The draft Arbitration and Conciliation (Amendment) Bill, 2024, which has been released for public comment by the Department of Legal Affairs under the Ministry of Law and Justice, Government of India, proposes significant modifications to the framework of arbitration in India.[1] This Bill seeks to amend the Arbitration and Conciliation Act of 1996, with a notable change being the extension of the standard for "patent illegality" to international commercial arbitration (ICA).

Arbitration serves as a mechanism for the private resolution of disputes wherein parties mutually appoint one or more arbitrators to deliver binding rulings. This method of dispute resolution offers several advantages over traditional litigation, notably efficiency and finality, thereby facilitating a more effective resolution process. Both national and international efforts have concentrated on preserving the autonomy of arbitration by restricting the extent of judicial review over arbitral awards. These principles were enshrined in the Arbitration and Conciliation Act of 1996, which aimed to minimise judicial intervention, thereby affirming the enforceability of arbitral awards.[2]

A thorough examination of the Arbitration and Conciliation Act, supplemented by relevant case law, indicates that Indian courts traditionally permit the challenge of an arbitral award only on grounds of "perversity" or legal error. An arbitral award supported by a reasonable alternative interpretation of the law does not typically fall within the ambit of "perversity." This principle was articulated in the landmark decision of NTPC Ltd. v. Deconar Services (P) Ltd[3]., where Chief Justice N.V. Ramana stated:
"In order to succeed in a challenge against an arbitral award, it must be shown that the award of the arbitrator suffered from perversity or an error of law or that the arbitrator has otherwise misconducted himself. Merely showing that there is another reasonable interpretation or possible view based on the material on the record is insufficient to allow for the interference by the court."[4]

Section 34 of the Arbitration and Conciliation Act of 1996[5] enumerates the specific grounds for challenging an award rendered in domestic arbitration or an ICA seated in India before a competent Indian court. In Bhaven Construction v. Sardar Sarovar Narmada Nigam Ltd[6]., the Supreme Court clarified that recourse to a court against an arbitral award is permissible only through an application to set aside the award in accordance with sub-sections (2) and (3) of Section 34. The court underscored that the term "only" serves a dual function: it renders the enactment a self-contained code and delineates the procedural requirements necessary for recourse.

This article endeavours to elucidate the evolving concept of public policy in India, particularly concerning the interpretation of "patent illegality" on the face of an award, as construed by various courts. Additionally, it aims to analyse the implications of the proposed amendments contained within the draft Bill, with particular attention to their potential impact on the landscape of arbitration in India.

Background
The legal framework governing arbitration in India has evolved significantly from its inception with the Arbitration Act of 1940 to the more comprehensive Arbitration and Conciliation Act of 1996. This later Act incorporated key provisions from the UNCITRAL Model Law,[7] marking a pivotal shift in India's approach to arbitration. In particular, amendments in 2015 and 2019 sought to modernize the arbitration process, aiming to minimize judicial interference and enhance efficiency.

Historically, judicial intervention in arbitral awards was prevalent, often hinging on the subjective interpretation of the concept of 'public policy.' To mitigate such interference, India aligned itself with international standards through accession to the New York Convention and the adoption of the UNCITRAL Model Law within the Arbitration and Conciliation Act of 1996. However, landmark judicial decisions, specifically Renusagar Power Co. Ltd. v. General Electric Co.[8] and ONGC v. Saw Pipes[9]  have played a crucial role in defining the delicate balance between the finality of arbitration awards and the extent of judicial scrutiny.

Definition and Significance of Patent Illegality

A critical aspect of this discourse is the concept of 'patent illegality,' first introduced by the Supreme Court in the ONGC v. Saw Pipes case[10]. In this context, patent illegality was included as a ground for challenging awards based on 'public policy,' as outlined in Section 34 of the Act. The 2015 amendment further refined this concept by narrowing the definition of 'public policy' to exclude patent illegality in International Commercial Arbitrations (ICAs) while permitting its application in domestic arbitrations under Section 34(2A)[11]. Despite these reforms, patent illegality remains a contentious issue, continually evolving through judicial interpretation.

