By Parul Yadav, Suvaaankoor Das, KIIT School of Law, KIIT University.
Editor’s Note: Even though arbitration was known to the Indian legal and business community, only the ad hoc form found credence while the concept of institutional arbitration is relatively new. In an institutional arbitration, the arbitration agreement designates an arbitral institution to administer the arbitration. The parties then submit their disputes to the institution that intervenes and administers the arbitral process as provided by the rules of that institution. These rules and procedures are more likely to produce consistent and predictable results because of the institution’s experience and assets, providing greater resources to facilitate the arbitration. It was the Indian Arbitration and Conciliation Act, 1996 which infused a fresh lease of life into this concept and with a constrained ambit of public policy, its scope in the nation is bound to be infinitude.
Arbitration may be defined as “the process by which a dispute or difference between two or more parties as to their mutual legal rights and liabilities is referred to and determined judicially with binding effect by the application of law by one or more persons instead of a court of law”.[i] Arbitration is only an alternative to litigation and it also co-exists with it.
The object of arbitration is to provide fair and impartial resolution of disputes at a fast rate and at the same time, it allows freedom to the parties to agree upon the manner in which their disputes should be resolved, subject only to safeguards imposed in public interest.
In India, Arbitration as a mode of resolution of disputes came to be adopted from the medieval times when trade and commerce between traders in India and outside started growing.[ii] Arbitration existed in the form of informal agreements where disputing parties would agree to and listen to the decision of a respected elder, whom they trusted implicitly.
Prior to 1996, in India, laws governing arbitration were encompassed in three enactments. Whilst the Arbitration Act, 1940 contained general provisions pertaining to arbitration, the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961 dealt with the enforcement of foreign arbitration awards. These legislations did not prevent disputing parties from approaching the courts at any stage of arbitration. This factor and the interpretational interplay between three different enactments ensured that simplicity, speed and efficiency, were never going to be there. In fact the Supreme Court of India, while referring to the 1940 Act, observed that “the way in which the proceedings under the Act are conducted and without an exception challenged in courts, has made lawyers laugh and legal philosophers weep”[iii] in view of “unending prolixity, at every stage providing a legal trap to the unwary.”
Post 1996, following much persuasion from the various bodies of trade, the Arbitration & Conciliation Act, 1996 was promulgated. Commendably, the Act was based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law, which was recommended by the General Assembly of the United Nations to all countries. The influence of the UNCITRAL Model Law ensured some uniformity of the Act with arbitration worldwide, which was not entirely unwelcome as the Indian economy was undergoing a sea-change following the crisis of 1991. It was, at that time, the Act limited the manner in which a party could approach the courts, and significant power was given to the arbitral tribunal, including the power to rule on its own competence. This resulted in rejection at the threshold of all sorts of miscellaneous applications that would normally clog the courts.
Even though arbitration was known to Indian legal and business community, only the ad hoc form found credence while the concept of institutional arbitration is relatively new. These are the basic two forms of arbitration followed in varying degrees in different nations across the globe.
TYPES OF ARBITRATION
Arbitration, as mentioned above, can be divided into two basic forms, Ad-Hoc Arbitration and Institutional Arbitration.[iv]
1. Ad-Hoc Arbitration
Ad-hoc arbitration refers to ‘arbitration where the parties and the arbitral tribunal will conduct the arbitration according to procedures which will either be agreed by the parties or, in default of agreement, laid down by the arbitral tribunal at the preliminary meeting once the arbitration has begun. However, there are different sets of rules available to parties who contemplate arbitration, including the rules of their own trade associations.’[v]
A peculiarity that came about was that in an arbitration consisting of three arbitrators, each party would appoint one arbitrator and the two arbitrators would jointly appoint the presiding arbitrator. By custom, the two arbitrators would only appoint a presiding arbitrator who was senior to both and prefer to appoint retired Chief Justices of India. Parties mostly prefer to appoint retired judges of the High Court or the Supreme Court, depending on, amongst other things, the quantum of the claim. Nowadays, given the huge demand for such limited senior judges, parties are often faced with a scenario where the dates between hearings could even be as long as one year, thus negating the entire concept of arbitration as a quick and efficient mechanism for dispute resolution.
2. Institutional Arbitration
As the Indian economy was on the verge of massive expansion, and foreign investment into India was beginning to swell, a demand for institutional arbitration suddenly arose. Yet despite the surge in foreign investment, the growth of institutional arbitration in India was relatively slow off the block.
