As commercial disputes increasingly bypass India’s overcrowded courts, there is growing disquiet over the efficiency of the arbitration process
There is little disputing the fact that only the very patient should knock on the doors of a court in India. But a 4 July ruling from Delhi High Court, in Ariba India Pvt Ltd v M/S Ispat Industries Ltd, suggests that the fate of those who use arbitration to resolve their disputes may not be much better.
Ariba India documents the travails of two Indian companies caught up in an arbitration that in four and a half years of sporadic hearings – one after an interval of 13 months – had only got as far as examining one witness. Terminating the mandate of the arbitration tribunal for failure to act “without undue delay”, Justice Vipin Sanghi noted in a 75-page judgment that the cost to the claimant had already reached 5.6% of the amount at stake.
The delays described in Ariba India, which the court said “makes a mockery of the institution of arbitration”, are certainly not unique. Precedents it cites include a case triggered by a dispute that went to arbitration, but remained unresolved even after nine years. The Arbitration and Conciliation Act, 1996 – unlike its predecessor, the Arbitration Act, 1940 – does not specify how long an arbitral tribunal can take to make an award.
An efficacious remedy?
What makes Ariba India remarkable is the stature of the arbitrators involved: a retired chief justice of India and two former high court judges. For, although retired judges are the arbitrators of choice in India, few take the risk of questioning their commitment in an open court.
“Arbitration needs to be more than just an alternate to the courts; it needs to be an efficacious alternate,” says Mukul Talwar of Delhi-based Talwar Associates, who was lead counsel for Ariba India. “The focus has to be on both speed and costs and our purpose in approaching the courts was to ensure that arbitration remains an affordable and viable remedy.”
Justice Sanghi’s landmark judgment will no doubt embolden parties who are similarly trapped in endless rounds of arbitration hearings in India – the vast majority of which are ad hoc arbitrations. When arbitration is done in this manner, the parties choose the arbitrators, who draw up a schedule for hearings and implement it. Whether that happens with any rigour depends on the arbitrators and on how much clout the parties command.
A recent high-profile ad hoc arbitration between Essar Oil and United India Insurance that began in July 2010 appears to have taken just 11 months to reach closing submissions. “The written closing submissions were filed in March, with reply submissions filed in April, and oral submissions in May,” says Jeremy Stuart-Smith QC, a UK-based barrister who was one of five counsel for United India Insurance. The two companies were in arbitration following a long-drawn-out dispute over a ₹30 billion (US$655 million) advanced loss of profit insurance claim by Essar Oil, which is said to be one of India’s largest insurance claims.
Arbitrations run by institutions are rare. “Institutional arbitration as a concept is still in its infancy here,” says Shaan Katari Libby, registrar of the Nani Palkhivala Arbitration Centre (NPAC) in Chennai.
The NPAC was founded in 2005 but has not as yet succeeded in attracting any clients to its institutional arbitration services. It is, however, a popular venue for ad hoc arbitrations, with 30 to 40 hearings being held each month on its premises.
Libby, who is on a mission to educate companies and public bodies about the advantages of institutional arbitration, says it is a challenge to convince companies “that we have an in-house registrar and very detailed comprehensive rules to govern arbitrations”.
An arbitral institution that has had more success is LCIA India, which set up shop in New Delhi in 2009 as the first independent subsidiary of the London Court of International Arbitration (LCIA). It is currently administering two arbitrations and expects to make its first arbitral award “shortly”, according to Ajay Thomas, LCIA India’s registrar. He too sees educating members of the in-house legal community and law firms about the advantages of institutional arbitration as his primary role for the moment. “Given the feedback from the Indian business and legal communities, the future promises to be busy and exciting for the LCIA India casework team.”
Meanwhile, those seeking an institution to oversee their arbitration proceedings venture outside India. In the first six months of 2011 alone, of 121 disputes referred for arbitration to the LCIA in London, 10 cases involved parties from India.
The Singapore International Arbitration Centre (SIAC) handled 36 arbitrations involving at least one Indian party in 2010. The SIAC says that there has been nearly a 200% increase in the number of such cases in the past two years, while the monetary quantum of the disputes involved has gone up by more than 140% for the same period.
