Dispute resolution strategies for India need a rethink in the wake of changes to the arbitration regime
Naresh Thacker and Sumit Rai explain
Indian businesses have traditionally been trigger happy when it comes to commercial disputes. They could afford to be this way, as the time taken from initiation of a dispute to a final decision on it has typically been at least three years. A robust dispute resolution strategy has not been necessary and strategies could evolve as the dispute progressed.
Arbitration as a last resort?
This situation has been altered by two key changes to the Arbitration and Conciliation Act, 1996, brought in by the Arbitration and Conciliation (Amendment) Ordinance, 2015: (1) a strict timeline of 12 months (extendable by mutual agreement to 18 months) to make arbitral awards, introduced by way of a new provision, section 29A; and (2) the introduction of a cost-follows-event regime or loser pays principle, including a clarification that all related costs (including travel, lodging, etc.) may be recoverable. Costs recoverable are not only with respect to arbitrations but also all court applications arising out of an arbitration.
Over the years, it has become difficult to find a commercial contract without an arbitration clause. Arbitration is now the default choice for dispute resolution in India, not only for international commercial contracts but also domestic commercial contracts.
Yet many disputes need time to evolve and take shape before parties can effectively take a position before an adjudicating body such as an arbitral tribunal. In addition, in the life of a dispute parties often find ways to mutually halt an arbitration so as to explore a settlement.
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Such flexibility may not be permitted by the tribunal as the arbitrators themselves have been put in the line of fire, and it will no longer be possible in light of the strict deadline at the end of which the mandate of a tribunal necessarily terminates. Under India’s new arbitration regime, once an arbitral tribunal is constituted it will be like a bullet that has left a gun. It is important to ensure that the trigger is now pulled only as the last step in the life of a dispute and not used as the first intimation of a dispute – as is currently the practice in India.
Fresh thinking
If arbitration is to be the last step, what should be the first step or steps leading to it? This is where a traditional linear way of thinking about disputes needs to give way.
The last couple of decades have seen several alternative dispute resolution (ADR) mechanisms evolve and be used with success in advanced commercial jurisdictions. In India, however, these mechanisms have largely been received with scorn by the business community and leading disputes practitioners. For instance, while mediation today resolves more commercial disputes in the West than arbitration, in India the common perception is that mediation is meant solely for matrimonial or other family disputes.
The Indian business community, and lawyers advising Indian businesses, need to open their minds to understanding the dynamics of the various ADR mechanisms available and to structuring and building them into their contracts as a precursor to arbitration.
Even in situations where an ADR mechanism has not been built into a contract, a timely intervention to propose one of them before parties decide to draw their swords in arbitration can be useful. Most ADR mechanisms need little planning and can be initiated at any time the parties so desire. Since any solution arising out of an ADR mechanism is largely in the control of the parties and works on consent, parties rarely have anything to fear or lose.
Understanding the options
Nothing prevented the use of ADR even prior to the ordinance, but after these changes, it would be sheer negligence to not give it a closer look.
While doing so it should be kept in mind that ADR does not result in a binding decision that is enforceable, unless parties agree to accept the decision. In that sense, the end result in most cases is similar to that of a negotiated settlement. In addition, when a dispute is resolved through an ADR mechanism, the parties are often able to retain their business relationship because they are able to put an end to the dispute without entering an adversarial process such as arbitration or litigation. ADR mechanisms also give parties full flexibility to tailor the process according to the needs of their particular transaction or their particular dispute. For instance, parties can structure a mediation that will last only two days, or be held in three stages over one week in each of three consecutive months.
The most commonly used ADR mechanisms are mediation, conciliation, expert determination, and dispute review boards (DRBs). Although the terms mediation and conciliation are often used interchangeably, they are different processes. Both are a form of assisted negotiation, but the crucial difference is that in mediation the mediator plays a detached role in facilitating parties to talk through their dispute and is not expected to express an opinion on the positions taken by the parties. In conciliation, the conciliator gets involved in the dispute and is primarily concerned with actively drawing both parties towards a settlement on terms that the conciliator considers reasonable. However, in both cases, the settlement has to be mutually agreed and cannot be imposed.
An important distinction between mediation and conciliation is that by virtue of section 74 of the Arbitration and Conciliation Act, a settlement agreement reached in a conciliation and authenticated by the conciliator has the same legal status as that of an arbitral award. It can therefore be enforced directly if either party reneges on its obligations. This powerful provision has been hidden in the act and has not been used to its potential.
Expert determination does exactly what the name suggests – parties appoint an expert in the field that the dispute pertains to and present their views to the expert, who then gives an opinion on the points in dispute. The finality and binding nature of an expert determination will depend on the terms of the contract and the law applicable to the contract.
Under Indian law, a final and binding expert determination does not prevent the parties from raising the same issue before a court or arbitral tribunal, but the extent to which the court or tribunal can review such a determination is controversial and depends on several factors. An expert determination can often resolve an important technical deadlock between parties, and subsequently open avenues for the settlement of a larger set of disputes. It is often relevant in the context of valuation or issues relating to a difference of scientific opinion.
A DRB is a useful mechanism that was developed primarily for the resolution of disputes over construction contracts and large projects. A DRB will usually consist of one or three independent people appointed at the inception of works in a long-term construction or infrastructure project, who will familiarize themselves with the project documents and site from the start of the project itself. Typically in such projects, owing to the nature of works involved, small disputes or disagreements arise almost on a daily basis. These disputes cannot be allowed to create hurdles that jeopardize the project at large. A working interim solution is essential and a DRB achieves precisely that.
