India’s Reputation As ‘Arbitration-Unfriendly’ Jurisdiction: Panel Blames Interventionist Courts, Lack Of Govt Support [Read Report]

A high-level committee set up by the Centre to review institutionalisation of arbitration mechanism has found that judicial intervention and failure of the government and its agencies to use institutional arbitration has, among others, led to India’s reputation as an “arbitration-unfriendly” jurisdiction.

The HLC, in its report, has suggested various reforms for promoting arbitration as a mechanism for dispute resolution and to promote institutional arbitration over ad hoc arbitration.

While reviewing institutionalisation of arbitration in India, the committee, set under the chairmanship of Justice BN Srikrishna, retired judge of the Supreme Court, also believed that developing international-level arbitration institutions with complete facilities is important and that “one of the important incentives for the creation of an arbitration-friendly ecosystem is the training of judicial officers to understand the supervisory jurisdiction of courts in the arbitral process”.

The HLC was set up by the Ministry of Law and Justice on January 13 to review the institutionalisation of the arbitration mechanism in India and submit a report on suggested reforms.

Other members of the committee are Justice RV Raveendran, Justice S Ravindra Bhat, Attorney General of India KK Venugopal, Additional Solicitor General of India  PS Narasimha and senior advocate Indu Malhotra.

It also comprises Research Director of Vidhi Centre for Legal Policy Arghya Sengupta, Deputy Secretary General FICCI Arun Chawla, Senior Director CII Vikas Mohan and Secretary of Department of Legal Affairs, GoI, Suresh Chandra.

Institutional Arbitration Over Ad Hoc

Institutional arbitration refers to the administration of arbitration by an institution in accordance with 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, venues for holding hearings, etc. It differs from ad hoc arbitration in that several aspects of the arbitral proceedings such as appointment of arbitrators, conduct of the arbitral proceedings, scrutiny of awards, etc. may be determined by the arbitral institution.

Despite the existence of numerous arbitral institutions in India, parties in India prefer ad hoc arbitration and regularly approach courts to appoint arbitral tribunals under the relevant provisions of the Arbitration and Conciliation Act.

The preference for ad hoc arbitrations by Indian parties is not limited to arbitrations where the amounts in dispute are small, the HLC found, as it cited the example of construction and infrastructure, one of the fastest growing sectors in the Indian economy, which spends crores of rupees on resolution of disputes. In 2001 alone, Rs. 54,000 crores of capital was blocked in construction sector disputes. Dispute resolution in this sector consists mostly of ad hoc arbitration.

“Broadly, it has been accepted that ad hoc arbitration is more effective in cases where parties to a dispute cooperate with each other, and can mutually agree to constitute a tribunal and select arbitrators to resolve their dispute. However, typically once a dispute reaches arbitration, it is highly likely that parties no longer want to cooperate. In such a case, ad hoc arbitration is vulnerable to the risk of dilatory tactics, which increases delays and costs. A developed arbitral institution can handle these challenges adequately,” the HLC found.

There are over 35 arbitral institutions in India. These include, in addition to domestic and international arbitral institutions, arbitration facilities provided by various public sector undertakings (PSUs), trade and merchant associations, and city-specific chambers of commerce and industry.

A large number of these arbitral institutions administer arbitrations under their own rules or under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL Arbitration Rules).

Some of the Indian institutions that administer arbitrations include the ICADR, the Indian Council of Arbitration (ICA), the Delhi International Arbitration Centre (DAC), and recently, the Mumbai Centre for International Arbitration (MCIA). Many of these institutions have their own sets of arbitral rules, panels of arbitrators, and offer venues for conducting arbitral proceedings.

They offer varying degrees of administrative support for arbitrations. While these institutions are growing in popularity, their caseload is insignificant compared to those of well-established international arbitral institutions, the HLC noted.

“The promotion of institutional arbitration in India by strengthening Indian arbitral institutions has also been identified as being critical to encouraging dispute resolution through arbitration. Though various arbitral institutions have been set up in India, particularly in the last five years, they have not been preferred by parties, who have leaned in favour of ad hoc arbitration or arbitrations administered by arbitral institutions located abroad,” it noted.

It was in this context that the HLC was set up to identify the roadblocks to the development of institutional arbitration, examine specific issues affecting the Indian arbitration landscape, and prepare a roadmap for making India “a robust centre for international and domestic arbitration”.

