Experts CornerTariq Ahmad Khan

Every State has a right to regulate its social, political and economic system however, the said right should not be exercised in such a manner that it affects the ease of doing business in that State. In other words, it is the duty of the State to provide its investors a comfortable business environment, predictable legal framework, fair and equitable treatment and a robust dispute resolution mechanism.

Why public interest?

All in all, the right to regulate must be exercised keeping in mind the principles of fair and equitable treatment of the investors. In some cases, we have seen that the foreign investors invested in a particular State keeping in mind the existing laws of that State. Later on, that contracting State made changes to its legal framework which had a direct impact on these investments hence, the investor was entitled to compensation as these were the changes not contemplated by the investor while investing in that State. For instance, during the pandemic, the Indian Government amended the Insolvency and Bankruptcy Code, 2016 for protecting businesses in the unprecedented times and increased the threshold for initiation of corporate insolvency resolution process to Rs 1 crore. Additionally, initiation of proceedings under Sections 7, 9 and 10 of the IBC was also suspended. In such cases, the investors may rely on the fair and equitable treatment (FET) clause in the bilateral investment treaty (BIT) and file a claim against India for bringing these amendments which restrict the investors from taking the benefit of the IBC and takes away their right to initiate proceedings under the aforementioned provisions. It is a settled position that a contracting State is under an obligation to adhere to the expectations of the investor that were taken into consideration by the foreign investor at the time of making the investment. On the other hand, the Government can always rely on exception clauses in the BIT and take the defence of necessity. The Government may contend that the suspension of IBC was in public interest as the companies were severely impacted by the pandemic and had the risk of being declared insolvent.

Indian context

India has seen an increase in the inbound FDI in the past few years however, it is equally true that there has been an increase in the number of disputes between foreign investors and the Government. Some of these disputes have been going on for more than a decade and have been handled by the Government in a manner which has projected India as a jurisdiction that is not an investment-friendly jurisdiction. Interestingly, public interest is often cited as the reason behind challenging arbitral awards which are passed by Arbitral Tribunals against the State. No doubt the BITs protect the interest of the investors however, in many BITs there exists a public interest exception clause which is often invoked to justify State regulation. Such clauses give the host State a right to regulate investment where public interest is involved. Though, presence of such a clause does not mean that the State has an absolute right to regulate foreign investments.

Investors context

Incidentally, any State that aspires to attract investments would not regulate investments as the global investor community keeps a close check on State activities and prefer to invest in States that do not interfere in the business and provide ease of doing business by least State regulation.

 

Needless to say, jurisdictions having stable and friendly legal system attract more investments. Afterall, an investor who is investing in a country expects business growth, profit making, least interference and most importantly a robust dispute resolution mechanism. Business certainty is extremely crucial for attracting investments and any State which interferes in business is unlikely to attract investments.

Need for fast-track mechanism

India has terminated more than 60 BITs in the past few years and as a result, many prospective investors will now be at the mercy of the courts in India for getting their disputes adjudicated as they will not enjoy the protection and comfort guaranteed by a BIT. The delay in adjudication of such disputes is another fear that the investors have in view of fact that the outcome of dispute may take years in the Indian courts. Therefore, the Government must take some measures and provide a fast-track dispute resolution mechanism to the foreign investors so that they do not spend years in the court to get their disputes resolved. Especially, the enforcement of foreign awards should be done expeditiously and number of appeals may be reduced in these cases so that the losing party does not file multiple appeals to resist the enforcement of the award. After all, a decree-holder should not be deprived of the fruits of the award.

 

Conclusion

For the foregoing reasons, the State must strike a balance between the investor interest and public interest. The Government should always look at the common interest rather than looking at investor or public interest. The State has a responsibility to ensure that its citizens are protected and public interest is taken care of. State also has a responsibility to extend all the support to the investors that are investing in the economy. There may be cases where there is a conflict between the public interest and the interest of investors in such cases the State must be careful while choosing a side and while bringing changes in the legal framework the obligations under the BIT must be kept in mind as it can cause great prejudice to the investors who have invested in the contracting State. Government must also keep in mind that it is for the greater good of the general public that more and more investors come and invest in our country so as to generate employment and create a business environment in the country. Investors also have a duty to be responsible while conducting business as the same is essential for claiming protection under the BIT as there are national legislations which protect the people. State interference and intervention would be justified in cases where the foreign investment transactions raise concern regarding the security of the State, health of its citizens, environment, etc.

 

* Principal Associate at Advani & Co.

