INSTITUTIONALISING ARBITRATION IN INDIA-PROSPECTS AND CHALLENGES

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THE CONTEXT: As of Apr 15, 2021, 67279 cases are pending in the Supreme Court while in High Courts the number is a whopping57. 53 lakh. The restricted functioning of the courts during the Covid pandemic has added to the pendency. A NITI Aayog study in 2017, notes that India takes as much as 1,420 days and 39.6% of the claim value for dispute resolution. The above statistics reiterate the need for reforms not only in speeding up dispute resolution but also in having a strong in-country mechanism for out-of-court dispute resolution. Legally, this process is known and is practiced in the forms of arbitration; negotiation conciliation, and mediation. This write up examines the need for institutionalizing an important ADR mechanism in India: Arbitration

UNDERSTANDING ARBITRATION

• Arbitration is a form of Alternative Dispute Resolution (ADR). Arbitration is a procedure in which a dispute is submitted, by agreement of the parties, to one or more arbitrators who make a binding decision on the dispute.
• In choosing arbitration, the parties opt for a private dispute resolution procedure instead of going to court.
• Unlike litigation, arbitration proceeding takes place out of the court and the arbitrator’s decision is final and the courts rarely reexamine it.
• Usually, all the disputes in which the civil rights of a citizen are infringed and the disputes falling within the jurisdiction of the civil court can be referred to arbitration. But, the disputes which are related to morality, public policy, status, and religious rights are not arbitrable in India.
• Under the Constitution of India, Article 51, India is obliged to encourage the settlement of international disputes by arbitration.

 PRINCIPAL CHARACTERISTICS OF ARBITRATION

Arbitration is consensual: An arbitrator proceeding can only take place if both the parties to the disputes have agreed to it.

Parties choose the Arbitrators: Under the Indian Arbitration Act parties are allowed to select their arbitrator and they can also select a sole arbitrator together who will act as an umpire.

Arbitration is neutral: Apart from selecting neutral persons as arbitrators, the parties can choose other important elements of proceeding, such as the law applicable, language in which the proceedings should be conducted, the venue for arbitration proceedings.

The decision of the Arbitral Tribunal is final and easy to enforce: The decision or award given by the arbitral tribunal is final and binding on the parties and persons can appeal only after the expiry of a specified time limit.

HISTORICAL BACKGROUND OF ARBITRATION IN INDIA

PERIOD: ANCIENT

PREVALENT MEASURES: The settlement of differences by tribunals chosen by the parties themselves was well known in ancient India. There were different grades of arbitrators with provisions for appeals in certain cases from the award. The ancient texts of Yajnavalka and Narada refer to three types of popular courts (Puga, Sreni, and Kula).

PERIOD: MEDIEVAL

PREVALENT MEASURES: During the Mughal Dynasty, most villagers resolved their cases in the village courts themselves and appeal to the caste courts or the arbitration of an impartial umpire (“Salis”). In Maratha Empire, It was up to the Panchayat to study the case and pass its judgment impartially or without any bias to any party.

PERIOD: BRITISH

PREVALENT MEASURES: In the British era, the Bengal Regulation of 1772, 1780, 1781 and the Cornwallis Regulation of 1787 recognized and encouraged arbitration. The Indian Arbitration Act of 1899 dealt with arbitration by agreement without the intervention of the court. However, it was in 1940, the first Arbitration Act of the country was enacted.

PERIOD: POST-INDEPENDENCE

PREVALENT MEASURES: In 1977, the Law Commission of India suggested amendments in the Act on grounds of delay, hardship, and other factors that affect smooth arbitral proceedings. Consequently, the Arbitration and Conciliation Act, 1996, was enacted. Various Committee reports like Justice B.P. Saraf Committee (2004) and the 246th report of the Law Commission (2014) highlighted the challenges associated with the arbitration legal regime. Ultimately, the Arbitration and Conciliation (Amendment) Act, 2015, 2019, and 2021 brought in crucial changes to the 1996 statute to overcome the shortcomings.

