Fix the dispute settlement system

Sarosh Zaiwalla | Updated on January 22, 2018

Sort things out: Rather than wrangle over it

Changes in arbitration law will repair India’s poor reputation with respect to contract enforcement

Since Prime Minister Narendra Modi came to power last year, the Centre has driven through a reform agenda to improve ease of doing business. Initiatives such as Make in India and Digital India have unleashed entrepreneurial forces that were initially missing in India’s manufacturing and financial sectors.

The Centre has set out to overhaul India’s legal system — notably in its proposal to change the framework of arbitration. Changes in the legal system are essential to attract foreign investment.

Outmoded system

Foreign companies are often reluctant to invest in India as there is a perception that the Indian legal system does not sufficiently protect foreign investment. Changes to the framework of arbitration are, therefore, welcome. The legislation in question is The Indian Arbitration and Conciliation Act 1996. Since new international standards were set in the UNCITRAL Model Law 2006, this law has been criticised internationally as being increasingly ineffective for the parties involved.

The Law Commission, an advisory body to the Ministry of law and justice, recently went as far as to say that “litigating in courts in India is a time-consuming and expensive exercise, and justice usually eludes both parties to an action”, and that arbitration in India has been going the same way, being “afflicted with … high costs and delays”.

The standing of India as a reputable seat for international arbitration and litigation is not high. This has resulted in parties turning to neighbouring centres such as Hong Kong and Singapore to resolve disputes.

The Arbitration Amendment Bill, now cleared by the Cabinet and to be introduced in Parliament soon, is expected to include a vast range of new statutory provisions. This includes the option for tribunals to award compound interest, the imposition of time limits on awards, and the opening up of arbitration to foreign law firms.

Having worked in arbitration cases in India for over 30 years, I believe that the change in the law is a step in the right direction. A society needs to be driven by the law and, in turn, needs to be enshrined in law.

The lack of confidence in Indian arbitration, whether true or not, needs to be recognised, and steps taken to effectively tackle this perception. One arbitrator found to be lacking integrity can reflect negatively on the whole arbitration community. The arbitration community in India should ensure that an arbitrator against whom there is a shadow of diminishing integrity is rooted out from the system.

Lack of coordination

Another criticism that is often aired is that retired judges have monopolised the profession of arbitrators. Since they conduct arbitration proceedings along the lines of court processes, this leads to lengthy delays. It is common for Indian parties to appoint a retired judge as an arbitrator, who is not able to communicate effectively with his two other co-arbitrators. I personally had this experience when I was sitting as a co-arbitrator in London with a retired Chief Justice of India and the third arbitrator who was a retired chief justice of the European Court of Justice.

There was a complete breakdown of communication between the Indian chief justice and the chairman of the tribunal. This would not have happened had the arbitrator appointed by the Indian party been able to ensure that the Indian appointer’s case was heard by the co-arbitrators.

This cannot be remedied by making amendments to the law. The government should develop institutions that train individuals who aspire to practice in the field of arbitration. Parties should have a range of options from which to choose their arbitrator.

Professional training

There are some disputes that require an arbitrator to have a working knowledge of the sector concerned. It is common in shipping and construction arbitrations for the parties to appoint arbitrators who have first-hand expertise in those fields.

It is easier to understand the parties and resolve a dispute if the arbitrator is well-versed with the knowledge and expertise in a particular business sector or industry. Therefore, creating specialised arbitral institutions along similar lines as that of the London Maritime Arbitrators Association (LMAA) should also be considered.

Non-governmental bodies need to step up their efforts to help reinforce the government’s reform agenda. While I applaud the recently established India International Alternate Dispute Resolution Association (IIADRA) for engaging stakeholders to improve efficiency, I would suggest not having too much bureaucratic red tape. Information and ideas can flow efficiently and effectively across all channels, leading to speedier outcomes.

I am sure that in due course these bodies will succeed in bringing about a very high international standard to promote institution arbitration and mediation in India.

The proposed Bill is a positive step forward, and should be welcomed by foreign investors. If passed, the enforcement of commercial contracts in India by arbitration should be easier. Of course, the details of the Bill will need to be reviewed carefully, once available.

There are worries in India’s legal circles that the Bill may suffer the same fate as the draft law introduced in 2003, which was later withdrawn. However, it seems that the indications are more positive this time. The biggest risk is in the Indian parliamentary process — there are a number of other significant reforms being considered by Parliament, and the Arbitration Amendment Bill may be pushed down the agenda.

I hope Indian politicians, and those involved in the legislative process of this Bill, recognise its potential for making India a more attractive international destination for dispute resolutions. No time should be wasted in its implementation, as reform in this area of Indian law is overdue.

The writer is the founder and senior partner of Zaiwalla & Co

Published on November 22, 2015

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