Arbitration in India: Scope and Challenges

By Aditya Balaji

Introduction

The world we live in is highly globalized and is run by contractual relationships. There is a need to maintain relationships amongst businesses to maintain the validity of contracts. When a dispute arises, however, parties tend to take matters to court. And when such situations arise, it often makes things difficult and complex between both parties and strains the relationship. The process is also extremely time-consuming and expensive as well which often impacts both parties adversely despite the case being put to rest. Businesses need to settle things fast in order to continue conducting business. Therefore, an efficient way of settling disputes has been innovated in order to accommodate for the delay in solutions provided by the court sometimes. These methods in solving problems are referred to as Alternative Dispute Resolution mechanism of ADR mechanism. These are alternate methods where parties can turn to in order to settle matters amongst themselves quickly and cost-effectively without taking matters to the court. Furthermore, these methods often try to preserve or protect the existing relationship amongst the parties, unlike court procedures where sometimes the final outcome can result in the relationship coming to an end between both parties. There are various types of ADR mechanisms. Some of the popular choices are the mechanisms of negotiation, meditation, and arbitration. For this article, we will be looking at how arbitration works and how it has developed in the Indian atmosphere.

Arbitration

The process of arbitration refers to the process of dispute resolution wherein a person is appointed via a procedure for selecting an arbitrator. This person then on behalf of both parties comes up with a solution by analyzing and evaluating the facts and evidence provided by both parties. Arbitration is different from that of negotiation and mediation because the solution or the dispute resolution that is provided by the arbitrator is legally binding on both or all parties involved in the process. Arbitration is not a new concept; it has been a concept that has been in practice since the 1940s. In order to make it more uniform and in line with international standards, The arbitration laws were amended in 1996. This was done in order to keep up with the changing economic atmosphere in India. Furthermore, this was done to bring the arbitration laws and process in line with the UNCITRAL Arbitration Rules. The UN recommendations put out procedures for the member countries to adopt in the field of arbitration. This was done so with the view that arbitration would be an effective mechanism for solving disputes amongst countries when businesses deal internationally and thus would give various countries uniform procedures making the process a whole lot easier.  The laws were amended a further two times in order to make it, even more, accommodating and simpler and easier to arbitrate disputes. One such amendment was in 2015, while the last one was in 2019. 

Scope of Arbitration in India

1. Types of Arbitration

There are two types of arbitration. They are ad hoc arbitration and institutional arbitration.

1. Ad Hoc arbitration refers to the arbitration method where an arbitration tribunal decides over the issue with the rules established by either both the parties or by the rules established by the tribunal itself. 
2. Institutional arbitration refers to the arbitration that is overseen by a particular institution and the rules adopted by that institution. These institutions can be various in numbers such as a chamber of commerce and industry. This method allows for more professional help as the rules are already established and clear-cut in nature.

In India, most of the arbitration is done via the ad hoc method. This method is far more popular in India. The use of institutional arbitration is a small minority as it is still lacking in a strong base and structure in India as they face a lack of support. Very few institutions exist that oversee the arbitration process, therefore, making it a less viable option.

2. Minimal Judicial Intervention

The purpose of arbitration is to ensure that judicial intervention is at a minimum. It is defined by section 5 of the Arbitration and Conciliation act 1996:

“5. Extent of judicial intervention.—Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.”

The aim of the act was to bring together all the various arbitration acts that existed previously. This act aimed to reduce judicial intervention, however, it failed to do so. Section 11 of the 1996 act gave powers to the chief justice of the high court or of the country to choose members of the arbitral tribunal members. This in turn raised eyebrows as many considered this as an act of judicial interference while some saw it as an administrative measure. Even the courts pondered upon this question for a long time where the answer swung both ways. Finally, the 2015 amendment was passed in order to ensure the principle of minimum judicial intervention is followed. According to this, it is up to the supreme court or the High court to appoint a tribunal in the event that parties do not appoint arbitrators.

