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Will India Become A Hub For Foreign Arbitrators?

There is a Chinese proverb, “Going to law is losing a cow for the sake of a cat.”

Dilwyn once said, “To seek the redress of grievances by going to law, is like sheep running for shelter to a bramble bush.”

Judge Moses H. Grossman shows the way out by saying, “Four out of five potential litigants will settle their disputes the first day they come together, if you put the idea of arbitration into their heads.”

Replying to the debate on the Arbitration and Conciliation (Amendment) Bill, 2021, union law minister Ravi Shankar Prasad told the Lok Sabha on February 12, 2021, that India will become a major hub for international and domestic arbitration. Prasad further said that India’s ranking has substantially improved in terms of enforcement of contracts and the country has some of the best judges and legal brains who are respected internationally. Prasad added that under the law, which allows ample opportunities to create India as an arbitration hub, India will welcome foreign arbitrators.

The Bill seeks to ensure that all the stakeholders get an opportunity to seek unconditional stay from the court on enforcement of arbitrated awards where the agreement or contract is “induced by fraud or corruption”.
In the Arbitration and Conciliation Act, 1996 (the principal Act), in Section 36 (sub-section 3), after the proviso, the following will be inserted and shall be deemed to have been inserted with effect from the 23rd day of October, 2015, namely:-

“Provided further that where the court is satisfied that a prima facie is made out that,

(a) The arbitration agreement or contract which is the basis of the award; or
(b) The making of the award,

was induced or effected by fraud or corruption, it shall stay the award unconditionally pending disposal of the challenge under Section 34 to the award. The Bill intends to repeal the Arbitration and Conciliation (Amendment) Ordinance, 2020, which was issued on November 4, 2020.
The Act was amended in 2016, 2019 and now in 2021, with an aim to make it more robust by plugging the lacunae that existed in the legislation.

Arbitration is a form of Alternative Dispute Resolution (ADR), a procedure to resolve disputes outside the court. The dispute is decided by one or more arbitrators, arbiters or arbitral tribunal, which renders the arbitration award. Arbitration is a proceeding in which a dispute is resolved by an impartial adjudicator whose decision the parties to the dispute have agreed, or legislation has decreed, will be final and binding on parties. Arbitration agreements are generally of two kinds:-

(a) Agreements which provide that, if a dispute should arise, it will be resolved by arbitration. These are normal contracts but contain an arbitration clause.
(b) Agreements which are signed after a dispute has arisen, arguing that the dispute should be resolved by arbitration.

Historically, United States and Britain are the pioneers of resolving disputes through arbitration. The method was first used in the Jay Treaty of 1795, negotiated by John Jay, and played a major role in the Alabama Claims case of 1872, whereby major tensions regarding British support for the confederacy during the American Civil War were resolved. The Hague Peace Conference of 1899, saw the major world powers argued to a system of arbitration and creation of a Permanent Court of Arbitration.

In India, Indian Council of Arbitration (ICA) was established in 1965. It is the largest arbitral organisation at the national level. The ICA is allied to both the Federation of Indian Chambers of Commerce and Industry (FICCI) and the International Centre for Alternative Dispute Resolution (ICADR). In 2016, the Mumbai Centre for International Arbitration (MCIA) was launched with the adoption of the MCIA rules. The MCIA has also provided much-needed infrastructure by creating a state-of-the-art facility as a venue to carry out arbitrations.

However, the aforementioned arrangements are not sufficient enough to realise the dream of making India a hub of foreign arbitrators. In addition to paucity of physical infrastructure, the problematic compliance requirement of multiple legal formalities is another major impediment in the way. Citing a study by the National Restaurants Association of India (NRAI), the Economic Survey FY20 pointed out that for obtaining a licence from Delhi Police to open a restaurant, 45 documents are required. The survey said that the major challenge faced by most firms is the complex architecture of the governance framework, including the density of legislation and statutory compliances. Viewing the crucial situation, Narendra Modi on March 5, 2021, addressing a webinar on Production-Linked Incentive (PLI) scheme, announced that the government is planning to scrap over 6000 compliance requirements for businesses both at central and state levels to facilitate ease of doing business in India.

