Section 42A – A stumbling block for unprejudiced Arbitration in India
Khushbu Turki and Shagun Singhal[i]
Confidentiality is generally recognized as an inherent principle of arbitration. Initially, the Indian Arbitration and Conciliation Act, 1996 (‘the Act’) provided for confidentiality only in conciliatory proceedings, under Section 75. This flaw was discerned by the Srikrishna Committee, which was entrusted with the job to suggest amendments to the Act. Consequently, the Committee proposed the introduction of a confidentiality provision in arbitrations, in the form of Section 42A. It further suggested three exceptions to this provision, which would permit the disclosure of information when required by i) legal duty, ii) to protect and enforce a legal right, or iii) to enforce or challenge an award before a Court or judicial authority. However, the 2019 Amendment Bill did not fully incorporate these suggestions, leading to the formulation of a half-baked provision which provides that “the arbitrator, the arbitral institution and the parties to the arbitration agreement shall keep confidentiality of all arbitral proceedings except award where its disclosure is necessary for the purpose of implementation and enforcement of award.” While the intent behind the amendment was to transform India into a major hub of arbitration, the authors in this blog contend that due to its restrictive language, the section might defeat the purpose behind its enactment.
The need for transparency in Section 42A
While confidentiality of proceedings is one of the reasons why parties prefer to opt for arbitration, a certain degree of transparency is equally important since it enhances the efficiency of the proceedings. For instance, the publication of arbitral awards leaves parties, arbitrators, and judges with guidelines in legally and factually similar cases. In the recent amendment, the recognition of the implementation and enforcement of an arbitral award as the sole necessary ground for disclosure of confidential information clearly disregards the importance of transparency in the arbitral regime. It is contended that there are a number of circumstances that should be considered as ‘necessary’ enough in this provision, in order to merit the disclosure of confidential information in the interests of justice.
Firstly, public interest has been recognised as a ground for overriding the obligations of confidentiality by many countries. The possibility of keeping a low profile on disputes that have the potential to tarnish a company’s public image is an important factor weighing in favour of confidentiality of arbitral proceedings. However, when the outcome of the arbitration involves legitimate public interest, the State’s moral and legal obligation to inform its citizens of the outcome, trumps the company’s desire to exercise damage control.
Secondly, there might be a scenario wherein the outcome of arbitration between two parties affects the rights of a third party. Alternatively, an arbitrating party might need to disclose certain confidential information to enforce its rights vis-à-vis the third party. In such situations, the enforcement of a legal right should supersede the obligation of confidentiality.
Thirdly, in accordance with the principle of party autonomy, parties must be given the freedom to reveal confidential information with mutual consent, in accordance with the terms of any such agreement between them.
Lastly, companies are usually subject to a duty of financial transparency under various regulations, which require them to reveal certain confidential information. Not permitting disclosure in such cases leads to a clear conflict between the confidentiality provision and the disclosure requirements. For instance, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, requires listed companies to make disclosures by way of periodic filings, reports, etc. to enable investors to track the performance of a listed entity over regular intervals of time. Further, under the Companies Act, 2013, a company is required to disclose material information by way of a board of directors’ report, annual return, etc. on its website. A literal interpretation of Section 42A would exempt the concerned company from these requirements if the facts so concerned are crucial to the arbitration proceedings.
Further, the nature of information which is to be considered confidential has not been adequately defined in the Act. The section fails to distinguish between ‘inherently confidential’ information such as trade secrets, finances, etc. and other documents disclosed for the arbitration proceedings. Since different protection is accorded to different types of information, the lack of clarity further contributes to the ambiguity of the section.
The tussle with the other provisions of the Act
As already discussed, Section 42A provides for disclosure of confidential information solely in instances, wherein it is ‘necessary’ for the implementation and enforcement of an arbitral award. If strictly interpreted, this section is in direct conflict with the other provisions in the Act. Section 9 of the Act, provides for parties’ right to seek interim relief from the Courts. This assistance is only granted when the appealing party can prove that the relief initially sought from the arbitral tribunal turned out to be inadequate in nature. For this, the concerned party must put forth a good case based on the merits of the dispute, which may require them to disclose certain confidential information. However, such disclosure after the amendment can be in contravention with Section 42A of the Act.
