INSTITUTIONAL ARBITRATION HAS SOLUTION FOR REDUCING THE ARBITRATION COST

Union of India -vs- Singh Builders Syndicate 2009(2) Arb. LR 1 (SC)

The Supreme Court has held that the cost of arbitration can be high if the Arbitral Tribunal consists of retired Judge/s.  When a retired judge is appointed as arbitrator in place of serving officers, the government is forced to bear the high cost of arbitration by way of private arbitrator’s fee even though it had not consented for the appointment of such non-technical non-serving persons as arbitrator/s.  There is no doubt a prevalent opinion that the cost of arbitration becomes very high in many cases where retired judge/s are arbitrators.  The large number of sitting and charging of very high fees per sitting, with several add-ons, without any ceiling, have many a time resulted in the cost of arbitration approaching or even exceeding the amount involved in the dispute or the amount of the award.  When an arbitrator is appointed by a court without indicating fees, either both parties  or at least one party is at a disadvantage.  Firstly, the parties feel constrained to agree to whatever fees is suggested by the arbitrator, even if it is high or beyond their capacity.  Secondly, if a high fee is claimed by the arbitrator and one party agrees to pay such fee, the other party, who is  unable to afford such fee or reluctant to pay such high fee, is put to an embarrassing position.  He will not be in a position to express his reservation or objection to the high fee, owing to an apprehension that refusal by him to agree for the fee suggested by the arbitrator, may prejudice his case or create a bias in favour of the other party who readily agreed to pay the high fee.  It is necessary to find an urgent solution for this problem to save arbitration from the arbitration cost.  Institutional arbitration has provided a solution as the arbitrators’ fees is not fixed  by the arbitrators themselves on case-to-case basis, but is governed by a uniform rate prescribed by the institution under whose aegis the arbitration is held.  Another solution is for the court to fix the fees at the time of appointing the arbitrator, with the consent of parties, if necessary in consultation with the arbitrator concerned.  Third is for the retired judges offering to serve as arbitrators, to indicate their fee structure to the Registry of the respective High court so that the parties will have the choice of selecting an arbitrator whose fees are in their ‘range’  having regard to the stakes involved.  What is found to be objectionable is parties being forced to go to an arbitrator appointed by the court and then being forced to agree for a fee fixed by such arbitrator.  It is unfortunate that delays, high cost, frequent and sometimes unwarranted judicial interruptions at different stages are seriously hampering the growth of arbitration as an effective dispute resolution process.  Delay and high cost are two areas where the arbitrators by self regulation can bring about marked improvement.

By

D.Saravanan, Chairman

Council for National and International Commercial Arbitration (CNICA)

APPOSITE PERCEPTIVE OF ARBITRATION ACT, 1996

The Supreme Court on 6^th September, 2012 had delivered the much awaited Constitutional Bench judgment by taking a refreshing and encouraging view regarding Arbitration & Conciliation Act, 1996  (hereinafter referred to as the ‘Act’) by overruling the earlier views. The earlier observations in Bhatia International vs Bulk Trading S.A. and Venture Global Engineering vs Satyam Computer Services Ltd had jeopardized the position of the Foreign Investors and Corporates and placed India in a bad light with respect to International Commercial Arbitration.

Before going through the questions of law raised and the fresh current views of the Constitutional Bench, we need to understand as to why Alternative Dispute Resolution Mechanism is vital, especially to commercial disputes. In a developing nation such as India, economic reforms cannot become fully effective, if the law dealing with settlement of domestic and international commercial disputes remained out of sync with such reforms.

In Bharat Aluminium vs Kaiser Aluminium, the Constitutional Bench of the Supreme Court headed by Chief Justice of India has overruled the views taken in Bhatia International and Venture Global Engineering (supra) and put to rest the confusion created by those rulings.

To recap the earlier views, in Bhatia International and Venture Global Engineering the Supreme Court held that the Part I of the Act ,  shall be applicable even  to the arbitration that takes place outside India. Consequently Indian courts attained jurisdiction to pass interim reliefs as contemplated under Section 9 of the Act. Further Indian courts entertained the applications challenging the foreign arbitral award even on merits contemplated under Part I of the Act.

In order to reconcile the view of both the judgments, the Constitutional Bench had analyzed the troubled Sections of the Act in its fullest length and breadth and carried out a fine comparative analysis with judgments of other nations. The Constitutional Bench has observed that Arbitration Act has accepted the ‘territoriality principle’ of the Model Law and the ‘seat’ is the center of gravity. 

Part I and Part II of the Act has been analyzed separately. Let us go through the important aspects and analysis of the judgment in brief. Sections 1 (2), 2 (1)(e),(2),(4),(5),(7),(20) and (28)(1)(a) of Part I and Sections 45, 48 (1)(e) of Part II have been analyzed to understand the scope, object and ambit of the aforementioned sections. It was observed that the Act is a consolidated Act of three acts namely Protocol Act, 1937, Foreign Awards Act, 1961 and Arbitration Act, 1940.

In its judgement on Konkan Railways, the Supreme Court observed that the Act and the Model Law are not strictly identical. The model law, judgments, literature are not a guide to interpretation of the Act. Keeping this in view, it was analyzed that the word “only” missing in Section 2(2) of the Act is not an instance of CASUS OMISSUS. It was also observed that it was neither the judicial option nor a compulsion of the Court to supply the words and interpret.

The Bench further went on to observe that the seat of arbitration is intended to be its ‘center of gravity’. However, center of the gravity does not mean that all the arbitration proceeding must be held in the seat initially agreed by the parties. Any changes in the seat during the process of the arbitration proceedings will not affect the status of the “seat” initially agreed by the parties. Hence, the missing word “only” in Section 2(2) does not detract from the territorial scope of its application.

The need for  interpretation of Section 2(4) & (5) was the usage of wordings "apply to every arbitration" and "all arbitrations" respectively and whether these wordings necessarily include the arbitration that takes place outside India and also on the applicability of  Part I to such arbitrations. The Bench observed that the phrase "all arbitrations" has to be read as limited to all arbitrations that takes place within India. The two sub-sections merely recognize that apart from the arbitrations which are consensual between the parties, there may be other types of arbitrations which are mandatory by statutes as it is  under the Indian Telegraph Act, 1886, Electricity Act, 2003 etc. Hence, this cannot be a ground for applicability of Part I.

