Tuesday, July 9, 2013

Chief Justice of India-Designate, P Sathasivam on Arbitration.

In a recent interview that appeared in Economic Times here, Chief Justice of India(CJI)-designate expressed his dissatisfaction in the way arbitration mechanism has evolved  as an alternate to court litigation. He stated that "Unfortunately even after award, the aggrieved person is not accepting it. When it goes to court, we(the courts) treat it on par with other civil matters, so it gets delayed."  He suggested that the High Court or the Supreme Court should segregate the matters coming from arbitration and direct all such cases to a special bench familiar to the subject. He also suggested that, when dealing with arbitration cases coming to the courts, a time frame be drawn. 

He was of the opinion that commercial matters too, like " green benches" and special benches for death sentence should go to specialised benches earmarked for them. In his view "at least four commercial cities Mumbai, Delhi, Kolkata and Chennai, High Courts must create separate benches for corporate matters."

Australia, in particular has separate bench particularly for arbitration matters which is much narrow when compared to specialised commercial benches as suggested by the upcoming CJI. How far his vision meets reality, only time will tell. However, considering the short span of time for which he will serve as the CJI, for around 10 months, it might be difficult for him to bring in a turnaround in this area when there are already many concerns that will need his attention. 

Thursday, July 4, 2013

Future of Indian Arbitration-Cautiously Optimistic: Says the PWC Report.

PricewaterhouseCooper (PWC) recently released its survey report on Corporate Attitudes and Practices towards Arbitration in India.  

70 respondents comprising Legal Counsels, Legal Heads and other legal personnel of various companies in India were asked to give their feedback on various issues.  The report reveals that a staggering 91% companies include arbitration as opposed to litigation to resolve their future disputes. The top three factors that make arbitration most desired Dispute Resolution (DR) mechanism are 1. Speed, 2. Flexibility and 3. Confidentiality  The report recognizes that institutional arbitration is yet to take off in India and most companies (47%) prefer Ad-hoc arbitration over institutional arbitration (40%). Retired judges of the Supreme Court and High Courts are the most sought-after arbitrators. Among them also, there is only a small club of seasoned arbitrators that the companies choose from.

A very important finding of the survey is that the “Companies in Indian are yet to fully appreciate the tactical significance of the seat of arbitration” This, I believe is very correct because parties and to a large extent even the arbitrators do not have a clear idea of the distinction between seat/place and venue of arbitration. With recent case laws, things appear to be improving but the issue is too important to be pleaded ignorance of.

India followed by Singapore and England are the most favoured seats of arbitration and SIAC/IAC followed by ICC and LCIA finish as the top three institutions for institutional arbitrations.  Although, HKIAC currently has a share of only 3%, I anticipate that this may rise substantially after Honk Kong was notified by the Government of India as a reciprocating country under the New York Convention on enforcement of foreign awards.

Most of the arbitrations in India took more than three years for the completion and the most time consuming activity is constitution of the arbitral tribunal.

Unexpectedly, arbitrators’ fee is among the top three factors that companies attribute to cost of proceedings. What is surprising is, internationally, arbitrators fee comprises not more than 10-15 percent of the total cost involved in arbitration proceedings. The major cost ideally should be attributed to the counsels’ fee and associated expenses.  A report in 2009 by the Commission on Arbitration of the ICC (International Chamber of Commerce) had found that such costs amounted to an average of 82 percent of the total arbitration costs.

Although the future of arbitration is optimistic, companies were dissatisfied up to three times more with the arbitrations happening in India as opposed to arbitrations happening in a foreign seat.  The report says that “though India is a preferred choice as a seat of arbitration, however in practice it is not” The report also suggests that use of expert witness is not very common in India and nearly half of the companies have never used them in their arbitrations.

The report recognizes that “Arbitration remains a preferred dispute resolution mechanism, despite certain loopholes and shortcomings in the arbitration environment in India. “

Wednesday, July 3, 2013

Guest Post: The Kishanganga Dispute and the Partial Award rendered by the PCA: What it means for India?

Below is a guest post by Rishav Banerjee. He is a graduate of Gujarat National Law University and did his masters from  University of Cambridge. The post discusses the partial award that was rendered by Permanent Court of Arbitration in India's favour in an arbitration between India and Pakistan. This article written by Shashank Kumar may also be of interest to the readers. 

