The Jury Is Out

 

If you think arbitration cases are restricted only to consumer disputes with service providers, you would be mistaken. Some of the biggest battles in the corporate world are being fought in arbitration centres — not in courts of law. For instance, the acrimonious dispute on whether Unitech has any veto rights to prevent Uninor’s sale of assets is now in front of arbitrators at the Singapore International Arbitration Council (SIAC). The Company Law Board under the Ministry of Corporate Affairs where the dispute had first landed, allowed Unitech’s plea for the dispute to be settled through arbitration in Singapore.

 

The dispute between India’s biggest private sector firm Reliance Industries (RIL) and the Centre on costs incurred in the KG-D6 basin is also likely to be decided by an arbitration tribunal consisting of former Supreme Court (SC) Chief Justice S.P. Bharucha and Justice V.N. Khare and an as yet unnamed presiding member. The government has reportedly sought the services of former solicitor general Gopal Subramaniam to argue its case, while RIL is represented by yet another former solicitor general, Harish Salve. 

 

The other high profile cases expected to be settled through arbitration centres include Sistema versus the Government of India on the cancellation of 2G licences as well as Vodafone’s $2.5-billion retrospective tax dispute with the income tax department (through the Bilateral Investment Treaty (BIT) with the Netherlands).

 

Welcome to the world of arbitrations, the corporate world’s answer to the long and winding road that is the judicial system, where any dispute — from the terms of divorce between two of the largest automakers in the world to the future home of paintings allegedly stolen by the Nazis during World War II — can be resolved by a neutral umpire. Over the past decade, arbitrations as a means of dispute resolution have shot up sharply. SIAC, which is Asia’s biggest hub for arbitrations, saw a doubling of the number of cases involved in arbitration between just 2008 and 2011. For disputes involving at least one Indian party, the increase was threefold, with a total of 217 million Singapore dollars being in dispute in 2011. An Ernst & Young study, ‘Changing Face of Arbitrations in India’, said that during 2004-07, the SC decided 349 arbitration cases. It also said that the Delhi High Court’s mediation and conciliation centre decided 668 out of 868 cases in 2007-08. While no real figures are available, the value of corporate disputes being settled through arbitrations are estimated to run into several billion dollars.
 
 

Why are arbitrations becoming popular in the business world, as an alternative to court cases? There are plenty of reasons. In most of the developed world, and increasingly in India as well, arbitrations are seen as the panacea to the costs of proceeding through the normal judicial system. Specially for disputes between parties of different countries, the general distrust of local courts has favoured this parallel and neutral system. 

 

Under the New York Convention of the Recognition and Enforcement of Foreign Arbitral Awards 1958, 146 countries have agreed to recognise an arbitral award made in a foreign country, giving it the status of a court decision in the country. With a typical arbitration panel appointed by each of the parties to a dispute, and presided by a third and neutral arbitrator, corporates see it as a way to cut litigation time from about 10 to 12 years on average in courts (if you’re lucky, lawyers in India would add) to about two years through arbitration. 

 

Moreover, parties to the dispute get to choose the arbitrator; in court cases, their docket could end up with any judge or bench. Also, in many cases where technical and commercial nuances are important, parties can choose technical experts as arbitrators. Veteran arbitration lawyer Hiroo Advani sums it up: “When courts are not geared to decide on commercial matters, arbitration becomes the obvious choice.”

 

A classic example of how arbitrations help in calling for accountability in execution of justice is the case of White Industries. This Australian mining company had won a suit in 2002 against Coal India, with which it was jointly developing the Piparwar coal mines in Uttar Pradesh. But since Coal India had appealed the verdict in Indian courts and there was no resolution of the matter till 2010, White invoked the BIT between India and Australia which, it claimed, protected its investment.

 

The arbitration tribunal set up under the treaty ruled late last year that the delay in the judiciary breached India’s duty to offer “effective means” to assert claims. India was ordered to compensate White for the amount it was awarded in the earlier arbitration with Coal India, as well as interest for the period of delay. The irony is that this BIT award will probably also be challenged in Indian courts.

 

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The surge in arbitrations is, perhaps, a fallout of the spike in deals struck during the global investment boom of the past decade. When the bust of 2008 happened, many companies found themselves unable to honour terms of contracts signed during the boom. As a result, disputes broke out across the world. In India, the effect just happened to be more pronounced and noticeable because many of these contracts involved a foreign counterparty,  and they often preferred the arbitration route to brawling in court.

 

That said, India itself is not a favoured arbitration destination. Indeed, a large number of disputes involving Indian companies or at least one Indian company as a party goes straight to the SIAC or the London Court of International Arbitration (LCIA). Some even land up in the International Chamber of Commerce in Paris.

 

That begs the question: why didn’t India, with its fastest-growing emerging nation tag, emerge as a credible arbitration destination that could handle this onslaught of cases? Why do Indian companies that can afford it prefer to go to Singapore or London to resolve disputes?

