Amendment to Article 17 of UNCITRAL Model Law & Indian Legal Perspective

Author: Vedang Mishra, Research Associate

Parties are seeking interim measures in an increasing number of cases. This trend and lack of clear guidance to arbitral tribunals as to the scope of interim measures that may be issued and the conditions for their issuance may hinder the effective and efficient functioning of international commercial arbitration. . . .        – Secretary General, UNICITRAL explaining the need for interim measures

The UNICITRAL Model law on International Commercial Arbitration (hereinafter ‘the model law’) was adopted by the United Nation Commission on International Trade Law (UNICITRAL) on 21st June 1985 in the view of the desirability of uniformity in the law of arbitral procedures  and the specific needs of international commercial arbitration practice ((As adopted by the Commission at its eighteenth session, in 1985)). Article 17 of the 1985 Model Law empowers the arbitral tribunal to order any interim measures of protection on the request of the parties to arbitration agreement. This 1985 Model Law proceeded on an assumption that the parties would voluntarily accept the interim order of the tribunal and no need of any enforcement procedure was felt at that time. Article 17 read:

‘Power of arbitral tribunal to order interim measures unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, order any party to take such interim measure of protection as the arbitral tribunal may consider necessary in respect of the subject-matter of the dispute. The arbitral tribunal may require any party to provide appropriate security in connection with such measure.’

This position was not satisfactory and after an elaborated process the 1985 model law was amended by UNICITRAL on 7th July 2006 ((As adopted by the Commission at its thirty-ninth session, in 2006)). The old Article 17 has been completely replaced by an extensive scheme providing inter alia for ex parte orders and for interim measures to be binding and enforceable. The purpose of amending Article 17 was to clarify following three aspects regarding the use of interim measures which were left underdeveloped and open-ended by the old provision.

  • Tribunal-ordered interim measures protection, where a need was felt to overhaul the minimalist approach of old Article 17.
  • Enforcement of such tribunal-ordered interim measures
  • Court-ordered interim measures in support of arbitration

This amendment of article 17 on interim measures was considered necessary in light of the fact that such measures are increasingly relied upon in the practice of international commercial arbitration and the effectiveness of arbitration frequently depends upon the possibility of enforcing interim measures. This new provision has been incorporated in a new chapter of the Model Law on ‘Interim Measures and Preliminary Orders’.

Article 17 gives powers to arbitral tribunal in the widest terms. The amended Article 17 inter alia empowers the arbitral tribunal to maintain or restore the status quo; direct a party to refrain from doing anything which may prejudice the arbitral process; provide a means for preserving assets for satisfaction of the award, or preserve material evidence that may be relevant for resolution of the dispute.

Article 17A provides for the conditions for granting interim measure i.e. balance of convenience; irreparable harm and chances of the requesting party in succeeding on the merits of the claim.

Article 17 B introduces a preliminary order procedure which allows for an ex parte application in the case of the emergency. The scope of such orders is narrower and is essentially confined to maintaining the status quo. Under Article 17 C an ex parte order shall be valid only for 20 days from the date of its issuance. Such order shall be binding on the parties but shall not be enforceable by a court process. Further such order does not constitute an award. Under Article   17 E the tribunal requires the applicant to provide appropriate security in connection with the same unless the tribunal considers it unnecessary to do so.

Article 17 H expressly provides that “interim measures” are enforceable “upon application to the competent court, irrespective of the country in which it was issued,” unless otherwise provided by the arbitral tribunal. However, it is subject to the conditions provided under Article 17 I which means that Measures must be enforced, unless there are some reasonable grounds for its non-enforcement as set forth in article 36.

Finally the last part of this chapter i.e. Article 17 J deals with the issue of municipal court’s power to issue interim measures of protection. Before 2006 amendment, the issue of court ordered interim measures was touched on only by Article 9 of 1985 Model Law. This provision does not positively resolve the question of whether the court has express power to issue interim measures in support of arbitration and whether the Court can take cognizance if the arbitration took place outside the country in which the court is constituted. It was therefore thought necessary to address the issue in specific manner which led to the inclusion of article 17 J in 2006 Model law.

