Monthly Archives: July 2014

Arbitration in India – Finding its way?

S.N. Chidambara Sastry^ & Puloma Mukherjee*

 

The historical roots of arbitration in India run deeper than most countries which are considered the new world arbitration havens, such as London and Singapore, and can be traced back to far before India’s independence in 1947. Arbitral tribunals existed since ancient times in the form of the Panchayat system, where village elders informally decided matters brought before them, on issues ranging from property and torts to even murder and rape.[i] A more formal system of arbitration was established by various laws passed by the British, such as the Bengal Regulations 1772, which provided for reference by a court to arbitration on civil claims such as contractual matters among others.[ii]

Post-independence, the Government of India enacted a number of laws to formally govern arbitration in India; the Arbitration (Protocol and Convention) Act, 1937, the Indian Arbitration Act, 1940 and the Foreign Awards (Recognition and Enforcement) Act, 1961. The Indian Arbitration Act, 1940 was the primary law governing arbitration in India along the lines of the English Arbitration Act of 1934. In 1996, the Government enacted the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the Indian Arbitration Act) to replace the 1940 arbitration act and to reflect the provisions of the UNCITRAL Model Law. The new act included various sections which echoed the Indian Legislature’s attempts to provide for an expeditious dispute resolution system, minimizing the intervention of courts. Flexibility in the procedure and the submission of evidence, freedom of the parties in the selection of the arbitral tribunal and of the tribunals themselves in making decisions were other provisions of the Act which showcased arbitration as a viable alternative to litigation in Indian courts.

Other than the above, the Constitution of India and a number of other legislations in our country reflect the essential features of arbitration. Article 262 of the Indian Constitution – adjudication of disputes relating to waters of inter-state rivers or river valleys, which finds its genesis in sections 130 to 134 of the Government of India Act, 1935, provides that the Parliament may, by law (in this case the Interstate River Water Disputes Act, 1956), exclude the jurisdiction of any court including the Supreme Court in matters that fall within the purview of this Article. Section 4 of the Interstate River Water Disputes Act, 1956 states that dispute resolution under the Act will be by way of the establishment of a tribunal. This very express exclusion of the Indian courts reflects one of the fundamental elements of an arbitral system. The final and binding nature of the decisions of these tribunals, wherein they are treated at par with an order of a court in India and the time bound nature of the adjudication by the Tribunal expressly stating that in no case would an adjudication exceed two years, are further evidence of essential techniques of arbitration being embedded in the Indian legislative system. Similarly, the River Boards Act of 1956 provids for arbitration as a means of dispute resolution and expressly excludes the 1940 arbitration Act from the purview of this section, providing the parties and the arbitrators with complete freedom and a wide berth in the matter of procedure and conduct of the arbitration.

Despite its early start however, somewhere along the path of establishing an alternative dispute resolution mechanism as a viable alternative to litigation, it would seem perhaps that India lost its way. While public dispute resolution mechanisms remained largely ad hoc, in the private sector, most corporate houses preferred their arbitration to be conducted in jurisdictions such as Singapore and London and under the law in those countries, even in cases of domestic disputes. The absence of an institutionalized procedure, time, cost, and most importantly judicial intervention seemed to be the primary reasons why arbitration in India did not develop the way it should have given our historical background in this area.[iii]

The cost of prolonged arbitration is largely due to the fact that the Indian Arbitration Act has very few if any provisions at all setting down any timelines. On the other hand, the SIAC (Singapore International Arbitration Centre) Rules for instance, have provisions for expedited procedure, which require that the entire arbitration process be completed within a period of six months. Further, provisions relating to challenge and correction of an award, finality of an award and intervention of the judiciary (or in this case the tribunal), are drafted in a manner that ensures the entire arbitration process rarely exceeds a period of two years.

While cost and time are obviously interlinked, the intervention of the Indian judiciary is a further deterrent to an expedited alternative dispute resolution mechanism in India. The implementation of the Indian Arbitration Act, and the varied case laws on the manner of exercise of Section 9, 34 and 48 by the judiciary has shown, that the judiciary in our country is not yet ready, even after all these years, to formally pass on the mantel of adjudication of certain disputes to tribunals established beyond their purview.

