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GOVERNMENT OF INDIA

LAW COMMISSION

OF

INDIA

Report No. 24 6

Amendments to the Arbitration and Conciliation Act 1996

August, 2014

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The 20th Law Commission was constituted for a period of three years from 1st

September, 2012 by Order No. A-45012/1/2012-Admn.III (LA) dated the 8th

October, 2012 issued by the Government of India, Ministry of Law and Justice,

Department of Legal Affairs, New Delhi.

The Law Commission consists of a full time Chairman, four full-time Members

(including Member-Secretary), two Ex-officio Members and five part-time

Members.

Chairman

Hon’ble Justice A.P. Shah

Full-time Members

Justice Mr. S.N. Kapoor

Prof. (Dr.) Mool Chand Sharma

Justice Ms. Usha Mehra

Mr. N.L. Meena, Member-Secretary

Ex-officio Member

Mr. P.K. Malhotra, Secretary (Department of Legal Affairs and

Legislative Department)

Part-time Members

Mr. R. Venkataramani

Prof. (Dr.) Yogesh Tyagi

Dr. Bijai Narain Mani

Prof.(Dr.) Gurjeet Singh

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D.O. No.6(3)238/2012-LC(LS) 5 August 2014

Dear Mr. Ravi Shankar Prasad ji,

I am enclosing herewith the 246 th^ Report of the Commission on ‘ Amendment to the Arbitration and Conciliation Act, 1996 ’. The Commission was entrusted with the task of reviewing the provisions of the Arbitration and Conciliation Act, 1996 (‘the Act’) in view of the several inadequacies observed in the functioning of the Act.

The Commission had earlier recommended various amendments to the Act under its 176 th^ Report on the ‘ Arbitration and Conciliation (Amendment) Bill, 2001 ’. After considering the recommendations of the 176th Report, the Government decided to accept almost all such recommendations and accordingly, introduced the ‘ Arbitration and Conciliation (Amendment) Bill, 2003 ’ in the Rajya Sabha on 22nd^ December, 2003. Subsequently, in the wake of the report of the Justice Saraf Committee the Bill was referred to the Department Related Standing Committee on Personnel, Public Grievances, Law and Justice for a further analysis.

The Departmental Related Standing Committee was eventually of the view that many provisions in the Bill were insufficient and contentious and, therefore, the Bill in its present form should be withdrawn and be reintroduced after considering its recommendations. Accordingly, the Bill was withdrawn from the Rajya Sabha.

In order to re-look into the provisions of the Act, the Ministry of Law and Justice issued a consultation paper on 08 th^ April, 2010 inviting suggestions from eminent lawyers, judges, industry members, institutions and various other stakeholders. After receiving various responses to the Paper, the Ministry held several National Conferences across the country during July/August, 2010 inviting suggestions from lawyers, judges, industry, arbitration institutions and public at large. On the basis of such

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comments and suggestions received at the National Conferences, the Ministry prepared draft proposals and a Draft Note was prepared for the Cabinet.

Thereafter, the Ministry asked the Commission to undertake a study of the amendments proposed to the Act in the ‘ Draft Note for the Cabinet ’. Accordingly, the Commission set up an expert Committee comprising of several eminent persons from the field of law to study the proposed amendments and make suggestions accordingly. Written responses were also received from various institutions like FICCI, CII and ASSOCHAM.

After extensive deliberations and study, the Commission has now prepared the present Report.

Chapter III of the present Report contains the proposed amendments. Also Annexure to the Report contains the proposed amendments in track changes made in the present Act along with notes.

With warm regards, Yours sincerely,

[Ajit Prakash Shah]

Mr. Ravi Shankar Prasad Hon’ble Minister for Law and Justice Government of India Shastri Bhawan New Delhi - 110115

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showing the proposed amendments in track changes along with notes.

