India Losing its Domestic Arbitration – Urgent Need for Legislative Amendment

Payal Chawla

First published on Bar & Bench in 18.01.2018 and later in Mondaq on 03.01.2020

Of late, there has been the emergence of a disturbing trend whereby Indian contracting parties are choosing foreign jurisdictions to arbitrate their disputes. Resultantly, India is losing its larger domestic arbitrations, quite antithetical to the reasons for which the amendments to The Arbitration and Conciliation Act, 1996 (‘the Act’) were brought about.

The Act had been amended with a view to make India into the next arbitral destination and to enhance international arbitration. Unfortunately, and quite unintentionally, the interplay of certain amendments and judgments have caused large domestic arbitrations to leave the country. There is, therefore, the urgent and compelling need to plug the crevices to prevent any further percolation of domestic arbitration.

The parlous interplay:

Each amendment and judgment on its own is progressive, however, it is the interaction with each other and the ground realities at play, in the country, that has given rise to this rather undesirable situation.

One of the significant amendments carried out vide the 2015 amendments to the Act was the inclusion of sub-section 2A to s.34 of the Act which reads – ‘An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award‘. With this amendment, the patent illegality test stood restricted only to a challenge of a domestic arbitral award. Consequently, the courts in India can no longer test the objections to international commercial arbitration and enforcement of foreign seated arbitrations in light of patent illegality.

To put it simply, in international commercial arbitration (where one of the parties is foreign but the arbitration is held in India) and a foreign-seated arbitration (where the arbitration is outside India), the intervention of Indian courts is more limited than domestic arbitrations (where parties are Indian and the arbitration is held in India). The court has a wider amplitude of interference in case of the latter.

Further, in view of the judgments in Atlas Exports Industries vs. Kotak & Company [(1999) 7 Supreme Court Cases 61] & Reliance Industries Limited v. Union of India [(2014) 7 SCC 603)] two Indian parties can choose a foreign-seated arbitration with the application of Indian law [Section 28(1)(a) of the Act; Addhar Mercantile v. Shree Jagdamba Agrico Exports [2015 SCC OnLine Bom 7752] & TDM Infrastructure Private Limited v. UE Development India Private Ltd. [(2008) 14 SCC 271)]. If two Indian parties so choose, the objections to the award would lie in the country of the chosen seat, however, if assets (which in all likelihood would be in India) the award would need to be enforced here.

Since Indian parties can now choose a foreign jurisdiction, they have been opting for jurisdictions such as Singapore to arbitrate their disputes. The proximity to India is attractive. Furthermore, there is speed and efficacy in the delivery of the awards. Significantly, some of the known foreign arbitral jurisdictions have been able to draw a fine balance in the exercise of judicial restraint and intervention when the award is under challenge. The absence of the patent illegality test in a foreign-seated arbitration (s.48) significantly improves the chances of the award passing judicial scrutiny. However, this latitude would not be available in a challenge to a purely domestic award under s.34. It is, therefore, no surprise that Indian parties are choosing foreign jurisdictions to arbitrate their dispute.

Urgent measures:

There is the urgent need to curb this outflow. One option could be to withdraw the permissibility to allow Indian parties to choose a foreign-seated arbitration. This would need to be done by way of an amendment to the Act.

Having said this, I must rush to add that such a step would, admittedly, be regressive by international standards. I would be failing in my duty if I did not mention that most progressive arbitral jurisdictions permit their nationals to choose a jurisdiction outside their country. S. 3(a) of the English Arbitration Act, 1996 and Article 176(3) of the Swiss Federal Private International Law Statute of 1987 are among some provisions around the world that statutorily recognize the autonomy of parties to choose their seat. Similarly, Singapore places no restriction on choice of seat. Perhaps, the fact that other countries see these jurisdictions as favourable arbitral seats, may be reason enough for these jurisdictions to have the confidence that their own domestic arbitration will stay put. But India, despite steps in the right direction, still has some distance to traverse in attracting international commercial arbitration.

The country that does impose a restriction, is China. Article 128 of the Contract Law of the People’s Republic of China, has been interpreted to mean that for a dispute to be arbitrated outside China or by a foreign arbitral institution, the dispute needs to have a “foreign element”. While, China may hardly be the model to follow and aspirationally Singapore is our role model; but the cruel reality is that our competitor in attracting international commercial arbitration today, as things stand, is unfortunately China, and not Singapore. Be that as it may, I recognise that there may be merit to those who feel that we must aspire to achieve international standards.

If this rather unconventional (and un-recommended) measure is adopted, it should be done prospectively and as a temporary measure to ensure that the parties that are already in an ongoing foreign-seated arbitration are not impacted.

Another option may be to do away with the patent illegality test altogether, and bring domestic arbitration at par with international commercial arbitration and foreign seated arbitration while testing the validity of the award under s. 34, s.36 and s.48 of the Act.

The reasons for retaining the patent illegality test is well-founded in relation to domestic arbitrations, the Law Commission in its 246th report had, in this regard, stated – ‘The legitimacy of judicial intervention in the case of a purely domestic award is far more than in cases where a court is examining the correctness of a foreign award or a domestic award in an international commercial arbitration ……. given the circumstances prevalent in our country, legitimately so, greater redress against purely domestic awards‘ is required. The circumstances that the Law Commission is alluding to is the quality of arbitrators and arbitral awards, without so saying it.

That being the case, there seems no explicable reason why there should be a different standard applied to the same arbitrators, in cases of an Indian seated arbitration for parties that are Indian (domestic award) and where one of the parties is foreign (international commercial arbitration).

In my personal view, there is a third and more viable option, which is to restrict the patent illegality test to ad-hoc arbitrations alone. The legislature may consider amending the Act, to apply the patent illegality test and restrict its application to ad-hoc arbitration.

This will help allay fears of the judiciary and also give the necessary impetus to institutional arbitration. There is a recognised ‘need for popularizing institutional arbitration in India‘ [246th Law Commission Report, page 6, para 21]. While the Report states that, ‘the Act is institutional arbitration agnostic – meaning thereby, it neither promotes nor discourages parties to consider institutional arbitration‘, the Report also recognises that the ‘changes suggested by the Commission however, attempt to encourage the culture of institutional arbitration in India‘ [page 9, para 6]. Such an amendment will enable institutional arbitrations to gain momentum and the country retain its domestic arbitration.

While we clamour to garner international commercial arbitrations, India is at serious risk of losing its current domestic arbitration. And I am not exaggerating this risk. The risk is serious, and it is imminent. The legislature must act, soon and decisively.

The original article can be viewed by following the links:

https://www.barandbench.com/columns/domestic-arbitration-urgent-legislative-amendment