Factual Background:
The Kishanganga dispute stems from the construction of a dam as planned by India on the Kishangaga River which is a tributary of Jhelum (one of the Western Rivers allocated to Pakistan under the Indus Water Treaty).

Legal Framework:
Article III(2) of the Indus Water Treaty (IWT) is the provision of main concern in the dispute which talks about India’s compliance  with its obligations to “let flow all waters of the Western Rivers” and its limited exceptions. India strongly relies on the IWT provisions that provides for inter-tributary diversions.  
The other aspect of the dispute arises out of the interpretation of Annexure D and its restrictions on the design and operation of Run of River Plants, such as the KHEP, including in particular the restrictions on dead and live storage, set out in paragraphs 2(a), (b) & (g), 8, 14 and 15 of Annexure D of the IWT. Paragraph 2(a) and (b) define the distinction between “Dead Storage” and “Live Storage” respectively, while paragraph 2(g) sets out the criteria for a ‘Run-of-River Plant’. Paragraph 14 makes Paragraph 18 and 19 of the Annexure E applicable to the filling of Dead Storage. Paragraph 8 sets out certain design restrictions, whereas paragraph 15 imposes further operational restrictions. Based on these provisions, Pakistan submitted that India’s proposal of drawdown flushing as part of KHEP’s design and operation is disallowed under the IWT.

