Why Is Arbitration Not Working In India?

Why Is Arbitration Not Working In India?

Arbitration has been the toast of the legal community for a long time. It has been long expected that arbitration will replace business litigation to a great extent one day. Lawyers have been encouraging parties to have an arbitration agreement in all their business transaction documents for more than two decades now.

However, arbitration has not been proven to be effective too often. A lot of lawyers have begun to reevaluate if they should put in those arbitration clauses blindly in the agreements they draft. Also a lot of people who have already put in binding arbitration clauses in their agreements already, are finding arbitration very difficult to navigate and too expensive when disputes actually arise.

And that is perhaps the biggest story about lack of serious adoption of arbitration by India Inc. Even after 23 years since the introduction of Arbitration and Conciliation Act of 1996, arbitration seems to be slowly evolving and not really making a dent on pendency of litigation situation. Would it ever become the mature alternative that Indian businesses can safely rely on for reliable, fast, efficient and cost-effective dispute resolution, especially given the terrible state of civil justice?

The BN Srikrishna Committee Report on Institutionalisation of Arbitration Mechanism in India states that a lack of governmental support to promote arbitration is also one of the reasons why arbitration has not become the most preferred way of resolution. The report goes on to suggest that there should be awareness programs and training to make arbitration a more popular concept. However, such awareness campaigns are very unlikely to attract parties to arbitration given the way it functions at present.

Quality of arbitration and arbitrators can often be suspect. Courts in India regularly interfere and do not respect party autonomy. The award is expected to be up for appeal or review in the higher courts and that really does not instil confidence in the parties involved in disputes. These factors are putting off parties from adopting arbitration. At present, it appears that only in a handful of matters involving very large claims, arbitration is still viable in India.

We are seeing big business preferring to take things to court rather than arbitration. Banks, NBFCs and lenders clearly do not see much merit in arbitration and prefer specialised laws and forums that seems to give them more efficient resolution. Litigators still advice litigation over arbitration because arbitration is still seen as a fancier way of litigation which would only cost more and can be completely unreliable.

Government also seems to have recognized the failure, pushing for a bunch of reforms in arbitration law in the last few years, and also emphasizing on institutional arbitration. Nonetheless, it has stepped up to set up commercial courts, a measure that should have been entirely unnecessary if arbitration had served the purpose it was expected to serve. Commercial courts as well as tribunals like NCLT have made arbitration even less attractive.

It seems there has been excitement and enthusiasm about arbitration when it started, but over all the mechanism has so far failed to deliver according to the levels required and we are seeing some reversal of sentiments at present.

Arbitration was meant to be the alternate dispute resolution mechanism that will takeover litigation and make dispute resolution expeditious rather than being cumbersome and costly. However, that has not been the case. Both the time and cost argument gets defeated in the Indian context of arbitration. Let us explore the factors that are holding arbitration back in India, and potential solutions that can put it back on track.

Why is arbitration expensive?

Cost of arbitration proceeding typically includes the arbitrator's fee, the rent for the arbitration venue, some basic clerical expenses and professional fees for the representatives of parties involved, including lawyers and expert witnesses.

However, this does not even begin to describe the costs involved.

Every step of the process, from the appointment of arbitrator to execution of arbitration order involves litigation in the district courts as the primary forum, and the order of which may be challenged in higher courts. This means instead of avoiding litigation, you are getting into even more litigation when you opt for arbitration, and pay for many sets of lawyers and legal proceedings in every step.

The arbitrators fee itself can be very high. In India, most of the time retired High Court and Supreme Court judges are appointed as arbitrators. While there is no bar on someone else being appointed as an arbitrator, the judicial community frowns on the same and most lawyers feel that it is easier to get the order of an arbitrator panel set aside in court of law if the arbitrator was not a retired judge.

This unfortunately translates into delays and high costs of arbitration as the arbitrator fees of such exalted retired judges tend to be very high. I have personally come across many cases where fees spent on arbitrators have crossed the amount claimed by the claimant in the first place! Basically, parties lost a lot of money by starting the arbitration and would have been better off if they never pursued their claims!

Arbitrators often demand that they will only hold proceedings in 5 star hotels of their choice.The cost of venue can add up really fast. Parties are expected to often pay for business class travel tickets also. Once the arbitration has begun, the parties find it hard to say no to the demands of the arbitrators, because the outcome of expensive claims depend on those arbitrators.

There is a prescriptive fee schedule in the statute, but it is not uncommon for arbitrators to refuse to follow the same.

The cost of litigation has turned out to be much cheaper in most cases. The litigation costs only involve the lawyers' fee and court fees which is also calculated on the claim amount of the suit. Further, writ petitions or fixed appeal costs are very minimal. The only costs that bother the parties in the case of litigation are the appearance fee of the lawyers. Further, there is also the hidden costs of drafting various legal documents such as the drafting of suits, plaints, petitions, affidavits and the likes. The lawyer fee may also depend upon the kind of seniority and the experience that he has to offer. However, there is no relief from such costs in case of arbitration but one has to spend more on these accounts.

