Arbitration is one of the most commonly used methods for dispute resolution. For many years now, it has been used in India for the settlement of various disputes, especially commercial disputes. The country’s arbitration environment is governed by the Arbitration and Conciliation Act, 1996, which was last amended in 2015. Since then, a number of policy measures have been taken to make arbitration the preferred mode of dispute resolution as well as to promote India as a hub for international commercial arbitration. Some of these measures are reducing timelines to make the process more effective, encouraging institutional arbitration and ensuring neutrality in the appointment of arbitrators.
The dispute resolution process has a big impact on the economy. Not only does it affect the state of domestic commercial activities but also the level of foreign trade and investment. It is, therefore, important to create an environment where disputes are minimised and in case they do arise, make sure that they get resolved in a timely, impartial and speedy manner through arbitration.
At the India Infrastructure Forum 2019, a panel discussion was held to discuss the current state of dispute resolution and arbitration in India, recent developments and improvement measures and some of the unresolved issues and challenges…
Current state of affairs
Infrastructure projects are often beset by disputes and conflicts among the parties involved. Inclusion of arbitration clauses in construction contracts that lay down the mechanism for dispute resolution is quite common in sectors such as construction, and oil and gas. Disputes occur due to the complex nature of the projects in these sectors and the uncertain environment in which entities operate. Such disputes not only lead to delays in project implementation but also increase in costs and loss of revenue due to large public and private investments getting stuck in the dispute resolution process.
It is therefore important to identify the factors that lead to conflicts between project stakeholders to minimise the number of disputes and accelerate infrastructure development. The genesis of such disputes is usually poorly drafted contracts and bidding documents with asymmetric information and risk sharing. Many contracts are one-sided and favour one party over the other. With this inequitable distribution of risks, it is inevitable that disputes will arise.
To avoid conflicts, it is necessary that adequate focus be laid on proper designing of contracts. Contracts should clearly define the roles and responsibilities of the parties involved in the project. Further, detailed and comprehensive planning in the framing of contracts is essential to prevent disputes from arising and ensure successful project delivery. The arbitration clause should be clearly stated and lay down a step-by-step mechanism for resolution of disputes. If this is not the case, when a dispute does arise, processes such as selection of an arbitrator, fees, arbitration costs, etc. take a lot of time, thus leading to unnecessary delays in starting the resolution process.
Recent developments and improvements
Over the years, arbitration has been gaining importance in the country due to an increase in the number of commercial disputes and an already overstressed judicial system that has a huge number of pending cases. Various measures are being taken to improve the arbitration ecosystem and to promote the country as a global arbitration hub. However, these initiatives are fairly recent and are yet to show any significant impact.
Under the Arbitration and Conciliation (Amendment) Act, 2015, a one-year time limit has been fixed for resolving disputes in a time-bound manner. This timeline can be extended by a period of six months with the consent of the concerned parties. However, another amendment to the act was proposed in the Lok Sabha in 2018. This amendment aims to increase the duration for the arbitration from 12 months to 18 months. This six-month period has been provided for the completion of pleadings by the party in domestic arbitrations. The additional extension of six months, based on parties’ consent, stands as it is. The proposed amendment is yet to be passed by the Rajya Sabha.
The proposed amendment also seeks to establish an independent body – the Arbitration Council of India – for the promotion of arbitration and other alternative dispute resolution mechanisms. The council will frame policies and guidelines for arbitral institutions and accreditation of arbitrators. It will also help in promoting the country as a destination for international arbitration and help establish confidence in the legal system.
According to the existing act, the parties are free to appoint arbitrators. In case of a disagreement on the appointment, the parties can request the concerned court to appoint an arbitrator. Another positive step has been ensuring neutrality in the appointment of the arbitrator. Before an arbitrator is appointed, the court is required to seek a disclosure in writing from the prospective arbitrator. The arbitrator has to disclose the existence of any past or present relationship with either of the parties that raise doubts regarding his independence or impartiality. In case such doubts are proved to be true, the arbitrator can be disqualified.
Further, to make sure that disputes are resolved in a cost-effective manner, a fixed fee is paid to the arbitrator for domestic arbitrations. This helps the parties in making provisions for the cost of settling disputes and ensures that the settlement process does not become very expensive. It also helps the parties in avoiding situations where a large amount of their funds get stuck in arbitral proceedings.
Meanwhile, there has been an increase in the participation of expert witnesses in resolving disputes, especially construction disputes. Construction claims often involve technical issues. Thus, the involvement of experts enables the arbitrators to make informed decisions. This also allows arbitrators to make a scientific evaluation of the matter, conduct delay analysis and accurately quantify the settlements. Thus, the matters can be solved more efficiently.
Unresolved issues and concerns
Despite the introduction of a number of initiatives and measures to simplify the arbitration procedure, there are still a number of unsolved issues and challenges that continue to plague the arbitration ecosystem. The country lacks a pool of professional arbitrators. The lack of availability of arbitrators is also one of the key reasons that dispute resolution continues to linger for years. There is high dependence on retired judges to act as arbitrators. In most of the cases, the arbitrators are not aware of the technical issues. Thus, there is a need to expand the base of arbitrators not only from the judiciary but also from fields such as engineering and finance to ensure there is a diverse representation in the arbitration panels and settlements are balanced and fair.
The proposed amendment to the arbitration act in 2018 lists the qualifications required to practise as an arbitrator in the country. However, the prescribed qualifications are such that foreign legal professionals will no longer be able to act as arbitrators in India. Restricting foreign arbitrators from practising in the country will defeat the entire purpose of promoting India as a global arbitration hub.
Most of the arbitrations are still conducted on an ad hoc basis with no set rules and procedures. There is thus a need to promote institutional arbitration by setting up arbitral institutions and providing financial and infrastructural support. It is also important to check the extent of judicial intervention in the proceedings and maintain the autonomy of the processes to create an arbitration-friendly environment.
The adoption of technology to reduce delays in the arbitration process has been minimal so far. The use of digital tools such as e-Discovery and data management systems can save both time and effort and help in cost reduction as well.
The high cost of arbitration in the country cannot be ignored. The exorbitant amounts spent on the proceedings seriously impact the budgets of the involved parties. The role of third-party funding for arbitration in allowing parties increased flexibility in pursuing their claims, gaining access to better resources and mitigating risks associated with cost escalations needs to be examined.
The way forward
The arbitration landscape has undergone a number of changes over the past few years. There have been significant improvements to create an arbitration-friendly environment. The regulatory framework and arbitration processes are slowly catching up with global best practices. However, far more needs to be done to realise the vision of making India a preferred destination for international arbitration. The country needs to establish confidence in its legal system and policies need to keep pace with the evolving economic changes and global trends.
Leveraging technology for faster delivery of arbitral awards and building a pool of full-time professional arbitrators are some of the measures that can help in the development of a robust arbitration ecosystem.