Arbitration in India

Business Conflict Blog by Peter Phillips

Once again I have had the privilege of teaching the excellent students at New York Law School in International Commercial Dispute Resolution, and once again it has resulted in some superb pieces of written research. Here is the work of Somya Kaushik, who will be graduating in a few weeks and, clearly, has a promising future in front of her.

Arbitration in India: The Internal Challenges, India as an International Arbitration Destination, and the Risk Analysis for Foreign Investors
Introduction:
In this research paper I will analyze and comment on India’s arbitration and jurisprudence from pre-colonization to post-colonization in 1947. In Part I, I will briefly discuss the goal and purpose of arbitration, for those who are unfamiliar with them, and I will delve into the history of India’s arbitration, including the major legislative acts and arbitration institutions. In Part II I will analyze and comment on the challenges that arbitration in India faces, as well as create. This section will illustrate some of the key issues in Indian arbitration, such as time efficiency, costliness, advantages and disadvantages of ad hoc arbitration in India, difficulties in award enforcements, and issues with public policy as a ground for appeal. Part III will move on to discuss India as an international arbitration destination, considering the strengths and weaknesses that come with Indian arbitration. Lastly, Part IV will provide a risk analysis guide for foreign investors seeking to invest in India’s market. This section will bring awareness to certain issues that may be easily overlooked regarding the judicial process in India and it will also consider the advantages of arbitration in India for foreign investors.
Part I: Introduction to Arbitration and Arbitration in India
What is International Arbitration?
As defined by Michael McIlwrath in International Arbitration and Mediation: A Practical Guide, “arbitration is a process by which parties agree to the binding resolution of their disputes by adjudicators, known as arbitrators, who are selected by the parties, either directly or indirectly via a mechanism chosen by the parties.”
Arbitration is different from litigation because the arbitrators are chosen by the parties, depending on the rules or the type of arbitration used (ad hoc or institutional). Further, arbitration is a product of the parties in dispute and is agreed upon, usually, through an arbitration clause in an agreement between the parties. Lastly, arbitration awards are binding, unlike other forms of alternative dispute resolutions (ADR), such as mediation. The New York Convention of 1958, which constitutes 140 nations, facilitates the enforcement of international arbitral awards across borders. One of the signatory nations to the New York Convention is India.
What are the Main Arbitration Institutions in India?
India’s main arbitration institutes consists of The Chambers of Commerce, which is organized by either a region or a trade, the Indian Council of Arbitration (ICA), The Federation of Indian Chambers of Commerce and Industry (FICCI), The International Centre for Alternative Dispute Resolution (ICADR), and The Indian Institute of Arbitration and Mediation (IIAM). A survey conducted by Ernst & Young showed that 34% of respondents preferred the London Court of International Arbitration (LCIA), India for their Indian arbitration institute.[1]
These institutes help facilitate the arbitration process throughout the country for both nationals and corporations. Having these arbitration institutes in India has helped the nation build its foreign investor security, allowing foreign investors to feel safe and protected when investing in the Indian market. Despite having several developed arbitration institutions in India, the option for parties to choose ad hoc arbitration is quiet common. Ad hoc arbitration differs vastly from institutionalized arbitration, as discussed in Part II.
The History of Arbitration in India
In the 1770s and 1780s, India enacted the Bengal Regulation Act 1772 and 1781, which provided the disputing parties with an option to submit the dispute to an arbitrator. The arbitrator would be chosen after the parties mutually agreed, a procedure still used in arbitration around the world today. Further, the arbitration awards would be binding on both parties. This pre-colonial arbitration legislation illustrates that arbitration in India has been prevalent and a legal option for more than a hundred years.[2]
In 1940, India enacted the Arbitration Act of 1940, which only dealt with domestic arbitration. Under the 1940 Act, judicial intervention was required in all three stages of arbitration: before referring the dispute to the arbitral tribunal, during the proceedings, and after the award was passed. The judicial court was required to determine whether a dispute existed and whether it could be resolved through arbitration. Further, before the arbitral award could be enforced, it was required to be made the rule of court.[3]
In 1996 India’s legislature enacted the Arbitration and Conciliation Act of 1996. The 1996 Act was modeled after the UNCITRAL Model Law. As Ashok Bhan stated in his inaugural speech during the “Dispute Prevention and Dispute Resolution” conference in India in 2005, the 1996 Acts’ “primary purpose was to encourage arbitration as a cost-effective and quick mechanism for the settlement of commercial disputes.” The Act is broken down into two parts: Part I of the Act governs domestic and international commercial arbitration that takes place in India and Part II governs foreign arbitration that is conducted outside of India. The enforcement of foreign arbitral awards in India is highly influenced and guided by the New York Convention.[4] The 1996 Act, Section 5 particularly, refuses judicial intervention in arbitration proceedings, diametrically opposed to the 1940 Act.