On analysis of Section 2(7) in the context of Section 2(f), the Bench observed that the term "domestic award" can be used to distinguish from "International award" and "foreign award". Domestic Award made in India is purely domestic in context. "International Award" shall mean an award from an arbitral tribunal which is domestically seated [in India] for an International Commercial Arbitration. Further, where the parties select a seat outside India, an award from such foreign seated arbitral tribunal will be called a "foreign award".

Further it was observed that, the term ‘subject matter of arbitration’ cannot be confused with ‘subject matter of the suit’ as contemplated under Section 2 (1)(e). “The legislature has intentionally given jurisdiction to two courts i.e. the court which would have jurisdiction where the cause of action is located and the courts where the arbitration takes place” hence the reference in the provision is to identify the courts having supervisory control over the arbitration proceedings. The need for identification of courts is essential because in an agreement parties may agree at a place which would be neutral to both the parties. In such a case, the courts where the arbitration takes place is required to exercise its supervisory control over the arbitral process.

The Bench has further clarified and distinguished the difference between “seat/place” and “venue” in arbitration while analyzing Section 20 in context with Section 2(2). Firstly “venue” is not synonymous to “seat” in an arbitration agreement. The ‘seat/place’ of the arbitration is the place where parties by agreement agree to have the arbitration proceedings. Further, during the course of the arbitral process the tribunal may shift from place to place according to arbitrators, witnesses and parties convenience, for spot visit etc. Apart from the agreed ‘seat/place’, wherever the arbitral tribunal sits that spots can be called as ‘venue’. However, the Bench observed that, the change in the place of meeting for further process or at the convenience of the parties, arbitration and witnesses, will not change or affect the ‘seat/place’ of the arbitration. “The seat of the arbitration remains the place initially agreed by or on behalf of the parties”. Hence, even in a hypothetical situation, if a foreign arbitral tribunal has one or more sitting in India for their convenience, it would not attract the applicability of Part I, though one of the parties may be Indian National.

Further it was observed and upheld from Conflict of Law Rules as quoted in Dicey & Morrirs that, “where the parties have failed to choose the law governing the arbitration proceedings, those proceedings must be considered, at any rate prima facie, as being governed by the law of the country in which the arbitration is held, on the ground that it is the country most closely connected with the proceedings.”     

Collectively, the Bench observed that, the ‘seat/place’ is the center of gravity of the arbitration and hence “if the parties choose another country as the seat of arbitration, inevitably they import an acceptance that the law of that country relating to the conduct and supervision of arbitrations will apply to the proceedings”. Therefore, if the parties select ‘seat/place’ outside India for the purpose of arbitral process, Part I of the Act shall not apply, though the parties might have opted Indian Law and Arbitration Act, 1996 as their substantive law.

The Bench has examined the choice of substantial law and procedural law in the context of Section 28 of the Act. The law governing the conduct of the arbitration is usually procedural law or curial law or the lex fori. The law governing the contract and the obligation of the parties in whole is substantial law. The Bench observed that, Section 28 makes a distinction between domestic arbitrations and international commercial arbitrations, having its seat in India.

The Bench observed that, “Section 28(1)(a) makes it clear that in an arbitration under Part I to which Section 2(1)(f) does not apply, there is no choice but for the Tribunal to decide “the dispute” by applying the Indian “substantive law applicable to the contract”….”On the other hand, where an arbitration under Part I is an international commercial arbitration within Section 2(1)(f), the parties would be free to agree to any other “substantive law” and if not so agreed, the “substantive law” applicable would be as determined by the Tribunal”. Hence, it was concluded that the Parliament was not with the intention to give an extra-territorial operation to Part I of the Arbitration Act, 1996.    

Part II of the Act:

It was observed that the regulation of arbitration consists of four steps (a) the commencement of arbitration; (b) the conduct of arbitration; (c) the challenge to the award; and (d) the recognition or enforcement of the award.

Further it was observed that the Part II, unlike Part I of the Act, has no provisions regulating the conduct of arbitration nor the challenge to the award. Hence, the regulation of conduct of arbitration and challenge to an award would have to be done by the courts of the country in which the arbitration is being conducted. Such a court is then necessarily being the supervisory court which was possessed of the power to annul the award. It was upheld that, “it follows from this that a choice of seat for the arbitration must be a choice of forum for remedies seeking to attack the award”

One of the most important aspects in the judgment, while analyzing Section 48(1) (e) observed that, the country in which the award was made is “First Alternative” and the courts under the law of which the award was made is “Second Alternative”. Further, “the words suspended or set aside in Section 48(1)(e) cannot be interpreted to mean that by necessary implication the foreign award sought to be enforced in India can also be challenged on merits in Indian Courts”

Therefore, a foreign arbitral award shall be recognized and enforced by virtue of Sections 48 and 49 of Part II of the Act. However, vide this judgment the Supreme Court has made it clear that, Indian Courts will not have the jurisdiction to challenge the foreign arbitral award on merits. It is only the courts of the country where the seat of the arbitration has been held will have the jurisdiction by exercising its ‘supervisory powers’ over the arbitral process.

Interim measures etc. by Indian Courts where the seat of arbitration is outside India:

It was observed that, “when parties voluntarily select/choose the seat of arbitration to be outside India, they are impliedly also understood to have chosen the necessary incidents and consequences of such choice”. Hence, the Indian courts cannot import the provisions meant under Part I of the Act especially Section 9 for any such interim measures, wherein the seat of the arbitration is outside India. The parties cannot maintain Inter-Parte Suit under the Code of Civil Procedure, 1908 pending arbitration abroad for interim measures and suit under Specific Relief Act, 1963 for grant of temporary / perpetual injunction since the primary requirement for filing a suit is a rise of ‘cause of action’ and initiation of arbitration proceedings cannot be construed as ‘cause of action’.     

Conclusion:

The Constitution Bench concluded that, the Part I of the Act would have no application to International Commercial Arbitration held outside India and there can be no overlapping or intermingling of the provisions contained in Part I with Part II of the Act. The Judgments of Bhatia International and Venture Global Engineering were overruled. The law laid down by this judgment shall apply prospectively, to all the arbitration agreements executed hereafter.

