Business Mandate

Arbitration in the Age of Globalisation:

Navigating Cross-Border Disputes in India’s Business Landscape

As India continues to develop as a leading economy and destination for foreign investment, the need for effective dispute resolution mechanisms has become increasingly important. International arbitration has emerged as a preferred method for resolving disputes, particularly in cross-border transactions, but also in domestic disputes.

Justice (Retd) V Ramasubramanian
Former Judge, Supreme Court of India

Tamil Nadu has always been one of the favoured destinations for foreign investments. Therefore, one would have expected Chennai to be one of the top destinations for arbitrations also, but ironically, while the flight of capital is towards the southern part of India, the flight of arbitration is towards north of India.

Today India has become one of the fastest growing economies in the world. The IMF executive director was quoted by CNBC on March 1, 2024 as saying, “If you look at the GDP numbers, India is poised for about 8% growth this year.” That makes India easily the fastest growing economy in the world.

Since 1991, the economy has grown by leaps and bounds. Total FDI inflows into the country from April 2000 to December 2023 was US $ 971.5 billion. Out of this, the total FDI inflows received from April 2014 to December 2023 constituted about $ 448 billion. Mauritius contributed 26%, Singapore 23%, USA 9%, Netherlands 7% and Japan 6%. All these countries emerged as top five countries for FDI equity inflows into India for the year 2023-24. History shows that many times the flow of capital is followed either by aggression or litigation. India is no exception to this general rule.

After our economy opened up in 1991, India entered into a series of Bilateral Investment Treaties (BITs). By the year 2015, India had signed 83 BITs  and several international investment agreements. The first ever BIT was with the United Kingdom in 1994. In the year 2003, India developed its own model BIT. The first ten years from 1994 to 2004 perhaps proved to be a period of honeymoon between the Republic of India and the investors.

The Dabhol Power Plant Fiasco
But this honeymoon ended in 2004 with the initiation of the first round of BIT arbitration in 2004, in the Dabhol Power Plant case. Planned as a joint venture between Maharashtra Power Development Corporation, Enron, General Electric, and Bechtel, Dabhol Power Corporation aimed to set up a huge naphtha-based plant in the first phase and another huge gas-based plant in the second phase. As the largest foreign investment in the country at that time, Enron was given top priority in terms of clearances. But the power purchase agreement between Enron and the Maharashtra State Electricity Board was kept under the wraps.

The party in opposition at that time promised to cancel the project. When they came to power, it was revealed that Maharashtra State Electricity utility was paying Rs 7.80 per unit to buy power from Enron, while charging retail consumers Rs 1.89 per unit. By contrast, the cost of power purchased from the other producers like the National Thermal Power Corporation and the Bombay Suburban Electric Supply varied from 80 paise to Rs 3 per unit.

At around the same time, in the US, Enron was found guilty of a huge accounting and corporate fraud and it went into bankruptcy. The agreement was terminated. However, other investors like Bechtel and General Electric brought claims against India, under the India-Mauritius BIT, alleging expropriation of their interest in the power plant by the Indian government. The claims were however settled and India had to compensate for the losses.

White Industries vs. India
The second most important BIT arbitration case involved the Australian company, White industries. In 1989, the Australian company entered into a contract with Coal India Limited. Though the contract was governed by Indian law, the contract specifically excluded the operation of the Indian Arbitration Act 1940, which was the law at that time, but it contained an arbitration clause requiring the parties to arbitrate all disputes under the ICC arbitration rules.

Therefore, when the disputes arose, they were referred to an ICC tribunal in June 1999. An award was passed in 2002 which was challenged before the Calcutta High Court. The Australian company filed an application before the Delhi High Court to enforce the award. The Australian company moved an application first for transfer of the Section 34 petition from the Calcutta High Court to the Delhi High Court. Thereafter, they moved the Calcutta High Court itself for rejection of the application to set aside the award. The Calcutta High Court dismissed the application for rejection of the petition under section 34. The Division bench confirmed it.

