Arbitration has gained traction as a means of avoiding India’s overburdened courts. Despite its appeal, results may not always match expectations

Nish Shetty explains

In April 2009 the London Court of International Arbitration (LCIA) became the first international arbitration institution to set up shop in India. This move by the LCIA coincided with a surge in the number of cases being referred to international arbitration at the LCIA and other leading institutions, including the Singapore International Arbitration Centre and the International Chamber of Commerce. The surge is in no small part due to the increased level of cross-border commercial activity in the past decade.

The Indian court system is even busier. Recent statistics suggest that almost 56,000 cases were pending before the Indian Supreme Court at the end of 2009. The number of pending cases in high courts and district courts exceeds 11 million. The huge volume of pending cases causes long delays. As a result, most international investors see international arbitration as a more efficient method for resolving commercial disputes with Indian parties.

The potential efficiencies associated with arbitration may well be attractive. However, companies doing business in India, or with Indian counterparties, should also consider issues such as enforceability and cost when choosing between international arbitration and litigation in India’s courts.

Practice and perception

Where parties agree to submit disputes related to a particular contract or subject matter to international arbitration they cannot, as a general rule, commence proceedings related to that contract or subject matter in domestic courts. International rules, which aim to expressly limit the powers of domestic courts to intervene in international arbitration proceedings, reflect the belief that the efficient resolution of commercial disputes is best achieved by holding the parties to their agreement that disputes will be referred to arbitration.

The 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (known as the New York Convention) and the 1985 Model Law on International Commercial Arbitration promulgated by the United Nations Commission on International Trade Law require domestic courts to play a predominantly supportive role in relation to international arbitration. In particular, the power of domestic courts to refuse to recognize and enforce awards made by arbitration tribunals is strictly limited. Rights of appeal against international arbitration awards, if they exist at all, are also limited.

In this respect, a series of decisions by Indian courts has caused concern among lawyers and users of international arbitration. According to one commentator, parties to arbitrations with a connection to India may unwittingly become “caught in a litigating jamboree”.

Time is money: Clerks ply their trade outside one of India’s busy courts.
Time is money: Clerks ply their trade outside one of India’s busy courts.

One of the most controversial decisions was rendered by the Supreme Court in January 2008, in a dispute between a US company, Venture Global Engineering (VGE), and Satyam Computer Services. The two companies had set up a joint venture and agreed to submit disputes relating to the joint venture to arbitration in London. However, when a dispute arose and the award went against VGE, it resisted efforts by Satyam to enforce the award in the US by asking an Indian court to set aside the award on the grounds that it was contrary to certain Indian statutory provisions. The matter reached the Supreme Court which, relying on a number of earlier decisions including Bhatia International v Bulk Trading SA and Oil & Natural Gas Corporation v SAW Pipes, decided that the Indian courts could set aside awards made in arbitrations conducted outside India.

The VGE decision has been criticised by lawyers both inside and outside India. Indeed, many observers have claimed that the Supreme Court’s assertion of a power to review and set aside awards rendered by arbitration tribunals outside India is contrary to international norms, as reflected in the New York Convention and the UNCITRAL Model Law.

In the minds of many international investors, the VGE decision tarnished India’s reputation and indicated that the country was hostile to the enforcement of foreign arbitral awards. The reality – according to at least one commentator – is rather different. Since the introduction of India’s Arbitration Act in 1996, just one award out of a total of 17 has been successfully challenged.

However, in part due to the negative publicity generated by the VGE decision, the Indian Law Ministry recently initiated a review of the Arbitration Act. Pending any revision to the law, it is possible for parties who have agreed to submit disputes to international arbitration (i.e. arbitration outside India) to exclude the Indian courts’ power to set-aside the arbitration award by providing in the arbitration clause that Part I of the Indian Arbitration Act shall not apply in the event of any arbitration proceedings.

The enforceability advantage

While courts may not be bound to enforce judgments issued by foreign courts, international arbitration awards are enforceable in more than 140 countries worldwide (including India) that are parties to the New York Convention. An international survey of corporate counsel conducted by PricewaterhouseCoopers in 2008 confirmed that the international enforceability of arbitration awards was regarded as a major advantage of international arbitration.