Development of Public Policy Jurisprudence in India

The development of public policy jurisprudence in India is significantly influenced by international frameworks such as the New York Convention, which permits the refusal of enforcement if an award contradicts the public policy of the state where enforcement is sought.

The Renusagar case established a foundational precedent for public policy standards in India, which encompasses three key criteria: the fundamental policy of Indian law, justice or morality, and national interests. Following the ONGC v. Saw Pipes decision, the interpretation of public policy broadened to incorporate the doctrine of patent illegality. However, the 2015 amendment has confined this doctrine primarily to domestic arbitration.

In summary, while significant strides have been made in refining arbitration law in India, particularly regarding judicial intervention and the interpretation of public policy, the complex interplay between these elements continues to evolve through ongoing judicial scrutiny and legislative reform.[12]

• Analysis of Patent Illegality Test Extension
  • The draft Bill reintroduces patent illegality as a ground for challenging awards in ICA. This reintroduction essentially returns to a framework established by the ONGC v Saw Pipes case, where judicial review of arbitral awards became more vigilant.
     
  • On the surface, the intent might be to enforce against egregious errors or illegalities. However, the method is radically at odds with international arbitration standards of minimal court involvement in upholding awards.
     
  • Many jurisdictions to which the UNCITRAL Model Law applies, such as Singapore and the United Kingdom, are now in line with allowing challenges to arbitral awards principally in cases of procedural irregularities or public policy violations. None of these jurisdictions are extending the concept of "patent illegality" to international arbitration. However, the amendment that is now proposed in India will deprive ICA of something to offer because it will keep the possibility of protracted and unpredictable judicial reviews open.
  • In Ssangyong Engineering and Construction Co Ltd v NHAI, the Supreme Court, while considering patent illegality, further clarified that the patent illegality must go to the root of the matter and exclude only errors of law. However, by reintroducing patent illegality into ICA, the reintroduced draft Bill runs the risk of diluting this clarity by enabling a greater breadth of judicial intervention.
     
  • The judgment in I-Pay Clearing Services Pvt Ltd v ICICI Bank Limited also underscores the significance of 'findings' in arbitral awards to survive judicial scrutiny. Under the expanded framework, the lack of clear findings could create a surge in challenges that could potentially swamp courts and the proposed Appellate Arbitral Tribunal.
  • Apart from patent illegality being already a ground for challenging domestic arbitral awards under Section 34(2A), the application of that ground to ICA goes against the principle of party autonomy and minimal judicial intervention, which is the very essence of international arbitration. One such example could result in potential confusion and damage the image of India as an arbitration-friendly jurisdiction.
     
• Key Provisions of the Draft Bill
  • One of the most notable proposals is the creation of the Appellate Arbitral Tribunal (AAT), which provides an opportunity for arbitral institutions to entertain applications to set aside arbitral awards under Section 34. If the parties agree to use the AAT, section 34 deprives courts of jurisdiction. However, this dual system (AAT versus the courts) brings the risk of divergent interpretations and inconsistency in the arbitration jurisprudence, which can undermine the notion of clear and efficient jurisprudence.
  • The Bill provides for new disclosure requirements and procedural steps in Section 34. For parties who file Section 34 applications, there is an obligation to disclose challenges to awards from a common legal relationship. Along with these, courts and AATs must also predefine grounds upon which Section 34 applications can be heard, but the ability to add grounds later renders the provision meaningless.
     
  • The Bill also allows a partial setting aside of arbitral awards, which is something that has been lacking. The law does not say whether a severable offence is an exception, only to the accepting of the award as tender.
     
  • The Bill also raises the problem of increased litigation. The amendment risks further overloading the judiciary by allowing appeals from courts as well as AATs under section 37. An introduction of an appellate mechanism for the appointment of arbitrators under Section 11 could further delay arbitration proceedings and thus undermine the purpose of resolution of cases in a timely fashion.
     
  • The Bill makes expansive changes to seat and jurisdiction as it seeks to extend Indian courts' jurisdiction in foreign arbitrations where awards are enforceable in India. It includes a new Section 2A and brings clarity to the definition of "court," following the judgment in Indus Mobile v. Datawind Innovations. However, the proposed second option, which restricts the seat to locations of contract execution or cause of action, narrows jurisdiction unnecessarily and diverges from global best practices.
     
