Arbitration Law in Sri Lanka

The formulation of a Model Arbitration Law by UNCITRAL has proved to be an event of great importance for the legal and commercial world. Countries all over the world have re-modelled their arbitration laws in the light of the U. N. Model. Sri Lanka is one of them. In 1995, it enacted a fresh Arbitration Act (No. 11 of 1995). As stated in the Preamble, one of its objects is to make “comprehensive legal provision” for the conduct of arbitration proceedings and the enforcement of arbitral awards. The second object is to make legal provision to “give effect”, to the principles of the Convention on the Recognition and Enforcement of Foreign Awards of 1958 (the New York Convention).

General approach

The Sri Lanka Act very largely follows the UNCITRAL Model law. At the same time, certain departures from, or additions to, the rules given in the Model Law have been considered necessary. Important departures and additions will be referred to, in this article, at the appropriate place.

Arbitration agreement and court proceedings

The Sri Lanka Act provides that an arbitration agreement shall be in writing. It can be contained in a signed document or in an exchange of letters, telexes, telegrams or other means of telecommunications which provide a record of the agreement (section 4).

The Sri Lanka Act provides that by an agreement “any dispute” can be determined by arbitration “unless the matter in respect of which the arbitration agreement is entered into, is contrary to public policy or is not capable of determination by arbitration”

(section 4).

[The Act does not elaborate the two exceptions mentioned above.]

If legal proceedings are instituted in court by a party to an arbitration agreement, in respect of a matter covered by the arbitration agreement, the court shall have no jurisdiction to hear and determine the same, if the other party objects under (section 5).

Arbitrators and Chairman

Parties are free to determine the number of arbitrators. But if it is an even number, then the arbitrators so appointed shall jointly appoint an “additional arbitrator” who shall act as the Chairman. Where the parties do not determine the number, it shall be three

(section 6).

The parties are free to agree on the procedure for appointment. Failing such agreement, the High Court can make the appointment. If the agreed procedure fails, then also, the High Court has power to make the appointment. (section 7).

Termination of Mandate

The mandate of an arbitrator terminates, if the arbitrator becomes unable to perform his functions or, for any other reason fails to act without undue delay or dies, or withdraws from office or if the parties agree on the termination. It may be noted that the provision for terminating the mandate by agreement is not found in many Arbitration Acts.

In case of undue delay by an arbitrator, the aggrieved party may move the High Court to remove him and to appoint another person in his place.

It is further provided that where the mandate of an arbitrator is terminated, the proceedings shall not be held de novo, unless the parties otherwise agree (sections 8-9).

Challenge to arbitrator

An arbitrator has to disclose circumstances raising justifiable doubts as to his impartiality or independence. If circumstances exist which give rise to such doubt, a party may challenge an arbitrator. If the arbitrator does not resign, the matter can be taken to the High Court (section 10).

Challenge to jurisdiction

If an arbitrator’s appointment is challenged (this includes a challenge about the existence or validity of the arbitration agreement), then the arbitrator determines the matter in the first instance. But the aggrieved party may “apply” to the High Court for a determination of such question.

In the meantime, the arbitral tribunal may continue the proceedings (section 11).

Interim measures

The Sri Lanka Act provides for interim measures of protection to be ordered by the arbitrator to protect or secure the claim (section 13).

Settlement

It is provided that it shall not be incompatible with arbitration proceedings, for an arbitrator to encourage settlement. Further, with the agreement of the parties, the arbitrator may use at any time during the arbitral proceedings:

(a) mediation;

(b) conciliation or

(c) any other procedure

to encourage settlements [section 14 (1)].

It the parties settle the dispute, the settlement is recorded as an award on agreed terms [sections 14 (2) to (4) and 25].

Procedure: arbitrators duties

The arbitrator must deal with the dispute in an “impartial, practical and expeditious manner” [section 15 (1)].

