Transforming commercial dispute resolution

The enactment of an Act to amend the Arbitration and Conciliation Act and passing the Commercial Division of High Courts Bill will change the face of commercial dispute resolution

Most judicial systems undergo periods of high pendency and delay in dispensation of justice which are usually followed by a realisation from within and give rise to widescale legislative reforms. While it was the Lord Woolf Report and the Chief Justice’s Working Committee Report that spurred such a change in the U.K. and Hong Kong, the Justice A.P. Shah-led Law Commission Reports numbered 246 and 253 could potentially be what the Indian commercial dispute resolution system has been waiting for. These reports suggest widescale reforms by suggesting the enactment of an Act to amend the Arbitration and Conciliation Act, 1996, and a “Commercial Division and Commercial Appellate Division of High Courts and the Commercial Courts Act” (Commercial Divisions Bill/Act), respectively.

In pursuance of its ‘ease of doing business’ propaganda and an overall attempt to attract investors, the Bharatiya Janata Party government is set to introduce these two bills in the budget session of Parliament. If passed and implemented, these enactments are likely to change the face of commercial dispute resolution in India.

Commercial Divisions Bill/Act

The Commercial Divisions Act introduces a commercial division in every high court having original jurisdiction (i.e. Madras, Delhi, Bombay, Calcutta and Himachal Pradesh) and commercial courts in such districts, as the Central government, in consultation with the concerned State government and Chief Justice of the concerned High Court, may establish. These specialised courts will resolve all “commercial” disputes of value of over Rs. 1 crore. Simultaneously, the jurisdictional limits of all high courts which have original side jurisdiction would be increased to Rs. 1 crore across the country. These disputes will be heard by judges who not only have a background in commercial laws but will also receive special training in this area.

The Act will have wide ramifications as the term “commercial” is widely defined and includes disputes ranging from intellectual property rights disputes to disputes arising out of joint venture agreements and proceedings in aid of arbitrations. The Bill provides for a fast track mechanism with stringent timelines. And for the first time it introduces in the Indian system the concept of a case management conference wherein a procedural order is passed prior to trial, setting out a time table (including time-bound oral arguments supplemented with written arguments) which has to be strictly adhered to. The court is given wide powers to ensure that strict compliance is enforced. Moreover, the court, too, is mandated to deliver its judgment within a period of 90 days.

The Bill adopts the “carrot and stick” approach and judiciously offers “carrots” for compliance and provides courts the power to wield the “stick” in case of delay by one of the parties. The Bill also makes mandatory the ‘cost follow the event’ regime, whereby, as a general rule, the party against whom the order/judgment is passed bears the entire cost of litigation, subject to exceptions where delaying parties, even if successful, have to bear part of the cost.

While an earlier version of this bill had been introduced during the United Progressive Alliance regime, the Bill, in the words of the Law Commission, did “not make an effort to fundamentally alter the litigation culture in India” and that the changes suggested were “cosmetic” in nature. The Rajya Sabha had raised certain valid concerns including the unworkability of some of the procedural measures suggested. The Law Commission has carefully scrutinised these objections and introduced procedures which have been internationally tested (more specifically in the U.K. and Singapore).

Amendments

An attempt is also being made to encourage arbitration, which is a form of alternative dispute resolution wherein private parties, usually by consent, appoint an arbitral tribunal to adjudicate on the dispute outside of the regular court system. One of the major problems that have plagued this system is excessive judicial intervention and the proposed amendments are primarily aimed at reducing such interventions.

“ One of the major problems that have plagued the system of arbitration is excessive judicial intervention, which the proposed amendments aim at reducing. ”

Today, interventions by courts happen at all stages — pre-arbitration proceedings for appointment of a tribunal and post-arbitration challenges to the award. The proposed amendments restrict the scope of pre-arbitration review to a “prima facie” review of the existence of an arbitration agreement and narrow down the scope of the challenge of an award by prohibiting an analysis on merits. Specifically, the scope of challenge to a foreign award has been greatly narrowed.

Perhaps the biggest shortfall of the present arbitration regime is the fact that a successful party in arbitration is not in a position to enjoy the fruits of its success for many years as the mere filing of a petition challenging its validity renders the arbitral award unenforceable. The Law Commission has suggested amendments to Section 36 of the Act and a losing party will henceforth have to satisfy a Court as to why it is a fit case for the arbitral award to be stayed and the Court will have powers to order the losing party to deposit part of the award sum into Court.

Another major area where the proposed amendments would make a significant difference is in relation to neutrality of the arbitral tribunal which is constituted. The Supreme Court of India, in Indian Oil v. Raja Transport, has declared a tribunal appointed by a public sector undertaking comprising its own employees to be valid subject to certain narrowly carved out exceptions. This decision is sought to be legislatively overruled by incorporating the International Bar Association guidelines on conflict of interest as a schedule to the Act.

Further, the proposed amendments suggest a more realistic interest and costs regime, permitting compound interest to be awarded and incorporating the “costs follow the event” rule as the base rule in relation to arbitration.

The investment treaty arbitral tribunal in White Industries v. Union of India has held that the Indian system does not provide “effective means” for a foreign investor to enforce its rights. The bills proposed to be introduced in the budget session not only expedite commercial dispute resolution but also effectively disincentivise initiation of frivolous proceedings.

However, enacting a law is only part of the solution; implementing it effectively by selecting the right personnel is as important. Effective implementation of the Lord Woolf report resulted in eradicating frivolous commercial litigation in the U.K. — statistics suggest that the number of litigations initiated fell by around 80 per cent. Commercial dispute resolution in our country is at its cross roads and the enactment of these laws and their implementation over the next couple of years would determine whether in India the maxim ‘Ubi jus ibi remedium’, i.e. every right has a remedy, translates into something more than a de jure principle.

(Anirudh Krishnan, an advocate of the Madras High Court, has been a consultant to the Law Commission for drafting the reports mentioned herein. E-mail: anirudh@aklawchambers.com)

Keywords: Commercial Divisions Bill, Arbitration and Conciliation Act, Law Commission