  • The Act is set to be renamed "The Arbitration Act," with references to conciliation being removed. While this aligns the Act's scope with its name, it also signals a shift in legislative focus away from conciliation.
     
  • Procedural timelines are another area of focus. It sets out strict deadlines for several important stages of the process. In particular, it provides 60 days for disposing of applications under Section 8, 30 days for tribunal decisions on some pleas under Section 16, and 90 days for commencing arbitration following interim measures. These deadlines, although designed to speed the process along, could result in situations that are both impractical as well as unanticipated delays and additional litigation.
     
  • The Bill sets up an Arbitral Council whose function is to create model rules and fee structures for ad hoc arbitration. Yet trimming the mandatory role of the Supreme Court and High Court in designating arbitral institutions and lowering the qualifications for council leadership carries the risk of conflicts of interest. This dilution of oversight will need to be reconsidered, bearing in mind the government's status as India's biggest litigant.
     
  • The Bill has progressive clauses, such as expanding arbitration to include audio-video electronic means and including emergency arbitration but fails to address the most critical reforms. Missing elements also involved addressing third-party funding, fraud arbitrability, and reversing the 2021 amendment to section 36.
     
• Implications for Stakeholders
  • The introduction of Appellate Arbitral Tribunal and expansion of institutional responsibilities are likely to significantly alter the operational dynamics. Arbitral institutions will be faced with the task of allocating additional resources and training their staff to meet these additional duties. The existence of a dual regime set by the AAT may also require new procedural rules for arbitral awards review, which may increase complexity.
     
  • Legal practitioners will face challenges in navigating the broader grounds for contesting awards and the procedural changes brought by the AAT. This may involve more extensive case preparation, as legal practitioners will need to address additional grounds that constitute patent illegality. The introduction of the AAT also requires that new procedures be adapted for determination by the AAT, which may be substantially different from the existing court-based mechanisms.
     
  • These changes are certainly a concern for businesses, as they will increase costs and cause longer timelines. The introduction of the Appellate Arbitral Tribunal may prolong the disputes and raise uncertainty in commercial transactions. The heightened risk of judicial interference in ICA awards might deter foreign investors and could even erode India's standing as an arbitration-friendly jurisdiction. These changes may also force businesses to reconsider their arbitration clauses and choose seats away from India to reduce the risk.
     
• Critique and Recommendations
  • Potential Gaps and Increased Costs: The dual appellate mechanism and the expanded grounds for declaring patents illegal may lead to increased costs and delays. Additionally, there is insufficient clarity regarding the severability of partially set-aside awards, a significant concern noted by the Delhi High Court in the case of NHAI v. Trichy Thanjavur Expressway Ltd. Moreover, the Bill fails to tackle the backlog of pending cases in Indian courts, raising concerns about its ability to reduce delays.
  • Inconsistencies in Application: The dual system of AATs and courts may lead to inconsistent jurisprudence, as different forums may adopt divergent interpretations of similar provisions. This inconsistency could create further uncertainty, undermining the credibility of India's arbitration framework.

Recommendations
For the International Chamber of Arbitration (ICA), it is essential to narrow the scope of patent illegality to align with international standards. This approach will protect arbitral awards from any judicial interference and will ensure an award that is final and definitive. Without measures such as these, the ICA in India would lose its predictability and efficiency.

Additionally, the rules for giving severability to awards should be laid out clearly in order to prevent ambiguity in the enforcement process. If arbitral awards can be separated into separable parts, some clarity will be achieved, the execution process will be facilitated, and where possible, certain unnecessary litigation will be avoided.

The next essential recommendation is the enhancement of the autonomy of arbitral institutions. The improvements in their independence will lead to establishing trust and credibility in arbitration processes, and arbitrations will be perceived as impartial and authoritative.

It is important to introduce realistic timelines for arbitration proceedings in order to assure implementation at a practical level without compromising efficiency. It permits the flexibility necessary to avoid unnecessary delays while realizing the particular complexities of individual matters.