There are some serious concerns such as there is no provision for any sort of Interim relief in Part II in the Act etc. considered by the Supreme Court in this judgment, however the Bench observed that if at all there is a gap or lacuna, it would be for the Parliament to rectify the same. Such a task cannot be undertaken by the Court and thus it is a wake-up call to the Parliament.

To achieve the economic reforms contemplated by attracting foreign investors it is necessary that the alternate dispute resolution mechanism both by domestic and international arbitration should be revisited by making the necessary changes and amending the provisions of the Act.   

Sukumar .A

Associate at Fox Mandal & Associates, Bangalore

Author, Arbitration – Law and Applicability 

AN ARBITRATION AWARD RECORDING SETTLEMENT DOES NOT REQUIRE STAMP DUTY OR REGISTRATION

Channulal Chandrakar –vs- Chhangalal & others 2012(2)Arb.LR 18 (DB) Chhattisgarh

The parties to the arbitration agreement were real brothers, who entered into arbitral agreement for distribution/partition of the movable and immovable properties.  The parties had appointed Arbitrators, who had passed an Award.  The Award was challenged on the ground that it was not properly stamped and was not registered under Section 17 of the Indian Registration Act, 1908.   The award was set aside   against which an appeal was preferred before the Division Bench.  The Division Bench has set aside the order of Court below and passed a judgment in terms of the Arbitral Award as provided under Section 17 of Arbitration Act, 1940.  While passing the judgment in terms of the Award, the Division Bench has held that the Court below should not have entertained the application to set aside the Award as it was barred by limitation.  The Division Bench has further held,  by relying upon the  judgment of Apex Court, in the case of N. Khadervali Sagar (Dead) by LRs  –vs- N. Gudu Sahib (Dead) 2003(1) Arb. LR 647 (SC) wherein it was held that the document which records the settlement, an award, does not require registration under Section 17 of the  Registration Act, 1908 since the document does not transfer or assign interest in any asset and hence there is no question of payment of stamp duty.  In the instant case, it was held that  since it was the settlement of the properties between parties who were real brothers, no stamp duty or registration was required.

BY

D. SARAVANAN

CHAIRMAN

COUNCIL FOR NATIONAL AND INTERNATIONAL COMMERCIAL ARBITRATION (CNICA)

DELHI HIGH COURT HAS SET ASIDE THE FOREIGN AWARD AS THE ARBITRATOR HAD FAILED TO DISCLOSE HIS PREVIOUS APPOINTMENT AS ARBITRATOR BY ONE OF THE PARTIES

M/S.SHKTI BHOG FOODS LTD., VS. KOLA SHIPPING LTD.,  

   

The Shakti Bhog Foods Ltd.,  hereinafter referred to as “Petitioner” filed a suit before the III Additional District and Sessions Court, Kakinada, Andhra Pradesh claiming damages against M/s.Kola Shipping Ltd., hereinafter referred to as “Respondent”.  The Respondent issued a notice appointing Mr.Alan Okley as their Arbitrator. The Petitioner sent a communication to the Respondent denying the existence of agreement and declined to appoint an Arbitrator.  Thereafter, the Respondent filed an application u/s 45 of Arbitration and Conciliation Act, 1996 to refer the parties to arbitration in London.  Thereafter, the Respondent requested the Petitioner to appoint an Arbitrator and in the event of failing to appoint an Arbitrator, Mr. Alan Okley would be the Sole Arbitrator.  The District Court allowed the application filed u/s 45 and referred the parties to arbitration in London.  Against which the Petitioner preferred a Civil Revision Petition before the High Court of  Andhra Pradesh which came to be dismissed.  Thereafter, the Respondent sent a letter to the Arbitrator Mr. Alan Okley requesting him to act as a Sole Arbitrator as the Petitioner was not willing to appoint his Arbitrator.  Against the order of dismissal of Civil Revision Petition, the Petitioner filed a Special Leave Petition before the Supreme Court of India.  That be so, the Respondent filed a statement of claim before the appointed Arbitrator Mr. Alan Okley.  Upon which, the Arbitrator Mr.Alan Okley sent a communication to the Petitioner directing the Petitioner to file a statement of defense.  Upon which, the Petitioner’s Advocate sent a letter to the Arbitrator Mr. Alan Okley requesting for extension of time for filing the statement of defense.  Thereafter, the Petitioner sent a communication to the Respondent that the arbitration proceedings should not be continued pending S.L.P.  Finally, the Supreme Court dismissed the S.L.P. filed by the Petitioner and directed the parties to go for arbitration in London.  Thereafter, the Petitioner nominated Mr. Ramaswamy as Arbitrator, which was disputed by the Respondent.  Thereafter, the Respondent sent a letter to the Arbitrator Mr. Alan Okley requesting him to reconfirm his appointment as Sole Arbitrator.  Upon which, the Arbitrator Mr. Alan Okley sent a communication to the Petitioner confirming that he has accepted the appointment  as Sole Arbitrator and that he has ordered the Petitioner to file the defense submissions within a particular day failing which the final and voluntary order would result which would carry severe sanctions.  Upon which, the Petitioner sent a communication to the Counsel for the Respondent disputing the validity of appointment of Mr. Alan Okley as Sole Arbitrator which communication was marked to the Arbitrator Mr. Alan Okley.  To which the Arbitrator Mr. Alan Okley replied stating that his appointment as a Sole Arbitrator was in accordance with the law and agreement.  Thereafter, the Petitioner made an application challenging the constitution of Arbitral Tribunal.  Thereafter, the Petitioner filed an application Section 14 r/w Sections 17(3) and section 24 of the Arbitration and Conciliation Act, 1996 before the Court for terminating the mandate of the arbitrator Mr. Alan Okley.  The said application was contested by the Respondent stating that the Petitioner has subjected himself to the arbitration by seeking time to file the statement of defense.  The Arbitrator Mr. Alan Okley rejected the application of the Petitioner and stated that he would be proceeding to the final arbitral award, if the Respondent would make an application.  Upon which, the Respondent requested the Arbitrator Mr. Alan Okley to pass pre-emptory  order directing the Petitioner to serve the defense and counter claim.  However, the Petitioner requested the Arbitrator Mr. Alan Okley to avoid decision of the Court in the application made by them u/s 14 r/w with sec.17 (3) and 24 of Arbitration and Conciliation Act, 1996 for terminating the mandate of Arbitrator.  However, on the same day, the arbitrator Mr. Alan Okley passed final and pre-emptory order as requested by the Respondent.  Thereafter, the Arbitrator Mr. Alan Okley fixed the hearing in London.  The Petitioner did not participate in the arbitration proceedings.  On the other hand, the Respondent filed his written submission which was not provided to the Petitioner.  Based on the written submissions and evidence provided by the Respondent and upon oral hearings, the Arbitrator Mr. Alan Okley proceeded with the arbitration proceedings and passed an Award of 11.02.2009.  The said Award was challenged before the Delhi High Court on various grounds, including the contention that the Arbitrator Mr. Alan Okley failed to disclose that he had acted as Co-Arbitrator of the Respondent in a related dispute between the Respondent and the head owner of the vessel.  Finally, the Delhi High Court was pleased to hold that the constitution of Arbitral Tribunal with  Mr. Alan Okley was  invalid and such award is liable to be set aside u/s 34(2)(a)(v) of the Arbitration and Conciliation Act, 1996 as the Arbitrator Mr. Alan Okley failed to disclose the material fact concerning his appointment as the Arbitrator involving the Respondent which gives rise to justifiable doubts as to his independence on a collective reading Section 12(3), 13(5), (34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996.  

