Resolving commercial disputes in India

January 2011 | TALKINGPOINT | CORPORATE GOVERNANCE

financierworldwide.com

FW moderates a discussion between M. P. Bharucha at Bharucha & Partners, Sanjeev Kapoor at Khaitan & Co LLP and Vikram Nankani at the Economic Laws Practice, on Indian commercial disputes.

FW: Have you seen an increase in commercial disputes in India over the last 12 months or so? What types of disputes seem to be most prevalent?

Bharucha: We have not seen a significant increase in commercial disputes. With globalisation, the trend, if it can be so termed, is that a greater number of non-Indian commercial entities are involved in disputes. A number of regulators, including the securities regulator SEBI, the telecommunications regulator TRAI, and the Electricity Regulatory Commissions, often enough deal with commercial issues couched as regulatory issues and in that sense the scope of commercial disputes has expanded.

Nankani: There has been a considerable increase in the number of commercial disputes in India, particularly relating to infrastructure projects and the construction industry. Some disputes relating to sale-purchase contracts, which could not be amicably resolved during the global recession of 2008-09, have gone to arbitration in 2009-10. A spurt of disputes has also arisen from M&A deals entered into prior to September 2008. There has also been an increased activity on IPR disputes with corporates and individuals getting more conscious of the commercial value of their intellectual property. Similar trends have been observed in the oil and gas sector, offshore services sector and the telecom and power sectors.

Kapoor: India has seen an increase in disputes arising out of increased business activity and the last 12 months were no exception to this general trend. There are disputes which arise out of contentious interpretations of shareholder rights in newly formed joint ventures, disputes arising out of rescission or cancellation of contracts, issues arising out of enforcement of foreign judgements and awards in India. There are also multifaceted disputes with the government which may arise as a result of denial of requisite clearances by the government or actions initiated by the government which have a direct bearing on the commercial activities of a company.

FW: To what extent are companies in India embracing alternative dispute resolution methods?

Kapoor: Increasingly, there is a growing dependence of companies on the alternate dispute redressal mechanism. In the context of international commercial transactions, our experience has shown that parties generally rely on established arbitral institutions such as the ICC, LCIA or SIAC, to name a few. In the context of domestic arbitrations, the Indian Arbitration and Conciliation Act, 1996 has provided a good framework, and the inclination therefore is to resolve domestic disputes through alternative dispute resolution methods with arbitration generally being preceded by an informal mediation process.

Bharucha: As the justice delivery system struggles to keep pace with the growing economy, ADR is the preferred alternative except in situations where delay favours a litigant. Arbitration has been long established and is the preferred ADR route. While concerted efforts are ongoing to promote conciliation, these are yet to bear fruit, at least in serious commercial disputes. Perhaps one of the reasons for this is the absence of conciliators with credentials. While one does see international arbitrators adjudicating disputes, we have yet to see a conciliator with international practice being engaged.

Nankani: Almost all cross-border transactional contracts contain exhaustive dispute resolution clauses, which typically provide for resolving disputes outside of the Court system, most commonly through institutional arbitration. Domestic companies are also now increasingly referring their disputes to arbitration rather than resolve them through civil courts. There is also an increasing trend to provide for Multi-Tier Dispute Resolution Mechanisms. Furthermore, expert determination, adjudication, early neutral evaluation (ENE) and mediation are now being adopted as a precursor to arbitration, though these ADR methods are more common in certain sectors such as infrastructure and construction, than in the others.

FW: In your opinion, is the justice delivery system capable of dealing efficiently with the challenges posed by large commercial disputes?

Nankani: Currently, having regard to the prevalent judicial system and the large arrears, the courts in India are not equipped, administratively or technically, to deal with large commercial disputes expeditiously. This is something which has been noticed by the Legislature which is bringing in reforms to rectify the problem, particularly the proposal to set up the Commercial Division in the High Courts. A lot more can be done in terms of making the process more efficient through the use of technology. The Delhi High Court has also supported training and knowledge building exercises in specialised areas such as capital and finance markets involving complex products and transactions, IP disputes and the like.

Kapoor: India has a sound judicial system which is capable of dealing efficiently and effectively with the challenges posed by large commercial disputes. However, tending a backlog of approximately 30 million cases does present its share of difficulties to the courts dealing with such disputes, resulting in delays. Also there is some criticism of the Indian courts for adopting an interventionist approach by giving expansive interpretation to the provisions of the Arbitration and Conciliation Act, 1996 so as to increase the interference of the courts in the arbitration process.

Bharucha: In theory, the justice system is capable of dealing efficiently with disputes; in reality, it is not. While the intellectual capabilities and forensic skills exist in the higher judiciary, the infrastructure, including sufficient numbers of judges with specialised domain knowledge, and properly controlled case management procedures, are absent. Even managing documents in a large commercial dispute is a challenge. The absence of a Court transcription system is a more serious challenge. Again, efforts are ongoing to improve the infrastructure – the Delhi High Court has set up an e-court with electronic filing and data – but more needs to be done.

