The scientific and technological advancement which we are witnessing today has transformed the world into a global village. This is even more manifested in the hectic trade and commerce taking place between various nations. The efficacy and quickness of communication has changed the very paradigms of trade. International trade today is the very backbone of our commercial world as producers in various nations try to profit from expanded markets rather than selling their products within domestic borders. However, international commercial transactions often encompass cultural differences, unfamiliar philosophies, differing traditions, which sometimes lead to conflicts and disputes. So, the fast-paced, technology-driven and cross-border world of the twenty-first century, involving huge amount of money, requires quick and effective method of resolving disputes. Arbitration is one of the several forms of dispute resolution methods for international commercial transactions. As one of the oldest methods for settling international disputes, arbitration is a private process, where help of third person or neutral person is taken to resolve the dispute.
Arbitration is not exactly and precisely defined. Article 2(a) of United Nations Commission on International Trade Law (UNCITRAL) Model law on International Commercial Arbitration (Model Law) provides that for the purpose of this law: “arbitration” means any arbitration whether or not administered by a permanent arbitral institution. Arbitration can be “domestic” or “International”. The term international arbitration is used for the arbitration which transcends national borders. Domestic arbitration refers to arbitration that takes place in a particular State, between the parties which are residing in that State. Parties in international arbitration will usually be corporations or State entities rather than individual parties.
Though, it has become very common nowadays to speak of international commercial arbitration, but still no precise meaning has been accorded to the term ‘commercial’. Even Convention on Recognition and Enforcement of Foreign Arbitral Awards 1958, known as New York Convention, which lays down that a party may submit to arbitration, disputes that are, commercial, does not define the word “commercial”. Even in article 1(1) of UNCITRAL Model Law (on which countries can base their arbitration laws) the word “commercial” is not defined, but footnote to the text of the said article provides an illustrative, and not exhaustive, definition of the word commercial.
International commercial arbitration can usually be either adhoc or institutional. Adhoc arbitration is conducted under the rules of procedure adopted for the purpose of arbitration drawn by the parties themselves, or they might be drafted by a non-commercial organization like UNCITRAL. Sometimes the rules may be drafted by arbitral tribunal also. An Institutional arbitration is one in which the help of one of the specialist institutions is taken which have their own rules of procedure. For instance, American Arbitration Association, International Chambers of Commerce and the London Court of International Arbitration provide services for conducting arbitration.
The UNCITRAL Arbitration Rules state that “The Award shall be made in writing and shall be final and binding on the parties. The parties undertake to carry it without delay.” A valid award is one which fulfills the formal requirements of validity mentioned in the arbitration agreement and in the law governing the arbitration i.e.
the law of the place where arbitration takes place. It is necessary to see any specific formalities mentioned in the arbitration agreement or rules that parties have adopted or the law governing the arbitration. Award once rendered should be notified to the parties, for e.g. UNCITRAL Arbitration Rules provide that: “Copies of the award signed by the arbitrators shall be communicated to parties by Arbitral tribunal.”
Reliable statistics about arbitration are not readily available mainly for two main reasons. First, arbitration is essentially a private process. Secondly, in any event, there is no particular reason why arbitral tribunal (or indeed arbitral institution) should know whether award has been carried out. Unlike a national court, an arbitral tribunal has no role to play in the enforcement proceedings.
As already stated, the majority of awards are performed voluntarily. But in case loosing party does not carry out the award, the winning party needs to take steps to recognize and enforce performance of it. To invoke the powers of a national court, in order to obtain on the losing party’s assets and to institute enforcement proceedings. Once the award is given, the next question that arises is to see how the award can be challenged by the losing party. Award can be challenged depending first, on whether the relevant rules of arbitration provide for an internal procedure of appeal. Secondly, it depends on whether arbitration contains any provision for appeal. Arbitral award can be broadly challenged on “procedural” grounds, such as lack of jurisdiction; failure to give proper notice to the party regarding the appointment of the arbitrators; incapacity to conclude an arbitration agreement; dispute being incapable of settlement through arbitration; award being in conflict with the public policy of the State where arbitration takes place etc. However, UNCITRAL Model Law provides that there can be no challenge on the basis of mistake of law or mistake of fact.
Recognition and enforcement of award that is regarded as “foreign” at the place where enforcement is sought, is a complex matter. This is due to the fact that the enforcing court is asked not merely to recognize the legal force of award, but also to ensure that it is carried out. Recognition of an award is a defensive process. It will come into picture when the court is asked to grant a remedy in respect of a dispute that has been subject matter of previous arbitral proceeding. Recognition is generally sought at the place where award was made and enforcement takes place where loosing party has its assets.