MANADATE OF ARBITRATOR IS TERMINABLE BY EFFLUX OF TIME

(Bharat Omen Refineries Ltd., -vs- Mantecn Consultant, 2012(2) Arb. LR 482 (DB) BOMBAY)

The Arbitration Agreement specifically contemplates that the Award should be made in writing and published by the arbitrator within two years after entering upon the reference or within such extended time not extending further twelve months.  The parties to the arbitration had advanced their arguments on 21.04.2006.  After a considerable delay, the Arbitrator wrote a letter on 14.03.2006 to the respondent that he is trying to publish the Award by 31.03.2006 and in any case latest by 30.04.2006 and that the Arbitrator requested the respondent to send him a Stamp Paper of Maharashtra State for Rs.100/- preferably by 23.03.2006 to publish the Award.  The Arbitrator wrote another letter on 19.05.2006 to the parties stating that he had received a call from the respondent who had requested the Arbitrator to publish the Award as quickly as possible.  By the said letter the Arbitrator stated that he could not publish the Award within 30.04.2006 as he had drafted the Award in respect of certain claims and he is expected to complete the Award of other claims shortly and publish the final Award on 31.03.2006.  Thereafter, the Arbitrator published the Award on 17.08.2006.  The said Award was challenged by the respondent u/s 34 of the Arbitration and Conciliation Act, 1996 and that the learned single Judge was pleased to set aside the Award on the ground that the Arbitrator becomes functus officio as the Award was not made within the stipulated time as mandated under the arbitration agreement.  Against which an appeal was preferred before the Division Bench of Bombay High Court wherein the Division Bench was pleased to confirm the order of the learned single Judge holding inter-alia that the jurisdiction of Arbitrator depends upon the Arbitration Clause in agreement itself; after conclusion of arguments, sending a stamp paper to Arbitrator is nothing but a ministerial act on the part of the respondent and it cannot be said to be effective  participation in arbitration proceedings;  simply because the respondent has provided a stamp paper or might have entered into telephonic conversation with Arbitrator itself cannot be treated as an act of waiver or it cannot be construed as an active participation in judicial proceedings before the Arbitrator;  the Award of Arbitrator is against the mandate given to the Arbitrator in the agreement and the subsequent proceeding after conclusion of arguments cannot be said to be legal and valid;   Arbitrator looses his jurisdiction as per the mandate of Section 14 and 15  once agreed time is lapsed and the said defect is incurable unless both the parties agreed by a fresh agreement in writing giving authority to the Arbitrator to declare the Award even after the stipulated time in furtherance of the original agreement;  implied consent cannot confer jurisdiction once the agreed period is lapsed;  once the agreed period is lapsed, the Arbitrator could have and/or might have refused to pass the Award or terminate the arbitral proceedings suo moto; or could have asked the consent of parties for extension of time;  the delay by the Arbitrator in passing the Award itself is misconduct;  parties cannot be deprived of their right to challenge the Award on the ground that there is a delay of 2 years and 4 months and Award as declared after such a long period can be challenged u/s 34 and finally the Division Bench dismissed the appeal confirming the order of setting aside the Award by relying upon the judgment reported in the Judgment of Supreme Court of India in the case of N.B.C.C. Ltd., -vs- J.G. Engineering Private Ltd. [2010(1) Arb.LR 165 S.C]

BY

D.SARAVANAN

CHAIRMAN

COUNCIL FOR NATIONAL AND INTERNATIONAL COMMERCIAL ARBITRATION (CNICA)

ARBITRATION TO SURVIVE AFTER THE DEMISE OF THE NAMED ARBITRATOR

COURT :	THE SUPREME COURT OF INDIA
JUDGMENT :	ACC Limited (formerly known as the Associated Cement Co. Ltd.) Vs. Global Cements Ltd.
JUDGES::	Their Lordship Justice Mr.K.S. Radhakrishnan and Mr.Jagdish Singh Khehar.JJ

BRIEF FACTS :

The parities to the dispute entered into an agreement dated 16.12.1989 which contained the following arbitration clause "21. If any question or difference or dispute shall arise between the parties hereto or their representatives at any time in relation to or with respect to the meaning or effect of these presents or with respect to the rights and liabilities of the parties hereto then such question or dispute shall be referred either to Mr. N.A. Palkhivala or Mr. D.S. Seth, whose decision in the matter shall be final and binding on both the parties."

A dispute arose between the parties after the demise of both the named Arbitrators. The named arbitrators were Chairman and Directors respectively of the company. They were appointed considering their eminence, impartiality and familiarity of commercial transactions and commercial laws. They can not be replaced by any other person was the argument placed by the appellant in the application preferred under section 11 of the Arbitration and Conciliation Act 1996 by the respondent before the Hon’ble High Court at Bombay.

The Hon’ble Bombay High Court took the view that the arbitration clause constitutes was valid and that the court cannot, when there is no express prohibition, presume that a vacancy of the named arbitrator cannot supplied by the Court under section 11 of the Act.  

