Mediation and Conciliation and Companies Acts, 2013 - NCLT

Negotiation, Conciliation and Arbitration Aspects: Role of Company Secretary in thesaid process Ms. KavitaJha, Principal Associate, VaishAssociates Advocates Ms. Kavita Jha, Advocate, VaishAssociates Advocates https://www.nclt.in/

Mediation andConciliation and Companies Act,2013

COMPANIES ACT,2013: Section442 • The Central Gov. shall maintain a panel of experts to be called as “Mediation and Conciliation Panel” for mediation between parties during the pendency of any proceedings before the Central Govt. or the Tribunal or the Appellate Tribunal under the newlaw. • The Panel shall dispose of the matter referred to it within a period of 3 months from the date ofreference.

I.ALTERNATIVE DISPUTE RESOLUTION

Introduction • ADR refers to the other ways that the parties can use to settle civil disputes with the help of an independent third party and without the need for a formal courthearing. • The main types of ADR’sare: • Arbitration • Negotiations • Mediation • Conciliation

Salem Bar Association v. Union ofIndia (AIR 2005 SC3353) • If the Court for one reason or the other cannot itself effecta • compromise, the only option it would have is to refer the parties to conciliationetc. • In the historic judgement in Salem Bar Association v. Union of India, the Supreme Court has directed the constitution of a committee to frame draft rules for mediation under S. 89(2)(d) of the CPC. Consequently, the Committee presided over by Mr Justice M. Jagannadha Rao, Chairman of the Law Commission of India has prepared a comprehensive code for the regulation of ADR process initiated under S 89 of CPC. which consists of two parts---Part I: ADR Rules 2003 consisting of “the procedure to be followed by the parties and the Court in the matter of choosing the particular method of ADR” and Part II: Mediation Rules, 2003 consisting of “draft rules of mediation under section 89(2)(d) of the Code of CivilProcedure”.

NEGOTIATION • ‘Negotiations’ occur when two parties set forth the type of remedy each desires, and try to reach some sort of an agreement that satisfies everyone involved. In the best-case scenario, negotiations are done between the parties and both come to a happyagreement. • Once agreement has been reached, the parties will create a written statement to reflect the terms of the negotiatedassets.

CONCILIATION • ‘ Conciliation’ is limited to encouraging the parties to discuss their differences and to help them develop their own proposedsolutions. • It is voluntary, flexible, confidential and interest based process. the parties seek to reach an amicable dispute settlement with the assistance of the conciliator, who acts as a neutral third party.

CONCILIATION • Section related toconciliation: • Commencement of conciliation proceeding u/s 62 of theAct. • After proceeding’s S.71 cooperation of parties withconciliator. • S.76 termination of conciliationproceeding. • What cannot be referred toconciliation: • Matters of Criminalnature • Illegaltransactions • Matrimonial matters like divorce suitetc. • What can be referred toconciliation? • Matters of CivilNature • Breach ofContract • Dispute of Movable or ImmovableProperty

Mediation • The term “mediation” broadly refers to any instance in which a third party helps others reach agreement. more specifically, mediation has a structure, timetable and dynamics that “ordinary” negotiationlacks. • The process is private and confidential, possibly enforced by law. participation is typically voluntary. the mediator acts as a neutral third party and facilitates rather than directs the process.

TYPES OF DISPUTE SUITABLE FOR MEDIATION • Mediation is suitable for resolving a wide rangeof • disputesincluding: • Business andCommercial • Partnership • Family • Workplace • Personalinjury • Industrial andConstruction

COMPANIES ACT, 2013: Need forMediation andConciliation • Mediation is assisted negotiation. It is a flexible process conducted confidentially in which a neutral party i.e. the mediator, manages the interaction between disputing parties to help them come to a negotiated settlement of the dispute. The disputants and not the mediator have ultimate control over the decision to settle and terms of resolution. The final terms of settlement are recorded in the form of a bindingagreement. • The process is time bound and costeffective. • Confidentiality of the entire process and all concessions made by parties during negotiation is maintained. Since the parties mutually agree to the settlement terms, probability of litigation over settlement is alsolow.

