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Is it really a gaffe to choose traditional court litigation over the voguish arbitration?
In the middle of closing an international-commercial deal, the junior-most counsel, on a table full of redoubtable intellects, stated with overbearing timidity: ‘Gentlemen, shouldn’t we repose dispute resolution in traditional court litigation and not arbitration?’
One would invariably think: Traditional court litigation in a big-dollar international commercial contract; what a real gaffe the novice has made there!
But is it really a gaffe to choose traditional court litigation over the voguish arbitration?
This article pulls the blinkers of this vexed issue.
From time immemorial, there has been preponderance in arbitrating the disputes that arise between parties under an international commercial contract[i].
An international commercial contract entails transnational entities; therefore endowing dispute resolution to a national court will never provide an equitable turf[ii]. One party will always have gratuitous advantages — forum conviniens and procedural prowess to name a few — especially when adjudication is held in those national courts where a party holds sway[iii].
But does moving away from court litigation and adhering to International Commercial Arbitration (“ICA”) clear all the clouds from the horizon? The answer is no. Rather, ambiguity abounds the ICA regime at the threshold, let alone the culmination into an award[iv].
And this article substantiates this very argument.
Fali S Nariman, Senior Advocate, bemoaned,
‘ICA has become almost indistinguishable from litigation which it was at one time intended to supplant. And the baggage-on-board continues to increase – with more law, and more legalese…’. [v]
The commencement of arbitral proceedings betrays four major concerns, which are: First, the Determination of Seat/Supervisory Jurisdiction; second, the ceaseless tussle between host theory and seat theory; third, legislative impasse; and, fourth, Principle of Comity.
I. Determination of Seat/Supervisory Jurisdiction
The procedural powers and duties of the arbitrator, determination of governing law of the substantive contract, questions of evidence, and the manner in which reference is to be conducted, among others things, are all guarded and interpreted according to the law governing the conduct of the arbitration (“Curial law”).[vi].
A choice of seat of arbitration inevitably imports an acceptance of that seat’s (nation’s) curial law.[vii] But who has the authority to decide upon the ‘choice of seat’, if not explicitly stated in the contract? And further, what if different national courts reach jarring conclusions? Who is the arbiter then? There is no categorical answer to these questions.
Recently, the Indian Supreme Court nodded a two-tier arbitration mechanism with an appellate tribunal set up in another country[viii] and subsequently enforced the award[ix]. The Court, however, eschewed from dabbling into the chaotic paradigm thereof.
The power to adjudicate upon the jurisdiction of an arbitral tribunal, surprisingly, rests with both the national courts of the seat and also the national courts of the place where the arbitral award is to be enforced.[x] And parallel proceedings — which run athwart of the object behind ICA[xi] — ensue.
II. Tussle between Host Theory and Seat Theory
Ever thought what a utopian world would look like? For corporations, it will be a world where all the courts interpret law the same way. But we live far from this commercial utopia.
In the real world, courts interpret laws differently from their peers.
Limiting the discourse to arbitration, the two major theories that hold ground in the current ICA regime are ‘Host Theory’ and ‘Seat Theory’. The former endorses that the governing law of arbitration should be same as the governing law of substantive contract (international commercial contract), while the latter advocates that the governing law of arbitration imports from the curial law (the law of the seat)[xii].
On the one hand, host theory places reliance on the fact that an ‘arbitration clause’ is just another covenant incorporated in the parent contract and its separability can only be availed when the host/parent contract is invalid[xiii], and on the other hand, seat theory adverts that an arbitration agreement has a closer and more real connection with the curial law.[xiv]
English law adheres to the seat theory[xv], whereas Indian law clearly follows the host theory[xvi]. Although the Indian Supreme Court continues to follow the lead of English law precedents in other aspects of ICA[xvii]; while applying the foregoing theories, the two jurisdictions are poles apart.
Taking the case of other nations, the ICA-hub Singapore earlier followed the seat theory for quite some time[xviii], before scotching it all together to validate the host theory[xix]. Theories devised by French courts[xx] and New York courts[xxi] cannot fit in the pigeonhole compartments delineated in both the host theory and seat theory.
Hence their approach seems to be an ingenious one.
Which theory best suites an ICA? No one can intuitively answer. This is another question that beclouds the merits of ICA at the threshold.
III. Legislative Impasse
The hydra of parallel litigation holds a toehold after the ‘choice of seat’ and ‘choice of theory’ issues are somehow resolved. There have been multitudinous cases where the seat has been clearly stated, but parallel litigation between courts of different jurisdictions has continued[xxii].