LAW LAID DOWN:

The Apex Court after going through the facts of the case, Sections 14 and 15 of the Act and various the judicial precedence came to the following conclusions:-

a)      The words “at any time” has to be interpreted contextually and reasonably taking note of the intention of the parties.

b)      In the present arbitration agreement the words “at any time” had nexus to the reference of dispute and not to the life time of the named arbitrators.

c)       Further clause 21 of the agreement did not prohibit or debar the parties in approaching the court for substituting an arbitrator on the vacancy of the name arbitrators.  

d)      The view of the Bombay High Court was upheld.

BY G.Ashokapathy 

Secretary General and Co Founder

CNICA 

Fostering Cultural Intelligence and the Art of ADR

A Synopsis

Cultural intelligence is inherent to an individual. There should be a reason to improve cultural intelligence on a general notion. The inherent skills, which are determined by one’s culture, equip the individual with unique and exclusive qualities. Cultural inheritance influences social change to a greater extent. Thriving hard in one’s own culture most often results in unknown practices while the others who slightly stay detached from the hardcore cultural practices, experience a better slot adapting to the social standards in general. The skills of ADR come as a technique fostered by the cultural intelligence on most occasions.

Although cultural intelligence comes as a natural instinct, there is a wider scope to understand and inherit the cultural intelligence by learning such trait from others by generally observing and focusing them on low-pressure situations. Being judgmental in most occasions might end up being inaccurate and stereotypic. The trait of inculcating a very high standard set of ADR skills will not only render a status of resolved disputes but on the other hand results in a day to day solution of harmony. It is important that one understands the new environment in true sense to focus on the situation more accurately. Hanging on to a wrong foot, miscommunication or misinterpretation ends up in an awkward move and perhaps, the ways and means to avoid this is to interact effectively with an utmost sense of clarity. Trust building is the most useful concept, which stands throughout the process of dispute settlement and helps parties by paving way to reach their goals.

This synopsis shall form the base for the study session to be held on 13/07/2012 and chaired by Ms. Harshitha Ram

No Service-Tax on Individual Advocates, GTA etc w.e.f. 1.7.2012

Vide Notification No.15/2012-Service Tax dated 17.03.2012, the Ministry of Finance had specified that in respect of services provided by an individual advocate, Goods Transport Agency, Insurance Agent, services provided or agreed to be provided by way of sponsorship to any business entity, in respect of services provided or agreed to be provided by an arbitral tribunal etc, the service-tax payable shall be Nil and that the person receiving the service shall pay 100% of the tax. This Notification is to come into force from the date on which section 66B of the Finance Act, 1994 comes into effect. S. 66B of the Finance Act, 1994 has been inserted by clause 143 (F) of the Finance Bill 2012. Vide Notification No. 19/2012 dated 5.6.2012, 1.7.2012 has been appointed as the date on which s. 143(F) of the Finance Act 2012 shall come into force. The result is that Notification No. No.15/2012-Service Tax dated 17.3.2012 shall come into effect on 1.7.2012.

Negative List of Services Applicable from 01.07.2012

Central Government has appointed July 1, 2012 (vide Notification No. 19/2012-ST dated 5.6.2012) as the effective date from which Negative List based service tax will come into operation. Now no need to classify the services under any particular category for taxing purpose. Any activity carried out by one person for another for a consideration, unless covered by the Negative List or by some exemption Notification, will be liable to service tax. Many transactions/activities which were hitherto out of the scope of service tax may now be liable to service tax. We expect corresponding changes in Cenvat Credit Rules, 2004, Place of Provision of Services Rules, 2012, Point of Taxation Rules, 2011 and Service Tax Rules, 1994 to align these with the Negative List based service tax regime in next few days. Now more activities will be covered by Service Tax Law, so it become Important to analyse existing and future transactions afresh to ascertain the applicability of service tax or otherwise.

Notified Date for Insertion of New Sections 65B, 66B, 66C, 66D, 66E, 66F & Amendment In Section 67/68

Following new sections have been inserted for governing the Service Tax Legislature:
1. Section 65B – Definitions
2. Section 66B – Charge of Service Tax
3. Section 66C – Determination of Place of Provision of Service
4. Section 66D - Negative list of Services
5. Section 66E – Declared services

6. Section 66F – Principles of interpretation of specified description of Services or bundled Services

—————————————

FINANCE ACT, 2012 – NOTIFIED DATE FOR INSERTION OF NEW SECTIONS 65B, 66B TO 66F AND AMENDMENT IN SECTION 67/68
NOTIFICATION NO. 19/2012-SERVICE TAX, DATED 5-6-2012
In exercise of the powers conferred by clauses (C), (F), (G) and (I) of section 143 of the Finance Act, 2012 (23 of 2012), the Central Government hereby appoints the 1st day of July, 2012 as the date from which the provisions of clauses (C), (F), (G) and (I) of the said section of the said Act shall come into force.

[F. No. 334 /1 /2012-TRU]

(Rajkumar Digvijay)

Under Secretary to the Government of India

This information was taken from the following website:

http://taxguru.in/service-tax/servicetax-individual-advocates-gta-wef-172012-notified-date-insertion-sections-65b-66b-66f-amendment-section-6768.html

INDIA’S BILATERAL INVESTMENT TREATIES: AN INVITATION TO INVESTMENT ARBITRATIONS

Bilateral Investment Treaties being paramount in the present economy it is necessary to have a carefully well-worded investment treaty to avoid potential disputes. India as of today has signed Bilateral Treaties with 82 countries out of which 72 have come into force.[1] Many countries including India being lured by the concept of economic growth have signed many Investment Treaties to attract Foreign Direct Investments so as to develop its economy. They are under a blind perception that signing investment treaties will increase investments. Hence they enter into bilateral treaties without taking cognizance of any legal implications that would follow.