LEGAL AND INSTITUTIONAL FRAMEWORK OF ARBITRATION IN INDIA

• Section 89 of the Civil Procedure Code, 1908 provides that opportunity to the people, if it appears to court there exist elements of settlement outside the court then the court formulate the terms of the possible settlement and refer the same to Arbitration, Conciliation, Mediation or Lok Adalat.
• The Legal Services Authority Act, 1987 is the basis for Lok Adalat and free legal aid.
• The Arbitration and Conciliation Act, 1996 applies to arbitrations inside and outside India.
• The Arbitration Act was also recently amended in 2019 and 2021.
• There have been a series of judicial decisions and legislative amendments in recent years that apply partly prospectively and partly retrospectively.
• An Arbitration clause is a section of the contract that defines the rights of the parties in the case any dispute arises over the contractual obligation
• Arbitration Tribunalmeans a sole arbitrator or a panel of arbitrators.
• An arbitration award is an award granted by the arbitrator in the proceeding before it. This award can be a monetary award and it can also be a non-financial award.

SALIENT FEATURES OF The Arbitration and Conciliation (Amendment) ACT, 2019&2021

• Arbitration Council of India: The Act seeks to establish an independent body called the Arbitration Council of India (ACI) for the promotion of arbitration, mediation, conciliation, and other alternative dispute Redressal mechanisms.
• Appointment of arbitrators: Under the Act, the Supreme Court (for International) and High Courts (for domestic) may now designate arbitral institutions, which parties can approach for the appointment of arbitrators.
• Completion of written submissions: Currently, there is no time limit to file written submissions before an arbitral tribunal.  The act mandates that the written claim and the defense to the claim in an arbitration proceeding should be completed within six months of the appointment of the arbitrators.
• Confidentiality of proceedings: The act provides that all details of arbitration proceedings will be kept confidential except for the details of the arbitration award in certain circumstances
• The amendment in 2021 did away with the qualifications prescribed for the arbitrators in the 1996 Act and the same will be prescribed by the Arbitration Council. The Act also provided for an unconditional stay by the courts on the enforcement of arbitration awards based on ‘fraud or corruption” in the contract.

AD HOC ARBITRATION AND INSTITUTIONAL ARBITRATION

• There are two types of arbitration – institutional arbitration and ad hoc
• Institutional arbitration refers to the administration of arbitration by an institution under its rules of procedure.
• The institution provides support for the conduct of the arbitration in the form of appointment of arbitrators, case management services including oversight of the arbitral process, etc.
• Ad hoc arbitration is a form of arbitration where the parties and the arbitrators independently determine the procedure, without the involvement of an arbitral institution.
• Institutional arbitration differs from ad hoc arbitration in that several aspects of the arbitral proceedings, such as the appointment of arbitrators, the conduct of the arbitral proceedings, scrutiny of awards, etc. May be determined by the arbitral institution.

The advantages of institutional arbitration over ad hoc arbitration

• Institutional arbitration offers the advantages of providing a clear set of arbitration rules and timelines for the conduct of the arbitration.
• Support from trained staff who administers various stages of the arbitration proceedings, a panel of arbitrators to choose from to decide the dispute are also available.
• Ad hoc arbitration is vulnerable to the risk of dilatory tactics, which increases delays and costs.
• Moreover, where parties are not sophisticated and do not have sufficient knowledge regarding arbitral proceedings, institutional arbitration is highly preferable.
• In India, ad hoc arbitrations tend to be protracted and costly in some cases in the absence of monitoring.
• One of the reasons for these delays and costs is that the fees of arbitrators are charged on a sitting-by-sitting basis without any regulation.

BENEFITS OF ARBITRATION IN INDIA

AREA: ENFORCEMENT

EXPLANATION: Ease of enforcement is often an important deciding factor in favor of arbitration. India is a signatory to the New York Convention. If a party receives a binding award from a country that is a signatory to the New York Convention and the award is made in a territory that has been notified as a ‘convention country’ by India, the award would then be enforceable in India.