There could be a cost advantage to arbitration if it was time efficient and courts did not interfere as a routine. Unfortunately, arbitration has come to mean spending twice for the same remedy, once on arbitration and then again in the court.

For most people and businesses, arbitration is prohibitively costly.

This is in addition to time cost and opportunity cost - all due to massive delay which arbitration was supposed to cure but does the opposite in reality!

Calculate the cost of capital spent on arbitration as well as claims that take too long to recover, and arbitration in India turns out to be the nightmare of business class.

Several big banks and companies have now made it a standard rule to not put in arbitration clauses in their agreements, because of these reasons. Banks are often the bellwether parties to watch out for because they need the most efficient contract enforcement and their legal practices are usually the most well-considered based on their experience of enforcing many contracts. Cost of enforcing a contract is not reduced by arbitration in India, and this is the most major factor for lack of adoption.

Why is arbitration unreliable?

Commercial arbitration has become quite common in India, but only as far as arbitration clauses in contracts are concerned. For years, lawyers have mindlessly put in clauses for ad-hoc arbitration in any contract they drafted.

However, for the vast majority of contracts, arbitration is not the most appropriate or efficient option. If you are trying to enforce a contract to get 10 lakhs or 1 crore in Indian rupees, it may be a bad option to use arbitration not only due to high costs of arbitration as discussed above, but also due to convoluted process and overall low credibility of arbitration and arbitrators.

Is arbitration reliable? There is no regulatory body at present that accredits or approves arbitrators, or oversee their professional conduct or certify their level of expertise. There is no official code of conduct or rules that apply to arbitrators, which means they enjoy unprecedented autonomy, and have a lot of opportunity to indulge in corruption or unethical and unprofessional behaviour.

Perhaps this is what has led to an assumption that retired judges alone should be appointed as arbitrators, and the rest are untrustworthy. However, whoever becomes the arbitrator, there are no checks and balances and no code of conduct for them. Most things are left to the personal discretion of the arbitrators.

Also, Indian judiciary is eager to claim arbitration as it's exclusive turf and keep out all others. Arbitration now serves as the most lucrative post-retirement work opportunity for retired High Court and Supreme Court judges and perhaps they are very reluctant to cede this space to other professionals. This has severely restricted the availability of arbitrators and made long delays quite normal. It is common in European countries that jurists, respected lawyers and law professors serve as arbitrators. But not so in India! Of course, nobody says this aloud ever, but the reality explains itself.

Arbitrators also for their personal gain increase the number of hearing for an arbitration especially when the fees are received on per hearing basis. Many arbitrators fully intend that arbitration should go on for a few years and not get over quickly so that they continue to get richer!

Overall, this unavailability of reliable ad-hoc arbitrators, doubts over credibility of many of them, lack of information regarding past performance of arbitrators make it hard for parties to find arbitrators reliable and trustworthy.

On top of this, many parties, especially government bodies, try to draft one sided arbitration clauses that allow them to appoint arbitrators unilaterally, further reducing reliability of such process.

The public sector companies also have an arbitration clause in their agreements usually, where they go ahead and appoint their own officers as arbitrators if disputes arise. This is a sheer violation of the principles of natural justice. These arbitrators often pass decisions which are not just unfair but also unconscionable.

Why is arbitration time-consuming in India?

Arbitration was supposed to be an effective and quick substitute for civil suit which can take many years to be heard. Also, the idea was that there would be very limited opportunity to appeal an arbitration order, thus reducing the time taken to get to enforcement as in civil court one can appeal an order or decree at least twice. In reality, things have turned out very differently and arbitration has turned out to take longer than civil suits in some cases.

Also, the scope of civil suits has really reduced as there are many specialised tribunals and forums for business matters at present. For example, under MSME Development Act, there is arbitration like statutory procedure which one can approach for faster and low-cost resolution. Similarly, the Consumer Act precludes arbitration as well. It is in very rare instances that a business is required to go to a standard civil court any more.

Another example is how companies prefer to take disputes to forums like NCLT under insolvency law rather than filing a money suit at present.

While less time consuming alternatives to civil court has been created, arbitration is not less time consuming at all. Primary reason for this is the reluctance of Indian higher judiciary to allow fast arbitration process which is quite the norm in places like Dubai, London, Hong Kong and Singapore.

It is quite common in Dubai or Singapore for a matter to be argued in institutional arbitration within a week or even a day, if need arises. However, in India, such a thing will make judges lose faith in the process.

How can justice be done so fast, they tend to ask!

Non-cooperation of the judiciary is a big reason why we do not have fast arbitration in India. Recently, the time taken has been reducing, and arbitrators are trying to wrap things up in a year though in most cases they overshoot that time limit prescribed by statute. This is of course preceded and followed by a bunch of other court proceedings that delay things further.

