With the emergence of globalization, the world has turned into a global village. We see an expansion of business organizations across and beyond borders leading to increased cross-border transactions. Certain agreements and contracts entered by such organizations may sometimes go bad the ambit of which will not be covered by the municipal of a country them being ‘cross-bordered’ in nature. This necessitates expertization in the adjudication of such matters to adequately cover transactions of such type. Here comes the picture of arbitration, which has been considered as the best bet by many in dealing with cross-border transactions.
Commercial Arbitration Meaning
It is a method of dispute resolution in which the parties agree, usually in form of an arbitration clause embodied in the main transaction agreement or a separate arbitration agreement, to have an independent and impartial single arbitrator or a tribunal (usually made up of three arbitrators) to determine their disputes. The arbitrators make a final determination that is binding on the parties of the dispute. The arbitrators are generally legal or technical experts of the parties’ choosing and also parties can influence and select the procedures according to applicable laws. It involves parties from different countries agreeing to submit their disputes to arbitration without recourse to the courts of a particular country. The award is final and binding on the parties also enforceable.
Types of Commercial Arbitration
- Domestic commercial arbitration – these refer to the cases covered by countries’ municipal laws;
- International commercial arbitration – refer to the resolution of disputes relating to cross border transactions that may or may not be covered by countries’ municipal laws;
Arbitration law in India falls under the purview of the Arbitration and Conciliation Act of 1996 which is based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law. It has been classified as –
- Part 1 relating to domestic arbitration,
- Part 2 relating to International Commercial Arbitration.
International commercial arbitration is defined under Section 2(1)(f) of the Act “as an arbitration relating to disputes arising out of a legal relationship, whether contractual or not, which are considered as commercial as per the law in force in India; where one or more of the parties are entities (personal or impersonal) which reside outside India”.
All agreements executed between corporations have three primary covenants;
- ‘governing law’ which talks about taking recourse to the law of the country when deals between international corporations go bad;
- ‘jurisdictional clause’ specifies the courts of which country have the jurisdiction in a particular dispute, at hand;
- ‘arbitration clause’, deals with how conflicts can be resolved between corporations before bringing them before a particular court for adjudication, it may be mediation, arbitration, and conciliation.
Benefits of Arbitration
The process of arbitration has several pros associated with it. Some of them are –
- Enforceability – enforcing an arbitral award against a foreign party present in a foreign jurisdiction employing the UN Convention on Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention) is comparatively much easier than enforcing a court judgment against a foreign party in a foreign jurisdiction. The above-mentioned convention provides for recognition and enforcement of foreign arbitral awards in 168 countries. For the enforcement of court judgment internationally, there must be mutual recognition agreement between countries having jurisdiction in which the award was made and the countries whose jurisdiction in which enforcement is sought. In addition, in cases of international litigation, parties must resolve disputes in the national courts of one of the parties. The enforcement of such decisions is also difficult as it involves the seizure of assets of the losing party. This needs lot of money and consumes lots of time.
- Choice of the decision-maker – the power given to the parties to nominate the arbitrators to determine the dispute provides an opportunity to the parties to appoint arbitrators with expertise in the field also may include arbitrators of high fame. The parties generally choose arbitrators with the necessary qualifications and experience. On the flip side of the spectrum, in the courts, the parties have little or no control over the appointment of a judge who has gotten the power to determine the dispute. Also, a judge may lack technical expertise over a particular subject matter as he/she is not a specialist.
- Confidentiality – Most countries across the world have recognized arbitration as a confidential process. This is generally present in the municipal law of the country. On the other hand, court proceedings are public. Which makes arbitration less likely of disclosing commercially sensitive information.
- Neutrality – during arbitration, the location of both arbitrator(s) and parties may be neutral. In case of international litigation, the judge may have the same nationality as one of the parties, whereas in international arbitration, the arbitrator(s) will likely be from a different nation to that of the parties. Arbitration also restricts one of the parties from having to prosecute their claims through a foreign court system using unfamiliar laws and procedures.