He must afford all the parties “an opportunity of presenting their respective cases and of examining all documents and other material furnished by the other party or by any other person” [section 15 (2)]

Proceedings

An arbitral tribunal is authorised by the Sri Lanka Act to continue the arbitral proceedings and to determine the dispute on the available material, notwithstanding the failure of a party without reasonable cause:-

(a) to appear before it or

(b) to comply with any order made by it [section 13(3)].

Amendment as to relief

An interesting and useful provision to be found in the Sri Lanka Arbitration Act relates to amendment of pleadings in relation to relief, Parties are allowed to introduce “new prayers for relief”, provided:–

(a) such prayers fall within the scope of the arbitration agreement and

(b) it is not inappropriate to accept them, having regard to the point of time at which the new prayers are submitted and other circumstances.

Parties are also allowed to amend or supplement the prayers for relief already introduced and to rely on new circumstances, in support of their respective cases [section 15(4)].

This is also a useful provision. However, it is somewhat strange that the main provision as to pleadings – section 15 (2) – is not very elaborate and does not set out the contents of pleadings, time limits for the same and points of detailed nomenclature, such as “statement of claim”, “defence”, “rejoinder” etc. [In this respect, the Nepal Arbitration Act 1999 is much more specific].

Venue

Parties may determine the venue of arbitration, by agreement. Failing agreement, the arbitrator decides it, having regard to the “circumstances of the case, including the convenience of the parties” [section 16(1)].

But (subject to a contrary agreement between the parties), the arbitral tribunal may meet at any place considered appropriate for consultation among the members, hearing the witnesses, inspection, etc. [section 16 (2)].

Procedure generally including evidence

Subject to the provisions of the Act, the parties can agree on the procedure of the arbitral, tribunal in conducting the proceedings. The Act further provides as under:

“The power conferred upon the arbitral tribunal shall include the power to determine the admissibility, relevance and weight of any evidence” (section 17).

Decision

Subject to agreement to the contrary, the following provisions apply under the Sri Lanka Act in regard to any decision made in the course of arbitral proceedings:–

(a) the decision shall be by a majority of the arbitrators;

(b) failing a majority, the decision of the arbitrator appointed by the other arbitrators shall be binding [section 6 (3)];

(c) where, in terms of the agreement or the Act, there is a Chairman, then the decision of the Chairman shall be binding [section 19(1)].

Where there is a Chairman, he has the power “to administer the conduct of the arbitral proceedings” [section 19 (2)].

Summon and Oath

A party may, with the written consent of the arbitral tribunal, apply to the High Court for summons to witnesses [section 20 (1)].

A person is not to be compelled to answer any question or to produce any document, which he could not have been compelled to answer or produce, at the trial in an action before the court [section 20 (1)].

Penalty is provided for failure to attend or refusal to take oath etc. (section 21).

It may be mentioned that the arbitrator is expressly empowered to administer oath, unless otherwise agreed upon by the parties [section 22 (2)]. [The power to administer oath is not provided in the Indian Act of 1996 though it was provided in the Act of 1940].

Evidence

The Sri Lanka Act contains two important provisions regarding evidence before the arbitral tribunal, as under:

(a) Unless otherwise agreed upon by the parties, evidence before the arbitral tribunal may be given orally or in writing or by affidavit. This provision seems to confer a wide discretion on all concerned [section 22 (1)].

(b) Unless otherwise agreed upon by the parties, an arbitral tribunal “shall not be bound by the provisions of the Evidence Ordinance” [section 22 (3)].

It may be recalled that it is for the arbitral tribunal to determine the “admissibility, relevance and weight of any evidence” [section 17].

However, the Sri Lanka Act is silent about the “materiality” of the evidence, – a concept expressly mentioned in section 19 (4) of the Indian Act of 1996.

Representation of the parties

Subject to a written agreement to the contrary, a party to an arbitration agreement may appear before the tribunal:–

(a) personally, or

(b) where the party is a body corporate or not corporate, then by an officer, employee or agent of that body, or

(c) through an attorney at law, if the party so desires (section 23).

