Tag: Arbitration

From Bias to Balance: Informed Consent in AI Arbitration

BY A.S. VAMSI KRISHNA AND SWAGAT AHUJA, THIRD-YEAR STUDENTS AT RGNUL, PUNJAB

Introduction

Recently, there has been a surge of interest in the notion of artificial intelligence (‘AI’) based platforms taking over the role of an arbitrator. This interest stems from their potential to provide a swift and cost-effective alternative to the traditional arbitration process, particularly in light of the fact that over 31 million disputes are currently pending before Indian courts. However, legal and ethical concerns have been raised regarding the use of AI-arbitrators due to their susceptibility to incorporating biases stemming from racial, cultural, religious, and geographic stereotypes into their assessments. For instance, COMPAS, an AI-based risk assessment tool implemented in American judicial systems to predict the likelihood of a defendant becoming a repeat offender, was found to exhibit significant bias. The program inaccurately categorised African American offenders as high risk nearly half of the time, raising serious concerns about its fairness and reliability. These concerns are firmly supported by both the UNCITRAL and the Indian Arbitration & Conciliation Act, which recognise challenges against a biased arbitrator. Consequently, the question arises as to whether the inherent biases of an AI-arbitrator render it an unusable proposition, even if the parties involved consent to their usage. The answer is not so straightforward, since a blanket ban on the use of AI-arbitration would infringe upon the freedom of the parties to opt for their preferred arbitration process, even if it involves a fully-AI based arbitrator at its helm.

The authors argue that a balance must be found between preserving the parties’ freedom to submit their dispute to the arbitrator of their choice against the consideration of potential costs incurred should there be mass-unenforceability of AI-generated awards in courts. To achieve this balance, the authors suggest that AI-arbitration agreements should only be allowed where the parties involved fully understand the biases inherent in the AI-arbitration and provide informed consent accordingly. Further, this article delves into potential measures that could be implemented within a regulatory framework to ensure that parties are capable of providing informed consent to an AI arbitration agreement.

The Need for Informed Consent

In the context of AI-arbitration, informed consent must be understood to be fulfilled when the concerned parties have access to sufficient and accurate information regarding the AI’s inherent biases and predisposition prior to entering into the agreement. The need for informed consent is countered by some, who argue that the higher threshold of consent in selecting an AI-arbitrator imposes an unnecessary burden, especially when compared to their human counterparts who, despite sharing susceptibility to inherent biases, are exempt from such requirements. In response, the authors contend that equating AI-arbitrators with their human counterparts would be misguided, since the manner of the manifestation of their biases and the scale of their operations are not comparable. AI in general is in its nascent phase and as such, the methods of investigating inherent biases it may possess are complicated and time-taking. Expecting both parties to be sufficiently knowledgeable on the basis of their own investigations is a big ask and would often lead to challenges at the time of enforcement. This is certainly true in the cases of consumer facing contracts where an AI-arbitrator is employed by banks, large constructors and other large-scale operators, where the opposing party often consists of individuals who lack sufficient resources to investigate the AI-arbitrator thoroughly. Additionally, an AI-arbitrator differs from humans in that the multitude of cases it can resolve is much greater than a single human. This means that any bias challenged by a party in one case would lead to a domino effect, toppling every case it has previously dealt with on the basis of a single challenge. In light of these factors, the element of informed consent is a vital consideration with respect to AI-based arbitration.

Integrating Informed Consent into AI-Arbitration Platforms

To ensure that the parties involved are capable of providing informed consent, the regulatory framework must be such that the potential AI-arbitration platforms are examined thoroughly and any inherent predispositions undertaken by the AI is disclosed. However, as previously discussed, the complexity of investigating such AIs means that the regulation in place cannot evolve an independent statutory body which evaluates each AI and certifies it as this would increase the cost and resources of the state. Thus, the authors propose that the potential AI arbitrator should be made open-source, meaning the model whether a language learning model or otherwise on which the AI operates should be publicly accessible to ensure transparency. An open-source AI offers significant benefits, as complete access to its inner workings allows experts worldwide to examine it and identify potential loopholes, emulating a peer-review process of the code. This approach has proven effective, evidenced by the case of ChatGPT, an open-source AI. It was discovered to have inherent biases in favour of a more liberal stance, revealed only by the efforts of a group of experts who carefully examined the code. An open-source AI is preferable to a confidential program since it would reduce arbitration costs for the parties by mitigating the need for private investigations of the code in each case. Additionally, it would be more efficient for the arbitration platform, which would otherwise need to protect the secrecy of its code through rigorous Non-Disclosure Agreements and other tedious privacy measures before permitting parties access for investigation. Therefore, an open-source approach is a win-win situation for the parties involved and the arbitration platform. It ensures transparency regarding any inherent biases or errors within the AI and eliminates the need for parties to conduct an ex-ante investigation for each case.

Furthermore, an additional element to informed consent is to ensure that the variant of the AI which both parties have tested and agreed is the AI which actually acts as the arbitrator. This factor is relevant in light of the capability of AI to be altered post-agreement due to new updates. For example, if both parties provide consent to appoint an AI variant developed in 2024 as their arbitrator, any subsequent updates to this variant could potentially alter the AI’s assessment of the case. This would create the possibility of challenges during enforcement. Thus, to prevent enforcement errors, AI-arbitration agreements must specify the variant which they choose to act as arbitrator and the AI-arbitration platform must possess the capability to assess disputes as per their previous variants as well. Alternatively, the parties can reach an agreement to consent to the use of the specific AI along with the updates therein to ensure that no claim regarding lack of informed consent leads to challenges during enforcement.

Conclusion

AI-based arbitration promises low-cost, expedited dispute resolution, a prospect that is so enticing that it has drawn investments to bring the idea to reality. While parties have the right to opt for AI arbitration as their preferred process, ensuring fairness and equitability is necessary to ensure that the awards so produced are not vulnerable to challenge in courts. It is in the interest of future AI-arbitration platforms to provide parties with the ability to give informed consent to ensure successful enforcement of awards.

Further, regulators face a daunting task since they always have to catch-up with the lightning-fast development of AI. Falling behind is not an option, since a defect in the AI-program could impact not just one, but potentially all the awards it has produced. The authors suggest a pre-authorisation process for AI-arbitration platforms, mandating open and peer-reviewed programs to uncover potential biases. This is since AI’s complex nature means that understanding and revealing its potential biases can only be done by a small group of experts and so cannot be expected to be understood by all potential users. Peer review allows for a breakdown of complex information into simple intelligible data that can be understood by the parties before agreeing. Should there be no regulation, the state risks having its people consent to arrangements for which it is not moral to hold them accountable since they are unable to give informed consent. Hence, it is a justified regulatory filter to require AIs to pass certain tests before being released into the market.

June 9, 2024
SECTION 29-A OF ARBITRATION ACT: THE EXIGENCY OF LEGISLATIVE PRESCRIPTION.

BY DIGVIJAY KHATAI AND ZOYA FARAH HUSSAIN, THIRD-YEAR STUDENTS AT

NLU ODISHA

Introduction

Section 29-A (4) of the Arbitration and Conciliation Act, 1996, is currently under scrutiny in India due to its perceived impact on the efficiency and expediency of arbitration proceedings. This provision mandates the completion of arbitral proceedings within twelve months from the date of the arbitrator’s appointment, with an extension of six months by the consent of the parties. Non-adherence to this timeline leads to the cancellation of the arbitrator’s mandate. The issue of allowing extension after the expiry of the mandate arose recently in the Rohan Builders  case which awaits a final decision in the Supreme Court.  In that light, the first section analyzes the uncertainty regarding the contribution of the parties in seeking an extension of the mandate after its expiry. Beyond that, we expound on the dichotomous judicial stance on the said matter and its implications. Finally, we culminate our opinion to understand the need for a statutory prescription on this issue.

Comprehending the Conundrum

In acknowledgment of the need for a fine balance between the two pillars of the Arbitration and Conciliation Act which are party autonomy and time-bound resolution of disputes, the 2015 amendment inserted Section 29-A to the act wherein sub-section (1) limits the time period for the arbitral tribunal to announce the arbitral award within twelve months from the ‘date of completion of pleadings for claims and defences’, which has to be concluded within six months from the date the arbitrator(s) received the notice of appointment as per sub-section 23(4) of the Act. Further the same can be extended, with the consent of the parties for a period not extending six months under sub-section 29-A (3).

However, under sub-section 29-A (4), in case the arbitral tribunal fails to announce the award either within the timeline under sub-section (1) or within the extended timeline sub-section (3), the mandate of the arbitrator shall expire, upon completion of such time-period, unless the court extends the same either prior or after the expiry. Sub-section (5) further mandates that such an extension by the court shall be on the ground of a ‘sufficient cause’ that must be proved by the party making the application under sub-section (4).  These provisions enshrine the essence of time-bound efficiency in the statute limiting the period of resolution within twenty-four months from the date of notice of appointment to arbitrators.

The legislation explicitly addresses the authority of courts to extend the arbitrator’s mandate, both preceding and following its expiration. However, it remains silent on the specific timing for parties involved in the proceedings to submit an extension request. Hence, the central legal quandary arising from this ambiguity is whether parties must adhere strictly to applying under sub-section 29-A (4) before the arbitrator’s mandate expires, or if they retain the autonomy to do so even after its expiration.

Judicial Dichotomy

The scope of section 29A has been analysed in a catena of judgments. In Rohan Builders case, the Hon’ble Calcutta High Court examined the extension of the arbitrator’s mandate through the interpretation of the word “suspended” in the 176th Law Commission Report concerning section 29A (1). The learned Single Judge referred to this report which proposed using the term “suspension of arbitral proceedings” instead of “terminate” when suggesting the implementation of time limits for concluding arbitration proceedings. However, the statute uses the word “terminate” in recognition of the need for efficacy in arbitration proceedings. This choice implies that once the prescribed timelines expire without extension requests from either party, the tribunal’s authority would cease definitively rather than remain suspended.

Relying on the aforesaid judgement, Hon’ble Calcutta High Court in Vrindavan Advisory Services L.L.P. v. Deep Shambhulal Bhanushali rejected an extension application filed after the specified period under section 29A. Notably, the Hon’ble Supreme Court has ordered a stay of the Calcutta High Court’s verdict (given vide order dated November 06, 2023) after an SLP was filed against Vrindavan Advisory.