Dispute Resolution: Arbitration at the Permanent Court of Arbitration
Pakistan commenced the process for resolution of the dispute under Article IX (2), (3), (4) and (5) of the Treaty. In May 2005, Pakistan raised the following six objections:
1. “Whether India’s proposed diversion of the Kishanganga (Neelum) into another tributary, i.e. the Bonar-Madmati Nullah, being one central element of the Kishanganga Plant, breaches the legal obligations India owes Pakistan under the Treaty, as interpreted and applied in accordance with international law, including India’s obligations under Article III(2) (let flow all the waters of the Western rivers and not permit any interference with those waters”) and Article IV(6) “maintenance of natural channels?”
2. Whether the design of the plant is in conformity with Paragraph 8(a) of Annexure D to the Treaty?
3. Whether the design of the Kishanganga Plant is in conformity with Paragraph 8(c) and Paragraph 8(f) of Annexure D to the Treaty?
4. Whether the design of the plant is in conformity with Paragraph 8(d) of Annexure D to the Treaty?
5. Whether the design of the plant is in conformity with Paragraph 8(e) of Annexure D to the Treaty?
6. Whether under the Treaty, India may deplete or bring the reservoir level of a run-of-the-river plant below dead storage level in any circumstances except in the case of an unforeseen emergency?[1]
It is the second time Pakistan sought resolution of a dispute through the dispute settlement mechanism contained in the IWT and the first time through the International Court of Arbitration. In the Kishanganga case, both "difference" and "dispute" has come into play.[2] Pakistan had proposed the reference of certain technical issues to the Neutral Expert and had sought legal interpretation on two major parameters concerning the diversion of Kishanganga water for a power project from the Court of Arbitration. Although the two countries have rejected each other’s nominees for the Court of Arbitration, they have decided to set up a panel comprising a chairman, a legal member and an engineer to select the umpires, by drawing lots.[3] The court comprised of six members and was presided over by a chairman which was Judge Stephen Schwebel in this case. It is important to reiterate that the Court of Arbitration route is taken only when the issue does not pertain to technicalities and concerns a legal dispute over the interpretation of the IWT.
In its Request for Arbitration, Pakistan stated that the Parties had failed to resolve the “Difference” concerning KHEP by agreement pursuant to Article IX(4) of the Treaty. Pakistan identified “two questions that are at the centre” of the dispute in the following manner:
1) Whether India’s proposed diversion of the river Kishenganga (Neelum) into another Tributary, i.e. the Bonar-Madmati Nallah, being one central element of the Kishenganga Project, breaches India’s legal obligations owed to Pakistan under the Treaty, as interpreted and applied in accordance with international law, including India’s obligations under Article III(2) (let flow all the waters of the Western rivers and not permit any interference with those waters) and Article IV(6) (maintenance of natural channels)? (First dispute)
2) Whether under the Treaty, India may deplete or bring the reservoir level of a run-of river Plant below Dead Storage Level (DSL) in any circumstances except in the case of an unforeseen emergency?[4] (Second Dispute)
With regards to the first dispute Pakistan submitted before the court that by making the proposed diversion at KHEP India has breached its obligation under the IWT in four manners:
1)      India has violated its obligations under Articles III (1) and (2) to let flow all the waters and not to permit any interference with these waters, as the tightly constrained exceptions to these obligations, including the right to use the waters of the Jhelum to generate hydroelectric power in accordance with Annexure D, does not establish a right to operate a project that permanently diverts the entirety of the waters of the Kishenganga to another Tributary of the Jhelum.[5]
2)      Even if Paragraph 15(iii) of Annexure D did establish some right to divert, such right is limited by the express wording of Article III(2) of the IWT, restricted in the case of the Jhelum ‘to the drainage basin thereof’.
3)      The planned diversion is not in compliance with the strict criteria set out in Paragraph 15(iii) of Annexure D, as it is not necessary and as it causes adverse impact to ‘the then existing Agricultural Use or hydro-electric use’.
4)      By the planned diversion India would also breach its obligation under Article IV (6) of the IWT to ‘use its best endeavours to maintain the natural channels of the Rivers’.[6]
With respect to the second dispute, Pakistan submitted that India’s proposed design of the KHEP, including its ability to drain the reservoir behind the Plant and then halt the flow of water for as long as it takes to refill the reservoir is prohibited under Annexure D, which sets out a series of restrictions on the design and operation of Run-of-River Plants, including in particular with respect to the height and size of the outlets, gates and water intakes, as well as with respect to the water impounded behind the Plant.[7]
India in response to Pakistan’s arguments submitted that KHEP fully complies with its rights and obligations under the IWT and that the second dispute is inadmissible as it constitutes a ‘difference’ which is subject to referral to a Neutral Expert in accordance with Article IX(2) of the IWT before it can be submitted to arbitration.[8] With regards to the first dispute, India argued that it is expressly permitted by Article III(2) and Annexure G to generate hydroelectric power and that this right is limited only with respect  to the manner in which it can be exercised by Annexure D.[9] India further submitted that that Annexure D contained enabling provisions granting the right to construct Run-of-River Plants involving inter-tributary transfers subject to the then existing agricultural or hydroelectric uses by Pakistan not being adversely affected.[10] According to India, these uses are to be assessed by reference to KHEP’s purported conception in the 1950’s.[11] India also argued that in any event, the areas that Pakistan claims would be adversely affected by the operation of the KHEP are a part of Kashmir which forms an integral part of India in accordance with its constitution.[12]

Order on Interim Measures:
Pakistan submitted an application for the indication of provisional measures. It prayed before the Court to pass an interim order restraining India from proceeding further with the planned diversion of the river Kishenganga/Neelum until such time as the legality of the diversion is finally determined by a Court of Arbitration.[13] The Court of Arbitration after a site visit in June 2011 issued its Order on the Interim Measures Application on September 23, 2011. In paragraph 152, which is the operative provisions of the order, the Court ordered that “It is open to India to continue with all works relating to the Kishenganga Hydro-Electric Project, except India shall not proceed with the construction of any permanent works on or above Kishenganga/Neelum riverbed at the Guez site that may inhibit the restoration of the full flow of that river to its natural channel”[14] and that both the Parties “shall arrange for periodic joint inspections of the dam site at Guez in order to monitor the implementation” of that order[15].