To cite an example of appeal against arbitration award, Finance Minister Nirmala Sitharaman on March 5, 2021, indicated that the government is intending to appeal against an arbitration panel asking India to return $104 billion to UK’s Cairn Energy Plc. Nirmala pointed out that it is her duty to appeal in cases where the Nation’s sovereign authority to tax is questioned.
Legal luminaries viewing the prospects of arbitration in India commented below:-

Pawanjit Ahluwalia, CMD of a multi-national risk mitigation company, Premier Shield, said, “It is difficult for India to become a location of choice for arbitration cases. The world loves and admires Indian intellect but does not trust the Indian legal system, complex procedural requirements, unpredictable local law and order situation and biases at various levels of society. In most cases , even today joint ventures will insert a clause stating location for arbitration to be in Dubai or in the Europe. India has the ability to become a location for arbitration if we can improve the image of our country as non-corrupt, cases conclude in time, the judicial system gets a more clean image, etc., and there is a sense that India is a place where business can be done with ease.”

Advocate Neeraj Aarora, cyber law expert said, “The Arbitration and Conciliation (Amendment) Act, 2021, paving the way to challenges on the ground of fraud or corruption would in fact increase the interference of the courts and as such would further delay the grant of justice to the litigants. It will drastically reduce the chances of India becoming a major hub for international and domestic arbitrations. Inserting specific provision which allows the parties to get the stay not only due to the corruption during the arbitral proceeding but also in the formation of the arbitration agreement or contract will open up another pandora box allowing the parties to raise frivolous grounds to challenge the award at the stage of section 34 and also during appeal under section 36 of the Act. There was no need to insert this provision as the ground of fraud and corruption was always available to the parties for challenge during the arbitral proceedings, at the stage of challenge u/s 34 and section 36. In my view, the present Bill is unwarranted and would in fact, prove to be fatal to the underlying objectives of speedy disposal and would further deter the parties not to invoke the arbitration as dispute resolution mechanism.” 

Advocate Khursheed Zaidi said, “Arbitration Act in India was based on international law. There was no difficulty in tackling the international awards. Here comes the Arbitration and Conciliation Bill, 2021 which created the ripples internationally. The entire Bill is so-so. But an amendment of section 36 by introducing a proviso, “Provided further that where the court is satisfied that a prima facie case is made out that-
(a) The arbitration agreement or contract which is the basis of award; or
(b) The making of award,

was introduced or effected by fraud or corruption, it shall stay the award unconditionally pending disposal of the challenge under section 34 to the award.

The awards which shall come to India, would be a failure due to the unrestricted powers of the judge. It will affect the contracts internationally with Indian businessmen.  

For example, I may say that there was a provision under Order XXXIX Rule 3 Code of Civil Procedure for ex-parte order with certain restrictions. But this made the court not to function properly and it was considered a failure of civil court not imparting justice to the parties.  In 1977 the legislature made an exhaustive amendment, putting a rider on the exercise of discretion of the judge  by introducing a provisio, “Provided that where it is proposed to grant an injunction, without giving notice to the opposite party, the court shall record the reasons for its opinion that the object of granting the injunction would be defeated by delay……..”

Zaidi further said, “ This was also not found sufficient by the High Court judges and this power has been restricted by the High Courts by giving the directions to the judges how the discretion in this matter be exercised.
In the objects and reasons of the Arbitration and Conciliation Bill, 2021 it has been mentioned,

(i) To grant uncondi-tionally stay of enforcement of arbitral awards, where the underlying arbitration agreement, contracts or arbitral awards, is induced by fraud or corruption.

I am doubtful whether the proposed significant changes by the Bill would push forward India’s ambition to emerge as a hub of International Commercial Arbitration. The changes would prolong collateral litigation surrounding arbitration in India.

It is a feather in the cap that the Bill clarifies that the proviso shall be retrospective in the nature and apply to, “ all court cases arising out of /or in relation to arbitral proceedings, irrespective of whether the arbitral or court proceedings were commenced prior to/ or after the commencement of the Arbitration and Conciliation Act, 2015.”

Zaidi added, “The proposed amendment is a welcome development to the extent that fraud in making the award would be ground to challenge the award  and such a plea of fraud would be available after making the award. Thus the litigant would not leave any stone unturned to obtain a stay on the execution of the award.”