ROLE OF MEDIATOR/ CONCILIATOR UNDER SECTION442 • The mediator/conciliator shall attempt to facilitatethe • following: • voluntary resolution of the dispute(s) by theparties, • communicate the view of each party to theother, • assist them in identifyingissues, • reducingmisunderstandings, • clarifyingpriorities, • exploring areas of compromise and generating optionsin • an attempt to resolve the dispute(s), emphasizing that itis • the responsibility of the parties to take decisionwhich • affectthem. • He shall not impose any terms of settlement on theparties. • However, if both the parties consent, he may imposesuch • terms and conditions on the parties for early settlementof • thedispute.

“An ounce of mediation is worth a pound of arbitration and a ton of litigation!” — Joseph Grynbaum

II.ARBITRATION

Introduction • Arbitration: As per Halsbury ‘s Laws ofEngland • It means reference of a dispute between not less than two parties, for determination, after hearing both sides in a judicial manner, by a person or persons other than a court of competent jurisdiction. • Object ofArbitration • Settlement of dispute in an expeditious, convenient, inexpensive and private manner to prevent it fro, becoming a subject of future litigation.

Types of Arbitration Practice -Institutional Arbitration and Ad HocArbitration ADHOC ARBITRATION INSTITUTIONALARBITRATION A. The procedures have to be agreed upon by the parties and the arbitrator. This requires cooperation between the parties and involves a lot oftime A. In institutional arbitration, the procedural rules are already established by the institution. The fees are also fixed and regulated under rules of theinstitution. B. Infrastructure facilities for conducting arbitration pose a problem and parties are often compelled to resort to hiring facilities of expensive hotels, which increase the cost of arbitration. Other problems include getting trained staff and library facilities for ready reference. B. In contrast, the institution will have ready facilities to conduct arbitration, trained secretarial/administrative staff, as well as libraryfacilities. C. No such panel per se is availablehere. C. The arbitral institutions maintain a panel of arbitrators along with their profile. The parties can choose the arbitrators from the panel. Such arbitral institutions also provide for specialized arbitrators. Inspite of the numerous advantages of institutional arbitration over ad hoc arbitration, there is currently an overwhelming tendency in India to resort to ad hoc arbitrationmechanisms.

Evolution of ArbitrationAct • The Pre-1996 Position (1940 Act): This Act was largely premised on mistrust of the arbitral process and afforded multipleopportunities • to litigants to approach the court for intervention. Coupled with a sluggish judicial system, this led to delays rendering arbitrations inefficient andunattractive. • The 1996 Act: The 1996 Arbitration Act based on the UNCITRAL on International Commercial Arbitration and the Arbitration Rules of the United Nations Commission on International Trade Law 1976 wasenacted. • The Statement of Objects and Reasons to the Act said that the old Act had ‘become outdated’ and there was need to have an Act ‘more responsive tocontemporaryrequirements’. Amongstthe main objectives of the 1996 Act were ‘to minimize the supervisory role of courts in the arbitral process’ and ‘to provide that every final arbitral award is enforced in the same manner as if it were a decree of theCourt.

Arbitration and Conciliation Act,1996 • Part I – DomesticArbitration • Part II – Enforcement of foreign awards • Part III – ConciliationProcedures • Part IV –Supplementary • Provisions

In spite of Arbitration being an effective tool of dispute resolution, there were various shortcomings which were required to be resolved.

Issues faced under 1996Act • High costs and delays: Thus, making it no better thaneither • the earlier regime which it was intended toreplace. • After the award, a challenge under section 34 makes the award in executable and such petitions remain pending for severalyears. • Proceedings in arbitrations are becoming a replica ofcourt • proceedings. • Appointment and independence ofArbitrators.

Arbitration andConciliation (Amendment) Act,2015 • In an attempt to make arbitration a preferred modeof • settlement of commercial disputes and making India a hub of international commercial arbitration, the President of India on 23rd October 2015 promulgatedan Ordinance ("Arbitration and Conciliation (Amendment) Ordinance, 2015) amending the Arbitration and Conciliation Act,1996. • Prior to the amendment of the Indian Arbitration and Conciliation Act 1996 (“the Act”), India’s journeytowards becoming an international commercial hub that could rival Singapore and London was hampered by a largely ineffective Act and an arbitration regime that was afflicted with various problems including those of high costs anddelays. • To address these issues the Arbitration and Conciliation Act, 2015 wasintroduced.

