United States: How To Resolve Business Contract Disputes

Since India is seeing rapid foreign investment, foreign investors need to have a clear understanding of the various forms of dispute resolution available to them in case their business contracts give rise to disputes. In this article, we discuss the various modes of resolution of business contract disputes in India.

1. LITIGATION

As a preliminary point, India is a common law country with an adversarial system of dispute resolution. Statutes and judicial precedents are the primary sources of law. Though litigation is the most common mode of dispute resolution, it has its own challenges as the Indian courts are overburdened with an enormous backlog of cases. This leads to a delay in the resolution of disputes. Such delay in resolution of disputes results in heavy monetary losses to the litigating parties, thus impacting the ease of doing business in India.

To combat such delays in the resolution of disputes, the Law Commission of India, in 2015, recommended the establishment of a system of commercial courts. In line with the recommendations, the Commercial Courts Act, 2015 ("Commercial Courts Act") was passed. Disputes categorized as "commercial" under the act and valued at INR 3,00,000 (approx. USD 3,750) or above are heard by courts designated as commercial courts under the Commercial Courts Act.

The Commercial Courts Act aimed at enabling the commercial courts formed under it to follow a streamlined, time bound hearing procedure while departing from the traditional court process prescribed in the Code of Civil Procedure, 1908. To further make the process expedient, the Commercial Courts Act mandates pre-institution mediation and case management hearings. However, the commercial courts under the Act have been unable to achieve the goal of expedient dispute resolution due to the non-observance of the legislative framework and lack of adequate training of judges to adopt these procedures effectively (and resolve commercial disputes more broadly).

In addition, India also has a wide network of Tribunals for adjudicating particular kinds of disputes. These highly specialized Tribunals were created primarily to ease the burden of Courts, and to provide streamlined remedies to affected parties. For example, the National Company Law Tribunal was created with the intention of becoming the sole forum for adjudication of company law and insolvency law matters (which are usually time-sensitive in nature). However, many of these Tribunals have also now become overburdened with a significant case backlog, like the courts.

2. ARBITRATION

Arbitration is a procedure in which a dispute is submitted, by agreement of the parties, to one or more third party neutral arbitrators who make a binding decision on the dispute. The feature of arbitration to provide a neutral forum is particularly attractive in cross border or investment treaty disputes. Not only does arbitration enable the parties to ensure a neutral forum, but it also enables the parties to ensure that the tribunal has the relevant technical expertise to adjudicate the commercial dispute between the parties.

Indian procedural law offers the parties several opportunities to appeal a judgment of the court. However, there are no such appeals against an arbitration award. The only remedy available to a losing party in an India seated arbitration is to get the arbitral award set aside by the court on the limited grounds provided in the Arbitration & Conciliation Act, 1996 ("Arbitration Act"), which restrains the court from engaging in a comprehensive review of the merits.

The ease of enforcement of arbitral awards is a critical factor which often leads to arbitration being favored. India is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention"). If an award has been made in a country that is a signatory of the New York Convention, the award can be enforced in India. On the other hand, there is no equivalent system for the enforcement of foreign court judgments in India. For a judgement of a foreign court to be executed in India, the foreign court must belong to a 'reciprocating country'. For all other cases, a fresh suit must be filed before the relevant court in India, which makes the enforcement of foreign judgments more cumbersome and costly.

Generally, the Indian courts narrowly interpret grounds for setting aside or refusing enforcement of awards. They do not engage in a review of the merits of the award, which is crucial to instill confidence of the parties in the arbitration process.

As a result, parties are increasingly resorting to arbitration to resolve commercial disputes in conjunction with other methods such as mediation, negotiation, and conciliation, which are discussed in Section 3 below.

1.1 Arbitration Seat

Parties while choosing arbitration as a mode of dispute resolution must decide on a seat of arbitration. The "seat" is the juridical place of an arbitration and determines the arbitration law that would be applicable to that arbitration. The courts of the seat have exclusive jurisdiction over all applications that may arise in relation to the arbitration. On the basis of seat, the Indian Arbitration Act categorizes arbitrations as either India seated or foreign seated arbitrations.

Indian seated arbitrations are governed by Part I of the Arbitration Act while foreign seated arbitrations are governed by Part II of the Arbitration Act. Under part I, if both parties to the arbitration are Indian parties, the arbitration is classified as domestic arbitration and if one of the parties is a foreign party in a commercial relationship with an Indian party, the arbitration is classified as international commercial arbitration. India seated arbitrations under part I are supervised by the Indian courts while no such supervision is present on foreign seated arbitrations except to the limited extent of obtaining interim relief.

Recently, the Indian Supreme Court in the case of PASL Wind Solutions v. GE Power Conversion (Civil Appeal No. 1647 of 2021) held that two Indian parties may choose a seat of arbitration outside India, thereby upholding the principle of party autonomy. India seated arbitrations unlike foreign seated arbitrations (and Indian court litigations) are time bound. The Arbitration Act provides for domestic arbitrations to be completed within twelve months from the constitution of the arbitral tribunal. This period can be further extended by a period of six months with the consent of the parties. Given the timebound and flexible nature of arbitrations, the cost and length of an arbitration is substantially reduced. Hence, the adoption of India seated arbitration clauses is on the rise.

Arbitration also provides the parties the flexibility to choose the laws which govern the arbitration. Unlike litigation before the courts, the parties can choose the law governing their contracts.

