The Corporate & Commercial Law Society Blog, HNLU

Tag: Indian Arbitration & Conciliation Act

  • The Boundaries of Judicial Intervention In Arbitration: Navigating Section 34

    The Boundaries of Judicial Intervention In Arbitration: Navigating Section 34

    BY MANAV PAMNANI, THIRD-YEAR STUDENT AT NALSAR UNIVERSITY OF LAW, HYDERABAD

    Introduction

    Recently, a three-judge bench of the Supreme Court (‘SC’) in the case Gayatri Balasamy v. ISG Novasoft Technologies Ltd. (‘Gayatri Case’) decided to refer the matter regarding court modification of arbitral awards to a Constitution Bench. This comes in light of the relatively unsettled legal position regarding the power of a court to amend or modify an arbitral award under section 34 of the Arbitration and Conciliation Act, 1996 (‘Act’). Against the backdrop of multiple conflicting decisions over the course of several years, the judgement in the Gayatri case, which is yet to be pronounced, is expected to settle the position. However, there is a discernible trend that can be observed lately with the majority of court decisions holding that the court does not have this power.

    The epitome of this is the landmark judgement delivered in National Highways Authority of India v. M. Hakeem (‘Hakeem Case’), wherein the SC declared that the court under section 34 has no jurisdiction to modify the arbitral award as doing so, will amount to crossing the line (Lakshman Rekha) under the guise of judicial interpretation of statutes. 

    One of the most recent SC decisions that upheld the several precedents mentioned was delivered on 4th January 2024 in the case of S.V. Samudram v. State of Karnataka. The SC, in this case, held that any attempt to modify or amend an arbitral award while adjudicating section 34 and section 37 petitions is not permissible. A modification can be effected only by the SC in the interests of justice under Article 142 of the Indian Constitution, provided such a modification is in tandem with relevant statutory laws.

    The power under section 34 of the Act extends only to the setting aside of an award under the grounds specified in sub-section (2), which include incapacity of the parties, invalid arbitration agreement, lack of proper notice, decisions beyond the scope of arbitration, improper tribunal composition or procedure, or if the Court finds the subject matter non-arbitrable or the award in conflict with India’s public policy. With the intention of analysing the intricacies of section 34, this article explores the rationale behind the restriction on court modification, its implications, and potential solutions to address the inherent challenges.

    The Rationale Behind the Restriction on Court Modification

    The most plausible rationale is the express exclusion of such a power from the purview of section 34 of the Act. This power was explicitly included under section 15 and section 16 of the erstwhile Arbitration Act of 1940 but has been omitted under the current statute. As explained in  Larsen Air Conditioning and Refrigeration Company v. Union of India, this reflects the intention of the Legislature to amend the law pertaining to modification. Adopting a contrary approach would undermine the very purpose of excluding this power, making such an interpretation unsound. An analysis of the law in other jurisdictions like England, Singapore, Australia, and the United States reveals that such power has expressly been conferred under the respective statutes, which is not the case in India. Moreover, the purpose of Section 34 is to set aside awards on the basis of procedural or jurisdictional issues, whereas modification involves re-evaluating the substantive merits of the tribunal’s decisions, which deviates from the provision’s principal intention. This reasoning was given in the Hakeem Case mentioned previously, wherein the SC held that section 34 is not like an appellate provision. Considering it to be so is fallacious since it will violate section 115 of the Civil Procedure Code 1908, which deals with revisional jurisdiction. Moreover, the Court stated that since the right to get the award set aside is itself very truncated, the enforcement of such a right should also be very limited in nature. The SC further observed that section 34 of the Act aligns with the UNCITRAL Model Law,  which confers no modification power to a court hearing a challenge to an award, as well as the legislative policy of minimal judicial interference in arbitral awards.

    A deeper substantive analysis of arbitration’s fundamental tenets also results in the same conclusion. Firstly, arbitration aims to provide a speedy and cost-efficient resolution to disputes, and allowing courts to modify awards would undermine this objective by leading to protracted litigation involving high costs akin to traditional court proceedings. The grant of such a power would also vitiate the core principle of party autonomy,  by allowing external interference in the parties’ agreed-upon process of resolving disputes through chosen arbitrators, thus potentially undermining their autonomy to determine the terms and conditions of the resolution process.