Amendments made in 2015 The Law Commission of India had brought out Report No. 246 in August2014, recommending various amendments tothe Arbitration & Conciliation Act, 1996, which have been incorporated videArbitration and Conciliation (Amendment) Act,2015

Issues resolved by Arbitration andConciliation (Amendment) Act,2015

1. Appointment ofArbitrator- administrativepower • Section 11 of Arbitration and Conciliation Act, 1996 provided for appointment of Arbitrator by Chief Justice or any person or institution designated by him. Now, the powers are with High Court or Supreme Court. Thus, now, any bench of High Court/ Supreme Court can appoint Arbitrator. • Section 11(6A) has been inserted to provide that the Supreme Court or High Court, while considering application for appointment of arbitrator, shall examine only existence of arbitration agreement (and not merits of thecase). • Section 11(6B) has been inserted to clarifythatappointment of Arbitrator by any person or institution nominated by Supreme Court or High Court will not be considered as delegation of judicialpowers. • Thus, appointment of Arbitrator is only an administrativematter.

2. Independence ofArbitrator • Neutrality of arbitrators, viz. their independenceand • impartiality, is critical to the entireprocess. • Test for neutrality is set out in section 12(3) which provides– • “An arbitrator may be challenged only if (a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality…” • The balance between procedural fairness and binding nature of these contracts, appears to have been tilted infavour. • Large scale amendments were suggested to address this fundamental issue of neutrality of arbitrators particularly to sections 11, 12 and 14 of theAct. • Further, the Commission had proposed the requirementof • having specific disclosures by thearbitrator.

Independence ofArbitrator • Section 12(1) of Arbitration and Conciliation Act, 1996 expected Arbitrator to make disclosure of his possible connection orinterest • However, the section did not specify anycriteria. • Now, fifth schedule has been inserted specifying grounds to guide onwhich • independence and impartiality of Arbitrator can bedoubted. • Section 12(5) also inserted by Amendment Act, 2015, which provides that if arbitrator has interest ( direct or indirect) as specified in schedule seven of the Arbitration and Conciliation Act, 1996, he cannot be appointed as Arbitrator, unless both parties agree in writing, after dispute hasarisen. • Thus, a mere clause in Arbitration Agreement about appointmentof • arbitrator of choice of one of the parties is notsufficient. • This is a very good provision. The reason is that, at the time of contract, one of the parties is usually in dictating position and other party has practically no option to sign on dottedlines.

3. FEESOF ARBITRATORS • Unilateral and disproportionate fixation of fees by severalarbitrators. • The subject of fees of arbitrators has been the subject of the lament of the Supreme Court in Union of India v. Singh Builders Syndicate, (2009) 4 SCC523. • Commission had recommended a model schedule of fees and has empowered the High Court to frame appropriate rules for fixation of fees for arbitrators and for which purpose it may take the said model schedule of fees intoaccount.

The model fees payable to Arbitrator have been specified in Fourth Schedule inserted to Arbitration and Conciliation Act, 1996 vide 2015 amendment. The fee varies between Rs. 45,000 to Rs. 30 lakhs depending on the sums indispute. • Section 11(14) inserted by Amendment Act, 2015: For the purpose of determination of the fees of arbitral Tribunal, the High Court may frame such rules as may be necessary, after taking into consideration the rates specified in the FourthSchedule.

4. CONDUCT OFARBITRAL PROCEEDINGS • Commission had proposed addition of the second proviso to section 24 (1) to the Act, which is intended to discourage the practice of frequent and baseless adjournments, and to ensure continuous sittings of the arbitral tribunal for the purposes of recording evidence and forargument. • Proviso to section 24(1) of Arbitration and ConciliationAct, • 1996 inserted by Amendment act,2015. • Hearing of Arbitrator Tribunal should be on day to daybasis • withoutadjournment. • If any party seeks adjournment without sufficient cause, costs including exemplary costs can be imposed on him - - proviso to section 24(1) of Arbitration and Conciliation Act, 1996 inserted by Amendment act,2015.

