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Part II: Revamping the Arbitration Act 1996: Proposed Reforms for the Indian Arbitral Regime

Garima Dhankar(*)


 

PUTTING THE “PATENT ILLEGALITY” SAGA TO REST


Several grounds for setting aside an arbitral award are enumerated in Section 34 of the A&C Act, Public Policy being one of them. Supreme Court categorized the meaning of public policy in Renusagar Power Co. v. General Electric Co. into three heads namely (i) fundamental policy of Indian law, (ii) the interests of India, or (iii) justice or morality. The 2015 amendment vested the court with the power to vacate an award based on “patent illegality”. This ground is roughly equivalent to “justice and morality”, which is a subset of the public policy ground for setting aside an arbitral award. Challenging arbitral awards on grounds of public policy and patent illegality has become an Achilles heel for arbitration in India: a means by which losing parties can attack arbitral awards, on much broader grounds than are permitted in other countries.

Judicial rulings like PSA Sical Terminals Pvt. Ltd. v. Board of Trustees of V. V. O Chidambranar Port Trust Tuticorin & Ors, South East Asia Marine Engineering & Constructions Ltd. v. Oil India Ltd, among others, allowing reappreciation of evidence and almost unlimited judicial review of the arbitral award in the garb of “patent illegality” are a fatal blow to the arbitration regime in India. In the former case, the court re-appreciated the evidence by examining the tariff guidelines and orders related to a license agreement and substituted its view without considering whether the arbitrator’s view was a plausible one. In the latter, the court re-interpreted contractual provisions to come to a different conclusion than that of the arbitrator. Such decisions have been notable departures from the goal of limited juridical intervention in arbitral awards.

Lately, the courts have been making active efforts to clarify and uphold the limited and measured approach to be adopted by courts while dealing with arbitral awards under Section 34. In the recent case of Reliance Infrastructure Ltd. v. State of Goa, the Supreme Court held that for an award to be tainted by patent illegality, it must be prima facie obvious. The court further observed that arbitral awards cannot be casually interfered with. Additionally, it observed that the review of an arbitral award, under section 34 of the Arbitration Act, should not entail reappreciation of facts or evidence. Party autonomy and the finality of the award are the two pillars on which the arbitration regime is built. The Arbitration Act will fail to achieve its goal and lose its identity if these two pillars are altered by unnecessary judicial intervention. Therefore, the scope and meaning of ‘patent illegality’ must be redefined by the judicial courts to preserve the principle of limited judicial interference in arbitration.

Further, as per Section 34 (Explanation 2A) of the Arbitration Act, the test of patent illegality applies only to domestic arbitrations and is categorically not applicable to international commercial arbitrations. It is pertinent to note that the leading pro-arbitration judgment like Pasl Wind Solutions[1], which allowed two Indian parties to opt for a foreign seat to arbitrate their disputes, has the potential of effectively deterring domestic arbitrations in India. Indian parties now have the option to subject themselves to the jurisdiction of a foreign seat and avoid the rigors of additional scrutiny that domestic awards are subjected to in India considering the patent illegality test. After the introduction of the said test, the threshold of scrutiny of an arbitral award is more rigorous domestically as compared to any foreign jurisdiction. Considering the same, Indian parties often tend to opt for enforcement of arbitral awards in a foreign jurisdiction which ultimately affects the overall ecosystem of domestic arbitrations in India. Setting identical standards or grounds of scrutiny for setting aside a domestic as well as an international award would be a major progressive and pro-arbitration move in furtherance of India’s goal of becoming a global arbitration hub.


RECOGNITION OF EMERGENCY ARBITRATION


Emergency Arbitration is a mechanism wherein parties can obtain urgent relief in an arbitral dispute before the tribunal has been constituted. The Arbitration Act neither formally recognizes nor makes provisions for the enforcement of orders or awards pronounced in emergency arbitration proceedings. In a significant breakthrough, the Indian Supreme Court in the case of Amazon.com NV Investment Holdings Inc. v. Future Retail Ltd acknowledged that orders issued by emergency arbitrators under institutional arbitration rules like that of SIAC, International Court of Arbitration (ICC), etc. are recognized under Section 17(1) of the Arbitration Act and subsequently, can be enforced under Section 17(2).

The court opined that the purpose of emergency arbitration would be defeated if the award pronounced by an emergency arbitrator was not given due consideration and effect. This landmark decision has strengthened India’s pro-arbitration approach by upholding the sanctity of party autonomy and has also paved the way for the formal recognition of arbitral awards rendered by an emergency arbitrator in the country. In this light, any reform in the Arbitration Act incorporating the term emergency arbitrator within the definition of a panel of arbitrators under section 2 can turn out to be a definitive course of legitimizing emergency arbitrations in India.


ADDRESSING THE AMBIGUITY IN THE APPOINTMENT OF ARBITRATORS


Jurisprudence around the appointment of arbitrators is an evolving concept in the Indian regime. There have been contradictory judgments in the past which is evident from TRF Ltd. v. Energo Engineering Projects Ltd. (“TRF Case”) and Central Organisation for Railway Electrification v. ECL-SPIC-SMO-MCML (“CORE”). In the TRF Case, the Supreme Court held that a person ineligible to be an arbitrator cannot nominate a person to be an arbitrator. On the contrary, in CORE, the three-judge bench of the Supreme Court legitimized an arbitration clause that included employees and ex-employees of the appointing party as part of the arbitral panel. This case is currently referred to a constitutional bench for consideration and now the issue before the bench to decide is whether courts can deviate from the process of appointing arbitrators provided under Section 11 of the Arbitration Act and whether a person who is disqualified to serve as an arbitrator can nominate another person to serve in that capacity.

However, the Supreme Court postponed the case until September 13 considering the formation of the expert committee for inviting suggestions on reforms in the Arbitration Act. Clarifying ambiguities surrounding such issues settles any possible conflicts of interest and ensures independence & impartiality in arbitral proceedings by clarifying the ambiguity related to the appointment of arbitrators. This ambiguity is one of the reasons why the committee for suggesting reforms was set up in the first place. The decisions in the TRF case and Perkins Eastman Architects DPC v. HSCC (India) Ltd. which broadly held that unilateral appointment of arbitrator is non-est in law can be together used as a guideline for resolving the ambiguity around unilateral appointment of arbitrators and connected discourses. It is expected that the committee will deal with these issues by warranting a legislative amendment or some other similar reform that would clarify the existing ambiguities in this realm.


CONCLUSION


The Government’s proactive step of soliciting input from various stakeholders regarding potential reforms to the Arbitration Act showcases a strong commitment to progress and the promotion of arbitration. The government is actively striving to foster a favorable atmosphere for arbitration in India. The effective implementation of these suggestions will not only enhance and rejuvenate India’s arbitration framework but could also significantly propel India towards becoming a global hub for arbitration.


 

* Garima Dhankhar graduated from the Jindal Global Law School (JGLS) in 2022 and has been working as a legal researcher under a Judge at Delhi High Court. Her interests lie in Dispute Resolution, Arbitration and Legal Research. For any discussion related to the article, she can be contacted via mail through: garima.dhankhar765@gmail.com. [1] Pasl Wind Solutions (P) Ltd. v. GE Power Conversion (India) (P) Ltd., (2021) 7 SCC 1.


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