Category Archives: Arbitration

Anatomization of the South China Sea Dispute

Standard

This Blog Post shall shed clarity on the contentious award passed by the Permanent Court of Arbitration. It tries to unearth certain conflict of views in dispute, as it also discusses the shortcomings of the award & China’s claims in the dispute.  

Facts, Issue & Ratio

In 2013, the Philippines filed a case in the Permanent Court of Arbitration in The Hague, asserting its rights to exploit the 200-nautical mile Exclusive Economic Zone that extends from the archipelago into the South China Sea. The Philippines brought 15 claims under the United Nations Convention on the Law of the Sea (UNCLOS), to which both states are parties. China claimed that the Tribunal had no jurisdiction, and boycotted the proceedings. After almost three years of proceedings, the five-member tribunal issued its award on jurisdiction on Oct 29 last year. A hearing on the merits of the case was held late last November. The award issued on July 12, 2016 largely upheld Philippines claims.

The dispute is over territory and sovereignty over ocean areas, which involves having claim over two island chains namely Paracels and Spratlys. These island chains are beneficial not just in terms of Mineral wealth and fishing but also gives either nations a firm position in the south-china sea in turn affecting trade & commerce.

The tribunal stated that the root of the disputes at issue between the Philippines and China lies in fundamentally different understandings of their respective rights under UNCLOS in the waters in the South China Sea, and not in any intention by one of the parties to infringe the rights of the other.

The tribunal finally ruled that –

  • China cannot lawfully claim historic rights to resources within the nine-dash line.
  • China (and others) cannot claim an EEZ from land features above high tide in the Spratlys, which were all judged to be “rocks” entitled only to a 12 nautical mile (nm) territorial sea.
  • Mischief Reef was determined to be a low-tide elevation on the Philippines’ continental shelf. China has violated the sovereign rights of the Philippines in its exclusive economic zone (EEZ) by interfering with Philippine fishing and petroleum exploration activities, constructing artificial islands, and failing to prevent Chinese fishermen from fishing in the Philippines’ EEZ.
  • China has caused severe harm to the coral reef environment and violated its obligation to preserve and protect fragile ecosystems and the habitat of depleted, threatened or endangered species through its recent large-scale land reclamation and construction of artificial islands on seven features in the South China Sea.
  • The Spratly Islands as a group cannot generate any maritime zones as a unit. This appears to be an effort to pre-empt a Chinese claim to any maritime zones based on straight baselines that could be drawn around the Spratlys as a whole.
  • China has aggravated the dispute since the start of the arbitration process, particularly through large-scale land reclamation and artificial island construction activities, which have inflicted irreparable harm on the marine environment.

Though out of award passed by the tribunal, there lies lacuna over which Tribunal technically favored the Chinese –

  • Gaven/McKenna Reef was deemed to be a rock and not a low-tide elevation.
  • The tribunal claimed no jurisdiction in the standoff over Second Thomas Shoal, as it concerned military activities exempted by Article 298.
  • Traditional fishing rights for all states within the territorial sea of features in the Spratlys were apparently upheld based on the finding that the Philippines had traditional fishing rights at Scarborough.
  • The tribunal did not define what the nine-dash line might mean but only ruled on what it could not mean, namely, a claim to historic rights.

The Tribunal has failed to construe upon what is nine dash line. It would thereby mean that China’s Nine Dash Line claim would still stand test. Although the tribunal found that China’s claim to historic rights in the nine- dash line is not compatible with UNCLOS, it did not rule that the nine-dash line per se is illegal or invalid.

Secondly dispute with respect to Second Thomas Shoal also remains unanswered as tribunal had no jurisdiction.

It should be noted that the tribunal did not rule that it was unlawful in principle for China to undertake construction activities on the disputed islands that it occupies.

China’s Position

China claims by far the largest portion of territory – an area defined by the “nine-dash line” which stretches hundreds of miles south and east from its most southerly province of Hainan.

China has denied being bound by the arbitral award of the PCA as it holds the award as null and void.

The Chinese contend that the tribunal does not have the jurisdiction to preside over issues of sovereignty, as it regards ICJ (International Court of Justice) as an Adjudicating Authority to preside over such matters.

China contends that Tribunal prima facie has no power to interfere in the dispute as there has been a bilateral negotiation agreement between Philippines and China.

Thus China has prima facie questioned the Jurisdiction of the tribunal and hence it i snot bound by the award of the tribunal.

