A regional comparison of arbitration landscapes: India

India has taken several steps to promote arbitration as an alternative dispute resolution mechanism, and facilitate a more efficient and secure arbitration process since enacting the Arbitration and Conciliation Act (Arbitration Act) in 1996, with significant amendments in 2015 and 2019.

The judiciary has also played a key role in advancing this goal through its decisions. Yet while the judiciary has mostly furthered the cause, there have been setbacks where occasional contrary decisions have provoked amendments to the Arbitration Act.

This article focuses on three recent judicial pronouncements in India: a Supreme Court judgment on the stamping of arbitration agreements; a Supreme Court judgment on the limited scope of enquiry by courts at the stage of appointing an arbitrator; and a Delhi High Court judgment on third-party funding in arbitrations.

STAMP DUTY AGREEMENT

The Supreme Court’s recent decision in NN Global Mercantile v lndo Unique Flame & Anr held that an agreement, including an arbitration agreement, in which stamp duty had not been paid in terms of the Indian Stamp Act, 1899, was not capable of being acted on by courts in the appointment of arbitrators.

Courts are now required to ascertain that appropriate stamp duty has been paid on the underlying instrument prior to acting on the arbitration agreement. The Supreme Court reasoned that an agreement that is unenforceable due to the operation of substantive law – in this case, the Indian Stamp Act – would not be a valid contract under the Indian Contract Act, 1872.

This decision raises concerns within the arbitration community as regards its potential misuse and impact, including widespread fear that it would be used to delay appointments of the tribunal by courts. Another concern is that it would breed challenges by parties to awards on the ground that the underlying agreement was not stamped, or insufficiently stamped.

Red flags were raised for foreign investors, who are usually unaware of the substantive laws in India, often leaving it to the Indian counterparty to ensure the agreement is enforceable. The fact that the agreement is not stamped becomes the Achilles’ heel weakness in commencing arbitration proceedings until this irregularity is corrected. Pertinently, not only does post facto stamping require payment of penalties, but can also be a lengthy and cumbersome process.

While the judgment did not make any observations regarding its impact on ongoing arbitrations, the Indian judiciary has been quick to recognise and counter some impediments to which it may lead.

Most recently, in Arg Outlier Media Private v HT Media, before Delhi High Court on 4 July, the award debtor sought the setting aside of an award on the ground that in view of the NN Global judgment, the agreement being insufficiently or improperly stamped could not have been acted upon by the arbitrator.

The high court rejected the plea to set aside the award on this ground. It held that where the underlying agreement, including the arbitration agreement, was not properly stamped it should not have been admitted in evidence. However, once it had been so admitted, the resultant award could not be faulted on this ground.

This decision alleviates concern as regards the increase in challenges of practical impacts of the NN Global judgment. While this is certainly a step in the right direction, there is still some way to go, since the high court’s decision does not touch on potential delays to the appointment of arbitrators that will be caused by the judgment.

One can also see improvement as the Supreme Court has agreed to hear a curative petition in another decision by it, which involves the question of enforceability of an insufficiently stamped arbitration agreement.

Until there is clarity, the parties should exercise diligence to ensure their agreements are stamped as per the Indian Stamp Act to be considered enforceable and avoid potential delays should disputes arise.

TWO-STEP ENQUIRIES

Earlier this year, in April, the Supreme Court dealt with the pre-referral jurisdiction of courts under the Arbitration Act in NTPC Limited v SPML Infra, emphasising the limited scope of their enquiry while appointing an arbitrator.

The issue in this case concerned objection by a counterparty to the appointment of the arbitral tribunal on the ground that no disputes existed between the parties. The counterparty relied on a settlement agreement that stated all obligations of the counterparty stood satisfactorily discharged.

The question before the Supreme Court was whether existence of the dispute in this context should be determined by the referral court appointing the arbitrator, or left for consideration by the tribunal.

In the past, the court’s position had been that it must prima facie examine the credibility of allegations before referring parties to arbitration. As these precedents did not align with the idea of minimal judicial intervention in arbitrations seated in India, the legislature intervened through an amendment to the Arbitration Act in 2015. This limited the court’s power to appoint an arbitrator by examining whether an arbitration agreement existed between the parties “nothing more, nothing less” (Duro Felguera v Gangavaram Port, 2017).

The NTPC judgment echoed the legislative intent of minimal judicial intervention. It further clarified that courts are required to carry out two limited inquiries.

The primary inquiry is the existence and validity of an arbitration agreement. This requires examination by the courts as to who the parties to the agreement are, and whether those are the parties before it.

The secondary inquiry is limited to examining whether the dispute is arbitrable. The court also clarified the secondary inquiry to be a prima facie scrutiny of the facts that lead to a conclusion that there is “not even a vestige of doubt that the claim is non-arbitrable”.

The rule formulated by the Supreme Court is clear. If a prima facie review on the objection of non-arbitrability is found to be inconclusive, the dispute is to be referred to arbitration. Clearly, this secondary inquiry is limited to protecting parties from being forced to arbitrate when the matter is demonstrably non-arbitrable, aiming to cut out the dead wood.

This decision reinforces the principle that the arbitral tribunal is the preferred authority to decide all questions of non-arbitrability. It will translate to a more efficient and speedier appointment of the arbitral tribunal by courts, as parties will think twice before raising objections at the appointment stage with a view to delaying arbitration.

THIRD-PARTY FUNDING

Delhi High Court’s recent decision in Tomorrow Sales Agency v SBS Holdings, in May this year, offers clarity on the legal validity of third-party funding of arbitrations, which is not a legislatively recognised principle to date. However, courts have implicitly recognised this practice in judgments.

The high court was dealing with the question of whether an award holder can enforce an arbitral award against a claimant and its third-party funder. The claimant failed to satisfy the award. Subsequently, the award holder demanded payment of the awarded sum from the third-party funding the claimant’s arbitration, which was refused.

The award holder sought interim relief in terms of an order of security of the awarded amount, disclosure of assets and holdings, and an order restraining the alienation of assets from the award debtor and the third-party funder.

This relief was granted by a single judge of the high court. But on appeal, the division bench of the high court overturned the order, rejecting the request for interim relief against the funder on the ground that it could not be treated as an award-debtor against which the award could be enforced.

The high court emphasised the purpose of third-party funding – namely, to ensure access to justice – and observed that while regulation was required to be formulated for transparency and disclosure in respect of funding in arbitration, it would be counterproductive if the law would allow for “mulcting third-party funders with a liability that they have not agreed to bear”.

This judgment is a step towards further legitimising third-party funding, particularly by protecting them from being made parties to enforcement action.

Hopefully, the legislature will pay heed to the observations of the court and develop formal regulations for third-party funding in India, which until now was undertaken with trepidation and unease.

CONCLUSION

The arbitration landscape in India is developing at a fast pace. Generally, it is safe to say that the judiciary is consistently rendering judgments that are commercially sound and arbitration-friendly. The legislature is also taking steps to amend unforeseen pitfalls in the existing legal framework.

On 14 June, the government constituted a 15-member expert panel to recommend reforms to the Arbitration Act. This panel will be submitting its report in the coming months.

Hopefully, this consultative process including renowned figures from the arbitration fraternity will result in changes to obvious pain points in the present system, making India a more arbitration-friendly jurisdiction for users both within and outside the country.

SHARDUL AMARCHAND MANGALDAS & CO

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