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Legal Capsule by Economic Law Practice

Lessons from 2019 for the Indian Arbitration Regime: A Commercial Viewpoint

The year 2019 saw a second amendment to the Arbitration and Conciliation Act, 1996 (Act)
and a plethora of important judgments6. Against this context, we seek to, analyze a few decisions that have commercial significance for stakeholders. Our objective is not to deal with every decision, but to focus on those with important takeaways for contracting parties.

With the Arbitration and Conciliation (Amendment) Act, 2015, (2015 Amendment  Act), the position regarding eligibility of an arbitrator and the grounds that give rise to justifiable doubts as to an arbitrator’s impartiality and independence became clear with  the  insertion of the Fifth and the Seventh Schedule. Starting with TRF Ltd. v. Energo Engineering Projects Ltd. the Supreme Court interpreted the amended provisions to state that a person who is ineligible to be an arbitrator cannot naturally exercise the right to appoint an arbitrator. This was followed up by Bharat Broadband Network Ltd. v. United Telecoms Ltd. Recently, in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd (Perkins Eastman) the Supreme Court went one step further to state that where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution, and therefore such party having an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator.

The above decisions give the necessary ammunition, during contract negotiation, to parties, which otherwise would not have an equal bargaining power, in ensuring that the appointment procedure under the arbitration agreement is equitable.

Pertinently, arbitration  clauses  granting unilateral appointment rights have been  held  to be valid in various jurisdictions for the  reason  that when sophisticated commercial parties agree to such clauses, the courts shall endeavor to give full effect to them. However, in India, owing to the unique circumstances, more particularly those which prevail in Public Sector contracts there has been an urgent need to address this issue. While purists may argue that the decision of Perkins Eastman goes against the grain of  party  autonomy, however, the contra argument is that a purge is necessary to address the ills of unilateral appointments in India, especially where such appointments are often muddled in opaque processes. Against this background the decision comes as a huge relief to many who suffer arbitrator bias, both covert and otherwise, and  can do precious little to challenge the status quo.

Contracting parties must also be alive to certain aspects that can alter the very scope of what may be referred to arbitration. This may not be a bone of contention at the stage of appointment of an arbitrator under section 11 of the Act. As clarified in Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman (Mayavati Trading) a court is now restricted to merely examining the existence and not the scope of the arbitration agreement. While this decision seems to be indirectly in conflict with Oriental Insurance Co. Ltd. v. Narbheram Power and Steel (P) Ltd., it signals the correct approach towards the restricted scope of inquiry at the stage of appointment. Expectedly, section 11(6-A)12 has also been omitted from the scheme of the Act vide the Arbitration and Conciliation (Amendment) Act, 2019 (2019 Amendment Act). As clarified in Mayavati Trading, the same doesn’t amount to a resuscitation of the law prevalent prior to the 2015 Amendment Act wherein the court was empowered to go into certain preliminary issues at the time of appointing the arbitrator. Instead, the omission has been recommended because appointment of arbitrators is to be done institutionally, in which case the Supreme Court or the High Court under the old statutory regime are no longer required to appoint arbitrators and consequently to  determine whether an arbitration agreement exists or not. It is pertinent to note that none of  the amendments proposed to section 11 by the 2019 Amendment Act have been notified as on date.

Be that as it may, the question of what falls within the scope of an arbitration agreement and what are excepted matters assumes importance in a jurisdictional challenge before the  arbitrator under section 16 of the Act as well as in an eventual challenge to the award under section 34 of the Act. Readers should be aware of the  decision of the Supreme Court in Mitra Guha Builders (India) Co. v. ONGC Ltd that excepted matters are precluded from being arbitrated. To prevent such a situation from presenting itself, contracting parties are advised to broaden the scope of the arbitration agreement such that at a later stage they are not forced to litigate on matters which may be beyond the scope of the arbitration agreement.
In Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd., the Supreme Court concurred with its decision in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (SMS Tea Estates). The Supreme Court held that even post the 2015 Amendment Act, an arbitration agreement contained in a contract needs to be stamped in accordance with the relevant law.  If the same is unstamped or inadequately stamped, the court17 would impound the instrument and hand it over to the relevant authority for adjudication of stamp duty and  applicable  penalty. The parties would then have to pay the stamp duty and applicable penalty, and only thereafter the court would act upon such agreement. This principle was further elucidated in S. Satyanarayana & Co. v. West Quay Multiport Pvt. Ltd. wherein a contract was  executed  outside Maharashtra, but the seat of arbitration was in Maharashtra. The Bombay High Court held that the contract, while stamped according to the law in Visakhapatnam, when brought into Maharashtra, needs to be stamped according to  the law prevalent in Maharashtra in order for the court to act upon it.

