Institutional Arbitration Centres – A Pressing need for Compliance and Legislative Intervention

Introduction

The object of the Arbitration and Conciliation Act, 1996³ (the Act), right from its very inception was to achieve minimal court interference and to minimise the delay in the conclusion of the proceedings by upholding the sanctity of arbitral procedures. In order to achieve the same, the Act has undergone wholesale changes in 2015 and in 2019. One such crucial amendment in 2019 was a step to give increased powers and recognition to institutional arbitration centres (IAC) in India, in the form of an amendment to Section 11 of the Act. The amendment to Section 11(6)⁴ authorises IACs designated by the Supreme Court or the High Court (as the case may be) to appoint an arbitrator. This is a very welcome first step towards bringing IACs in India to the forefront and this amendment encourages litigants to look at IACs as an option to avoid ad hoc procedures and to better streamline the conduct of arbitrations. Most IACs also contain a fixed fee structure which enables the parties to better estimate the costs of the arbitration even before the arbitration commences.

However, the IACs are not bereft of issues looming large, despite comprehensive procedures adopted by the various IACs. The authors opine that the IACs are largely powerless in directing the parties before arbitration to comply with the procedures laid out. Further, the Act does not have any provision addressing the non-compliance of the directions issued by the IACs, resulting in long drawn arbitrations, which defeats the purpose of IACs. This article explores these problems in depth in the following sections and the possible recommendations that can be carried out within the scheme of the Act in order to strengthen the authority of the IACs in India.

Problems associated with appointment of arbitrators and subsequent conduct of proceedings by IACs

(i) IACs are powerless in enforcing its procedures on the parties

While most IACs’ procedures are very exhaustive and negate any unambiguity in the conduct of the arbitrations, the authors argue that the IACs are powerless in mandating the parties to comply with its procedures. This is because, even the 2019 Amendment to the Act, by bringing the IACs to the fore, does not contemplate a scenario where there is non-compliance of the orders passed by the IAC. For instance, the IACs cannot mandate a non-complying party to even appoint its nominee arbitrator, as there are no sanctions to such non-compliance. Even Section 29-A⁵ of the Act states that the award in an arbitration proceeding shall be made before the expiry of twelve months from the date of completion of the pleadings. Section 29-A⁶ was drafted with the intention that the Tribunal ought to be constituted within a fixed timeline as directed by the High Court or the Supreme Court under the erstwhile regime. Even if the IACs do appoint an arbitrator on behalf of the non-complying party, there is no certainty that there would be further steps taken by the non-complying party to actively participate in the arbitration proceedings. This creates a scenario where the directions and orders passed by the IACs would not be earnestly followed by the parties in the arbitration proceedings. A party who possibly knows that it has a weaker case on merits can deliberately stall and prolong the arbitration proceedings and thereby delaying the adjudication of the rightful claims of the opposing party.

(ii) The existing procedures place an unreasonable burden on parties complying with the procedures set out by the IACs

The authors state that most IACs, in order to conduct the arbitral proceedings would require costs to be paid to the Arbitral Tribunals upfront, which includes fee of arbitrators, costs of hearing, administrative charges, travelling charges of arbitrators among other things. The IACs estimate these costs prior to the commencement of the arbitration proceedings based on the number of arbitrators and the claim value and an approximate figure is arrived on this basis. The said costs of arbitration need to be borne by both the parties equally.

If the IACs reckon that the non-complying parties do not show any reasonable compliance to the directions of the IACs, the general practice, is to direct the party complying with the procedures of the IACs to pay the entire costs of the arbitration and recover the same once the award is passed ex parte. For instance, this practice is contemplated in Rule 28 of the Indian Council of Arbitration Rules⁷ and Rule 24(d) of the Nani Palkhivala Arbitration Centre Rules,⁸ which are two of the most reputed IACs in India.

The authors opine that this practice of the IACs is extremely burdensome for the complying party. The situation is exacerbated in cases where the complying party is undergoing corporate insolvency resolution process (CIRP) as resolution plans hinge on possible costs to be paid for dispute resolution and payment of such huge amounts towards arbitration becomes commercially unviable for a resolution applicant, proposing to invest in the corporate debtor.

Payment of the entire arbitration costs also becomes burdensome for micro, small and medium enterprises (MSME) firms, whose turnover cannot possibly support a lump sum payment of arbitration costs, including the costs of the non-complying party. This process is extremely cumbersome even for public sector undertakings (PSU) as there is an unwarranted wastage of public money. In addition to this, the payment of the full upfront costs is extremely burdensome for litigants in general owing to the deep financial crunch that the COVID-19 Pandemic has presented. Further, realisation of such monies invested takes a long time as there are layers of options available to challenge the award/ex parte award under Sections 34⁹ and 37¹⁰ of the Act and under Article 136 of the Constitution of India.¹¹ This would lead to significant delays even in the execution of the award of the Arbitral Tribunal.

Suggestions proposed

In order to remedy the problems presented above, arbitrations conducted by IACs need to have stricter compliance measures. For instance, Section 27(5)¹² of the Act states that proceedings of contempt can be initiated against the party for any default or if the party is guilty of any contempt to the Arbitral Tribunal. The Supreme Court, in Alka Chandewar v. Shamshul Ishrar Khan¹³ interpreted Section 27(5)¹⁴ liberally to bring into its ambit any default or non-compliance with the directions of the Tribunal to be a fit case for a court to proceed against the party for contempt. While Section 27(5) is applicable only after the formation of an Arbitral Tribunal, a similar import in the form of a legislative amendment may be brought into initiate action for non-compliance with the directions of the IACs even before the formation of the Tribunal. This fear of sanction through a legislative amendment would result in the parties diligently following the timelines set out by the IACs.

In the alternative, it is suggested a suitable legislative amendment may be made in such a way that the complying party can approach the Court under Section 11 of the Act and request for directing the non-complying party to adhere to the directions passed by the IACs in relation to appointment of arbitrator. Further, the timeline to decide such applications shall not be more than 30 days to ensure that the parties do not spend more time in the court. This measure is a further extension of the court upholding the party autonomy principles under Section 11 of the Act. The Supreme Court in its judgments in Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd.¹⁵ and Pasl Wind Solutions (P) Ltd. v. GE Power Conversion India (P) Ltd.¹⁶ has held that party autonomy is the brooding and the guiding spirit in an arbitration and is the backbone of the Act and the Court cannot decide anything contrary to the agreement of the parties unless the agreement is in clear violation of the public policy of India.

The authors argue that the principles of party autonomy wherein the parties have agreed for the arbitration to be conducted by the IACs, would be rendered meaningless if there is no affirmative provision under Section 11 of the Act for the Courts to direct the appointment of an arbitrator, empaneled in the IACs, on ground of non-compliance by the defaulting party. One would argue that this may go against the mandate of Section 5¹⁷ of the Act i.e. minimal judicial intervention. However, such measures are absolutely necessary in order to expedite the constitution of the Arbitral Tribunal and this step will further the object of the Act. Since this alternative may increase the court litigation, the first option suggested above is highly recommended.

Conclusion

The authors opine that there is a pressing need for a legislative intervention to better equip the IACs to deal with the prevalent issue of non-compliance of the parties to the directions of the IACs. The authors urge that arbitrations through IACs are the need of the hour as the fixed fee structures and comprehensive procedures would give more clarity regarding the conduct of arbitration proceedings and would result in more cost-effective arbitrations in comparison to ad hoc arbitral proceedings. The authors feel that such legislative interventions as suggested above would encourage litigants to consider IACs more seriously as a preferred mode of arbitration.