Enforcement of award is difficult because of complex nature of arbitral process. Even comparatively simple International Commercial Arbitration may require reference to as many as four different national systems of rules of law. First, there is law that governs recognition and enforcement of arbitration agreement. Then, there is law that governs or actually regulates the arbitral proceeding. Next and most importantly, there is law that arbitral tribunal has to apply to substantive matters in dispute. Lastly, there is system of law that deals with the recognition and enforcement of award of the arbitral tribunal. However, traditionally the most difficult aspect of international commercial arbitration is to get the recognition and enforcement of arbitral awards.
‘Recognition’ and ‘enforcement’ are generally concerned with carrying out of award. The ultimate sanction for not carrying out the award is the enforcement by proceeding in a national court. Recognition on its own is considered to be a defensive procedure and is usually sought when dispute which is decided by arbitration is again instituted in the court. The party successful at arbitration then asks such court to recognize the arbitral award as valid and binding upon the parties concerned in respect of the dispute already decided by the arbitration. Enforcement, on the other hand, is a procedure where national court is asked to implement an award. One of the important factors in selecting the forum for the enforcement of the award is to see whether the State where enforcement is sought is a signatory to New York Convention or any other relevant international treaty relating to arbitration.
The time limits for the commencement of the proceedings for the recognition and enforcement of arbitral award which are usually laid down in the national legislations should be carefully observed. Reason for this is that, when it comes to enforcement of an award, the relevant period may be anything from one to three years. In case winning party is not successful in getting the award recognized and enforced it can still get the award enforced in some other place where loosing party has assets, but much depends upon the grounds of refusal of the enforcement. If enforcement was refused on the ground of public policy of a State, it may still be possible for the winning party to seek enforcement in another country in which same consideration does not apply. On the other hand, if enforcement was refused on account of failure of the arbitration tribunal to follow required procedures, it may not be possible to enforce the award elsewhere, since other courts may take the same view. In a case like this, successful party will have no other option but to start arbitral proceedings once again, on the assumption that the right to recommence the proceedings has not been lost as a result of the time limit.
Since an arbitral tribunal does not possess powers of a court, enforcement of awards must take place through national court at place of enforcement, operating under its own procedural rules. The detailed procedures adopted in these courts vary from country to country. However, it has become easier to obtain recognition and enforcement with the network of international conventions. Some of the main international conventions and treaties which apply to the recognition and enforcement of international arbitral awards are:
The Geneva Convention of 1927 was superseded by New York Convention of 1958. It has been described by Wetter as “the single most important pillar on which the edifice of international arbitration rests.” The New York Convention is strikingly international in attitude. Article 1(1) of the Convention states that awards made in one State will be enforced in States where their recognition and enforcement is sought whether it is party to Convention or not. However, despite being internationalist in approach there is qualification added under article 1.3 which provides for the States to makes two reservations as far as recognition and enforcement of awards is concerned. The first of these is “reciprocity reservation” and the second is the “commercial reservation.” According to the first reservation, any State may declare that it will apply the Convention to the recognition and enforcement of awards made only in the territory of another contracting state. Second reservation is commercial in nature, ie, each State may decide for itself what relationship it considers to be “commercial”.
The grounds for recognition and enforcement mentioned under New York Convention and under the UNCITRAL Model Law are similar. These grounds are of considerable importance as they represent internationally acceptable standards: not only because of widespread acceptance of New York Convention, but also because UNCITRAL Model Law adopts precisely the same grounds for refusal of recognition and enforcement. However, one more ground which is not mentioned in the New York Convention as well as under the Model Law but which may be faced in practice, is the defense of “State Immunity” or “Sovereign Immunity”. In general usage, it means that a sovereign State cannot be compelled to submit to the jurisdiction of another state. This defense is taken where the unsuccessful party is either a sovereign State or a State agency. In considering State Immunity, a distinction may need to be made between acts of a State taking place in its capacity as a State (acts jure imperii) and those taking place in its commercial capacity (acts jure gestionis).
While ‘arbitration’ is defined in section 2(1)(a) of the Arbitration and Conciliation Act, 1996 (1996 Act), ‘international commercial arbitration’ is defined in section 2(1)(f) of the Act. One of the main problems being faced in international commercial arbitration in India is enforcement of arbitral awards. Initially, in order to enforce the awards rendered in other countries, the Arbitration (Protocol and Convention) Act, 1937 and later the Foreign Awards (Recognition and Enforcement) Act, 1961 were passed. However, with the passage of the 1996 Act, the laws relating to domestic arbitration, international commercial arbitration and the enforcement of foreign arbitral awards have been consolidated and amended. The 1996 Act has repealed all the earlier Acts relating to recognition and enforcement. It not only provides for the enforcement of foreign awards, but also lays down the grounds on which recognition and enforcement of awards will be refused.