AREA: LENGTH OF PROCEEDINGS

EXPLANATION: Indian courts are infamous for endemic delays in resolving commercial disputes.  Arbitration can be substantially quicker as all India seated arbitrations must be completed within 12 months of the constitution of the tribunal.

AREA: NEUTRALITY AND EXPERTISE

EXPLANATION: In arbitration, parties can refer their disputes to a neutral forum.  This is particularly attractive in the context of cross-border transactions.

AREA: PROCEDURAL FLEXIBILITY

EXPLANATION: Arbitration allows parties to tailor procedures to the needs of a particular dispute. In practice, parties often choose institutional arbitration and simply adopt the standard rules and procedures of their chosen institution.

AREA: CONFIDENTIALITY

EXPLANATION: Arbitration hearings are usually held in private and a party is involved in arbitration proceedings is also confidential. By contrast, Indian court proceedings, with some exceptions, are almost always open to the public.

AREA: MAKING INDIA A GLOBAL HUB

EXPLANATION: To develop India as a global hub for international arbitration, we must open ourselves to the outside world and incorporate best practices for creating word class Institutional and legal procedures.

AREA: EASE OF DOING BUSINESS

EXPLANATION: As per the EoDB Ranking by World Bank, India’s position is 163 in the Enforcement of Contract indicator. Thus, foreign investors are increasingly doubtful about the timely delivery of justice, which affects the success of programs like ‘Make in India’.Having a streamlined arbitration regime encourages foreign investments in a country.

WHAT ARE THE PROBLEMS OF ARBITRATION IN INDIA?

LACK OF CREDIBLE ARBITRAL INSTITUTIONS: Arbitral institutions in India lack access to quality legal expertise and lack exposure to international best practices. Thus the rules and practices followed by these arbitral institutions are often outdated and inadequate.

MISCONCEPTIONS RELATING TO INSTITUTIONAL ARBITRATION: Parties consider institutional arbitration to be substantially more expensive than ad hoc arbitration. This assessment is largely misconceived because numerous arbitral institutions charge very reasonable fees.

FAILURE BY THE GOVERNMENT AND ITS AGENCIES TO USE INSTITUTIONAL ARBITRATION: The general conditions of contract used by the Government and PSUs often contain arbitration clauses, but these clauses usually do not expressly provide for institutional arbitration. For instance, if the government, were to adopt institutional arbitration as a regular practice, the volume of cases moving to arbitral institutions would provide a powerful impetus to institutional arbitration.

JUDICIAL ATTITUDES TOWARDS ARBITRATION: Delays in Indian courts and excessive judicial involvement in arbitral proceedings have resulted in India not being favored as a seat of arbitration. It has contributed to discouraging foreign parties to arbitrate in India. The high pendency of litigation before Indian courts means that arbitration-related court proceedings take a long time to be disposed of.

HIGH COSTS AND INEFFICIENCY: Arbitration proceedings are often dragged on by lawyers on either side filing misconceived applications at various stages of the proceedings. Litigants, too, at times contribute to this delay with their stubbornness in not conceding a loss or defeat.

ISSUE OF TRANSPARENCY: Arbitration hearings are generally held on camera, and decisions are usually not publicly accessible, giving rise to doubts about impartiality and fairness. The aggrieved party may well be stuck with the award and precluded forever from challenging it. In 1984, in Tarapore and Company v. Cochin Shipyard Ltd, the Supreme Court had remarked that an honest man dreads arbitration more than lawsuits. The same fear persists today.

HOW TO INSTITUTIONALISE ARBITRATION IN INDIA?