Applicable law

Most Arbitration Acts (including those following the UNCITRAL Model law) usually allow the parties to choose the substantive law to be applied, if it is a transnational contract. The Sri Lanka Act goes a little further. The material part of section 24(1) provides as under:

“(1) An arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute”

Here, there is no limitation that the (main) contract should have a foreign element. Thus, even an agreement between two Sri Lankan residents or companies can (it seems), choose a foreign law. Of course, this provision applies “only to the extent agreed to by the parties”, – as is emphasised in section 24 (3) [section 24 (1) and 24 (3)].

Section 24 (2) provides that failing any such designation (of the applicable law) by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable. However – and this is somewhat unusual – section 24 (3) provides that this provision shall apply “only to the extent agreed to by the parties”. The question naturally arises, as to what is to happen, if the parties have neither chosen a particular system of substantive law nor opted for the conflict of laws rules. It is submitted that even in such a case, the arbitrator (like a civil court) will apply the rules of conflict of laws. This would be a reasonable course to adopt, in the circumstances [section 24 (2) and section 24 (3)].

Considerations of “general justice and fairness” can be applied, only if the parties have expressly authorised the arbitral tribunal to do so. This provision in section 24 (4) of the Sri Lanka Act is understandable (though the language is different from that adopted in the UNCITRAL Model Law). What is not understandable, is the provision also in section 24 (4), as under:

The arbitral tribunal shall decide according to ….. trade usages only if the parties have expressly authorised it do so.”

This would mean that trade usages will be relevant, only if the agreement adopts them. This approach is contrary to the UNCITRAL Model Law. The Sri Lanka draftsman had to adopt this course, presumably in view of some peculiarities of the commercial and legal scene in that country.

The award

The award is to be made in writing and signed by the arbitrators. The majority may sign, giving reasons for the omitted signature [section 25 (1)].

Reasons must be stated (unless the parties agree otherwise or unless it is an agreed award [section 25 (2)].

Subject to the provisions of the Act, the award is final and binding on the parties (section 26).

Correction and interpretation

The Act provides for correction and interpretation of the award as well as for its modification, in case of an omitted matter. Certain time limits are, provided for in this regard (section 27).

Interest

The Sri Lanka Act makes a fairly comprehensive provision as to interest to be awarded by the arbitrator. Its salient features are as follows (under section 28):

(a) In an award for the payment of money, interest can be awarded, whether it is a claim for liquidated or unliquidated amount (section 28).

(b) The rate is that agreed between the parties or (in the absence of agreement), it will be the “legal interest” (section 28).

The expression “legal interest” is defined in section 50, as meaning interest at the rate specified in an order made under section 192 of the code of Civil Procedure and for the time being in force.

(c) Interest is awarded on the principal sum awarded from the date of commencement of arbitration proceedings to the date of the award (section 28).

(d) As regards subsequent period, the Act provides that the arbitral tribunal may award further interest at the aforesaid rate on the aggregate sum so awarded, from the date of the award to the date of payment or such earlier date as the arbitral tribunal thinks fit (section 28).

Compensation of arbitrators

The Sri Lanka Act contains a specific provision as to compensation of the arbitrators, to the effect that the parties shall be jointly and severally liable for the payment of reasonable compensation to the arbitrators constituting the arbitral tribunal, for their work and disbursements [section 29 (1),].

[There is no saving regarding any provision in the agreement to the contrary].

There are detailed provisions as to deposit etc. [sections 29(1) to (6) and 30].

Enforcement of the award

The award can be enforced by the High Court, on an application made to the High Court within one year after the expiry of fourteen days of the making of the award [section 31 (1)].

Subject to provisions regarding setting aside the award, the High Court shall, on a day notified to the parties “proceed to file the award and give judgment according to the award”. Upon the judgment so given, a decree shall be entered [section 31 (6)].

Thus, the intention seems to be that the decree so entered shall be executed like any other decree of a civil court

Setting aside the award

The award can be set aside by the High Court (on an application made within sixty days) on grounds which are substantially similar to those laid down in the UNCITRAL Model Law (section 32).

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