According to Vivekananda N, the deputy head for South Asia at SIAC, this implies that “not only are more Indian parties opting to arbitrate at the SIAC but that higher value contracts involving Indian parties increasingly provide for arbitration at the SIAC”.
Perhaps spurred on by this growth in Indian clients, the SIAC is in the process of opening a representative office in Mumbai and is awaiting regulatory approvals for it. It may, however, decide to proceed with caution at a time when sensitivities towards foreign lawyers and legal institutions are so high. The Association of Indian Lawyers has filed a civil suit against LCIA India, accusing it of bringing foreign lawyers and foreign law into India under the garb of arbitration. Delhi High Court ordered LCIA India on 25 July to file a written statement. The case is ongoing.
While the challenges of obtaining an award can be considerable, the struggle to enforce it can overwhelm even the most determined and patient of parties.
“We in India have developed into a fine art how not to honour an award – domestic or foreign,” said Fali Nariman, an eminent senior counsel and authority on arbitration, while recently speaking at LCIA India. He was delivering LCIA India’s first annual arbitration lecture, titled “Ten steps to salvage arbitration in India”.
Expanding scope of the judiciary
While parties looking to challenge an arbitral award usually search for loopholes in the applicable laws, in India they can also look to what Sumeet Kachwaha, a partner at Delhi-based Kachwaha & Partners, calls “judge-made grounds” for doing so. This includes, most notably, three judgments from the Supreme Court that widen the scope for courts to scrutinize an arbitral award.
The first came in 2002 in Bhatia International v Bulk Trading SA & Anr, where a three-judge bench held that part 1 of the Arbitration and Conciliation Act, which focuses on domestic arbitrations and gives the court wide powers to set aside an award, would apply to an international commercial arbitration unless the parties have agreed to exclude it. A domestic arbitration is one where both parties are Indian and an international commercial arbitration involves least one non-Indian party.
Hot on its heels came ONGC v Saw Pipes Ltd in 2003 – a decision that expanded the scope of section 34 of the act. A two-judge bench of the Supreme Court held that a domestic award could be set aside on the grounds that it was “patently illegal” and so was contrary to the public policy of India. Then in 2008 came a highly controversial ruling, Venture Global Engineering v Satyam Computers Systems, where a three-judge bench extended to foreign awards the public policy challenge, which until then could be used only for domestic arbitral awards.
This steady expansion of the role of the judiciary in arbitration and arbitral awards set alarm bells ringing both inside and outside India. Critics argue that these rulings go against the letter and spirit of the Arbitration and Conciliation Act, which unlike previous legislation in this regard, aims to put in place speedy arbitration with minimal court intervention.
In addition, the judgments have been criticized as being contrary to the international norms of arbitration as laid down in the Model Law on International Commercial Arbitration, promulgated by the United Nations Commission on International Trade Law (UNCITRAL). India’s Arbitration and Conciliation Act, which covers both international and domestic arbitrations, is based on UNCITRAL’s model law.
Voting with their feet
To bypass some of the expanded powers of an Indian court, parties can seat arbitrations in venues outside India. This may be possible only if a foreign party is involved, but even then any award that needs to be enforced in India requires the go-ahead from an Indian court. A domestic award on the other hand, carries the same weight as a decree from a court and if there is no challenge it can be executed without any intervention by the courts.
Parties who intend to settle disputes through international arbitration also often state in the arbitration agreement that part I of the Arbitration and Conciliation Act will not apply if arbitration is necessary. This protects the foreign arbitral award from scrutiny by an Indian court.
However, Sidharth Sharma an in-house counsel at Tata Sons, believes “it is not advisable to exclude part 1 as there are instances where court assistance is required”.
He points out that if an arbitration is held outside India, but the goods or assets under dispute are located within India and at risk, only an Indian court can order their protection. If this is necessary the party in question would need to apply to the relevant court under section 9 of the act. This section lies within part 1.
Similarly, if a witness is reluctant to give evidence before an arbitration tribunal, section 27 of the act allows a party to seek the court’s assistance to compel the individual to do so. As this section also lies within part 1, Sharma says that it would be risky to draw up an arbitration agreement that expressly excludes it.
