International Commercial Arbitration: An Insight into How Disputes are Resolved in MNCs

By Aditi Utkarsha

Introduction

The procedure through which disagreements between involved parties are resolved or resolved amicably, without the involvement of the judicial system or any formal trial, is referred to as Alternative Dispute Resolution (ADR).

ADR serves as a means to address various issues, encompassing civil, commercial, industrial, and familial matters, especially when negotiations have not been initiated, and an agreement seems unattainable. Typically, ADR involves the engagement of a neutral third party who facilitates communication between the parties, encourages discussion to bridge differences, and ultimately resolves the dispute.

Alternative mechanisms for dispute resolution have become increasingly popular in the commercial sector and otherwise, as clients and lawyers attempt to avoid litigations. Hence, arbitration, mediation, and other alternative dispute resolution mechanisms are commonly relied upon today in various fields as securities regulation, commercial law, employment law, domestic relations, labor law, medical malpractice, construction law, international private law, and many other areas.[1]

Legal Background

Alternative Dispute Resolution is not a new concept. Mediation was used as a method of dispute resolution in India even centuries before the British arrived. In ancient times, a Panchayat System existed in India. This system required the village heads to resolve community disputes. This mechanism is prevalent in Indian society to date. Even in the pre-British period, the business class in India utilized mediation to resolve disputes. At that time, business association members requested impartial and respected businessmen to resolve disputes through informal procedures.[2]

Modern arbitration law in India was first codified under the Bengal Regulation in 1772 during British rule. Its key features were: (i) Reference by Court to arbitration, and (ii) Consent of the parties for such reference.

Until 1996, the law governing arbitration in India consisted mainly of three statutes:

• The 1937 Arbitration (Protocol and Convention) Act – It was designed to enforce foreign arbitral awards
•  The 1940 Indian Arbitration Act- It was the general law governing arbitration in India.
• The 1961 Foreign Awards (Recognition and Enforcement) Act- This act was also used to enforce foreign arbitral awards along with the 1937 act.

The government enacted the Arbitration and Conciliation Act, of 1996[3] in order to address the new emerging issues in ADR and the surrounding sectors. The 1996 Act is a comprehensive legislation modeled on the basis of the UNCITRAL Model Law.

This Act also repealed all three previous statutes dealing with ADR, i.e., the 1937 Act, the 1961 Act, and the 1940 Act. The 1996 Act addresses mechanisms and processes for both domestic and international commercial arbitration.

The objective of the Arbitration and Conciliation Act is the swift resolution of commercial disputes through private arbitration.

The Supreme Court has also given its judgment and formal rules on the formation of an expert committee to formulate how the provision relating to ADR incorporated in Section 89[4] of the Civil Procedure Code – 1908 has to be brought into operation. This judgment was given in the case of Salem Advocate Bar Association v. Union of India[5].

Section 89 of the Civil Procedure Code, 1908 provides an opportunity for the people to settle their disputes without litigation if it appears to the court there exist elements of settlement outside the court. Then court formulates the terms of the possible settlement and refers the same for Arbitration, Conciliation, Mediation, or Lok Adalat.

Types of Arbitration

Arbitration is a form of alternative dispute resolution (ADR) that is used to settle disputes outside of the court system. It is a process in which one or more impartial third parties, known as arbitrators, are appointed by the parties involved in a dispute to make a decision on the matter. The decision made by the arbitrator is legally binding and enforceable.

Arbitration is often used as an alternative to litigation because it is generally faster, less expensive, and more flexible than going to court. It is also a private process, which means that the details of the dispute are kept confidential.

There are the following types of arbitration:

• Ad hoc arbitration – Ad hoc arbitration is when the parties involved in a dispute agree to appoint an arbitrator or a panel of arbitrators to resolve their dispute. This is specifically established for a particular agreement or dispute. When a dispute or difference arises between the parties in the course of a commercial transaction, then in this case ad-hoc arbitration may be sought by the conflicting parties. This arbitration is agreed to get justice for the unsettled part of the dispute only.
• Institutional arbitration- In this type of arbitration, the parties have previously agreed that if any future differences or disputes arise between them in the course of their commercial dealings, these issues will be resolved through arbitration according to the terms outlined in the agreement.

Arbitration can be used to resolve a wide range of disputes, including commercial, labor, and consumer disputes. It is often used in international trade because it provides a neutral forum for resolving disputes between parties from different countries.

The process of arbitration typically involves several stages. The first stage is the agreement to arbitrate, which is a contract between the parties involved in a dispute that outlines the terms and conditions of the arbitration. The second stage is the appointment of arbitrators, which can be done by mutual agreement or by an institution. The third stage is the hearing, which is where both parties present their case to the arbitrator or panel of arbitrators. The fourth stage is the award, which is the decision made by the arbitrator or panel of arbitrators.