The committee in its report has recommended strengthening of institutional arbitration in India through measures such as the grading of arbitral institutions, the accreditation of arbitrators, the creation of a specialist arbitration bar and bench, and the provision of governmental and legislative support for institutional arbitration.

It also recommends further amendments to the ACA to clear ambiguities in the legislation and promote the use of India as a seat of arbitration.

Why Ad Hoc Arbitration Is Preferred In India?

The HLC found various drawbacks that made India arbitration-unfriendly and compelled parties to choose ad hoc over institutional arbitration. Lack of credible arbitral institutions, misconceptions about institutional arbitration being more expensive than ad hoc arbitration and judicial attitude towards arbitration were some of the reasons.

Judicial attitude towards arbitration

The report says that delays in Indian courts and excessive judicial involvement in arbitral proceedings have resulted in India not being favoured as a seat for arbitration. While this may not have a direct bearing on arbitral institutions, it has contributed to discouraging foreign parties to arbitrate in India. Parties often delay arbitration proceedings by initiating court proceedings before or during arbitral proceedings, or at the enforcement stage of the arbitral award. The high pendency of litigation before Indian courts means that arbitration-related court proceedings take a long time to be disposed. The Commercial Courts Act sought to remedy this situation by setting up commercial courts at the district level or commercial divisions in High Courts having ordinary original civil jurisdiction.

Indian courts’ tendency to frequently interfere in arbitral proceedings has also contributed to India’s reputation as an ‘arbitration-unfriendly’ jurisdiction. It is a well-known fact that courts in India are generally interventionist when it comes to regulating arbitration proceedings, whether at an initial stage of the arbitral proceedings (such as the appointment of arbitrators, referral of disputes to arbitration or grant of interim relief) or at the enforcement stage.

They have, despite good intentions and justifications, often misjudged the course to take, doing justice in the case at hand but laying down questionable precedent for the future. Further, inconsistent judicial precedent on several crucial issues has contributed to uncertainty regarding the law, with severe consequences for India’s reputation as a seat of arbitration.

 Minimising judicial intervention

The 2015 amendments, in two important respects, signal a paradigm shift towards minimising judicial intervention in the arbitral process, the HLC has found. First, the amendment to section 9 of the Arbitration and Conciliation Act (ACA) provides that courts should not entertain applications for interim relief from the parties unless it is shown that interim relief from the arbitral tribunal would not be efficacious. Second, the amendment to section 36 of the ACA provides that the filing of an application to set aside an arbitral award will no longer trigger an automatic stay on the operation of that award. Prior to the 2015 Amendment Act, both section 9 and section 36 enabled uncooperative parties to engage in dilatory tactics through unnecessary involvement of the courts. However, continuing confusion regarding the retrospective applicability of the 2015 Amendment Act has limited its impact in creating a pro-arbitration climate.

Thus, India continues to be viewed largely as an arbitration-unfriendly jurisdiction.

Failure by Govt, its agencies to use institutional arbitration

As per the HLC, another reason for a weak institutional arbitration framework in India is the lack of sufficient governmental support for the same over the years. While the Government is the most prolific litigant in India, it can do more in this capacity to encourage 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.

Further, government policy on arbitration requires a relook if institutional arbitration is to become the norm, particularly for disputes valued at large amounts. For instance, if the government, being the biggest litigant, were to adopt institutional arbitration as regular practice, the sheer volume of cases moving to arbitral institutions would provide a powerful impetus to institutional arbitration.

Recommendations

1. Setting up a flagship arbitral institution: The committee recommends developing International Centre for Alternative Dispute Resolution (ICADR), an arbitral institution receiving significant funding from the Government, as a flagship arbitral institution. It has also examined the issues of management and resolution of bilateral investment treaty (BIT) arbitrations involving the Union of India, and makes specific recommendations for effective dispute resolution, dispute management and prevention.


2. Better facilities, infrastructure and expertise,


3. An active legislature which regularly updates arbitration legislation to reflect best practices and resolve ambiguities in judicial precedent is essential for creating a supportive arbitral seat where arbitral institutions can flourish. The Indian government should consider mechanisms that allow the Indian legislature to play a similar role.


4. Sustained positive action by governments, business and legal communities and these institutions themselves.


5. Establishment of body for grading arbitral institutions: There are over 35 arbitral institutions currently functioning in India. The establishment of a body at the national level, which shall grade arbitral institutions on the basis of criteria related to infrastructure, personnel and performance, is required.


6. It has also suggested various statutory amendments to promote institutional arbitration in India.

Read the Report Here