The pendulum swings
In addition, Sharma says: “increasingly, the urge [on the part of the courts] to extend part 1 to arbitrations that happen outside India is slowing”. As such, it may not be necessary to specifically exclude part 1.
The fact that India’s judiciary is moving towards being less interventionist is evident from the ruling in Videocon Industries Ltd v Union of India & Anr, reached on 11 May by a two-judge bench of the Supreme Court. In it the court held that if parties to an international arbitration have agreed to be governed by a law other than Indian law, this would amount to an implied exclusion of part 1 of the Arbitration and Conciliation Act. As a result, courts in India will be prevented from looking into the merits of a foreign award made by the arbitral tribunal.
While judgments such as this go some way towards reining in the courts, any real change to the arbitration regime in India will need an amendment to the Arbitration and Conciliation Act. The Ministry of Law and Justice, which in April 2010 issued a consultation paper on amendments to the act, is clearly aware of this, but has not taken further action so far.
Despite India’s reputation as an arbitration-unfriendly jurisdiction, there is little to show that foreign parties are treated any different to domestic parties. Relying on statistics from the International Council for Commercial Arbitration, Kachwaha points out that in the last 15 years India has refused to enforce only about 7% to 8% of foreign awards. Globally the average rate of refusal is 10%.
Still, in at least one case – MSM Satellite (Singapore) Pte Ltd v World Sport Group (Mauritius) Limited – an Indian court intervened even though there was no Indian party involved in an arbitration that was being held in Singapore. Ruling on this case in September 2010, Bombay High Court explained that it was a “rarest of rare” case and it was passing an injunction order as there was an “inter-connection and close proximity in the obligations of parties” with an Indian party, the Board of Control for Cricket in India.
How all of this will translate into perceptions of international and India-related arbitration is debatable. For now, parties opting for this method of dispute resolution will profit from caution, thoughtful drafting and a willingness to accept the possibility of a protracted settlement process.
Exceptions to enforcement
A little-known fact about the enforcement of foreign arbitral awards in India is that not all New York Convention countries are treated equally
India is one of 149 signatories to the convention on the recognition and enforcement of foreign arbitral awards – the New York Convention. However, section 44 of the Arbitration and Conciliation Act, 1996, says a foreign award is one that is made in a territory that has been notified in the official gazette by the central government.
As it stands only 45 countries have been notified. They are as follows: Austria, Belgium, Botswana, Bulgaria, Central African Republic, Chile, Cuba, Czechoslovak Socialist Republic, Denmark, Ecuador, Arab Republic of Egypt, Finland, France, German Democratic Republic, Federal Republic of Germany, Ghana, Greece, Hungary, Italy, Japan, Kuwait, Republic of Korea, Malagasy Republic, Malaysia, Mexico, Morocco, Nigeria, the Netherlands, Norway, Philippines, Poland, Romania, San Marino, Singapore, Spain, Sweden, Switzerland, Syrian Arab Republic, Thailand, Trinidad and Tobago, Tunisia, Union of Soviet Socialist Republics, United Kingdom, United Republic of Tanzania, and United States of America.
“The political breakups of these countries would also be included,” says Sumeet Kachwaha, the managing partner at Kachwaha & Partners. “For example, Ukraine, Kazakhstan, etc., would be included as the USSR figures in the list.”
A notable exception to this list is Hong Kong, which is the seat of arbitration for several disputes between Indian and Chinese parties including those that chose to use the services of the Hong Kong International Arbitration Centre. As such, while an international party could obtain an arbitral award against an Indian party in Hong Kong and it can be enforced in any New York Convention country, it may be difficult to enforce in India.
A way around this (as stated in a 1963 decision of the Supreme Court in Badat & Co v East India Trading Co) could be to bring a civil suit in India based on a foreign award, provided the award is complete and final in the country where it was made. If it has to go through some further process in that country, e.g. be converted into a judgment, then that process must be completed before it can be brought into India for enforcement.
“Not many are aware of this pitfall and sometimes they are in a fix once the award is rendered,” says Kachwaha.