Experts CornerTariq Ahmad Khan

Government has no business being in businessPrime Minister Narendra Modi 

One of the fastest growing nations in the world is facing problems in becoming a hub of international arbitration. India has often been considered as a jurisdiction that sends mixed signals to the global investor community insofar as investments are concerned. Investors are often confused whether to invest in India or not. The efforts of the Government and the Judiciary in making India a hub of arbitration are praiseworthy however, somewhere we have lost the plot. Interestingly, India started early and was one of the first few countries to adopt the New York Convention in 1960 as compared to Singapore which adopted the same in 1986. Despite that, Singapore stands out as one of the leading centres for International Commercial Arbitration as parties prefer choosing it as a neutral venue for Arbitration. In a short span, Singapore has emerged as a hub of international arbitration alongside popular Arbitration hubs such as Paris, London and Geneva. The credit goes to the Supreme Court of Singapore that has upheld arbitration agreements, enforced foreign awards and construed public policy narrowly and the Government of Singapore that has ensured world class infrastructure and is known for its competence and integrity.

Every country aspires to become the centre of arbitration owing to various benefits that it entails. Also, every country wants to get more and more investment, but the investors take a note of various factors before investing in a country i.e. whether the country has a robust arbitration mechanism, whether the Courts and Government of that country are arbitration friendly or whether there is ease of doing business and stable environment, etc.

In India, most of the arbitrations are ad hoc and we are slowly moving towards Institutional Arbitrations. The Government has taken certain steps to make India a hub of arbitration. The Arbitration and Conciliation (Amendment) Act, 2019 , which was based on the recommendations of B.N. Srikrishna Committee Report, aimed to institutionalise Arbitration in India. It also provides for establishment of an Arbitration Council of India under Sections 43-A to 43-M. However, these steps are not sufficient. India can achieve its dream of becoming a hub of arbitration if the following issues are addressed.

Full-time Arbitration Lawyers

One of the major problems is that we do not have full-time arbitration lawyers. Lawyers often give second preference to arbitration matters and choose the time slot after the court hours for conducting arbitrations. After spending the entire day in court, they are already exhausted and thus, the proceedings do not go on for long. Also, sometimes they seek adjournments if they are in a court hearing and fix dates in arbitrations when they do not have hearings before the court. Similarly, some of the arbitrators, who are also practising in the courts, are unable to give sufficient time to the arbitration proceedings. Therefore, there is a need for full-time Arbitration Lawyers and Arbitrators who can devote sufficient time to arbitration so that there are no delays in the arbitration process.

Sloppy drafting of the law

Before the amendment of 2015, Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter “the 1996 Act”) was an invitation to file objections as it would automatically stay the operation of the arbitral award as soon as the petition under Section 34 was filed. This was a major hurdle in the execution of the arbitral awards. In 2015, this issue was addressed through the amendments made to the 1996 Act. However, the language of the Amendment Act was such that it took three years to understand whether the Amendment Act applied to pending Section 34 petitions or not. Even when the judgment of BCCI[1] was passed, another Section 87 was introduced by the legislature which was later struck down in Hindustan Construction Co. Ltd. v. Union of India [2] . A lot of judicial time got wasted to give clarity to these amendments.

Lack of proper law

The Arbitration and Conciliation (Amendment) Bill of 2021 seeks to amend Section 36 of the 1996 Act and raises several concerns as it provides for an unconditional stay on the operation of the award in case fraud or corruption is involved. This will take us back to the era of the automatic stay of arbitral awards as it would make it convenient for the judgment-debtors to avoid their obligations under the award. There is an ambiguity as to what constitutes fraud or corruption as it has not been defined under the 1996 Act. Thus, in every case a judgment-debtor may allege fraud and corruption for getting an unconditional stay on the operation of the award. As a result, the enforcement of awards will get more difficult and the ease of doing business will be adversely affected.

The Government has recently brought in amendments after amendments which shows that issues were not properly addressed, and the amendments were not properly drafted. In spite of a number of amendments, the seat versus venue conundrum has not been addressed in any of the Amendment Acts. Another example is Section 29-A which is contrary to the idea of minimum judicial interference as enshrined in Section 5 of the Act and an application under Section 29-A may itself take more than a year to decide whether an extension of six months should be granted.