- Flexibility – the parties have the power to choose where the arbitration may take place and the law and rules that have to govern the procedure of arbitration. Which ensures greater procedural flexibility than litigation. Parties have the choice of selecting time limits, confidentiality, location of oral hearings, the language of documents and hearings, and even whether the tribunal will decide according to law or justice and fairness.
- Faster resolution – the arbitration procedures can be completed quickly for hearing provided the availability of parties and arbitrators, especially in the case when parties select fast-track arbitration.
Difficulties with Arbitration
- Limited Rights of Appeal – court proceedings generally allow one or two stages of appeals. In the case of arbitration, it is conclusive and final, and generally lacks the provision for an appeal of an arbitral award.
- Costs – in many instances, the costs of arbitration may be disproportionate, particularly in a case where the amount in dispute is very low.
- Lack of familiarity and historical preference given for litigation over arbitration – most people are not familiar with the concept of arbitration. The concept is alien to many. This leads to a natural preference for litigation over arbitration. Some parties after looking to the confidentiality of arbitration may raise doubts on its transparency, consistency, and predictability. Also, some matters due to their impact on the public at large necessitate disclosure at that time arbitration will not be the right course of action.
When to choose arbitration?
In practice, it is ideal if the parties decide to choose to settle their disputes through arbitration in the following circumstances –
- In case of existence of enforceable arbitration agreement covering a particular kind of dispute, in absence of which arbitration cannot be enforced,
- The counterparty does not have substantial assets located within the jurisdiction of the concerned party. This raises a question on the enforceability of order by the courts.
- When there is a risk of disclosure of commercially sensitive information when the parties approach the courts. This is true, especially in the cases of cross-border disputes relating to commercially sensitive matters which have too much at stake.
LANDMARK CASES REGARDING CROSS-BORDER ARBITRATION
These are a few of the landmark Indian cases concerning cross-border arbitration.
Bhatia International vs Bulk Trading [SA (2012) 9 SCC 552] – (“Bhatia”)
The arbitration proceedings took place in Paris per the Rules of the International Chamber of Commerce or the ICC. An application was initiated under Section 9 of the Arbitration and Conciliation Act, 1996 seeking an order of injunction restraining transfer, alienation, or creation of third-party rights on the property. The application was held to be maintainable. The court held that Part 1 of the Act apply to arbitrators even though the place of arbitration was not situated in India. The court also opined that remedies under Section 9 of the Arbitration and Conciliation Act, 1996 Act do not get excluded by the application of the rules framed by the International Chamber of Commerce.
Bharat Aluminium Co vs Kaiser Aluminium Technical Services Inc [(20120 9 SCC 552] – (“BALCO”)
The Arbitration and Conciliation Act, 1996 has accepted the territoriality principle as adopted in the United Nations Commission on International Trade Law (UNCITRAL) Model Law.
Section 2(2) of the Arbitration and Conciliation Act, 1996 makes a declaration that Part 1 of the Arbitration and Conciliation Act, 1996 shall apply to all arbitrations occurring within India. Part 1 of the Arbitration and Conciliation Act, 1996 Act, has no application in respect of International Commercial Arbitration occurring outside India. Both the provisions are not in conflict with each other.
An application initiated for interim relief in a foreign seated international commercial arbitration is maintainable under any provision of the Arbitration and Conciliation Act, 1996.
Hence, the law laid down by the Bhatia case concerning the applicability of Part 1 of the Arbitration and Conciliation Act, 1996 Act to International Commercial Arbitrations, was overruled prospectively by the BALCO case.
