Arbitration Reform Recommendations: Need for Change in Practice, Policy, Technology and the Law

The Expert Committee constituted by the Department of Legal Affairs, Ministry of Law & Justice, Government of India, to consider reforms with the Arbitration and Conciliation Act, 1996 has invited from comments from various stakeholders. The deadline for submitting comments has been extended to 10 July 2023. The aim of this piece is to flag certain issues the authors feel require some reconsideration and reform. We hope to generate some discussion within the arbitration community on these topics, and potentially persuade more people to submit their views to the committee on these and other topics.

Creation of an Arbitration Bar: A key problem with the development of arbitration in India has been the absence of a dedicated arbitration bar. This has resulted in several key advantages of arbitration (such as stipulating a timetable for the entire arbitration at the outset; fixing block hearing dates; conducting full-day hearings etc.) not being achieved in domestic arbitration. A holistic set of reforms must be aimed at encouraging the creation and development of a dedicated arbitration bar. Some suggested measures include: (i) courts appointing specialist arbitration practitioners as arbitrators etc; (ii) amending criteria of designation of Senior Advocates to allow specialist arbitration practitioners to be considered for designation; and (iii) considering specialist arbitration practitioners for elevation as judges to Commercial Benches of High Courts and the Supreme Court.

Appointment of Arbitrators: Ad hoc arbitration continues to be the most common form of arbitration in India. In these arbitrations, courts are invariably called upon to appoint an arbitrator. We believe that courts are ill-equipped to appoint arbitrators because: (i) they have a limited list of arbitrators to choose from; (ii) they do not have sufficient data regarding the availability of these arbitrators; (iii) they do not have sufficient data regarding the efficiency and quality of these arbitrators. Arbitration institutions build a reputation by being in a position to bridge exactly this gap. We propose that Section 11(3-A) be given immediate effect and appropriate guidelines be framed for the creation of a panel of arbitrators by such institutions.

In the interim, until such time as Courts choose to retain the power of appointment, there must be utmost transparency and responsibility in the creation of a panel of arbitrators, and appointment of arbitrators. Specifically:

(i) The list must contain arbitrators from a diverse pool of arbitrators covering at the very least judges, advocates and technical experts. The preparation of the list must involve a selection process where interested applicants are called to apply to be a part of the panel and evaluated based on their subject matter expertise, arbitration experience and arbitrator training certifications provided by institutions like the Chartered Institute of Arbitrators.

(ii) In due recognition of party autonomy, parties must be invited to agree on an arbitrator with the Claimant sending a shortlist of about five proposed nominees drawn from the list maintained by the concerned court, together with its application under Section 11 of the Act, for the Respondent to choose. The court should only proceed to make an appointment if the parties are unable to agree on the arbitrator(s).

(iii) A portal must be created where each arbitrator registers herself/himself and updates on a monthly basis:

a. the number of arbitrations in which they are acting as arbitrators.

b. the number of arbitrations in which they sat as an arbitrator in which they have been unable to comply with the time limits set out in Section 29A of the Act.

The portal must also automatically draw from the judgments rendered by the Commercial Courts across the country to identify (i) if any award by an arbitrator has been set aside by any court in India; and (ii) if an arbitrator has been unable to complete proceedings within the time limit prescribed under Section 29A of the Act and the time for rendering an award has been extended in any case. A judge exercising the power to appoint arbitrators must have access to this data at the time of appointing the arbitrator in each case.

Unilateral Appointment of Arbitrators: The Supreme Court in the case of Perkins Eastman has rightly held that the unilateral right enjoyed by a party to appoint the sole arbitrator to a dispute is invalid. However, the decision has had a devastating effect on several lakhs of contracts (including various government contracts, banking contracts, insurance contracts etc) where historically the default clause provided the government entity/bank/insurance provider the right to appoint the arbitrator. This right to appoint a sole arbitrator was often with a view to avoid having to resort to courts to appoint arbitrators, and to avoid having to pay the hefty fees charged by arbitrators to decide even simple matters. Taking into account these ground realities and legitimate concerns, while retaining the essence of the decision of the Supreme Court, as a one-time measure, we propose that the Act be amended to set a cut-off date prior to which all clauses providing for the unilateral appointment of an arbitrator be held valid for the limited purpose of enabling the concerned entity to choose a neutral, independent, third-party arbitration institution to appoint the sole arbitrator on their behalf.

Arbitrator Fees: There is significant dissatisfaction in the arbitration community regarding the opaqueness with which fees are charged by arbitrators in ad hoc arbitration. To bring greater certainty and confidence, it is suggested that the fees mentioned in the Fourth Schedule should be the norm for all cases, and any deviations must necessarily require either the express consent of the parties before the Arbitral Tribunal accepts the reference or the permission of the Section 11 Court.

In the event Courts are of the view that the fees mentioned in the Fourth Schedule are onerous, taking into account the value in dispute and/or complexity, then Courts should be empowered to refer such disputes to any Online Dispute Resolution institution/service providers that may be recognized by the Ministry of Law and Justice.

Emergency/Interim Orders: Interim/emergency orders passed in foreign seated arbitrations should also be made enforceable by legislation in India. There must however be some mechanism for ensuring that in rare circumstances, an Indian Court can exercise some oversight before allowing the direct enforcement of an interim order. Grounds similar to those identified in Article 47(2) of the Act may be extended to refuse enforcement.

Recording of Evidence: Several practices prevalent in court litigation have seeped into arbitration, bringing significant inefficiencies in the process. Two such practices have contributed very significantly to increasing delays in arbitration in practice:

(i) Marking of documents, and Admission/Denial: Significant time and energy is spent on the administrative process of marking and admitting a document into evidence (routinely subject to objections) and embossing the new-numbering on to the document. This process has limited practical benefit, is a relic of the practice adopted in court, and must be done away with through suitable guidelines.