 

Successive law ministers have ‘dreamt’ of making India a global hub for arbitrations. But apart from a much-criticised draft amendment to the Arbitration and Conciliation Act, introduced in 2003, nothing has moved. Some of the fault also lies in the fact that the losing party often moves court in India which, in turn, negates the whole purpose of a relatively quick and final resolution that the arbitration process is supposed to promise. First, in 2002, the SC, in the famous Bhatia International case, ruled that Indian courts had the right to interfere (that is, admit appeals against) in  an award by a foreign arbitration tribunal. Then, in a case involving Patel Engineering, the court in 2005 gave itself the right to decide whether a dispute is arbitrable in the first place.

 

It is not as if arbitration decisions cannot be challenged in the courts of other countries. But in most countries, courts rarely accept a case disputing an arbitral award, giving it some semblance of finality. The exceptions are when it interferes with ‘public policy’, but that is also used very sparingly. Switzerland, for instance, is one example practitioners tout. It has only one recorded case where an arbitration award was set aside on grounds of ‘being opposed to public policy’. In India, on the other hand, the definition of public policy has been widely interpreted by courts, and they entertain virtually every appeal against an award by an arbitrator. And, as Hiroo Advani notes, “When an award is stayed on challenge (meaning, liability to pay is frozen), the incentive to challenge is high.”

 

The effect is an arbitration system in India that leaves an aggrieved party waiting, sometimes even over 10 years for a final resolution, including between six months and a year for the courts to decide on arbitrability, around four years on an average for an award by the tribunal, and then an appeal heard by a high court and, if necessary, the SC. And quite often, the aggrieved party is left footing the bill.

 

J.L. Ashar, head of works contracts at Gammon India, an infrastructure major that has had several legal battles, often with PSUs, laments about how he is often at the mercy of the delaying tactics of the opposed parties. “The government has nothing to lose. So at every stage, we have to bear the financial consequences.” 

 

Ashar recalls an incident when a PSU refused to pay the arbitrator’s fee halfway through the proceedings and the arbitrator threatened to walk out. The company then undertook to pay the PSU’s share of the fees, to be adjusted in the final award. A couple of years down the line, the arbitrator decided in favour of Gammon. Then came the appeal, which took a few more years. After about 10 years, the company was finally paid, with simple interest for the period since raising the dispute before the arbitral tribunal. Ashar points out the irony when you compare the final award with the opportunity cost of the funds for the company: it might have lost funds net. So much for faster, cheaper justice!

 

Predictably, much of the blame is laid on the fact that India does not have a proper council for arbitrations, and also few experts in different fields who can be called in for specialised arbitration proceedings. A lot of arbitration cases here also follow an ad hoc process, not an institutional one.

 

Also, quite often, the arbitrators chosen are retired judges. Some of them are genuinely interested in holding proceedings quickly and properly, following strict timetables. But not all. Vijaya Sampath, advisor to the Bharti Group, says the proceedings are slow because these retired judges follow the procedures they were used to in courts — every document and witness statement is cross-examined, affidavits are called for and detailed oral evidence is taken. The result: awards take years. Given that the arbitrators are often quite advanced in years, there are quite a few cases where arbitrators die while the dispute is pending, delaying resolution further.

 
 

Ciccu Mukhopadhaya, a noted arbitrator who is on the SIAC panel and, till recently, a partner with law firm Amarchand & Mangaldas & Suresh A. Shroff & Co, says that Indian arbitrators somehow fail to see why cases should be time-bound. “Arbitrations at Singapore and London follow the ‘chess clock’ method. Parties must finish arguments within the time allotted to them. Delays in filing documents or being present for hearings could attract heavy penalties, and, result in losing the case itself.”

 

Of course, there are exceptions. Justice B.N. Srikrishna, who retired as an SC judge in 2006, is a much sought-after arbitrator now. He takes up cases only if parties agree to commit their entire day to the arbitration at hand. Lawyers point out other arbitrators such as Justice Bharucha and Justice Sam Variava as some of the other choices known for their strictness, punctuality and refusal to tolerate delaying tactics by either party.

 

The result is that today, most investors insist that agreements with Indian companies have built-in clauses that name arbitration centres in Singapore or London in case of disputes. Rajendra Barot who, as head of litigation at AZB Partners, handles some of the most high profile cases, explains that people have realised the futility of soft-pedalling litigation. “Gone are the times when companies thought they could get away with not honouring contracts because delays in the judicial system would protect them in the short, and often, even the medium term.”

 

That, of course, comes with a cost. SIAC, for instance, charges parties a percentage of the claim amount. The LCIA caps its fees, but it is still significantly higher than what comparable Indian institutions charge. Add to that logistical expenses, and it becomes uneconomical for mid-tier Indian firms.

 

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But even at the elevated levels, the real cost of conducting arbitration tends to be lower than an ad hoc (non-institutionalised) proceeding in India. Several corporates lament that for arbitrators in India, the sky is the limit when it comes to fees. A two-hour session could land the parties a bill of up to Rs 2 lakh with top arbitrators. As a whole, a single day of arbitration could leave them poorer by around Rs 15 lakh. Sometimes, the gaps between sessions can be months together, so the arguments need to be redone just to refresh arbitrators’ memory. 

