Reforming the Indian Arbitration System

Context:

Recently, the Vice-President of India underlined the need for reforms in the Indian Arbitration system.

More on News:  

• In February 2024, an expert committee headed by former law secretary T K Vishwanathan submitted its report on reforms in the arbitration sector to the law ministry.
  • In March 2021, the government set up this expert panel to recommend reforms in the Arbitration and Conciliation Act, 1996.
• Last year, the former Chief Justice of India, NV Ramana, highlighted the significance of a robust arbitration system to India’s economy. 
• Recently, the President of the International Court of Arbitration, emphasized on the evolving arbitration landscape and how it facilitated better business.

About Arbitration in India:

• Refers: Arbitration is a form of dispute resolution. If two or more parties have a dispute, which they cannot resolve themselves, instead of going to court, they might appoint a third person as an arbitrator to resolve the dispute for them. 
  • They might appoint a panel of arbitrators to act as an arbitral tribunal.
• Evolution: India’s arbitration landscape has evolved through the era of panchayat systems to ones driven by principles of Lex Mercatoria and the UNCITRAL arbitration laws. Further, amendments to India’s arbitration laws enabled businesses to some extent.
  • 1899: The first Arbitration Act in India was enforced in 1899. 
  • 1996: Arbitration in India is regulated by the Arbitration and Conciliation Act, 1996.
    • This Act draws inspiration from the 1985 UNCITRAL Model Law on International Commercial Arbitration and the UNCITRAL Arbitration Rules 1976.
    • It is the primary legislation governing arbitration and conciliation in India. 
    • It aims to provide an effective and efficient dispute resolution mechanism outside the traditional court system.
    • The judgements and amendments in the Principal Act of 1996 have clearly expressed the lawmaker’s intention to progress India as an arbitration-friendly regime.
  • 2015: The Arbitration and Conciliation (Amendment) Act, 2015 was enacted to enhance the arbitration process in India.
    • Included Objectives: Expediting contract enforcement, facilitating the recovery of monetary claims, reducing court case pendency, and accelerating dispute resolution through arbitration.
  • 2019: New Delhi International Arbitration Centre (NDIAC) was established in 2019 under the provisions of the NDIAC Act, 2019.
    • Aim: To improve the management of arbitration in India by promoting institutional arbitration, provide state-of-the-art infrastructure for arbitration proceedings.
  • 2021: The recent addition to the pro-arbitration outlook is the Arbitration & Conciliation (Amendment) Act 2021. 
    • This is the third amendment to the Act of 1996 and shows the legislative intent to reform the Arbitration Act of 1996, making India an arbitration-friendly regime.
• Applicable: Arbitration happens in a wide range of settings, both domestic and international, from family law and rent reviews, through commodity trades and shipping, to international commercial contracts and investor claims against states. 
• Validity: Any form of arbitration irrespective of its nature has been recognised statutorily in India by bringing such arbitration under the ambit of the Arbitration and Conciliation Act, 1996. 
• Working: It consists of a simplified trial, with simplified rules of evidence and with no discovery. 
  • Arbitration hearings are usually not a matter of public record. 
  • Arbitrator renders a binding award on parties just like a court decree or order. 
• Types of Arbitration in India: There are two types of arbitration in India- Ad-hoc arbitration and Institutional arbitration.
  • Ad-hoc Arbitration: Here, a tribunal conducts arbitration using either pre-agreed rules or tribunal-laid rules, in the absence of any agreement between the parties.
  • Institutional Arbitration: It refers to the administration of arbitration by an institution in accordance with its rules of procedure.
• Contemporary Indian Landscape:
  • Shift in Mindset among Corporates: Earlier corporates considered arbitration as a costly and complex process lacking co-operation, which now has been changed. 
  • Understanding on Arbitration: Arbitration is now an opportunity for India to fuel its economic ascent. 
    • In both above mentioned cases, arbitration implies several benefits, although the case may not always be desirable in the manner that it should.
• Significance: Arbitration certainly offers flexibility in terms of the selection of arbitrators, the location of proceedings, and the rules governing the process. 

Need for Arbitration

• High Pendency of Cases: Indian judiciary currently has approximately 3 crore pending cases, with many more increasing day by day. This overburden cases on the judiciary highlights an urgent need felt for the establishment of a system to address the disputes outside the judiciary.
• Right to Timely Justice: It is an implicit part of the fundamental Right to Life and Liberty. Justice delayed is justice denied and it needs to be rectified with the strengthening of the arbitration system.
• Internalizing the Culture: The arbitration system plays a crucial role in internalizing the culture of conciliation and mediation among the people.
• People-Friendly: The arbitration system is not as technical as the judicial system and suits the common people’s needs for simplicity of laws. 

Difference between Arbitration & Litigation:

About Arbitration And Conciliation (Amendment) Act, 2021:

• Brought Changes: The amendment has two primary changes in the Act. 
  • To enable automatic stay on awards in certain cases where the court has prima facie evidence that the contract on which award is based was affected by ‘fraud’ and ‘corruption’. 
  • Omission of the Eighth Schedule from the principal Act, which specifies the regulations, qualifications, experience, and norms for accreditation of arbitrators. 