(ii) Arbitrator led dictation of witness’ testimony: The practice regularly adopted in domestic arbitration in India is for the arbitrator to paraphrase and record witness testimony (often without recording the question asked by the lawyer, in response to which the testimony has been given), thereby fundamentally reducing the accuracy of witness’ testimony, and increasing the time required for cross-examination by as much as five-fold. This is in contrast to international practice of transcription, which maintains an accurate verbatim record of proceedings. The Supreme Court has taken the lead in embracing transcription by using cost-effective Artificial Intelligence based solutions which have made real-time and delayed transcripts significantly more affordable and accessible. The Act should mirror this positive step and keep pace with times and international practice. We propose suitable guidelines be formulated to encourage an Arbitral Tribunal to maintain an accurate and verbatim record of proceedings, while having due regard to the value in dispute and the cost of maintaining such a record.

Multi-Party and Multi-Contract Arbitration: There has been some discontentment in the arbitration community regarding the impact of the expansion of arbitration clauses to non-signatories based on the group of companies doctrine pursuant to decision of the Supreme Court in Chloro Controls. It is believed that such reference fundamentally alters notions of party autonomy and may not be appropriate in cases where parties have carefully chosen their dispute resolution strategy/corporate structure. It is recommended that the Act clarify that any expansion of the arbitration clause to non-signatories can only be done where such reference is not inconsistent with the express choice made by the parties, and there is identity of cause of action across disputes. The Joinder and Consolidation provisions in the Rules of Arbitration of institutions such as the ICC and SIAC can provide valuable guidance on formulating the test for such composite reference.

On a related note, clarity is needed on what happens in a situation when some of the reliefs and parties in the suit fall under the arbitration clause and the others don’t. Some High Courts, such as the Karnataka High Court in Town Essentials have held that cause of action or parties to a suit cannot be split, following the ruling of the Supreme Court in Sukanya Holdings. However, other High Courts, such as the Bombay High Court and the Calcutta High Court, in Taru Meghani and Lindsay have proceeded on the basis that the ruling in Sukanya Holdings on this aspect no longer applies. There is therefore a need for legislative clarity. We recommend adding an appropriate provision where the court may refer the signatories and permitted non-signatories to the arbitration and stay the suit in relation to the rest if it feels that the cause of action cannot be split or where there is a real risk of parallel proceedings.

Multi-tiered Arbitration: There has been significant proliferation of arbitration in recent times, especially with the increased use of Online Dispute Resolution, creating a significant increase in the case-load of arbitration (with an anticipated case load of over 1 million arbitrations per month). A necessary corollary is an increase in the number of arbitrators that will be required to arbitrate these disputes. It is inevitable that with such a significant increase in the number of arbitrations, there will inevitably be cases where the award is not correct. The high threshold of challenging awards will result in either poor quality and/or incorrect awards becoming final, or awards being set aside and parties being relegated to restart arbitration since courts (rightly) do not have the power to correct awards. The Supreme Court in Centrotrade Minerals upheld the validity of multi-tiered arbitration clauses. We propose that statutory recognition be given to this decision, allowing parties to choose arbitration clauses/arbitration institutions that provide an appellate arbitration remedy to minimise the adverse impact of poor-quality arbitral awards.

Stamping of Arbitration Agreements: The decision of the Supreme Court in NN Global has created significant concern in the arbitration community. The decision also overlooks the manner in which arbitration agreements can be entered into, including as set out in Section 7 of the Act itself. We suggest that the ruling in NN Global be legislatively overruled and that it be clarified in the Act itself that no stamp duty needs to be paid on arbitration agreements, for the following reasons:

(i) There are several types of agreements (such as Click wrap agreements and an agreement to arbitrate over email etc) where payment of stamp duty at the time of the contract is impossible.

(ii) There is no clarity on whether the Court can act on a request for interim measures before satisfying itself about payment of adequate stamp duty. The NN Global decision, which seeks to invalidate such agreements, has the potential to cause grave prejudice where urgent interim relief is crucial and relegating parties to an adjudication process for payment of stamp duty will deny parties the ability to seek such protection.

(iii) The question of whether the underlying agreement is required to be stamped can be left to the arbitrator to decide without burdening courts with considering this question. The arbitrator is empowered already under the Indian Stamp Act 1899 to impound a document with deficient stamp duty and collect adequate stamp duty.

Third-Party Funding: Businesses across the world are seeking to diversify their disputes risk and are resorting to third party funding arrangements and creative insurance arrangements to this end. Several internationally renowned arbitration seats have recognised this trend and have enacted legislation regulating such funding. The position in India, including as confirmed most recently by the Delhi High Court in Tomorrow Sales appears to be that Third Party Funding is not illegal in India. However, absent regulation, there is scope for significant abuse with Third Party Funders exercising direct control over arbitration; taking an exorbitant share of the claims awarded in the arbitration; not acting in the best interests of the party being funded; not being accountable for adverse costs orders and increasing the scope of conflicts for arbitrators (to name a few). There is an urgent need for regulation in this space.

Contingency Fee: It has long been the view in India that, owing to restriction in the Advocates Act, 1961, advocates are not permitted to charge a fee contingent on the outcome of a dispute. However, with recent changes to the regulations permitting entry of foreign law firms into India, particularly for international commercial arbitrations, an uneven playing field has been created. Several foreign jurisdictions permit contingency fee arrangements. If Indian advocates are not permitted to charge such fees, they may find themselves at a disadvantage while servicing clients in India related international arbitrations. It is suggested that a level playing field be created to allow fair competition.