Making India an Arbitration Hub, Methods, Types, Challenges

Context: SC ruled unstamped contracts enforceable in arbitration, easing delays and upholding minimal court intervention.

Judgements by Supreme Court on Arbitration

• Judgement of five-judge bench of the Supreme Court (N Global Mercantile Pvt. Ltd. vs. Indon Unique Flame Ltd.): They had previously adjudicated that arbitration agreements lacking adequate stamp duty were not enforceable.
  • This judgement introduced challenges, particularly in the appointment of arbitrators by courts, which was stalled until the necessary stamp duty was paid.
• Recent, a seven-judge bench of the Supreme Court ruling: This latest decision permits the enforcement of arbitration agreements that are either unstamped or insufficiently stamped.
  • Moreover, this ruling facilitates the inclusion of technical experts as arbitrators in complex cases, which is especially beneficial for cross-border transactions.

We’re now on WhatsApp. Click to Join

What Is Alternative Dispute Resolution (ADR)?

• Alternative Dispute Resolution (ADR) refers to a range of methods used for resolving disputes outside of traditional courtroom settings.
• In this approach, the involved parties come together to settle their differences under the guidance of an independent third party, known as an
• The conclusions reached in this process are as binding as a court’s verdict, allowing for a private resolution of conflicts.
• This method is favoured for its ability to resolve disputes without delving into the complexities and formalities of legal court procedures.

What are the Methods Of ADR?

Alternative Dispute Resolution (ADR) encompasses four primary methods, offering alternatives to traditional court litigation. These methods are designed to be less time-consuming and more flexible compared to court proceedings.

• Arbitration: In this quasi-judicial process, a neutral third party, known as an arbitrator, is appointed by the disputing parties to make a decision.
  • This process is more formal than other ADR methods, including hearings and evidence presentation, but remains private and allows parties to set their own rules.
  • The outcome, termed an “Award,” holds the same legal standing as a court order.
  • In India, arbitration is regulated under the Arbitration and Conciliation Act, 1996.

• Mediation: In mediation, a mediator assists the disputing parties to reach a mutual agreement.
  • Unlike an arbitrator, the mediator doesn’t make a decision but facilitates dialogue to help parties find common ground.
  • The outcome is typically a legally enforceable contract agreed upon by both parties.
• Conciliation: This method is a blend of arbitration and mediation.
  • A conciliator, like a mediator, aids the parties in finding a resolution but can also suggest settlement proposals.
  • These suggestions are not binding, and the parties are free to accept or reject them. If an agreement is reached, it is formalised into a settlement agreement.
  • In India, conciliation is also governed by the Arbitration and Conciliation Act, 1996.
• Negotiation: The most informal ADR method, negotiation involves direct discussions between the parties without a third-party facilitator.
  • Parties engage in dialogue to resolve their dispute and reach a settlement independently.

Appointment Of Arbitrator

• Nationality of Arbitrators: The nationality of an arbitrator is generally not a crucial factor unless specified otherwise by the parties involved in the dispute.
• Agreement on Appointment Procedure: Parties have the liberty to mutually agree upon a specific procedure for appointing arbitrators.
• Default Procedure in the Absence of Agreement: If the parties fail to agree on a procedure, a default process comes into play for appointing three arbitrators:
  • Each party selects one arbitrator.
  • These two arbitrators then jointly appoint a third arbitrator, who serves as the presiding arbitrator.
• Qualifications of arbitrators: An advocate under the Advocates Act, 1961 and 10 years of experience; an officer of the Indian Legal Service.
• Role of Supreme Court and High Courts: These courts are empowered to designate arbitral institutions. The Arbitration Council of India grades these institutions as per Section 43-I of the Act. In scenarios where a High Court lacks a graded arbitral institution, the Chief Justice of that High Court may maintain and periodically review a panel of arbitrators.
  • When the default procedure is applied, two conditions must be met:
    • Each party should appoint their arbitrator within 30 days of receiving a request to do so from the other party.
    • The two appointed arbitrators must agree on the third arbitrator within 30 days of their appointment.

Arbitration and Conciliation Act, 1996

• The Arbitration and Conciliation Act, 1996, is a comprehensive piece of legislation in India that governs arbitration and conciliation proceedings.
• This Act is modelled on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration, 1985, and the UNCITRAL Conciliation Rules, 1980.
• Its main objectives are to minimise the supervisory role of courts in the arbitral process and to provide a legal framework for arbitration and conciliation as effective forms of alternative dispute resolution (ADR).

Amendments To The Act

The Act has been amended several times to make arbitration more efficient and to align it with international standards. Major amendments were made in 2015, 2019, and 2021.

The Arbitration and Conciliation (Amendment) Act, 2015

• Introduced the concept of fast-track arbitration for disputes.
• Made it mandatory for arbitral tribunals to give reasons for their awards.
• Empowered the Supreme Court and High Courts to designate arbitral institutions.

The Arbitration and Conciliation (Amendment) Act, 2019

• Establishment of an independent body, the Arbitration Council of India, for the promotion of arbitration.
• Specification of qualifications and experience for accreditation of arbitrators.
• Time-bound disposal of applications for setting aside arbitral awards.

The Arbitration and Conciliation (Amendment) Act, 2021

• Elimination of the automatic stay on enforcement of arbitral awards when a court challenge is pending.
• Introduction of additional grounds for setting aside an arbitral award.
• Clarifications on arbitration agreements being valid and enforceable even if the underlying contract is not stamped properly.