Contracting parties need to now ensure that the contract containing the arbitration agreement is stamped adequately in accordance with the law prevalent in the jurisdiction where the arbitration agreement needs to be acted upon. To err on the side of caution if there are several jurisdictions where the contract is likely to be acted upon, it may be prudent to pay stamp duty in a jurisdiction where the stamp duty payable is the highest. This will address the requirement of  paying  differential stamp duty under circumstances where the instrument is required to be moved from one state to another.

Prior to the 2015 Amendment Act, the award debtor could by simply filing a challenge to the award get an automatic stay against the enforcement of the award. This meant that the award holder would never realize the amounts under the award until the challenge was finally decided. With the 2015 Amendment Act, the  award holder is permitted to enforce the award and it is the award debtor that has to obtain a specific stay against enforcement. In such a case, the court may order the award debtor to deposit a part or whole of the award amount in court thereby securing the award holder. The question before the Supreme Court in Hindustan Construction Company Limited & Anr. v. Union of India & Ors. (HCC) was whether this benefit for the award holder could only be granted for arbitrations that had commenced after the 2015 Amendment Act came into force. Although the applicability of such a provision had been clarified by the BCCI v. Kochi Cricket Pvt. Ltd (BCCI) judgment to be retrospective in nature, the Arbitration and Conciliation (Amendment) Act, 2019 made the provision of the 2015 Amendment Act in this regard expressly prospective (by introducing section 87 in the Act). The constitutionality of this section 87 was successfully challenged in the HCC case. Stating that the automatic-stay of an award, as laid down previously by National Aluminum Company Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd; National Buildings Construction Corporation Ltd. v. Lloyds Insulation India Ltd and Fiza Developers and Inter-trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd was incorrect, it was further held by the Supreme Court that no automatic stay was ever contemplated even in the Act as it stood prior to the 2015 Amendment Act and thus, the amendments made by the 2015 Amendment Act being merely clarificatory in nature, ought to be applied retrospectively.

In light of the decision in HCC, even if there is a challenge to the award under section 34 of the Act pending in court (including in cases where the arbitral proceedings commenced prior to the  2015 Amendment Act), an application under section 36(2) of the Act can be filed by the award holder for vacation of the stay wherever such stay
had been granted automatically against the enforcement of the award. In such a scenario, the award debtor will be compelled to seek a stay against enforcement which might be made conditional on the whole or part of the awarded amount being deposited in the court. This amount, if ordered to be deposited, can then be withdrawn by the award holder by giving a bank guarantee of equivalent amount to the court. This would ensure that cash flows of an award holder are not affected. This is of particular importance in infrastructure projects where ongoing work is not impaired  by the liquidity crunch that was otherwise being faced on account of pending disputes.

In Pam Developments Pvt. Ltd. v. State of West Bengal, the Government as an award debtor argued that it can be exempted from furnishing security/depositing the award amount on account of Order 27 Rule 8-A of the Code of  Civil  Procedure, 1908 (CPC). Relying upon section 36 of the Act and its   interpretation,   it   was   held   by the   Hon’ble   Supreme   Court   that    the provisions  of  CPC  act   as   mere   guiding principles in the scheme of the Act. In light of section 18 of the Act25, it was also  held  by  the court that the Act neither  made  any  distinction nor   afforded   any    differential    treatment    to  the Government as an award debtor when compared         to private parties. The Government,    like    any    ordinary    award   debtor,  will  have   to   deposit   the   award   amount in court if it wishes to challenge the award and seek a stay against enforcement. Thus, if a  party secures an arbitral award against the government/Public   Sector   Undertaking    (PSU),  it can now rightfully  claim  the  awarded amount  to be deposited in the court when the government/PSU  desires  to  challenge   the arbitral award.

The judiciary, through decisive pronouncements, has undoubtedly tried its best to set  things  right for arbitration in India. While the commercial impact of various decisions of the Supreme Court can be debated, one has to appreciate the fact that the judiciary’s approach in 2019 towards arbitration in India seems to be more commercially astute, which bodes well for 2020.

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