Arbitration becomes a long drawn affair when the losing party has a recourse of challenging the order in court on wide grounds. An order being against "public policy" is the favourite loophole of Indian lawyers when they need to delay the enforcement of an arbitration order. All arbitration orders are challenged in the court as a matter of routine, and courts have been generous in entertaining such challenges.

This tendency of prolonging seems to be especially problematic when the biggest litigant of the country, the government, is on the losing side of an arbitration.

It is not only enforcement that is prolonged, some parties make sure that they prolong the entire process as much as possible, by challenging everything from appointment of arbitrator to validity of arbitration notice in the court. Even minutiae of arbitration procedure is used as an excuse to delay the arbitration by starting more and more processes in courts.

This completely defeats the purpose of arbitration because this tactics can be reliably used in India to cause significant delay in arbitration.

The typical way for any party to disrupt arbitration proceedings is to file an application and stay the proceedings in some way or the other. A similar tactic is used by lawyers in trial courts too. The scope of judicial intervention has been curtailed by the recent amendments and judicial decisions but the problem still persists.

The problem may also lie somewhere in the appointment of retired judges as arbitrators. They tend to hand out frequent and long adjournments as used to be given in a courtroom trial.

Arbitrators treating arbitration like a normal courtroom affair is also a significant reason for delay in Indian arbitrations. Arbitrators often break the statutory time limit and parties cannot protest in fear of getting a bad verdict!

Is there a solution ahead?

Overall, arbitration has become a victim of many vested interests in India and is barely functional.

India needs a strong institutional arbitration culture if arbitration is to stay relevant. Indeed the government has made some efforts to launch some arbitration institutions as have some private parties. These are still at the stage of experimentation and have not been very successful.

Will arbitration remain a tool to decide only 100 crores and 1000 crore disputes? Or where parties can afford to contract out of India and take their arbitration to Dubai or Singapore to avoid very eager Indian courts from interfering?

The 2015 Arbitration and Conciliation (Amendment) Act brought a lot of relief to the arbitration community. The amendments had tried to solve a lot of problems including making the arbitration a cost and time effective method of dispute resolution. The amendments make sure that the arbitration proceedings have to be completed within 12 months of their inception (although it remains to be seen if arbitrators will actually follow these rules). The amended provisions also make sure that the arbitrator has to be appointed as soon as possible by the High Court or the Supreme Court of India and delays are reducing.

It was encouraging to see the current Minister of Law and Justice stating that the present government intends to make the country a hub of domestic and international arbitrations by bringing in changes in the current. And they lived up to their promise, the New Delhi International Arbitration Centre Act, 2019 was passed approved by the cabinet and passed in the Parliament this year. It seeks to establish an autonomous and independent institution for better management of arbitration in India.

The Act proposes to establish a New Delhi International Arbitration Centre. This centre will be of national importance and will be replacing the International Centre for Alternate Dispute Resolution.

This can be seen as one of the steps taken by the government to promote institutional arbitration in the country. The government is trying its best to make India, a viable seat of arbitration and compete with the most sought after arbitration hubs in the world. The step also intends to do better in the coming ease of doing business index and attract more foreign investors in the country.

Furthermore, the Arbitration and Conciliation (Amendment) Bill, 2019 was recently passed by the Parliament in the monsoon session of this year. This Amendment Act is trying to fix the loopholes which were made by the 2015 Amendment Act. The Act has gone ahead and talked about setting up of an Arbitration Council of India for promotion of ADR mechanisms in the country. Further, the Supreme Court and the High Courts have been given the power to appoint arbitral institutions in specific cases, if the need arises.

However, there has been criticism on the composition of such a council which is headed by former judges but would be appointed by the Government. This proposition seems a bit problematic because the Government through its PSUs who party to a considerable number of arbitrations. The idea of party autonomy which the Apex Court has been reiterating through a number of judgments that seems to be lost in this specific part of the said Amendment. Further, the ACI intends to govern arbitral institutions, register all arbitrators and maintain all the arbitral awards made in India and abroad. It will be interesting to see if the ACI favours and grades some arbitral institutions compared to the others depending upon who sits on these arbitral panels of the said institutions.

All these seem very welcome steps and it would be exciting to see how this shapes the arbitration scene in the country.

Imagine the disputes being resolved in a time-bound manner and with ease which arbitration is supposed to stand for. More importantly, arbitration being accessible to small, medium and micro-entrepreneurs for resolving disputes. That could be a game-changer for our economy! After all, good arbitration regime means more ease of doing business, of which contract enforcement is a key factor, in which India has performed very poorly going by our history.

India would also become a more attractive destination for foreign investors if they knew that their contracts and interests can be enforced quickly and efficiently through Indian legal system.

There have also been suggestions from the popular 2015 NITI Aayog report of a separate bar for arbitrators in India. This will basically help in formulating rules for its members which can help in improving quality of arbitration services.

We really need it, because the further we separate arbitration from litigation, the better it is likely to work.

Written by Ramanuj Mukherjee, who teaches an arbitration law course and Kashish Khattar, a final year student at Amity Law School, Delhi.