As institutional arbitration takes root in India, how should companies select the best forum for resolving their disputes?
In 2005 the Supreme Court of India’s constitutional bench handed down 17 judgments. Eight dealt with specific articles of the constitution, and the rest were on subjects ranging from corporate criminal liability to the fallout of nationalizing a bus route in rural Andhra Pradesh.
However, one judgment – SBP & Co v Patel Engineering Ltd – required the seven judges who delivered it to consider their own powers. The question before them was: is the power given to the chief justice to appoint an arbitrator in section 11 of the Arbitration and Conciliation Act, 1996, judicial or administrative?
A niggling doubt
India’s judiciary had considered this seemingly innocuous question several times since 1999. Their decision in this case would be key to how much control the courts have over arbitral proceedings that appear on their radar.
For, if the chief justice was seen to exercise judicial powers, parties could expect the appointment of an arbitrator to be a long drawn out process that only a member of the judiciary could carry out. But if it was merely administrative, as held by the Supreme Court in three earlier rulings, the courts would play only a minimal role and could be expected to act swiftly. More significantly, it would not require the involvement of a member of the judiciary and arbitral institutions could expect the courts to ask them to carry out this key task.
The decision which came in October 2005 was emphatic: the power exercised under section 11 “is not an administrative power. It is a judicial power”. In addition, the court ruled that only the chief justice or a “judge designate” could appoint an arbitrator and arbitral institutions could only give their opinion in the matter.
Back at square one
“The SBP case was a setback for institutional arbitration in India,” says NL Rajah, a Chennai-based advocate and a founder of the Nani Palkhivala Arbitration Centre (NPAC) in Chennai. But despite this thumbs down from the courts, as vast numbers of arbitrations completely bypass the courts and so are not affected by the judgment, both domestic and international arbitral institutions have been striving to make their presence felt in India.
Among domestic institutions the most talked about 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). LCIA India’s rules came into effect in April 2010 and it is currently administering two arbitrations.
Others include the Indian Council of Arbitration (ICA), which was set up in 1965 and is frequently touted as India’s premier arbitration centre; the International Centre for Alternative Dispute Resolution (ICADR), set up in 1986; and sector specific institutions like the Construction Industry Arbitration Council – all of which operate with varying success.
The NPAC, which is relatively unknown outside southern India, is still working towards its first arbitration case, although its meeting rooms frequently host ad hoc arbitrations.
In 2009 Delhi High Court set up the Delhi High Court Arbitration Centre (DHCAC) within its premises. According to the centre’s coordinator, Neeraj Kumar Gupta, although it began as an independent arbitration centre, it was converted into an “adjunct of Delhi High Court” in August 2010.
DHCAC has made 18 arbitral awards in its short life and is currently administering 145 arbitrations, most of which were referred to it by Delhi High Court.
Despite the efforts of these institutions, paying an institution to administer an arbitration is still almost unheard of in the domestic context. (For a detailed analysis of arbitration in India, including enforcement of foreign arbitral awards, see Bypassing the courts in the July/August 2011 issue of India Business Law Journal.)
The reasons for this situation are partly historical as the role of institutions in administering arbitrations was only recognized with the passing of the 1996 act, which is based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law.
This recognition was key to the emergence of institutions like the NPAC. “The 1996 act laid the foundation for institutional arbitration and we felt it needed to be exploited,” says Rajah.
A second reason why ad hoc arbitrations continue to be the norm has to do with the manner in which the older domestic institutions have gone about their business and the scepticism with which they are regarded by the Indian legal community. Sumeet Kachwaha, an arbitration expert and managing partner at Delhi-based Kachwaha & Partners, remarks that these institutions have not made much of an impact as they lack vision and stature.
“We in India are stuck at [the] bricks and mortar [stage],” he says bluntly. “We are not able to build an institution that can attract people of eminence who can drive it forward … Building an arbitral institution is not just about putting up a building, with a secretary and staff.”
Ciccu Mukhopadhaya, a Delhi-based partner at Amarchand Mangaldas who is currently a vice-president of the International Chamber of Commerce (ICC) International Court of Arbitration, takes a similar view of domestic arbitral institutions. He points out that an arbitral institution “needs to be credible in terms of efficiency and choosing arbitrators who are really good … and [able to] run an arbitration the way it should be run”.
Institutions like the ICA have not been much of a success, Mukhopadhaya says, as “good arbitrators do not want to do arbitrations under those rules … [they] do not feel remunerated enough”.
He adds that the ICA’s rules are “felt to be bureaucratic” and its facilities “completely inadequate” for running an arbitration.
The bottom line
But ultimately whether an arbitration takes the ad hoc or the institutional arbitration route will depend on “the commercials of the document”, says Vivek Vashi, a partner at Bharucha & Partners. The fees of an arbitral institution would not be affordable in medium to small transactions: “Costs are a deterrent … and institutional arbitration is considered only in disputes that involve substantial stakes.”
The arbitral institutions are well aware of this, and affordability is one of LCIA India’s main selling points. Registering an arbitration at its parent organization, LCIA in London, costs almost three times more than it does in Delhi. In addition, fees for arbitrators at LCIA India, as at LCIA, are based on an hourly rate that is capped at a specific amount. (For details see table on page 25.)
Arbitrators’ fees are also based on an hourly rate in arbitrations administered by the International Centre for Dispute Resolution (ICDR) – the international division of the American Arbitration Association (AAA).
This is in sharp contrast to the ad valorem fee, which links the arbitrator’s fees to the amount in dispute, used by both the ICC in Paris and Singapore International Arbitration Centre (SIAC). This system is often criticized as it implicitly assumes that the higher the stakes, the more complicated a dispute.