Section 44 of 1996 Act defines foreign awards and ingredients necessary for an award to be enforced in India. This section also provides that the ‘commercial reservation’ and ‘reciprocity reservation’ can be made by the India, as permitted by the New York Convention. The word “commercial” is not defined in the 1996 Act, and since India has opted for ‘commercial reservation’, it is free to interpret the term in any manner. Further, section 45 of the 1996 Act deals with the role of courts in arbitration as it requires that in case there is valid arbitration, matter will not be decided by the court but will be referred to arbitration. It is also laid down that foreign award would be binding once it is not open to any challenge and will be enforced. But in order to get the award enforced, evidence in the form of original arbitration agreement and in case if award is in foreign language, then certified translation is required.
In order to resist enforcement, a party can rely on the incapacity of the parties as provided in section 48 (1) (a). Capacity of the parties is to be judged according to the law applicable to them. In other words, in case one of the parties is Indian, the capacity to enter into a contract will be judged according to the Indian Contract Act, 1872. Further, the question whether arbitration agreement is valid is to be seen from the point of view of the proper law of the contract, i.e., law dealing with the substantive matters in the dispute. In case of absence of choice by the parties, validity of the agreement has to be seen according to laws where award was made, i.e., law of the place of arbitration. Section 48(1)(b) states that enforcement will not take place if proper notice was not served or parties were not able to present their case. This section talks about the due process of law to be followed while rendering an award to get it enforced. Short time limits, refusal to extend the time limit, non-intimation of name and address of the arbitrators are covered by this ground. While section 48(1)(e) specifies that enforcement may be refused if it can be proved that award has not yet become binding on the parties, or it has been suspended or set aside by country where award was made; section 48(2)(a) lays down that enforcement of arbitral awards will be refused if court finds out that subject matter of the dispute is not capable of settlement by arbitration under the law of India. What is considered as not arbitrable in India has not been laid down in the 1996 Act, but certain matters like matrimonial matters, granting of intellectual property rights, bankruptcy rights etc., are considered not arbitrable. Most importantly, section 48(2)(b) says that award which is against the public policy of the country will not be enforced. ‘Public policy’ as such is not defined and term is given different meanings in different countries. It is a concept which keeps on changing with the changing times.
Arbitration is an effective mode of settling disputes, particularly in today’s fast paced and technology driven world. Once an arbitral tribunal renders an award, it is the duty of the parties to carry out the award. Problem arises when in national courts where the award goes for enforcement, the respective national judges adjudicate the awards according to their respective national laws, which defeats the whole process of litigating out of court. Awards rendered in other countries need to be enforced with an ‘open mind’. Countries should give broad interpretation to the word “public policy” and should not judge an award solely on the basis of their domestic norms. Similarly, the words “commercial” and “arbitrable issues” should also be given an expansive interpretation.
Currently, in India ‘International Commercial Arbitration’ is in a somewhat budding stage. This practice is dominated by the British and American arbitrators and the arbitrations are conducted mostly outside India. In India, there are only two Arbitration Centres, both based in Delhi. One is the Indian Council of Arbitration (ICA) and the other is the International Centre for Alternative Dispute Resolution (ICDR). However, after 2007-08, fortunately some international arbitration institutions have started or are in the process of starting their offices in India. One of them is the Permanent Court of Arbitration, with headquarters in Hague. It has entered into an agreement with the Government of India and proposes to set up an office i.e. the Permanent Court of Arbitration for South Asia in Delhi. London Court of International Arbitration, which is functioning in London, has now started an office in India, whose main objective is to develop the pool of Indian international arbitrators.
Coming to reciprocal arrangement with regard to enforcement of arbitral awards, the Indian law contains a specific provision stating that there should be a reciprocal arrangement between the parties who are the signatories to the New York Convention of 1958 regarding the enforcement of foreign awards. Around 145 member countries have signed the New York Convention and India is one of the foremost signatories. But the problem is that the reciprocal arrangement exists with only 42 countries, the other 102-103 countries are yet to have such an arrangement.