Indian Legal Framework

On 20th of January 1996 by way of a special Ordinance, India promulgated a new Arbitration and Conciliation Act, 1996 (hereinafter 1996 act). The act has been enacted on the line of 1985 UNCITRAL Model Law and the 1976 UNCITRAL Arbitration Rules with very few departures.

In relation to interim measures section 17 of the 1996 act empowers the arbitral tribunal to order a party to take any interim measures of protection in respect of the subject matter. This section does not confer any power upon the arbitral tribunal to enforce its order nor does it provide for judicial enforcement thereof. A provision is made for an appeal to court from an order of the tribunal “granting or refusing to grant an interim measure ((Section 37 (2) (b) of the Arbitration and Conciliation Act, 1996)).” This creates a grey area. A party is entitled to appeal if it feels aggrieved by the interim order but it is nowhere stated as to what will be the consequence if it simply chooses to disobey it. At the same time if the succeeding party wishes to enforce it, there is no enabling mechanism for it to do so. The power given to the arbitrator under this section is a limited one. This is because the power is restricted only to the extent of agreement between the parties and not beyond that.

Like the Model Law the Indian Act also enables an approach to a court for interim relief. Under Section 9 of the 1996 Act the court, may on application by a party, grant interim relief “before or during the arbitral proceedings or at any time after making of the arbitral award but before it is enforced.” But the powers of the court, under this provision are available only where the place of arbitration is in India.

Arbitration Amendment Bill, 2003

The Law Commission ((Law Commission’s 176th Report on Arbitration and Conciliation))proposed an amendment back in 2003 that generated ample debate. It was proposed to add to and elaborate the powers of the tribunal in relation to interim measure. It empowered the arbitral tribunal to direct a party to furnish security for the costs of the arbitration. It also provided explicit powers to the arbitrators to examine a party or witness on oath or affirmation. But still no mechanism had been proposed for enforcement of the same. A parallel committee proposed that interim measures of protection ordered by the arbitral tribunal be enforceable through courts.

However the Amendment Bill ran into trouble and in the end, the entire amendment was struck down because it was deemed not to bring any improvement, but additional confusion and additional litigation.

Conclusion

This new regime of 2006 Model Law provides a number of improvements in the area of interim measures of protection. However, achieving true harmonization seems to look difficult in this area of law. One of the main problems lies in the fact that the new provisions interfere more with the civil procedure of the adopting states than some states are prepared to permit. Nevertheless, it is undisputed that UNICITRAL made its very best effort to negotiate an internationally acceptable harmonized text ((Peter Binder, International Commercial Arbitration and Conciliation in UNICITRAL Model Law Jurisdiction, 2nd Ed 2005)).

The Working Group on Arbitration and Conciliation is currently drafting revisions to the Model Rules ((UNCITRAL Working Group II (Arbitration), Settlement of Commercial Disputes: Revision of the UNCITRAL Arbitration Rules)). The draft text proposed by the Working Group is modeled closely on Article 17 of the Model Law, based on the general consensus that the revision will further clarify the conditions, circumstances, and procedures for granting interim relief.

Till now, Many Countries like Mauritius, Slovenia, New Zealand, Rwanda, Georgia, Ireland, Peru etc. have incorporated the Model Law amendments into their national law ((UNCITRAL, Status of Conventions and Model Laws, Note by the Secretariat (As on 31St August 2013).)). While in India the arbitral tribunal still lacks the power to directly enforce such interim measures, leaving it with no effective way of forcing the party to obey the order. By adopting the amendments to Article 17, India will establish the uniform framework which its current arbitration law lacks. This will also ease the enforcement of interim orders because there will be uniform standards for the scope of power of arbitral tribunals.

