Infrastructure projects are complex in nature. The capital investment is high and the gestation period is long. There are multiple stakeholders involved. Contracts often do not clearly define the role and responsibilities of the parties involved. These projects are thus quite prone to disputes and litigation. The claims mostly pertain to delays, liquidated damages, termination- and price escalation-related issues.
Arbitration has long been a method of dispute resolution in India. However, it is often criticised for being costly, time consuming and ineffective. The problem of enforcement and execution of arbitral awards is also quite widespread. As per government estimates, around Rs 700 billion is tied up at various stages of arbitration across infrastructure sectors. The National Highways Authority of India (NHAI) has about 2,500 cases in high courts, of which 10 per cent are cases pertaining to arbitration itself. NHAI thus has over Rs 270 billion stuck in arbitration.
Most of the arbitrations in the construction and infrastructure sectors are ad hoc in nature, as against institutional arbitration globally. In India, there are a few prominent domestic institutions which conduct institutional arbitration such as the Indian Council of Arbitration (ICA), the International Centre for Alternative Dispute Resolution (ICDAR), the Construction Industry Arbitration Council, etc. However, so far, only a few cases have been handled by these institutions. Many Indian companies approach foreign arbitration centres such as the Singapore International Arbitration Centre (SIAC) and the London Court of International Arbitration (LCIA), leading to a loss of arbitration business opportunity for India. At present, Indian parties account for around 30 per cent of the arbitration cases handled by the SIAC and LCIA.
The situation is set to change, with several new policy measures announced in the past one-two years. Steps are also being taken to promote India as a preferred destination for resolving international business disputes. The first international arbitration centre was opened in Mumbai in October 2016. Further, the SIAC has signed an agreement to establish a representative office in the Gujarat International Finance Tec-City (GIFT) to resolve international commercial disputes.
A ray of hope: Arbitration and Conciliation (Amendment) Act, 2015
The Arbitration and Conciliation (Amendment) Act, 2015 came into effect on October 23, 2015, repealing the two-decade-old Arbitration and Conciliation Act, 1996. The new act aims to make arbitration the preferred mode of settlement of commercial disputes in India by making it viable and cost-effective, and make the country a hub for international commercial arbitration.
The act permits arbitral award to be made within 12 months from the date of reference, though parties may, by consent, extend the period for another six months. The mandate of the arbitrator is to terminate the proceedings if the timelines are not adhered to, unless the time is extended by the court. The arbitrator also has to disclose the circumstances, if any, that are likely to affect his ability to conclude the entire arbitration within 12 months. The amendment also provides for “fast-track proceedings” under which parties can consent to resolving the dispute within six months with only written pleadings and without any oral hearing or technical formalities.
The fixed timelines for the completion of arbitration proceedings are expected to ensure that construction and infrastructure projects are not left in a limbo for indefinite periods of time. This will also help infrastructure companies get loans from banks, which is currently curtailed because of the fear of the loans turning non-performing/bad due to delays in project execution.
The power of the arbitral tribunal to impose exemplary penalties for seeking adjournments without sufficient cause will act as a deterrent against delaying tactics being used. The act also attempts to fix limits on the fee payable to the arbitrator. It further enables the parties of an international commercial arbitration (with the seat of arbitration outside India) to approach the Indian courts and seek interim relief. The definition of “court” has been amended to refer only to high courts in the case of international commercial arbitrations.
The Indian industry has, for the most part, responded positively to the new policy measures. However, there is still much ground to cover. More clarity is needed on the issue of arbitrability of fraud and the appointment of an arbitrator.
Reviving construction activity: New guidelines for arbitration
In recent years, construction activity has been affected by a large number of projects getting stalled due to multiple issues related to land acquisition, obtaining clearances, etc. The banking sector has a large exposure to construction, estimated at over Rs 3 trillion and as per industry estimates, around 45 per cent of the bank loans to the sector are stressed.
In 2016, the government announced new arbitration measures for the construction industry. Under the proposal put forward by NITI Aayog and approved by the Cabinet Committee on Economic Affairs, it has been decided that in cases where government departments and public sector undertakings (PSUs) have challenged arbitral awards rendered against them, 75 per cent of the amount of the award will be first deposited by the departments or PSUs into an escrow account, against a margin-free bank guarantee from the contractor. This will ensure that liquidity is available to contractors and no financial burden is unnecessarily imposed on them.
The escrow account can be used to repay bank loans or to meet commitments in ongoing projects. This step will allow the recovery of loans by banks as well as permit construction companies to speed up the execution of ongoing projects. It will also increase the ability of construction companies to bid for new contracts.
Further, in the case of construction contracts/concessions where the process of arbitration was initiated under the “pre-amended” Arbitration Act, the PSUs/departments will seek the consent of the contractors/concessionaires to transfer the pending cases under the amended act, wherever possible. The shift to the amended act is expected to make the arbitration process cost-effective and help in the settlement of disputes in a timely and systematic manner.
The way forward: Critical factors for promoting institutional arbitration
A critical factor in making India a preferred international arbitration hub is providing adequate infrastructure, both physical as well as social.
The country needs to promote institutional arbitration where a specialised institution aids and administers the arbitral process. The institutions should be regarded as independent, efficient and transparent. Besides, there is a need to hire a pool of professional arbitrators, who should be competent, technically sound and specialised in their field. The reliance on retired judges as arbitrators is regarded as a key problem area. It is said that with retired judges as arbitrators, cases move at a slow pace. Further, the exorbitant fee charged by them discourages parties to go in for arbitration. Experts in the fields of engineering, construction, and operations and management are the right choice as arbitrators, as they are in a better position to understand the situation and how to adjudicate on the issue.
Technology can also help improve efficiency in the process of arbitration and reduce the time and cost of delivering judgments by bringing the parties together through video technology. Technologies such as e-filing, big data analytics, online dispute resolution, and videoconferencing need to be put to extensive use in the process of arbitration. Through videoconferencing, cases can be registered online, voluminous papers can be transmitted instantly, and the testimony of experts can be recorded.
To conclude, the recent reforms are definitely a step in the right direction in strengthening the arbitration mechanism in the country. To make India a global hub for international arbitration, it is essential to make sure that the process is less time consuming and more cost- effective as compared to arbitration elsewhere in the world. For this, going forward, adherence to timelines, minimisation of judicial interference and the promotion of institutional arbitration will play a key role in making the process user friendly and cost effective.