Fortunately, in the last few years, the Supreme Court and the High Courts have passed a number of judgements which have sought, to an extent, to reduce the stagnating effect of the arbitration jurisprudence in the country as affected by the Indian Judiciary all these years. Foremost among these is the case of Bharat Aluminium v. Kaiser Aluminium,[iv] where the decisions of the Supreme Court in the Bhatia International[v] and Venture Global judgments[vi] were overruled in favour of non-intervention by the Indian Judiciary in case of arbitrations seated outside the country, including, for the purposes of granting interim relief. With regard to the enforcement of foreign awards, the Delhi High Court in Penn Racquet Sports v. Mayor International Ltd.,[vii] dismissed a challenge regarding the enforcement of a foreign arbitral award, ruling that the ground of ‘public policy’ under Section 48 of the Indian Arbitration Act, should be narrowly interpreted when refusing enforcement of foreign awards. In Chloro Controls (I) P Ltd. v. Severn Trent Water Purification,[viii] the Supreme Court ruled that, a judicial authority has limited scope in making a reference to arbitration in case of multiple multiparty agreements and for non-signatories, which would be limited only to exceptional circumstances. These cases indicate that, the Indian Judiciary has taken a positive step towards reducing judicial interference in arbitrations conducted outside India. However, similar (albeit less drastic) measures are still needed with respect to international commercial arbitration conducted in India.

The Indian executive has not been very far behind. The LCIA (London Court of International Arbitration) and the SIAC opened chapters in India in 2009 and 2013 respectively. On June 17, 2014, the Indian Merchant Chambers inaugurated the International arbitration centre in Mumbai. This centre aims at providing an institutionalised system of arbitration along the lines of the SIAC and the LCIA.[ix]

Despite the above developments however, what is surprising is the limited scope of arbitration in areas outside of private commercial dealings. As constitutional provisions relating to adjudication of inter-state water disputes, legislations such as the Interstate River Water Disputes Act, 1956 and the River Boards Act of 1956 and the Electricity Act, 2003 indicate, India has, since many decades understood the essentials of an arbitration process. Such understanding was not limited to the private sector alone, and alternative dispute resolution in the public sector has been explored as a viable means of settling disputes in the public sector. In 1989, the Government of India set up the Permanent Machinery of Arbitrators (PMA) in order to regulate alternative dispute resolutions between the Government and public sector enterprises (PSEs) and among the PSEs themselves.[x] In 2005, the Government issued further guidelines refining the PMA with respect to settlement of disputes between two public sector enterprises or banks and between a public sector enterprise or bank and a Government department. These guidelines were reworked in 2013, when the Department of Public Enterprises released a memorandum revising the existing guidelines.[xi] However, the revised guidelines themselves offer but little in terms of a formal and institutionalized process of arbitration and almost nothing in terms of procedure.

Falling outside the purview of the Indian Arbitration Act, development of public-public and public-private arbitration has therefore remained stagnant. Unfortunately, while in areas of public sector disputes such as labour disputes, there is a distinct inclination towards litigation, the absence of a sound public sector dispute resolution mechanism, has had a largely negative effect on public private partnerships in India and foreign investment in that sector.[xii] In the third quarter of 2013, the Planning Commission was tasked with drafting a bill on dispute resolution in public contracts to specifically target public private partnerships.[xiii] Though this has come into some difficulty due to differences in the approach as perceived by the Planning Commission on the one hand and the Finance Ministry on the other,[xiv] the draft bill itself seems to be a step in the right direction.

It can therefore be safely concluded, that India may not have after all completely lost its way. Despite the long periods of stagnation over the years, the Indian Judiciary, Executive and the Legislature, have in small measures taken steps to improve the arbitration mechanism in India, though most of such improvements may be attributed to the last few years. Given the state of international commercial arbitration following the Bhatia International decision[xv], it is of course not expected that India would take steps, towards improving the state of alternative dispute resolution mechanism in the country, all at once. However, the above-mentioned developments are indicative of the conscious efforts that are now being made to ensure that alternative dispute resolution mechanism develops as a legitimately viable alternative to the traditional dispute resolution system in India.