Harmony Innovation Shipping Limited vs Gupta Coal India Limited and another [(2016) 11 SCC 508] – (“Harmony”)
In this case, the Supreme Court dealt with the question relating to the implied exclusion of Indian Laws under the arbitration agreement. The agreement in question provided that in case a dispute arose with the amount involving less than $ 50,000, then the arbitration had to be conducted following the small claims procedure of the London Maritime Arbitration Association. The agreement though lacked express provision regarding the exclusion of Indian Laws clearly stated that the contract executed to be governed and constructed under the arbitration clause as provided under English Law. The agreement was effected during the pre-BALCO phase hence the principles laid down, in that case, were not applied. Nevertheless, the Court held that the implied exclusion of the Arbitration and Conciliation Act, 1996 Act was clear from the phrases used in the agreement which evidenced the parties’ intention to exclude the applicability of Part 1 of the Arbitration and Conciliation Act, 1996.
Enercon (Indian) Ltd & Ors vs Enercon GmbH & Anr [(2014) 5 SCC 1] – (“Enercon”)
In this case, it was held that the “venue” of an arbitration refers to the geographical location selected based on convenience of the parties and it is different from the “seat” of arbitration, which has the power to decide the appropriate jurisdiction. In this case, Indian law was selected as the law applicable in respect of all aspects of the agreement and the arbitration. Per the Intellectual Property Licence Agreement (the IPLA) the venue of arbitration was London. The question arose if the parties selected Indian law, particularly for the conduct of arbitration, and if the parties had intended to fix the seat of arbitration as London, the same as the venue? The Court could not find any other connecting factor in favor of London and so India was held as the ‘seat’ and the London was selected by the parties as a venue for the conducting hearings.
Shri Lal Mahal Ltd vs Progetto Grano Spa [(Civil Appeal No. 5085 of 2013 arising from SLP (c) No. 13721 of 2012)] – (“Lal Mahal”)
As per Section 34 of Part 1 and Section 48 of Part 2 of the Arbitration and Conciliation Act, 1996, an arbitral award could be set aside by the court, in case the arbitral award conflicts with the public policy of India.
In the instant case, an award was passed under the rules of the Grain and Feed Trade Association, London which was upheld in the courts of the UK and was to be enforced in India. An objection was raised under Section 48 of the Arbitration and Conciliation Act, 1996 on the ground that the award was illegal and in violation of ‘public policy’ as it was against the provisions of the contract.
The court passed an order that established a distinction between the scope of objections of the enforceability of a foreign award under section 48 of the Arbitration and Conciliation Act, 1996 and challenges to set aside an award under Section 34 of the Arbitration and Conciliation Act, 1996. It held that the ground of ‘patent illegality is limited to Section 34 of the Arbitration and Conciliation Act, 1996 in which the issue is if the award should be set aside or not. The expression ‘public policy’ under Section 48 of the Arbitration and Conciliation Act, 1996 would not bring under its purview the ground of ‘patent illegality.
The court held that the expression ‘public policy of India’ per Section 34 of the Arbitration and Conciliation Act, 1996 had to be interpreted in respect of the jurisdiction of the court where the validity of the award was challenged and prior to it becoming final and executable. It should be viewed in contrast with enforcement of an award after it becomes final. The Court also clarified that Section 48 of the Arbitration and Conciliation Act, 1996, does not offer an opportunity for a second glance or review of the foreign award at its enforcement stage. It declined to entertain the petition and the challenge was allowed.
The arbitral process is a time-effective and cost-effective mechanism, making it convenient for the parties to arrive at unbiased outcomes so that commercial relations between parties can be taken forward healthily. To ensure transparency and bias it is an established practice to permit the parties involved in international commercial transactions to select the “seat” of arbitration in a country that has no interest in respect of the commercial transactions of the entities involved. The parties also get the opportunity to choose arbitrator(s) to determine the dispute. The voluntariness of the process should be emphasized and the awareness of arbitration should be spread among the people. The benefits of arbitration clearly out ways the drawbacks of the same. It has proved itself to be better than the adjudication process of a country. Hence, arbitration becomes the most effective way to resolve cross-border disputes.