• Amendment to Section
• Amendment to Section
• Amendment to Section
• Amendment to Section
• Amendment to Section
• Amendment to Section
• Amendment to Section
• Amendment to Section
• Amendment to Section
• Amendment to Section
• Amendment to Section
• Amendment to Section
• Amendment to Section
• Amendment to Section
• Amendment to Section
• Amendment to Section
• Amendment to Section
• Amendment to Section
• Insertion of Section 85A
• Amendment to Schedules
• Annexure: The Arbitration and Conciliation Act,

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Chapter I BACKGROUND TO THE REPORT

1. The Arbitration and Conciliation Act, 1996 (hereinafter the “ 1996 Act ”), is an Act to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards, and to define the law relating to conciliation and for matters connected therewith or incidental thereto.

HISTORY OF ARBITRATION LAW IN INDIA

2. Regulation of the conduct of arbitration has a long history in India. The first direct law on the subject of arbitration was the Indian Arbitration Act, 1899; but, its application was limited to the Presidency towns of Calcutta, Bombay and Madras. This was followed by the Code of Civil Procedure, 1908 where the Second Schedule was completely devoted to arbitration.
3. The first major consolidated legislation to govern the conduct of arbitrations across the country was the Arbitration Act, 1940 which was based on the (English) Arbitration Act, 1934. The Act repealed the Arbitration Act, 1899 and the relevant provisions in the Code of Civil Procedure, 1908, including the Second Schedule thereof. The 1940 Act however, did not deal with enforcement of foreign awards, and for which purpose, the legislature had passed the Arbitration (Protocol and Convention) Act, 1937 to deal with Geneva Convention Awards and the Foreign Awards (Recognition and Enforcement) Act, 1961 to deal with New York Convention Awards. The working of the 1940 Act, which dealt with domestic arbitrations, was far from satisfactory. The arbitral regime at that point of time was premised largely on a mistrust of the arbitral process, and the same was the subject of much adverse comment by the courts.
4. The Supreme Court in F.C.I. v. Joginderpal Mohinderpal , (1989) 2 SCC 347, at para 7 observed –

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enact the law in the required time period. Finally, Parliament passed the Bill in terms of the Arbitration and Conciliation Act, 1996 (hereinafter “the Act”) which received the assent of the President of India on 16.08.1996 and came into force on 22.08.1996. However, it was made applicable to cases where the arbitral proceedings commenced as of 25.01.1996. The 1996 Act is based on the UNCITRAL Model Law on International Commercial Arbitration, 1985 and the UNCITRAL Conciliation Rules, 1980. The 1996 Act repealed all three earlier laws (the 1937 Act, the 1940 Act and the 1967 Act as set out above) and applied to (i) domestic arbitrations; (ii) enforcement of foreign awards; and (iii) conciliations. Although the UNCITRAL Model Law was intended to provide a model law to deal with international commercial arbitrations; in the 1996 Act, the UNCITRAL Model Law provisions, with some minor modifications, are made applicable to both domestic and international commercial arbitrations.

9. The Act is based on the UNCITRAL Model Law (a set of 36 Articles) which was drafted to govern all international arbitrations by a working group of the United Nations and finally adopted by the U.N. Commission on International Trade Law (UNCITRAL) on June 21 st, 1985. The Resolution of the UN General Assembly envisages that all countries should give due consideration to the Model Law, in view of the desirability of uniformity of the law on arbitral procedures and the specific needs of international commercial practice. This is also duly reflected in the Preamble of the Act of 1996 saying that: “ it is expedient to make law respecting arbitration and conciliation, taking into account the aforesaid Model Law …”. SCHEME OF THE ARBITRATION AND CONCILIATION ACT, 1996
10. While drafting the 1996 Act, one of the major considerations was the need to curtail delays in the arbitral process. Another objective was to bring in its fold, international commercial arbitrations; in contrast the 1940 Act only dealt with domestic arbitrations. Some of these objectives are clearly reflected in the Objects and Reasons of the Arbitration and Conciliation Bill, 1995 as stated herein below:

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(a) To comprehensively cover international commercial arbitration and conciliation as also domestic arbitration and conciliation; (b) To minimise the supervisory role of courts in the arbitral process; (c) To provide that every final arbitral award is enforced in the same manner as if it was a decree of court.

