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What is International Commercial Arbitration? What is the Status of International Arbitration in India?

Editor, TRANSFIN.
Oct 27, 2020 10:43 AM 4 min read
Editorial

Two major “international arbitration” cases have caught the limelight recently.

First was the more than decade-long snoozefest between Vodafone and the Government of India (GOI)  - where the Permanent Court of Arbitration at The Hague sided with the telco, ruling that GOI’s ₹22,100cr ($3bn) retrospective tax demand as unfair.

The second one happened over the weekend - when Singapore’s International Arbitration Centre (IAC), upon a plea from Amazon, blocked Future Retail’s ₹24,713cr ($3.3bn) deal with RIL through an Emergency Arbitrator ruling.

These two matters are interesting cases on their own, involving a lot of moving parts. But they also give us the chance to explore the practice of international arbitration when it comes to commercial disputes.

What is International Arbitration?

As the name suggests, international arbitration involves two companies or entities in two different jurisdictions resolving their differences in a mutually-agreed-upon arbitration platform - usually an IAC in a third jurisdiction.

The most significant courts of arbitration today include the ones in New York, Singapore, London, Hong Kong and Stockholm.

 

Why Do Companies Prefer Arbitration?

As an Alternative Dispute Resolution (ADR) mechanism, international arbitration enables companies or individuals to swiftly resolve conflicts without having to resort to domestic legal proceedings in either of their countries, which can be lengthy, complicated and taxing.

International arbitration is also less expensive and relatively expeditious.

 

International Arbitration and Indian Law

The foundational instrument of international arbitration is the New York Convention, which was a UN diplomatic conference that met in 1958 to put in place a global system to recognise and enforce arbitration awards.

While India signed onto the New York Convention in 1960, international arbitration became a necessity only after the economic reforms of 1991. Following the opening up of the economy, as more MNCs began striking deals with Indian firms, the need to ensure seamless and easy arbitration rules became clear.

With this in mind, the Indian Government in 1996 passed the Arbitration and Conciliation Act. This law was meant to create an image of India as being investor-welcoming and arbitration-friendly. And while it did introduce the concept of ADR in Indian legalese, it fell short of its intended goals due to its ambiguous clauses and an overzealous judiciary.

 

Judicial Activism Overload

Despite the 1996 Act, Indian courts continued to play a supervisory role in the arbitration process. In many instances, domestic courts acted on pleas by losing parties to restart the litigation process. Sometimes, the appointment of an arbitrator was stalled; other times, the awards were set aside despite both conflicting parties initially agreeing to the ADR route. In some cases, the lower and higher courts took conflicting stances and delivered opposite judgements, further elongating the legal process and dampening investor confidence.

This trend of incessant judicial interference began to reverse in 2011. The case in question was Phulchand Exports v OOO Patriot. Here, the Supreme Court declined to nullify the award of the Russia-based IAC, despite the petitioner arguing it was not in the interest of “public policy” in India. The apex court disagreed with this stance, holding that "the agreed terms must ordinarily be respected as parties may be taken to have had regard to the matters known to them".

 

Executive Action

The 2011 SC ruling set a new precedent for Indian courts. A new-found respect for international tribunal rulings was established. This was further codified into law from 2015 when the Government began amending and modernising the 1996 Act.

The first step in this direction was reducing the supervisory role of courts vis-a-vis revoking arbitration review powers of lower courts (those below High Courts).

Other changes brought about by the 2015 Amendment include (a) doing away with the provision of granting an automatic stay of an arbitration award upon filing of a court challenge, (b) introduction of strict timelines for completion of arbitration proceedings, and (c) reducing the scope of challenges to arbitration awards on grounds of "public policy".

In subsequent years, more liberalisation was brought forth. A 2019 amendment sought to resolve all commercial disputes within a six-month timeframe. An Arbitration Council of India was established. The New Delhi International Arbitration Centre (NDIAC) Act was passed. Plans were announced to set up an IAC in India, so as to make the country a hub for domestic and international arbitration.

 

Where Do We Go From Here?

India’s confidence in international arbitration has come a long way since the 1996 Act. There remain however still unresolved concerns with regard to enforceability.

In the Amazon-Future matter itself, in case the losing party doesn’t agree to comply with the Emergency Arbitrator, Amazon may have to move an Indian High Court under Section 9 of the 1996 Act for enforcement, bringing the latter again (albeit indirectly) into a supervisory role.

And Future Group has the right to object. The trajectory seems to be headed there, considering RIL’s already saying their deal with Future is fully enforceable under “Indian law”. 

All this within the non legal backdrop of Future’s dependency on a deal to trim its debt-ridden balance sheet, the wider fight between Amazon and Reliance to dominate India’s retail segment, and the challenge of an International company against a swadeshi one should add sufficient drama for all (non) stakeholders to enjoy.

FIN.

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