 

The opportunity cost of funds for the period of delay can negate the benefits of a successful award. “An ideal arbitral institution will slot a fixed timeline for each stage of the arbitration process,” says Barot. “Hearings happen at one go, nine to five, five or six days on the trot, and the arbitrator is mostly able to complete the process within a year and a half.”

 
 

 

To solely blame the retired judges who act as arbitrators would be to miss the point. Justice Srikrishna points out that the arbitration laws do not require that an arbitrator be a lawyer or a judge. But at the same time we need people who understand the nuances of legal decision-making. “In foreign countries, arbitration is seen as a profession that young people are willing to specialise in. Whereas, in India, lawyers prefer to conduct arbitrations after normal court hours or on weekends,” he says. “India desperately needs an arbitration bar.”

 

An arbitration bar is where lawyers take up arbitration as a full-time specialisation. The absence of one, and conversely, the practice of court lawyers doubling up as arbitration counsel, means that sessions are fixed and curtailed according to the demands of court work. It isn’t too difficult to imagine how effective a lawyer will be during an arbitration session at 5:30 pm, after an entire day of arguing multiple cases in, say, the high court. Chai and samosas, followed by an adjournment, is what often transpires.

 

Often, such a lackadaisical approach is also a delaying tactic — which stems also from the belief that your obligation to pay arises only after completion of the entire hearing. As Justice Srikrishna puts it, “Every other country has a healthy attitude towards litigation. In India, however, we have a litigious attitude. The solution is hefty costs. Penalties for dishonest litigation must be made so heavy so that it acts as a disincentive”

 

“Unless and until the users of arbitration make an effort to facilitate smooth process, the scenario cannot change,” says Dushyant Dave, an SC lawyer. And there have been instances where attitude has helped matters. 

 

Mukhopadhaya recounts a recent dispute between an Indian company and the subsidiary of a foreign company that was resolved in around six months. “Both the counsel as well as the arbitrators wanted to end the matter quickly, and so it was possible,” he says.

 

The answer is also to have strong institutions of arbitration within India that enforce such discipline. The Indian Council of Arbitration (ICA), set up by industry body Ficci in 1965, claims to have received over 500 requests in the past couple of years. But rarely does it hear a major case. Vineet Vij, head of the legal department at HCL Technologies, says while he is impressed with the rules of the ICA, perhaps, it has not been able to translate into confidence in its procedures in terms of timely closure of proceedings, costs and enforcement of awards.

 

Vidya Rajarao, who as head of forensic services at PwC India assists in putting a value to claims as part of arbitrations, explains the advantages that foreign arbitral institutions have. “What makes them more successful is their integrity and a sound procedure of dispute resolution within the minimum time-frame possible,” she says. “Above all, they have been seen as a neutral venue for arbitration. These institutions go a long way to understand the future market and prepare themselves in advance to face potential disputes between parties.”

 

A ray of hope on the horizon, if it can do better, is the Indian subsidiary of the LCIA, its first independent subsidiary outside London. Set up in 2010, it seeks to institutionalise for India the same qualities that make LCIA a global hub for arbitration. While, even by its own admission, it has cases only in the single digits, most lawyers agree that that is only because the contracts that name the LCIA-I as the seat of arbitration are relatively new, with disputes yet to occur.
 

But the law on arbitrations may also need modification. The Arbitration and Conciliation Act of 1996 was specifically designed to reduce court interference, in line with global practices. But after a spate of successive SC judgements, courts now have the right to interfere in arbitration at several levels, becoming further hurdles in what was intended to be a smooth ride. Justice Srikrishna is quite vocal about this: “If the law did not intend courts to interfere in arbitrations, judges cannot give themselves the right to.” The court’s argument in the Patel Engineering verdict was that the chief justice’s role cannot be merely administrative, but has to be judicial. But that has opened the gates for the courts to interfere, defeating the purpose of arbitrations.

 

In fact, courts also ruled that merely signing a consumer agreement with a service provider does not make it a contract, because few consumers have the opportunity to read the agreement they are signing in its entirety or the expertise to understand the fineprint.

 

The role of courts in arbitration will soon have a definitive judgement when a five-judge bench of the SC headed by Chief Justice S.H. Kapadia pronounces its verdict on the validity of the Bhatia International ruling. Expected before the chief justice retires in late September, lawyers hope that the court will put an end to the confusion by prescribing clear guidelines on when, and on what grounds, the judiciary can interfere in arbitration.

 

Also in another promising development, last week in Mumbai, some of the most prominent law firms, including AZB, J. Sagar, Economic Laws Practice and Advani & Co. came together to form an arbitration bar, which they hope will take the lead in evolving best practices for the ecosystem around arbitrations to follow. There seems to be some hope that the arbitration scene can be turned around without waiting for legislative reforms.

 

In the meanwhile, at least some companies are modifying the arbitration clauses in new contracts to take care of some of these issues. But for the average Indian corporate, with more of a reactive mindset when it comes to litigation, it would prefer to assume that like in marriages, quibbling between parties can be hushed without invoking the law. Of course, the legal professionals are not complaining.

 

abraham(dot)mathews(at)abp(dot)in

 

(This story was published in Businessworld Issue Dated 03-09-2012)