3. International Commercial Arbitration

The new arbitration laws are amended in such a way to support international arbitration within India and outside India. This greatly increases the scope of arbitration. Furthermore, this is a sign of India’s growing economic position in the global economy and therefore is making it more accommodating to companies to arbitrate easily without having to worry about geographical and jurisdictional lines. The interference of the Indian judiciary is further reduced when it takes place abroad. The seat is a concept that refers to which courts have jurisdiction in the event judicial intervention is necessary. If the seat is in India then the Indian courts have a say and if it is abroad then it is beyond the jurisdiction of Indian courts. This is a certain way gives flexibility to parties who are contracting around the world.

Challenges of Arbitration in India

1. The Limited Scope of Arbitration

The arbitration and conciliation act 1996 lay down the limitations of arbitration in sections 32 (4) and 48(2). 

 Enforcement of an arbitral award may also be refused if the Court finds that—

 (a) the subject matter of the difference is not capable of settlement by arbitration under the law of India; or 

(b) the enforcement of the award would be contrary to the public policy of India

Criminal offenses, matrimonial disputes, insolvency disputes, testamentary matters, grant and issue of patents and trademarks are non-arbitrable matters. 

However, matters incidental to criminal offenses and matrimonial disputes such as damages to personal injury or agreement between husband and wife on the terms of separation may be referred to arbitration. The arbitrability of disputes is decided by arbitral authority or by courts after the issue of an award under section 34 of the act. 

2. Outdated Technology of Arbitration

Although the arbitration act lays down time limits for issuance of arbitral awards, the time incurred for proceedings is significantly lengthened due to the outdated technology of stenographers. The invariable human error within stenography results in a flawed record of witness testimony extended duration due to the speed of the stenographer and subsequently a break in the flow of cross-examination. Highly trained stenographers have to be sourced from abroad to combat these problems and end up increasing the cost of arbitration. There is a necessity to encourage transcription in arbitration since it significantly cuts downtime, cost, and human inefficiencies. With the shift to online judicial proceedings due to the pandemic, technologically advanced transcription services became a necessity and should now become the norm. 

3. Automatic stay on Awards 

The 2021 amendment of the arbitration act section 34 stays the arbitral award unconditionally if the courts are prima facie satisfied that the arbitration agreement or award was induced or affected by fraud or corruption. This has a retrospective effect from October 23, 2015. The act does not define “fraud” or “corruption” This may diminish the pro-arbitration culture India has been trying to cultivate since parties may suffer through litigation even if they are correct. It may also open up previously closed cases due to the retrospective effect of the amendment. 

4. The Limited number of Arbitral Institutions

Institutional arbitration provides a fixed timeline, trained staff, and concrete guidelines resulting incalculable and efficient arbitration. However, there are only 35 arbitral institutions in India. An increase in the number of institutions without compromising their regulation is necessary to overcome the backlog and pendency of cases. Such an improvement in efficiency would encourage more people to settle out of court and reduce judicial dependency. 

5. Cost and time of Arbitration 

The highlight of arbitration is its two intrinsic characteristics – it is speedy and inexpensive. However, due to the utilization of ex-judges as arbitrators and lawyers, the rigor and cost of arbitration are high. It becomes difficult for the judge to abandon the judicial discipline or the procedures of a courtroom and the arbitral process becomes similar to litigation. Similarly, due to their legal training, lawyers raise all the legal technicalities as they would in the courtroom, and the judge allows it. This prolongs the proceedings, making it a costly affair. 

Conclusion

Arbitration is a very cost-efficient method on paper as compared to taking disputes to court. Its wide use and popularity are a testament to its effectiveness as an alternate dispute resolution mechanism. However, that being said despite its positives, there are various areas that still need to be noticed and improved upon in order to make this a more beneficial process for all parties involved. An improved and well-supported arbitration system in India can truly help raise the bar and meet the world-class standards of arbitration that are available in different parts of the world like the United States of America. This not only makes the process a lot more effective than it already is, but it also makes it highly attractive for multinational companies to be involved in the economic growth of the country. Furthermore, it helps in easing the load of the judiciary and fasten the process of ensuring fair and just resolutions to matters of concern to the courts by allowing them to focus on more pressing situations.