5. Time Limit for makingawards • Section 29A inserted by Amendment Act,2015. • The Arbitral tribunal shall make ArbitrationAward • within 12 months from date ofreference. • The period can be extended by the parties uptosix months by mutualconsent. • Fees payable to Tribunal can be reduced upto 5%for • each month ofdelay. • If award is not made within that period, the mandate of arbitratorterminates. • However, court can further extend the mandateon • suitable terms andconditions. • In fact, now Arbitrator, while giving declarationunder section12(1)of the Act has to state whetherhehas sufficient time to complete assignment within 12 months.

6. Fast track procedure for arbitral award • If both parties agree in writing, thearbitral • tribunal can follow fast trackprocedure. • Decision will be on basis of writtenpleadings, • documents andsubmissions. • Oral hearing will be only to clarify certain points. Technical formalities for oral hearing may be dispensed with by arbitraltribunal. • Award shall be made within six months – section 29B of Arbitration and Conciliation Act, 1996 inserted by Amendment Act,2015.

7. JUDICIARY ANDARBITRATION • It is thought in some quarters that judicial intervention is anathema to arbitration, and this view is not alien to a section of the arbitration community even in India. The Commission however, does not subscribe to this view. The Commission recognizes that the judicial machinery provides essential support for the arbitral process. The paradox of arbitration, as noted by a leading academic on the subject, is that it seeks the co-operation of the very public authorities from which it wants to freeitself. • The Commission has strived to adopt a middle path to find an appropriate balance between judicial intervention and judicial restraint.

Judicial intervention in arbitration proceedings • Judicial intervention in arbitration proceedings adds significantly to the delays in the arbitration process and ultimately negates the benefits ofarbitration • Dedicated benches for arbitration related cases: eg. DelhiHigh • Court has a separatebench. • Amendment in section 11: Delegate the power of appointment (being a non-judicial act) to specialized, external persons orinstitutions. • Amendment to section 11 (7) made providing that decisions of the High Court/ Supreme Court (regarding existence/nullity of the arbitration agreement) are final where an arbitrator has been appointed, and as such arenon-appealable.

Judicial intervention in arbitrationproceedings (contd..) • section 11 (13) was inserted, which requires the Court to make an endeavor to dispose of the matter within sixty days from the service of notice on the oppositeparty. • Sections 34 (6) inserted which requires that an application under those sections shall be disposed off expeditiously and in any event within a period of one year from the date of service ofnotice • New sub-clause (2A) inserted to section 23 of the Act in order to ensure that counter claims and set off can be adjudicated upon by an arbitrator without seeking a separate/new reference by the respondent, provided that the same falls within the scope of the arbitrationagreement

9. SCOPE AND NATURE OF PRE- ARBITRAL JUDICIALINTERVENTION • The Act recognizes situations where the intervention of theCourt • is envisaged at the pre-arbitral stage, i.e. prior to the constitution of the arbitral tribunal, which includes sections 8, 9, 11 in the case of Part I arbitrations and section 45 in the case of Part II arbitrations. • Supreme Court in Shin Etsu Chemicals Co. Ltd. v Aksh Optifibre, (2005) 7 SCC 234, (in the context of section 45 of the Act) ruledin favour of looking at the issues/controversy only primafacie. • Sections 8 and 11 has been amended restricting the scope ofthe judicial intervention only to situations where the Court/Judicial Authority finds that prima facie no valid arbitration agreement exists.

10. SETTING ASIDE OF DOMESTIC AWARDS AND RECOGNITION/ENFORCEMENTOF • FOREIGNAWARDS • Section 34 of the Act deals with setting aside a domestic award and a domestic award resulting from an international commercial arbitration whereas section 48 deals with conditions for enforcement of foreign awards. The Act, as it is presently drafted, treats all three types of awards assame. • The legitimacy of judicial intervention in the case of a purely domestic award is far more than in case of otherawards. • Therefore, Section 34 (2A) was added, to deal with purely domestic awards, which may also be set aside by the Court if the Court finds that such award is vitiated by “patent illegality appearing on the face of the award.” • In order to provide a balance and to avoid excessive intervention, it is clarified in the proposed proviso to the proposed section 34 (2A) that such “an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciatingevidence.”

