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Arbitration amendments proposed in Budget 2017 Hemant Sahai clarifies
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Arbitration amendments proposed in Budget 2017 Hemant Sahai clarifies

Varun Marwah

This year’s budget made a short yet significant reference to amendments that will be introduced in the Arbitration Act, 1996 to ‘streamline institutional arrangements for resolution of disputes in infrastructure related construction contracts, public-private partnerships and public utility contracts’.

This, however, is not the first time that such reforms were suggested in the budget speech.

Last year’s budget speech, also, proposed a ‘Public Contracts (Resolution of Disputes) Bill’ which, inter alia, made provisions for institution of separate tribunals for resolution of such disputes.

Last year also witnessed, the constitution of India’s first institutional arbitration centre, the MCIA, and a 3-day conference organised by NITI Aayog on ‘Strengthening Arbitration and Enforcement in India’. Further, in December of 2016, a High Level Committee to review institutionalization of arbitration mechanisms in India, headed by Justice BN Sri Krishna was also constituted, which is expected to submit it’s report by end of this March.

While there is some opacity in inasmuch as the proposed amendments are concerned, greater clarity in this context is expected once the Committee chaired by Justice BN Sri Krishna submits its report.

And during this period of uncertainty, Bar & Bench reached out to Hemant Sahai, founding partner at HSA Advocates, for his views on the subject.

Varun Marwah: What are the drawbacks in the existing regime, which the proposed amendments seek to cure?

Arbitration amendments proposed in Budget 2017 Hemant Sahai clarifies

Hemant Sahai: If you see the past budget speeches of the Finance Minister where he has talked about providing legal framework for dispute resolution in PPP projects and public utility contracts, it is clear that the two concerns in the dispute redressal dispensation which he sought to redress were, firstly, that disputes arising in public contracts take long time to resolve and, secondly, the process is very costly. However, the amendments subsequently made to the Arbitration and Conciliation Act, 1996 in December 2015 have addressed these issues. These amendments have made arbitration expeditious, efficacious and a cost effective remedy.

Nevertheless, there is one aspect which remain unattended, that is, the need to have specialist arbitrators. The success of arbitration in large part rests on the abilities and experience of the arbitrator, and the need to have an arbitrator well-versed with the technical nuances and commercial realties of the sector to which the dispute relates cannot be over-emphasized. For example, take the case of Permanent Court of Arbitration (PCA), which has a set of Optional Rules for Arbitration of Disputes Concerning Natural Resources and Environment prescribing specialized set of arbitral rules for the energy sector, or the Energy Arbitrators List hosted by the International Center for Dispute Resolution (the international arm of the American Arbitration Association).

The existing legal regime in India does not provide for such an institutional mechanism giving parties access to a pool of arbitrators with requisite industry knowledge and expertise. It is this void in the present legal system, which the Finance Minister is seeking to plug with the proposed amendments to the Arbitration Act. 

VM: Can institutional frameworks be applied for all sectors? Presuming challenges faced in Roads, for example, will be different from the challenges faced in Ports.

HS: An institutional framework which is set up as part of the Arbitration and Conciliation Act would be applicable to all the sectors. While it is true that different sectors do have certain challenges which are unique to the sector, but the broad economic and financials principles underlying any PPP or public utility contract are same. Therefore, an institutional mechanism which provides for a strong pool of specialist arbitrators having expertise in areas like economics and finance would be easily able to address sector-specific concerns and requirements.

Having said that, in order to inspire confidence in the investors and industry, it is absolutely imperative that the proposed amendments create a robust institutional arbitration infrastructure which can overcome any challenge relating to selection and availability of arbitrators and that it is not in any manner undermined by State legislations like we have seen in the case of Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983 where the State of Madhya Pradesh has created a separate forum for the purpose of determination of disputes arising inter alia out of the works contract. The members of the arbitral tribunal constituted under this Act are not nominated by the parties and the disputants do not have any control over their appointment.

VM: While Budget 2016 had made similar recommendations, a ‘Public Contracts (Resolution of Disputes) Bill’ was proposed in that regard which, inter alia, proposed institution of separate tribunals for resolution of such disputes. However, this Bill was proposed much earlier (in 2013) as well and the draft was made available in 2015.

And this year, the Government has taken a different stance by deciding to amend the Arbitration Act instead, to implement these reforms. Does this mean the Public Contracts Bill will no longer be required? Are tribunals the way to go when the same speech sought to reduce the number of tribunals?

HS: In a bid to expeditiously resolve disputes in PPP contracts, the UPA government for the first time in 2013 had proposed the Public Contracts (Resolution of Disputes) Bill, which aimed to provide an institutional arrangement for resolution of disputes between the government and contractors in construction and infrastructure projects. Subsequently, the NDA government in the year 2015 revived the bill and the present Finance Minister in his Budget Speech had proposed to introduce the Public Contracts (Resolution of Disputes) Bill. The draft of the Bill was also released for public comments but it could not take a final shape.

In his 2016 Budget Speech, the Finance Minister once again promised to introduce a Public Utility (Resolution of Disputes) Bill, but it also remained a non-starter. The basic objective of both these bills was similar, that is, to provide a legal framework for speedier resolution of disputes in PPP projects. This objective has already been achieved when the Arbitration and Conciliation Act was amended in December 2015, which made the arbitration process time-bound and cost effective. The government now seeks to establish an institutional framework which will give the parties access to a pool of specialist arbitrators which in turn will help improving the quality and efficacy of arbitration process in infrastructure sector.

In view of the proposed amendments to the Arbitration and Conciliation Act, the Public Contracts Bill may no longer be required, which contemplates an independent dispute resolution system for public contracts. In my view, no useful purpose may be served by creating multiple dispute resolution mechanisms and forums. This may only create uncertainties regarding jurisdiction and may end up proving to be counter-productive. It is, therefore, better to have a single comprehensive dispute resolution mechanism which is robust, efficacious and cost-effective. The proposed amendments to the Arbitration and Conciliation Act satisfy all these tests.

VM: The Cabinet had last year in August accepted the recommendations made by NITI Aayog to revive the construction sector which, inter alia, included transfer of pending cases from the pre-amended (arbitration) act to the amended act and payment of 75% of the disputed award to contractors. Do you expect any additional amendments as well? What would you like to see in the amendments?

HS: The decision of the government to accept NITI Aayog’s recommendations was a laudable effort to ensure that projects are not stalled and the developer and its project do not suffer because of want of funds while the dispute with PSU/Govt. department is resolved. However, it needs to be appreciated that this was the decision of an Executive government at the Centre which was made applicable to the PSUs and departments under the control of the Central Government. The benefit of this scheme does not extend to the disputes which are pending against State government departments and undertakings.

Therefore, in my view, if the recommendation made by NITI Aayog is given statutory sanction and is incorporated in the Arbitration and Conciliation Act, then it would be a great step forward and a yeoman service to the infrastructure sector. Presently, the developers despite succeeding in arbitration continue to face liquidity crunch if the government challenges the arbitration award in appeal, and delay in deciding the appeal only adds to the piling up of bad loans and impairing of balance sheets of both the lenders as well as the developers. If the proposed amendments can make it statutorily compulsory to pay or secure the award amount then this will go a long way in reviving the sector.

It may be added that such a course would not be unprecedented because the Code of Civil Procedure contains similar provision which makes it mandatory for the appellant to secure or deposit the money while preferring an appeal against a money decree.

(Views expressed in this interview are of HSA Managing Partner Hemant Sahai. Bar & Bench neither endorses nor is responsible for the same)