Some might hasten to say: as ICA entails transnational entities, the institution of cases before different national courts is inevitable[xxiii]. But can’t the hobby horses of these flippant litigators be halted? Clear and certain legislations can definitely come to rescue.
Both the English Arbitration Act[xxiv] and the Indian Arbitration Act[xxv] labor upon the substance of dispute but fail to bring forth any clarity on the curial law which would govern ICA proceedings when seated in England or India respectively. The void is somewhat filled by the precedents of courts, where it has been enunciated that law of seat is the curial law[xxvi].
But why let there be a void in the first place?
IV. Principle of Comity
What good is a judgement of a court of one nation if it does not stand on a firm ground in the courts of another nation? What remedy does a party have if a judge holds the judgement of a foreign court by its veritable nape and tosses it away?
The only, weak yet cardinal, thread that may come to a party’s aid is Comity of Courts. Comity identifies the judges of different nations as brethren of one common being i.e. justice. It requires a judge to respect a judgment of a foreign court as he/she would have done with peers of the same court.
The principle of Comity is imperative under the prevailing ICA regime[xxix]. With multiple courts’ opinions varying over multiple issues[xxx], comity may be the only subject where the opinions unify. Black Laws dictionary[xxxi] defines comity as the principle by which the courts of one state/jurisdiction will effectuate the laws and judgments of another, not out of obligation, but out of deference.
Mounds of empirical evidence may be readily adduced to show that the stream of ICA is clogged with parallel institution of cases owing to the fact that comity of courts holds merely holds a persuasive value[xxxii].
Comity can never be mandatory or obligatory[xxxiii]. This leads to another impasse as an ICA in which two courts of different jurisdictions opine variedly would never see the end of the matter.
Based on the threshold issues presented in the preceding sections and in umpteen landmark judicial pronouncements, it is certain that ICA in its current form is treading icy waters.
Lord Mustill cautioned the community practicing ICA to avoid the fate of the dinosaur,
‘Nobody has yet discovered why dinosaurs became extinct, but it is a reasonable surmise that their bulk was a significant factor. It would be a pity if arbitration went the same way. This is unlikely to happen, but it is at least worth asking whether a course of slimming might be in order.’[xxxiv]
Either there has to be a change in the current system, or the commercial stakeholders would run for an alternate option— which evidently has started happening. ICA as a form of an alternate dispute resolution mechanism has become overburdened by its own weight and size so much so that it is being supplanted by other speedier, more cost effective, and more rewarding methods such as mediation and conciliation[xxxv].
Due to the dissatisfaction with current ICA scenario, Sir Micheal Kerr vilified it as an “international disputology.”[xxxvi] Arbitral proceedings in the twenty first century tend to be a good deal more expensive than the adversarial proceedings in court.
This is giving impetus to a shift towards other dispute resolution mechanisms. For this very reason, a new convention is at the inception stage viz the United Nations Convention on International Settlement Agreements (resulting from mediation).
Arthur Marriott Q.C., in his contribution titled ‘Blessed are the Peacemakers’[xxxvii] invoked a prescient warning in his peroration that if ICA remains to be unduly expensive and time consuming, then the commercial community will find other alternatives and it would most certainly be the right thing to do.
Relying a fair deal on the statements of legal academicians, recourse to an alternative of ICA is one solution. But in order to ameliorate the challenges faced by ICA per se, an international arbitration court may be set up[xxxviii].
This court could address issues right from the preliminary stage to the enforcement of awards. As the international Court would ensure neutrality, the certainty of the decisions being without prejudice would increase.
Most importantly, the circuitous path of parallel proceedings in courts of two or more nations would be avoided. Although enforcing decisions of an international tribunal in municipal courts is no garden walk, the parties involved in ICA, being transnational corporations, would generally honour the decisions of the international court and not take refuge behind the robe of legalese fearing distrust and discredit[xxxix].
This solution was canvassed nearly three decades ago, but nothing has been done since. Many legal doyens are leery about the repercussions of such a drastic measure and many are devising a substantial procedure in which the change can be brought about.
But one thing is certain – ICA needs a revamp.
The authors daresay that, having gained some acquaintance with troubles of ICA, the novice counsel’s statement at the outset of this article, seems to be more of a painstaking concern, and not a gaffe.
(The authors are students at Faculty of Law, University of Delhi)