There are two categories of arbitration, i.e., institutional arbitration and ad hoc arbitration. Ad hoc arbitration, considering the Indian scenario, is the most accepted in the International Commercial Arbitration. It is very flexible and the arbitrators are appointed according to the choice of the parties. This is the only advantage for ad hoc arbitration, since all the other aspects like cost, fees of the arbitrator etc., are within the discretion of the arbitrator. In institutional arbitration, the decisions are left to the institutions who have well established procedure, rules and regulations. All prominent institutions, such as International Court of Arbitration (ICC) headquarters in Paris; London Court of Arbitration and the Permanent Court of Arbitration have well established and time tested rules.
In my view, in Institutional Commercial Arbitration, it is better to opt for institutional arbitration rather than ad hoc. However, presently around 98% of Indian parties are following the ad hoc method. This being the situation, the first thing to be tackled is how to increase the pool of international arbitration experts in India. Secondly, the curriculum of law schools should include International Commercial Arbitration as a separate subject.
We are the apex body and are the oldest in the field of arbitration. When a matter comes to us for arbitration, the first thing that ICA does is to find out, if the parties have an ICA arbitration clause in the contract. If parties have such a clause, then at the time of any dispute, the matter will be referred to ICA. Then, we see whether both the parties are from our country or from some other country. For instance, if one of the parties is from abroad, then we need to find out if we are having any collaboration with that country. For e.g. we have an agreement with AAA i.e. American Arbitration Association. Thus, if any dispute arises where an American company and an Indian company are concerned, then AAA and ICA will work together to resolve the dispute with backing from the government. Both arbitral awards have force of law. During the proceedings, if the parties do not cooperate or do not file a reply then we take proper care that respective notices are sent by them to the said parties at their end. This is how an international arbitration works.
We have collaboration with international arbitration bodies from 45 different countries, ranging from Western, European, Asian to African countries and even Australia. When we have an agreement, we become their members and they become our members. We collaborate in terms of conferences so as to exchange knowledge. The idea is to draft agreements where arbitration clause is the part and parcel of the contract. In the absence of such clause, the parties have to approach the court which is an expensive, long drawn and troublesome process. We want that small industries and the companies to add ICA arbitration clause at the time of the “golden handshake”. It is only when the matters go wrong, and the dispute arises that the case is referred to ICA for arbitration. We see to it that the necessary letters are sorted out, notices sent and the respondent comes to the platform.
After applying to ICA for the appointment of the arbitrator, the governing body will have to approve the said application. Once this is approved, a person becomes a part of ICA. We have arbitrators from various fields of knowledge for example, retired judges, engineers, lawyers, etc. The qualities of an arbitrator, includes patience as this is crucial to the role of the arbitrator. He needs to hear and understand the grievances of both the parties. Apart from this, he needs to have an extensive and thorough knowledge of his areas of expertise.
Primarily, we approve of the Consultation Paper sent by the Ministry of Law. The sections mentioned in the Paper needs to be amended and we are with the Law Ministry as far as the amendments are concerned. If we go by CPC, we still have a very long way to go. The most important shortcoming is that arbitration awards are not mandatory. Unfortunately in India, the present day scenario is such that of all the awards given by the arbitrators, a big chunk lands up in the courts. By making an arbitration award mandatory, one can give the enforcement procedure some teeth to bite!
According to me, even at the time of the appointment of an arbitrator the courts go into the integrity of the entire matter. What was the contract? What dispute has arisen between the parties? Whether there is any dispute between the parties. The parties also challenge the jurisdiction of the arbitral tribunal in courts when there is a specific provision in the Act that you can challenge the arbitrator’s jurisdiction before the arbitrator. The courts must try and stay away from interfering in the arbitration procedure as that is the best approach and will help in the long run. It would also be a wise step for us to have two sets of enactments for domestic and international arbitration matters, respectively.
I think that we could all learn from each other as far as the international commercial world is concerned. I do hope, that Hong Kong, through its statutory and courts’ support for arbitration could provide models and certain other aspects which other developing nations like India could adopt. Let me cite two instances:
Well, I feel that reciprocity is where the problem lies at the moment. But, I would have thought that it is simply a question of ensuring that countries get together to look at what reciprocity actually means. It means, thinking in advance as to whether the court would grant recognition to an arbitral award. The starting point probably would be the signing up of an international convention like the New York Convention. Of course, there is a possibility of making a reciprocity reservation.
www.grandmasters.in | 8 Years & Counting
www.rcls.in | 8 Years & Counting
www.itlegalsummit.com | 8 Years & Counting
www.bfls.in | 8 Years & Counting
www.maels.in | 8 Years & Counting
www.plcs.co.in | 8 Years & Counting
Copyright © 2020 Lex Witness - India's 1st Magazine on Legal & Corporate Affairs Rights of Admission Reserved
