Litigation Specialised

Statutory reform alone will not make domestic arbitration more efficient – A closer look at the Law Commission’s 246th Report

SindhuSivakumar_DraftingForArbitrationThat arbitration in India is a costly, time-consuming, and inefficient affair is well known. Excessive court applications, exorbitant arbitrator fees, and respondent recalcitrance are the norm and in many ways, arbitrations do not provide a better and more efficient alternative to the courts for the resolution of commercial disputes. Only if this important objective is achieved can arbitration promote trade, commerce, and investment.

The Law Commission of India, on August 7, 2014, released its 246th report (“Report”), suggesting amendments to the Arbitration and Conciliation Act, 1996 (“ACA”) to make arbitration in India more efficient. With the Union government indicating that it will implement statutory reforms to the ACA soon, let us first look at some aspects of arbitration practice in India that the Report has identified as being at the root of the inefficiency.

No ‘institutional’ arbitration

‘Institutional’ arbitration is carried out under the administration of a specialised institution, like the London Court of International Arbitration (“LCIA”) or the Singapore International Arbitration Centre (“SIAC”) and in accordance with their rules. In ‘ad hoc’ arbitrations, the parties determine all aspects of the arbitration themselves. Institutional arbitrations typically tend to be better regulated and therefore, less inefficient as they involve detailed procedural rules, tighter timelines, reasonable (arbitrator) fee schedules, and administrative oversight.

Exorbitant ‘per sitting’ fees

The fees that are typically charged by arbitrators in Indian ad hoc arbitrations not only drive up costs, but also disincentivises arbitrators from conducting arbitrations speedily (that is, with fewer sittings).

Adjournment culture

Parties seek and receive too many adjournments over the course of the arbitration and arbitrators do not use cost sanctions to check any wasteful or dilatory conduct.

Wide scope of judicial enquiry

The judiciary has unnecessarily widened the scope of judicial enquiry when hearing arbitration applications. For instance, Section 11 appointments have been characterised as a ‘judicial’ function. This has subjected them to the lengthy Special Leave Petition process. Similarly, when hearing set-aside applications under Section 34, awards are re-opened and reviewed on merits based on the ‘public policy’ ground.

Perverse statutory incentives that increase arbitration-related court applications

A party who challenges an award under Section 34 can obtain the statutorily created ‘stay’ of the enforcement of the award under Section 36. This has led to losing parties routinely filing set-aside proceedings to delay the enforcement of an award.

Let us delve deeper into the Report’s recommendations to disentangle arbitration from the courts, specifically its recommendations to reduce the scope of judicial enquiry in arbitration-related court applications.

The first problem is one of ‘judicial overreach’, that is, the trend of Indian courts expanding the scope of judicial review in arbitration-related court proceedings, undercutting the spirit of judicial minimalism in the ACA. The other is the volume of arbitration-related court proceedings in domestic arbitration in India. We will concentrate on the first problem.

Expansive judicial review in arbitration-related court proceedings

There has been a lot of academic and practitioner-led literature in this regard, particularly in the context of:

– Section 5 of the ACA, which has been read down to make it subject to the inherent powers of the civil courts under Sections 9 and 151 of the Code of Civil Procedure, 1908;

– Section 8 of the ACA, which has also been interpreted to allow the courts to get into issues relating to the validity, operability, and enforceability of the arbitration agreement notwithstanding its express exclusion by the drafters of the ACA, worsened by the fact that the courts often encroach upon the jurisdiction of the tribunals and decide substantive issues in dispute when hearing challenges to the arbitration agreement;

– Section 11 of the ACA, under which the arbitrator-appointment function of the courts has been converted from an ‘administrative’ function to a ‘judicial’ decision, which can be subject to lengthy appellate proceedings through the SLP route; and

– Section 34 of the ACA, under which the ‘public policy’ ground for challenging awards has been expanded to such an extent that it is now essentially the same as a regular appeal on law under the Code of Civil Procedure, 1908.

The Report echoes existing popular opinions and recommends on reducing the scope of judicial review in these proceedings. For example, it clarifies that Section 11 appointments should be regarded as administrative acts (not subject to review through the SLP process).

Judicial review of issues related to the validity of arbitration agreements and the arbitrability of disputes

Further, the questions that a court can get into when hearing Section 11 and Section 8 (stay) matters should be limited to issues regarding the existence or validity of the arbitration agreement as well as issues of arbitrability, but not questions regarding the scope of the arbitration agreement or the merits of the dispute (which includes issues relating to the validity of the underlying contract). Essentially, the Report echoes the position taken by the Supreme Court in National Insurance Co. Ltd. v. M/s. Boghara Polyfab Pvt. Ltd. (September 18, 2008) and other such cases.

The Report also clarifies what matters the court can and cannot determine when hearing challenges to the arbitrability or the arbitration agreement under Sections 8 and 11. Again, it echoes what was said in Boghara Polyfab Pvt. Ltd., that is, that the court can decide questions of (i) whether it (the relevant court) has jurisdiction to hear the application; (ii) whether there is a valid and enforceable arbitration agreement; (iii) whether the party who has applied is a party to such an agreement; (iv) whether the claim that is subject to arbitration is a dead claim (barred by limitation) or a live claim; and (v) whether the disputes subject to arbitration have been settled.