Public Policy- Section34 • Object of the Act: Ensure speedy disposal with minimum courtintervention. • Section 34(2)(b)(ii) provides that court can set aside an arbitral award if the court finds that ‘’the arbitral award isin conflict with the public policy of India’’. Similarly, section 48(2)(b) provides same in case of foreign arbitralawards. • Challenge: The term ‘’public policy’’ is not defined and under UNCITRAL Model (from where sec. 34 is derived), the courts were supposed to act as Courts of Review and not Courts of Appeal. • However, over the period a very wide interpretation has been given to the aboveterm.

Public Policy- JudicialInterpretation • Supreme Court in Renusagar Power Co. Ltd. vs. General Electric Co. [(1994 SCC supp. (1) 644] gave narrow interpretation to term ‘’publicpolicy’’. • Subsequently, SC in ONGC Ltd. vs. Saw Pipes Ltd. (2003 5 SCC 705) expanded its definition to include cases of ‘’patentillegality’’. • Criticism: Eminent jurist/ Advocate Fali Nariman adversely commented on abovejudgment. • International view: Enforcement of foreign awards is regulated by New York Convention (article V(2)(b) and same was incorporated in section 48 of the Act and so Act should be interpreted in consonance with the objectives of NYC that is that the term ‘’public policy’’ must be construednarrowly.

Public Policy- Judicial Interpretation(contd..) • This international view was reflected in Delhi HC decision in Glencore Grain Rotterdam BV vs. Shivnath Rai Harnarain (India) Co. [2008] 94 ARB LR 497(Delhi)]. • However, SC in Phulchand exports Ltd. v OOO Patriot (2011 11 SCALE 475) followed the ‘Saw Pipes’’ view of expanded interpretation. • Thereafter, SC overruled above decision in Sgri Lal Mahal Ltd. vs. Progetto Grano Spa (2014) 2 SCC 433 following the narrow interpretation in ‘’Renusagar’’decision. • Accordingly, 246th report provided for the same narrow approach by inserting an explanation to section 23((2)(b)(ii) and inserting new provision section34(2A).

Public Policy- TheProblem • SC in ONGC Ltd. vs. Western Geco International Ltd. (2014) 9 SCC 263 in para 39 construed the term ‘’fundamental policyof • India’’ very widely incorporating the Wednesbury principle of • reasonableness. • Same was followed in Associates Builder vs. DDA (2014) 4 ARBLR 307SC. • Such power of review of award on merits is against the international practice and the Statement of object of 1996 Act which says ‘’minimization of judicialintervention’’. • This would lead to disastrous effectas: • Erosion of faith in arbitrationproceedings • Reduction of popularity of India asarbitration • destination • Increase in judicial backlog iv.Increased Investorconcern

Public Policy: Solution-2015 Amendment • Practically, the Court had become appellate authorityover • the arbitraltribunal. • This was not the intention of Arbitration and Conciliation act, 1996 atall. • Hence, explanations have been added by Amendment act, 2015 to section 34(2)(b) of Arbitration and Conciliation act, 1996 restricting the scope of ‘publicpolicy’. • Thus, now, Courts cannot go into merits of thearbitral • award.

Public Policy: Solution- 2015 Amendment • 34(2)(b)(ii) : The arbitral award is in conflict with public policy ofIndia. • Explanation 1: For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India onlyif: • making of award was induced or affected by fraud or corruption or was in violation of section 75 or81; • It is in contravention with the fundamental policy of Indian Law;or c.It is in conflict with most basic notions of morality orjustice. • Explanation 2: For avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entaila review on merits ofdispute.