DRBs usually meet on a regular basis on the site of a project and help resolve simple issues through informal consultation. For disputes that cannot be resolved informally, a reference will be formally made to the DRB, which hears the parties and gives a reasoned recommendation. Although the recommendation made is usually accepted (a 97% success rate has been reported), parties retain the right to object to the recommendation and take the dispute to an adversarial process such as arbitration or litigation. Usually, the DRB recommendation will have to be acted on in the interim, on the principle of “pay now, argue later”.
The precise manner in which a DRB works will depend on the terms in the contract. Many organizations provide rules and standard operating procedures for DRBs that parties can adopt in their contracts.
Multi-tiered disputes strategy
Despite their value in preventing and resolving disputes before they threaten relationships and businesses, ADR mechanisms are not legally enforceable. Therefore, it is important that they are used in conjunction with either litigation or arbitration, which becomes the final remedy when everything else fails. In order to obtain the maximum benefit, parties should structure a multi-tiered disputes process that begins with one or more ADR mechanisms and eventually leads to an arbitration to resolve all outstanding issues that parties are not able to resolve through other means.
For instance, in a sale of goods contract where disputes are most likely to flare up over technical specifications of the goods supplied, a time-bound short mediation could be provided as a first step, followed by an expert determination. If neither results in an acceptable solution, the parties can move to arbitration.
If a DRB is to be used during the construction of a project, the contract should specifically provide that if certain recommendations of the DRB are objected to within a certain time, both parties must act on the recommendation and raise the issues for final determination before an arbitral tribunal at the end of the project.
The many permutations and combinations possible for structuring dispute resolution strategies give parties complete flexibility to design a process specific to their transaction.
Conclusion
Arbitration clauses used to be called midnight clauses or champagne clauses, as they were added at the last minute and little attention was paid to their drafting or negotiation. Over time and with experience, parties and their lawyers became aware of the importance of drafting these clauses carefully. The recent changes in the law mandate that parties and transactional lawyers relook at their disputes clauses from a perspective much wider than arbitration, so as to provide for a process that adjudicates disputes, but also a means to either avoid them or resolve them without resorting to adversarial proceedings.
Many arguments can be made in favour of and against the timeline introduced in the ordinance, but the law has taken shape and little can be done to avoid it. Prudent businesses can choose to make the most of the changed situation by deploying innovative means and rethinking their dispute management strategy. As the saying goes: If you don’t like something, change it. If you can’t change it, change your attitude.
The specifics
What are the key changes to India’s arbitration regime?
The Arbitration and Conciliation (Amendment) Ordinance, 2015, will alter the experience of users of the Arbitration and Conciliation Act, 1996. The ordinance is guided to a large extent by the 246th report of the Law Commission of India on amendments to the act.
Bonanza for international parties
All matters related to an international commercial arbitration – such as interim measures, challenge of award and enforcement of award – will now be heard by a high court. This will be a relief for international businesses, as many among their ranks have been dragged in the past to lower courts in remote corners of the country.
The ordinance allows for Indian courts to grant interim measures (as per section 9) and to provide assistance in taking evidence (as per section 27) in support of international arbitrations seated outside India. This had become a major concern with international parties, as protective injunctions, orders for summoning a third party witness, etc., could not be sought in India.
New directions
The ordinance also introduces a cost-follows-event regime, which is a first for an Indian statute. While the law had allowed arbitral tribunals the discretion to grant actual costs incurred in pursuing the arbitration to the winning party, this was rarely done. The ordinance introduces a new provision (section 31A) that explains the width of a tribunal’s discretion and lays down a loser pays principle as the default position. This has been made applicable also to costs incurred in arbitration-related litigation.
The amendment further clarifies that public policy is to have a more limited scope than it has received in judicial precedents and no merits review is to be done – both in cases where an international arbitration award (rendered in India) is challenged and where foreign awards are brought to India for enforcement.
Changing course
A new provision (section 29A) introduces a strict time limit for arbitral awards to be made. Tribunals have to make awards within 12 months of the date of constitution of the tribunal. Even by mutual agreement, this can only be extended by six months.
The mandate of the tribunal would terminate by default at the end of the period unless before or after such time, on an application by either party, a court agrees to extend the deadline. While extending the deadline, the court will have the power to penalize the arbitrators if they are found to be responsible for the delay (by ordering a reduction in fees) or the party so responsible (by imposing costs). The courts can also replace the tribunal by appointing a new set of arbitrators and ask it to continue the proceedings.
Through a series of other small tweaks to certain provisions – for oral hearing on a day-to-day basis, no adjournments without sufficient cause, right to impose exemplary costs, forfeiture of right to file a defence statement if timeline not adhered to – arbitral tribunals have been given the corresponding powers to impose the strict timelines introduced.
Other important changes include capped arbitrator fees, direct enforceability in court of interim measures granted by tribunals, and introduction of a list of relationships that must be disclosed or in certain cases disqualify individuals from being appointed as arbitrators. Anyone accepting appointment as an arbitrator now needs to sign a declaration about such relationships and that they believe themselves capable of adhering to the timeline prescribed. An immediate impact of this will be on contracts where existing employees of certain large organizations are named as arbitrators. This will no longer be permissible.
Conclusion
From a strictly jurisprudential perspective, the changes with respect to timelines and arbitrator fees are unhealthy. They radically interfere with party autonomy and take away from the primary attraction of arbitration as a process that can be tailored by parties to their needs.
However, unique problems sometimes call for original solutions. We can only hope that the changes made through the ordinance will evolve as a positive influence on Indian arbitration.
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Naresh Thacker is a partner and Sumit Rai an associate partner at Economic Laws Practice. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided above.
