India The Next Asian Arbitration Hub?

The increased growth in economies across Asia, interaction between Asia and the West, various mergers and acquisitions within Asia, has given rise to the creation of artificial boundaries. This increased interaction between different countries has also led to an increase in cross border disputes.

The situation in a cross border dispute is critical as it has the disadvantage of differences and uncertainties in the law, language and business culture. Lack of clarity on the defined roles and responsibilities as well as terms and conditions in the contract, differences in revenue sharing and cost calculations, change in ownership or management control and regulatory changes enforced by the Government further aggravate the matter.

In order to set up a successful arbitration system in any country, one must ensure that the essential factors---a clear and unambiguous regulatory environment, enforceability of the arbitral award, cost and time efficiency, availability of arbitrators and experts---are all in place. Effective functioning of these parameters is the key to a successful arbitration mechanism in any country.

When doing business in Asia, for the companies which are seeking to rely on arbitration as an effective method of commercial dispute resolution, it is important to have a good understanding of how the arbitral process operates. The most important parameter which needs to be comprehended by the companies is the regulatory environment of arbitration in any country. If the regulatory set up is not appropriate, then it can turn out to be the biggest hindrance in effectively utilizing arbitration as an alternate dispute resolution method.

The next important parameter which needs to be considered is the integrity of the arbitral process and the enforceability of the arbitration award. Every award maybe challenged in the Indian courts. There are difficulties in enforcing the awards too. Lot of interference is observed by the courts in the overall proceedings at some places. The effectiveness of arbitration as a legal institution depends upon efficiency and efficacy of its award enforcement regime.

Obtaining an arbitral award at any of the international institutions takes six to eight months, however the enforcement of the foreign arbitral award in India may take an alarming six to eight years. Thus which country the award is being enforced in is also a key parameter for companies to keep in mind while choosing their arbitration process. However, recent judgements and the ministry's recent steps towards the amendment of the Arbitration and Conciliation Act, 1996, have indicated an arbitration-friendly approach by Indian regulators.

As per our survey on Arbitration in India, more than half of the respondents believed that the ministry's recent steps to develop arbitration as a dispute resolution mechanism in India are in the right direction. It is very critical for companies to ensure that all commercial contracts that the business enters into contain a comprehensive and unambiguous arbitration clause. It is one of the most effective ways to avoid being sued in a foreign jurisdiction.

Arbitration clauses are an effective method of protecting your business's commercial rights and obligations from the risks of being subjected to the vagaries of unfamiliar laws and procedural processes inherent in legal disputes in a foreign jurisdiction. Indian courts have also repeatedly highlighted the need to have clear arbitration clauses by way of several case laws in the past. Our survey also highlights that three fourth of the respondents confirmed that the arbitration clause is an essential part of their legal contracts.

Cost and time efficiency are the key challenges to establish arbitration as an alternate dispute resolution method. In most of the Asian countries, arbitration is considered as a cost effective mechanism as it is flexible in nature. However, in India, arbitration is considered as an expensive mechanism for the settlement of disputes. Also the timeliness of arbitration is extended by the number of hearings taken for the disposal of cases. This hampers the essence of dispute resolution over a period of time.

Almost half of the respondents revealed that arbitration in India is expensive and does not provide timely resolution. If this issue is addressed on time, then in the near future, most of the Asian countries would prefer to conduct their arbitration in India. India follows the trend to appoint retired judges of the Supreme Court or High Court as arbitrators, which often leads to difficulty in understanding technical matters, the capabilities for which the arbitrators may not possess.

It is advisable for people to consider selection of relevant technical experts as arbitrators, so that the arbitration process is smooth and hassle free. Sixty-eight per cent of the respondents believe that subject matter experts should be arbitrators, as against 22% who believe that retired judges should play this role. Effective implementation of the above mentioned points will ensure smooth functioning of the arbitration procedure in any country.

Today, arbitration is increasingly being used as a cost effective, prompt, neutral and readily enforceable means of resolving disputes. It offers the added flexibility of allowing parties to choose the arbitration tribunal, the arbitrators, and in some cases, the arbitration rules and laws. This is not only because of the rapid expansion in international trade in the region, but also because companies are considering the benefits of arbitration.

Due to all such benefits, of adopting arbitration as a mechanism for resolving disputes, there is an increase in the number of foreign companies that undertake businesses in Asia to include arbitration clauses in their agreements. With these developments, there has been a concomitant increase in the number of Asian arbitration centres and adoption of modernized arbitration laws among Asian countries.

Arbitration is practised on a big scale in some of the countries in Asia such as Hong Kong, Singapore, Japan, Malaysia and Indonesia, as against other countries which are still waking up to the concept like India, Sri Lanka, Bangladesh, and Nepal. Currently, much of India's arbitration cases are conducted by Singapore, Hong Kong & London institutions. The Singapore International Arbitration Centre (SIAC) has recorded a 169% increase in the number of cases since 2000, out of which 36 cases were from India in 20101.

Hong Kong International Arbitration Centre (HKIAC) has also recorded 291 arbitration cases in 2010, where 60% were international cases including Indian parties2. This is because of the neutrality of the location and institutional arbitration being followed. London Court of International Arbitration (LCIA) too recorded an increase in the overall number of cases; however there was a dip in the number of cases from India from 4% in 2009 to 2.5 % in 20103.

The Arbitration Act in India was implemented in 1940. It underwent substantial change in 1996 with the enactment of the Arbitration and Conciliation Act. This act is modeled on the United Nations Commission on International Trade Law (UNCITRAL) Model Law and it covers both domestic as well as international commercial arbitration. Out of the two arbitration procedures of ad-hoc & institutional arbitration, India is still in the nascent stage as far as institutional arbitration is concerned as mostly ad-hoc arbitration is followed.

Today, Singapore is one of the leading and most established arbitration centres in Asia. SIAC was established in 1991 under the auspices of the Economic Development Board and the Trade Development Board. SIAC arbitration rules were influenced by the UNCITRAL rules, the LCIA rules. It also has well established facilities, a qualified pool of arbitrators and experts from different fields. It is one of the preferred destinations because of its neutrality and its geographic location vis-a-vis other Asian countries.

Similar to Singapore, Hong Kong is also one of the most established arbitration centres in Asia mainly due to its sophisticated Arbitration Ordinance, which includes the UNCITRAL Model Law and also because of its experienced International Arbitration Centre (HKIAC), which has witnessed hearings of more than 1600 disputes since its establishment in 1985. With the new Arbitration ordinance effective June 2011, the key highlight includes removal of the distinction between domestic & International arbitration.

This would have a significant impact on how Hong Kong would now be perceived in the arbitration arena. Malaysia has a dual system of international arbitration - the one which comes under the Malaysian Arbitration Act 1952, and the other, which comes under the rules of the Kuala Lumpur Regional Centre of Arbitration (KLRCA). Arbitration is also preferred in Malaysia as it is quicker than the courts and less expensive. The KLRCA was established in 1978, and has become the principal organization responsible for international commercial arbitrations in Malaysia. These rules are based on UNCITRAL Rules, with certain modifications, and allow for significant autonomy to parties in relation to arbitration procedure and the appointment of arbitrators.