Partial Award:
On February 18, 2013 the Court of Arbitration rendered the Partial Award in respect of the dispute between India and Pakistan under the IWT concerning the two disputes as stated above.
In its Partial Award, which is final with respect to the matters decided therein, without appeal and binding on the Parties, the Court of Arbitration unanimously decided:
1. The Kishenganga Hydro-Electric Project (KHEP) constitutes a Run-of-River Plant under the Treaty, and India may accordingly divert water from the Kishenganga/Neelum River for power generation by the KHEP in the manner envisaged. However, when operating the KHEP, India is under an obligation to maintain a minimum flow of water in the Kishenganga/Neelum River, at a rate to be determined by the Court in a Final Award.
2. Except in the case of an unforeseen emergency, the Treaty does not permit India’s reduction below “Dead Storage Level” of the water level in the reservoirs of Run-of-River Plants located on the rivers allocated to Pakistan under the Treaty. This ruling does not apply to Plants already in operation or under construction (whose designs have been communicated by India and not objected to by Pakistan).[16]
While adjudicating the first dispute and coming to the conclusion that the IWT expressly permits the transfer of water by India from one tributary of the Jhelum to another for the purpose of generating hydro-electric power, subject to certain conditions, the Court of Arbitration found that this right is not circumscribed by the Treaty’s restriction of Indian uses on the Western Rivers to the drainage basin of those rivers but the restriction relates to where water may be used, and is not violated by the use outside of the drainage basin of electricity generated from the water.[17] Thereafter the Court scrutinized the provisions under the IWT which requires the Parties to maintain the natural channels of the rivers and its effect on inter-tributary transfers wherefore the Court observed that this obligation involves maintaining the river channels’ physical capacity to carry water, and does not require maintaining the timing or volume of the flow in the river and thus accordingly, this obligation does not limit India’s right to transfer water for the purpose of generating hydro-electricity.[18] On deciding whether the KHEP meets the express condition of such transfers as mentioned in the IWT, the Court observed that the KHEP is a Run-of-River Plant within the definition of “Run-of-River Plant” under the IWT and which is also a requirement under Annexure D.[19] Finally, the Court found that the KHEP’s inter-tributary transfer is “necessary,”[20] as required by the Treaty, for the generation of hydroelectric power, as power can be generated on the scale contemplated by India in this location only by using the 665 metre difference in elevation between the dam site on the Kishanganga/Neelum and the place where the water is released into the Bonar Nallah.[21]

The Court thereafter went to discuss another requirement of Paragraph 15(iii) which is “then existing Agricultural Use or hydroelectric use by Pakistan” on the downstream reaches of the Kishanganga/Neelum should not be affected by the inter-tributary transfer required for KHEP. The Court while determining the fact referred to Article 31(1) of the Vienna Convention on the Law of Treaties and observed that the provisions focus on the operation of hydro-electric plants and the implication that the determination of “then existing” uses should take place on an ongoing basis throughout the operational life of the plant.[22] After examining the object and purpose of the IWT, the court observed that the IWT gives Pakistan a priority to use the waters of the Western Rivers as well gives India the right to generate hydro-electric power on the Western Rivers.[23]
Coming to the question of application of the IWT to KHEP, the Court rejected both the “ambulatory approach” as suggested by Pakistan and the “critical period” approach as suggested by India and noted that the proper interpretation of the treaty combines elements of both the approaches.[24] The Court considered the critical period of the KHEP and the NJHEP i.e. the period in which the parties not only planned the projects but also took major steps to realize the projects. After reviewing the evidence provided by the Parties, the Court found that the critical period of KHEP was in 2004-2006 in comparison to NJHEP which was in 2007-2008 and thus the Court decided that India’s right to divert waters of the Kishenganga by KHEP is protected by the Treaty.[25] However according to the Court India’s right to divert the Kishenganga/Neelum is not absolute as it is subject to the restrictions specified in the IWT and by the relevant principles of customary international law.[26] Paragraph 15(iii) obliges India to operate its projects in such a way as to avoid adversely affecting Pakistan’s then existing agricultural and hydro-electric uses. The Court thus observed that Pakistan retains the right to receive a minimum flow of water from India in the Kishenganga/Neelum riverbed at all times.[27] The Court found that this right also stems from customary international environmental law, and that it considered that the IWT must be applied in light of contemporary international environmental law principles.[28]
With regards to the determination of the minimum flow of water downstream, the Court deferred it till the Final Award as the data provided by the Parties were insufficient. Thus the Court also ordered the Parties to provide additional data concerning the impacts of a range of minimum flows at the KHEP dam on, (for India), (a) power generation at the KHEP; and (b) environmental concerns from the dam site at Gurez to the Line of Control; and, (for Pakistan), (a) power generation at the NJHEP; (b) agricultural uses of water downstream of the Line of Control to Nauseri; and (c) environmental concerns at and downstream of the Line of Control to Nauseri.[29]