Lack of institutional arbitration

In spite of a few good centres like Delhi International Arbitration Centre (DIAC), Nani Palkhivala Arbitration Centre (NPAC), Mumbai Centre for International Arbitration (MCIA), etc. India still does not have any institution that can be considered in the same league as Singapore International Arbitration Centre (SIAC), International Criminal Court  (ICC), London Court of International Arbitration (LCIA), etc. Most of the Arbitrations in India are ad hoc which is a major reason why arbitration mechanism in India is not robust. A world class arbitral institution would also need a renowned arbitration expert, e.g.  SIAC was led by Gary Born. Owing to the busy schedule of litigation lawyers in India, it is unlikely that any leading lawyer would thoroughly engage with an arbitration centre.

Judicial intervention

Another issue is inadequate support from the Courts. We have seen that there are judicial delays because the courts are overburdened. Once an arbitration matter gets entangled in the Court, then it gets delayed and it cannot be ascertained as to how much time the matter will take. For instance, if we take the example of a Section 34 petition, which deals with challenge to an arbitral award, the same may take forever to decide. The petition is also heard as an appeal by various courts in spite of clear directions from the Supreme Court that the Court under Section 34 does not sit over as an appeal and cannot go into the merits. In many cases, the courts have re-appreciated the evidence and have permitted the counsels to argue the merits of the case at length.

The other problem is that some of the judgments delivered by the High Courts have turned out to be bad jurisprudence. This is because it is not possible for all the courts in India to be on the same page. In fact, we have seen some regressive judgments even by the Supreme Court e.g. ONGC v. Saw Pipes Ltd.[3] We must remember that it takes years to undo the harm which such judgments cause. This forms a perception of India as a jurisdiction which is not arbitration friendly and where investments are not safe.

Practice of Appointment of Retired Judges as Arbitrators

It is surprising to see that the best arbitrators are overburdened with arbitrations because there are not many options to choose from. The reason is that we do not let young arbitration lawyers be appointed as arbitrators and as a result, mostly the retired Judges are appointed. This practice must be done away with and young lawyers must be appointed as arbitrators in disputes. This will make the arbitration mechanism more robust as a whole and the quality of awards will also not suffer. Usually, it gets impossible to maintain the quality of awards while having a huge quantity of arbitration matters. No other country is thus fond of appointing only retired Judges as arbitrators like ours.

Moreover, the appointment of young lawyers as arbitrators is also in line with the disclosure prescribed by Schedule 6. According to the Schedule, the arbitrator is bound to disclose how many ongoing arbitrations he is handling and whether he will be able to finish the arbitration within one year or not.  Also, in highly technical matters, we need skilled arbitrators from a particular field such as maritime arbitration.

Inadequate Representation of the Arbitration Issues: Need for an Arbitration Bar

The leaders of the Bar Associations do not speak about the arbitration issues as they are too busy dealing with the problems of the Court. This is one of the major reasons why the issues relating to arbitration mechanism are not highlighted or addressed. Thus, there is a pressing need to have a Bar to address the prevailing issues and the concerns of the arbitration practitioners.

Rigid Approach of the Arbitrators

Another reason why the arbitration mechanism has failed is because of the rigid approach adopted by the arbitrators. If in a tribunal there is an arbitrator who is strictly going by Civil Procedure Code, 1908 (CPC) and evidence, as opposed to Section 19 which categorically states that strict rules of evidence and CPC will not apply to arbitration, then the whole purpose is defeated. This is because the arbitration proceedings in such cases become just like a civil suit.

In addition to this, Arbitrators generally do not control the cross-examination. We have seen lawyers asking unnecessary and repeated questions, which eventually delays the arbitration proceeding immensely. Thus, the arbitrators must not sit as spectators when the cross-examination is taking place instead, they must control the cross-examination and should not permit questions that are based on contents and interpretation of documents.

Other issues faced during Arbitration Proceedings

The arbitration proceedings in India suffer from other difficulties such as absence of professionalism and mannerism. Arbitrators do not have dates for proceedings for months. This, in turn, leads to unnecessary delays. There is also a dire need to emphasise on the ethics and duties of Arbitrators as well as counsels.

Problems posed by the Public Sector Undertakings (PSUs)

We must focus on PSUs as most of the cases are filed by them. PSUs have a tradition of not settling and contesting till the end. The Government must direct the ministries concerned to analyse which cases should be contested and which should not be contested. For instance, if the award is a reasoned one then the same should not be challenged.

Government Interference

None of the institutions of the world including ICC, SIAC, LCIA, are Government controlled. On the other hand, the New Delhi International Arbitration Centre and Arbitration Council of India have members from the Government. Therefore, a lot will depend on the functioning of Arbitration Council of India and Government’s interference should be least in arbitration matters.