Up until the 1980s, India “still saw arbitration as a foreign judicial institution imposed on them.”[5] This perception of arbitration as a foreign imposition may have been, and still may be, why India’s judicial courts are hesitant to give absolute arbitral freedom. Thus, judicial intervention in arbitration proceedings may be a way for India to protect its legal system from a “legal colonization.” Although the 1996 Act has prohibited judicial intervention, it is still evident and prevalent in both domestic and foreign arbitration in India today. However, India has slowly developed its arbitration legislation and has attempted to strengthen its arbitration practice with minimal judicial intervention, as I will discuss in greater detail later. Regardless of the improvements India has seen in its arbitration practice, there are significant challenges and issues that come with arbitration in India.
Part II: Challenges to International Arbitration in India
Ad Hoc Arbitration in India versus Institutional Arbitration in India
In Ad hoc arbitration there is no arbitration institution to govern the proceedings, hearings and procedures. Ad Hoc arbitration allows the disputing parties to create their own agreed upon rules. These rules include, the process of picking arbitrators, the process of adjudicating during arbitration, the type of award sought, the rule of law used during the arbitration and the venue for the arbitration. There are no time limits imposed by an institution in order to speed up the process and the fees are unregulated. Further, there is no specialized panel to choose arbitrators from. There are no removal sanctions for non-compliance with the agreed upon rules, therefore issues of candor and ethics will often arise. Further, there are no substitute arbitrators, therefore, if necessary, the parties must agree on a newly appointed arbitrator in the middle of the arbitration, increasing the time drastically. Finally, there is no pre-award scrutiny. Therefore, appeals are likely.
On the other hand, in institutional arbitrations the chosen institution sets forth the rules that will govern the arbitration. The institution provides an arbitrator panel for the parties to choose from (allowing for timely proceedings), the institution has a facility for the hearings (less costly than finding an expensive venue in ad hoc), the fees are regulated, there are removal sanctions for non-compliance, there is a pre-award scrutiny (limiting appeals and time consuming procedures), and substitute arbitrators are available (cost and time efficient service).
Given these major differences, Ernst & Young’s survey recorded that 24% of the respondents have undertaken Indian ad hoc arbitration.
Major Hurdles in Indian Arbitration
Time and Judicial Intervention: Arbitration in India is known to be a timely and lengthy alternative to litigation. The backlog of cases in the Indian court system does not help the arbitration practice, despite their “independence” under Section 5 of the Arbitration and Conciliation Act of 1996. Judicial intervention prolongs the arbitration proceeding, especially because Indian courts are looked to for adjournments during the proceedings. Enforcements of awards and appeals to an award are also extremely time consuming and lengthy processes that deter parties from using arbitration. Both enforcements and appeals will be discussed later in this section. According to Ernst & Young’s study, 50% of respondents believe that Indian arbitration does not provide timely resolutions.
Cost: Cost effectiveness will vary depending on the dispute at hand and/or the type of arbitration used (ad hoc or institutional). In both types of arbitration, varying in degree, arbitrators and party representatives will be paid high fees. In ad hoc arbitration, the parties will have to pay for expensive venues, often times expensive hotels. In institutional arbitration, the parties will have to pay administrative fees for administering the arbitration. In many countries, arbitration is a cost-effective alternative to litigation. However, in India, arbitration is costly because of the lengthy arbitration practice as described above. Ernst & Young’s survey identified that 46% of respondents believe that Indian arbitration is not cost effective.
Enforcement: Enforcement of foreign arbitral awards in India are largely guided by the New York Convention of 1958, which is incorporated in parts I and II of the 1996 Act. Domestic awards are guided by §36 of the 1996 Act, which states that “an arbitral award is enforceable as a decree of the court, and could be executed like a decree in a suit under the provisions of the Civil Procedure Code, 1908.”[6] In India, an enforcement of an award that would usually take six months in an international institution, may take up to eight years.[7] Further, “a New York Convention state may also refuse to recognize or enforce arbitral awards if, according to its own national law, the subject matter of the dispute is not capable of settlement by arbitration, or where such recognition or enforcement is contrary to the individual state’s notions of public policy.”[8] “Public policy” has become a broad and ever-expanding term in Indian arbitration, predominantly seen in regard to appeals. Enforcement delays are a big hurdle in Indian arbitration, deterring foreign investors from engaging in Indian companies.