11. The 1996 Act covers both international and domestic arbitration, i.e., where at least one party is not an Indian national and where both parties are Indian nationals respectively.
12. Part I of the 1996 Act titled ‘Arbitration’ is general in nature and contains ten chapters. Part II deals with ‘Enforcement of Certain Foreign Awards’. Chapter I of Part II deals with New York Convention Awards and Chapter II deals with Geneva Convention Awards. Part III of the 1996 Act deals with Conciliation which does not have any bearing on the present Report. Part IV of the 1996 Act deals with supplementary provisions.
13. The 1996 Act also contains three Schedules. The First Schedule refers to the Convention on the Recognition and Enforcement of Foreign Arbitration Awards (also covered under Section 44 of the 1996 Act). The Second Schedule refers to Protocol on Arbitration Clauses (also covered under Section 53 of the 1996 Act). The Third Schedule refers to the Convention on the Execution of Foreign Arbitration Awards. 176 TH REPORT OF THE LAW COMMISSION
14. In the year 2001, the Government made a reference to this Commission to undertake a comprehensive review of the Arbitration and Conciliation Act, 1996 in view of the various shortcomings observed in its working and also various representations received by the Government in this regard.
15. The Commission considered such representations which pointed out that the UNCITRAL Model (on the basis of which the Arbitration and Conciliation Act, 1996 was enacted) was mainly intended to enable various countries to have a common model for ‘International Commercial Arbitration’ but the 1996 Act had made provisions of such a Model Law applicable also to cases of purely

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their views in detail. The Committee thereafter submitted its report to the Parliament on August 4, 2005.

21. The Committee was of the view that the provisions of the Bill gave room for substantial intervention by court in the arbitration process. The Committee stressed upon the need for popularizing institutional arbitration in India and called for establishment of an institution in our country in this regard which would be along international standards.
22. The Committee further expressed the view that many provisions were not only insufficient, but also contentious. Therefore, the said Bill ought to be withdrawn and a fresh Bill be brought after considering the recommendations of the Committee.
23. In view of the various amendments recommended by the Committee, the above Bill was withdrawn from the Rajya Sabha. At that time, it was decided that a new Bill must be introduced in the Parliament after undertaking an in- depth study of the various recommendations of the Committee. THE PRESENT REPORT BY THE 20 TH LAW COMMISSION
24. In order to undertake a study for suggesting amendments to the 1996 Act, the Ministry of Law and Justice also issued a Consultation Paper on April 08, 2010 inviting suggestions/comments from eminent lawyers, judges, industry members, institutions and various other sections of the government and other stakeholders.
25. Many written responses were received by the Ministry which were collated and studied in detail. The Ministry of Law and Justice thereafter held National Conferences in New Delhi, Mumbai and Bangalore during July/August 2010, inviting suggestions on the Consultation Paper from various significant quarters including lawyers, judges, industry, arbitration institutions and the public at large.
26. Taking into account the comments and suggestions received in writing and expressed orally in the National Conferences and discussions held thereafter, the Ministry prepared draft proposals. On the basis of the draft proposals, the Ministry prepared a ‘Draft Note for the Cabinet’. Thereafter, vide F. No. A- 60011/48/2010-Admn.III(LA), the Ministry of Law and Justice requested the

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Law Commission to undertake a study of the amendment proposed to the Act in the ‘Draft Note for the Cabinet’. Accordingly the present reference came to this Commission in the aforesaid terms.