Of late, however, a large number of well-known and internationally recognized institutional arbitration centers – such as the International Chamber of Commerce, the London Court of International Arbitration and the Permanent Court of Arbitration – have opened centers in India.
In an institutional arbitration, the arbitration agreement designates an arbitral institution to administer the arbitration. The parties then submit their disputes to the institution that intervenes and administers the arbitral process as provided by the rules of that institution. The institution does not arbitrate the dispute. It is the arbitral panel which arbitrates the dispute.[vi]
All arbitral institutions do not provide the same services. Some institutions of high reputation simply offer a set of rules and guidelines, and no other arbitral services. One such illustration is the London Maritime Arbitrators Association (LMAA), etc. There are other institutions, which provide rules and a roster of qualified arbitrators but are not involved in the appointment of arbitrators; an example is the Society of Maritime Arbitrators in New York.
Certain groups of institutions supervise the whole arbitration process from the notification to the defending party of the claimant’s request for arbitration to, and including, the notification of the arbitral award to the parties. For instance the International Court of Arbitration of The International Chamber of Commerce.[vii]
ADVANTAGES OF INSTITUTIONAL ARBITRATION
Institutional arbitration has significant number of advantages over ad hoc advantages both for the parties involved as well as the court. Some of these advantages have been listed below:
An advantage of institutional arbitration is the reputation and prestige of the institution. It is widely perceived that an arbitral award issued under the name of a well known institution for example, ICC, is helpful in terms of enforcement. It is only natural for courts faced with the enforcement of an award from a reputed institutional arbitration to be more accommodating considering the institution’s reputation in running a well administered and supervised arbitration. The parties have the comfort of knowing that such arbitration institutions have the experience in ensuring the constitution of the arbitral tribunal, the hearing and publication of the award.
2. Arbitration rules
In Institutional arbitration, well-tried and tested set of arbitral rules are set out in a booklet. Parties who agree to submit any dispute to arbitration in accordance with the rules of a named institution effectively incorporate that institution’s book of rules into their arbitration agreement. Automatic incorporation of a book of rules is one of the principal advantages of institutional arbitration.
If one party starts dragging its feet to proceed further with arbitration proceedings, it will nevertheless be possible to arbitrate effectively, because a set of rules exists to regulate the way in which the arbitral tribunal is to be appointed and the arbitration is to be administered and conducted. The arbitration rules provide for the various factual situations which may arise in arbitration. This is clearly an advantage.
There is a mechanism in the rules to challenge and, if necessary, remove arbitrators. Suppose for instance, that there is a challenge to an arbitrator, on the grounds of lack of independence and impartiality; or suppose that the arbitration is to take place before an arbitral tribunal of three arbitrators and the defending party is unwilling to arbitrate and fails or refuses to appoint an arbitrator. The book of rules will provide an elucidation for this situation.[viii]
These rules and procedures are more likely to produce consistent and predictable results because of the institution’s experience and assets, better anticipating unexpected and diverse circumstances, and providing greater resources to facilitate the arbitration.
Another significant advantage of institutional arbitration is that most arbitral institutions provide trained staff to administer the arbitration. The arbitral institution’s staff will ensure that the arbitral tribunal is appointed, that advance payments are made in respect of the fees and expenses of the arbitrators, that time limits are kept in mind and, generally, that the arbitration is run as smoothly as possible.
Where the arbitrator has to do the administrative work as well, then it may detract them from their primary responsibility of resolving the disputes between the parties. In institutional arbitration, the institution has all facilities required to conduct the arbitration smoothly. It is also easy to maintain confidentiality of the proceedings.
In addition to administration, certain arbitral institutions, like the International Chamber of Commerce (ICC), and the International Court of Arbitration (ICC Court) in Paris, scrutinize an award before it is published to the parties, thus ensuring that the reasoning and content of the award deal with all claims and counterclaims made by the parties and that the principles of due process have been adhered to throughout the course of the proceedings.
5. Quality of the arbitral panel
International arbitration institutions usually benefit from vast databases of arbitrators in order to assist parties in appointing appropriate arbitrators for the resolution of their disputes. The institutions have panels of experienced arbitrators specializing in various areas like construction, maritime, contract, trade, commodities, etc. available to them.
Institutions like the ICC even have at their disposal an extensive network of national committees that can be consulted by the ICC headquarters in Paris to help in the identification of arbitrators with no national bias and some measure of experience or expertise in particular industry sectors.