Appeals: Under Section 34(2)(b)(ii) of the 1996 Act, a party to an arbitration may appeal an award when: 1) the party is under some incapacity, 2) the arbitration agreement is invalid, 3) the party is unable to present the case and is not given proper notice 4) the award is beyond the terms of reference and 5) the award is in conflict with public policy. The term “public policy” has yet to be defined by Indian courts, creating a subjective ground for arbitral appeals, determined on a case-by-case basis. This increases the length and cost of arbitration. It also lessens the predictability of outcomes, failing to give foreign investors a sense of security in the Indian arbitration process.
In Renusagar Power Co. v. General Electric Co., the Court held that an arbitral award is contrary to the public policy of India if it is contrary to: (1) a fundamental policy of Indian law, (2) the interest of India, or (3) justice or morality.[9] This holding broadens the scope of the term “public policy” and does not help arbitrators and officials in interpreting the legislation, creating room for unpredictability and inconsistent precedent. The subjectivity of the term allows for every party to attempt to appeal on the grounds of “public policy,” adding to the already backlogged court system.
All of these major hurdles in Indian arbitration have led the international community to believe that India is not a preferred international arbitration destination. However, India is continuously attempting to overcome these hurdles and follow legislation accordingly, without any loopholes and with less subjectivity.
Part III: India as an International Arbitration Destination
India is Not a Preferred International Arbitration Destination
Arbitration is generally seen as an “alternative dispute resolution,” one that is considered to be more cost-effective and time-effective than litigation. As discussed in Part II, India is not a preferred international arbitration destination because of time, extreme judicial intervention, costliness, difficulty in enforcing both domestic and international awards, and the subjective grounds for appeals based on public policy. These are major issues that deter foreign investors and parties from choosing India as an international arbitration destination.
Aside from the hurdles mentioned in Part II, India’s arbitration has also circumvented the rules established by legislature, creating an unpredictable process for parties. Section 5 of the 1996 Act specifically prohibits judicial intervention in Indian arbitration. Despite this legislation, Indian courts have repeatedly intervened with arbitrations, from adjournments to appeals. This circumvention around the proscribed rule of law has and will rightfully deter parties from choosing India as an arbitration destination. Research and preparation is required for arbitrations. However, if the courts are going to circumvent the explicit rule stated in the legislation, no one will be attracted to this type of arbitration. Unfortunately the prohibited judicial intervention in Indian arbitration has “come to constitute a distinct branch of law, i.e. the ‘law of arbitration’. This trend clearly frustrates the foundational aim of providing for arbitration clauses – which is to ensure speedy and efficient dispute-resolution in the commercial context.”[10]
Nevertheless, India has the potential to become an international arbitration destination if these issues can be regulated.
Potential for India to Become a Preferred International Arbitration Destination
India has attempted to curtail the major hurdles to its arbitration process by creating new systems and divisions of arbitration. One way India has tried to improve the quality of its arbitration process is through its “fast-track” arbitration. Fast-track arbitration applies only to disputes regarding trademark, intellectual property, construction, and licensing contract issues. It is a time-bound arbitration with stricter procedural rules, allowing for time efficient and cost effective arbitration. The fast-track arbitration provides parties with predictability and time boundaries, sometimes requiring an award to be issued within six months. If India could implement the fast-track arbitration rules and time limit to regular commercial arbitrations in India, many more parties would comfortably choose Indian arbitration.
Suggested Ways to Make Indian Arbitration Preferred
In India, ad hoc arbitration is commonly used. Ad hoc arbitration, as discussed earlier, is an inefficient and costly method of resolving international disputes. The common use of ad hoc arbitration allows for errors in justice, failure in procedures and unpredictability of outcome. However, if the Indian government invests in the development of institutional arbitration in India, more arbitration institutions can be set up. This will help regulate the arbitration process, allow more people to use institutional arbitration, increase predictability of outcomes, regulate judicial intervention and make arbitration cost effective and time efficient. This has already begun “with the recent launch of the Delhi High Court Arbitration Centre (DAC) in November 2009.”[11] The more established arbitration institutions there are, the more likely India will become a preferred international arbitration destination.
More institutions will also allow for stricter sanctions for non-compliance with arbitral rules. This will help create a credible arbitration practice and allow for ethical issues to be resolved fairly and efficiently. Stricter sanctions for non-compliance should be implemented regardless of the government’s investment in arbitration institutions. Additionally, strict restrictions on judicial intervention should be upheld. As noted before, section 5 of the 1996 Act has repeatedly been circumvented, undermining the legal process and the legislation of India as a nation.