Tightening the ‘public policy’ ground used to set aside awards

In relation to Section 34, the Report seeks to tighten the ‘public policy’ ground for setting aside arbitral awards to discourage the courts from interpreting this ground widely and reviewing awards on merits. The Report refers to Renusagar Power Co. Ltd. v. General Electric Co. (1994), where the Supreme Court, in relation to a challenge to the enforcement of a foreign award, interpreted the meaning of the ground, “in conflict with the public policy of India”. The Court held that the term ‘public policy’ meant: (i) fundamental policy of Indian law; (ii) the interests of India; or (iii) justice or morality. The Court categorically held that contravention of law alone will not attract the bar of public policy.

The Report suggests that ‘public policy’ be confined to (i) and (iii) above in the context of international arbitrations seated in India, that is, that challenges based on the award being against the interests of India be disallowed. For domestic awards however, courts should be permitted to check the award for “patent illegality” when there is a challenge under Section 34.

These suggestions are commendable and mostly in line with what practitioners and commentators suggest. However, it is not clear whether they will make a difference in practice, as their application and interpretation remains at the hands of the judiciary, which has traditionally expanded the scope of its role in arbitration-related court hearings.

For example, in relation to challenges to the arbitration agreement, it is not difficult to envisage a situation where a court decides to delve into the substantive issues in dispute, such as the validity of the underlying contract, when it is framed as part of a challenge to the validity of the arbitration agreement (as the lower courts did in Enercon), or declare an agreement “inoperable” when there are pending proceedings before the courts relating to matters subject to the arbitration agreement (as the Delhi High Court did in Vikram Bakshi and Another v. Mc Donalds India Pvt. Ltd. and Others, I.A. No.6207/2014). Likewise, the public policy criteria in Section 34 – “justice or morality” and “fundamental policy of Indian law” can easily be interpreted by the courts in a wide manner. The point is simple. Statutory reforms by themselves do not protect against an interfering judiciary; much of the effectiveness of these reforms depends upon the judicial approach to arbitration-related court proceedings.

The large volume of arbitration-related court applications is another, and perhaps even more important aspect, of the problem of arbitration-court entanglement in India. This not only slows down arbitration, but also adds to the arrears before our already overburdened civil courts. The suggestions in the Report in this regard are quite far reaching and deserve closer attention.

(Sindhu Sivakumar is a solicitor on the rolls of England and Wales and qualified as an advocate in India.)

Human Rights

A judgment very much in error — Part 3 (presumption of constitutionality and judicial overreach)

NoticeAndStayAdityaVerma_SupremeCourtcolumnWe need to get rid of two red herrings that have captured at least some of the debate that followed the Supreme Court’s decision in Suresh Kumar Koushal and Another v. NAZ Foundation and Others. The first is the issue of the presumption of constitutionality of the Indian Penal Code, 1860 (“IPC”) and the second relates to whether the Court characterised the Delhi High Court’s judgment as an instance of judicial overreach.

The question of presumtion of constitutionality

The rule of presumption of constitutionality of laws is that when any law is under judicial review, it is for the person challenging its constitutionality to establish its unconstitutionality. It is a rule of procedure applicable to cases in which the constitutional validity of a law has been called into question. It is not a substantive rule. If the law is not shown to be unconstitutional, its validity will be upheld. Conversely, the presumption of constitutionality is rebuttable, and it does not prevent a law from being declared unconstitutional.

The presumption of constitutionality of a law does not mean that a law is actually constitutional any more than the presumption of innocence until proof of guilt in criminal cases means that a person accused of a crime is actually innocent — it only means that the task of proving guilt lies on the prosecution.

Indian colonial laws authored by people like Thomas Babington Macaulay (left) and James Fitzjames Stephen (right) continue to benefit from the presumption of constitutionality.
Indian colonial laws authored by people like Thomas Babington Macaulay (left) and James Fitzjames Stephen (right) continue to benefit from the presumption of constitutionality. Macaulay is considered the author of the Indian Penal Code while Stephen is considered the author of the Indian Evidence Act. 

There is little controversy about the rule of presumption of constitutionality applying to laws made after the Constitution of India came into force. However, the IPC (including Section 377) is a pre-Constitution law. The High Court stated (Paragraph 105 of its judgment) and others have argued that the presumption of constitutionality of laws does not or ought not to apply to pre-Constitution laws, primarily because the colonial law could not possibly have anticipated the requirements of constitutional validity.

To the contrary, in Madhu Limaye v. Sub-Divisional Magistrate, (1970) 3 SCC 746, at page 753, a seven-judge bench of the Supreme Court has held:

Pre-constitution laws are not to be regarded as unconstitutional. We do not start with the presumption that, being a pre-constitution law, the burden is upon the State to establish its validity. All existing laws are continued till this Court declares them to be in conflict with a fundamental right and, therefore, void. The burden must be placed on those who contend that a particular law has become void after the coming into force of the Constitution by reason of Article 13(1), read with any of the guaranteed freedoms.