In a sharp turn of opinions, the Delhi High Court in ATC Telecom Infrastructure Pvt Ltd case, ruled that an application under section 29A (4) can be filed after the expiry of the mandate of the arbitrator. It reasoned that since the section has empowered the court to extend the arbitrator’s mandate either ‘prior’ or ‘after’ the expiry of the same, it saw no reason why an application of extension ‘after’ the expiry shall not be entertained. The rationale behind such a stance was justified by the expeditious approach of the arbitrator backed by the consent of the parties for the said extension. These were reasons enough for allowance of the extension application rather than rejecting it merely for filing the same after the expiry of the mandate.

The expeditious conduct of the arbitrators was again a crucial ground for the Hon’ble Delhi High Court in Wadia Techno-Engineering Services Ltd. v. Director General of Married Accommodation Project to grant an extension of arbitrator’s mandate despite the parties applying for the same after the expiry of the mandate.

Upholding the approach laid down by ATC Telecom (Supra), the Bombay High Court in Nikhil H. Malkhan case, has reasoned that since the courts are empowered under section 29-A (4) to grant an extension after the expiry of the mandate, such power conferred cannot be negated solely by the virtue of parties making application ‘after’ the expiry.

Legislative Prescription: A Need

The approach opted by ATC Telecom, Wadia Techno-Engineering and Nikhil H. Malkhan adopts a logical viewpoint as opposed to a stricter and a more literal approach of the statute solely focusing on the efficiency of proceedings, taken by Rohan Builders. The former not only seeks to accurately construe the legislative intent of section 29-A (4), but it also intends to preserve the element of party autonomy which stands on an equally significant pedestal. While it shall be interesting to see how the Supreme Court balances both the aspects in the SLP filed against the Rohan Builder (Supra), we need to be cognizant of a potential loophole that shall entail at the event of allowance of the parties to apply for extension after expiry of the arbitrator’s mandate.

Notably, none of the rulings that advocate acceptance of applications after the expiry of the mandate, prescribe a specific time limit after the said expiry within which such an application must be made. In the absence of such an additional time limit, parties will have a free pass to apply for the extension after any unreasonable delay. For example, recently in Glencore India Pvt Ltd v. Amma Lines Limited case, the Bombay HC laid down that as per the current legal framework and given an expeditious conduct on behalf of the arbitrator, the arbitrator’s mandate may continue to be valid despite an ‘unreasonable delay of 6 months’ attributable to parties applying for extension of the mandate.

The direction to apply ‘before’ the expiry of the arbitrator’s mandate in Rohan Builders (Supra) contributes a sense of certainty to the ambiguous maze of specific time limits which the other cases are devoid of, creating an enriched ground for violation of the statute to conclude arbitral proceedings within twenty-four months. The entire scheme of discussions highlights the pernicious implications of enforcing the ATC Telcom approach coupled with an absence of a further statutory time limit, on the efficiency of arbitral proceedings.

The creases of the conundrum can be ironed out if a legislative endeavour is sought to be made to not only lay down conditions for extending the mandate under section 29-A(4), which includes expeditious conduct of arbitrator coupled with consent of parties; but also prescribe a specific time limit of say fifteen or thirty days within which an application for extending arbitrator’s mandate is to be mandatorily made.

Conclusion

The slew of judgements paints conflicting pictures on the issue of extension of the arbitration mandate. While the decision in the SLP pending in the Rohan Builders case would be fascinating to observe, the approach to allow the extension of the mandate after the expiry of the timeline taken by another set of judgments does not come as a panacea either. The approach does entail some lacuna like the ‘absence of a specific period’ to adhere to while applying for an extension of the arbitrator’s mandate, after the expiry affects the time-bound efficacy of the legislation. In response to this a need for a statutory prescription of a certain timeline for requesting an extension after the expiry of the mandate has been proposed which could give certainty in such a scenario where the opinions of the courts are divided and act as an uncontested thumb rule to guide further decisions.

In conclusion, a balanced outlook to encapsulate the essence of both the pillars of the statute would ensure that both the judiciary and the legislature, in pursuit of endeavouring in the said matter would be guided by the original intent of the legislators.

May 28, 2024
Post Cox and Kings: Delhi High Court Exempts Directors From Group Of Companies Doctrine- Implications And Analysis

By Shivang Monga and Varun Pathak, Third-Year Students at MNLU, Mumbai

I. Introduction

The Delhi High Court(‘DHC’)on 24 January 2024, in the case of Vingro Developers Pvt Ltd v Nitya Shree Developers(‘Vingro Developers’), delivered an important ruling on the aspect of impleading directors of a company to the arbitration agreement. The court, in this case, excluded directors from the ambit of the group of companies’ doctrine, which the Supreme Court(‘SC’) upheld in the case of Cox and Kings Limited vSAP India Private Limited(‘Cox and Kings’).

According to this doctrine, an arbitration agreement entered into by one company binds non-signatory group entities under certain circumstances. This doctrine applies only when the circumstances demonstrate the mutual intention of the parties to include both signatories and non-signatories. Consequently, the non-signatory gets impleaded despite not formally consenting to it.

The DHC judgement brings certain clarity to the doctrine by excluding directors from being impleaded. The exclusion in this case stems from the application of the principal-agent relationship.

This article seeks to analyse the high court’s verdict in the context of the Cox and Kings judgement, and sheds light on why ‘group of companies’ doctrine should not apply to such scenarios. Furthermore, we broaden our analysis by examining how different international jurisdictions have addressed issues of binding directors and employees within a company to the arbitration agreement.

II. Binding Directors to Arbitration: Applicability of Cox and Kings

The Respondent in the above case signed two Builder Buyer Agreements with the Petitioner concerning the Rajasthani Resident Township Project of the Respondent. The Respondent company’s directors were authorised representatives. Director 1 had signed the BuilderBuyer Agreements on the Respondent’s behalf, while Director 2 was a non-signatory. Pursuant to the non-delivery of the possession of flats, the Petitioner invoked arbitration against the Respondent.

The Petitioner also sought to enforce the arbitration agreement against the company’s directors by invoking the Cox and Kings judgment. It was argued that in light of the said judgement, non-signatories could be impleaded and that the directors cannot be separated from the company. Petitioner argued that as per the said judgement, a joint reading of section 2(1)(h) and section 7 of the Arbitration and Conciliation Act, 1996 would mean that ‘parties’ included signatories and non-signatories. The contention was that one director (signatory) and other director (non-signatory) were not ‘third parties’, but rather ‘non-signatories.’

However, the DHC underscored that the application of the ‘group of companies’ doctrine, as per the Cox and Kings judgment, hinges upon the common intention of the parties to bind non-signatories to the arbitration agreement. To accurately ascertain this intention, the court emphasized the need to consider the relationship between the parties and the surrounding circumstances.

In light of the fact that the arbitration agreement was not signed by Respondent 2 in personal capacity but only in representative capacity and the fact that Respondent 3 was not a signatory to the arbitration agreement, the court held there was no intention to bind the directors to the arbitration agreement.The High Court therefore, did not apply the group of companies’ doctrine and allowed arbitration proceedings only against the company and not its directors.

III.Authors’ Analysis: Deciphering the Common Intention and Corporate Separateness

In Dow Chemical v. Isover Saint Gobain, the ICC tribunal emphasized that non-signatories could be made a party to arbitration agreement based on the mutual intent of the signatory and the non-signatories. Similarly, in Cox and Kings, the Supreme Court clarified that the group of companies’ doctrine applies only when there is clear corporate separateness among the entities within the group.

Applying these principles to such cases, it becomes evident that the directors cannot be bound by the arbitration agreement for two key reasons. Firstly, due to the absence of corporate separateness between the director and the company. Secondly, the crucial element of common intention necessary for enforcing the arbitration agreement is lacking.

To establish corporate separateness, there needs to be the involvement of two separate entities, such as a holding company and its subsidiary, each with its own legal identity. However, in such a case, the director’s role as an agent of the company cannot fall within that definition. Consequently, with only one corporate entity at play and the director acting on its behalf to execute the arbitration agreement, the prerequisite of common intention also remains unfulfilled.

Due to the absence of corporate separateness between a director and the company, the lines between the intentions of the individual director and those of the company becomes blurred. Directors, as agents of the company, are generally seen as integral parts of the company rather than distinct entities. When a director signs an arbitration agreement, it’s typically assumed as an action on behalf of the company, with the intention assumed to be that of the company. Without clear corporate separateness, it becomes difficult to ascertain the intentions of the director and of the company as a whole. This lack of distinction makes it challenging to establish the necessary common intention required for enforcing arbitration agreements. The enforcement of arbitration agreements involving directors also becomes uncertain, as it remains unclear whether the director’s actions truly represent the collective intention of the company or if they’re acting in their personal capacity.

Therefore, DHC noted in the absence of corporate separateness and common intention the directors cannot be bound by the arbitration agreement in the present circumstances as they were also not acting in their personal capacity.

IV. Understanding Directorial Exemption: The Role of Agency Principle

In addition to addressing the absence of a common intention to bind directors, the court also relied on the agency principle to discern the relationship between the company and its directors. Notably, it was observed that directors acted on the company’s behalf, as specified under Section 182 of the Contract Act. Similarly, Section 230 of the Contract Act clarifies that an agent does not assume liability for principal’s actions unless the agent personally commits to such responsibility.

The court’s perspective for not relying on the group of companies’ doctrine in favour of the agency principle is commendable. By emphasizing the fiduciary duties and roles of directors as company agents, the court elucidates a more nuanced understanding of corporate relationships and individual responsibilities within corporate structures.

V. International Position

In light of the High Court’s oversight in considering international jurisdictions, it becomes imperative to delve into global legal perspectives on this issue. International jurisdictions have a mixed view regarding binding non-signatory directors and employees of companies to arbitration agreement. In the USA, in DK Joint Venture 1 v. Weyand it was held that because of the principles of contract and agency law, non-signatory corporate officers and agents of a corporation cannot be bound by the arbitration agreement entered on behalf of the company. The court in Covington v. Aban Offshore Ltd took the same view. Once, an arbitral tribunal in Geneva also held that the arbitration clause should not extend to the directors who have acted under employment.

Due to the lack of uniformity on this issue in the international jurisdiction, it has also been held in certain cases that employees could be subject to arbitral jurisdiction as per the arbitration agreement signed by the company. This approach is based on the principle of ‘third party beneficiary’. According to this principle, employees could be subject to arbitral jurisdiction based on arbitration agreements signed by the company when they are intended beneficiary to the contract. However, this position is different and does not hinge on the group of companies’ doctrine, as argued before the Delhi High Court.