JUSTICE BN SRIKRISHNA COMMITTEE RECOMMENDATIONS: 

1. Arbitration Promotion Council of India – An autonomous body called the Arbitration Promotion Council of India (“APCI”) and having representation from various stakeholders may be set up by amendment to the ACA for grading arbitral institutions in India.  (The ACA Amendment 2019 provides for an Arbitration Council of India, which is yet to be constituted)
2. Accreditation of arbitrators – The APCI may recognize professional institutes that provide for accreditation of arbitrators. Accreditation may be made a condition for acting as an arbitrator in disputes arising out of commercial contracts entered into by the government and its agencies.
3. Creation of a specialist arbitration bar – Measures may be taken to facilitate the creation of an arbitration bar by providing for the admission of advocates on the rolls of the APCI as arbitration lawyers, encouraging the establishment of fora of young arbitration practitioners, and providing courses in arbitration law and practice in law schools and universities in India.
4. Creation of a specialist arbitration bench – Judges hearing, arbitration matters should be provided with periodic refresher courses in arbitration law and practice.
5. Role of the government and the legislature in promoting institutional arbitration – Measures to promote institutional arbitration, such as facilitating the construction of integrated infrastructure for arbitration in major commercial hubs, adopting arbitration policies providing for institutional arbitration in commercial disputes involving the government, maybe adopted.
6. Changes in ADR culture – Measures may be taken to promote the use of ADR mechanisms, including requiring the provision of mediation facilities by arbitral institutions.
7. Bilateral investment arbitrations involving the Union of India –This assumes relevance in the case of Cairn Energy where the company has accused India of not honoring the Arbitration Award in its favor and also in the context of the revised framework of BIT from India. A few recommendations for effective dispute management and resolution, and dispute prevention include: (a) appointing the Department of Economic Affairs as the Designated Representative of the Government in existing BITs; (b) creating the post of an International Law Adviser, who shall advise the Government and coordinate dispute resolution strategy for the Government in disputes arising out of its international law obligations,

NEW DELHI INTERNATIONAL ARBITRATION CENTRE (NDIAC) ACT, 2019:

1. The Act provides for the setting up of an independent and autonomous body, for institutional arbitration.
2. NDIAC will conduct arbitration, mediation, and conciliation proceedings (Yet to be constituted)
3. NDIAC will establish a Chamber of Arbitration which will maintain a permanent panel of arbitrators.
4. Further, the NDIAC may also establish an Arbitration Academy for training arbitrators and researching the area of alternative dispute resolution.
5. It will facilitate the conduct of arbitration and conciliation in a professional, timely, and cost-effective manner and assist in the conduct of ADRs.

INTERNATIONAL EXPERIENCe: SINGAPORE MODEL

• The SIAC (Singapore International Arbitration Centre) has benefited significantly from the support they enjoyed from their government.
• The SIAC was established as a part of the Singapore government’s effort to create an arbitration industry in Singapore.
• It was set up by the government with two governmental agencies, the Economic Development Board and the Trade Development Board as its shareholders, and operated for many years under their aegis.
• The government also played a role in promoting the SIAC at an international level, getting international arbitration practitioners to be associated with the institution.
• The SIAC received financial assistance and/or infrastructural support from the government.
• The Indian government, like the Singapore government, could consider assisting arbitral institutions in India by building suitable infrastructures such as integrated dispute resolution facilities in major commercial centers such as Mumbai and Delhi.

WAY FORWARD

• Effective use of Technology such as e-filing, creating a database of cases, big data analytics, Online Dispute Resolution, video conferencing, etc. needs to be scaled up and be put to extensive use in the process of arbitration
• The Law Commission of India has in its 246^thReport has noted the problems in ad hoc arbitrations and therefore recommends that India needs to promote institutional arbitration where a specialized institution with a permanent character aids and administers the arbitral process.
• Fast-tracking of disputes in case of government contracts requires an independent settlement committee, which could be approached by the stakeholders at any stage of proceedings for the resolution of disputes.
• Judicial cooperation is vital to give effect to the law of arbitration. Therefore, an effort is to be made to identify those steps which would make a good balance between judicial and arbitration, at pre, during, and post arbitral proceedings.

CONCLUSION: Apart from legal reforms, arbitration promotion also needs further support on a few other fronts like the need to decentralize dispute resolution mechanisms. It would also need an administrative mechanism to ensure that arbitration matters have been handled separately and efficiently. For this, the government needs to create an enabling framework for institutional arbitration. The proposed ACI be set up expeditiously for providing leadership in the arbitration landscape of the country. These measures are a must to “resolve in India” which will create a conducive environment for attracting investment and facilitating economic development.