Additionally, more specialized sectors for arbitrations will increase the overall efficiency associated with arbitration. Currently, India’s arbitration sectors include construction disputes, maritime activities and goods and services trade. However, if India branches out to create more specialized sectors, such as intellectual property, corporate law, and consumer law, arbitration in India would be more effective and attractive.
Lastly, India should consider amending the 1996 Act in order to accommodate foreign and domestic arbitrations separately. Currently, the 1996 Act applies the Model Law to both foreign and domestic arbitration and “applying the Model Law to both domestic and international arbitrations has created confusion and disorder.”[12] Further, the “UNCITRAL Model Law was not designed for the ad hoc domestic arbitrations that are prevalent in India and because the dual regimes invite conflation of jurisprudence between Parts I and II of the Act.”[13]
If Indian legislation and the government can implement such changes as suggested, India has the potential to become a preferred international arbitration destination.
Part IV: Risk Analysis Guide for Foreign Investors
India as a Foreign Investment Destination
The New Industrial Policy (NIP) fundamentally changed foreign investments in India. The NIP relaxed regulations on foreign investments in India, provided tax incentives for foreign investors and privatized many sectors of the Indian economy.[14] The effects of the NIP are illustrated starting from 1991 where “foreign investment in India totaled approximately $100 million” and “by 2006, foreign investment totaled over $15.6 billion and continues to increase steadily.”[15] This steadfast growth and desire to invest in the Indian market has increased commercial transactions, inevitably increasing commercial disputes. Thus, foreign investors should be made aware of the risks associated with investing in the Indian market, not only economically but legally as well.
Foreign Investor Guide to the Loopholes and Benefits of Indian Arbitration
1. Be Aware of the “Spirit” of the Law: In Bhatia International v. Bulk Trading S.A., “the bench of three judges relied on what they described as the “spirit” of the 1996 Act when granting an interim measure of protection to the foreign party, invoking Section 9 in Part I (interim measures of protection by the court in pending arbitrations)—even though Part I did not apply, and was not intended to apply to foreign arbitrations.”[16] As discussed above, Section 5, restricting judicial intervention, has also been highly disregarded. Foreign investors should be aware of this “spirit of the law” doctrine that the courts use because it provides for unpredictability of the outcome. Further, the unpredictability of outcome may lead to inconsistent arbitration precedent. Be aware that judicial intervention is possible and other sections may be read differently according to the “spirit of the law.” This is something foreign investors should highly consider before entering into an arbitration agreement.
2. Be Aware of the “Public Policy” Ground for Appeal: As discussed above, public policy has become a broader and more subjective term than before. This can be used to the foreign investors advantage, if they want to appeal a case. However, it can also be something the foreign investor has close to no control over if the opposing side chooses to use this for an appeal. Further, the what lies within “public policy” will constantly be changing with time. Therefore, long-time investments should be carefully assessed. This is a risk that the investor will have to consider before entering into any arbitration agreement. This is also something the parties will not be able to contract around.
3. Be Aware of the Lengthy Award Enforcement: As discussed above in detail, both domestic and foreign awards are guided by different legislation in India. Enforcement of awards can be lengthy, sometimes taking years to enforce. The “Venture Global holding allows parties to ask an Indian court to set aside a foreign arbitral award, in addition to the option to request that the Indian court refuse to enforce the award.”[17] This can be used in favor of the foreign investor as well as the opposing Indian party.
4. Be Aware of the Indian Courts’ View of Domestic Awards: A “peculiar feature of a domestic award in India is that its finality is not respected by the parties nor looked upon too seriously by courts: for over fifty years (from 1940 to 1996) courts in India had become accustomed to supervising arbitral awards, and setting them aside for errors apparent on their face.”[18] This is important because after years of arbitration, an award can be set aside easily. Further, judicial intervention is still highly prevalent in Indian arbitration, even over appeals and enforcement judgments. This is important for the foreign investor because large investments may be at stake and large awards should be enforced if legally valid.
5. Know that Arbitral Bias is Uncommon but Not Gone: “The foreign party loses or wins as often as the local. In fact, statistics show that in the last fifty-five years, amongst the important arbitration cases that ultimately reached the Supreme Court of India, foreign parties have succeeded over Indian parties in a preponderating majority of cases.”[19] This is important for the foreign investor to know because bias is possible in ad hoc arbitrations as well as institutional arbitrations. This favors investing in India and can be an advantage for the foreign investor. However, bias can never truly be eliminated.