Furthermore, institutions like the ICC will ensure that the appointment of an arbitrator is only confirmed if he is independent and impartial and has sufficient time to fulfill his mandate with due care and efficiency.
6. Remuneration of arbitral tribunal
Institutional arbitration avoids the discomfort of the parties as the remunerations of the arbitral tribunal are already fixed. Most institutions have a mechanism for determining the scale of remuneration and collecting from the parties the money from which the arbitral tribunal will be paid without directly involving the arbitrators. This means that the tribunal is able to maintain a certain level of material detachment.
Since there is no arbitral institution which sets and supervises the time limit, and fixes the scale of fees in ad hoc arbitration, the parties will have to agree upon these matters directly with the arbitrators. It is therefore possible for parties to agree in hourly remuneration rate with arbitrators, which eventually may result in a sum greater that the amount they would have paid had they submitted their dispute to the rules of a specific arbitral institution.[ix]
In all arbitrations, speed is of essence. Where an arbitral institution is involved, there will be tight time limits for the exchange of the parties’ pleadings, the main hearing and the publication of the final award. These time limits will guide the tribunal and the parties to resolve the dispute swiftly, even though non-compliance with a given deadline will not be fatal and the parties are free to agree a more flexible timetable.
8. Default procedures
Some institutional arbitration rules expressly provide for the continuation of arbitration proceedings to prevent the proceedings from stopping short in its tracks, even when one of the parties defaults during the course of the arbitration. For example, Article 21(2) of the ICC Rules provides that “If any of the parties, although duly summoned, fails to appear without valid excuse, the Arbitral Tribunal shall have the power to proceed with the hearing”.[x]
PRESENT INDIAN SCENARIO SUPPORTING THE GROWTH OF INSTITUTIONAL ARBITRATION
The Indian Arbitration and Conciliation Act, 1996 is the statutory adoption of the UNCITRAL Model Law for international commercial arbitration and the UNCITRAL rules of arbitration, with relevant modifications to fit into its institutional framework. India is also a party to the New York Convention (on enforcement of arbitration awards) allowing arbitral awards to be enforced by the courts in almost any country around the world. The Act provides for party autonomy, maximum judicial support of arbitration and minimal intervention.
Section 89 of Civil Procedure Code, 1908 also supports settlement of disputes outside the court through the methods of Alternate Dispute Resolutions. Among the various forms of ADR, arbitration stands out as the most favorable mode.
1. Maximum Court Support
The courts in India offer full support and encouragement for institutional arbitration. At the request of a party:
- They stop a court case from being carried on in breach of an arbitration agreement in a court of law.
- They enforce foreign arbitral awards made in New York Convention countries:
A foreign award by definition means an award passed in such territory as the Central Government by notification may declare to be a territory to which the New York Convention applies[xi]. About 40 countries have been notified so far by the Indian government. The United States of America, United Kingdom, and France are among the countries notified whereas Australia and Hong Kong have not yet been notified.
- They enforce awards made in international arbitrations taking place in India.
The Code of Civil Procedure, 1908 (CPC) governs the execution of decrees[xii], whether foreign or domestic, in India. If the award is not performed by the losing party, the successful claimant can enforce it ‘in the same manner as if it were a decree of the court’[xiii], under the CPC.
- They issue a wide range of interim measures of protection, including:
- preservation and interim custody of the subject matter of the dispute
- interim injunctions to preserve the status quo
- appointment of receiver
- securing the amount in dispute
- securing costs of the arbitration
- They issue processes to compel witnesses to attend arbitral proceedings
- Apart from this, the Supreme Court gave a pro-arbitration judgment inSumitomo Heavy Industries Ltd. vs. ONGC[xiv] which was decided on 28th July 2010. It laid down that:
“It is true that if there is an error apparent on the face of the award or where the umpire had exceeded his jurisdiction or travelled beyond the reference, the Court can interfere. If the conclusion of the arbitrator is based on a possible view of the matter, the Court is not expected to interfere with the award. The High Court has erred in so interfering. Court while considering challenge to arbitral award does not sit in appeal over the findings and decision of the arbitrator… “
2. Minimum Court Interference
Indian courts do not review the merits of an award in arbitration, unless it is at the request of a party and only under restricted grounds of challenge laid down in the Arbitration Act.[xv] A foreign award may also only be reviewed according to a similarly limited set of criteria.