My Perspective

UNCLOS is a major treaty, but it covers only a very limited number of issues being contested in the South China Sea—excluding the most fundamental issues of sovereignty and sea boundary delimitation. An arbitral tribunal established under UNCLOS can only consider disputes on the interpretation or application of UNCLOS, and convention contains no provisions on how to resolve sovereignty issues. This is one of major limitations of PCA which means that issue of Sovereignty would remain unsolved.

The Question over Jurisdiction of the Tribunal has been China’s Primary objection, as issue of sovereignty needs to be taken up before the International Court of Justice according to well established principles of International Law.

Secondly the tribunal has erred in denying that there exists between China and the Philippines an agreement to settle the disputes in question through bilateral negotiation. Like in case of India and Bangladesh Land Border dispute, dispute was resolved vide negotiations between both the nations. But in this dispute, the tribunal erred in exercise of its powers and jurisdiction.

Distance between the Island and Mainland is never a critical element in cause of determination of sovereignty. Take for example – Great Britain exercising its sovereignty over Falkland Islands in South America.

Article 298 of UNCLOS provides that a state may “declare in writing that it does not accept any one or more of the procedures,” including for “disputes concerning the interpretation or application of Articles 15, 74, and 83 relating to sea boundary delimitations, or those involving historic bays or titles,” “disputes concerning military activities,” and “disputes concerning [certain] law enforcement activities.”

It is universally recognized that land territorial issues are not regulated by UNCLOS. Thus, the territorial issue in Nansha Qundao is not subject to UNCLOS. Thus position of law is quite clear with respect to ambit of operation of United Nations Convention on Law of Sea.

China on its part has also failed to understand that UNCLOS was established as a universal body of rules that is to be interpreted and applied by all state parties in the same manner, notwithstanding their historical and cultural traditions. (as claimed by China)

China’s only lawful claims in the South China Sea would be 12 nautical miles of territorial seas from the land features in the Spratly Islands deemed to be rocks above high tide. China cannot claim an EEZ from any land feature in the Spratlys, as none were judged to be islands under UNCLOS warranting such a zone nor can it claim any historic rights to resources, either, as the tribunal judged that China gave up those rights when it acceded to UNCLOS. The Tribunal’s ruling significantly restricts the scope of maritime claims that China can lawfully make under UNCLOS in the South China Sea.

The award adds clarity to certain extent w.r.t the law of the sea. The ruling sheds light on types of islands which would be entitled to resource zones and those which would not be entitled. The award ensures that the waters in the South China Sea outside the 12-nautical-mile territorial sea from the islands will be open to all states to exercise freedoms of conducting navigation & military activities.

Tribunal tried hard to go into the Pith & Substance of the dispute but it has largely failed in laying down whose territorial claims are superior among disputing parties or whether China’s Nine Dash Line is Illegal per se. The nine-dash line is still relevant because it shows the location of the various islands in the South China Sea over which China claims sovereignty. The difference is that as a party to UNCLOS, China can claim sovereignty only over those islands that meet the definition of an island in Article 121 of UNCLOS, that is, naturally formed areas of land surrounded by and above water at high tide.

Thus in my opinion it would be best suited for the parties to approach the International Court of Justice at Hague so that long impending dispute can be amicably settled, without question of jurisdiction looming over further.

Please Feel Free to Chip in your Dissensions, Opinions & Suggestions !!!!

 

Arbitration & Conciliation Amendment Act 2015 : The Way Forward

Standard

                             Arbitration and Conciliation Amendment Act 2015

The Arbitration and Conciliation Act 1996 was enacted with the optimism that it would serve as a quick redressal mechanism to commercial disputes. Over a period of time the legislation has tried to consolidate enforcement of domestic as well as foreign arbitral award owing to which arbitration has become one of most preferred options to settle commercial disputes. It has minimised the supervisory and intervensionary role of courts in the arbitral process.  The Arbitration and Conciliation Act, 1996 (hereinafter “the Act”) is based on the UNCITRAL Model Law on International Commercial Arbitration, 1985 and the UNCITRAL Conciliation Rules, 1980. The Act had been in force for almost 2 decades and although arbitration had fast emerged as a frequently chosen alternative to litigation it had become afflicted with various problems such as those of high costs, frequent delays etc.

