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We Are Deluded If We Think Arbitration Will Work Without Systemic Reforms

03/11/2016 3:39 PM IST | Updated 11/11/2016 8:42 AM IST
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A three-day conference on strengthening arbitration and its enforcement in India was recently organized by NITI Aayog in the national capital. It was more or less another arena to highlight the ongoing tussle between the judiciary and the executive regarding the abysmal ratio of pending cases to the number of judges in the Indian courts. Yes, alternative dispute resolution mechanisms such as arbitration, mediation and conciliation are important for effective functioning of the legal machinery. But we are day-dreaming if we think it will work in a country that needs basic systemic reforms throughout the ecosystem.

Preventing disputes

First things first. We have to prevent commercial disputes from arising so rampantly across the economy. Since the government is the biggest litigant, there's a need to overhaul the attitude of the bureaucracy that supervises day to day business transactions. In order to assist the bureaucrats who are mostly generalists, consultants with specialization in that particular domain are brought on board to assist them. However, what is often missing is the good faith and co-ordination between them that could pre-empt disputes. Multiple power centres within the hierarchy and lack of accountability in enforcement of contracts make things worse.

Being a part of a litigant-averse culture, preference for alternative dispute resolution is what we have always preached. It is high time we practice that ourselves.

And then there is the Damocles sword of charges under the Prevention of Corruption Act constantly hanging over a bureaucrat's head that makes him or her want to minimize risk and postpone taking decisions. Instead of trying to mediate at an early stage, a bureaucrat would probably refer everything to arbitration or litigation so that the responsibility of an adverse award doesn't befall him or her. The lack of flexibility to renegotiate terms of contract based on market conditions is also contributing to disputes especially in Public-Private-Partnership projects in the infrastructure sector.

Why arbitration over litigation?

Once a dispute arises, parties in India need to understand why it is preferable to approach for arbitration instead of conventional litigation.

• Arbitration allows parties that may hail from different cultural, linguistic and legal backgrounds to adopt a procedural framework that is mutually acceptable to both—this places a moral responsibility on them to abide by the final award rather than subject it to appeal and hence dispose of cases quickly. The quicker resolution also helps regular transacting parties to get on with their business dealings—the high upfront arbitration fees may seem puny in comparison to the economic cost of stalled business due to litigation.

• Unlike courts which lack the flexibility to change procedures in litigation, arbitration allows parties to adopt the original or amended form of readymade rules as set by bodies such as the ICC (International Chamber of Commerce) or UNCTRAL (United Nations Commission on International Trade Law).

• Unlike judges who evaluate disputes on the basis of the civil code or principles of natural justice that they have been using historically to give judgements, arbitrators who are selected on the basis of their domain knowledge are better suited to evaluate the technical details and decide fairly on the merits of the case.

• Unlike court orders on commercial disputes which are in the nature of civil judgements and cannot be enforced in cross-border jurisdictions, arbitration awards, in alignment with the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards 1958, are more easily enforceable

• Arbitration strives to keep intact the reputation of the disputing parties by ensuring privacy and confidentiality. No publicity can be used to strengthen a case or force a settlement

Clarity in laws

Having understood the merits, arbitration clauses have to be very carefully drafted in every contractual agreement specifying details such as the composition of the tribunal (number and qualification of arbitrators), procedure of their appointment and language of proceedings. For any contract that has an arbitration clause, there are two sets of laws which serve different purposes and hence should be clearly spelled out.

Substantive law, which safeguards rights and obligations arising out of the contract; mostly the local law of the country of party most affected by contract is chosen.

The law governing arbitration, which, on the basis of the seat of arbitration (like London/Singapore), decides the validity, efficacy and interpretation of arbitration provisions in the contract and consequently the scope of the arbitrator.

Arbitration has to be envisaged as a separate career choice and not a safe retirement option.

Today, as per Part I of the Arbitration and Conciliation Act 2015, Indian courts are vested with powers to set aside the awards given under domestic arbitrations (basis place of incorporation instead of management control) or international commercial arbitrations with India as the chosen seat. This is not the case with foreign seated arbitrations, covered under Part II, that seek Indian courts' assistance primarily for enforcement. With recent amendments, such parties have also been allowed to take the court's help in seeking interim relief or gathering evidence. But it is still not clear on what happens in a dispute between two domestic companies who have chosen a foreign seat of arbitration.

The debate on what is more important—"party autonomy" (a cardinal principle of arbitration which allows parties to opt for any law or jurisdiction) OR "public policy" is still to be resolved in such cases. Recently Uruguay put aside a foreign award (in favour of a Swiss tobacco company Phillip Morris) to uphold public health. The expansive definition of "public policy" in India to include awards that are in contravention to fundamental policy of Indian law or notions of morality and justice is giving jitters not only to foreign investors who are planning to set up special purpose vehicles for local investment but also for any business choosing India as the seat of arbitration. In the model Bilateral Investment Treaty, India has dropped the Most Favoured Nation clause to prevent its misuse for treaty shopping. It has also made exhaustion of local remedies a must before initiating arbitration, which might not be acceptable to the US and EU, especially when the Trans Pacific Partnership agreement is so pro-arbitration. India is also one of the countries that recognizes only about one-third of all the 150 signatories of the New York Convention as member states which gives no guarantee to foreign investors that foreign awards shall be duly enforced here. As long as there is no coherence in this area, we will continue to rank poorly in the ease of doing business.

Legal infrastructure

The legal infrastructure in the country isn't conducive enough for it to portray itself as a destination for arbitration. Though the intention behind the passage of the Commercial Courts Act 2015 is noble, the execution doesn't look promising when 40% of the vacancies in high courts are yet to be filled. To usher in quality arbitrators, the subject matter of arbitration needs to be an important part of the legal curriculum, providing a choice of sectors in which it is to be practiced. For this, alignment with the industry is a must. Arbitration has to be envisaged as a separate career choice and not a safe retirement option. Participation in international arbitration conferences, having bilateral relationships with international institutions and liberalization of the legal service sector are crucial for such exposure. The recent amendment has done some good in specifying that appointment of arbitrators isn't a judicial function and hence can be delegated by the courts to other specialized bodies.

We may build a state-of-the-art institutional arbitration centre in Mumbai or put a time limit for the disposal of cases but these will end up being just photo-ops unless systemic reforms take place...

Historically our answer to problems has been either more institutions or more regulations. We may manage to build a state-of-the-art institutional arbitration centre in Mumbai (emulating Singapore or London) or put a time limit for the disposal of such cases but these will only end up being just photo-ops unless systemic reforms take place simultaneously. Research proves that 60% of arbitration cases decided on merit are won by investors instead of the State. With all hands on Make in India, it is imperative that the nation builds a strong arbitration ecosystem to prevent loss to the exchequer. Being a part of a litigant-averse culture, preference for alternative dispute resolution is what we have always preached. It is high time we practice that ourselves.

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