27. Pursuant to this Reference, the Law Commission set up an expert committee to study the proposed amendments and make suggestions accordingly. The Committee comprised of several eminent persons from the legal field such as Justice Rohinton Nariman (then Senior Counsel), Mr. Arvind Datar, Mr. Shishir Dholakia, Mr. Darius Khambatta, Mr. Dushyant Dave, Mr. Ciccu Mukhopadhyay, Ms. Zia Mody, Mr. N.L. Rajah, Mr. Ajay Thomas, Mr. Suhaan Mukherjee, Mr. Anirudh Krishnan, Mr. Anirudh Wadhwa, Mr. Giriraj Subramanium and Mr. Ashutosh Ray.
28. Written notes and suggestions were thereafter circulated to the Commission by Justice Rohinton Nariman, Mr. Arvind Datar, Mr. Darius Khambatta, Mr. Shishir Dholakia, Mr. Dushyant Dave and Mr. N.L. Rajah. A written note was also given separately by Mr. Gourab Banerji (then Additional Solicitor General of India).
29. Written responses were also given by various institutions like FICCI, Assocham and CII. Mr. Lalit Bhasin, Sr. Advocate, Mrs. Pallavi Shroff and Mr. Tejas Karia, Advocates on behalf of CII, and Mr. D. Sengupta on behalf of FICCI made valuable suggestions.
30. The Commission also held various rounds of discussions with Justice Jagannath Rao, former Chairman of the Law Commission and author of the earlier Report (176th^ Report) on the subject. The Commission also considered the views of Justice V. Ramasubarmaniam of the Madras High Court.
31. The Commission also separately held a series of discussions with Mr. Anirudh Wadhwa and Mr. Anirudh Krishnan, whose inputs were incisive, vital and require special appreciation.
32. Thereafter, upon extensive deliberations, discussions and in-depth study, the Commission has given shape to the present Report.

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purpose of this Chapter is to lay down the foundation for the changes suggested in the report of the Commission. The suggested amendments address a variety of issues that plague the present regime of arbitration in India and, therefore, before setting out the amendments, it would be useful to identify the problems that the suggested amendments are intended to remedy and the context in which the said problems arise and hence the context in which their solutions must be seen. INSTITUTIONAL ARBITRATION IN INDIA

5. Arbitration may be conducted ad hoc or under institutional procedures and rules. When parties choose to proceed with ad hoc arbitration, the parties have the choice of drafting their own rules and procedures which fit the needs of their dispute. Institutional arbitration, on the other hand, is one in which a specialized institution with a permanent character intervenes and assumes the functions of aiding and administering the arbitral process, as provided by the rules of such institution. Essentially, the contours and the procedures of the arbitral proceedings are determined by the institution designated by the parties. Such institutions may also provide qualified arbitrators empanelled with the institution. Further, assistance is also usually available from the secretariat and professional staff of the institution. As a result of the structured procedure and administrative support provided by institutional arbitration, it provides distinct advantages, which are unavailable to parties opting for ad hoc arbitration.
6. The spread of institutional arbitration however, is minimal in India and has unfortunately not really kick-started. In this context, the Act is institutional arbitration agnostic – meaning thereby, it neither promotes nor discourages parties to consider institutional arbitration. The changes suggested by the Commission however, attempt to encourage the culture of institutional arbitration in India, which the Commission feels will go a long way to redress the institutional and systemic malaise that has seriously affected the growth of arbitration.
7. The Commission has, therefore, recommended the addition of Explanation 2 to section 11(6A) of the Act with the hope that High Courts and the Supreme

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Court, while acting in the exercise of their jurisdiction under section 11 of the Act will take steps to encourage the parties to refer their disputes to institutionalised arbitration. Similarly, the Commission seeks to accord legislative sanction to rules of institutional arbitration which recognise the concept of an “emergency arbitrator” – and the same has been done by broadening the definition of an “arbitral tribunal” under section 2(d).

8. In this context, the Commission notes the establishment and working of the Delhi High Court International Arbitration Centre which started in 2009 and is now fairly established and is providing good service to its users. The Punjab & Haryana High Court has also started an Arbitration Centre in 2014 with its own set of rules. The Commission further notes the working of the Indian Council of Arbitration (ICA), which is associated with FICCI and which is one of the earliest arbitral institutions in the country. The Commission further commends the working of the Nani Palkhivala Arbitration Centre in Chennai which similarly has its own set rules, governing body and staff, and is well established in the southern India.
9. In order to further encourage and establish the culture of institutional arbitration in India, the Commission believes it is important for trade bodies and commerce chambers to start new arbitration centers with their own rules, which can be modeled on the rules of the more established centers. The Government can also help by providing land and funds for establishment of new arbitration centers. It is important to start a dialogue between the legal community which is involved in the practice of arbitration, and the business community which comprise of the users of arbitration, in order that institutional arbitration takes wing. The Government may also consider formation of a specialised body, like an Arbitral Commission of India, which has representation from all the stakeholders of arbitration and which could be entrusted with the task of, inter alia, encouraging the spread of institutional arbitration in the country. FEES OF ARBITRATORS
10. One of the main complaints against arbitration in India, especially ad hoc arbitration, is the high costs associated with the same – including the

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and must be reviewed every 3-4 years to ensure that they continue to stay realistic.