One amongst such grounds for setting aside the award is violation of public policy.[xvi] Different states have different concepts of their own public policy. Public policy in India, both for domestic as well as foreign awards, has been given a very wide ambit. Despite a precedent suggesting that the term public policy be interpreted in a restrictive manner, the court held that any arbitral award which violates Indian Statutory provisions is “patently illegal” and contrary to public policy[xvii]. By equating patent illegality to an error of law, the court effectively paved the way for losing parties in the arbitral process to have their day in the Indian courts on the basis of any alleged contravention on Indian law, thereby resurrecting the potentially limitless judicial review which the 1996 Act was designed to eliminate.[xviii]
The global financial crisis of 2008-09 did not leave any country unharmed.[xix] On the other hand, it is fact that India’s economy grew at 6.1% in the quarter ending June 2009 which is amongst the highest growth rates in the world. In our opinion, India has sufficiently outgrown itself; therefore, it is time that the cloth of ‘public policy’ is tailored, so that India can acquire its rightful place as an economic powerhouse and institutional arbitration centre.
COMPARATIVE ANALYSIS OF INDIAN ARBITRATION INSTITUTIONS AND OTHER SUCCESSFUL ARBITRATION INSTITUTIONS ACROSS THE GLOBE[xx]
Institutional arbitration in a nation flourishes only when its arbitral institutions fulfill the basic requirements to successfully and effectively carry out an arbitration process. These requirements include
- A degree of permanency
- Modern rules of arbitration
- Qualified staff
- Reasonable charges[xxi]
A Degree of Permanency:
Disputes frequently arise many years after the making of the original commercial agreement, particularly in long term contracts. It is important that the institutions named in the arbitration clause should still be in existence when the dispute arises, otherwise, the arbitration agreement may prove to be “inoperative or incapable of being performed”, in the words of New York Convention, and the only recourse will be to the national court. It is easier to have confidence if the institution or the centre that is chosen has an established track record or, if it is a recent creation, has some reasonable guarantee of permanency. The International Chamber Commerce and London Court of International Arbitration established in 1923 and 1892 respectively have a track record of successful arbitrations over the course of their prolonged existence. The Indian Council Arbitration was established in 1965. At the beginning of the year 2010, 574 arbitration cases were pending with the Council at different stages of arbitration proceedings but by the end of that year, 579 arbitration cases were under process including 20 arbitration matters which have been pending in courts pursuant to litigation between the parties.[xxii] Thus, though not as successful as the ICC or the LCIA, the ICA has shown reasonable guarantee of permanency.
Modern Rules of Arbitration:
The practice of international commercial arbitration changes as new laws and procedures come into existence, both nationally and internationally. It important that the rules of arbitral institutions should be altered to reflect these changes[xxiii] and not rest in some comfortable time wrap. The ICA rules are in accordance with the IACA, 1996. For instance the appointment of sole arbitrator or three arbitrators in the arbitral tribunal[xxiv] is in harmony with section 10(1) of the IACA, 1996.
One of the main objects of an arbitral institution is to assist arbitrators and the parties in the conduct of arbitration. This assistance may extend not only to explaining the rules, making sure that the time limits are observed, collecting fees, arranging visas and reserving accommodations, but also to advising on appropriate procedures by reference to past experience. It is a task that requires a combination of qualities-tact and diplomacy as well as legal knowledge and experience. It is an area in which ICC sets the standard, with each arbitration being under the supervision of a designated “Counsel”, drawn from the ICC’ staff of experienced and multi-lingual lawyers. Though the ICA does not has such a designated counsel to supervise arbitration, it does boats a panel of around 1500 arbitrators with an extensive array of professional qualifications and expertise (legal and non- legal), guaranteeing a tribunal of the highest aptitude and proficiency. The ICA has access to the most eminent and experienced arbitrators and with the widest range of expertise from India, U.K., Singapore, France, USA, Malaysia, Germany and Belgium.[xxv]
The process of arbitration is deemed efficacious if along with being expeditious and just, it is cost effective as well. Some arbitral institutions including the International Chamber of Commerce and the Indian Council of Arbitration assess their own administrative fees and expenses, and the fees payable to the arbitrator, by reference to a sliding scale which is based on the amounts in dispute. This has the advantage of certainty, in that the parties can find out at a reasonably early stage what the total cost of arbitration is likely to be.