Arbitration Agreements: Understanding the Basics

Author: Sibani Panda, Research Associate

‘At all events, arbitration is more rational, just, and humane than the resort to the sword’ – Richard Cobden

The provisions of the Arbitration & Conciliation Act govern arbitration in India. The United Nations Commission on International Trade law (‘UNCITRAL’) which was established in the 1966 has been responsible for the development of international arbitration. India enacted the Arbitration and Conciliation Act, 1996 by taking into account the arbitration rules of UNCITRAL Modern Law on International commercial Arbitration. India is also a signatory to the New York Convention (1960) and the Geneva Convention (1924).  Arbitration under Arbitration and Conciliation Act, 1996 is a matter of consent, not coercion and the parties are free to structure their arbitration agreements as they see fit. ‘This concept of arbitral contractualism allows the parties  to write their own rules of arbitration, therefore, they can customize the arbitral process according to the needs of their transaction, eliminate legal rules or trial techniques that might prove inconvenient or unsuitable , and maintain procedural elements they believe essential to the dictates of fairness, finality and functionality ((Charbonneau, Cases and Materials on law and practice of Arbitration , second edn,2000, p 15)).’

According to Section 7 of the Arbitration and Conciliation Act, 1996

  1. An ‘Arbitration agreement‘ means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
  2. An Arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
  3. An Arbitration agreement shall be in writing.
  4. An Arbitration agreement is in writing if it is contained in-
  • a document signed by the parties;
  • an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
  • an exchange of statements of claim and defense in which the existence of the agreement is alleged by one party and not denied by the other.
  1. The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

In Arbitration agreements, the parties have the freedom and legal right to engage in arbitration and to make specific provisions for the implementation and operation of their arbitration. By entering into a contract of arbitration, the parties voluntarily abandon their rights to judicial relief and, in effect, create a private system of adjudication that presumably is better adapted to their transactional needs.

Section 7(1) contemplates two types of arbitration agreements:

        I. The first type of agreement is referred to as an ‘Arbitration clause’ where an agreement mainly takes place in the form of an arbitration clause, which is embedded, in the principal contract between the parties. The agreements where a clause is inserted in the contract that creates some rights and duties which, in the event of dispute, will be the subject of the intended arbitration are called substantive contract ((Mustill & Boyd, Commercial Arbitration, second edition , 1989, p 6)). The arbitral clause is a contract where the parties agree to submit future disputes to arbitration.  The arbitral clause has an autonomous legal existence and it must identify the contractual relationship to which it applies.

      II. The second type of agreement is referred to as a ‘Submission to arbitration’ or a ‘Submission agreement’ where an agreement is made between the parties after the disputes have already arisen. In submission agreement, an agreement is formed between the parties to submit a dispute to arbitration, which has already arisen between the parties before the arbitration agreement, comes into existence. The submission agreement is usually a detailed document, dealing with the construction of the arbitral tribunal, the procedure to be followed, the issues to be decided and other matters ((Redfern and Hunter , Law And Practice Of International Commercial Arbitration , fourth edn, 2004, p 7,para 1- 10)). It is necessary to have the necessary terms of reference in an arbitral process because it helps to establish the arbitral tribunal’s jurisdiction to adjudicate.

In Bihar State Mineral Development Corporation v Encon Builders (I) Pvt Ltd, ((2003 (3) Arb LR 133,137 (SC).))the Supreme Court has observed that the following four essential elements of an arbitration agreement:

  1. There must be a present or future difference in connection with some contemplated affair.
  2. There must be the intention of the parties to settle such difference by a private tribunal.
  3. The parties must agree in writing to be bound by the decision of such tribunal.
  4. The parties must be ad idem.

