Arbitration Law: What Needs To Change?

In theory, arbitration is an attractive avenue for civil dispute resolution. It boasts of minimal court intervention, quicker chances of settlement, finality of awards, and so forth. But the very ills that plague the traditional dispute resolution system, remain a hurdle in Indian arbitration's progress as well.

India is in "dire" need of arbitration reforms, according to a recent ruling from the Calcutta High Court. This observation seems to be in sync with the views of the Union government, which recently appointed TK Viswanathan to head a committee charged with analysing the existing arbitration ecosystem in the country and making recommendations for its improvement.

BQ Prime spoke with industry experts to find out what changes could be expected in the law to streamline the extant arbitration framework and, thereby, achieve its overarching objectives of resolving disputes in a timely and effective manner.

Experts agree that the most significant issues pertain to the enforcement of awards. These include unpredictable timelines, constant adjournments, delay tactics and prolonged enforcement.

"The key to reduce delays that are endemic in our legal system is to fill the vacancies on judges, have dedicated arbitration benches manned by judges experienced in commercial disputes and arbitration," Shaneen Parikh, partner at Cyril Amarchand Mangaldas, told BQ Prime.

Parikh said it is critical to penalise frivolous applications and requests for adjournments with heavy costs.

A solution could be to mandatorily direct an award debtor to deposit 100% of the award amount, along with post-award interest for 12 months and costs as a pre-condition for challenge to an award, according to Alok Jain, partner at Economic Laws Practice.

Jain said the legislature could also divorce the enforcement of arbitral awards from regular execution processes under the Code of Civil Procedure and create a dedicated mechanism for enforcement of awards.

Other crucial areas in need of reform include:

Third-party funding is when an unconnected party takes care of the costs of defending a party in an arbitration proceeding in return of a contingent share in the win. In India, the concept of third-party funding has been alive for many years. However, there is no clarity regarding rules around this concept.

The concept helps level the playing field in cases with high litigation costs and encourages settlements based on the merits of the case and not by a difference in risk appetite of the parties.

Parikh said the legislature should clarify the stand that third-party funding is permissible. "A clear legal recognition would provide clarity and intent, where there is none yet. But the legislature ought to go further and also set out the kind of cases where funding would be permitted."

There is a specific provision in the Arbitration & Conciliation Act, which says that parties and arbitrators shall maintain complete confidentiality of information, except in cases where disclosure of information is necessary for enforcement of an award.  

The clause was a key feature of the 2019 amendments to the Act. 

A reason why parties choose to arbitrate, apart from a timely disposal of cases, is that such arbitration proceedings are private and promise to keep sensitive business information, trade-secrets, price-sensitive data and business models.

However, the provision is rendered toothless since it doesn't stipulate the consequences of any breach of such confidentiality obligations by a party, which can often cause grave prejudice, hardship and loss to a party, said Krishnayan Sen, partner at Luthra & Luthra.

Recently, a judgement by a five-judge bench of the Supreme Court has put the arbitration landscape in a bind. The top court has said that if a contract, which is exigible to stamp duty, is not stamped or is insufficiently stamped, will render the arbitration agreement contained in it invalid.

The ruling came out in the form of a 3:2 verdict, wherein the minority was of the view that enforcement of the arbitration agreement should not be stalled on an issue that is capable of being resolved at a later stage by the arbitrator.

The case has now been referred to a seven-judge bench, given that the issue carries significant importance.

The requirement to appropriately stamp arbitration agreements will cause significant delays and clog the process at the referral stage, according to Tine Abraham, partner at Trilegal.

Sen said the judgement goes against the separability doctrine, which protects the arbitration clause even if the validity of the underlying contract is challenged.

The idea that an arbitration agreement is separate and independent with its own validity requirements is to ensure that there is no impediment in enforcing the arbitration agreement.

In India, there is no legal provision to enforce an interim or emergency order that emanates out of a foreign-seated arbitration. Only final orders coming out of foreign seats can be enforced under the Act.

For example, there's a dispute between an Indian party and an American party with Singapore International Arbitration Centre as their preferred seat of arbitration. If SIAC passes an interim order against the Indian party, directing it not to sell its assets till the case is finally disposed of, there is no way to ensure its enforcement in India.

The ability to enforce foreign-seated emergency or interim awards in India will provide comfort to parties to opt for emergency arbitrations and will allow parties to be flexible with their choice of seat, Abraham said.

This would also help achieve the goal of making India a hub of international commercial arbitration, she said.