It has been held in the case of In re Vesta Ins. Group Inc by Supreme Court of Texas that arbitration clauses apply only to contractual signatories, and the agents or officers of corporates can only be made a party to the dispute if they are enlisted as a third party beneficiary.

Thus, even in cases where arbitration agreements bind employees, it is not based on the group of companies’ doctrine. The argument that the arbitration agreement must bind the directors by relying on Cox and Kings judgment does not stand as the group of companies’ doctrine in the present case cannot be applied in light of non-existence of separate companies.

Therefore, the High Court’s decision aligns with the prevailing international stance, affirming that the impleadment of non-signatories to arbitration agreements, as per the Cox and Kings judgment, is contingent upon the common intention and the existence of separate entities within a group of companies.

VI. Conclusion and Way Forward

The judgment in Vingro Developers brings some clarity to the application of the Group of Companies Doctrine. By excluding directors from arbitration agreements, it underscores the defined fiduciary relationship within corporate structures. This decision emphasizes the need to consider agency principles and the absence of distinct entities within a group, to ensure a nuanced understanding and application of this doctrine in India. Moving forward, a comprehensive approach is needed to ensure consistency and fairness in resolving disputes involving directors and other employees of the company to ensure trust and efficiency in corporate arbitration proceedings.

April 6, 2024
Navigating Arbitration Through UK, Singapore, and India: From Governing Laws To Enforcement Realities
BY SHUBHAM SINGH, A THIRD-YEAR STUDENT AT NATIONAL LAW UNIVERSITY, ODISHA

Introduction

Contracts often integrate arbitration through dedicated clauses or standalone agreements. While most arbitration agreements or clauses are well-structured, some of them exhibit ambiguity or omissions in terms of governing law, seat, or venue of arbitration. These inconsistencies risk misinterpretations, necessitating litigation to resolve disputes over the arbitration clause itself.

A unique dilemma arises when a main contract with a comprehensive arbitration clause omits to mention the governing law. Domestically, it is easy to resolve this dilemma as all matters fall under one jurisdiction and revolves around one statute i.e., the statute of arbitration under that jurisdiction. However, international arbitration introduces complexities regarding this issue. Variations of law across jurisdictions can lead to differing interpretations and nuanced issues.

In its latest report titled Review of the Arbitration Act 1996, the United Kingdom Law Commission (‘Law Commission’) addresses the dilemma of governing laws and proposes solutions to address this issue. This article examines the Law Commission’s recommendations on governing law while comparing them with Singapore’s interpretation of governing laws and providing insights for India from these two jurisdictions. Furthermore, this article will attempt to understand to what extent it is beneficial to decide the issue of governing laws in international arbitration.

Decoding the Recommendation and its Reasoning

The backdrop of the report can be aptly summarised using Enka Insaat Ve Sanayi A.S. v. OOO Insurance Company Chubb(‘Enka v. Chubb’), which serves as the case to illustrate the current stance of the United Kingdom regarding governing law in arbitration.

The Enka v. Chubb ruling establishes that the governing law of an arbitration agreement typically aligns with the law chosen by the parties involved. If there is no explicit designation in the arbitration agreement, it is implied that the law selected to govern the main contract extends to the arbitration agreement, except if applying that law would invalidate the arbitration agreement. In such cases, an alternative law will be applied using the validation principle, which prioritizes interpretations that uphold the validity of contract in instances of contractual ambiguity. Therefore, in situations where no governing law is specified, the arbitration agreement will be governed by the law most closely associated with it, a principle often referred to as the ‘law of the seat’.

The Law Commission recommended that the applicable governing law should either be the one expressly agreed upon by the parties or if no such agreement exists, the law of the seat of arbitration. Thus, it discarded the prevailing practice of applying the law of the main contract to the arbitration agreement in the absence of a pre-decided governing law.

The Law Commission reasoned that implementing the recommended changes would safeguard party autonomy in arbitration, mitigating risks associated with foreign governing laws that may offer less favourable provisions on arbitrability, scope, and separability. Furthermore, it is believed that the recommended approach would eliminate the need for the application of a very uncertain validation principle and reduce the likelihood of disputes over position of foreign arbitration laws in these matters.

Analysing the United Kingdom and Singapore Perspective

The Law Commission through its recommendations may have aimed to eliminate the complex hierarchy for determining the governing laws, established by Sulamerica Cia Nacional De Seguros S.A. v. Enesa Engenharia S.A. (‘Sulamerica’). This hierarchy has been influential in various succeeding cases, notably, Enka v. Chubb and Kabab-Ji SAL v. Kout Food Group (‘Kababji’). Enka and Kababji relied on the Sulamerica hierarchy. Sulamerica hierarchy proposed the following sequence for ascertaining the governing laws:
- the express choice of law made by the parties;
- the implied law reflecting their intention;
- the law closely connected to the arbitration.
This hierarchy has been used in many jurisdictions, especially Singapore through judgments such as BCY v. BCZ (‘BCY’) and BNA v. BNB (‘BNB’). However, Singapore accepting the Sulamerica case hierarchy, formulated its own interpretation regarding the governing laws. The case of BCY asserts that an arbitration agreement typically aligns with the main contract’s governing law unless such alignment negates the arbitration agreement. Meanwhile, the BNB decision holds that merely specifying the governing law for a contract is inadequate to qualify as an express choice for the proper law of the arbitration agreement.

Based on Singaporean case laws and UK Law Commission recommendations, it is clear that both jurisdictions suggest that the main contract’s governing law may not always govern arbitration. It is so because it potentially impacts party autonomy or may negate the arbitration process as a whole. Parties often choose the seat of arbitration based on favourable laws, expediting the process. Thus, prioritizing party choice or the seat’s laws over hierarchical considerations from the Sulamerica case to Enka v. Chubb, enhances party-friendly nature of arbitration rather, as, the outcome of the Sulamerica hierarchy which was further developed in the Enka v Chubb suggests that arbitration agreements could fall under the jurisdiction of foreign laws. This stems from the fact that while arbitration agreements may not consistently indicate a governing law, main contracts frequently stipulate foreign laws as the governing authority and it can be treated as an expressed choice. This observation was also put forth by the Law Commission.

Criticism of the United Kingdom and Singapore Perspective

Singapore and the Law Commission prioritize shielding of arbitration proceedings. This is evident in their emphasis on linking the arbitration agreement to a governing law which does not negate arbitration, thereby ensuring the viability of arbitration. However, this focus risks neglecting the broader picture of international arbitration, particularly the critical matter of award enforcement. While their commitment to safeguarding proceedings is laudable, overlooking enforcement mechanisms creates potential hurdles in realizing the global effectiveness of arbitration outcomes.

Indian Perspective and Its Criticism

In India, as per Union of India v. Reliance Industries Limited and Ors., if the governing law is not expressly mentioned, the substantive law of the main contract will apply.

The Indian approach prioritizes enforceability, as the jurisdiction where the main contract originates often serves as the place for enforcing arbitral awards. However, this position also raises concerns about limiting party autonomy, which could potentially restrict the freedom to choose the governing law for arbitration independently. While prioritizing enforcement is undeniably essential for successful arbitration outcomes, striking a balance with upholding party autonomy remains paramount. After all, party autonomy is a cornerstone of the arbitration process, allowing flexibility and tailored solutions for diverse business transactions.

Mixing The Ingredients – A Scenario-Based Approach

While respecting party autonomy and ensuring the viability of arbitration is crucial, every jurisdiction should consider the entire arbitration process, from initiation to award enforcement, while crafting its framework. In this section, the author will propose a scenario-based approach, integrating the analysed approaches of the jurisdictions mentioned above.

In scenarios where the enforcement of the arbitral award occurs in a jurisdiction that supports the arbitrability of the dispute, solving the governing law issue will not be a problem. In this case, it will assist the parties in completing the arbitration process.

In scenarios where the enforcement of arbitral awards must be done in a jurisdiction where the dispute between the parties is non-arbitrable, delving deep into the issue of governing law is not appropriate. Implementing a law that upholds arbitration proceedings may seem like a solution, but ultimately, if the arbitral award cannot be enforced, the mechanism of arbitration does not benefit the party.

For example, in the case of Anupam Mittal v. Westbridge Ventures II Investment Holdings (‘Anupam Mittal’), Anupam and Westbridge had signed a Shareholders’ Agreement with an arbitration clause impliedly designating Singapore as the arbitration seat. Anupam Mittal filed an oppression and mismanagement petition with the National Company Law Tribunal (‘NCLT’). Westbridge obtained an injunction from the Singapore High Court to halt NCLT proceedings, to which Mittal appealed to the Singapore Court of Appeal. The Court of Appeal also granted a permanent injunction, directing arbitration under Singaporean law. Indian courts, similarly, issued an anti-suit injunction over the arbitration proceedings, as oppression and mismanagement disputes are not arbitrable in India but are in Singapore. However, since the Shareholders’ Agreement concerned an Indian company, enforcement of the arbitral award would ultimately fall under Indian jurisdiction, where, according to Indian law, the award would be null and void.

It is argued that ultimately, if the enforcement of the arbitral award will be null and void, why go through the arbitration process? It is suggested that enforcement should also be considered a primary element of arbitration when deciding disputes over arbitration agreements or clauses. Arbitration, introduced to reduce litigation- as shown in cases like Anupam Mittal– can lead to over-litigation and burden the parties if enforcement is not considered. Parties involved in international arbitration may find themselves navigating various jurisdictions to sustain arbitration through litigation, thus defeating its purpose.

Conclusion

Jurisdictions must acknowledge the importance of time and efficiency. Where enforcement of an arbitral award is expected to be smooth, delving into the governing law can facilitate timely resolution. However, if non-enforcement looms, it is preferable to defer the dispute to the courts of the enforcing jurisdiction, especially if the dispute would not be arbitrable where the arbitral award will be enforced. In such cases, forcing parties through full arbitration followed by litigation in the enforcing jurisdiction is wasteful and inefficient. Allowing the enforcing court to decide on arbitrability upfront helps streamline the process and avoids subjecting parties to unnecessary double proceedings.
March 7, 2024
Navigating Uncharted Territories: ICSID Tribunal’s Power to Remove Counsel

BY AARyA PARIHAR, THIRD-YEAR STUDENT AT RMLNLU, LUCKNOW

Introduction

The role of a lawyer is extremely crucial in an arbitration proceeding. The right to effective legal representation of one’s choice is recognized explicitly in various international instruments, like Article 14 of the International Covenant on Civil and Political Rights and Article 6 of the European Convention on Human Rights. Such a right is equally essential in investor-state arbitration proceedings, where it may form part of the due process expectations of the parties to the proceedings with serious transgressions from the principle, even potentially constitute a ground to challenge the award itself. The ICSID Convention, Rules, and Regulations do not expressly address the authority of ICSID Tribunals to permit the withdrawal of legal counsel or to compel their continued participation in the proceedings (against their wishes). This post discusses the authority of ICSID Tribunals to exclude or require the presence of particular counsel in a dispute. The post then discusses the existing arbitral decisions on this issue to examine the contours of ICSID Tribunals’ powers concerning these matters.