6. Know that Indian Arbitration is Designed to Attract Foreign Investors: Since the 1990s Indian arbitration has been modeled to increase and attract foreign investors, possibly creating a bias toward foreign investors. This is important to remember because, although the foreign party loses or wins as often as the local party, there is a need for the developing nation to attract foreign investors. This shift can be beneficial to the foreign investor. Additionally, “there is a point at which policies become so favorable to foreign investors as to sacrifice fairness to the party with inferior bargaining power in contract negotiations.” [20] However, as India’s market is developing rapidly, the desperate need for foreign investors, as seen in the 1990s, may downsize and narrow its focus on certain sectors. Therefore, it would be beneficial to invest in the emerging Indian markets, where foreign investors are needed.
7. Know That There are Increase Legal Costs and Loss of Finality: “Increased legal costs and loss of finality associated with India’s arbitration system are factored into investors’ negotiated contracts with Indian parties as a risk premium, which may be a price that India is willing to pay in exchange for assurance that fairness and justice cannot be completely contracted around through an arbitration agreement.”[21] Legal costs are extremely high in Indian arbitration, as noted above, and may not be a better alternative to a negotiated settlement or litigation. This factor is important to realize before entering into an arbitration agreement.
Part V: Conclusion:
Having discussed the history of India’s arbitration practice, ranging from the 1770s to the 1990s, it is evident that arbitration is a common alternative dispute resolution in India. However, Indian arbitration has come across major issues stemming from post-colonial fears of foreign imposition, judicial intervention, and the desperate need for foreign investors during its economic boom in the 1990s. These major hurdles have created monetary and timely issues for international parties, keeping India from being a preferred international arbitration destination. Further, unpredictability and inconsistent precedent have undermined the arbitration process in India.
Nonetheless, India has continuously tried to amend its legislation regarding arbitration to meet the nations’ needs and its growing market. If India implements these changes to regulate these major issues, it can be a preferred international arbitration destination. Though such changes are already underway and may take years to fully develop, they are worth the effort and time. These changes will create more interest in India as a country, both economically and financially. Further, it will increase India’s legal credibility, something that has always been under strict scrutiny and criticism.
Foreign investors face heavy risks in investing in the Indian market. But as I have suggested, there are certain issues that can weigh in the foreign investors favor. Nonetheless, it is important for foreign investors to remember that India’s arbitration practice is continuously developing based on the developing economy and market. Foreign investors should look to emerging markets and sectors, giving investors the greatest chance of a favorable outcome. As for efficiency, investors should look to highly established sectors in India, giving India the benefit of efficiency and experience. Overall, India’s market will always attract foreign investors. It is this risk analysis that will help analyze when to invest, why they should invest and how much to invest.

[1] Arpinder, Singh. Ernst & Young Survey. Changing Face of Arbitration in India: A study by Fraud Investigation and Dispute Services. (2011), available at http://WWW.EY.COM/PUBLICATION/VWLUASSETS/CHANGING_FACE_OF_ARBITRATION_IN_INDIA/$FILE/CHANGING_FACE_OF_ARBITRATION_IN_INDIA.PDF
[2]Krishna, Sarma et al., Development and Practice of Arbitration in India—Has it Evolved as an Effective Legal Institution (Stanford Ctr. on Democracy, Dev., and the Rule of Law, Working Paper No. 103, 2009), available at http://IIS-DB.STANFORD.EDU/PUBS/22693/NO_103_SARMA_INDIA_ARBITRATION_INDIA_509.PDF
[3] Id. at 3
[4] Fali S. Nariman, India and International Arbitration, 41 Geo. Wash. Int’l. L. Rev. 372 (2009).
[5] Id. at 368
[6] supra, Krishna, Sarma et al., at 21
[7] supra, Arpinder, Singh at 12
[8] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 3
[9] Renusagar Power Co. v. General Electric Co., (1994) 1S.C.R.22 (India).
[10] supra, Krishna, Sarma et al., at 34
[11]Amelia C. Rendeiro, Indian Arbitration and “Public Policy,” 89 Tex. L. Rev. 726 (2011).
[12] supra, Krishna, Sarma et al., at 378
[13] Law Comm’n of India, One Hundred and Seventy-Sixth Report on the Arbitration and Conciliation (Amendment) Bill, 2001, at 2 (2001).
[14] supra, Amelia C. Rendeiro, at 701
[15] Id. at 702
[16] supra, Krishna, Sarma et al., at 375
[17] supra, Amelia C. Renderio, at 721
[18] supra, Krishna, Sarma et al., 378
[19] Id. at 376
[20] supra, Amelia C. Renderio, at 706
[21] Id. at 708

                       

F. Peter Phillips

F. Peter Phillips is a commercial arbitrator and mediator with substantial experience providing consultation on the management of business disputes to companies around the globe. A cum laude graduate of Dartmouth College and a magna cum laude graduate of New York Law School, Mr. Phillips served for nearly ten years… MORE >