India must reflect & implement essential reforms to strengthen the arbitration process

Arbitration has been struggling to take off in India since the first Arbitration and Conciliation Act, 1996. This is worrisome. From PM to vice-president, many have argued for a sound institutional arbitration process. Law minister Arjun Ram Meghwal recently even wondered why India can't become the hub for arbitration in the Asia-Pacific region.

As efforts are made to ensure its take- off, a recent finance ministry notification has the potential to nix the Act. It prohibits automatic arbitration clauses in any procurement and requires that even if one is incorporated, it be for less than ₹10 cr. The primary reason behind this is GoI's unsatisfactory experience in arbitration. The alternative prescribed is mediation or the courts, whose track record in timely disposal is poor.

Most contracts come with an arbitration clause because it is quick, and the awards are final. It is the choice for businesses not only in India but all over the world.

Arbitration as a law emerged after India signed the New York Convention and framed it based on the UNCITRAL (UN Commission on International Trade Law) model, which is uniform to most countries. For GoI, the biggest litigator in the country, to recommend avoiding that procedure amounts to it not trusting its own law aimed at improving the ease of doing business.

If arbitration is to be avoided, what are the options to settle disputes? The notification encourages GoI departments and state-run companies to choose the Mediation Act 2023, or negotiate a settlement to resolve the dispute. One argument to dump arbitration is that 'acceptance of an adverse award when judicial avenues are not exhausted is often perceived to be improper by various authorities, despite the 'finality' envisaged in theory'.

If acceptance of an arbitral award is perceived improper, it is difficult to understand how a negotiated settlement would be an option for a government servant, whose decision-making is even otherwise blunted by fears of questioning by bosses and agencies. When the Arbitration and Conciliation Act is becoming a no-go area, how can resorting to the Mediation Act be a better choice?

The Mediation Act is in its infancy and has not been tested yet, unlike the arbitration law. Furthermore, mediation is by consent and does not have the finality like an arbitration award.

A significant aspect where arbitration scores over mediation is that an arbitral award is binding on the parties involved in the dispute, and there could be no appeal over the award - barring some exceptions, like it going against the country's public policy or being illegal.

An arbitration process provides some certainty and timeliness in settling disputes, which is essential in business dealings. If arbitration fails, many who began doing business with the government could pull back.

'A large majority of arbitration decisions are being challenged in the Courts both by the Government (or its entity or agency) and by the opposite party, when the decision of the arbitrators is not to the satisfaction of either party,' says the notification.

If appeals are encouraged by courts, they are acting against the will of Parliament, which prohibits appeals. The law prohibits alteration of the award. That a particular award is not to the satisfaction of the losing party can't be justification for abandoning a mechanism. Almost every appeal - in High or Supreme Court - is out of dissatisfaction over a lower court's ruling. Does that mean lower courts should be junked?

There are scores of instances where government departments such as I-T, or    regulators like Sebi, appeal against the order of their tribunals. Should that lead to abandoning tribunals?

Arbitration law has had a tedious journey. The judiciary was happy to interfere even in international arbitral awards. After years, in a case involving Balco and Kaiser Aluminium, the top court reversed its decision, leading to it becoming a choice of dispute settlement.

It could also reduce government dealings with global companies, which are mostly governed by tax and investment treaties, which invariably have arbitration clauses.

Like all systems, arbitration has also been usurped by vested interests. Chief Justice D Y Chandrachud termed it an 'old boys club'. Last year, vice-president Jagdeep Dhankhar said that arbitration is in a 'tight fist' and that 'time has come when we need to introspect and move forward by bringing about necessary changes, including, if required, by legislation'.

Meghwal is set to take the national litigation policy to the Cabinet as part of the 100-day agenda. He should have proposals to make arbitration orders transparent. Let alone progress in speeding up justice delivery, if India must arrest sliding back, it must scrap the note discouraging arbitration.