FW: What measures have been implemented or suggested by the government to make dispute resolution more efficient? Is there scope for further improvement?

Bharucha: The government now seems acutely conscious of the need to improve the justice delivery system. One proposal is the setting up of a commercial division for the High Court of every State to decide commercial disputes. Since what is ‘commercial’ is easy to perceive but difficult to define, the government proposes reserving to itself power to notify disputes as being ‘commercial’. Another proposal is the revamping of the Arbitration & Conciliation Act, 1996 to restore the position originally intended by the Legislature: minimum court intervention in the arbitral process. The most significant initiative is the National Litigation Policy. The government is the single largest litigant. It is also the prime contributor to judicial delays, rarely being able to timely progress litigation. The Policy, recognising that the government and its panel of lawyers are all stakeholders, aims to set up committees, the apex committee being headed by the Attorney General, to review litigation and to make each stakeholder accountable. The Policy also aims at revamping the system of selecting lawyers for the government panels, such that only lawyers with requisite skill sets are empanelled.

Nankani: The Code of Civil Procedure has been amended to encourage courts to refer matters to arbitration. The government also plans to introduce the Commercial Courts Bill whereby each High Court shall have specially trained judges to handle commercial disputes. This Bill is likely to be introduced in Parliament in the next session. Further changes are proposed to the existing Arbitration and Conciliation Act, 1996 by way of an Arbitration and Conciliation Bill to make the law arbitration friendly and minimise judicial intervention. The same has currently been thrown open for public debate. There is further scope for improvement which can be achieved by incorporating the recent trends in international commercial arbitration including changes made to the Model Law. The State is also reviewing its litigation-happy past with the objective of minimising litigation where the State is one of the parties. All of this apart, the one biggest challenge for the Indian judicial system is the use of technology for making the process efficient. The Government also needs to create an institutionalised system of continuing professional development so that the global best practices can be introduced into the system. The Code of Civil Procedure is over a century old. It is time for a thorough review to bring it up to speed with the commercial realities of the day.

Kapoor: The government is taking steps to make the disputes resolution process more efficient. As a step towards this, the Commercial Division of High Courts Bill, 2009, has been introduced in parliament to create special divisions in high courts to deal exclusively with commercial disputes above a certain threshold value. Also, in June 2010 the government introduced the National Litigation Policy 2010, which aims, inter alia, to reduce government litigation in courts and the average time of cases from fifteen years to three years. On the arbitration front, the Ministry of Law has released a Consultation Paper on the proposed amendments to the Indian Arbitration and Conciliation Act, 1996 with a view to resolving disputes in a speedy manner through the ADR route without much interference of the courts.

FW: How relevant is ‘reciprocity’ in the context of dispute resolution?

Nankani: Both for enforcement of foreign judgements as well as foreign awards, reciprocity is an important factor. The same is clear from S. 44A of the Code of Civil Procedure, 1908 and S. 44(b) of the Arbitration and Conciliation Act, 1996 wherein the reciprocal provisions are a prerequisite. India has notified several countries whose court judgements can be directly enforced as a decree and also, separately, those whose awards can be directly enforced, as India is itself a signatory to the New York Convention, 1958.

Kapoor: Reciprocity is relevant to ensure the enforcement of foreign court judgements as well as awards passed in international commercial arbitrations and is an accepted principle under the Arbitration and Conciliation Act, 1996. Under the Act only those awards which are passed in a convention country and which country is so notified by the Central Government as being a territory to which such convention applies, are enforceable in India. The awards not falling in convention could be enforced in India under the common law [(1964) 4 SCR 19] on grounds such as justice, equity and good conscience. A suit would be filed before the competent court and after proving conclusiveness of the foreign award, judgement thereon would be obtained. However, the observation of the Supreme Court in (2002) 4 SCC 105 that any award not passed under either Convention can also be considered a ‘domestic award’ and may lead to enforcement of an award passed in a non-convention country as per provisions of Part I of the Act.

Bharucha: Reciprocity is crucial in litigation as well as international arbitration. Under Section 44A of the Code of Civil Procedure, 1908 decrees of courts in reciprocating territories may be executed in India as if they were decrees of Indian courts. Decrees of other foreign courts can only be enforced by bringing a suit on the foreign judgment in India. The government has the power to declare, by notification, a foreign state to be a reciprocating country. That power has been sparsely exercised. As a result, enforcing a foreign judgment in India is a long process. India has subscribed to the New York Convention of 1958 on Recognition & Enforcement of foreign awards. However, a foreign state only subscribing to the Convention is not enough to make an award rendered in that state a ‘foreign award’ enforceable as such in India. For enforcement purposes, the Indian government must notify that state as a reciprocating state. As a result, unless a foreign state is notified by India, an award rendered within that state can be enforced in India either by an action on the foreign award or by enforcing it as a domestic Indian award.