The 246th Report of Law Commission highlighted certain shortcomings in the act and hence stressed upon amending those provisions in the act. The Law Commission has also submitted a Supplementary to Report No. 246 on “Amendments to the Arbitration Act, 1996 on ‘Public Policy’- Developments post Report 246″, wherein the Law Commission taking into account subsequent decisions of the Supreme Court had recommended reformulation of amendment in Section 34(2)(b) of the Act.[1] The Commission recommended the addition of section 34 (2A) 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 or by an erroneous application of the law or by re appreciating evidence.

The Government of India felt the need to amend certain provisions of the act so as to make arbitration more user friendly as well as cost effective method of settling commercial disputes. Acting on the recommendations of the Law Commission, Modi led government promulgated the Arbitration and Conciliation Ordinance 2015 to amend certain provisions of the Arbitration and Conciliation Act 1996 which received the assent of the President of India. The Arbitration and Conciliation Amendment Bill 2015 was introduced in both the houses of parliament in order to replace the ordinance. The Amendment Bill was passed by the Lok Sabha and Rajya Sabha on 17th and 23rd December 2015 respectively. The Amendment Bill received assent from the President on 31.12.2015 and post notification in the official gazette on 1st January 2016 the amendment act was deemed to have been in force since 23rd October 2015.

Applicability of Part-I of the 1996 Act to International Commercial Arbitration

The Principal Act consists of 3 parts which includes Part-I which deals with domestic arbitrations and international commercial arbitrations when the seat of such arbitration is in India. The Ratio in case of Bhatia International v. Bulk Trading SA[2] was that Part I of the Act (which provided for remedies such as awarding interim relief under section 9 of the 1996 Act, and setting aside of arbitral awards) was applicable only to an arbitration seated outside of India.

The Supreme Court in case of Bharat Aluminum & Co. v Kaiser Aluminium and Co.[3] held that that Part I and Part II of the Act are mutually exclusive. It further held that Part I of the Act only applied to arbitrations seated within India. This meant that no interim relief was possible in a foreign seated arbitration where the assets of a party/project under dispute were located within India.

Through the amendment of Section 2(2) of the 1996 act, it has been clarified that there is a specific agreement to the contrary, provisions of Part I would be available to parties, who are subject to a foreign seated arbitration.

Hence the parties to a foreign seated arbitration can approach the courts in India for interim relief, Appeals etc after fulfilling the following conditions:

  1. There should be no agreement to the contrary by the parties; and
  2.  An arbitral award made or to be made in such place is enforceable and recognized under the provisions of Part II of the Arbitration Amendment Act.

Hence parties to international commercial arbitration which is enforceable under Part-II of the 1996 Act have the option of approaching the courts to seek interim relief.

High Court’s Jurisdiction over International Commercial Arbitration  

According to Section 2(2) of the 1996 act all forms of arbitration were subjected to the jurisdiction of Civil Court of original jurisdiction in a district. Though only in certain districts would the high court have the jurisdiction under the letters patent. This position has changed post amendment in the definition of the term “Court” under Section 2(e) of the principal act.

The term “Court” now differentiates between domestic arbitrations and international commercial arbitrations wherein:

(a) Domestic arbitrations are subject to the jurisdiction of districts courts and High Courts;                                               (b) International commercial arbitration is subject to the jurisdiction of only High Courts (in exercise of its ordinary civil jurisdiction).

This particular amendment has been introduced in the context of the recently enacted Commercial Courts Act, which provides for the constitution of Commercial Divisions and Commercial Appellate Divisions with High Courts. The constitution of committed divisions within the high court would facilitate scrupulous adjudication of commercial disputes.

Neutrality of Arbitrators

The amendment act aims to negate the factor of partial adjudication on part of the arbitrator, thus to ensure fair and equitable arbitration proceedings it amended provision under Section 12 which lays down the grounds and procedure to challenge the appointment of an arbitrator. Thus under the amendment, the person approached in connection with possible appointment of arbitrator, shall disclose in writing about existence of any relationship or interest of any kind, which is likely to give rise to justifiable doubts. The inherent ambiguity in Section 12(1) (a) has been addressed vide the Arbitration Amendment Act, which elaborates on the type of circumstances that may raise justifiable doubts regarding the neutrality of the arbitrator. In addition, Section 12(1)(b) requires that a potential arbitrator should also disclose in writing any ground that may affect his ability to complete the arbitration within the prescribed time limit of 12 months. Furthermore Schedule 5 has been added which provides the guidelines to determine whether the circumstances exists which give rise to justifiable doubts as to the independence or impartiality of an arbitrator.