In KK Modi v KN Modi, ((AIR 1998 SC 1297))Supreme Court observed some of the important attributes of Arbitration agreement which are as follows:

  1. The arbitration agreements contemplates that the decision of the tribunal will be binding on the parties to the agreement.
  2. The jurisdiction of the tribunals to decide the rights of the parties is derived either from the consent of the parties or from an order of the court or from a statute, the terms of which make it clear that the process is to be an arbitration.
  3. The arbitration agreements contemplates that the substantive rights of the parties will be determined by the agreed tribunal.
  4. The tribunal determines the rights of the parties in an impartial and judicial manner, owing an equal obligation of fairness towards both sides.
  5. The agreement of parties to refer their disputes to the decision of the arbitral tribunal is intended to be enforceable in law.
  6. The agreement contemplates that the tribunal will make a decision upon a dispute, which is already formulated at the time when a reference is made to the tribunal.

An Arbitration agreement is required to be in writing which means that a legally binding and valid agreement between the parties purporting to submit to arbitration any existing or future disputes arising out of or in connection with the main contract, ((Union of India v GS Atwal and Co (1996) 3 SCC 568))must be in writing. A mere oral understanding between the parties to refer the disputes to arbitration would not constitute a valid arbitration agreement ((Jayant N Sheth v Gyaneshwar Apartment co-operative Housing society Ltd (1999) 1 Bom CR 774)).

According to Section 7(4) ((The Arbitration and Conciliation Act, 1996)), there are three situations in which an arbitration agreement should be treated in writing:

                    I. In a document: An arbitration agreement may be in the form of an arbitration clause in a contract, or in the form of a separate agreement. It is mainly required that the documents relating to the agreement should indicate that it is an agreement to arbitrate and it should be signed by the parties.

                 II. In the correspondence: An arbitration agreement also results from the correspondence between the parties. An arbitration agreement is in writing if it is contained in an exchange of letters, telex, telegrams or other means of telecommunication, which provide a record of the agreement ((The Arbitration and conciliation act, 1996, s 7(4)(b).)).  In these cases, even if the parties but the assent of do not sign the agreement each party is required in written form ((Study on New York Convention  A/CN 9/168, para 21)).

               III. In the claim and defense statements: In cases where the claimant in his claim statement alleges the existence of an arbitration agreement and the defendant, in his defense does not deny it, then a valid arbitration agreement will be inferable.

An agreement enforceable by law is a contract ((The Indian Contract Act 1872, s 2 (e).)). An arbitration agreement stands on the same footing as any other agreement. Every person capable of entering into a contract may be a party to an arbitration agreement. He who cannot contract, cannot make a reference to arbitration. An agreement to submit a dispute to arbitration is based on the consent of the parties. It is binding upon the parties unless it is tainted with fraud, undue influence etc. in which case it can be avoided like any other agreement. The terms of the arbitration agreement must be definite and certain. The parties to the arbitration agreement must be clearly identified either in the main contract or in the arbitration agreement. It is essential that while drafting an arbitration agreement, the intention of the parties should be mentioned in a clear and unambiguous language. The first and foremost requirement of drafting an arbitration clause is that the intention of the parties, that all disputes between them shall be resolved by arbitration, should be stated in clear and unequivocal words.

In order to constitute an arbitration agreement between two parties, the other must accept the proposal made by one person. Unless the proposal is accepted, there can be no binding and enforceable agreement. An arbitration agreement is separate and independent of the contract in which it is embedded. Even if the contract in which the arbitration clause has been embedded is held to be invalid for the reason that its subject matter is not arbitral under the law for the time being in force in India, the arbitration clause survives and the award resulting from the arbitral proceedings under such clause will be perfectly valid.

Incorporation of Arbitration Agreements:

An arbitration clause can be incorporated either by reference to a standard form of clause or to a set of trade terms which themselves include provisions requiring disputes to be submitted to arbitration. In Alimenta SA V National Agriculture Cooperative Marketing Federation Of India Ltd (([1987] 1 SCC 615)), the Supreme Court observed that ‘ the arbitration clause of an earlier contract can, by reference , be incorporated into a later contract, provided, however it is not repugnant to or inconsistent with the terms of contract in which it is incorporated’. Section 7(5) provides that ‘the reference in a contract to document containing n arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause as a part of the contract’.

