Over the past couple of years, India has registered rapid economic growth, with the GDP growing 7.6% in the last fiscal year. The country’s economic profile has also witnessed a dramatic shift over a long period from rural –based agricultural production to urban economic activities, and from low-value manufacturing to high-value services. Indeed, the economy is on track to maintain its current growth rate for the rest of this year too. Though economic activity is buoyant, the country still has a long way to go. The Modi government must capitalize on the current economic momentum and use it to accelerate its reform agenda.

In today’s interconnected global economy, efforts to liberalize legal policies will help drive the expansion of world trade and help countries to integrate into an increasingly globalized production system, rather than being left on the margins of world trade. Commerce in a country thrives with the support of a legal framework that provides for the swift resolution of commercial disputes. Experts have stated that one of the key ingredients in any recipe for successful international trade and investment is the legal security of commercial transactions. Stakeholders across the spectrum of international trade and business are demanding an open, responsive and receptive dispensation mechanism for legal services in India. The growth of international services has become increasingly relevant to the development of the Indian legal sector and the national economy.

A relevant area of concern for Indian policymakers is how to efficiently utilize international agreements to foster Foreign Direct Investment (FDI). Research suggests that multilateral arbitration conventions are much more effective that bilateral treaties to promote FDI. These results, though still tentative, allow us to draw an important preliminary conclusion for policy. After enforcing a Multilateral Arbitration Agreement (MAC) a host country joins an investor club of many countries. This signal seems to be stronger than one-to-one investment agreements. Further, studies have found a positive correlation between access to quality arbitration and boosts to Foreign Direct Investment (FDI). According to Wagle, an increase in arbitration quality generally leads to an increase in FDI flows.1 Overall, the increase in FDI is the result of an increase in the size of FDI investments (the intensive margin) rather than an increase in the number of FDI investments (the extensive margin). This is consistent with a view that the benefit of an effective arbitration regime is that it reduces the variance in the expected return on investment, and so increases capital constrained investors incentive to take “larger bets”. Regarding sectorial differences, an interesting implication is that the quality of the arbitration matters more for industries where transaction cost is more important. Liberalization of legal services plays a key role in bolstering the indigenous arbitration regime and securing foreign investment. The entry of foreign lawyers encourages economic growth by catalyzing investments, fostering the growth of the Indian legal regime by raising standards and increasing employment opportunities and granting businesses the access they need to global legal services. The move also helps India fulfill its obligations under the General Agreement on Trade in Services, of which it is a member.

While arbitration is firmly established in countries or territories with highly developed and effective legal systems and may co-exist happily with litigation and other forms of dispute resolution, litigation before local courts in developing countries like India does not always provide a sufficient assurance of legal security for investors, whether they are local or foreign. Investors may face a number of issues such as unfamiliarity with local procedures, corruption in the judiciary, risk of partiality, and a threat of delays and appeals.

If India wishes to be an economic heavyweight in the global arena, it must have a robust framework in place to ensure the growth of international arbitration within its borders. As the global economic power shifts towards India, liberalization of the legal services sector is essential for attracting Foreign Direct Investment (FDI) and promoting the growth of the knowledge economy. The expansion of borderless markets and cross-border trade has changed the scope and character of legal services to an international scale. Institutional connectivity, of which services liberalization is a key driver, is necessary to facilitate any successful development and execution of transactions by the private sector.

Why would a robust arbitration regime make a country an attractive prospect for potential investors?

According to officials of the Netherlands Arbitration Institute, more than 80 percent of private international contracts have clauses providing that disputes will be decided by arbitration. In the legal literature, all scholars seem to agree that international arbitration is regarded by the international business community as the normal means of settling disputes arising from international transactions. Arbitration owes its popularity amongst investors primarily because it holds four distinct advantages over other dispute redressal mechanisms.