    Additionally, it would be against the interests of efficiency and specialisation to give this power to courts since arbitrators are often chosen for their specific subject matter expertise, and judicial modification could devalue this specialised knowledge, as judges may lack the same expertise level in the given subject matter. Lastly, on a practical level, limiting court intervention to setting aside awards rather than modifying them, helps conserve judicial resources and reduces the burden on the court system. 

    Implications

    The restriction on this power ensures the finality and certainty of arbitral awards, promoting confidence in arbitration as a preferred dispute resolution method. Parties can rely on the arbitral process knowing that awards, once issued, are less susceptible to judicial interference beyond specified grounds for setting aside, which can also be cured by the Tribunal itself under section 34(4) of the Act, thus reinforcing the pro-arbitration approach. This stability enhances the enforceability of arbitral awards, both domestically and internationally, which is crucial for businesses operating in a globalised economy. 

    However, the restriction also presents challenges, particularly in cases where an award contains minor errors or miscalculations that do not warrant setting aside the entire award but still require correction for fairness. Parties may feel aggrieved if they cannot seek judicial correction of such errors, potentially leading to dissatisfaction and increased challenges to awards. Although they have the right to approach the SC for modification under Article 142, this is not feasible if the modification required is not substantial. Moreover, the power under Article 142 is also restricted.

    Thus, the binary approach of either upholding or setting aside the entire award limits available remedies, potentially leaving parties with incorrect or unfair outcomes. This may compel them to initiate fresh arbitration proceedings to rectify errors, increasing costs and delays, and undermining arbitration’s efficiency goals. Furthermore, dissatisfaction with limited recourse may lead to more appeals and litigation, increasing judicial workload and contradicting arbitration’s purpose as a swift and efficient dispute resolution method. Balancing finality with the need for fairness and efficiency remains a critical challenge in the arbitration landscape, necessitating thoughtful reforms and procedural enhancements to address these concerns effectively.

    Potential Solutions

    Legislative clarity through well-drafted guidelines should be achieved through amendments that grant courts limited powers to correct errors in awards. This would align with international practices, allowing selective corrections without compromising award finality. This is the practice in the United Kingdom wherein the power of courts to modify awards is largely restricted to limit judicial intervention and uphold fundamental principles of arbitration. Additionally, emphasising enhanced arbitration agreements can empower parties to include internal review mechanisms, such as appellate arbitration panels or expedited procedures, to address errors or ambiguities. This approach would minimise judicial intervention.

    Opting for a three-member tribunal instead of a sole arbitrator can also improve decision quality and reduce the need for modifications. Moreover, ensuring that arbitrators have relevant expertise is crucial for sound decisions. Judicial guidance should also clearly differentiate between grounds for setting aside an award and situations needing corrections, thus ensuring consistency and transparency in judicial decisions.

    An increased use of section 34(4), allowing the tribunal to make necessary modifications, can also be beneficial since it limits judicial intervention, alongside effectuating the required changes. This balancing act, along with other solutions, if effectively implemented, will contribute towards a robust arbitration framework.

    Conclusion

    The evolving jurisprudence surrounding section 34 underscores clear judicial intent to preserve the finality and autonomy of arbitral awards by restricting courts from modifying the same. The accepted position is largely clear, with numerous precedents establishing that courts do not have this power. The Gayatri Case, as mentioned in the beginning, is likely to follow this established norm.  While this approach bolsters the integrity and efficiency of arbitration, it also presents challenges that necessitate thoughtful reforms, particularly in addressing minor errors that do not justify setting aside an award. A more balanced and effective arbitration framework can be established by implementing legislative amendments, enhancing arbitration agreements, providing judicial guidance, and leveraging the tribunal’s powers under section 34(4). Such measures will ensure that arbitration remains a preferred method for dispute resolution, combining finality with fairness and efficiency, thus bringing about a balanced framework. 

  • From Bias to Balance: Informed Consent in AI 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.