BITs can have far-reaching and typically negative implications for host country governments and citizens, because of the sweeping protections afforded to investors at the cost of domestic socio-economic rights and environmental standards.[2] One of the major problems with BITs is it allows private companies to file cases against governments, and consequently subject the countries to the risk of litigation by corporations from another country which is a signatory to the same agreement. India should initiate a comprehensive review of its existing investment treaties since recent cases have shattered the myth that its investment treaties are adequate to protect the interests of investors, their rights and responsibilities.[3]

India has recently lost its first ever and the only international arbitration that it faced under a BIT till date where White Industries initiated Arbitration against in India by using the “Dispute Settlement Clause” provided under Article 12 of BIPA between India and Australia. The tribunal found India guilty of violating the India-Australia BIT because the delay by Indian courts violated India’s obligation to provide White Industries with an “effective means’ for enforcing their rights.”[4] White Industries invoked the ‘Most Favoured Nations’ Clause (MFN) from India-Australia BIT which obliged India to provide effective means for enforcing rights in relation to investment. MFN assures equally favourable treatment to the investments by the nationals and companies of a contracting country, as the Government of the investee country would accord to the investors of any other country under any other BIT.[5] White Industries imported 'effective means' provision from India-Kuwait BIT through MFN in India-Australia BIT to use it against India. An important repercussion of this ruling is that undue delays in Indian courts in disposing matters related to a foreign investor can, potentially, violate India’s BIT obligations not due to the violation of ‘denial of justice,’ but due to a violation of the ‘effective means’ standard, which requires a lower threshold than ‘denial of justice.’[6]

Similarly Vodafone has threatened to initiate Arbitration against India under the India-Netherlands BIT owing to the retrospective tax laws that was proposed by the Indian Government.  The press release posed by Vodafone on 17^th April 2012 says that “the retrospective tax proposals amount to a denial of justice and a breach of the Indian government’s obligations under the BIT to accord fair and equitable treatment to investors.” In addition our country has felt the impact of cancellation of 2G licences authorised by A. Raja in 2008. Companies like Telenor and Sistema which have suffered huge losses as a result of cancellation have served notices to our Government seeking a huge compensation for their losses. Failure to resolve the issues through negotiations or discussions would only lead to arbitrations under the respective BITs being signed with the countries.

            There are major problems with India’s old-style investment treaties and the similar investor-state dispute settlement system.[7] It is high time that India should depart from the traditional old-style investment treaty model which has lead to the many problems discussed above. Consequently India must draft foolproof Bilateral Investment Treaties which would favour the policy goals of our Government and prevent future arbitrations against India. Provisions such as “Most Favoured Nations” and “Dispute Settlement Clauses” must be carefully scrutinized before inclusion so as to prevent other Countries to invoke such provisions against our Government.

            Even if India adopts a strong investment treaty model, it will not solve its problems with existing bilateral treaties. Hence India must seek suitable amendments in the existing treaties through bilateral negotiations so as to improve the same. If such amendments prove to be time consuming, a notification could be sent by our Government of its interpretation of various standards contained in the treaties.

Certain modifications are necessary in our BITs to shield our Government from the adverse affects which could be created by our Bilateral Treaties with other nations. Our policymakers should not permit investor-state dispute settlement mechanisms in BITs through which a foreign investor can instigate an international arbitration against India. Furthermore India must altogether remove provisions such as MFN in future treaties or at least forbid the possibility of importing such clauses from earlier treaties signed by India. In addition ambiguous clauses which give wide scope for interpretation must be avoided as the same would give rise to unwarranted disputes which would ultimately strain the relationship between countries.

It is true that all countries including India that have signed an investment treaty is at risk of being sued. Dispute Settlement clauses are proving to be an invitation for other Countries to initiate arbitration against India. Therefore India will have to assess the various risks and benefits that arise out of its Bilateral Treaties. Recent cases have showed the risks involved are far higher than the merits such treaties have envisaged. Our Government must recognise the downside of these treaties and amend the same to avoid future complexities. Only through creations of effective Investment treaties can India avoid the catena of cases that might arise in the near future.

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[1] Ministry of Finance: Government of India [http://finmin.nic.in/bipa/bipa_index.asp]
[2] India's Bilateral Investment Treaties: Worst fears realised, Jayati Ghosh, Frontline, Volume 29 - Issue 5, March 10-23, 2012
[3] ECONOMIC ANALYSIS: India's "Bilateral Investment Treaties": A New Form of Colonialism?, Kavaljit Singh, Global Research, April 30, 2012
[4] White Industries Australia Ltd. (Claimant) v. The Republic of India (Respondent), Final Award, 30 November 2011
[5] India’s Battle Under Bilateral Investment Treaties, Alishan Naqvee, LexCounsel Law Offices, April 2nd, 2012
[6] The White Industries Arbitration: Implications for India’s Investment Treaty Program, Prabhash Ranjan, Investment Treaty News, April 13, 2012
[7] India’s Many Investment Treaties Make it Vulnerable, IISD Commentary, January 2012, pg.2

This article was writen by Mr. B. Deepak Narayanan and Ms. K. Priyadarshini, interns at CNICA.

Fly In Fly Out Policy for International Law Firms 

International law firms are having to fight tooth and nail for the right to practise in India

India has been high on foreign firms’ lists of target countries for decades, but has also been a source of frustration. While the global legal market has been steadily opening up to international players - South Korea is the ­latest to allow foreigners in - India has remained stubbornly closed. And if some of the country’s lawyers got their way, it would ­become even harder for international firms to do business there.

At present the international firms ­operate ’India desks’ from their home ­jurisdictions. When Indian advice is required, they turn to Indian firms; when foreign advice is needed for ­Indian clients, they pick it up. ­Naturally, there is a need for lawyers to see clients for both inward and outward deals on the ground, so foreign lawyers ’fly in and fly out’ of India to do so.

Protection racket

But this way of doing business has ­always been controversial in some quarters of the Indian legal profession. In late 2009 the Bombay High Court ruled against foreign firms in a case brought by a group of Indian ­advocates, the Lawyers Collective, finding that the foreign firms should not have been allowed to set up ­liaison offices in India. The ruling led Ashurst to close its Delhi branch and international firms were forced to look for alternative ways of working in India.

However, less than a year after the Bombay decision, a further challenge to foreign law firms was launched, this time in the Madras High Court in Chennai.

The petition, filed by lawyer AK Balaji, asked the Indian government, the Reserve Bank of India and the Bar Council of India (BCI) to “take appropriate action” against a large group of named foreign firms plus “any other foreign law firms or foreign lawyers who are illegally practising the profession of law in India and forbear them from having any legal practice, either on the litigation side or in the field of non-litigation and commercial transactions, in any manner within the territory of India”.

The case took far less time to reach court than the 14 years between the filing of the petition and judgment in Bombay. In February this year Chief Justice Eqbal and Mr Justice Sivagnanam handed down their ­decision, which clarifies that “fly-in, fly-out” does not contravene India’s Advocates Act 1961.