“Therefore, the relief under section 34 (2) (b) suggest that for a court to set aside an award on the ground of its conflict with the public policy of India, the court must come to the conclusive finding that a fraud has occurred. Thus there is no time limit for taking such a decision. In other words the execution of the award would be a difficult task for the aggrieved parties and the aggrieved party shall suffer irreparable loss and injury.”

“The Bill makes a stay mandatory where there is prima facie view of the ingredients of fraud. In other words if there is an iota of whims of fraud, the aggrieved party would be electrocuted. The Bill, left upon the court to decide whether the finding of fraud would strike at the very root of the transaction or the intention of the legislature is to restrict the scope of section 34 to objections concerning fraud or corruption in making the award only and not the arbitration agreement or the contract itself. The amendment has convoluted the process and resulted in a somewhat complex and complicated series of paths to search the plea of fraud.”
Vasudeva Rao, IPS (Retd.), former Special Commissioner of Delhi Police said, “Entry of foreign arbitrators will certainly widen our perspective on issues of arbitration. It will help assure parties from outside that there is a fair play situation here in deciding business disputes. We can’t say our own interpretation of law and our knowledge are the ultimate in proper resolution of disputes. It also compels Indian advocates prepare themselves for sharper presentation of their cases. This legislation looks hurried and piecemeal. It is better to go in for comprehensive arbitration law, after a deeper study of arbitration law in other similarly placed countries. This should be done at the earliest. Retrospective effect is unjust and bad in law. We have come under strong criticism for such a blinkered approach in the  recent past. Claims of level-playing field appear, now, far-fetched. The negative impression on the scope of ‘automatic stay’ has to be got neutralised with a cool, wise and on-merits approach by courts to the issues raised by applicants.”

Advocate Yawer Qazalbash, a stalwart of legal profession, said, “While properly discharging an obligation provided under Article 51 of Indian Constitution, an Ordinance was promulgated in 2019, and now recently the Parliament has passed the Arbitration and Conciliation (Amendment) Bill 2021, to establish an independent body called Arbitration Council of India (ACI), for promotion of arbitration, conciliation or other disputes redressal mechanisms. In the past the so called “fly-by night operators” took advantage of the law and obtained favourable awards through fraud.”
Qazalbash further said, “Arbitration is a process through which the disputes between the parties could be resolved by appointing third party, presumably independent arbitrators, supposed to be impartial and neutral. But due to anomalies in the appointment of arbitrators, some fraudulent practices were found to be involved. Those practices hampered the Indian reputation around the world.”

Qazalbash added, “The object of the new law is to give guidelines to ATC for appointment of arbitrators, who are now restricted to the advocates having 10 years of practice; or, members of Indian judiciary. This is a welcome step. It is expected that the Rules or Regulations provide for a permanent panel of such persons to be appointed as arbitrators. It is also noteworthy that the legislation did not define fraud or corruption, but provides for an unconditional stay till pendency of appeal. It may encourage multiplicity of proceedings, that too for a long time.”

Hon’ble Justice B.A. Khan, former Chief Justice of J & K High Court said, “In my view, India will not become the hub of foreign arbitrators anytime soon. The reason is not far to seek. Firstly there is no physical infrastructure like any global standard Arbiter Centre as in Singapore or America or any Arbitration institutions which can attract foreign arbitrators and make them comfortable. Nor is there any suitable conducive environment which can facilitate their arbitration and earn timely execution of their awards. If anything, India’s ‘ramshackle court system’, to use former CJI Justice Gogoi’s expression is not tuned to support the arbitration process. Therefore all things considered one doesn’t see India becoming a paradise for foreign arbitrators or for that matter a hub of international arbitration in near future. The statement made by union law minster in this regard can only be seen as his political statement or a pious wish for the present unless things change dramatically laying red carpet for foreign arbitrators in the days to come.”

When asked about his comments on proposed Arbitration & Conciliation (Amendment) Bill of 2021, Justice Khan said, “It provides for an unconditional stay of an award in a challenge to the award under Section 34 proceedings in cases where arbitration agreement or award is allegedly induced by corruption or fraud thereby ending the ambiguity that surrounded grant of such stay of execution of award once it was challenged under Section 34 of the Act.”