First, international arbitration is seen as a way of securing a high degree of neutrality in the dispute resolution process. It does away with the traditional perception (and ensuing insecurity) the courts of a contract breacher’s home country are likely to favor that party in any international dispute. Arbitrators can, if the parties so wish, be chosen so that they are of different nationalities from any of the parties, or they can be chosen in a way that gives a balance between the nationalities of the parties. Likewise, the legal seat of the arbitration can be chosen, if the parties require, so that it is in a neutral location.

Second, parties have relative control over the outcome of a dispute as (in most cases) they choose the arbitrators. The right of party nomination is supplicated by the notion that those appointed are well suited to their task, and indeed more suited to the task than a judge in a national court would be. It is often possible to find well qualified and experienced arbitrators who will combine commercial knowledge with their legal skills and adopt a more international and pro-business outlook. As international arbitration has continued to grow, there has been a corresponding growth in the number of potential arbitrators, and while there remains a need to build further capability as well as diversify the range of those available to sit as arbitrators, there is nowadays a wealth of choice.

Third, arbitration offers parties a great deal of confidentiality and privacy. Whether or not arbitral rules provide for confidentiality in the arbitral process, it is normally open to the parties to reach agreement that the process is private and confidential. Confidentiality, is a significant issue for many parties with respect to their business dealings and it is more likely to be preserved through arbitral proceedings.

Four, international arbitration provides finality in the decision-making process. One of the disadvantages of the court process is that judgments can sometimes be subject to one or more appeals, and these can take years to be resolved. As already discussed above, there has been some movement towards a new style of court specifically targeting international dispute work, and towards a restriction on the ability to appeal, but this remains the exception rather than the norm.

Understanding the centrality of swift dispute resolution and contract enforcement to facilitating the growth of commerce, the Modi Government has taken a number of measures to modernize indigenous dispute resolution mechanisms. Most recently, the Government has put together a committee to create and review the institutional framework for arbitration in India. Though the Indian arbitration regime enjoyed significant amelioration with the amendment of the Arbitration and Conciliation Act of 1996, there is still a long way to go.

Amendments to the Arbitration Act

The Arbitration and Conciliation (Amendment) Act, 2015 was introduced in Lok Sabha on December 3, 2015 by the Minister for Law and Justice, Mr. D.V. Sadananda Gowda as The Arbitration and Conciliation (Amendment) Bill, 2015. The Bill amended the Arbitration and Conciliation Act, 1996. The Bill was passed by Parliament on December 23, 2015. Some of the relevant amendments to the Act are as follows:

  • Relevant court for domestic and international arbitration matters: Under the old Act, the relevant court for all arbitration matters was a principal civil court or a high court with original jurisdiction. The Amendment Act modified this to state that in the case of international arbitration, the relevant court is only the relevant high court.
  • Applicability of certain provisions to international commercial arbitration: Part I of the old Act included provisions related to interim orders by a court, order of the arbitral tribunal, appealable orders etc. only applied to matters where the place of arbitration was India. Under the Amendment Act, these provisions also apply to international commercial arbitrations even if the place of arbitration is outside India. This would apply unless the parties agreed otherwise.
  • Powers of Court to refer a party to arbitration if agreement exists: Under the old Act, if any matter that is brought before a court is the subject of an arbitration agreement, parties will be referred to arbitration. The Amendment Act states that this power of referral is to be exercised by a court even if there is a previous court judgment to the contrary. The Court must refer the parties to arbitration unless it thinks that a valid arbitration agreement does not exist.
  • Interim order by a Court: The old Act stated that a party to arbitration may apply to a court for interim relief before the arbitration is complete. For example, a party may have sought interim protection of goods, amounts, property, etc. that is the subject matter of the arbitration before a court. The Amendment Act amended this provision to specify that if the Court passes such an interim order before the commencement of arbitral proceedings, the proceedings must commence within 90 days from the making of the order, or within a time specified by the Court. Further, the Court must not accept such an application, unless it thinks that the arbitral tribunal will not be able to provide a similar remedy.
  • Public Policy as grounds for challenging an award: The old Act permitted the court to set aside an arbitral award if it is in conflict with the public policy of India. This included awards affected by (i) fraud or corruption, and (ii) those in violation of confidentiality and admissibility of evidence provisions in the Act. The Amendment modified this provision to also include those awards that are (i) in contravention with the fundamental policy of Indian Law or (ii) conflict with the notions of morality or justice, in addition to the grounds already specified in the Act.
  • Appointment of arbitrators: The old Act permitted parties to appoint arbitrators. If they were unable to appoint arbitrators within 30 days, the matter is referred to the court to make such appointments. The Amendment Act states that, at this stage, the Court must confine itself to the examination of the existence of a valid arbitration agreement.
  • Time period for arbitral awards: The Amendment Act introduced a provision that requires an arbitral tribunal to make its award within 12 months. This may be extended by a six-month period. If an award is made within six months, the arbitral tribunal will receive additional fees. If it is delayed beyond the specified time because of the arbitral tribunal, the fees of the arbitrator will be reduced, up to 5%, for each month of delay.
  • Time period for disposal of cases by a Court: The Amendment Act states that any challenge to an arbitral award that is made before a Court, must be disposed of within a period of one year.
  • Fast track procedure for arbitration: The Amendment Act permits parties to choose to conduct arbitration proceedings in a fast track manner. The award would be granted within six months.