Suggestions and concluding remarks

Arbitration in India is like an unruly horse that moves forward, backward and sometimes even sideways. Undoubtedly, in the past few years, there has been a significant growth of arbitration in India. The situation has improved and now various arbitration centres have come up. These institutions are playing a significant role in strengthening arbitration in the country through their operations and are also imparting knowledge to the general public by organising number of conferences. However, we must remember that hubs are not made by getting a five-star property or by creating the infrastructure only. Making a building is not the only thing required as Delhi already has a lot of buildings. A lot will depend on the honest implementation as bringing amendments is not enough. Also, arbitration culture is required in other cities such as Kanpur, Ludhiana, Kolkata, Lucknow, etc. which are also hub of businesses. Focus should not only be on Delhi and Mumbai.

Ease of doing business, enforcement of contracts, and execution of arbitral awards are some key factors that will help in making any jurisdiction attractive for investment. Former Chief Justice of India Ranjan Gogoi, while speaking at an event organised by India Today, has highlighted the need of having a robust system to deal with commercial disputes. It is pertinent for India to adopt a pro-enforcement approach in order to increase the confidence of the foreign investors.

In cases where well-reasoned awards are passed by the Tribunal, the same should not be challenged by the parties. As officers of the court, lawyers should not resist arbitration or file frivolous challenges to the award to resist enforcement. Effective enforcement of awards would help in making arbitration more robust in India. This, in turn, will help in attracting more investment, which will prove to be beneficial for the economy as a whole. Indian economy is largely dependent on agriculture. It is important to get more investments in other sectors as well such as exports, infrastructure, etc.

There is lack of awareness in the general public about choosing arbitration over litigation. The reason is that institutions in India do not proactively hold conferences like SIAC and ICC. Thus, more awareness campaigns should be introduced to educate the society at large. Additionally, the students, practitioners and other members of the legal fraternity should be trained and encouraged to step in as full-time arbitration lawyers. Apart from this, less judicial interference is required. We should also look at the possibility of welcoming foreign lawyers to come and do arbitrations in India.

* Principal Associate at Advani & Co.

[1] Board of Control for Cricket in India v. Kochi Cricket (P) Ltd., (2018) 6 SCC 287.

[2] 2019 SCC OnLine SC 1520.

[3] (2003) 5 SCC 705.

Experts CornerTariq Ahmad Khan

“If you reveal your secrets to the wind, you should not blame the wind for revealing them to the trees.” ~Kahlil Gilbran

Confidentiality is considered as one of the key reasons why parties choose to go for arbitration for settlement of their disputes as they do not want their disputes to be a topic of public discussion. Considering the detailed documents and information that parties exchange in an arbitration, the idea is to protect the sensitive information, trade secrets, intellectual property which may be subject-matter of an arbitration as its disclosure may result in irreparable loss. For the foregoing reason, arbitration proceedings are kept confidential. But is confidentiality practically possible? What is the legal basis of confidentiality? What is its scope and what are the implications if it is breached by a party? In this article the author will shed light on Section 42-A which was introduced by the amendment of 2019 to the Arbitration and Conciliation Act, 1996.

Background

Section 75 of the Arbitration and Conciliation Act, 1996 states that the parties shall keep confidential all matters relating to the conciliation. However, the said provision is not applicable to arbitration proceedings and applies only to conciliation proceedings. Even though there was no statutory mandate in the 1996 Act, there was an implied duty of confidentiality for various reasons including protection of sensitive information or intellectual property, etc., reputation of parties in public, protection from potential claims in similar matters, no intervention of unrelated parties, etc.

In 2019, for the first time, a provision relating to confidentiality was incorporated in the Act based on the recommendation of Justice B.N. Srikrishna Committee submitted a report and gave certain suggestions for making arbitration more robust in India. The said recommendation was accepted and a provision has now been introduced by Arbitration and Conciliation (Amendment) Act, 2019  that expressly mentions the duty of confidentiality and reads as follows:

42-A. Confidentiality of information.— Notwithstanding anything contained in any other law for the time being in force, the arbitrator, the arbitral institution and the parties to the arbitration agreement shall maintain confidentiality of all arbitral proceedings except award where its disclosure is necessary for the purpose of implementation and enforcement of award.

It is noteworthy that Section 42-A is a non obstante clause which means that it deprives the parties of their autonomy and this provision supersedes any other law. As per the language of the section, the only exception to confidentiality is when the disclosure of the arbitral record is done for the limited purpose of implementation and enforcement of award.