Arbitrating in IP disputes

Certain features of arbitration make it particularly suited for resolving intellectual property (IP) disputes. Firstly, as arbitration proceedings are confidential, the documents and other information involved in the dispute can be protected. Secondly, as it is possible to appoint arbitrators with expertise in the subject matter of the dispute, it is possible that arbitration will result in quicker and better informed decision-making. Arbitration of IP-related disputes may also allow parties to avoid the expense and delay of commencing separate proceedings in multiple jurisdictions.

However, arbitration may not be appropriate for all IP-related disputes. For example, some countries do not allow disputes regarding patent infringement to be referred to arbitration. As such, parties that consider arbitration for solving IP-related disputes must get legal advice from all the relevant jurisdictions to confirm it is the right choice. In India, while disputes relating to the assignment, licensing, transfer or sale of IP rights may be freely submitted to arbitration, those that involve infringement of IP rights may not be suitable for effective resolution by arbitration as relief under the Patents Act can only be granted by the courts.

In India, foreign judgments may be enforced through section 44 of the Code of Civil Procedure (CPC), but only if the judgment was issued by a competent court of a reciprocating territory. At least ten countries, including Singapore and the United Kingdom, have been recognized as reciprocating territories. However, this is a far smaller number than the 144 countries that are signatories to the New York Convention.

Enforcement of a foreign judgment in India is also subject to other conditions imposed by section 13 of the CPC. For example, a foreign judgment will not be enforced in India if it sustains a claim that is founded on a breach of Indian law or if it was obtained by fraud. Determining if the conditions for enforcing a foreign judgment are satisfied may require an extensive hearing, particularly if one party decides to resist enforcement. As such enforcement proceedings can expose the parties to the risk of delays caused by the huge backlog of cases that are pending before the Indian courts.

On balance, it is likely to be easier and probably quicker to enforce an international arbitration award in India than it will be to enforce a foreign judgment. Such an award would also be enforceable against an Indian counterparty’s offshore assets if it were located in a country that is a signatory to the New York Convention.

Time and cost concerns

Time and cost savings were once seen as important advantages of international arbitration. However, in recent years the tables appear to have turned. Nowadays, corporate counsel and practitioners frequently cite excessive delays and costs in international arbitration as potential disadvantages.

The price of justice: India’s courts may be cheaper than international arbitration, but they are rarely faster.
The price of justice: India’s courts may be cheaper than international arbitration, but they are rarely faster.

The Supreme Court of India acknowledged these concerns in the recent case of Dolphin Drilling v Oil and Natural Gas Corporation (ONGC). In that case Dolphin, a Norwegian company, invoked an arbitration clause in a contract in order to resolve a payment dispute. ONGC resisted attempts to use arbitration as it was already involved in another arbitration with Dolphin and complained to the court that arbitration was extremely time consuming and expensive. ONGC argued that arbitration under the arbitration clause was a “one time measure” and Dolphin could not have repeated recourse to arbitration, even though a distinct and unconnected dispute had arisen. Although the Supreme Court rejected ONGC’s arguments it commented that “it is unfortunate that arbitration in this country has proved to be a highly expensive and time-consuming means for resolution of disputes”.

Litigation in India may actually be cheaper than international arbitration, but it is very unlikely to be faster. Some estimates suggest a case in India could take between 15 to 18 years, including appeals, before the final result is known. For commercial parties, and certainly for international investors, the risk of encountering such extensive delays is a compelling reason to choose international arbitration for the resolution of disputes related to contracts with Indian parties.

Domestic arbitration

Indian companies are increasingly aware of the possibility of using arbitration to resolve domestic disputes. The proposed revisions to the Arbitration Act, including streamlining the process for applying to the courts for assistance with appointing arbitrators, aim to further improve domestic arbitration.

One issue not addressed by the proposed revisions to the law is stamp duty on arbitral awards rendered in some states, including Tamil Nadu, Andhra Pradesh, Maharashtra, Karnataka and New Delhi. As a result, uncertainties about who pays the duty and at what rate it will be charged may continue to cause delays in finalizing and enforcing domestic awards.

Attempts to reform arbitration laws in India will no doubt remove some of the present challenges to both domestic and international arbitrations in India related disputes. More difficult to confront will be the challenge of clearing the backlog of cases in the Indian court system.

In the meantime, in order to avoid the risk of disputes becoming bogged down in the Indian courts, international investors would be wise to include arbitration clauses in their contracts with Indian parties.

Nish Shetty is the head of South East Asia International Arbitration and Dispute Resolution at Clifford Chance in Singapore.