Do ICSID Tribunals Have the Power to Remove/Exclude Counsel?

ICSID Tribunals are formed to resolve treaty disputes between contracting parties. Every dispute has its own Tribunal with separate procedural rules that disputing parties agree on. Arbitration’s inherent nature of being party-centric, where parties’ autonomy is given primacy, leads to divergent procedural practices. Additionally, the non-binding nature or lack of precedential character of ICSID awards over other ICSID Tribunals leads to differing awards. Thus, it is essential that before moving to ICSID Tribunals, assistance shall be taken from the federal courts of the United States, who have often used their power to decide upon the issue of counsel resignation.

The U.S. Court in May v. Seibert enquired about the existence of good cause, which depends upon the facts and circumstances of every case. Simply put, there is no straitjacket formula to when a counsel can legally stop their representation. It largely depends upon the peculiar factual matrix of every case and the application of mind by the judge presiding over it.

In the realm of ICSID, only a few Tribunals were called upon to decide upon the issue of counsel resignation or removal of counsel. Five publicly available awards are from the Hrvatska Tribunal, Rompetrol Tribunal, Edmond Khudyan Tribunal, Fraport Tribunal, and Theodore David Einarsson Tribunal. These five orders from five different Tribunals delve into the removal of counsel. In all these five decisions, the Tribunal found its power to remove counsel under Article 44 of the ICSID Convention, providing residuary power to the Tribunals. It empowers the Tribunals to decide upon any question of procedure which is not explicitly covered under the ICSID Convention, Rules, and Regulations.

Due to the heavy amount of cross-referencing/quoting done in these decisions, discussing them separately and conjointly is essential. The post attempts to cull out only the important dictum from these decisions, which is required to facilitate analysis in the present article.

Hrvatska Tribunal

In the Hrvatska award, the removal of counsel was warranted because of his apparent connection with one of the arbitrators, which might have caused bias. The Tribunal found that the right to effective representation is pitted against the right to effective and unbiased proceedings. After due deliberation, the Tribunal found itself empowered to rule on this issue by virtue of Article 44 of the ICSID Convention.

Rompetrol Tribunal

The Respondent in the Rompetrol decision cited the Hrvatska decision as the sole authority to bolster their argument regarding ICSID Tribunals’ authority to exclude counsel from the proceedings. The Tribunal found it has inherent power to exclude counsels under Article 44 of the ICSID Convention but refused to exercise the same in the present dispute. According to this Tribunal, this power should only be used in exceptionally uncommon circumstances where the integrity of the whole proceeding is in question/dispute.

Edmond and Fraport Tribunals

In the decision rendered in the Edmond dispute, the Tribunal reiterated that it has the power to exclude the participation of counsel under Article 44 of the ICSID Convention. In this case, both parties agreed to this power of the Tribunal without any disagreements. The Tribunal again emphasized using this power sparingly and only in certain circumstances. It should be used only to protect the proceedings’ integrity and fairness and to ensure the parties’ equality. The Tribunal heavily quoted from the Fraport decision, reaching a similar conclusion. The Fraport Tribunal also imposed the necessary contours of “ensuring fair conduct of the proceedings” while exercising its power under Article 44 of the ICSID Convention.

Theodore Einarsson Tribunal

Another crucial decision in this aspect is of the Theodore Einarsson Tribunal, where the Tribunal while deliberating on the removal of a counsel, outlined that the ICSID Tribunals do not have the power to police the compliance of counsels with their deontological or ethical mandates imposed by any local code/rule. These ethical constraints are generally introduced by a local code governing the professional conduct of the lawyer practicing thereof. They include the duty to not discontinue representation without a good cause or the commitment to confidentiality. It reasoned that since the removal of counsel attacks the core of the fairness of proceedings, it is a mandate of the ICSID Tribunal.

The Contours of the Power of ICSID Tribunals to Control Representation of Counsels

The Tribunals in all the above-quoted disputes have reasoned that the power to remove counsel is exercised to ensure the fairness and integrity of the proceedings. In both the decisions in Fraport and Theodore, the Tribunals refused to look into the counsel’s deontological or ethical mandate. They found it outside the purview of their authority and a question that is to be decided by local or regional courts.

It can be understood that the ICSID Tribunals have been reluctant to rule on anything else apart from simply the participation of a counsel. The Author believes that the power to exclude includes the power to retain counsel by overriding the parties’ choice. In simpler words, there are instances where the Client/Party does not want their counsel to continue. The Tribunals have the power to order the continuation of their representation against the party’s wishes. One crucial aspect is the conditions or situations where a counsel can be removed from the ongoing proceedings.

Ruling on Counsel’s request for removal

The five above-referenced awards do not concern any situation where the Tribunal was required to address a counsel’s request to resign. Almost all of them had some bias or conflict between the challenged counsel and an arbitrator. There may arise a situation where the counsel wishes to resign, whether voluntarily or per the desire of either party that wants their counsel to discontinue representation. In these scenarios, as already stated, the courts generally use their wisdom to decide based on every case’s peculiar facts and circumstances.

Generally, counsels decide to withdraw their representation when there is a breakdown of any attorney-client relationship. Simply put, it is when the attorney has lost faith in his client and their case or vice versa. It is broken down to such an extent that the representation would only harm the client’s case. Also, it is essential to note that the withdrawal should not cause undue or unreasonable delay to the proceeding. This also means that there should be no prejudice caused to parties involved by the ‘withdrawal of a counsel’.

In the Jean-Boscotrial, the International Criminal Tribunal (hereinafter “ICT”) for Rwanda denied withdrawal/replacement of counsel because of the possibility of undue delay in the proceedings that would cause prejudice to the parties. It was highlighted in the Jean-Bosco decision that new counsel needs to acquaint themselves with the facts, documents, and figures of the existing case. Sometimes, this process of getting acquainted with everything also causes an undue delay in the proceedings, and the Courts have rejected the withdrawal for this reason of delay. This similar reasoning was also employed by the ICT for Rwanda in the Jean-Bosco Trial to decide on dismissing the withdrawal/replacement of counsel.

Suggestions and Conclusion

There is an apparent dearth of awards and decisions by ICSID Tribunals on the issue of counsel withdrawal/exclusion. The available awards reiterate the similar reasoning applied by the Tribunals in every dispute. There seems to be a well-founded reluctance by ICSID Tribunals to adjudicate over counsel’s withdrawal or exclusion with full vigor. ICSID Tribunals are constituted mainly to resolve the dispute between investors and States. The contours of a Tribunal’s powers are well-defined in the ICSID Convention, Rules, and Regulation. Thus, the Tribunal finds itself in a quagmire or conundrum where the chances of overreach exist. In light of various awards highlighted in this article, it is abundantly clear that the ICSID Tribunals have discovered their inherent power to decide on any question of “procedure” of the dispute flowing from Article 44 of the ICSID Convention. Issues of counsel’s conduct and obligations are not the mandate of ICSID Tribunals. If the Tribunals are given unfettered power to decide upon the issue of counsel’s ethical obligations, it will open a floodgate of fresh proceedings and further cause delay. This would defeat the purpose of arbitration proceedings, where the primary aim is to promote expediency and efficiency.

If a further step could be taken, the ICSID Convention should insert an explicit provision defining the power of its Tribunals to decide upon the issue of counsel resignation/removal in cases of apparent bias/conflict with the arbitrator or irrevocable breakdown of attorney-client relationship. To develop their contours or limits, the Tribunals may take assistance from decisions of local courts and international tribunals where the issue of counsel resignation has been discussed in length.

November 29, 2023

Arbitral Tribunal’s Powers To Grant Interim Measures Affecting Third Parties: Still At Crossroads?

BY PRIYANSHI BHAGERIA, FOURTH-YEAR STUDENT AT RMLNLU, LUCKNOW

Introduction

Section 17 of the Arbitration & Conciliation Act 1996 (‘Act’) empowers the Arbitral Tribunal to grant interim measures during the arbitral proceedings. The phraseology of Section 17 is similar to Section 9 of the Act, which grants similar powers to the courts. Both the sections are similar in the sense that they not only deal with the grant of interim measures, although at different stages, but also the orders passed under the respective sections are deemed to be court orders and shall be enforceable in the same manner.

One major question that is a subject of repeated discourse is whether the tribunal has the power to grant measures affecting the rights of the third parties since a similar power is often exercised by the courts under Section 9. In this context, it is important to examine if there is a difference in the scope of the powers under both these sections.

This article analyses the bare provision and tries to establish that the Tribunal has powers that are at parity with a civil court and are to be governed by the Civil Procedure Code, 1908 (‘CPC’). Further, the effect of the conversion of Section 9 applications to Section 17 applications is dealt with by the author to make a case for the power of the Tribunal to grant interim measures affecting the third parties. Lastly, the article highlights the applicability of the group of companies doctrine and the necessity to grant such a power to the Tribunal.

Nature & Scope of Section 17

A reading of Section 17 suggests that the Tribunal has powers to grant interim measures like interim injunctions, appointment of receivers, appointment of guardians, etc. The powers of the Tribunal are wide and the same can be gauged from Section 17(1)(ii)(e) which empowers the Tribunal to grant any other measures, apart from the ones enumerated in the provision, that it deems just and convenient. Despite the wide ambit of powers, the primary argument against the applicability of Section 17 with respect to third parties is that it is a creation of an express contract between two parties and the tribunal hence cannot pass orders affecting the rights of the third parties. However, this argument cannot be seen in isolation.

