INDIA (DOMESTIC FIRMS): An Introduction to Dispute Resolution: Arbitration

Shaking off decades of sluggish socialist era growth, India embraced economic reforms from the early 1990s. This bore fruit and led to unprecedented growth. The country ranks amongst the top FDI destinations, with its GDP rising from USD476 billion in 2000 to about USD4 trillion in 2023. However, with cross-border investment came cross-border disputes, and Indian parties regularly top the foreign user chart of the SIAC and also the ICC’s South and East Asian segment.

The new Arbitration Act of 1996 

As part of its economic reforms, India felt the need for a new Arbitration Act (the “Act”) for both domestic and international arbitrations. This came about through a composite statute in 1996. The Act is based on the Model Law of 1985 and the UNCITRAL Rules of 1976.

Structure of the Act 

There are two main parts to the Act. Part I contains the substantive provisions to govern all India-seated arbitrations (domestic or international, statutory, institution administered, ad hoc or otherwise). So long as an arbitration is seated in India, Part I would apply. Two provisions of Part I also apply to foreign-seated arbitrations (but can be contracted out of). These include Section 9, where a party in a foreign-seated arbitration can take recourse to Indian courts for injunctive or interlocutory relief (but normally not once the arbitral tribunal has been constituted). Moreover, foreign-seated arbitrations can seek the assistance of Indian courts in taking evidence, provided such recourse is backed by a request from the arbitral tribunal.

Part II of the Act has a much narrower ambit and is concerned only with the enforcement of foreign awards (under the Geneva or New York Convention). India is not a signatory to the ICSID Convention.

Part III of the Act contains provisions for conciliation, which can be availed of by any party regardless of the seat of the arbitration (or indeed without recourse to arbitration). Any settlement arrived at under Part III of the Act has the same effect as an arbitral award and is enforceable as a decree of the court.

Distinction between domestic and international arbitration seated in India

The Act confers certain advantages on an arbitration that qualifies as an “international commercial arbitration”. The chief benefit is that the grounds for challenge to an award in an international commercial arbitration are narrower than those prescribed for a domestic arbitration. A domestic award is capable of being challenged on the “patent illegality” ground, although not on the merits of the dispute. This ground is not available in relation to an international commercial arbitration.

However, under Indian law, an arbitration is not considered to be an “international commercial arbitration” merely because a party is owned or controlled from outside India. If the party concerned is incorporated in India, it is deemed to be an Indian entity, and its arbitration is not considered to be an international commercial arbitration. At the same time, even if one party is incorporated in a foreign country, or if the individual concerned is a foreign citizen or normally resides outside India, the arbitration qualifies under Indian law as an international commercial arbitration.

The working of the Act  

Indian courts lean in favour of enforcement of arbitration agreements and awards. The Act (by a non-obstante clause) prohibits judicial authorities from intervening in any arbitration, except as provided for thereunder. The principle of non-intervention is expressly recognised as one of the “main objectives” of the Act, as set out in its Statement of Objects and Reasons. A judicial authority before which an action is brought, that is the subject matter of an arbitration agreement, is required to refer the parties to arbitration.

The only exception is if it concludes, on a prima facie basis, that “no valid arbitration agreement exists”. Indeed, the Act departs from the Model Law and does not permit court intervention during the pendency of the arbitration – whether it pertains to a challenge to an arbitrator on the ground of lack of independence or impartiality, or is against an interim order by the tribunal rejecting a challenge to its jurisdiction. All such court recourse during the arbitration (which is otherwise permissible under the Model Law) is not permissible under the Indian Act. These challenges can be made only once the award has been made.

While the purpose and purport of the Act are clear, it has had a rocky journey, with court judgments sometimes at cross purposes with the legislative intent. Certain judgments were not seen to be arbitration friendly, prompting multiple legislative interventions (in 2015, 2019 and 2021). The dust has not yet settled, as some legislative interventions were believed to be hasty and counterproductive. The government has recently set up an expert committee to suggest changes to the law, as required. An amendment to clarify the law is expected in due course.

Selecting the seat 

India is a wide and diverse jurisdiction, so it is particularly important to select the arbitration seat carefully. The seat determines which court has jurisdiction over the arbitration, including in relation to proceedings to set aside an award. Many cities and judges are not commercially savvy or steeped in the arbitration jurisprudence. All things considered, Delhi and Mumbai offer the most favourable seat options. The competent courts here are either the High Court of Delhi or the High Court of Bombay (Mumbai); the official language is English and the judges are well versed in commercial litigation and arbitration jurisprudence.

Conclusion  

India has several factors to lend comfort to foreign litigants, including an English-speaking Bar and sophisticated legal talent. Its commercial laws and legal traditions are based on the English laws and traditions. The courts are independent and robust, and do not suffer from any anti-foreigner or pro-state bias.

At the same time, India has a problem of judicial delays, which can impact award set-aside proceedings or enforcement proceedings. The effect of judicial delays can be neutralised to a large extent by a careful selection of seat (New Delhi or Mumbai), where the system is better geared for an efficient outcome.

In a growing cross-border world, large corporations need to be prepared to litigate in any corner of the world. An India-located dispute will have its unique elements. With a trusted legal team, these waters can be successfully navigated.