Institutional arbitration: The right choice for arbitration users in India

The popularity of arbitration in India has grown exponentially over the last decade. From infrastructure contracts to shareholders’ agreements, supply contracts to lease agreements, arbitration is now ubiquitous in commercial transactions across India.

Yet, the growing popularity of arbitration has not been mirrored by a growth in the popularity of institutional arbitration. Instead, ad-hoc arbitration, despite its numerous shortcomings, enjoys dominance.

In this article, we make a case for choosing institutional arbitration by first, dispelling the myth that institutional arbitration is expensive, and second, discussing the key advantages of institutional arbitration over ad-hoc arbitration. We also identify the reasons why institutional arbitration has failed to become popular in India so far.

Institutional Arbitration is inexpensive

Many arbitration users in India do not fully appreciate the advantages of institutional arbitration over ad-hoc arbitration. On the other hand, the administration fee payable to arbitral institutions often creates a perception that institutional arbitration is expensive and deters arbitration users in India from opting for institutional arbitration.

In reality, the administration fee is inexpensive. Table 1 tracks the administration fee payable to certain domestic arbitral institutions for domestic arbitration and expresses the administration fee as a percentage of the amount in dispute. While there are significant differences amongst these arbitral institutions, the administration fee tends to become a small fraction of the amount in dispute when the amount in dispute crosses ₹50 lakh. That being said, the administration fee for low value disputes (where the amount in dispute is less than ₹20 lakh) can be high for certain arbitral institutions. For such disputes, choosing the right arbitral institution becomes crucial.

MCIA – Mumbai Centre for International Arbitration

DIAC – Delhi International Arbitration Centre

HAC – Hyderabad Arbitration Centre

NPAC – Nani Palkhivala Arbitration Centre, Chennai

There is another perspective to this issue. While institutional arbitration requires the payment of an administration fee, a competent arbitral institution justifies such fee by providing useful services over the course of an arbitration. These services can include appointing arbitrators, facilitating hearings, providing guidance to parties and scrutinising awards. In ad-hoc arbitrations, the absence of such services often results in prolonged delays and substantial legal costs. From this perspective, the administration fee is not “expensive” since it helps the parties avoid delays and legal costs.

Advantages of institutional arbitration

The case for choosing institutional arbitration ultimately rests on the advantages offered by institutional arbitration over ad-hoc arbitration – all of which can dramatically improve the arbitration process. While ad-hoc arbitration is seen as a more flexible form of arbitration which permits greater party autonomy, most arbitral institutions today use arbitration rules, which provide a comparable degree of flexibility and respect party autonomy to the maximum extent.

First, an institutional arbitration is governed by arbitration rules which provide clarity and certainty on a range of procedural issues. For this reason, complex procedural issues, such as challenges to arbitrators, consolidation of arbitration proceedings, joinder of parties, etc, can typically be decided more reliably in an institutional arbitration. On the other hand, in an ad-hoc arbitration, the adjudication of complex procedural issues is often riddled by doubt and uncertainty.

Second, an arbitral institution can expedite the constitution of an arbitral tribunal by appointing an arbitrator whenever a party fails or refuses to appoint an arbitrator, or if the parties fail to agree on a sole arbitrator, or the co-arbitrators fail to agree on a presiding arbitrator. Typically, an arbitral institution can appoint an arbitrator within a few days. On the other hand, in an ad-hoc arbitration, the appointment of an arbitrator is done by a court and this process may take several months. Additionally, this process can become contentious and thereby result in substantial legal costs.

Third, an arbitral institution can decide challenges to arbitrators in a transparent and impartial manner, thus increasing the credibility of the arbitration process. On the other hand, in an ad-hoc arbitration, any challenge to an arbitrator is decided by the arbitral tribunal itself, which may undermine the credibility of the arbitration process.

Fourth, an arbitral institution can facilitate quick interim relief through the emergency arbitration process, if provided for in its arbitration rules. Emergency arbitration allows parties to secure interim relief within days. On the other hand, in an ad-hoc arbitration, interim relief can be sought only after the constitution of an arbitral tribunal or from a court, and this process may take several weeks or even months.

Fifth, an arbitral institution can provide useful administrative support, such as arranging a hearing venue, facilitating filings and fee payments, and scrutinising draft awards for clerical errors or lacunae. In an ad-hoc arbitration, these tasks are performed by the arbitral tribunal or the parties, which can make the arbitration more cumbersome and inefficient.

In light of these decisive advantages, the choice of institutional arbitration over ad-hoc arbitration is obvious. Further, the absence of any major advantage of ad-hoc arbitration over institutional arbitration makes this choice even more compelling.