Challenges with Arbitration And Conciliation (Amendment) Act, 2021:

• Uses of Broad & Ambiguous Terms: The Amendment of section 36 uses terms like fraud and corruption without an exhaustive list or clarification of what would constitute fraud and corrupt practices. Also, in an amendment of section 43J, the term “regulated” is undefined. 
  • Therefore, parties who want to delay the award enforcement can exploit this section, pushing cases back to an orthodox litigation system.
• On Evidences: It is also unclear what threshold the courts will look for the prima facie evidence needed for fraud and corruption. 
  • Furthermore, there is no clarity on whether contracts agreements affected by fraud or corruption are a matter of fact and ought to be debated by the parties in the arbitral proceedings.
• Automatic & Unconditional Stay: As per experts, an unconditional stay amounts to a blanket stay, which will hurdle India’s efforts towards a pro-arbitration regime. The amendment on automatic stay of awards is more like a double-edged sword with equal potential to stretch matters and create hurdles in enforcing arbitral awards.
  • This is primarily because it becomes easy for losing parties to allege corruption and automatic stay on the arbitral award’s enforcement.
  • This may defeat the very purpose of the alternate dispute mechanism by drawing parties to courts and making it prone to litigation. 
  • This amendment’s retrospective effect might also open up a floodgate of litigation cases and overburden the courts.
• Delay & Pendency: In cases where an application under Section 36(2) of the Act is pending adjudication before a court, the applicants will now have to make renewed applications based on the grounds listed in the new amendment. 
  • This is likely to involve delays and increased costs unless the courts.
  • This amendment will affect enforcement of awards, and India might further slip in ease of doing business reports. This amendment takes a regressive step and does not help India’s aim of a pro-arbitration regime.
  • India aims to become a hub of domestic and international arbitration. Through the implementation of these legislative changes, resolution of commercial disputes could take longer duration now onwards.
• On Ability & Qualifications: Earlier Schedule Eighth qualifications and the general norms were very broad. This section, among other things, limited the ability of qualified foreign lawyers from acting as arbitrators in India. This was seen as a significant hurdle when compared to arbitration-friendly states like France.
  • The 2021 Amendment act has substituted Section 43J of the Act and deleted the Schedule Eighth of the primary Act. This effectively means that parties are free to appoint arbitrators regardless of their qualifications. 

• On Enforcement of Agreements: India already lags behind when it comes to the enforcement of international contracts and agreements. 
  • This lagging can further impact the spirit of Make in India campaign and deteriorate rankings in Ease of Doing Business Index.

Way Forward:

• Clear Language: To overcome the challenge of automatic stay of awards, the lawmakers should be precise in their language of drafting and promote consultation processes by industry experts. 
• Addressal to Ambiguities & Challenges: Need to address certain ambiguities exploited by losing parties when challenging awards. 
  • Addressal of the concerns related to delays, confidentiality, discrimination on the ground of sex, and the appointment, independence, immunity and disclosures of arbitrators would encourage more parties to opt for arbitration and contribute to the development of a robust and effective alternative dispute resolution framework in India.
• Encouragement to Settlements: Permitting an arbitral tribunal to use different Alternative Disputes Resolution mechanisms during the arbitral proceedings to encourage settlement of disputes may prove to be more effective but is rarely exercised in India.
• Collaborative Approach: Need for industry, legal fraternity and all other stakeholders in arbitration dispute resolution to work in unison to ensure the same is in the country and as per India’s legal regime. 
  • Need to emphasize the collective efforts of the judiciary, the executive, and the legislature in fostering an environment of hope, progress, and global recognition. 
• Effective Technological Use: Need to address the impact of disruptive technologies on arbitration as a dispute resolution mechanism. 
  • There is a need for adaptability to ensure effective and timely resolution amidst technological advancements.
• Balanced Approach: It should be adopted while accounting for both the stakeholder interests and the objective to make India a global hub of arbitration.
• A Pro-arbitration Approach: It should be adopted while keeping in mind the ground realities of the Indian legal system so as to ensure that the reforms are effective. 
• Increase Institutional Involvement: Steps must be taken to increase institutional involvement and reduce court intervention.
• Learning from Others: Some of the key features of the world’s leading arbitral seats ought to be considered, with due consideration of whether they are suitable or not for India.
• Appointments: Arbitrator appointments should be done by institutions. The amendments to Section 11 by the Arbitration and Conciliation (Amendment) Act, 2019 should be notified.
• Statutory Recognition: Interim orders arising out of emergency arbitrations should be given statutory recognition by bringing necessary amendments.
  • If a minority opinion is made available within fifteen days of the receipt of the decision of the majority, it shall be appended to the award.
• Ensure the Confidentiality: A provision should be inserted to ensure that confidentiality of arbitration is protected even in arbitration-related court proceedings.
• Allow Permission: A provision should be inserted to recognize/permit third-party funding in international commercial arbitrations seated in India.
  • A provision should be inserted to enforce interim and emergency orders passed in foreign-seated arbitrations under Part II of the 1996 Act.
  • A provision should be inserted in Part II of the 1996 Act to clarify that Indian parties can choose a foreign seat. 
    • It may be discussed if some reasonable or significant foreign nexus in the contract should be required for Indian parties to choose a foreign seat.
• Made Mandatory Provisions: Parties should not be allowed to circumvent mandatory obligations to attempt amicable settlement by treating them as merely a formality.
  • The position that enforcement of foreign awards is not subject to payment of stamp duty, should be codified.

Conclusion:

Arbitration may appear slow, but it is turning into an effective tool to resolve commercial disputes amicably in India. The changing landscape of arbitration in India is in line with what is required and desired. There is a need to work upon the arising concerns to make full use of India’s potential to become a global hub of arbitration.

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