Stemming from arbitration comes International Commercial Arbitration. It is an excellent dispute-resolution method between commercial parties or multinational companies. This type of arbitration is cross-border and is not restricted to a particular country. Its global nature makes it quite different from arbitration between individual parties.

International Commercial Arbitration

International commercial arbitration is a favored method for resolving disputes, providing a private alternative to national courts. Particularly popular in cross-border transactions, it ensures a neutral platform, and ease of enforceability, and allows parties the autonomy to select arbitrators. This commitment to arbitration is typically formalized through an arbitration clause in commercial contracts, though parties can also agree to arbitration after a dispute arises through a submission agreement.

Key aspects of the arbitration process, such as the administering institution, arbitrator selection, legal venue, language, and governing law, are often predetermined within the arbitration clause. The authority of arbitrators is governed by this clause and the laws of the place where the arbitration takes place. The process concludes with a binding final award, enforceable on both the parties generally without appeal rights and subject to limited grounds for setting aside.

The enforceability of international arbitration awards is a notable feature, facilitated by the New York Convention, allowing awards to be recognized in over 170 ratifying states. Neutrality is crucial, enabling parties to avoid local court advantages and navigate unfamiliar domestic judicial systems.

Privacy and confidentiality are inherent features in international arbitration, maintaining the confidentiality of legal communications between the parties, and extending to maintaining overall confidentiality on the parties’ agreement.

A distinctive feature is the freedom to choose arbitrators based on specified qualifications or relevant expertise. Awards in international arbitration are typically final and binding, with limited circumstances for setting aside, primarily related to due process or arbitrator powers rather than the merits of the award.

International arbitration stands out as it’s informal compared to judicial proceedings. It offers a private and flexible dispute resolution method. Parties retain autonomy to determine procedural rules, conduct, and the location of the arbitration hearing. This alternative dispute-resolution method embodies a collaborative and adaptable approach to resolving cross-border conflicts.

As businesses expand, they are bound to encounter legal conflicts due to differences in laws, regulations, and cultural differences. In such cases, international commercial arbitration serves as a great medium to settle disputes amicably. It contains all the benefits that an arbitration between individual parties has.

It offers flexibility in terms of procedure and rules. Parties involved in the dispute have more control over the process and can tailor it to suit their specific needs and concerns. This adaptability is particularly advantageous when dealing with complex or unique disputes. It also allows parties to select a neutral third-party expert or mediator who specializes in the relevant field. This ensures that the person helping to resolve the dispute understands the technical aspects and nuances of the issues involved. Thus, the time-consuming process of litigation can be skipped by employing this method of dispute resolution.

International commercial arbitration is a method for settling disputes between entities in different countries, utilizing an arbitrator or a panel. Unlike traditional litigation, parties opt for arbitration, where the arbitrator’s decision is binding. It is applied in various disputes, including contracts, intellectual property, investments, and construction, especially when parties aim to preserve their commercial relationships post-resolution. Conservation of the civil relationship between the parties and a confidential process is one of the most important features of International Commercial Arbitration.

Initiating ICA typically involves signing an arbitration agreement, outlining terms, procedural rules, arbitrator selection, and the arbitration venue. Once agreed upon, arbitration proceeds with the arbitrator or panel considering evidence to reach a final, binding decision. Contesting this decision is only possible under specific circumstances, such as procedural irregularities or decisions against public policy.

International Commercial Arbitration operates under international conventions and national laws, such as the UNCITRAL Model Law, providing a comprehensive framework.

Conclusion

In conclusion, the advantages of International Commercial Arbitration in resolving cross-border disputes are numerous. It is often quicker and more efficient than traditional litigation due to its informality and flexibility. Moreover, it typically maintains greater confidentiality compared to public court proceedings. Enforcing arbitration awards across borders is facilitated by the New York Convention, streamlining the recognition and enforcement process.

This approach aims to ease the burdens placed on the parties or businesses seeking dispute resolution and deliver outcomes that are both fair and efficient.

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[1] Stone, Katherine Van Wezel, Alternative Dispute Resolution, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=631346

[2] Anil Xavier, Mediation: Its origin and growth in India, www.arbitrationindia.org/pdf/mediation_india.pdf.

[3] Arbitration and Conciliation Act, 1996, Acts of Parliament, 1996 (India)

[4] Section 89, Civil Procedure Code, 1908 (India)

[5] Salem Advocate Bar Association v. Union of India, (2005) 6 SCC 344