Arbitration In India: Why It’s Always Taking Off, But Never Taking Flight

For the last few years, everyone has predicted India’s imminent arrival on the international arbitration scene.

At every international arbitration conference being held at a posh five-star hotel in a top-tier Indian city, we are promised by industry stalwarts (and of course, by the Chief Justice of the Supreme Court of India) that India is about to arrive at the international stage when it comes to arbitration.

Ministers and bureaucrats continue to hail the recent legislative reforms as trailblazing. And make no mistake, there have been legislative interventions, albeit more than we would like, as well as an industry push towards reforming the arbitration framework in India. International arbitration centres are popping up in almost all tier-1 and tier-2 cities. There has been a talk of an arbitration bar as well.

However, and I say this with utmost responsibility, the arbitration scene in India continues to be just as ‘taking off’ as it was ten years ago.

Despite the tall promises, there is nothing to suggest that India has become the preferred ‘place’ of arbitration even for the domestic companies let alone the multinational entities. In fact, if at all, India has become the favourite place for swanky international conferences on arbitration rather than the seat of arbitration itself.

While defeat is generally an orphan, the continued failure of arbitration in India has many fathers. The legislature has its fair share of the blame- poorly drafted, half-hearted and confused amendments to the Arbitration and Conciliation Act, 1996 over the last decade.

Some amendments passed by Parliament remain unnotified, adding to the confusion. Repeated recommendations by the Law Commission and High Level and Expert Committees have been ignored, while legislative amendments have been made to defeat arbitral awards as a knee-jerk reaction.

The executive isn’t far behind. Faced with adverse arbitral awards, it has decided to do everything it could to defeat the arbitration as a dispute resolution mechanism — deleted the arbitration clauses from contracts, coerced contractors to sign settlement agreements, issued circulars prohibiting arbitration, refused to appoint arbitrators, defended their right to have unilateral appointment of arbitrator till Supreme Court.

The judiciary, on its part, set aside an arbitral award in a curative petition as if the principle of ‘least judicial interference’ was an affront to basic structure doctrine. It allowed arbitrators (read retired judges) to fix their own fee, unmindful of the fee schedule given in the Act, and let PSUs/government unilaterally provide contractors with a panel of arbitrators to choose from.

All three branches of the government were competing on both fronts — to organise more conferences on arbitration and cause more chaos in the field. The government fears arbitral awards, the contractors are pessimistic about it, and the judiciary couldn’t care less. It is not cost-effective anymore. It is not efficient anymore.  

So, here we are. And how do we get out of it? Let us start at the beginning.

The first step is to amend the Act to address the legislative and judicial chaos that has crippled it. I believe that it is already in the works and yet, I dread it.

The Arbitration and Conciliation (Amendment) Bill, 2024 was recently released for public comment. The only good thing about the draft is that the seat fiasco has largely been undone by the proposed amendments to Section 20 which proposes to restrict the concept of seat to where the contract is executed or where the cause of action has arisen.

However, yet again, the proposed amendments are plagued by terrible drafting and overzealousness to fix what is not broken. It proposes an appellate provision to Section 11 (arbitrator appointment procedure) which is likely to add another layer of litigation. The amendments also propose to add another set of useless procedural requirements in Section 34 (Challenge procedure) apart from adding another layer of appellate procedure.

The amendments are so badly drafted that I would rather have the existing chaos than muddle the waters further. There is no focus on making arbitration effective, efficient and consequential.

The amendments, instead, could have considered the following:

(a) Implementing a mandatory arbitrators' fee structure under Schedule IV, determined by a formula rather than a fixed monetary cap;

(c) Requiring a mandatory deposit of 50 per cent of the award amount with the Commercial Court when challenging an award under Section 34 of the Act;

(d) Mandating the deposit of the remaining 50 per cent of the award amount with the Appellate Court when appealing under Section 37 of the Act (if not already paid to the award holder or deposited with the Execution Court).

These are some of the key concerns. We must make arbitration simple and outcome-based. Unless the process is fast and result-oriented, there is no point in celebrating it every two months at a fancy conference.

The second step would require stern messaging from the country's top political bosses to their senior bureaucrats and PSU heads to stick to arbitration as the preferred mode of dispute resolution. They cannot hide their inefficiencies and failures by refusing to go to arbitration or deleting the arbitration clause itself.

Often, tenders are invited while the land acquisition process is still progressing. While the intention behind this is to fast-track the projects and ensure that the work can commence immediately upon completion of the acquisition process, it often results in idle machinery leading to additional costs for the successful bidders, who then resort to arbitration. To avoid the same or delay payment of additional costs, there is a tendency to delete the arbitration clauses altogether.

In some cases, contractors are directed to sign a “Settlement and Conciliation Agreement” drafted by PSUs. If they refuse, they face threats of bank guarantee encashment.

In fact, the Ministry of Rural Development, specifically states in its PMGSY Standard Contracts that ‘there will be no arbitration at all’ and instead, there will be a settlement by a three-member government committee. This must stop.

The executive should be fair, and reasonable and must bear the consequences for its actions (and failures). It cannot take advantage of the judicial delays that have traditionally characterised our courts to kick the can down the road and harass the contractors. Arbitration, as a mode of dispute resolution, cannot be punished for a job well done.          

The third step would be to ensure that judges of the Commercial Courts are trained in commercial law for at least a year before they are made presiding officers.

The suggestions that I have for this would be radical and may be unimplementable (clerkships with Delhi/Mumbai High Court and Supreme Court judges having the arbitration/commercial roster). However, some middle ground will have to be found. I am certain that the regular classroom session won’t work unless practical training is not imparted.    

The next step would be the most difficult step and may require some practice of yoga and meditation. I am suggesting that our judiciary will have to exercise restraint when faced with arbitration matters. Borrowing the often-misused sentence, the heavens would not fall if awards were not set aside in curative petitions.

The second suggestion would be even more painful — do not leave the fee determination to the arbitrators. Arbitration has become insanely expensive due to the fees charged by arbitrators, and it cannot possibly go on.

The parties can fix it under the agreement at the outset during the execution of the contract, or Schedule IV can prevail, but it cannot be left to the arbitrator even with the consent of the parties. Because at times, one of the parties, being financially disadvantaged, refuses to accept the fee determined by the Tribunal and faces (even if unintentionally) a prejudiced tribunal.

Last, I would expect fewer conferences and more training sessions for arbitrators as well as arbitration lawyers. There must be certification courses which must be compulsory for both arbitrators and lawyers, and no one should be exempted — judges, engineers, chartered accountants or lawyers.

The biggest difficulty I face is that judges are often unaware of, or indifferent to construction industry practices or difficulties faced by developers and contractors while engineers find it difficult to conduct an arbitral hearing. The lawyers, on the other hand, don’t know when to get out of court and enter an arbitration meeting. Every one of us needs handholding and therefore, certification courses will do good to all of us.

These suggestions are merely the beginning. The structural reforms will have to be top-down. A starting point will be through regular practice notes by the Supreme Court that can clarify certain positions of laws and ease the difficulties.

There is a famous quote by Yogi Berra which goes, “If you don’t know where you’re going, you’ll end up somewhere else.” We know exactly where we will not end up if we continue the way we are going. Hopefully, we will see some course correction.