While adjudicating the second dispute, where India raised two objections to the admissibility of the Second Dispute, the Court while dismissing India’s objections ruled that the Second Dispute is admissible as according to the Court, the IWT provides for disagreements between the Parties to be resolved either by a seven-member court of arbitration[30] or by a neutral expert and once constituted, a court of arbitration has power to consider any question arising out of the IWT which also includes technical questions.[31]

On the issue of the permissibility of the Depletion of Reservoirs for Drawdown Flushing, the Court after examining three aspects of the context of the IWT with respect to drawdown flushing, concluded that the IWT prohibits depletion below Dead Storage Level of the reservoirs of Run-of-River Plant (and, correspondingly, drawdown flushing)[32] by referring to a provision of the Treaty Annexure dealing with storage works, which states that “the Dead Storage shall not be depleted except in an unforeseen emergency”.[33] After critically reviewing the technical documents submitted by the Parties and the testimony of the experts presented during the arbitration, the Court observed that drawdown flushing is only one means of sediment control and that hydroelectricity may be generated without flushing.[34]

Concluding Remarks:
The need for high level and sustained political leadership is required for joint benefits of both countries. In the author’s opinion, it will be desirable to think ahead and conceptualize building on the IWT, 1960. The use of reset terms by PCA for both India and Pakistan and the use of enhanced diplomatic methodology for mutual sustenance would be a good approach in troubled times to settle the disputes peacefully.

[1] Dr. Shaheen Akhtar, “Emerging Challenges to IWT: Issues of compliance & transboundary impacts of Indian hydroprojects on the Western Rivers”, p. 45, available at <http://www.irs.org.pk/f310.pdf> accessed on January 5, 2013 at 4 p.m.  p.46-47.
[2] Supra 1, p. 50.
[3] Ibid.
[4] Pakistan’s Request for Arbitration, para. 4.
[5] Pakistan’s Request for Arbitration, para. 4(a) ; Pakistan’s Memorial, para. 1.12.
[6] Ibid.
[7] Hearing Tr., (Day 4), 23 August 2012, at 190:18-20.
[8] India’s Counter-Memorial, para. 7.2; India’s Rejoinder, paras. 4.2, 4.4.
[9] India’s Counter-Memorial, para. 4.39.
[10] India’s Counter-Memorial, para. 4.78, referring to Record of the 93rd Meeting of the Commission, New Delhi, 9-13 February 2005, (Annex PK-29), para. 38.
[11] India’s Counter-Memorial, para. 4.23. According to India, Paragraph 15(iii) was intentionally inserted in the Treaty on the basis of a 1954 hydro-electric survey of the Indus basin carried out by India’s CWPC, which identified the possibility of building a hydro-electric scheme on the Kishenganga. See India’s Counter- Memorial, para. 4.70.
[12] India’s Counter-Memorial, para. 6.49.
[13] Pakistan’s Request for Arbitration, para. 54(a).
[14] Paragraph 152(1) of the Order on Interim Measures.
[15] Paragraph 151(2) of the Order on Interim Measures.
[16] PCA Press Release Indus Waters Kishenganga Arbitration (Pakistan v. India), Court of Arbitration issues Partial Award (“Partial Award”) available at <http://www.pca-cpa.org/shownews.asp?nws_id=351&pag_id=1261&ac=view>.
[17] Ibid., para.369.
[18] Ibid., para.373.
[19] Ibid., para.383.
[20] Ibid, paragraph 396 and 398.
[21] Ibid p. 369.
[22] Partial Award, supra 16, para 404.
[23] Ibid, para 410 and 411.
[24] Ibid, para 433.
[25] Ibid, para 442.
[26] Ibid, para 445.
[27] Ibid.
[28] Partial Award, supra 16, para 447- 453.
[29] Supra 16.
[30] IWT, Art. IX(1).
[31] Partial Award, supra 16, para 487.
[32] Partial Award, supra 16, para 514-515.
[33] IWT, paragraphs 18 and 19 of Annexure E.
[34] Partial Award, Supra 16, para 520. 
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