India: India Modernizes Its Arbitration System: U.S. Companies Should Consider Arbitration Clauses In Indian Commercial Contracts

This piece was co-authored by:
Sherbir Panag, Partner at the Law Offices of Panag & Babu in New Delhi, India.
Aanchal Basur, Partner at the Law Offices of Panag & Babu in New Delhi, India.

The Indian court system has gained an unfortunate reputation for being notoriously slow, cumbersome, unpredictable, and unreliable, which makes solving commercial disputes in India a challenging ordeal. India ranks near the bottom in the World Bank's rankings of contract enforcement; it takes an average of over 1,400 days — more than three years — for a dispute to finally see the light of day, and in a typical case, 40% of a claim's value is eroded by litigation expenses. The Law Commission of India, in its 245th Report, noted that the problem of delay in the Indian judicial structure "is not only enormous but also complex" and explained that it would require an overhaul of the judicial system to ensure that problems of delay and pendency are adequately addressed.1

Unfortunately, India's arbitration system was not, until recently, much better than the court system. In October 2015, India amended its arbitration laws in an effort to bring them "in tune with global best practices" and to make India "a leading arbitration jurisdiction."2 On the one-year anniversary of the new law, India's Prime Minister observed that the new arbitration law "has made the arbitration process easy, timely and hassle-free."3

Arbitration Under the 1996 Law

Before 2016, arbitration in India was governed by the Arbitration and Conciliation Act 1996 (1996 Act). This law faced constant and harsh criticism from practitioners and parties alike.

  • Delay
    Under the 1996 Act, arbitration proceedings were becoming protracted, and sometimes an award was not rendered for years. This delay could largely be attributed to excessive interference by courts in the arbitral process.
  • Hesitation To Refer a Dispute to Arbitration
    Parties also faced challenges because courts were hesitant to refer a dispute to an arbitral tribunal. In contrast to the international approach to arbitration, courts in India had started reviewing the substantive validity of the arbitration agreement, refusing to refer disputes to arbitration even when arbitration agreements were prima facie valid.
  • No Code of Ethics
    The old regime also did not instill confidence regarding the neutrality of arbitrators. Arbitrators, and in particular party-appointed arbitrators, were not subject to any express code of ethics.
  • Stay of Enforcement Proceedings
    Under the 1996 Act, the losing party in an arbitration could obtain a stay of the execution of the award merely by filing an application to set aside the award with an Indian court. This would serve as an easy route to stall the enforcement proceedings.
  • The "Unruly Horse" of Public Policy
    Lower courts in India, responsible for reviewing arbitration awards, were hostile toward arbitration proceedings and, therefore, awards could easily be set aside on vague "public policy" grounds.

These and other features of the 1996 Act made arbitration in India tedious and uncertain, and parties hesitated to choose India as their preferred seat of arbitration.

Arbitration After the 2015 Amendment

The 1996 Act was amended by the Arbitration and Conciliation (Amendment) Act, 2015 (Amending Act), which came into force on October 23, 2015. The amendments were largely based on the 246th Report of the Law Commission of India and were intended to remedy some of the perceived problems with the arbitration process in India, in order to encourage parties to arbitrate more disputes. The most notable amendments are:

  • International Arbitrations Are Now Supervised by High Courts
    Non-Indian parties will benefit immensely from the new regime, which designates the High Courts (India's intermediate appellate courts) as the relevant court to hear all applications related to an international commercial arbitration. The High Courts are more favorable to commercial arbitration; therefore, this change makes it likely that arbitration proceedings will not be as frequently disrupted by the hostile court orders that were issued by lower courts under the 1996 Act before it was amended.
  • Guidelines on Conflicts of Interest
    The Act now requires a nominated arbitrator to disclose in writing (1) potential conflicts of interest; and (2) "any circumstances . . . which are likely to affect his ability to devote sufficient time to the arbitration and in particular his ability to complete the entire arbitration within a period of twelve months."4 This has largely been inspired by the IBA Guidelines on Conflict of Interest in International Arbitration, which have been adopted widely by international arbitral tribunals.
  • Time Limit To Render an Award
    The Act now requires that an award be made within a period of 12 months.5 This provision is buttressed by monetary incentives to move things along. The parties may agree to higher compensation for arbitrators if the award is rendered within six months. If the award is not rendered within 12 months, the parties may extend the time period for an award by up to six months, giving the tribunal a total of 18 months to decide a dispute. While a court is empowered to extend this time period, we believe that this discretion is unlikely to be exercised in a majority of cases.
  • Interim Measures by Tribunal Now Executable
    An arbitral tribunal's powers have been expanded. The Amending Act provides that interim measures awarded by the Tribunal would be enforceable in the same manner as a decree of the court.6
  • No Automatic Stay on Execution
    Under the amended law, an application to set aside an award does not "by itself render that award unenforceable."7 Instead, the losing party must also apply to a court for a stay of the award.8
  • Restrictions on Application of the "Public Policy" Exception
    The Amending Act clarifies that courts must not be eager to adopt an expansive definition of public policy when enforcing a foreign award in India, and it expressly provides that an application to enforce an award will not entail a review of the award on its merits.9 This amendment is intended to give primacy to the parties' agreement to resort to arbitration as a mode of settling their disputes.

What To Expect Going Forward

The amendments are a welcome step in the reform of Indian arbitration law and reflect the intention of the legislature to promote India as a favorable choice of seat in arbitration agreements. Even though the amendments did not incorporate the entire gamut of suggestions from the Law Commission, the Amending Act goes a long way to address the issues faced by parties when arbitrating in India. The optimism portrayed by the judiciary and the Indian government at the global conference, "The National Initiative on Strengthening Arbitration and Enforcement in India," reflects their commitment to ensure that Indian arbitration law is aligned with international benchmarks and practices. The law is expected to go a long way toward improving the efficiency of India's arbitration procedures, making arbitration a much more attractive option for dispute resolution for U.S. companies doing business in India.

Given the fact that the amendments are not retrospective and the law has now been in effect for little more than a year, the first round of cases subject to the law's new 12-month time limit may just have concluded. Over the next few months, parties contemplating arbitration in India should have a clearer sense of the effectiveness of the new law in making the process more efficient.

Footnotes

1. The Law Commission of India, Report No. 245 'Arrears and Backlog Creating Additional Judicial (wo)manpower', July 2014, available at http://lawcommissionofindia.nic.in/reports/Report_No.245.pdf

2. Narendra Modi, "Speech at National Initiative towards Strengthening Arbitration and Enforcement in India," Oct. 23, 2016.

3. Id.

4. See The Arbitration and Conciliation Act 1996 as amended by the Arbitration and Conciliation (Amendment) Act, 2015, §12.

5. Id., §§ 29A and 29B.

6. Id., §17.

7. Id., §36.

8. Id.
9. Id., §§34 and 48.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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