What are the types of arbitration in India?

Ad-hoc and institutional arbitration are two distinct approaches to resolving disputes outside the courts.

Ad-hoc Arbitration

• Advantages:
  • Greater Autonomy: Parties have more control over the arbitration process, including the selection of rules and arbitrators.
  • Customizability: The procedure can be tailored to the parties’ specific needs.
  • Cost-Effectiveness: Often more affordable as there are no administrative charges from arbitral institutions.
• Disadvantages:
  • Potential for Prolongation and Increased Costs: Without institutional oversight, proceedings may become drawn out and expensive.
  • Dependence on Mutual Cooperation: Effective resolution requires both parties to be cooperative.
  • Lack of Formal Structure: Absence of a governing body can lead to uncertainties in the process.

Institutional Arbitration

• Advantages:
  • Structured Framework: Institutions provide a clear set of rules and timelines for arbitration.
  • Administrative Support: Assistance from trained staff and access to a panel of arbitrators.
  • Quality Control: Oversight includes the scrutiny of awards to ensure fairness and adherence to guidelines.
• Disadvantages:
  • Perceived Lack of Credible Institutions: Concerns about the quality and reputation of some arbitral bodies.
  • Cost Misconceptions: Assumptions that institutional arbitration is more expensive.
  • Judicial and Legislative Challenges: Institutional arbitration in India faces hurdles due to judicial attitudes and lack of robust legislative support.
  • Outdated Practices: Some institutions have not kept pace with modern requirements, lacking advanced facilities and flexibility.
  • Judicial Delays: Involvement of Indian courts can sometimes lead to delays and discourage international participation.

Status of Arbitration in India

• Historical Context and Development: The concept of arbitration is not new to India and can be traced back to ancient times.
  • However, it was only with the setting up of the International Centre for Alternative Dispute Resolution (ICADR) in 1995 and the enactment of the Arbitration and Conciliation Act of 1996 that institutional arbitration started gaining recognition.
  • Despite the establishment of ICADR, its inefficiencies led to its eventual replacement by the New Delhi International Arbitration Centre (NDIAC) through the 2019 Act​​.
• Current Scenario: Presently, India has over 35 arbitral institutions, with some gaining moderate success and emerging as credible alternatives to ad-hoc arbitration.
  • Institutions like the Delhi International Arbitration Centre (DIAC) and the Mumbai Centre for International Arbitration (MCIA) have been handling a significant number of cases.
  • However, there’s still a preference for ad-hoc arbitration over institutional arbitration among Indian entities, particularly in domestic disputes​​.
• International Recognition and Comparison: Internationally, institutional arbitration is often preferred over ad-hoc arbitration.
  • In India, while parties are free to choose their method of arbitration, there is a notable inclination towards ad-hoc methods. The development of arbitral institutions in India, such as the DIAC and MCIA, is a step towards aligning with international practices.
  • However, challenges remain in terms of government support and promotion of these institutions to an international level​

Challenges associated with Arbitration in India

• Conventional Thinking: In India, there is a prevailing reliance on the judicial system over alternative dispute resolution mechanisms like arbitration. This orthodox mindset, stemming from a lack of awareness and trust in alternative systems, has hindered the growth of arbitration​​.
• Lack of Comprehensive Laws: The existing Arbitration and Conciliation Act, 1996, while a significant step, is deemed insufficient for the complex needs of modern business arbitration. There is a need for more detailed and specific laws to encourage arbitration over traditional court proceedings​​.
• Court Intervention: The frequent intervention of courts in arbitration proceedings, particularly the possibility of challenging arbitral awards under Section 34 of the Arbitration Act, 1996, has led to a preference for the judicial system. This is exemplified in cases like White Industries Vs. Republic of India, where judicial intervention and delays in arbitration were key concerns. Minimising court intervention is crucial to preserve the essence of arbitration as an alternative to litigation​​.
• Lack of Awareness: Many individuals, particularly small-scale businessmen and those new to the industry, are unaware of arbitration as an effective dispute resolution mechanism. This lack of awareness limits the adoption and trust in arbitration processes​​.
• Delays and Enforceability of Awards: Arbitration proceedings in India often face delays due to the heavy workload of courts and limited availability of arbitrators. Additionally, the enforceability of arbitral awards has been a longstanding issue, with enforcement proceedings often being delayed and challenging​​.
• Challenges in Institutional Arbitration: Despite the presence of over 35 arbitral institutions in India, there are various issues like administrative and management challenges, lack of credible institutions, misconceptions about costs, insufficient governmental and legislative support, outdated rules and practices, and inadequate infrastructure. These factors contribute to the low workload of these institutions compared to international bodies like the ICC Court, SIAC, and LCIA​​.

Way Forward

the B N Srikrishna Committee made several recommendations:

• Establishment of the Arbitration Promotion Council of India (APCI) to grade arbitral institutions and promote arbitration.
• Creation of a specialist Arbitration Bench for commercial disputes.
• Promoting arbitration in government contracts through the National Litigation Policy.
• Recommending that government contracts stipulate the appointment of arbitrators accredited by recognized professional institutes.
• Suggesting the takeover of the ICADR by statute, aiming to develop it into a globally competitive institution​​.

Sharing is caring!