According to Article 395 of the Constitution, two pre-Constitution laws that were obviously at odds with the Constitution were expressly repealed – the Indian Independence Act, 1947, and the Government of India Act, 1935. According to the Article 372, laws in force prior to the commencement of the Constitution shall continue in force, subject to the other provisions of the Constitution, until altered or repealed. This should be read with Article 13(1), which makes pre-Constitution laws void “in so far as they are inconsistent with the provisions of [Part III – Fundamental Rights]. This constitutional stricture applicable to pre-Constitution laws applies in analogous terms to post-Constitution laws, by virtue of Article 13(2).

The standard for validity of laws remains the same, whether the law in question is a pre-Constitution law or a post-Constitution law. Therefore, if Parliament does not repeal a law (such as Section 377, IPC), it remains in force by virtue of Article 372, unless its unconstitutionality is established. It bears reiteration that the presumption of constitutionality does not imply that Section 377 is actually constitutional any more than the presumption of constitutionality implies that any post-Constitution law is actually constitutional.

If the presumption of constitutionality does not apply to pre-Constitution laws, two anomalies arise.

– Firstly, there is no reason for anyone to consider themselves bound by any provisions of a law such as the IPC (which also criminalises murder, for instance), unless those provisions are declared constitutional. Not having a presumption of constitutionality is another way of saying that the law is not valid until found to be so by the Supreme Court or any high court.

– Secondly, many pre-Constitution laws still in force today are relatively innocuous – for instance, the Indian Contract Act, 1872, the Transfer of Property Act, 1882, the much-loved Code of Civil Procedure, 1908, and a substantial chunk of the law of tort (not all pre-Constitution laws are in the form of statutes). Is there any reason these laws should not have the presumption of constitutionality?

The Supreme Court in this case was correct to state that the presumption of constitutionality applies to Section 377. The error, as far as this issue is concerned, was in then stating (in Para 32 of the judgment):

While [the presumption of constitutionality] does not make the law immune from constitutional challenge, it must nonetheless guide our understanding of character, scope, ambit and import.

Article13(1)_ConstitutionofIndia.jpgThe phrase ‘character, scope, ambit and import’ appears to refer to the constitutional challenge. In other words, the presumption of constitutionality appears to erroneously guide the understanding of the question of the validity of the law, as if the presumption is a self-reinforcing one. A procedural rule was allowed to have a substantive impact. The presumption is only a rule of procedure meant to indicate that the party challenging constitutionality must establish it to succeed.

The fact that Parliament has not interfered with Section 377 only means that the presumption of constitutionality is applicable to it, not that the law, by virtue of having implied popular approval, is somehow more likely to be constitutionally valid. Popular approval has no relevance to Article 13. The question of whether a law is consistent with fundamental rights has to be decided by analysing the law with reference to those fundamental rights, and not by looking at how many people (presumably) support that law. The Constitution guarantees fundamental rights and democracy, not fundamental rights subject to democracy.

Did the Supreme Court characterise the High Court judgment as a case of judicial overreach?

Two or three passages from the Supreme Court’s judgment appear to have created an impression (especially prior to the publication of the full judgment online) that the main reason for setting aside the judgment of the High Court was the doctrine of separation of powers, with the Court acknowledging that interpreting Section 377 as unconstitutional would be an instance of judicial overreach. These passages perhaps were:

In fact a constitutional duty has been cast upon this Court to test the laws of the land on the touchstone of the Constitution and provide appropriate remedy if and when called upon to do so. Seen in this light the power of judicial review over legislations is plenary. However, keeping in mind the importance of separation of powers and out of a sense of deference to the value of democracy that parliamentary acts embody, self-restraint has been exercised by the judiciary when dealing with challenges to the constitutionality of laws.” (Paragraph 26)

In its anxiety to protect the so-called rights of LGBT persons and to declare that Section 377 IPC violates the right to privacy, autonomy and dignity, the High Court has extensively relied upon the judgments of other jurisdictions.” (Paragraph 52)

Notwithstanding this verdict, the competent legislature shall be free to consider the desirability and propriety of deleting Section 377 IPC from the statute book or amend the same as per the suggestion made by the Attorney General.” (Paragraph 56)

By describing the interpretation by the High Court of Section 377 as “legally unsustainable”, the Supreme Court has impliedly endorsed the previous interpretations of Section 377, as a result of which any carnal intercourse other than penile-vaginal sex is classified as ‘against the order of nature’. Admittedly, this position of law was a result of judicial interpretation, which is certainly not beyond the scope of the Supreme Court.

While deference to legislative preference may appear to be part of the overall reluctance to uphold the judgment of the High Court, adjudication upon the core issues of the constitutional validity of Section 377 vis-à-vis Articles 14, 15, and 21 was unavoidable. The judgment of the Supreme Court is unambiguous in concluding that in substance, Section 377, as interpreted prior to the judgment of the High Court, does not violate the Constitution.

(The previous parts of this article are here and here.)

(Aditya Verma practices as an Advocate at the Supreme Court of India. He is an alumnus of NLSIU, Bangalore, and is on the roll of solicitors in England and Wales.)