Public Policy: Solution-2015 Amendment • Further, following sub-clause wasinserted: • Section 34(2A): An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court if the Court finds that the award is vitiated by patent illegality appearing on the face of theaward. • Provided that an award shall not be set aside merely on the ground of an erroneous application of law or re-appreciationof evidence.

11. Enforcement of arbitralawards • Under Section 1996 Act, pendency of a section 34petition • renders an arbitral award unenforceable i.e. automatic stay of enforcement of the award upon admission ofchallenge. • The Supreme Court, National Aluminum Co. Ltd. v. Pressteel & Fabrications, (2004) 1 SCC 540 had criticizedthis. • In order to rectify this mischief, certain amendments have been suggested by the Commission to section 36 of the Act, which provide that the award will not become unenforceable merely upon the making of an application under section34.

Enforcement of arbitralawards • Section 36 of arbitration and Conciliation act, 1996, as amended by the Amendment Act, 2015 specifically provides that the award can be enforced even if one of the parties has approached Court for setting aside the arbitral award, unless specific stay has been granted by the competentcourt. • Thus, mere application to Court for setting aside the arbitral award would not result in stay for enforcement of the arbitral award. This is a very good provision to avoid delay in enforcement of arbitralaward.

12. JUDICIAL INTERVENTIONSIN FOREIGN SEATEDARBITRATIONS • Section 2(2) of the Arbitration and Conciliation Act, 1996 (the “Act”), contained in Part I of the Act, states that “This Part shall apply where the place of arbitration is inIndia.” • Article 1(2) of the UNCITRAL Model Law provides: “The provisions of this Law, except articles 8, 9, 35 and 36, apply only if the place of arbitration is in the territory of thisState • Supreme Court in Bhatia International vs. Interbulk Trading SA, (2002) 4 SCC 105, and before the five-judge Bench in Bharat Aluminum and Co. vs. Kaiser Aluminium and Co., (2012) 9 SCC 552 (hereinafter called “BALCO”) was whether the exclusion of the word “only” from the Indian statute gave rise to the implication that Part I of the Act would apply even in some situations where the arbitration was conducted outsideIndia. • The Supreme Court in BALCO decided that Parts I and II of the Act are mutually exclusive of eachother.

JUDICIAL INTERVENTIONS INFOREIGN SEATED ARBITRATIONS(contd.) • The above issues have been addressed by wayof • addingaproviso to sections 2(2) of theAct: • “Providedthatsubject to an agreement tothecontrary, the provisions of sections 9, 27, and 37(3)(1)(a) shall also apply to international commercial arbitration, even if the place of arbitration is outside India, and an arbitral award made or to be made in such place is enforceable and recognize under the provisions of Part II of thisAct.”

13. POWERS OF TRIBUNAL TOORDER INTERIMMEASURES • Under section 17, the arbitral tribunal has the power to order interim measures of protection, unless the parties have excluded such power byagreement. • However, its efficacy is seriously compromised given the lack of any suitable statutory mechanism for the enforcement of such interim orders of the arbitraltribunal. • Delhi High Court attempted to find a suitable legislative basis for enforcing the orders of the arbitral tribunal under section 17 in the case of Sri Krishan v. Anand, (2009) 3 Arb LR 447(Del). • However, above is not suffice and therefore the Commission has recommended amendments to section 17 of the Act which would give teeth to the orders of the Arbitral Tribunal and the same would be statutorily enforceable in the same manner as the Orders of aCourt.

14. OtherAmendments • Arbitration agreement throughemails • Section 7 has been amended to make specific provision that arbitration agreement can be made through electronic communications. • Interim measures byCourt • Section 9 has been amended to provide that if Court grants interim relief, Arbitration should commence within 90days. • Further, once arbitration tribunal has been constituted, the Court shall grant interim relief only if the Arbitral Tribunal itself cannot grant relief under section 17 of Arbitration and Conciliation Act,1996. • Section 17 of Arbitration and Conciliation Act, 1996 as amended by Amendment Act, 2015 gives wide powers to Arbitral tribunal to grant interimreliefs. • Thus, normally, it may not be necessary to approach Court for interim reliefs and such orders are enforceable underCPC.

Mediation and Conciliation and Companies Acts, 2013 - NCLT