The petition argued that there was “absolutely no scope” for foreign lawyers to practise law in India under the act or to enrol as advocates with any state bar, thus escaping regulatory oversight in the country. It also suggested that by flying in and out, foreign firms were earning client money while on visitors’ visas and were violating income tax laws.

The petitioner said foreign law firms treated the practice of law as “nothing short of a trade or business, far different from the nobility attributed to it by Indian lawyers”, noting that Indian firms are prohibited from advertising and marketing their services, whereas international firms routinely do so. He argued that even though Indian lawyers are able to practise in the UK and US, doing so incurs a significant cost and time burden.

Firms’ rebuke

The foreign law firms named as respondents by the petitioner included all of the magic circle, Ashurst, Eversheds, Norton Rose, Slaughter and May and a large group of US firms, ­including Arnold & Porter, Covington & Burling, Shearman & Sterling and White & Case. Australia’s Clayton Utz and Freehills were also named.

The firms’ responses to the petition were fairly uniform. All the firms pointed out that they did not have ­offices in India and did not practise Indian law; nor did they have any ­intention of practising Indian law. They also noted that, contrary to the petitioner’s claims, it remains fairly straightforward for Indian lawyers to set up representative offices in the UK and US or to requalify as UK ­solicitors or US attorneys.

The respondents also made the ­argument that restricting the fly-in, fly-out practice could have a detrimental effect on the Indian economy. Speaking for eight US firms, counsel Abhishek Manu Singhvi said that ­advising on foreign law was not banned by the Advocates Act.

“According to the learned counsel, by the present writ petition,” said the judgment, “the petitioner wants a ban by way of judicial legislation on the entry of foreign law firms in India, especially when there is no statutory ban in this behalf. This, he states, would have serious consequences on foreign investment in the country in this ever-expanding era of global economy.”

Arbitration creation

The growing importance of arbitration to India was also discussed by the court. The Indian government has stated that it wants to make India a hub for arbitration, but counsel pointed out that if foreign lawyers were not allowed to come into the country to advise on international issues related to a dispute, the arbitrations would have to go elsewhere.

“We find force in the submission made by the learned counsel appearing for the foreign law firms that if foreign law firms are not allowed to take part in negotiations, for settling up documents and conducting arbitrations in India, it will have a counterproductive effect on the aim of the government to make India a hub of international arbitration,” agreed the judges, who also called this a “far-fetched and dangerous proposition”.

Similarly, the judges agreed that if foreigners were banned from coming into India to advise on their own laws, this would create a “manifestly absurd situation”, as Indian lawyers are trained only in domestic law and not in any foreign law.

Concluding, they dismissed the petition and said there was nothing in Indian legislation preventing international firms from flying in and out, nor anything stopping an outsourcing company such as Integreon, which was named in the petition, from providing non-legal services out of India.

The decision was welcomed by the foreign firms as well as a number of Indian lawyers. Dua Associates partner R Senthil Kumar, who acted for the group of US firms led by White & Case, thinks in principle most ­Indians accept the practice.

“The bulk of people in law firms who actually have a practice that ­involves foreign laws are okay with foreign lawyers flying in and out to practise foreign law,” Kumar says.

What’s the problem?

Foreign lawyers agree that to date there have been few issues on the ground in India.

“We’ve not encountered people having difficulties with us being in India on that basis,” reports Herbert Smith executive partner Chris Parsons, who heads the firm’s India group. “On the contrary, we’ve found Indian lawyers to be very welcoming and I hope pleased to see us and ­others.”

But at the end of April the BCI filed an appeal to the Supreme Court of India. Indian legal news websites ­reported that the BCI’s counsel, ­Ardhendumauli Kumar Prasad, said the issues should not have arisen in Madras as they had already been dealt with in Bombay - something that the Madras judges disagreed with. The BCI did not answer The Lawyer’s request for comment on the matter.

Quite how long the case will take to get to appeal is uncertain, with the Indian court system not renowned for being particularly speedy.

Brit grit

Another possible aspect of appeal could come from Clifford Chance, which was grouped in the case ­alongside Ashurst, Bird & Bird, Clyde & Co, Eversheds and Linklaters. ­Partner Sumesh Sawhney says the judgment was unclear on whether foreign lawyers are banned from practising non-Indian law in India.

“If that’s the case, we consider it to be unnecessarily and unreasonably restrictive and we believe it would be a misreading of the Advocates Act, which we don’t believe was ever intended to address the question of the practice of non-Indian law,” says Sawhney. “We’re currently considering whether an appeal to get clarity on these points is appropriate.

“What also remains to be addressed by the Indian authorities is the bigger issue of collaboration and partnership between Indian lawyers and international law firms, and of international firms advising on ­Indian as well as non-Indian law.”

Clasis Law partner Sakate Khaitan says he welcomes the judgment as a clarification of what many firms are already doing. Clasis formed an association with Clyde & Co in April 2011 and has its own London office in the UK firm’s City building. Khaitan himself is based at the UK office and is dual-qualified in India and the UK, but agrees with the Madras judges that Indian lawyers working in India are not in a position to provide foreign advice.

“I don’t know of any Indian lawyer residing in India and practising Indian law who has the ability to advise on UK or US law as proficiently as an international firm,” Khaitan states.

He adds that stopping the fly-in, fly-out practice would not benefit India on a global scale.

“It would be very difficult for a lot of the multinational clients operating in India if the Supreme Court were to stop fly-in, fly-out. Clients would need to travel, making it more expensive for Indian corporates,” Khaitan points out.

While in the short term he thinks it would benefit firms with UK offices, such as Clasis, ALMT Legal and Fox Mandal, ultimately Khaitan, like much of the market, hopes the Supreme Court upholds the Madras judgment.

Road to nowhere?

However, the longer-term goal of an opening-up of the Indian market and permission for international firms to launch offices there still seems a long way off.

“We continue to believe that the ­removal of restrictive barriers in the Indian legal market will bring direct benefits to the Indian economy and to Indian businesses and bring ­positive advantages to the profession domestically, and we look forward to a time when the Indian government is ready to take concrete steps in this direction,” says Clifford Chance’s Sawhney optimistically.

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In brief

Everybody wants to be in India, but a battle continues to be fought over the extent to which foreign lawyers can work there. A recent judgment in the Madras High Court was set to rubber-stamp the practice of flying in to offer foreign advice, but with an appeal pending, what does it mean for international business in this key market?