“It may be recalled that the issue of unconditional stay in Section 34 proceedings had its own ups and downs. Firstly, it was deemed provided in the relevant provisions of the Arbitration Act itself and then in a subsequent amendment to the Act in 2015, it was done away with making grant of stay on ground of agreement or award being induced by fraud or corruption subject to prima facie satisfaction of court. Now the position stands clarified in the new legislation providing for an unconditional automatic stay of the award till conclusion of section 34 proceedings challenging the validity of the award.”

Justice Khan added, “Whether this is a step forward or backwards depends on how one looks at it. It can be considered beneficial so long as it would provide equal opportunity to all stake holders to show that the award is or is not tainted by fraud or corruption. But the disadvantage is that going by ways of functioning of courts, it would delay the execution of award and deprive the award holder from enjoying its fruits impacting resolution of international commercial disputes. The other feature of this legislation is that it deletes Schedule 8 of the Act which prescribed the qualifications for an Arbitrator which is now left to be regulated by the Arbitration Council of India which is a welcome step considering the existing messy favouritism oriented ad-hoc system of appointment of Arbitrators which largely proceeds on likes and dislikes operating as an instrument of conferring favours on the near and dear ones.”

Justice Khan further said, “It is a matter of common knowledge by now that India is lagging far behind on the issue of delay in the  enforcement of arbitral awards which is said to be a critical factor in keeping away foreign investors adversely affecting opportunities of foreign investment in the country. In fact bringing in Arbitration the enactment of Arbitration & Conciliation Act  on UNCITRAl model following opening of global economy was reason to attract foreign investment  and to assure the world business community of country’s effective dispute resolution mechanism to resolve international commercial disputes speedily. But this could not happen due to variety of factors more particularly because of excessive and undue interference by the country’s court system in the arbitration process in disregard of non- interference  Rule as mandated by Arbitration Act. Resultantly arbitration ceased to be a cost effective and minimum time consuming alternate dispute redressal mechanism discouraging and disappointing its seekers. Now the current scenario is that Arbitration process has become a duplicate traditional court process erasing the distinction between arbitration and civil suit. Adjournments and extensions in time are sought and granted at the drop of hat violating time stipulations under the Act. Even innocuous interim orders passed by the arbitrators are challenged in courts even through writ petitions. What is notable and even surprising is that even higher courts up to Supreme Court are entertaining such pleas leaving arbitrations to languish at their stations. The situation is no better post award which is first challenged under section 34 objections on the limited ground of award being contrary to public policy. Even this ground has been so overstretched through varying  interpretations by different Benches of Supreme Court  bringing in all under the sky within its purview reflecting on  the finality of award and its binding nature. An arbitration award which was designed to be binding on the parties is like any court decision now which can be tossed from court to court with no end result. What is worse is that section 34 objections proceedings are treated as a civil suit by the courts triggering fresh time schedules for pleadings which takes an year or two to be completed in some cases. This is followed by appeals/ petitions questioning rejection of objections under Section 34 or otherwise preventing the award to see the light of the day.”
“Recently the Supreme Court was shocked to come across a civil suit in Bihar which had taken its own time in the state court hierarchy, ultimately landing in Supreme Court. There are also instances where an award passed by a three  former chief justices or high court judges, tribunals, are pending adjudication in lower trial courts. An anomalous situation indeed which destroys the sanctity and finality of an arbitration award.”
“Given this status and state of arbitration in the country, it is too idealistic  to hope for India becoming a hub of international arbitration anytime soon. To become an international hub there  has to be physical infrastructure  and physical capital as well, as pointed out earlier but both are somehow missing or not up to the mark. Presently there are  only a few arbitration institutions in the country, not to speak of any state-of-the-art Arbitral Centre of any international repute like the one of Singapore. Merely because foreign arbitrators, lawyers or foreign arbitrators can conduct arbitration proceedings here would not make India a hub of international arbitration. Similarly, there would have to be a pool of trained, competent and non-partisan arbitrators who could be appointed to resolve international commercial disputes.”

Justice Khan further said, “All this is not to suggest or conclude that nothing worthwhile had been done to promote and strength arbitration process in India. Efforts have all along been afoot like amendments made in the Arbitration Act in 2015, 2019 and now in 2021, to achieve the success of arbitration process as an instrument of alternate dispute resolution. It is a different matter though that the implementation of these legislative measures have not yielded desired results due to lethargic and faulty implementation.”

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Hasan Khurshid

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