Arbitrators’ fees

Apart from the advantages noted above, institutional arbitration offers a crucial advantage in relation to the issue of arbitrators’ fees. In an institutional arbitration, arbitrators’ fees are typically decided as per a fee schedule devised by an arbitral institution, which specifies lump sum fees based on the amount in dispute. This approach provides clarity and certainty to the parties, keeps the costs of arbitration in check and incentivises arbitrators to be as efficient as possible.

Table 2 tracks the fee payable to sole arbitrators for domestic arbitration administered by certain domestic arbitral institutions and expresses the fee as a percentage of the amount in dispute. There are again significant differences amongst these arbitral institutions, but the fee tends to become a small fraction of the amount in dispute once the amount in dispute crosses ₹50 lakh. While the fee for low value disputes (where the amount in dispute is less than ₹20 lakh) can be high for certain arbitral institutions, the advantage lies in relation to high value disputes (where the amount in dispute exceeds ₹10 crore) where the fee remains fixed at a reasonable level.

On the other hand, in an ad-hoc arbitration, arbitrators’ fees are decided by negotiations between the parties and the arbitral tribunal, which can be awkward and unfair for the parties. Further, in ad-hoc arbitration, arbitrators’ fees are charged on a per-hearing basis, without any overall limit. This creates uncertainty for parties, escalates the costs of arbitration and creates undesirable incentives for arbitrators.

Recently, the issue of arbitrators’ fees in ad-hoc arbitrations became the subject of judicial scrutiny after arbitration users – particularly public sector undertakings and government bodies – complained about excessive arbitrators’ fees. In ONGC Ltd. v. Afcons Gunanusa JV, the Supreme Court finally intervened and held:

1. An arbitral tribunal cannot unilaterally determine its fees;

2. Arbitrators’ fees should be decided by an agreement reached between the parties and the arbitral tribunal; and

3. If no agreement is reached, then arbitrators’ fees can be fixed as per the Fourth Schedule of the Arbitration and Conciliation Act, 1996.

While the decision in Afcons Gunanusa has provided much-needed clarity and order, arbitrators’ fees in ad-hoc arbitrations remain subject to negotiations between the parties and the arbitral tribunal and can still have no overall limit. Therefore, in relation to the issue of arbitrators’ fees, institutional arbitration offers a crucial advantage over ad-hoc arbitration.

The shortcomings of institutional arbitration in India

Considering the advantages of institutional arbitration over ad-hoc arbitration, choosing the former should be obvious. Yet, the adoption of institutional arbitration in India remains abysmally low, for both low and high value disputes. One reason is the lack of awareness about institutional arbitration amongst arbitration users in India. Another reason is the reluctance of the Central and state governments, public sector undertakings and government bodies to adopt institutional arbitration in their contracts. The reason for this reluctance is not clear, but it appears to arise, at least partly, from the absence of a “trusted” arbitral institution. Since such entities negotiate and execute most large commercial contracts in India, their reluctance to adopt institutional arbitration has resulted in the use of ad-hoc arbitration for most high value disputes.

However, the most significant reason for the poor adoption of institutional arbitration in India is the inability of domestic arbitral institutions to provide a consistent and reasonable standard of service to arbitration users. Instead, anecdotal evidence suggests that arbitration users opting for institutional arbitration administered by domestic arbitral institutions have seen no advantage in such institutional arbitration over ad-hoc arbitration. The most common complaints are lack of necessary expertise in case managers, absence of adequate administrative support, poor physical infrastructure, absence of oversight over the arbitration process, poor quality of arbitrator appointments and a lax attitude towards providing services to arbitration users.

The poor quality of domestic arbitral institutions was discussed at length in the 2017 report of the High Level Committee to review the institutionalization of arbitration mechanism in India under Justice BN Srikrishna (see here). Several recommendations were made for the improvement of domestic arbitral institutions. Regrettably, more than five years after the submission of this report, concrete action remains to be taken.

That being said, the emergence of new domestic arbitral institutions led by experienced arbitration lawyers has provided reason for cautious optimism. These arbitral institutions have not only adopted modern arbitration rules, but have also made an earnest effort to provide high quality service and expertise to arbitration users. These arbitral institutions need time to establish and prove themselves, but their promising start bodes well for the future of institutional arbitration in India.

The future of arbitration in India is inextricably tied to the development of institutional arbitration. If ad-hoc arbitration maintains its hold over arbitration users in India, then arbitration in India shall remain time-consuming, unpredictable, costly and inefficient. However, if institutional arbitration can thrive in India, then India can finally realize its ambitions of becoming a leading arbitration jurisdiction.

Ashutosh Kumar and Abhinav Hansaraman are practicing advocates based in New Delhi. Ashutosh can be reached at ashutosh@anchayilkumar.com and on LinkedIn. Abhinav can be reached at ahansaraman@gmail.com, LinkedIn, and on Twitter.