Interim Relief by the arbitral tribunal in arbitration proceedings

The Principal act provided for no statutory mechanism whereby the arbitral tribunal could provide effective and enforceable interim relief. This amendment of Section 17 aims to empower the tribunals with special powers which would reduce the burden upon the Courts.

The amendment act empowered the tribunal to grant all kinds of interim measures which the court is empowered to grant under Section 9 and such order as granted by the tribunal shall be enforceable in same manner as if it was an order of the court.

An arbitration proceeding shall commence within a period of 90 days after the declaration of interim relief by the court. This provision shall limit the instances wherein the parties use the court procedures to deliberately delay the disposal of arbitration matters, and will ensure that arbitration is commenced in a time bound manner.

Stringent Timelines for determining Arbitral Award

In accordance with the arbitration-friendly jurisdictions, the amendment act has introduced a fast track procedure whereby arbitrations can be completed expeditiously. The arbitral tribunals have been granted a 12 month window for completion of arbitrations seated in India, which can be extended by six months with the consent of the parties. If the award is made within a period of six months, the arbitrator may get additional fees upon agreement by the parties. If the award is not made within specified period or extended period, the mandate of the arbitrator shall terminate unless the time is extended by the court. The Court while extending the period may also order reduction of fees of arbitrators not exceeding five percent for each month of delay, if the court finds that the proceedings have been delayed for reasons attributable to the arbitral tribunal. The amendment act inserted new provisions in form of Section 29A, 29B which solely deals with the fast track procedure to be followed by the arbitral tribunal as mentioned above.

Regulating the grounds of challenge

An arbitral award can be challenged only in accordance with the grounds provided under Section 34 of the 1996 Act. One such ground of challenge is when an arbitral award is made in conflict with the public policy. This aspect of public policy is subjected to wide interpretation, and hence over these years it has led to increase of vexatious claims. The new provision brought under Section 34 prescribes a time period of 1 year within which an application for setting aside the award needs to be filed. Secondly the party filing such an application needs to issue a prior notice to the other party regarding the same.

The scope of the term ‘public policy’ has been further qualified by amendments to the Explanations under Section 34(2) that that provide that an award shall be considered as against ‘Public Policy’ only when the making of an award was: (a) induced or affected by fraud or corruption; or (b) is in contravention with the fundamental policy of Indian Law; or (c) is in conflict with the most basic notions of morality or justice. Explanation 2 to Section 34(2)(b) provides that the test to determine whether an award is against the fundamental policy of India shall not entail a review of the merits of the dispute.

Time-bound disposal of Arbitral Awards

Addition of two new sub-sections (5) and (6) to Section 34, has paved way for speedy disposal of applications to set aside an award. A period of one year has been prescribed for the same that shall ensure time bound disposal of arbitration matters.

Section 36 has been amended to the effect that mere filing of an application for challenging the award would not automatically stay execution of the award. Award can only be stayed where the Court passed any specific order on an application filed by the party. Previously due to absence of such a provision, any party which would remain unsatisfied with the arbitral award would move to the court and get a stay over execution of such an award. The Court would further have to look into the matter all over again which would ultimately be a very time and cost consuming process.

Computation of Costs

Computation of cost to be awarded to the parties under the Act are to include factors like conduct of parties, whether frivolous counter claims are made, whether reasonable offer to settle dispute is refused by any party, etc. The amount awarded by the tribunal shall carry interest at rate of 2% p.a. more than the current rate of interest, from the date of award to the date of payment.

Section 31A has been added to provide for comprehensive provisions for cost regime. It shall be applicable to both the arbitrators as well as related litigations in the court. It will avoid frivolous, merit-less litigation/arbitration. This Section has been inserted in parallel to provision under Section 36. The ultimate aim of both the sections is to avoid frivolous merit-less litigation and execution of arbitral award as decided by the arbitral tribunal.

Conclusion

These amendments are aimed at taking drastic and reform-oriented steps to bring the Indian arbitration law on a par with global standards and provide an effective mechanism for resolving disputes with minimal court interference.

Since the inception of the 1996 Act, there have been no amendments to the act whatsoever leading to affecting the functioning of arbitral tribunals in large run. This amendment was introduced with the ultimate aim of restoring confidence in the institution of Arbitration as a mode of dispute settlement.

 

[1] The 246th Law Commission Report, http://lawcommissionofindia.nic.in/reports/Report246.pdf .

[2] (2002) 4 SCC 105

[3] (2012) 9 SCC 552