It is important to note that there is a reference under this section about the powers of the tribunal being akin to that of a court while granting interim measures. It is significant to highlight that such a mention was specifically made by the Arbitration and Conciliation (Amendment) Act, 2015, highlighting the unambiguous intention of the legislature. Moreover, Section 17(2) states that an order under this section is deemed to be a court order and would be enforceable under CPC. In Pearl Hospitality & Events Pvt. Ltd. v. OYO Hotels and Homes Pvt. Ltd., the Delhi High Court held that the principles governing Order XXXVIII Rule 5 would be applicable, while considering a prayer for furnishing security, under Section 9 or Section 17. In another case, Navtrip Implementation Society v. IVRCL Ltd., the Delhi High Court observed that the object of Section 17 of the Act is similar to that of Order XXXVIII, Rule 5 of the CPC, and therefore its conditions have to be kept in mind while passing orders under Section 17. This shows that the principles of CPC govern the powers of the Tribunal despite there being resistance regarding the same. Hence, it is absurd to assume that some principles of CPC which grants inherent powers to the courts to grant interim measures affecting the rights of third parties will not be applicable while some mentioned above would still continue to guide the proceedings under Section 17. It is important to clarify that a blind application of all the existing principles of CPC is not desirable. However, unsubstantiated exclusion of these specific principles raises concerns and leads to adverse repercussions for the parties as explained further in the article.

Furthermore, Section 28(1)(a) of the Act states that the tribunal shall be bound by the substantive law of India in case of domestic arbitrations. In a number of cases, the Indian courts have enumerated general principles of granting interim measures and the same would apply to the Tribunal by virtue of it being a part of the substantive law of India.

Therefore, the nature of the power under Section 17 is guided by the principles of CPC and is placed at a similar stature to that of a court.

Practice of Converting Section 9 Applications into Section 17 Applications

Secondly, it is important to highlight a practice of the courts while dealing with an application under Section 9. In a catena of cases, the courts have converted an application under Section 9 to an application under Section 17 once the tribunal has been constituted. If we have a look at the data of the years 2022 and 2023, a significant number of applications filed under Section 9 before were converted into an application under Section 17 by various High Courts.

*Court*	*Year*	*Total Number of Applications Filed u/s 9 of the Act*	*Number of Section 9 Applications converted to Section 17 Applications*
Delhi High Court	2022	400	76
Delhi High Court	2023 (till May)	189	23
Mumbai High Court	2022	218	24
Mumbai High Court	2023 (till May)	53	2

A bare look at the data might suggest that the number of Section 9 applications converted to Section 17 applications is only a small proportion. However, one must consider that even if the number is not compelling enough, the data indicates a practice which is prevalent. And the repercussions of such a practice are borne by one of the parties who is ultimately rendered remedy less. This also points to the fact that this practice which is supposedly ‘pro-arbitration’ can infact disincentivise arbitration if the Tribunals are not given powers at parity with the courts.

The prayer under that Section 9 application which is now being converted to a Section 17 application before the Tribunal remains the same. It is impractical to assume that the Tribunal would not have the authority to grant measures at parity with the Court in the same prayer which is now to be dealt with by the Tribunal on the direction of the Court itself. For example, a prayer may pertain to custody or sale of the goods which are subject matter of the arbitration agreement and could include situations where the goods are in the possession of a third party. In such a scenario, the conversion of the Section 9 application to a Section 17 application would cause prejudice to the parties.

Moreover, if we were to assume that the powers of the court and the Tribunal are uneven, this conversion would disincentivize the constitution of the Tribunal. The parties would prefer applications under Section 9 or under the allied provision of CPC to an application under Section 17, where the Tribunal’s power is limited. This would create a lacuna and would defeat the purpose of the Act, i.e., to facilitate arbitration.

Group of Companies Doctrine: Its Effect on Section 17

Although the final verdict on the applicability of the group of companies doctrine by the Apex Court in Cox and Kings Ltd. v SAP India Pvt. Ltd. is awaited which would give more clarity, it is nonetheless important to analyze the position with regard to the Tribunal’s power under Section 17 affecting the rights of non-signatories.

The Supreme Court in cases, such as Chloro Controls (I) Private Limited v. Severn Trent Water Purification Incorporated, Ameet Lalchand Shah v. Rishabh Enterprises, and Mahanagar Telephone Nigam Limited v. Canara Bank, has acknowledged the multi-layered and complex nature of transactions in today’s times and has allowed that in certain exceptional situations, even non-signatories to an arbitration agreement could be referred to a composite arbitration proceeding and could be bound by the award.

There is still an absence of consensus with regard Tribunal’s powers under Section 17. This absence of consensus has resulted in courts giving conflicting judgments on the same issue. For example, in Prabhat Steel Traders Pvt. Ltd. v. Excel Metal Processors Pvt. Ltd., the Bombay High Court recognized that the interim orders passed by the Tribunal under Section 17 may affect non-signatory third parties in a direct or indirect manner. However, the same court in Bombay Slum Redevelopment Corporation Limited v. Samir Narain Bhojwani held that a Tribunal passing interim orders against a third party would be overstepping its jurisdiction under Section 17.

While ascertaining the Tribunal’s power in this context, the legislative intent must also be considered. Before the 2015 Amendment, Section 8 used the word ‘party’ which was replaced by ‘a party to the arbitration agreement or any person claiming through or under him’. This broadens the definition of party to make space for non-signatories. Hence, the complex nature of today’s transactions must be seen a reason enough for the Tribunal to exercise powers under Section 17 to grant measures that might affect the rights of the third parties.

Conclusion

Therefore, it is evident that there is a need to expand the powers of the Tribunal under Section 17 so as to grant interim measures that may affect the rights of the third parties. In order to incentivize arbitration, the Tribunal must be given such power to ensure that the measures granted can be practically executed which is only possible when the Tribunal has the liberty to include third parties. Even if there is no concrete provision establishing this power of the tribunal, the same should be seen in the context of the above arguments and the need of the hour. The courts must formulate guiding principles in this regard and the same must be allowed, even if it is only limited to exceptional circumstances.

November 9, 2023

Disintegrating ‘Sum in dispute’ in Fourth Schedule for Arbitration Fees
by Mohammad Atik Saiyed and Shukla Pooja Sunilkumar, Third year students at GNLU, Gujarat

Introduction

We are living in a global village with transforming commercial realities and with such radical evolutions – the corporate entities are driving forces of economic value additions. In correspondence to the novel societal structure, interdependent and entangled utility alternatives, new perspectives, disagreements, questions, and jurisprudential mechanisms have also evolved. Arbitration has developed as the core effective means for alternative dispute resolution and the exponential increase in its practice unveils a question of how much fees are to be paid for the arbitration, which was recently revisited by the Apex Court in the case of Oil and Natural Gas Corporation Ltd. v. Afcons Gunanusa JV.

Constructing the substructure of arbitration fees

Constructing the sub-structural root of the legal question, Section 31(8) of the Arbitration and Conciliation Act, 1996 (the “Act”) empowers the arbitral tribunal with the authority to ascertain the costs in accordance with Section 31A. Section 31A accredits the ‘discretion’ of the tribunal to determine three aspects revolving around the regime of costs – Firstly, whether costs are payable by one party to another; secondly, the amount of costs and thirdly, the time of payment of costs. Within the horizon of the present analogy, the explanation to Section 31(8)(a) and Section 31A(1) provides that the term ‘costs’ symbolizes “reasonable costs relating to the fees and expenses of the arbitrators and witnesses”, among other things. Moving further in the prism, Section 38(1) of the Act encompasses the authority of the tribunal to fix the amount of deposits, separately for claims and counter-claims, as an advance for the arbitration fees which is an integral part of ‘costs’ in Section 31(8).

The tribunal holds the power to determine costs and deposits as enshrined in the sections highlighted but the tribunal cannot be granted unbridled authority to unilaterally determine its own fees. This unveils the central question of how much fees are to be paid for the arbitration. Comprehensively dealing with ad hoc arbitrations, the Fourth Schedule (the “Schedule”) of the Act advances a model framework for the determination of arbitration fees. Rooting out the parliamentary purpose, the Schedule was introduced by the 2015 amendment on the recommendation of the 246^th LCI report, which addressed the issue of arbitrators charging exorbitant fees in ad hoc arbitrations. The Fourth Schedule sets out ‘Sum in dispute’ as a standard for ascertaining the fees of arbitrators based on the model prescribed. Ergo, for the determination of fees, the undefined terminology gives rise to a substantial legal dilemma regarding the interpretation of ‘Sum in dispute’ in the fourth schedule as to whether the sum for the determination of fees has to be accounted for claims and counter-claims, cumulatively or separately? Settling the two competing interpretations holds core importance, as the applicability of the ceiling enshrined in the Schedule will be resolved on that premise.

Cumulatively or separately? – Weighing ‘Sum in dispute’ on both ends

Navigating the two arguments based on the interpretation conundrum, firstly, if ‘Sum in dispute’ is regarded as the cumulative total of claim and counter-claim, on acceptance, there will be a common fee for adjudicating both the proceedings and the fee ceiling within the Schedule will apply to the cumulative total, whereas, secondly, if ‘Sum in dispute’ is considered separately for claim and counter-claim, with adoption, there will be different fees for claim and counter-claim proceedings and the fee ceiling within the Schedule will be administered separately to each proceeding. For instance, the sixth entry in the Schedule provides that if the ‘Sum in dispute’ is above Rs.20 Crore then the model fees would be “Rs. 19,87,500 plus ‘0.5 percent’ of the claim amount over and above Rs.20 Crores with a ceiling of Rs.30 Crores.” Consider a situation wherein, the claim is INR 20 Crores and the counter-claim is INR 20 Crores, ergo, with an interpretation of ‘Sum in dispute’ as cumulative of claim and counter-claim, then the fee ceiling will be INR 30 Lakhs, whereas, understanding ‘Sum in dispute’ separately for claim as well as counter-claim, then the fee ceiling stands at INR 39,75,000/-.

Comprehensive analysis and interpretation of ‘Claim’ and ‘Counter-claim’

Importantly, the terms, ‘Claim’ and ‘Counter-claim’ are not defined within the Act, and since the issue revolves around the two terminologies, to settle the question, it is foremost to comprehensively understand ‘Claim’ and ‘Counter-claim’ along with their nature in the proceedings. Understanding the nature of ‘Claim’ and ‘Counter-claim’ proceedings is important since the amount of deposits can be ascertained on that basis by the tribunal, wherein, if both proceedings are distinct and independent of each other, then separate deposits for claims and counter-claims would be required. As highlighted earlier, arbitration fee is an integral part of deposits and consequently, separate deposits imply that separate fees would be charged for ‘Claim’ and ‘Counter-claim’, and subsequently, the model in ‘Fourth Schedule’ will apply independently. Whereas, if a contrary interpretation is considered then ‘Claim’ and ‘Counter-claim’ will constitute the same proceeding, ergo, a combined deposit for both proceedings would be required.

