did not show a strong preference for the LCIA India arbitration rules over the ordinary LCIA Rules. The LCIA will, however, continue to administer Indian-seated arbitrations from its London headquarters.
B. Cases
B.1 The Arbitration Act and Foreign-Seated Arbitrations
In Reliance Industries Limited & Ors v. Union of India,27(2014) 7 SCC 603. a case decided before the enactment of the Arbitration Amendment Act in which the seat of the arbitration was in London and the arbitration agreement was governed by English law, the Supreme Court held that Part I of the Arbitration Act would not be applicable to such a foreign-seated arbitration even where the agreement predated the Supreme Court decision in BALCO. The court held that in cases that are governed by the Supreme Court’s principle in the Bhatia International case (where the arbitration agreement has been executed prior to the pronouncement of the BALCO decision), when the court comes to a determination that the juridical seat of the arbitration is outside India or where law other than Indian law governs the arbitration agreement, Part I of the Arbitration Act would be excluded by necessary implication. While the provisions of the Arbitration Amendment Act now permit parties to foreign-seated arbitrations to seek certain interim reliefs, these provisions remain untested by Indian courts.
B.2 Derogation by Indian Nationals from Indian Law
The Bombay High Court in Addhar Mercantile Private Limited (Applicant) v. Shree Jagdamba Agrico Exports Pvt. Ltd.28Arbitration Application No 197 of 2014 along with Arbitration Petition No 910 of 2013, Mumbai High Court. interpreted an agreement between two Indian parties to have the “arbitration in India or Singapore and governed by English law” to mean that the arbitration must be held in India and governed by Indian law, as Indian policy did not permit Indian nationals to derogate from Indian law. However, in a contradictory decision, the Madhya Pradesh High Court in Sasan Power Limited v. North American Coal Corporation29FA-310-2015, Madhya Pradesh High Court decision dated 11 September 2015. has ruled that two Indian parties may conduct arbitration in a foreign seat under English law. The court relied on an earlier decision of the Supreme Court in Atlas Exports Industries v. Kotak & Company30(1999) 7 SCC 61. (a case decided under the Indian Arbitration Act, 1940), which held that an agreement between Indian parties who have contractually agreed to have a foreign-seated arbitration would not be considered to be against the public policy of India. A final decision addressing the contradictory views taken by the various high courts on this issue is awaited from the Supreme Court.
C. Costs in International Arbitration
C.1 Allocation of Costs
The Arbitration Amendment Act has introduced Section 31A into the Arbitration Act, which adopts the “costs follow the event” principle, i.e., provides that as a default rule, the unsuccessful party will bear the costs of the successful party. However, the court or arbitral tribunal can deviate from this default rule for reasons that are recorded in writing. While awarding costs, the court or the arbitral tribunal are required to take into account the conduct of parties, subversive tactics (such as filing of a frivolous counterclaim) that have inordinately delayed proceedings, and whether reasonable offers to settle have been proposed by a party and rejected by the other, and render a decision accordingly. The arbitrator is also empowered to award exemplary costs in cases where parties seek adjournment.
While parties to a dispute may agree on a mechanism for the payment of costs, the Arbitration Amendment Act has clarified that an agreement that provides that a party will be responsible for paying all or part of the costs of the arbitration will only be valid if it is made after the dispute in question has arisen.
The Commercial Court Act also introduces a similar regime on costs (by way of amendments to the Civil Procedure Code, 1908), including the “cost follows the event” principle, as explained above, which is required to be followed as a general rule.31Schedule of the Commercial Courts Act.
C.2 Security for Costs
Under the Arbitration Act, the arbitral tribunal may fix the amount of the deposit required as an advance for the costs involved in the arbitration, which is to be borne equally by the parties. Where the arbitration involves a claim as well as a counterclaim, the tribunal may fix a separate deposit amount for the claim and the counterclaim. On an application made by a party to the relevant court, the court may, as an interim measure, pass an order to preserve goods that are the subject matter of the arbitration agreement, secure the amount in dispute in the arbitration, or any other measures that may appear to the court to be just and convenient. The Arbitration Amendment Act also provides that if an application is made for the stay of the operation of an arbitral award for the payment of money, the court is required to consider such an application as a money decree under the Code of Civil Procedure, 1908, which, among other things, requires the applicant to provide security for the due performance of the decree if it is ultimately found to be binding on the applicant.32Section 36 of the Arbitration Act (as substituted by the Arbitration Amendment Act).
C.3 Recovery of Costs
Costs imposed by the court or arbitral tribunal are recoverable as part of the award and are enforceable as a decree of the court under the provisions of the Code of Civil Procedure, 1908. The arbitral tribunal has a lien on the arbitral award for any costs that remain unpaid. The term “costs” has been explained under the Arbitration Amendment Act and the Commercial Courts Act to mean “reasonable costs” relating to the fees and expenses of the arbitrators, courts and witnesses, legal fees and expenses, as well as administrative fees and any other expenses incurred in connection with the arbitral or court proceedings and the award. In this regard, with a view to reducing the costs of arbitration, the Arbitration Amendment Act has empowered the high courts to frame rules for the purpose of determining the fees of the arbitral tribunal. These rules will, however, not apply to international commercial arbitrations where the parties have agreed for the fees to be determined in accordance with the rules of an arbitral institution. The Arbitration Amendment Act contains a schedule containing the model fees for the arbitral tribunal.33Fourth Schedule of the Arbitration Act (as inserted by the Arbitration Amendment Act).