12. The Commission notes that International Commercial arbitrations involve foreign parties who might have different values and standards for fees for arbitrators; similarly, institutional rules might have their own schedule of fees; and in both cases greater deference must be accorded to party autonomy. The Commission has, therefore, expressly restricted its recommendations in the context of purely domestic, ad hoc, arbitrations. CONDUCT OF ARBITRAL PROCEEDINGS
13. The Commission notes that there are numerous provisions in the Act which deal with the conduct of arbitral proceedings, and these are set out in Chapter V of the Act. However, despite existing provisions in the Act which are aimed at ensuring proper conduct of arbitral proceedings, the Commission found that the experience of arbitrating in India has been largely unsatisfactory for all stakeholders.
14. Proceedings in arbitrations are becoming a replica of court proceedings, despite the specific provisions in Chapter V of the Act which provide adequate powers to the arbitral tribunal. The Commission hopes that arbitral tribunals would use the existing provisions in the Act, in order to reduce delays.
15. In ad hoc arbitrations, fees are charged "per sitting" basis (with sometimes two/three sittings in a day in the same dispute and between the same parties), dates are usually spread out over a long period of time, and proceedings continue for years - which results in increase of costs, and denial of justice to the aggrieved party. 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.
16. The Commission notes that this cultural revolution has to come from within the arbitration community. Arbitrators must eschew purely formal sittings, which are meant only for compliances. The Courts have already indicated that delay in passing an award can lead to such an award getting set aside [see for instance the decisions of the Delhi High Court in Oil India Ltd v Essar Oil Ltd, OMP No 416/2004 dt 17.8.2012 at paras 30-40; UOI v Niko Resources

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Ltd, OMP No 192/2010 dt 2.7.2012 at paras 43-51; Peak Chemical Corporation Inc v NALCO, OMP 160/2005 No dt 7.2.2012 at para 29] – and the same should be a nudge to all arbitrators to hear and decide matters expeditiously, and within a reasonable period of time. Counsel for parties must similarly refrain from seeking frivolous adjournments or insisting upon frivolous hearings or leading long winded and irrelevant evidence. The Commission further notes that a conscious use of technology, like tele- conferencing, video-conferencing etc., should also be encouraged and the same can easily replace the need for purely formal sittings and thereby aid in a smoother and more efficient conduct of arbitral proceedings.

17. In this context, the Commission has proposed addition of the second proviso to section 24 (1) to the Act, which is intended to discourage the practice of frequent and baseless adjournments, and to ensure continuous sittings of the arbitral tribunal for the purposes of recording evidence and for arguments.
18. In order to further demonstrate and re-affirm the Act’s focus on achieving the objectives of speed and economy in resolution of disputes, the Commission has also proposed an addition to the preamble of the Act. While this would not directly affect the defined substantive rights and liabilities of parties in terms of the Act, it would provide a basis for Arbitral Tribunals and Courts to interpret and work the provisions of the Act such that it ultimately achieves those objectives for the benefit of the ultimate users of arbitration. JUDICIARY AND ARBITRATION
19. It is thought in some quarters that judicial intervention is anathema to arbitration, and this view is not alien to a section of the arbitration community even in India. The Commission however, does not subscribe to this view. The Commission recognizes that the judicial machinery provides essential support for the arbitral process. The paradox of arbitration, as noted by a leading academic on the subject, is that it seeks the co-operation of the very public authorities from which it wants to free itself.
20. The obvious starting point for any discussion on the role of the judiciary in arbitration is section 5 of the Act, which itself is derived from Art 5 of the Model Law, which brings reduced judicial involvement in the arbitral process