Though the impact from these reforms has been significant there is always room for improvement. A glaring issue with arbitration proceedings in India is that there is no consistency in procedure. The Act does not set out a procedure but leaves it to the parties to decide which procedures they wish to follow. Though a handful of arbitration centers have surfaced across the country, there is a fair amount of disparity in their core infrastructure and procedural framework. Additionally, many arbitrations are simply conducted in the home or the office of the arbitrators, which lends yet another note of uncertainty to the conduct of proceedings. Most arbitrators in India are retired judges who are more comfortable following tedious court procedures when overseeing proceedings. Another corollary emerging from this point is that while retired judges may have an excellent grasp on the law, they rarely have the industrial expertise and pro-business outlook required to handle delicate commercial disagreements.

India needs a robust arbitration framework to resolve the issues inundating the current system. The creation of a strong arbitration institution, replete with its own rules, guidelines and facilities, would allow for consistency in procedure and keep the mainstream judiciary out of arbitration disputes. A provision for the conduct of arbitration proceedings in the Arbitration Act would lend a note of consistency to arbitration proceedings carried out anywhere in the country. An overarching arbitration council could deploy its own agencies to oversee matters such as arbitrator appointments and could do so with a lot more celerity than the mainstream judicial system. This system is followed in both London and Singapore. Measures should be introduced to restrict appeals from awards to the national courts. This would help unload some of the burden on an already encumbered judiciary.

Another important move in the way of reform is to allow foreign lawyers to arbitrate in India2. Though the Arbitration Act does provide that an arbitrator may be of any nationality, foreign lawyers are only allowed to operate in India on a fly in fly out basis. The liberalization of legal services in India is central to the growth of the indigenous arbitration regime. As the global economic power shifts towards India, liberalization of the legal services sector is essential for attracting Foreign Direct Investment (FDI) and promoting the growth of the knowledge economy. The expansion of borderless markets and cross-border trade has changed the scope and character of legal services to an international scale. Institutional connectivity, of which services liberalization is a key driver, is necessary to facilitate any successful development and execution of transactions by the private sector. The influx of foreign lawyers will also translate into better job opportunities for many Indian lawyers. Allowing foreign lawyers to arbitrate freely in India will also help securing a high-degree of seat neutrality. As stated earlier, this is a vital component to a successful arbitration setup. Allowing foreign lawyers in will also help fill the vacuum of availability of competent arbitrators in India.