FW: How would you describe arbitration facilities and processes in India?

Kapoor: Arbitrations conducted in India are mostly ad hoc in nature. Such arbitrations tend to be procedurally cumbersome and time consuming as opposed to arbitrations which are conducted under institutional mechanisms. However the concept of institutional arbitration is gradually gaining a stronghold in the alternative dispute resolution sphere in India. Some of the arbitral institutions in India are the Chambers of Commerce (organised by either region or trade), the Indian Council of Arbitration (ICA), the FICCI Arbitration and Conciliation Tribunal and the International Centre for Alternate Dispute Resolution (ICADR). The launch of the London Court of International Arbitration India (LCIA India) also presents a credible dispute resolution option in India for corporate entities seeking to resolve their disputes in India which are administered by institutions.

Bharucha: While arbitration goes back a long way, the norm is non-institutional, or ad hoc, arbitration with retired judges being appointed to the arbitral tribunal. This has produced significant delays on two counts. Recourse must be had to the Chief Justice to constitute the tribunal if the parties do not cooperate in constituting the tribunal. This appointment process ought to be, but regrettably is not, an administrative process. As a result, particularly if jurisdictional issues arise, the appointing authority has to take on an adjudicatory role with concomitant delays. Secondly, with the preference for retired judges, the number of arbitrators available is insufficient, creating scheduling issues. Thirdly, the schedules are frequently not maintained. Lastly, but just as important, the litigating lawyers who take on arbitration hearings tend to give priority to court hearings accentuating scheduling problems and contracting arbitral hearings to a couple of hours outside the court timing.

Nankani: While a majority of arbitrations in India are ad-hoc, institutional arbitration is quickly catching up. Amongst others, the ICA, CNICA, CIAC, LCIA India, Permanent Court of Arbitration and the Nani Palkhiwala Arbitration Centre are well supported. Most of the local chambers of commerce have their own arbitration centres as well. The government is also promoting setting up ADR centres. The Ministry of Finance has proposed to allocate INR one crore, around $220,000, per district to set up ADR centres. The Finance Commission has also recommended a major investment in reformation of the judicial system.

FW: Typically, what are the circumstances in which Courts may interfere in arbitral proceedings?

Nankani: The Indian law is based on the UNCITRAL Model law. The courts play a role in providing interim relief, in the appointment of arbitrators, in challenges to the appointment of arbitrators, in providing assistance with taking of evidence, in deciding the challenges to the award and in enforcement of the award. While court interference has grown due to certain decisions of the Apex Court, the same is being sought to be whittled down by the proposed amendments to the arbitration law in India. Increasingly, the Court, while dealing with applications for appointment of arbitrators, dealing with such applications as one in discharge of a judicial function, and in the light of the 7-judge bench decision in (2005) 8 SCC 618, is pronouncing judgements that have wide ramifications on the arbitral process.

Bharucha: The principle objective of the Act was to minimise court intervention. Owing to several rulings of the Apex Court, that objective has been lost. Indian courts must now take on an adjudicating role even in constituting the tribunal. If jurisdictional issues should arise — such as whether a dispute is covered by the arbitration stipulation – until such issues are decided, the tribunal cannot be constituted. Besides, the statutory grounds to appeal an award are narrow – effectively those contained in Article V of the New York Convention of 1958. However, Apex Court rulings have substantially expanded the grounds for appealing an award. Effectively, an international award contrary to Indian law will not be enforced on public policy grounds. Moreover, while the enforcing court cannot review the award on merits, an error apparent would render the award unenforceable. The Apex Court ruling in Venture Global v. Satyam Computer Services Ltd (2008) 4 SCCD 190 enables an Indian court to set aside an international award even though that award is not being enforced in India.

Kapoor: The Courts in India have held that Part I of the 1996 Act, which compulsorily applies to arbitrations if the place of arbitration is India, also applies to international arbitrations held outside India [(2002) 4 SCC 105]. Therefore Indian Courts have powers to interfere with arbitral proceedings whether being held in India or outside India unless provisions of Part I of the 1996 Act have been specifically excluded by the parties. Also in [(2008) 4 SCC 190] it was held that a foreign award can be challenged under Section 34 of the 1996 Act before Indian courts. Broadly, the Courts have power to interfere with arbitral proceedings if, in their opinion, it is necessary or expedient to do so and when justice requires it. The arbitral proceedings being oppressive, vexatious or in a forum non conveniens may also warrant interference by the Indian Courts in pending arbitral proceedings.

FW: Are there any problems with the enforcement of arbitration awards by Indian Courts?