The existence of a central body of appeals or uniform guidelines will guarantee coherence in the application and interpretation of arbitration laws. It is this step that will help resolve disparities in judicial decisions throughout various jurisdictions.

The last necessary step is judicial training and sensitization to an arbitration-friendly approach to arbitration laws. Training of such nature should emphasize the importance of efficiency and finality and should focus on arbitration as an alternative dispute resolution mechanism.

Conclusion
The 2024 Amendment Bill to India's Arbitration Framework brings both Progressive and Regressive elements. Here, the adoption of emergency arbitration and policy on digital arbitration represent forward-thinking reforms aimed at modernizing the process. However, the patent illegality test extended to ICA, and the creation of Appellate Arbitral Tribunal would introduce layers of complexity and judicial oversight that would undermine many of the effects of earlier reforms.

From a broader perspective, one could argue that these issues highlight the tension between ensuring procedural fairness and promoting arbitration as a quick and cost-effective method for resolving disputes. While judicial oversight is crucial in serious cases, the proposed reforms may overemphasize intervention. It could dissuade international stakeholders, who want predictability and little judicial interference with their international disputes, from participating in India's arbitration framework.

Arbitration needs autonomy, finality, and efficiency in the field to thrive. While well-intentioned, the current proposals can, on reflection, risk eroding these principles. These concerns must be addressed by adjusting the reforms to align with global best practices, ultimately promoting India as an arbitration-friendly ecosystem that enhances its reputation as a leading arbitration venue worldwide.

The government must find a delicate balance: ensuring strong safeguards for fairness and legality while also preserving the speed and autonomy that make arbitration an appealing alternative. Failing to achieve this balance could jeopardize the significant progress made over the past decade and threaten India's ambitions to establish itself as a global arbitration hub.

End Notes:

1. Payal Chawla, Navigating Commercial Disputes: The Draft Arbitration and Conciliation (Amendment) Bill, 2024 - An Analysis, Bar and Bench (23rd Nov. 2024), available at https://www.barandbench.com/columns/the-draft-arbitration-and-conciliation-amendment-bill-2024-an-analysis (last visited on Dec. 21, 2024).
2. Ishita Kashyap, Patent Illegality As A Ground Of Judicial Intervention In Arbitration, LiveLaw (24th July 2024), available at https://www.livelaw.in/lawschool/articles/patent-illegality-ground-judicial-intervention-arbitration-264375 (last visited on Dec. 21, 2024).
3. NTPC Ltd. v. Deconar Services (P) Ltd., (2021) 19 SCC 694.
4. Hiroo Advanit, et. al, Decoding the Public Policy of India and Patent Illegality on the Face of an Award, (23rd March 2024), available at https://www.scconline.com/blog/post/2022/03/23/decoding-the-public-policy-of-india-and-patent-illegality-on-the-face-of-an-award/ (last visited on Dec. 22, 2024).
5. Arbitration and Conciliation Act, No. 26 of 1996, § 34, Acts of Parliament, 1996.
6. Bhaven Construction v. Sardar Sarovar Narmada Nigam Ltd., (2020) 4 SCC 462 (India).
7. UNCITRAL, Model Law on International Commercial Arbitration, U.N. Doc. A/40/17 (1985).
8. Renusagar Power Co. Ltd. v. General Electric Co., 1994 AIR 860.
9. ONGC v. Saw Pipes, (2003) 5 SCC 705 (India).
10. Id.
11. Supra, note 3, § 34(2A).
12. Supra, note 4.
13. Ssangyong Engineering and Construction Co Ltd v NHAI, AIR 2019 SC 5041 (India).
14. Shilpa Shah, THE TEST OF PATENT ILLEGALITY, Singhania & Partners, available at https://singhania.in/admin/blogimages/doc-7059685.pdf (last visited on Dec 22nd 2024).
15. I-Pay Clearing Services (P) Ltd. v. ICICI Bank Ltd., (2022) 3 SCC 121 (India).
16. Supra, note 2.
17. Id.
18. Indus Mobile v. Datawind Innovations, 2017 (7) SCC 678 (India).
19. National Highways Authority of India v. Trichy Thanjavur Expressway Ltd., 2023 SCC OnLine Del 5183 (India).