Cost is also used as a selling point at the NPAC and DHCAC. The NPAC tries “very hard to make the costs reasonable where smaller figures are in issue,” says its registrar, Shaan Katari Libby. The DHCAC does not charge an administration fee or room rental, and parties using its facilities need pay only the arbitrator’s fees.
A dose of realism
But how concerned should parties be about what they pay the arbitral institution or the arbitrator? Not much, argues Michael Lee, director of the Singapore-based Asia office of ICDR. Looking at the total cost of arbitration, which includes the fees of the lawyers who are advising the parties, Lee says: “Most lawyers exclude the money they bill their client when they talk about the cost of an arbitration.”
This can be misleading.
According to a 2007 report from the ICC Commission on Arbitration, on average 82% of the costs incurred by parties in the course of an ICC arbitration go towards presenting their cases. This includes lawyers’ fees and expenses. The report, which uses data from ICC cases in 2003 and 2004, adds that arbitrators’ fees and ICC administrative expenses accounted for only 16% and 2% respectively. Competition between arbitral institutions is intense and Lee suggests these figures are not exclusive to the ICC.
But while the proportion of total costs paid to arbitral institutions is minimal, an institution’s arbitration rules dictate the process to be followed and this is likely to impact the cost of the arbitration. Arbitrations at institutions that have complicated rules could cost more.
However, cost may not be the only reason why parties decide to seat their arbitration at a specific venue. They may also consider the governing law of the contract and the jurisdiction they are from.
“If the parties are from a common law jurisdiction, we would advise them to go to either the LCIA or SIAC,” says Tejas Karia, a partner at Amarchand Mangaldas. “If however one party is from a civil law jurisdiction and another from a common law country, we would suggest either UNCITRAL rules or ICC rules.”
In addition, parties seeking greater efficiency and credibility may decide to seat their arbitrations outside India, although this may only be possible if a foreign party is involved. “India-related disputes have gradually increased in numbers over the years,” says Lee at ICDR.
The AAA administered about 140,000 arbitrations in 2010 in the US alone. In addition, its international arm, ICDR, undertook 888 international arbitrations, 36 of which involved at least one Indian party, up from 35 in 2009. The ICC in Paris administered 793 arbitrations in 2010 and 3.31% of all parties that filed cases in that year were from India.
The next rung – the LCIA in London and the SIAC in Singapore – also attract arbitrations from India. According to the LCIA, 2.5% of the 246 disputes referred to it for arbitration in 2010 involved parties from India. The SIAC, which is steadily becoming the most talked about international arbitral institution in India, says it handled 198 new cases in 2010.
But Ankit Goyal, head (South Asia) and counsel at the SIAC, says that while it was involved in 36 cases from India in 2010, only 27 “were administered under the SIAC Rules”. The other nine cases were ad hoc arbitrations where the SIAC “was called upon to appoint arbitrators”.
The Hong Kong International Arbitration Centre (HKIAC), which was established in 1985, also involves itself with both ad hoc and institutional arbitrations. But unlike most other arbitral institutions, it includes ad hoc arbitrations in its figures for arbitrations handled. In 2010 it handled 291 arbitrations but only 16 of these were described as “fully administered by the HKIAC in accordance with its rules”.
Seven arbitrations involving Indian parties appear in the HKIAC’s figures for 2010, but all of them were ad hoc. Arbitral awards made in Hong Kong are not enforceable in India.
The SIAC, which was founded in 1990, appears to be making waves after it revised its rules in 2010. The new rules provide for the appointment of an “emergency arbitrator” to grant interim relief before the tribunal is constituted and also an “expedited procedure” under which an award has to be rendered within six months. Both have been used by Indian parties.
The ICC has also adopted new rules, which are expected to come into force on 1 January 2012. Mukhopadhaya, who took part in the drafting, says the process took over two years. The rules will allow for the appointment of an emergency arbitrator, who will be required to issue an order within 15 days. Any application for emergency measures to the ICC will cost a minimum of US$40,000, irrespective of the amount of the claim.
The SIAC charges an administration fee of S$3,000 (US$2,300) for applications for the appointment of an emergency arbitrator. The SIAC does not charge a separate fee for applications for expedited procedure.
Copy paste clause?
As arbitral institutions make their presence felt, parties may begin to think more carefully about the resolution of future disputes when contracts are drafted. Sidharth Sharma, in-house counsel at Tata Sons, says that currently: “The arbitration clause in an agreement is perhaps the least important clause in the sense that nobody applies his mind to it … it is a copy paste clause.” He however adds that it may be different if a foreign party is involved.
Ajay Thomas, registrar of LCIA India, is on a mission to “convince people that the way arbitration is conducted in India is not the way the world arbitrates”. He says he sees “a shift happening in India” from ad hoc to institutional arbitration.
But Mukhopadhaya at Amarchand Mangaldas believes that before that happens, there needs to be a change “in the mindset of people doing arbitrations in India – the lawyers, the arbitrators”.
Rajah of the NPAC thinks that a change in the legal framework will be critical for the future of arbitral institutions in India. A lot was riding on a consultation paper issued by the Ministry of Law and Justice in April 2010, which included a proposal for reversing the effect of the judgment in SBP v Patel Engineering. However, little appears to have been done to take the proposal forward. A similar attempt in 2003 failed.
But institutions like LCIA India are clearly not waiting for India’s lawmakers to act. “The potential for work in India is enormous … there is a latent demand and it is for institutions to create a market,” says Thomas with characteristic enthusiasm.