To serve the interpretation question of whether the ‘Claim’ and ‘Counter-claim’ are independent proceedings or not, reference is made to diversified sources of legal jurisprudence on two dimensions – arbitration proceedings and civil proceedings.

‘Claim’ and ‘Counter-claim’ in Arbitration Proceedings
- Within the statutory frame of the Arbitration Act, Section 2(9) highlights that if under the Arbitration part of the Act, there is any reference to claim & defense to claim, it must also apply to counter-claim and defense to counter-claim respectively. Thereby, the act treats both proceedings separately. Furthermore, Section 23(2A) obligates the tribunal to adjudicate upon a counter-claim or set-off, if the subject is covered within the ambit of the arbitration agreement directing ‘independence’. On the same lines, attributing Section 38(2) relating to deposits, the tribunal has the discretion to terminate the proceedings ‘separately’ for the claim, counter-claim, or both with failure to provide appropriate deposits. Ergo, the act principally provides that both are different proceedings drawing inference for separate deposits.
- Unfolding extensive analysis of ‘Claim’ and ‘Counter-claim’ by investigating academic opinions and references, it can be derived from Justice Bachawat’s seminal treatise on Law of Arbitration and Conciliation^[i] that the tribunal has the jurisdiction and the obligation to adjudge both claims and counter-claims ‘autonomously’, and CR Dutta’s treatise^[ii] reinforces the inference that the Arbitration Act perceives and handles claim and counter-claim as two separate and independent proceedings. Citing Gary Born on arbitration, it can be extracted that counter-claims are not restricted to claims wherein the subject of the counter-claim can be absolutely unlinked, provided that it falls within the ambit of the agreement. To dissolve, the Procedure and Evidence in International Arbitration, by noting that the counter-claim is not a defense to the claim and stands completely independent, corroborates the autonomy of claims and counter-claims.
- Progressing to the dimension of judicial behavior even before the introduction of Section 23(2A) in 2015, there existed various pronouncements including IOCL v. Amritsar Gas Service, whose position was supplemented in State of Goa v. Praveen Enterprises, that unanimously substantiate the obligation of the tribunal to ‘independently’ adjudicate counter-claims and provide that the rationale for recourse to the same arbitration is to eliminate the multiplicity of proceedings, Additionally, from Voltas Ltd. v. Rolta India Ltd., the independent nature of the claim, and counter-claim proceedings can be noted.
(B) Civil Proceedings

Parallelly, understanding whether civil proceedings treat ‘Claim’ and ‘Counter-claim’ as independent and separate proceedings or not is also important for an extensive analysis. Advancing the statutory structure of the Code of Civil Procedure, 1908 (“CPC”) and explicitly concentrating on Order VIII of the CPC associated with written statements, set-offs, and counter-claims, the distinction between set-offs and counter-claims can be constructed, as set-offs are covered within Rule 6, and Rule 6-A deals ‘explicitly’ with the counter-claims by the defendant. Emphasis has to be placed on Rule 6-D of Order VIII, which provides that “even if the suit which has been instituted by the plaintiff is stayed, discontinued, or dismissed, it will not affect the defendant‘s counter-claim”, concludes that counter-claims are not simply set-offs but stand distinct and independent as a separate proceeding. Moreover, investigation of academic convictions such as Mulla’s, Sarkar’s, and Zuckerman’s treatise on the Code of Civil Procedure consonantly points that counter-claim is an ‘independent action’ and they also crystalize Rule 6-D acknowledging that counter-claims remain unaffected by the dismissal of claims. Correspondingly, Halsbury’s Laws of India (Civil Procedure) describes a counter-claim as “a claim, independent of and separable from the plaintiff’s claim, which can be enforced by a cross-action.” Moreover, examining judicial precedents, Jag Mohan Chawla v. Dera Radha Swami Satsang and Rajni Rani v. Khairati Lal, among others, unanimously establish the aspect that counter-claims can arise out of the unconnected cause of actions and are ‘absolutely independent.’

Forecasting perspectives of ‘Sum in dispute’ as a cumulative

Advancing a different viewpoint, if we consider ‘Sum in dispute’ as a cumulative of claim and counter-claim, extensive repercussions on procedural fairness can be forecasted, such as, firstly, equitable division of fees between parties while accounting for individual deposits within Section 38(1), secondly, intermediate revision of arbitration fees in case of dismissal under Section 38(2) and thirdly, combined fees unproportionate to separate efforts for unique subject matters raised in same proceedings as empowered by Section 23(2-A). Taking note of the purposive interpretation of the insertion of the Fourth Schedule emphasized by the 246^th LCI Report, which highlighted the problem of exorbitant fees being charged by arbitrators in ad hoc arbitration; however, the lucid legislative meaning in the statute would have an overriding effect and if the contrary is required, there exists parliamentary wisdom for the amendment.

Concluding Perspective

In line with the stark contrasts and reasonable conflicts in the comprehensive legal and logical analogy of the multidimensional prism of “Sum in dispute,” the distinction and independence of proceedings of claim and counter-claim can be lucidly outlined and accordingly, both are capable of being raised in individual proceedings, but the primary rationale for consideration to same arbitration is to eliminate the multiplicity of proceedings. Conclusively, a counter-claim is not a rebuttal to the claim, besides, the dismissal or result of the claim will have no bearing on the counter-claim proceedings. Wherefore, it is reflected that in an arbitration case, deposits in respect of arbitration costs, including arbitrator fees, have to be filed separately for both. Dissolving the color of the same horizon to the interrelated prism of Section 31(8), Section 31A, Section 38(1), as well as the Fourth Schedule of the Arbitration Act, it can be outlined that the standard of “Sum in dispute” in the Fourth Schedule for ascertaining arbitrator fees has to be considered distinctively and independently for ‘Claims’ and ‘Counter-claims,’ thereby, the fee ceiling will be applicable autonomously and differently for claims and counter-claims, that will further enhance income for arbitrators.

^[i] Justice R S Bachawat, Law of Arbitration and Conciliation (Volume I & II, 6th Edition, LexisNexis, 2017)

^[ii] C R Datta, Law of Arbitration and Conciliation (Including Commercial Arbitration) (LexisNexis, 2008)
February 19, 2023
Enforcement of Foreign Seated Emergency Arbitration Award in India: Unboxing the Pandora’s Box
By Prerna Mayea, fifth-year student at Institute of Law, Nirma University

I. Introduction

Emergency arbitration has been a buzzword in the last few years in India since the ruling in Amazon.com NV Investment Holdings LLC v. Future Retail Ltd. The Supreme Court of India held that Emergency Award (‘EA’) in India-seated arbitration can be enforced under Section 17(2) of the Arbitration and Conciliation Act (‘the Act’). This is certainly a big step for creating a pro-arbitration environment in the country. However, this case did not provide authority for the issue that EA in foreign seated arbitration is enforceable in India. This is because Section 17 cannot be relied upon to enforce the EA since Part I of the Act does not apply to foreign seated arbitration.

II. Judicial Stance On Enforcement Of Foreign Seated EA In India

The matter regarding enforcement of EA in foreign seated arbitration firstly came before the Delhi High Court in Mr. Ashwani Minda & Anr. V. U-Shin Ltd. & Anr. In this case, the applicant tried to avail the remedy of EA in foreign seated arbitration which was denied to him. Subsequently, the applicant tried to seek interim relief under Section 9 of the Act, which was denied by the court on two premises:
1. The dispute resolution clause in the agreement excluded the applicability of Section 9.
2. The applicant had already failed before the emergency arbitrator, and there were no changes in the circumstances.
The court cited the continuing mandate of the emergency arbitrator to deny the relief under section 9. This suggests that the court considered EA in a foreign seated arbitration as an effective remedy to disallow relief under Section 9.

In HSBC PI Holdings Ltd. v. Avitel Post Studioz Ltd and Ors., even though the court did not enforce the EA directly, it granted relief under Section 9 of the Act to the party by reproducing the EA verbatim. This suggests an alternate mode of enforcement of the EA by obtaining similar interim reliefs under Section 9. However, this might not be an efficacious remedy since it would require re-adjudication by the court leading to duplication of proceedings and wastage of time.

In Raffles Design International India Pvt. Ltd. v. Educomp Professional Education Ltd., the court denied enforcement of EA in foreign seated arbitration citing a lack of authority, and insisted on filing a fresh application under Section 9 of the Act. The court however also added that a party cannot be denied interim relief simply because a similar relief has been obtained through EA. Further, the decision to grant the relief will be independent of the interim order in foreign seated arbitration.

III. Enforcement Of Foreign Seated EA Under The Act
- Section 44 and 48 – Enforcing as foreign award
Arbitral award has been defined under Section 2(1)(c) to include an interim award. However, this definition under Part I of the Act cannot be applied in the case of foreign seated arbitration. Section 44 of the Act does not define ‘arbitral award’. However, Section 44(a) applies to arbitral awards arising out of arbitration to which the New York Convention (‘NY Convention’) applies.

Under the NY Convention, Article 1(2) defines ‘arbitral award’ to “include not only awards made by arbitrators appointed for each case but also those made by permanent arbitral bodies to which the parties have submitted.” This definition is inclusive and wide enough to encompass emergency award made by the arbitrator. It must be noted that emergency arbitrators are appointed by arbitral tribunals and thus such award must be considered to be made by arbitral institutions only and subsequently be included under the definition of an arbitral award. For example, Schedule 1(3) of the SIAC Rules, 2016 states that emergency arbitrator shall be appointed by the president of the institution upon the filing of an application by parties.

Further, Article 3 and Article 5(1)(e) of the NY Convention have been interpreted to consider ‘binding effect’ and ‘finality’ as prerequisites for enforcing an award under the NY Convention. This has raised concerns regarding the non-finality of EA as it can be overridden by arbitral tribunal after its constitution. In Yahoo! Inc v. Microsoft Corporation, the US court observed that the emergency arbitrator’s order was final in nature. It reasoned that while deciding to grant a specific interim measure, the emergency arbitrator duly considered all necessary information to resolve the merits of that request. Further, urgent interim reliefs provided in EA have been considered as ‘final’ across several jurisdictions such as Germany and Egypt. Since EA provides a definitive ruling regarding the interim measure, the ‘finality’ requirement under NY Convention must be expansively articulated to include interim measures granted in EA.