Likewise, Section 29A lays down a time-limit for an arbitral proceeding, which compulsorily has to be adhered to, by the parties and the tribunal. However, an extension can be demanded from the Courts, provided they state the reasons for its delay. Additionally, they are under an obligation to disclose the nature of the dispute, the recorded evidence(s), the arbitrator’s details, and the stage of the proceedings. Such revelation can be in contravention to Section 42A of the Act, as the documents by default become a part of the public domain through its disclosure in the Courts. Moreover, this section by providing for necessary disclosures only for implementation and enforcement of an arbitral award fails to consider the importance of revealing information while setting aside an award under Section 34 of the Act. In lieu of these provisions, it is concluded that the vague wording of Section 42A has created a veil in the Act, which gives shelter to any party for claims that are filed against their will.
Impact on third-party fundings in India
Third-party funding (‘TPF’) as a concept in arbitration is still at its nascent stage in India. Since this mechanism is gradually becoming prominent, the Act at present does not have any express provision that governs such agreements. TPF agreements allow the parties to opt for a funder, who along with sponsoring the costs of the proceedings, agrees to bear the risks associated with the arbitration’s outcome. This makes resorting to TPF especially beneficial in commercial transactions, wherein the arbitrators usually impose a hefty financial penalty on the losing party. Even though this mechanism makes justice accessible to the financially strained, its process can violate the confidentiality provisions of an arbitral proceeding. This is because it requires a detailed discussion of the dispute to the funder, who evidently is a non-party to the arbitration agreement. These disclosures can act as a detriment to the non-funded party since these funders can use these case assessments to finance clients that enter into subsequent disputes with the same party.
In order to balance the conflicting interests of the funder and the non-funded, an agreement is entered into between the TPFs and the funded party, which asserts non-disclosure of confidential information to anyone other than the tribunal and the parties to the arbitration itself. In pursuance to these agreements, an exception has been carved out in the arbitral laws of many institutions, which allows for disclosure of information to the TPF to the end of securing funding in order to pursue the arbitral proceedings. However, Section 42A rules out the possibility of revelation to third parties in any form. If opted for, the non-funded party can contend the applicability of this section, jeopardizing the other party’s right of resorting to funded arbitrations. Hence, this amendment serves as a major setback to the people who can only pursue arbitrations, if given financial assistance.
Through the above-stated contentions, it is asserted that the unbridled scope of the section has defeated the purpose of its enactment. However, the following are certain suggestions which may enhance the effectiveness of the provision. First, to balance the issue between confidentiality and transparency, an exception can be carved out for publishing ‘sanitized’ awards. These awards shall be the edited/redacted versions of the actual award rendered by the tribunal. For instance, the ICC has updated its rules to publish redacted awards, if demanded by the parties. By doing this, the arbitral awards can be made accessible to the public without revealing the ‘sensitive’ information of the disputes in hand. Second, since this section is in conflict with the other provisions of the Act, the ‘doctrine of harmonization’, which focuses on reconciling two contradictory provisions in an act, can be followed by the tribunals and the Courts. For instance, in order to reconcile the confidentiality provision with Section 29A, an exception should be made for disclosing necessary information, such that it is sufficient to prove the reasons behind the delay in the arbitral proceedings. Third, an exception should be added that clearly provides for agreements between third-party funders and the parties, such that the former is under an obligation to keep the disclosed information only to itself. Through this, the financially strained will be able to resort to this mode of dispute resolution, making this mechanism available to everyone, irrespective of their hierarchy in the social stratum. Moreover, the Act should be amended to define the penalty that would be attracted in case of breach of any of the confidentiality obligations. These suggestions, if duly adopted, can help curb the existing pitfalls of the provision, thereby facilitating its unerring implementation by the tribunals and the Courts.
[i] Khushbu Turki and Shagun Singhal are third-year law students at NLIU, Bhopal. They are currently working as Editors with the Indian Arbitration Law Review. For any discussion related to the article, they can be contacted via mail firstname.lastname@example.org and email@example.com Preferred Citation: Khushbu Turki and Shagun Singhal, Section 42A – A stumbling block for unprejudiced Arbitration in India, Arbitration & Corporate Law Review, Published on 10th August, 2020.
This article was reviewed by Shebani Bhargava and Yagnesh Sharma.