Legal Alternatives: Arbitration in India

  • September 26, 2016

Arbitration, particularly commercial arbitration, has become increasingly common in India. Although common in cases with large contracts involving infrastructure and construction, arbitration is commonly used to resolve issues related to admiralty law, import-export transactions, and stock exchanges. However, issues relating to criminal law, rent, or taxation have their own dispute resolution mechanisms and cannot be subject to arbitration. While international arbitration follows a set standard, most arbitration in India still have provisions for ad hoc arbitration. Typically, arbitration in India has been lengthy, like a civil suit, with unsatisfactory results for the two parties.

Arbitration in India is preferred to civil suits as the latter can take long to decide. It is also a preferred method of dispute resolution in technical matters where experts are required. Nevertheless, some pitfalls remain. Arbitration has become an expensive recourse and several times the losing party can challenge the decision in court. This is particularly true when the losing party is a government organization.

Arbitration Law

Arbitration in India is governed by the Arbitration and Conciliation Act of 1996, which has four parts:

  • Part I: General provision on domestic arbitration
  • Part II: Addresses enforcement of foreign awards (New York Convention 1958 and 1927 Geneva Convention)
  • Part III: Deals with conciliation
  • Part IV: Supplementary provisions

No other laws govern arbitration apart from the above act. However, the Limit Act of 1963 applies to all proceedings unless expressly excluded by the Arbitration and Conciliation Act. Arbitration proceedings commenced after the limitation period (three years from date of notice) will not be valid. Local courts can intervene in domestic arbitration proceedings and are able to issue interim orders as well as appoint arbitrators if the parties cannot choose one.  India’s courts will refuse to entertain arbitration agreements that are invalid or if the dispute is not arbitrable.

In November 2015, the Indian Parliament introduced the Arbitration and Conciliation Ordinance, 2015 (the Ordinance hereafter) amending the Arbitration and Conciliation Act, 1996. The Ordinance was made to quicken the process of arriving at resolutions as the Act had several loopholes, which enabled the losing party to challenge the judgement by taking it to the courts. The Ordinance allows arbitration to be conducted outside India, while also allowing the parties to approach the Indian courts for interim relief. If a court passes an interim order, arbitration must start within 90 days from the date of such an order. This has been done so that the parties are discouraged from obtaining interim orders from courts without initiating the arbitration process. The Ordinance also ensures that oral hearings are done every day and no adjournments are granted unless due to a valid reason.

Generally, an arbitral award can be challenged if it is contrary to the “public policy of India.” However, this is general and has created much confusion. The Ordinance, therefore, narrowed the scope of ‘public policy’ to include only those awards that are affected by fraud, against the fundamental policy of India, or in conflict with the most basic principles of morality or justice.

The Process

In order to start an arbitration, the party can issue a notice in writing to the other party of its intention to refer the dispute to arbitration. Unless specified otherwise, arbitration proceedings start on the day when the respondent receives notice from the claiming party.

Parties must also ensure that a confidentiality clause is included in the arbitration agreement or with a separate agreement as the Arbitration and Conciliation Act does not have specific provisions for confidentiality on arbitration proceedings. However, as per Section 76, information from arbitral proceedings must be confidential in subsequent proceedings.
For commercial disputes, arbitration is either ad hoc or institutional. Some parties may opt for dispute resolution under a specific arbitration institution such as the International Chambers of Commerce (ICC), Delhi International Arbitration Centre, or the Indian Council of Arbitration (ICA).

The Arbitration and Conciliation Act of 1996 applies to domestic and international arbitration. As per Section 2(1)(f), the Act defines “International Commercial Arbitration” as arbitration that comes from disputes out of legal relationships, whether contractual or not. They are:

  • A person who is a nation or resident of any other country other than India;
  • A company incorporated in any other country apart from India;
  • A company or a group of individuals whose central management and control is done in any country apart from India;
  • The government of a foreign country.

Observations

If commercial disputes are resolved more quickly through arbitration, investors are likely to be encouraged rather than letting cases stagnate. Amendments made to the Arbitration and Conciliation Act want to ensure that arbitration is cost effective, reliable, and quick to resolve contractual and commercial disputes, which is imperative to make India an easier place to do business. Nevertheless, a common drawback of arbitration in India is that there is too much dependence on the ad hoc approach. This process leads to differences in how the dispute will be managed and whether both the parties will comply with rigid timelines. Foreign investors face risks and must remember that arbitration in India is continuously developing. Investors should look at the established sectors in India, which gives the benefit of experience. While India will continue to attract FDI, foreign investors must gauge their risks and do due diligence before entering the market.

This article was first published September 2016.
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