SEPTEMBER 10, 2014

By TIOL Edit Team

THE NDA Government should fast track the amendment of Arbitration and Conciliation Act 1996 as recommended by Law Commission in its report submitted in August, 2014. The revamped or perhaps a new enactment is required to reduce the pressure on overburdened judiciary and to instill confidence among both domestic and foreign investors in the rule of the law.

The amended law would also help the Government achieve its political objective of accelerating economic development and creating job opportunities. It also might serve as a restraint on foreign investors, relying on overseas arbitration, a trend that has sullied India's image of appropriate place for doing business.

Several foreign investors notably Vodafone of the UK in the mega capital gains tax dispute, Norway's Telenor, Russia's Sistema JSFC, Abu Dhabi's Etisalat and Bahrain's Batelco have reportedly opted for overseas arbitration process after cancellation of 2G licenses.

Arbitration disputes are aplenty in certain other sectors such as construction. National Highway Authority of India and contractors, for instance, are locked in disputes over projects costing several thousand crores of rupees.

The Oil and Gas exploration and production sector is also marred by arbitration disputes between the Government and the project developers and between the developer and the sub-contractors.

Information on total number of arbitration cases, the average cost and time involved in arbitration, the extent of pre-arbitration and post-arbitration litigation is hard to come by. A comprehensive study on these issues is required.

Such a study must also factor in the impact of avoidance of recourse to arbitration and rampant resort to public interest litigation on perceived as well as alleged violation of environment. The proposed study cannot be complete without accounting for the inter-state water disputes and other disputes between public authorities at various levels.

Put simply, India is a hotbed of litigation. And this must change through robust adoption and promotion of all variants of alternative dispute resolution (ADR) methods.

The Law Commission has made the Government's job easier by neatly drafting the amendments to the Arbitration and Conciliation Act 1996. The buck has now stopped at the executive. It is for the Government to promptly secure Cabinet approval for the amendment bill and introduce it in either house of Parliament.

The issue of changing the law has been considered at length and recommended by various forums in the past including Law Commission, Cabinet and a Parliamentary Standing Committee, an experts committee over the last 13 years. There is thus no scope for further consultation or to be precise foot-dragging, which is integral part of law-making process in the country.

The 1996 Act was enacted to replace three separate archaic arbitration laws and to imbibe international norms as offered by the UNCITRAL Model Law on International Commercial Arbitration, 1985. The Act applies to domestic arbitrations; enforcement of foreign awards; and conciliations. The Act and more importantly its implementation has failed to bring in change in arbitration environment.

As succinctly put by a working paper published by Standford University in October 2009, "Even though the 1996 Act was enacted to plug the loopholes of 1940 Act, the arbitral system that evolved under it led to its failure. The main purpose of the Act was to provide a speedy and efficacious dispute resolution mechanism to the existing judicial system, marred with inordinate delays and backlog of cases. But an analysis of the arbitration system, as practiced under the 1996 Act, reveals that it failed to achieve its desired objectives."

The Paper captioned 'Development and Practice of Arbitration in India- Has it Evolved as an Effective Legal Institution' says that the problems in the successful adoption of arbitration in the country are multifold – "starting from requirement for amendment of certain provision of law to changing the mindset of the stakeholders who are judges, arbitrators, lawyers and parties involved."

First and foremost the Government thus must change its mindset as a policy-maker and a public authority. It should give up the habit of spurning plea of contractors and licencees to resolve disputes through arbitration.

This brings us to to Law Commission's recommendation to constitute Arbitral Commission of India with a mandate to encourage the spread of institutional arbitration in the country.

The spread of institutional arbitration has so far been minimal notwithstanding the existence of a few institutions such as Indian Council of Arbitration (ICA), which operates under the aegis of FICCI.

A bulk of the arbitration cases are processed through the ad hoc channel under which parties have the option of deciding their own procedures and rules including fees charged by arbitrators. This is not the case under the institutional framework.

The Law Commission has thus rightly recommended a model schedule of fees. It wants the High Court to frame appropriate rules for fixation of fees for arbitrators and for which purpose it may take the said model schedule of fees into account.

Another area where sincere cooperation of all stakeholders is required is avoidance of delays as arbitration delayed is justice denied.

As observed by the Standford University Paper, though the 1996 Act confers greater autonomy on arbitrators and insulates them from judicial interference, it does not fix any time period for completion of proceedings.

It says: "Although the scope of judicial intervention under the 1996 Act has been curtailed to a great extent, courts through judicial interpretation have widened the scope of judicial review, resulting in the admission of large number of cases that ought to be dismissed at the first instance. Moreover, the parties usually approach arbitration with a similar mindset as for litigation, with the result that awards invariably end up in courts, increasing the timeframe for resolution of the disputes. Parties also abuse the existing provision that allows ‘automatic stay' of the execution of the awards on mere filing of an application for challenge of the awards. So, the objective of arbitration as a mechanism for speedy resolution of disputes gets obstructed due to obtrusive delays."

Similarly, the Law Commission has pointed out that "There is ingrained in the Indian system a culture of frequent adjournments where arbitration is treated as secondary by the lawyers, with priority being given to court matters."

It also believes that judicial intervention in arbitration proceedings adds significantly to the delays in the arbitration process and ultimately negates the benefits of arbitration.

To stem this culture of delays, Law Commission has proposed certain amendments to the 1996 Act. These and all other recommendations deserve appreciation and action.

BJP led NDA stirred up a mass yearning for change for the better. Now that it is at the helm, it must accept Law Commission's report in toto and might welcome suggestions from all stakeholders within a timeframe of one month. The amended law should put in place before the end of current financial year.