In a particular case, the scope and extent of an arbitrator’s jurisdiction and powers would depend on the proper construction of the arbitration agreement, therefore it is essential that the arbitral tribunal ‘must consider the dispute in question and then elicit from the arbitration agreement whether or not the parties intend a dispute of the kind in question to be resolved by arbitration’ ((Redfern and Hunter , Law And Practice Of International Commercial Arbitration , fourth edn, 2004, p 137,para 3-11)). The existence of difference or dispute is an essential condition for the arbitrator’s jurisdiction. If there is no dispute, there can be no right to demand arbitration. The dispute may be a present or a future one. In case of an agreement to refer future disputes to arbitration, the jurisdiction of the arbitrator does not arise until a dispute has arisen. A dispute means an assertion of a right by one party and repudiation thereof by another. A point as to which there is no dispute cannot be referred to arbitration.

So some of the essentials of the arbitration agreements can be summarized as follows:

  • An arbitration agreement must be in writing.
  • An arbitration agreement must comply with the requirements of a valid contract.
  • An arbitration agreement must be in respect of a dispute that is arbitrable.
  • Parties may agree on the number of arbitrators and their nationalities.
  • Parties may agree on the venue of the arbitration proceedings.
  • Parties may agree on the choice of procedure and the arbitration administered by an arbitral institution under its rules.
  • Parties may agree on the language of proceedings and pleadings;

Therefore it is always required that the arbitration agreements should be construed in a fair and proper manner according to the general principles of construction of statutes, statutory instruments and other contractual documents.

Essential Elements of an Arbitration Agreement

Author: Vedang Mishra, Research Associate

Arbitration provides for an alternative forum to the time consuming and expensive court proceedings and ensures speedy disposal of cases without the court’s intervention. In India, the provisions of the Arbitration & Conciliation Act, 1996, govern arbitration. As per section 7 of the said Act ‘Arbitration Agreement’ is an agreement by the parties to submit to arbitration, all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. It may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

Essential Elements of an Arbitration Agreement

  1. Written Agreement: An arbitration agreement must be in writing ((Section 7(3) of Arbitration and Conciliation Act, 1996)). It need not be in any particular form. It may be a single document containing all the terms or can comprise of two documents. However, an oral agreement of arbitration is not legally recognized in India.
  2. Capacity of the Parties: An arbitration agreement must be in compliance with all the requirements of a valid contract. It will be binding on the parties unless it is influenced by fraud, coercion or undue influence. The parties must have requisite capacity for entering into the contract. Lack of such capacity invalidates the contract.
  3. Intention: Another very important element is the intention of the parties to refer disputes already arisen or likely to arise in respect of a contract. A binding contract require consensus ad idem. It generally includes appointment of arbitrators, seat and the venue of the arbitration proceedings, choice of language and other procedures for proceedings and pleadings. If the intention of the parties is clearly discernible from the terms of the agreement, the presence or absence of the words ‘arbitration’, ‘arbitrator’, or ‘arbitral tribunal’ does not matter ((Sushila Seth v. State of MP, AIR 1980 Del 244)).
  4. Independent Clause: An arbitration clause in a contract is treated as an independent contract and even if main contract is itself illegal and void, it does not make the arbitration clause invalid ((Section 16(a) of Arbitration and Conciliation Act, 1996)). The contract survives for determining and measuring the claims arising out of breach and the arbitration clause survives for the mode of their settlement. This provision was incorporated with a view to give power to the arbitral, tribunal not only to rule on its own jurisdiction but also to decide objection with respect to the existence or validity of the arbitration agreement.