Kapoor: The Hon’ble Supreme Court has held that unless expressly barred, Part I of the Arbitration Act, 1996 also applies to international commercial arbitrations. This creates problems and complications for enforcement of foreign awards in India. Another problem with enforcement of arbitral awards is the delay due to a huge backlog in the courts. It is also difficult to have awards passed in a non-notified, non-convention country executed in India because such awards are not recognised by the Arbitration and Conciliation Act, 1996. In such cases the parties might have to file a suit before an Indian Court and based on such an award obtain a judgement from Indian Courts for enforcement, or such non convention awards may be enforced as domestic awards, as per reasoning in [(2002) 4 SCC 105].

Nankani: The power of the courts in this regard is circumscribed by Section 48 of the Arbitration and Conciliation Act, 1996 which is based on Article V of the New York Convention, 1958. However there have been few hiccups in the otherwise smooth enforcement of awards in India. One of the grounds of refusal is where the award is contrary to Public Policy. This has been interpreted by the courts to also cover an award which is ‘patently illegal’ which has been internationally criticised. The expression ‘patently illegal’ has been understood as conferring wide powers on the courts which has given the impression that the courts in India are not arbitration friendly.

FW: What clauses would you recommend that Indian companies insert into their commercial contracts to manage potential disputes down the line?

Bharucha: As a broad statement, three areas must be addressed: first, choice of law/governing law; second, dispute resolution, including seat of arbitration if arbitration is agreed; and third, jurisdiction for enforcement purposes. While the natural preference for Indian companies is to apply Indian law as the governing law, it is not uncommon for Indian corporates to agree English law as the governing law.

Nankani: Not enough attention is paid to dispute resolution clauses in drafting contracts. Depending on the nature of the contract – for instance, contracts relating to financial transactions or civil construction – parties must agree to mechanisms which are speedier and more cost effective than arbitration. Any mechanism, like adjudication, ENE, or expert determination, which enables parties to assess the relative merits of their respective cases, must be provided for in the contract and implemented seriously. The arbitration clause must be exhaustive to cover all disputes, the seat or place of arbitration, the number and procedure of appointment of arbitrators, the rules for arbitration including those for taking evidence and costs so that arbitrations can be conducted efficiently and effectively in terms of time and cost. As arbitration clauses recommended by international institutions are tried and tested, the same may also be resorted to.

Kapoor: In light of the judgement passed in (2002) 4 SCC 105, in cases of international commercial arbitrations held out of India, provisions of Part I would apply unless the parties by agreement express or implied, exclude all or any of its provisions. Therefore, if the parties do not want to submit themselves to the jurisdiction of the Indian courts in international commercial arbitrations, it is advisable to specifically exclude the provisions of Part I of the Indian Arbitration and Conciliation Act, 1996 while phrasing the arbitration clause. The parties, however, may like to keep section 9 (provision for interim relief) and also Section 27 (court’s assistance in taking evidence) applicable even to international commercial arbitrations.

M. P. Bharucha is a partner and founder of Bharucha & Partners. Throughout his career, Mr Bharucha has straddled two practice areas: dispute resolution and general corporate advisory and M&A. He helped found the present iteration of Amarchand & Mangaldas in 1995, and founded Bharucha & Partners in 2008. An illustration of his multi-disciplinary abilities is representation of Danone SA and Spie Batignolles SA, clients that he has represented for more than 15 years. He also represents JC Decaux. Mr Bharucha can be contacted on + 91 22 2289 9300 or by email: mp.bharucha@bharucha.in.

Sanjeev Kapoor is a partner at Khaitan & Co LLP. Mr Kapoor has 14 years of experience in litigation and dispute resolution and handles cases across a broad spectrum of law including constitutional law, general commercial laws, corporate laws, intellectual property laws, environment, natural resource and public interest law. He possesses a wide range of experience and an in-depth knowledge of commercial arbitrations, especially with regard to construction and infrastructural projects, and is an advocate on record of the Supreme Court of India. Mr Kapoor can be contacted on +91 11 4151 5454 or by email: sanjeev.kapoor@khaitanco.com.

Vikram Nankani is a partner and head of the Dispute Resolution and Litigation practice at the Economic Laws Practice, Mumbai. He is an India-qualified lawyer and has been at the Bar since 1986. He holds an LL.M from Government Law College, Mumbai. Mr Nankani regularly represents clients before the various High Courts and the Supreme Court of India and is a fellow of the Chartered Institute of Arbitrators, London and a Member of the International Bar Association. He can be contacted on +91 22 66371992 or by email: vikramnankani@elp-in.com.

THE PANELLISTS

M. P. Bharucha

Bharucha & Partners

Sanjeev Kapoor

Khaitan & Co LLP

Vikram Nankani

Economic Laws Practice