Indian Government declares China (including the Hong Kong SAR) as a territory to which the New York Convention applies

The Indian Government has declared that China (including the Hong Kong SAR) is a territory to which the New York Convention applies under the Indian Arbitration and Conciliation Act 1996 (“the Act“). We understand that the notification will be published in the official Gazette of India shortly, following an announcement by the Hong Kong Department of Justice last week.

Both India and China are signatories to the New York Convention, which they ratified in 1960 and 1987 respectively. However, Part II of the Act, which governs the enforcement of New York Convention awards in India, only applies to awards rendered in jurisdictions notified by the Indian Government in the official Gazette as jurisdictions in which the New York Convention applies. Whilst most of the major international arbitration centres lie within such jurisdictions, the most notable exception was Hong Kong which, until now, had not been notified. This was a significant omission and had encouraged parties in India-related contracts to choose a seat of arbitration other than Hong Kong. This should no longer be the case.

This notification will provide clients with long-awaited clarity regarding the enforcement of Hong Kong awards in India and, therefore, an additional choice of seat for India-related commercial contracts. Given the increasing volume of Sino-India trade, Hong Kong is likely to now prove a popular seat of arbitration for disputes arising out of those transactions, not least due to its pro-arbitration legal system and strong record on independence. Therefore, the decision by the Indian Government is a welcome one.

by Justin D’Agostino, Head of Greater China International Arbitration Practice, Herbert Smith

Appointment by Mutual Consent

By G.Ashokapathy, Secretary General CNICA. 

An arbitrator is created out of an arbitration clause or an agreement. So his appointment should be strictly in accordance to the agreement/ clause. The clause relating appointment of arbitrator on mutual consent came up for consideration before the Honourable High Court at Delhi in the case of Rajesh Batra v. Ranbir Singh Ahlawat 2011(4) Arb LR 371 (Delhi).

In this case the parties entered into an agreement wherein they agreed to resolve their disputes through arbitration process by mutually appointing an arbitrator. Dispute arose and the claimant appointed an arbitrator. Respondent had nor consented for the same. The arbitrator with out obtaining the consent from the respondent assumed office and posted the case for hearing. After several hearings the respondent had appeared and sought time on two occasions and on the second occasion, further time was refused by the arbitrator. The respondent sent a letter challenging that he had not consented for the appointment of the arbitrator and that the arbitrator had no jurisdiction. The arbitrator took a view that since the respondent appeared for two hearings he had consented on the appointment of the arbitrator.

The arbitrator seems to have relied on section 16(2) of the arbitration and conciliation act in coming to such conclusion. Section reads as follows:

16.Competence of arbitral tribunal to rule on its jurisdiction.-

 (1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,-

(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and

(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

(2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence; however, a party shall not be precluded from raising such a plea merely because that he has appointed , or participated in the appointment of, an arbitrator.

(3) A plea that the arbitral tribunal is exceeding the scope of its authority shall he raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings.

(4) The arbitral tribunal may, in either of the cases referred to in sub-section (2) or sub-section (3), admit a later plea if it considers the delay justified.

(5) The arbitral tribunal shall decide on a plea referred to in sub-section (2) or sub-section (3) and, where the arbitral tribunal takes a decision rejecting the plea, continue with the arbitral proceedings and make an arbitral award.

(6) A party aggrieved by such an arbitral award may make an application for setting aside such an arbitral award in accordance with section 34.

Section 16(2) states that objection relating to jurisdiction shall be raised before the filling of the statement of defence. In the case under discussion it is seen that the statement of defence was yet to be filed. At the out set the arbitrator ought not to have assumed office with out receiving the consent from the respondent. In clauses where arbitrator is to be appointed by mutual consent, the consent of parties is the foremost requirement and without this the arbitrator cannot act. Hence the arbitrator ought not to have proceeded having proceeded he should have at the least withdrawn after the respondent had raised serious objection as to consent and consequential jurisdiction.   In theses circumstance the High Court had come down heavily on the arbitrator’s action and had ordered cost on the arbitrator.

CNICA’s Inaugural Study Session – 3^rd March 2012

 

The inaugural study session of Council for National and International Commercial Arbitration (CNICA) was held at 5.45 pm on the 3^rd of March 2012 at Andhra Mahila Sabha, Mylapore, Chennai. Hon’ble Mr. Justice V. Ramasubramanian, Judge, High Court, Madras presided over the session. Welcome address was delivered by Mr. G. Ashokapathy, Advocate and Secretary General of CNICA. The welcome address provided the intent of conducting study sessions in view of various developments in arbitration law and practice; and the statistical achievements of CNICA in resolving disputes through Arbitration, Mediation and Conciliation including the remarkable conciliated settlement over two Motor Accident Claims in a short span of time; its present and future plans, tie ups with International Organisations to provide training in Alternative Dispute Resolution mechanisms.

The welcome address was followed by the Hon’ble Judge’s speech on the topic “Is Arbitration Indispensable?” The Hon’ble Judge commenced his address with the quote “Education is the progressive discovery of one’s own ignorance” of Will Durant, a famous American Philosopher and Writer, and explained the importance of study circles for the legal fraternity including the Judges. The Hon’ble Judge proceeded to explain the indispensability of arbitration recalling the history of arbitration laws; the statutory backing behind arbitration; case laws; the various shapes of arbitration laws that have taken place in states like Gujarat, Madhya Pradesh and Kerala. The Hon’ble Judge was of the view that the use of metaphors in judgements to explain greater legal contents as done in the West would help the legal fraternity in India. The Hon’ble Judge concluded on the lines that “precedents offer old solutions for new problems, but we need new solutions for new problems”.

The Hon’ble Judge was felicitated by Mr. D. Saravanan, Advocate and Chairman of CNICA. Vote of thanks was delivered by Mr. Raghav Ravindran, Registrar at CNICA. The programme concluded with National Anthem around 7.00 pm in the evening.

CNICA welcomes you to the Inauguration of its

Study Circle meet

Inaugural Address by

Hon'ble Mr. Justice V. Ramasubramanian

For more information see the invitation below

Event Time and Location

Saturday - 03.03.2012

Andhra Mahila Sabha (Near Nageshwar Rao Park)

Luz Church Road

Mylapore

Chennai - 600 004