This leads to the conclusion that EA falls within the scope of Section 44 and can be subsequently enforced under Section 48 of the Act.
- Section 27 (5)- Contempt of Court
Section 27(5) gives the power to the arbitral tribunal to punish for its contempt. The punishment is alike the offences in suits tried before the court. It is a reprimanding and novel provision that does not trace itself from UNCITRAL Model Law.

In Alka Chandewar v. Shamshul Ishar Khan, the Supreme Court has ruled that in case any party fails to comply with orders of the arbitral tribunal, this act will be considered to be contempt of court. The aggrieved party can seek relief under Section 27(5) by making representation to the court. The court will be competent to deal with the matter under the provisions of Contempt of Courts Act, 1971, or under Order 39 Rule 2A of the Code of Civil Procedure, 1908.

After the amendment in 2015, Section 27 is also applicable to Part II of the Act. Thus, Section 27 (5) can be used to ensure the enforcement of EA in foreign seated arbitrations as well. This line of reasoning was raised and rejected in Raffles case. The court reasoned that a person in contempt of interim order passed by tribunal in foreign seated arbitration cannot be punished by Indian courts. This reasoning by the court seems to be flawed to the extent that the party or its assets would be located in India and therefore would be within the jurisdiction of Indian courts, which would have power, even at the instance of a foreign seated arbitral tribunal.

IV. International Perspective

Various commercial jurisdictions such as Singapore and Hong Kong have a legislative framework that provide more certainty in enforcement of foreign seated Emergency arbitration award. For instance, in Hong Kong, Section 61 of the Arbitration Ordinance, 2011 requires to obtain the leave of the High Court to enforce interim measures granted by foreign tribunals. The party seeking enforcement needs to substantiate that the order falls within the description of an order or direction that may be made by an arbitral tribunal seated in Hong Kong. This mechanism has also been extended to emergency arbitration under Part 3A of the Arbitration (Amendment) Ordinance, 2013.

In Singapore, the International Arbitration Act, 1994 (IAA) includes emergency arbitrator within the definition of ‘arbitral tribunal’. Recently, the Singapore High Court in CVG v. CVH has also ruled that ‘foreign awards’ under the IAA would also include foreign interim awards made by an emergency arbitrator, thus allowing for enforcement of foreign seated EA. Further IAA also provides for grounds refusing recognition of EA including breach of rules of natural justice and exceeding the jurisdiction of emergency arbitrator.

V. Framework For India

It is evident that countries are moving towards an arbitration-friendly approach in terms of enforcement of foreign seated EA and interim measures while also providing for safeguards to honor their national public policy. The most effective legislative solution for India is to incorporate in the Act a provision similar to Section 17H of the Model Law, which provides for recognition and enforcement of interim measures by arbitral tribunals irrespective of the country of issuance. Such enforcement must also be paired with appropriate safeguards such as:
1. Vesting of power to in the court where enforcement is sought, to order for provision of adequate security from requesting party.
2. Specify grounds for recognition and enforcement of interim measures keeping in mind the public policy of India.
Such safeguards will help to maintain a balance between party autonomy and public policy of India. It will also make the enforcement of EA faster and easier. Parties must also be cautious while drafting the arbitration clause to ensure that it does not exclude the applicability of Section 9 of the Act. Courts adhere to predetermined procedures when deciding on interim measures. EA, on the other hand, can provide such relief in a more expedient and confidential manner, saving both money and time. Justice Srikrishna Committee Report (2017) and the 246^th Law Commission Report have also suggested including emergency arbitrators within the definition of ‘arbitral tribunal’. However, given the existing position of Indian courts refusing to enforce EAs, parties should exercise extreme caution when relying on emergency arbitral awards obtained in a foreign jurisdiction to defend their rights in an emergency
November 28, 2022
Revisiting the ‘Adverse effect’ factor in unilateral commissions: ZOMATO/ SWIGGY CASE

BY PRANAY AGARWAL, THIRD-YEAR STUDENT AT GNLU, GUJARAT

Introduction

Unilateral terms of an agreement are seen with suspicion and are often subjected to legal challenge on the grounds that it is arbitrary and unreasonable in nature. The unilateral terms which are abusive and are imposed on others under a‘compelled’      agreement, are also covered within the purview of ‘practice’ encouraging anti-competitive agreements under Section 3(3) of the Competition Act, 2002 (“the Act”). Such a broad interpretation can also be traced to the judgment of BMW Belgium SA v. Commission of European Communities , where the European Court of Justice (“ECJ”) defined the scope and validity of the agreement promoting unilateral conduct of a party. The principle was even adopted for Indian market in Aluminium Phosphide Cartel case to recognise bid rigging as a ‘practice’. However, for the application of the Section, the conduct should have an Appreciable Adverse Effect on Competition (“AAEC”).

In a recent letter addressed to Competition Commission of India (“CCI”), the Jubilant FoodWorks, the holding firm of Domino’s have indicated their intention to pull out from the deals with food delivery platforms like Zomato and Swiggy due to high commissions charged by these food delivery giants. The letter is a shockwave of the allegations of National Restaurant Association of India (NRAI) against exorbitant commissions charged by the food delivery platforms which ranges between 10% to 30% and the resultant investigative raids by CCI.

In the case that ensued, the CCI made the order in favour of the food delivery giants to hold their unilateral conducts not anti-competitive. While normally, the judgment of CCI is in accordance with the principles enshrined in the Indian Contract Act, 1872 (“Contract Act”), the Indian watchdog neglected in taking note of the future outcome of such unilateral terms and the adverse impact it may have on the competition in the market.

In view of these contemporary developments, this article analyses the status of the unilateral conducts like charging of high commissions, which are however part of the agreement and are therefore valid under the Contract Act, in light of the competition laws and principles of the country. The article then investigates deeper into the facets of AAEC and the importance held by ‘public interest’ in the determination of the case, thus giving a critical analysis of the CCI’s stance.

Unfair terms of agreement and unilateral conduct

Unfair terms of a contract have been a contentious issue in the contract law of every jurisdiction. While some protection has been offered under Section 23 of the Contract Act which considers contracts with objects opposed to public policy     ,reliance is often placed by both the consumers and the courts upon the principles of equity and justice embodied under Article 14 of the      C onstitution to escape its pre-conditions. In the recent case of NRAI v. Zomato Ltd. & Anr., one of the major contentions of NRAI was related to the one-sided terms of the contract, particularly      the commission clause. However, from the principle given in the United States v. Parke Davis & Co., the concurrence by even an unwilling party will result into a valid contract.

This makes it apparent that Section 23 will not be applicable in the present case, even if the Restaurant Partners (“RPs”) did not have any choice but to agree with the unilateral terms. However, the unilateral conduct of the dominant players and unfair trade practices has been a      major issue in the country since the initiation of debates around the Monopolies Restrictive Trade Practices (Amendment) Bill, 1983. The legal void in the contract laws was also recognised in the 103 ^rd Report of the Law Commission of India which recommended the insertion of the provision dealing with unconscionable conducts.

     Given the above legal position, the CCI’s order seems legally justified. However, the order will have dire consequences on the market competition in the future due to its economic and legal value. The problem however could have been avoided if CCI had interpreted Section 3 of the Act from a broader perspective like the ECJ did in BMW Belgium SA case . Although it can be inferred that the provision has been applied in the CCI’s order, the commission made a narrow interpretation of the adverse effect factor by failing to note of the provision, thus showing its ignorance of its prior legal instance and relevant circumstances of the case. This mistake can have a huge impact on not only the market and RPs, but also their customers, thus affecting the economic structure as a whole.

Looking from a broader perspective: A Review of the ‘Adverse Effect’ factor

Section 3(1) of the Act introduces the principle of Appreciable Adverse Effect on Competition       violation of which prohibits the enterprises from entering into anti-competitive agreements. It refers not to a particular list of agreements, but to a particular economic consequence, which may be produced by different sort of agreements in varying time and circumstances. It majorly deals with the acts, contracts, agreements, conducts and combinations which operate to the prejudice of the public interests by unduly restricting competition or unduly obstructing due course of trade.

However, for the factor to be applicable, reliance has to be placed upon the words ‘appreciable’ and ‘effect on competition’. In the present context, therefore, it is pertinent to       effectively analyse           the food delivery market of India, especially with respect to the separate relevant markets of both Zomato and Swiggy. Moreover, the nature of the restraint and conditions in the respective relevant markets before and after the restraint also has to be judged for giving a proper application to the principle of AAEC.

The term ‘appreciable’ has been defined by ECJ in Volk v. Vervaeke, where reliance was placed upon the probability ofthe pattern of trade such that it might hinder the very objective of the competition law. Similarly the Commission Notice on Agreement of Minor Importance provides for the circumstances under which actions are not viewed as significantenough to appreciably restrict competition. This further gives a concrete meaning to the term ‘appreciable’.

Unlike the term ‘appreciable’ which has been given restricted to certain circumstances, the phrase ‘effects on competition’ has to be judged with reference to the market share in the relevant market and thus it becomes an important task to define ‘relevant market’. In the present context, the mammoth task was attempted by both NRAI and Zomato/Swiggy giving narrow and wider interpretations respectively. But in this aspect, it is safe to accept       the position of CCI to simply refer Zomato/Swiggy as online intermediaries for food ordering and delivery.

Zomato and Swiggy are the biggest food delivery platforms in India, who conjointly holds      90-95% of the Indian food delivery business. Further, as on January 2022, the market valuation of      the se giants stood at $5.3 billion and $10.7 billion respectively which shows the dominant position enjoyed by them, which is also prima facie evident by the circumstances of the case.

Bad news for consumers? Highlighting the significance of ‘Public Interest’

While the economies of scale can be achieved with the reasonable commissions and the reduced costs will benefit the customers in the form of higher quality and lower prices, exorbitant prices will instead result in the reduction of the profits. The impact of such losses will then be passed down to the ultimate customers, thus having a negative effect on the consumers and RPs. Hence, the unilateral act of charging high commissions without any formal communication to the RPs hurts the interests of the general public and also takes away the ability of RPs to compete independently if they come out of the contract.