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^  B.B.A. LL.B (Business Law Hons.) National Law University, Jodhpur

* B.A. LL.B (International Trade and Investment Law Hons), National Law University, Jodhpur

[i]See B. K. Tiwari, ADR System- Its Role In Promoting Justice, 1.1 Res. Directions 1 (July 2013), available at http://researchdirection.org/UploadArticle/1.pdf

[ii]The Bengal Regulation Act, 1772 (India) provided that, in all cases of  disputed accounts etc., it shall be recommended to the parties to submit the decision of the cause to arbitration, the award of which shall become a decree of Court

[iii]Zulfiquar Memon, Sherbir Panag & Akash Karmakar, Challenges of Arbitration in India, Corp. Disp. 62 (Oct. – Dec. 2013), available at http://static.squarespace.com/static/520c8182e4b04f935ef41dbc/t/52f5118ee4b087ee088167c0/1391792526477/CD_Oct13_cd2310r7991.pdf

[iv]Bharat Aluminium Co. Ltd. v. Kaiser Aluminium Technical Service Inc., (2012) 9 S.C.C. 649 (India).

[v]Bhatia International v. Bulk Trading S.A., (2002) 4 S.C.C. 105 (India) [hereinafter Bhatia International case]

[vi]Venture Global v.Satyam Computer Services Ltd., (2008) 4 S.C.C. 190 (India).

[vii]Penn Racquet Sports v Mayor International Ltd., 2011 (1) Arb. L. Rep. (Del.) 244 (India).

[viii]Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 S.C.C. 641 (India)

[ix]Swati Deshpande, Mumbai gets its first International Arbitration Centre at the Indian Merchants’ Chamber, The Times of India (June 17, 2014, 7:34 PM), http://timesofindia.indiatimes.com/city/mumbai/Mumbai-gets-its-first-International-Arbitration-Centre-at-the-Indian-Merchants-Chamber/articleshow/36721035.cms.

[x]Permanent Machinery of Arbitration – reg. (DPE D.O. No.15(9)/86-BPE(Fin) dated 29th March, 1989), Department of Public Enterprises (Ministry of Heavy Industries & Public Enterprises),  http://dpe.nic.in/e_documents/archives/Guidelines/volume2/part2ch2/v2p24.

[xi]Revised Guidelines of the Department of Public Enterprises – Settlement of Commercial disputes between PSEs inter-se and Public Sector Enterprise(s) and Government(s) through Permanent Machinery of Arbitrators (PMA) in Department of Public Enterprises, Bharat Sanchar Nigam Ltd. (July 22, 2013), available at http://www.sneatn.com/files/business%20corner/Misc/Settlement%20of%20commercial%20disputes%20between%20PSE%20and%20Govt%20Dept%20through%20PMA%20in%20DPE%2022-07-13.pdf .

[xii]See Ronald J. Bettauer, India and International Arbitration: The Dabhol Experience, 41.2 The Geo. Wash. Int’l L. Rev. 381–87 (2010), http://docs.law.gwu.edu/stdg/gwilr/PDFs/41- 2/41-2-BETTAUER.pdf; also see Amit Kapur, Contracts in Public Private Partnerships for Infrastructure Development: A Legal Perspective, in Govt. Of India: Ministry of Finance (Department of Economic Affairs), Criticality of Legal Issues & Contracts for Public Private Partnerships 7–76 (2008), available at www.pppinindia.com/pdf/dea_ppp_criticality_legal.pdf.

[xiii]PPP projects: PMO asks Plan panel to draft Bill on dispute resolution, The Hindu: Business Line (May 16, 2013), http://www.thehindubusinessline.com/economy/ppp-projects-pmo-asks-plan-panel-to-draft-bill-on-dispute-resolution/article4721379.ece.

[xiv]Sanjeeb Mukherjee & Vrishti Beniwal, FinMin, PlanCom differ over PPP dispute resolution mechanism, Business Standard (Oct. 7, 2013), http://www.business-standard.com/article/eco nomy-policy/finmin-plancom-differ-over-ppp-dispute-resolution-mechanism-113100700038_1.html .

[xv]Bhatia International case, supra note5.

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