1.2 Institutional versus ad-hoc arbitration

Another choice that the parties need to make within the universe of arbitration is between institutional and ad-hoc arbitration. An institutional arbitration is one in which a specialised institution takes on the role of administering the arbitration process. Each institution has its own set of rules which provide a framework for the arbitration process. An ad hoc arbitration, on the other hand, is one which is not administered by an institution. Rather, the Tribunal along with parties' consent determines most of the procedural aspects of the arbitration. An advantage of institutional arbitration is that it makes the arbitration process more streamlined and provides clarity to the parties on process, for example, appointment of an arbitrator. This process clarity helps the parties to avoid approaching the Indian courts for appointment of an arbitrator under section 11 of the Arbitration Act and avoids extra costs as well as delay.

In practice, commercially astute parties are demonstrating preference for institutional over ad-hoc arbitrations especially under the rules of the Singapore International Arbitration Centre (SIAC), International Chamber of Commerce (ICC), and London Centre for International Arbitration (LCIA).

1.3 Investment treaty arbitrations

Foreign investors investing in India also have recourse to investment treaty arbitrations if the home country of the foreign investor has an investment treaty with India. Such investment treaties generally provide protection to foreign investors against the arbitrary regulatory actions of the Indian government such as expropriation of the investment. Given the increase in the number of investment treaty claims against India, Indian's new Model Bilateral Investment Treaty aims to strike a balance between investment protections with host state's right to regulate. Recent examples of successful investment treaty arbitrations against the Indian government include claims of (a) Vodafone International Holdings BV (tribunal dismissed India's tax demand of USD 3.79 billion) (b) Nissan Motor Co Ltd (amount in dispute was USD 660 million, which got eventually settled); and (c) Cairn Energy Plc and Cairn UK Holdings Limited (awarded USD 1.2 billion).

3. ALTERNATE DISPUTE RESOLUTION MECHANISMS

Given the lack of success of litigation in resolving disputes in an expeditious manner, parties are also resorting to other alternate dispute resolution ("ADR") mechanisms. The diverse forms of ADR help parties resolve their disputes at their own terms without delay and in principle, at lower costs. These modes usually involve a neutral third party who assists the parties in a dispute and who facilitates in resolving the dispute. While these ADR mechanisms may be used independently, they are sometimes used in conjunction with arbitrations in a multi-tier dispute resolution clause where the parties are first required to attempt to resolve their disputes through specific ADR mechanisms and only after their failure to resolve the dispute, can the parties resort to arbitration. We briefly deal with some ADR mechanisms below.

2.1 Negotiation

Negotiation is a process controlled by the parties where they try to achieve a mutually agreeable solution to their dispute. Negotiation is a non-binding process and has no statutory recognition. The parties can only enforce the decision reached through negotiation by the assistance of courts. This makes negotiation as a standalone dispute resolution mechanism redundant in most commercial disputes.

2.2 Mediation

Mediation is a voluntary and informal process of resolution of disputes where a neutral third party assists the parties in dispute to reach an amicable solution. Mediation is in effect negotiation conducted with the assistance of a mediator. However, the mediator is only a facilitator and does not take decisions on behalf of the parties and has no power to force a mediation outcome between the parties. Just like negotiation, the mediation outcome can only be enforced with court assistance. India is currently contemplating new legislation on mediation. Please refer to the Mediation Bill, 2021, which was recently tabled before the Rajya Sabha (i.e., the Upper House of Indian Parliament) and may likely soon become law. The proposed legislation inter-alia requires parties to compulsorily try and resolve civil and commercial disputes through mediation, before approaching any Court or tribunal. The objective is to promote institutional mediation and make mediation agreements enforceable as court judgments.

2.3 Conciliation

In conciliation, a neutral third party tries to reconcile the dispute between the parties and assist them to reach a compromise. Section 61 of the Arbitration Act provides for conciliation of disputes arising out of legal relationship, whether contractual or not and to all proceedings relating thereto. After the enactment of the section, there can be no objection, for not permitting the parties to enter into a conciliation agreement regarding the settlement of even future disputes. Akin to negotiation and mediation, conciliation is also a non-judicial mode of resolution of dispute where the conciliator does not give a binding decision on the parties. Therefore, if a settlement is not reached between the parties, they would be required to resort to litigation or arbitration.

2.4 Expert Determination

Expert determination is a procedure in which a dispute or a difference between the parties is submitted, by agreement of the parties, to one (or more) experts who decide on the matter referred to it (or them). There is no regulatory regime applicable for direct enforcement of determination. It is solely a creature of contract. Indeed section 28 of the Indian Contract Act,1872 renders void any contractual provision which prevents a party from enforcing his / her legal rights by legal proceedings, with arbitration being an exception. Judicial precedent on expert determination is scant. Therefore, whilst parties may contractually agree to make the outcome of expert determination binding on them, an arbitration award or court order will be necessary to enforce the determination.

CONCLUSION

Litigation in India does not usually provide an expeditious resolution of commercial disputes. Therefore, alternative methods of dispute resolution must be considered. Institutional arbitration offers a good alternative, especially when used with other alternative dispute resolution options.

If you are interested in finding out more about how business contract disputes can be effectively resolved in India, please consider our webinar coming up on 28 July 2022 which you can register for at https://lnkd.in/dqeG33gK.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com