The fee structure of the ICC for a sum between Rs. 2.5crore to Rs.5crore includes an administrative expense of Rs. 6, 32,500 + 1.37 % of amount over Rs. 2.5crore and a minimum of Rs. 4, 48,500 + 0.90% of the amount over Rs. 5crore as arbitrator’s fee.[xxvi] Whereas arbitration involving a disputed sum between Rs. 1crore and Rs. 5crore in India costs a total of Rs. 3,93,750 only ( arbitrator’ fee: Rs.1,50,000 + Rs. 22,500/-per crore or part thereof subject to a ceiling of Rs. 2,40,000 and administrative fee: Rs.75,000 + Rs. 11,250/- crore or part thereof subject to a ceiling of Rs.1,20,000 ) along with Rs. 2,500 per hearing as special fee.[xxvii] Thus, institutional arbitration in India is very economical and reasonable.
Other institutions, such as the LCIA, assess their administrative costs and expenses, and the fees of the arbitrator, by reference to the time spent on the case.
The Indian Arbitration and Conciliation Act, 1996 has infused a fresh lease of life into the Indian institutional arbitration. Being based on the UNCITRAL model, it is at par with international standard of arbitration. India is also a party to the New York Convention (on enforcement of awards). Maximum judicial support and minimum judicial intervention (except on grounds of public policy) along with the economical arbitration charges has given institutional arbitration in India a major boost. The arbitral institutions in India also fulfill the basic requirements to an acceptable level though there does exists ample scope for improvement.
With a constrained ambit of public policy, conceivably by applying the French concept of international public policy (international arbitral awards can be set aside if recognition or execution is contrary to international public policy),[xxviii] the scope of institutional arbitration in India is infinitude.
Edited by Kanchi Kaushik
[i] Butterworths, HALSBURY’S LAW OF ENGLAND (4th edition, 1991) ¶601.
[ii] Alternate Dispute Resolution, 13 (P.C. Rao & William Sheffield eds., Universal Law Publishing co. Pvt. Ltd.).
[iii] M/s. Guru Na nak Foundation v. M/s. Rattan Singh & Sons , AIR 1981 SC 2075, 2076
[iv] Gerald Aksen, Ad hoc Verses Institutional Arbitration, 2(1) ICC Bulletin (1991): 8-14.
[v] Instances of such association are Grain and Feedstock Trade Association (GAFTA) and London Maritime Arbitrators Association (LMAA).
[vi] Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration, 47(4th ed., 2004) ¶¶ 1-99.
[vii] G.K. Kwatra, Arbitration and Alternative Dispute Resolution, 59 (Universal Law publishing co., 2008).
[viii] See ICC Arbitration Rules art 21.2(If any of the parties, although duly summoned, fails to appear without valid excuse the Arbitral Tribunal shall have the power to proceed with the hearing).
[ix]See LCIA, India charges (20000 INR per hour).
[x] Art. 21.2, ICC Arbitration Rules.
[xi] Indian Arbitration and Conciliation Act, 1996, § 44. [ Hereinafter IACA]
[xii] Saurabh Kalani v Tata Finance Ltd., 2003 (Supp) Arb LR 217, 238 (Bom).
[xiii] IACA, 1996, supra note 11, § 36.
[xiv] 1998 (1) SCC 305.
[xv] IACA, 1996, supra note 11, § 34 and § 35.
[xvi] IACA, 1996, supra note 11, § 34(b) (ii).
[xvii] ONGC v. Saw PIPES, (2003) 5 SCC 705.
[xviii] Aloke Ray and Dipen Sabharwal, What Next for Indian Arbitration? (The Economic Times, 29 August, 2006).
[xix] Economic Survey, 2007-2008 of India, by the ministry of finance (India).
[xx] See Note: Indian Council of Arbitration being the apex arbitral organization of India has been used for comparison with the other successful arbitration institutions across the globe like International Chamber of Commerce and London Court of Arbitration.
[xxi] supra note 6.
[xxii] 46th Annual Report 2010-11,ICA
[xxiii] As happened in England, following the Arbitration Act, 1996.
[xxiv] Rule 23 of ICA Arbitration Clauses.
[xxv] ICA Official Brochure, http://www.icaindia.co.in/icanet/ICA-Brochure-Final.pdf.
[xxvi] Article 4, ICC Rules of Arbitration. http://www.iccwbo.org/uploadedFiles/Court/Arbitration/news_archives/Modification_App_III.pdf
[xxviii] French Decree law No. 81-500 of May 12,1981, Art.1502.5