In light of the above, the public interest test cannot be ignored while considering the economic consequences the AAEC may cause. Therefore as indicated in Standard Oil Co. v. United States, the factor of AAEC operates on the prejudice of the public interests. Public interest in this sense is the first consideration before the courts while considering the validity of the agreements under Section 3 of the Act. Moreover, Section 19(3) of the Act which provides for factors determining AAEC under Section 3 gives due regard to the accrual of benefits to the customers.

However, the term ‘public interest’ has to be constructed from a wider perspective with respect to the circumstances of every case. This proposition was made clearer in Haridas Exports v. All India Float Glass Manufacturers Association, where the Apex court clarified that public interest does not necessarily mean interest of the industry but due regard has also to be given to all possible customers in the market for ensuring that the law achieves its objective of fair competition and public justice.

Conclusion

Unilateral fixing of commission rates by the players like Zomato and Swiggy who enjoy a dominant position in the food delivery market in India has been declared by the CCI to be not anti-competitive. However, such narrow application of Section 3 of the competition act influenced by the provisions of contract laws of the country does more harm than good and has the potential to defeat the object of the competition laws. In such scenario, the importance of AAEC factor and test of ‘public interest’ should be relied upon to secure fair competition in the market as well as the interests of both the producers and the customers. While the decision has huge ramifications, one can only hope that the position is rectified in the subsequent decisions.

November 9, 2022

Regulating The Fees Of Insolvency Professional: A Hit Or A Miss?

BY SANYAM GUPTA, FOURTH YEAR AT NLIU, BHOPAL

Introduction

Since the advent of the Insolvency and Bankruptcy Code (“the Code”) in 2016, the Code has been evolving through various dictums given by the judiciary and regulations by the Insolvency and Bankruptcy Board of India (“the Board”) to ensure that it works in tandem with the current economic situation of the nation. These regulators ensure that the main spirit of the Code, i.e., value maximization and speedy resolution in a ‘creditor-in-control model’ is upheld and its scope is enhanced. In order to maximize the payment of the debt to the relevant stakeholders, it becomes incumbent to minimize the Insolvency Resolution Process Cost (“IRPC”). The remuneration of the Insolvency Professional (“IP”) forms a relevant portion of the IRPC; therefore, it must be regulated.

The IP plays a crucial role in the Corporate Insolvency Resolution Process (“CIRP”). He not only acts as the catalyst facilitating resolution but also runs the Corporate Debtor (“CD”) during the CIRP. It is his expertise that ensures the successful and profitable resolution of the CD. In the case of Essar Steel, the CD reported a profit gain of 5% during the CIRP and reported the highest production as well, under the supervision of the Resolution Professional (“RP”), which further lead to most Financial Creditors realizing 100% of their principal outstanding and 90% of their claim. The credit for this can surely be given to the RP running the CD.

The Adjudicating Authority (“AA”) has on numerous occasions reiterated that there should be some regulations w.r.t. the remuneration of the IPs. Starting from the case of Madhucon Projects Limited, wherein the fees of the Interim Resolution Professional (“IRP”) were 5 crores by the first meeting of the Committee of Creditors, while the total amount of debt was 4.45 crores; to the case of Variscon Engineering Services Pvt. Ltd. Vs. Pier-One Constructions Pvt. Ltd. wherein the AA specifically pointed out the need for regulations governing fees of the IPs. There are also instances wherein the IP quotes fewer fees in order to get the CIRP assigned to them, following which they add substantial miscellaneous expenses through advisors/support staff to inflate their dues. All this leads to further unnecessary bleeding of the CD. Thus, regulations and guidelines to regulate the remuneration of the IP become quintessential.

The Board introduced such regulations and guidelines by uploading a discussion paper titled, “Discussion Paper on Remuneration of an Insolvency Professional” which discusses various aspects of how the Board plans on regulating the remunerations of the IPs. The contents of this paper further went on to amend the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“IRP Regulations”), to provide incentives to meet the spirit of the code i.e. timely resolution and value maximization in addition to providing for a base pay for IRPs and IPs. The author of this article has criticized this approach of the Board of setting a base pay, while not regulating the extensive expenses charged by IPs that lead to unnecessary bleeding of the CD. The author further goes on to analyze the ‘ratio of cost of the process to recovery rate’ of insolvency proceedings in India, highlights the problems in the amendment, and provides solutions to improve the same.

The Regulation

The Board, vide notification No. IBBI/2022-23/GN/REG091 published the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2022 (“Amendment”) on September 13, 2022. By this notification, the Board has amended IRP Regulations, in order to facilitate the regulation on the remuneration of IRPs and IPs, appointed on or after 1^st October 2022. The Board has followed a two-pronged structure, wherein a minimum/base pay is set up on the basis of the quantum of claims admitted, followed by incentivizing the fees based on performance towards; i) timely resolution and ii) value maximization. The minimum pay scale will be as follows:

Quantum of Claims Admitted	Minimum Fee (Rs. Lakh) per month
(i) <= Rs. 50 crore	1.50
(ii) > Rs.50 crore < = Rs.100 crore	2.00
(iii) > Rs.100 crore < = Rs.500 crore	2.50
(iv) > Rs.500 crore < = Rs.1,000 crore	3.00
(v) > Rs.1,000 crore < = Rs.2,500 crore	3.50
(vi) > Rs.2,500 crore < = Rs.10,000 crore	5.00
(vii) > Rs.10,000 crore	7.50

Since time efficiency and value maximizations are the essence of the Code and the IPs play a major role in its realization, the board has added that apart from the minimum or floor fees, the IPs would be incentivized on the basis of i) resolution of CD in the prescribed timelines as given in the Code, and ii) achieving value maximization of CD. Thus, the Amendment provides a performance-linked fee structure for the timely completion of CIRP, wherein a certain percentage of actual realizable value shall be given to the IP as an incentive based on the time taken to resolve the CD. This ranges from 1% for resolution in less than or equal to 180 days to 0% for resolution after 330 days. Furthermore, a variable fee of 1% of the positive difference between the actual realizable value and fair value will be paid as an incentive to IPs who work towards value maximization. These sums must not exceed Rs. 5 crores and must be approved by the CoC.

The Amendment in the IRP Regulations ensures that all IPs are paid adequately and are incentivized for following the Code to its essence. While the same is beneficial for the creditors, it is detrimental and might lead to unnecessary bleeding of the CD.

Critique

The Bankruptcy Law Reforms Committee in its report mentioned the prodigal nature of any constraint to be imposed on the fees of the RP. It further mentions that due to a competitive market for IPs (where the lowest bidder gets the CIRP), the fees to manage the insolvency resolution process will converge to the fair market value for the size of the entity involved.

Even though the board has ensured that the IPs be paid a minimum (floor) payment for their services based on the quantum of claims, however, as stated earlier, during the process of appointment of the RP, the IPs quote fewer fees in order to get the CIRP assigned to them, following which they add substantial miscellaneous expenses through advisors/support staff to inflate their dues. Regulation 34 of the IRP Regulations provides for the fees and expenses incurred by the RP which shall be fixed by the CoC and shall be a part of IRPC. While fixing this cost, the RP indicates the approximate estimation of the expenses that would be incurred by them during the CIRP. It shall be assumed that since the RP is a professional, he would quote expenses with a reasonable understanding of the general expenses that would be incurred during CIRP. The RP’s exorbitant expenses should thus be regulated to avoid unnecessary bleeding of the CD and wrongful gains to the RP. The board should fix a maximum criterion (like 250% of the approximate cost stated) in order to ensure that the RP does not get illicit benefits. In cases wherein the RP crosses this statutory limit, they should bear these over-the-top expenses on their own, as a penalty.

The Board has also failed to address the issue of exorbitant fees charged by the IPs during the CIRP. The following is a list of countries along with their recovery rate during insolvency proceedings (cents on every dollar) as well as their cost of process on the basis of the percentage of the estate of the debtor as per data given in the Doing Business Data published by the World Bank in 2019 :

Name of the Country	Recovery rate (cents on every dollar)	Cost of the process (% of estate)
India	26.5	9%
United Kingdom	85.3	6%
United States of America	81.8	10%
Norway	92	1%
Sweden	78	9%
Slovenia	88.7	4%
Singapore	88.8	4%

It is quite evident that India has one of the highest costs of the process as well as one of the lowest recovery rates when it comes to insolvency regimes in the world. Thus, it becomes essential for the Board to regulate the IRPC as well as set a maximum limit on the remunerations filed by the RP, similar to the laws in Canada and the USA. The Board may propose different maximum limits on remuneration for different valuations of claims, similarly as it has done for minimum (floor) pay. Further, these limits can be relaxed for a speedy resolution and value maximization, as has been proposed by the Board.

The Board has also failed in providing a revision mechanism for these minimum (floor) pay scales as well as for the rate of incentivization. For the same purpose, the board may constitute a committee that may meet on an annual or bi-annual basis. The committee should analyze the prevailing market situation and the fair market value of the fees of IPs for various categories of CIRPs based on the quantum of claims, following which the minimum (floor) pay scales as well as the maximum pay scales of the IPs shall be revised by this committee.

Conclusion

The Amendment is merely a start to regulating the fees of IPs and subsequently the IRPC, but it is a long road ahead. While the IP plays a crucial role in the running of CD during the CIRP, they also have to ensure that the CIRP is completed in a timely manner with the aim of value maximization. The Amendment has tried to ensure that the IPs get a minimum pay as well as an incentivization towards the realization of the core values of IBC. This was done in order to reduce the burden of litigation between parties and on the AA. Yet, the Board should consider practical scenarios which lead to the bleeding of CD and hamper the spirit of the code and its core values and ensure rules and regulations such as regulating the maximum fees charged by the IPs, penalty for charging exorbitant expenses after quoting minimal expenses while getting the CIRP assigned to them, ensuring that these minimum (floor) pay rates and maximum rates are revised in a timely manner to be in tandem with the prevailing market rates are put in place to avoid such scenarios.

November 2, 2022

Tag: Arbitration

By Shivang Monga and Varun Pathak, Third-Year Students at MNLU, Mumbai

BY SHUBHAM SINGH, A THIRD-YEAR STUDENT AT NATIONAL LAW UNIVERSITY, ODISHA

BY AARyA PARIHAR, THIRD-YEAR STUDENT AT RMLNLU, LUCKNOW

by Mohammad Atik Saiyed and Shukla Pooja Sunilkumar, Third year students at GNLU, Gujarat

By Prerna Mayea, fifth-year student at Institute of Law, Nirma University

BY SANYAM GUPTA, FOURTH YEAR AT NLIU, BHOPAL