Judicial Pronouncements:

Every arbitration agreement must be liberally construed so as to give effect to the intention of the parties. It helps in widening the scope of the arbitrator’s jurisdiction. Indian Judiciary has made significant decisions while interpreting various arbitration clauses. The Supreme Court in Renusagar Power Company Ltd v. General Electric Company, ((AIR 1985 SC 1156))held that whether a given dispute inclusive of the arbitrator’s jurisdiction comes within the scope or purview of an arbitration clause or not primarily depends upon the terms of the clause itself; it is a question of what the parties intend to provide and what language they employ.

Regarding the intention of the parties, the Supreme Court in another case held that the intention of the parties to refer a matter to arbitration is to be gathered from the expression used in correspondence and the meaning it conveys. In case it shows that there had been a meeting of minds between the parties and they had actually reached an agreement upon all material terms, then and then alone can it be said that a binding contract was capable of being spelt out from the contract or the correspondence ((Rickmers Verwaltung GmbH v. Indian Oil corporation, (1999) 1 SCC 1)).

In Bihar State Mineral Development Corporation v. Encon Builders (I) (P) Ltd, (([2003] 7 SCC 418))following essential elements of an arbitration agreement are observed by the apex court of India

                     i.            There must be a present or a future difference in connection with some contemplated affair.

                   ii.            There must be the intention of the parties to settle such difference by a private tribunal.

                 iii.            The parties must agree in writing to be bound by the decision of such tribunal.

                 iv.            The parties must be ad idem.

In K.K. Modi v. K.N. Modi, ((AIR, 1998 SC 1297))Supreme Court held the following attributes must be present in an arbitration agreement:

         i.            The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties to the agreement.

       ii.            That the jurisdiction of the tribunal to decide the rights of the parties must derive either, form the consent of the parties or from an order of the court or from a statute.

     iii.            The agreement must contemplate that substantive rights of the parties will be determined by the arbitration tribunal.

     iv.            That the tribunal will determine the rights of the parties in an impartial and judicial manner with the tribunal owing an equal obligation of fairness towards both sides.

       v.            That the agreement must contemplate that the tribunal will make a decision upon a dispute which is already formulated at the time where a reference is made to the tribunal.

Scott v. Avery Clause:

A clause providing that any dispute must go to arbitration first before any litigation commences, is known as ‘Scott v. Avery’ clause. It is called ‘Scott v. Avery’ clause because its validity is upheld in that leading case ((Scott v. Avery, (1856) 5 HL Cas 811)). This clause makes arbitration a condition precedent to any court action. The Supreme Court has observed that such clauses have been held to be valid ((The Vulcan Insurance Co. Ltd. v. Maharaj Singh, AIR 1976 SC 287)).

‘Atlantic Shipping’ clause or Time-Bar clause:

Where a clause in an arbitration agreement provides that claims to which the argument applies shall be barred unless some step to commence the arbitration is taken within a stated time, such clause in arbitration is called a time bar clause. Time bar clause is also known as Atlantic Shipping Clause as it takes its name from the decision in Atlantic Shipping and Trading Co. v. Dreyfus (Louis) & Co. (([1922] 2 AC 250))It is to be noted that the time bar clause do not fall within the mischief of Section 28 of the Contract Act, the reason being that they do not shorten the period of limitation to enforce a right, but extinguish the right itself. Generally these clauses are strictly construes against the party relying on them but courts are empowered to appropriately extend the time fixed which had expired on terms, if any, in cases where in the circumstances of the case undue hardship would be caused.

Proposed Amendment in Arbitration & Conciliation Bill, 2003

The bill proposes amendment in section 7 (4) (b) of the act by inclusion of following words in definition of ‘arbitration agreement’:

‘An agreement by implication such as where one party sends a communication to the other which provides a record of the agreement, even though the party which receives the communication does not send a reply, his silence will be treated as amounting to acceptance of the arbitration clause, which is accepted by the other party without demur.’

However, the Central Government withdrew the bill in 2006 and now again comments and suggestions are being invited to for introduction of a new Bill on arbitration so that it can remove the difficulties and lacunas in the existing act and object of enacting Arbitration law may be achieved.