An interesting reform could be to allow third parties to fund arbitrations. This practice is followed in London, Paris and, most recently, Singapore. Third-party funding entails the funding of an arbitration proceeding by a party that is not party to the dispute in question. The availability of this facility offers businesses an additional financial and risk management tool when engaging in arbitration proceedings

Recognizing the need for further reform, the Central Government, on December 29, 2016 set up a High Level Committee to recommend ways to make arbitration more efficient. The committee will be headed by retired Supreme Court Justice B. N. Srikrishna. It will submit its report in 90 days. The mandate of the panel will be to analyze and review effectiveness of present arbitration mechanism, the facilities, resources, funding and manpower of existing ADR (Alternate Dispute Resolution) institutions. It will also examine the institutions funded by the Centre for arbitration purposes and assess skill gaps in ADR and allied institutions for both national and international arbitration. The committee will also evaluate information outreach and efficacy of existing legal framework for arbitration. Further, it will focus on the role of arbitrations in matters involving the Union of India, including bilateral investment treaties (BIT) arbitrations and make recommendations where necessary. The high level panel will suggest measures for institutionalization of arbitration mechanism so as to make India a hub of international commercial arbitration and identify amendments in other laws that are needed to encourage International Commercial Arbitration (ICA). The committee will also devise an action plan for implementation of the law to ensure speedier arbitrations, recommend revision in institutional rules and regulations and advice empanelment of national and international arbitrators for time bound arbitral proceedings. It will also recommend measures to make arbitration more widely available in curricula and study materials.

Suggestions for Improving the Extant Arbitration Framework in India to make India the hub for International Arbitration:3

  • Greater transparency and insight into institutional decision-making
  • The system should be flexible
  • It should allow parties the freedom to choose their arbitrators by allowing foreign lawyers to arbitrate in India
  • It should be cheaper than currently is
  • Sanctions should be more effective during the arbitral process
  • Simplified procedure should be provided for claims under a certain amount
  • Emergency arbitration services
  • The conduct of arbitrators should be regulated more closely
  • Institutions may allow for the third-party funding of arbitrations by providing loans to those who cannot afford arbitration
  • If an arbitration and mediation are held in conjunction with one another, there should be minimal overlap between the two processes so as to avoid obfuscation
  • Limit appeals from arbitrations
  • Procedural innovations to control time and cost, publication of awards, electronic case management, and soft law regulation
  • Institutions should provide feedback mechanisms for arbitrators
  • Setup training centres for arbitrators in National Law Universities
  • Incubate a think-tank to work solely on ameliorating arbitration issues within the country
  • Look to popular arbitration seats such as Paris, London and Singapore to see why parties flock to them to handle their arbitrations

This move will go a long way in ensuring the success of arbitration in India and securing further foreign investment for the country.

ABOUT THE AUTHOR

Dr. Manoj Kumar

After graduating in Law from the prestigious National Law School of India, Bangalore, Dr. Manoj Kumar has witnessed and led the transformation of Law, Regulation & Policy Practice over the past 22 years. Dr. Kumar is a Harvard Business School Alumni having done the BGEI Programme in 2010. As founder of Hammurabi & Solomon (and before), Dr. Kumar is well known for his immense expertise in providing cutting edge solutions to often complex regulatory or legal issues faced by valued clients. Dr. Kumar is a member associated with various global organizations including the World Bank, International Finance Corporation, International Bar Association, International Indian Bar Association, Indian national bar Association, Indo-American Chamber of Commerce, Bar Association of India, Delhi Bar Association, Supreme Court Bar Association, Delhi High Court Bar Association, Doctors For You, Society of Indian Law Firms, Potter Prize – India, Institute for Competitiveness, Thinkers50 – India, Advocates for International Development, Observer Reseach Foundation, India Strategy Group and Global Science & Technology Forum, to name a few.

Notes

1 Wagle, S. (2011). Investing across borders with heterogeneous firms: do FDI-specific regulations matter? World Bank Policy Research Working Paper 5914.

2 Report on Draft BCI Rules For Registration & Regulation of Foreign Lawyers in India: 2016

3 Report on Steps to Make India Hub For International Arbitration: 2017

This article is brought to you by India Unleashed

India Unleashed is a print and online publication by Global Legal Media and Legally India, providing country-by-country insights and sector-specific analysis from leading law firms and writers around the world.

Click here to read more on the India Unleashed microsite with all the articles from the print magazine, or view the full PDF below.