Section 42-A: Myth or reality?

As per the language of Section 42-A, only the award can be disclosed for the limited purpose of its implementation and enforcement. Surprisingly, the language of the section does not talk about disclosure of the award for the purpose of challenge to the arbitral award under Section 34 of the Act. It is not uncommon for parties to approach the court under Section 29-A for extension of time period for passing of an award. In that case, the relevant record of arbitration is often filed along with the application for extension. Thus, there seems to be a practical problem in implementation of Section 42-A considering the fact that it is a non obstante clause and only permits disclosure of award that too for implementation and enforcement of award. Let us take some other scenarios, where a party is seeking interim measures under Section 9 from the court, a party files an application for termination or substitution of the arbitrator under Sections 14 and 15 or files an appeal under Section 37 against an order of the tribunal, even in these cases the arbitral record is filed before the court, that makes Section 42-A impractical and otiose.

Confidentiality v. Transparency

Often this issue has been a topic of discussion as to whether transparency is more important or confidentiality. It can be argued that the general public has more faith in the court proceedings as there is transparency involved in the process and the court proceedings are accessible to the general public whereas arbitral proceedings are private and are not accessible to third parties. Neither the proceedings nor the award passed by the arbitrator is accessible to any third party. Whereas the judgment of the court is pronounced in open court and available for public. Moreover, transparency ensures fairness and builds the trust of stakeholders in arbitration. Parties often complain that there is no accountability on part of the arbitrator as the proceedings take place in a closed room and as a result, the credibility of arbitrators is often challenged in court. For the said reasons, many people opine that arbitral awards be published as it will cement the faith of the parties in arbitration and at the same time there will be a development of jurisprudence in arbitration. Arbitrators will be careful while passing awards as they would be concerned about their public image and quality of arbitral awards will be maintained. Publication of awards will make it easier for parties to nominate an arbitrator based on his reputation. However exciting the idea of transparency may sound but it cannot be ignored that confidentiality is one of the key features which makes arbitration attractive to parties as a mode of dispute resolution thereby, making it difficult to implement the idea of publication of awards.

Privacy and Confidentiality

Sometimes privacy and confidentiality are used interchangeably when in fact these two concepts are different. Privacy in arbitral proceedings would mean that no third party can enter the arbitration proceedings and cannot witness the same as these proceedings take place in a private set-up in a closed room. In other words, privacy only means that arbitration proceedings cannot be attended by a third party who is not a party to the dispute except the counsels, witnesses and the arbitrator. Confidentiality on the other hand means that the content, documents, information which is adduced during the proceeding and the award are to be kept confidential and cannot be published or disclosed by any party.

Outsiders in the Arbitration Proceedings

Apart from the parties to the arbitration proceedings, there are outsiders who are strangers to the agreement but still sit in the arbitration proceedings e.g. counsels of the parties, witnesses, stenographers/transcribers, tribunal secretary, translators, etc. They are not governed by the arbitration agreement and have access to confidential information produced in the arbitration. Section 42-A fails to address this concern as it remains silent on the duty of these third parties to keep the arbitral record confidential. The language of the section only imposes confidentiality on the parties, arbitrator and the arbitral institution.

International Perspective

The UNCITRAL Model Law is silent on confidentiality. In the absence of any international rules prescribing confidentiality in arbitral proceedings, there has been a difference of opinion between various jurisdictions on the issue whether arbitral proceedings are confidential? Courts in Australia and USA have rejected the idea of an implied duty of confidentiality in arbitration and held that there cannot be a presumption of confidentiality in arbitration. Norway is another jurisdiction which has an express statutory provision which states that there is no duty of confidentiality in arbitration proceedings unless the parties otherwise agree. On the other hand countries like UK and France have recognised the concept of implied confidentiality as there is no express statutory provision regarding confidentiality.

Conclusion

The language of Section 42-A fails to take into consideration the concept of party autonomy which permits parties to decide whether they wish to keep the arbitral proceedings confidential or not. It can be argued that no statutory provision can impose confidentiality on the parties in an arbitration. Further, Section 42-A has been worded in such a way that it does not leave scope for parties to voluntarily consent for disclosure of certain documents and the exceptions in the provision fail to take note of the mandatory legal disclosures. The provision also does not provide the consequences of breach of this provision. The fine print of Section 42-A will render it otiose and as a result, the precious time of the court will be lost in interpreting this loosely-worded provision.

* by Tariq Khan, Principal Associate (Advani & Co.).