The Australian company filed an appeal in the Supreme Court. The appeal was referred in the year 2002 to a larger bench. Nine years passed. In the year 2009, contending that the inability of the Indian courts to enforce an award for a period of almost seven to nine years tantamounts to a breach of articles 3,4,7 and 9 of the BIT. The Australian company launched a claim for a sum of Australian $10 million upon the Republic of India.

As there was no response from the Indian government, the Australian company invoked Article 12, which provided for the reference in the dispute to an ad hoc tribunal constituted under the arbitration rules of UNCITRAL. Before the arbitral tribunal, the Australian company advanced two arguments: one related to the violation of Fair and Equitable Treatment (FPT) clause under Article 3.2. It was contended by the Australian company that the entertainment by an Indian court of an application to set aside the award and the shocking delay on the part of the Indian courts in dealing with the application for enforcement of the award amounted to denial of justice; and as a consequence, it violated the fair and equitable treatment standard.

The second important contention of the Australian company was that the Indian courts’ delay of nine years, in enabling them to enforce an international arbitration award was directly attributable to the failure of the country to provide effective means of asserting and enforcing the rights under the award and that, therefore, it constituted a breach of article 42 of the BIT. Interestingly, article 42 of the BIT between India and Australia did not contain a clause for the provision of effective means of asserting claims and the enforcement of rights.

But the Australian company drew parallel from article 45 of the agreement between the Republic of India and the State of Kuwait and contended that there was an obligation on the part of the Republic of India to treat investments made in its territory on a basis no less favourable than those accorded to investments of investors of any third country. In other words, they claimed that the investments of all countries deserve equal treatment. Interestingly, the arbitral tribunal rejected the claim of breach of Article 32: FET standard, which revolve around the failure of the Indian courts to dispose of the matter. But the tribunal upheld the contention revolving around article 42.

Vodafone & Other Cases
After the White Industries case, there have been several BIT arbitrations, such as the Republic of India vs. Louis Dreyfus Armateurs SAS case under the India-France BIT, the Deutsche Telekom vs. Republic of India under the India-Germany BIT, and the Khadamat Integrated Solutions Private Limited vs. Kingdom of Saudi Arabia under the India-Saudi Arabia treaty.

Then came the Vodafone arbitration case, which became a classic example due to the nuances it presented. The original arbitration was conducted under the India-Netherlands treaty. While this arbitration was pending, Vodafone initiated another investment arbitration under the India-UK BIT, challenging the retrospective effect of an amendment made by the Indian government under Section 91 of the Income Tax Act 1961, read with Section 195 of the Finance Act 2012.In 2018, the Indian government sought an anti-arbitration injunction from the Delhi High Court against Vodafone for commencing two simultaneous arbitral proceedings—one under the India-Netherlands treaty and another under the India-UK treaty. However, the Delhi High Court rejected India’s arguments, affirming the principle of competence and emphasizing that intervention in BIT arbitrations is severely restricted. The court held that the provisions of the Arbitration Act do not apply to BIT arbitrations.

In 2019, there were also significant interstate investor-state disputes. Khaitan Holdings Mauritius issued a notice of dispute to the Republic of India under the India-Mauritius BIT. The Republic of India moved the Delhi High Court seeking an anti-arbitration injunction. However, the Delhi High Court, relying on the precedent set by Vodafone, rejected the application for injunctions.

Another interesting set of investment arbitrations occurred in the Nissan Motor Company case, where the concept of Fair and Equitable Treatment was scrutinised by the Permanent Court of Arbitration in Singapore. The arbitration was conducted under the India-Japan Economic Partnership Agreement concerning alleged non-payment of incentives under the Indian tax regime. The Republic of India’s objection to the jurisdiction of the PCA in Singapore was ultimately dismissed.

The New BIT Regime
As of 2014, there were about 17 known BIT claims against India. The fallout of these spate of arbitrations was an increased national concern. Therefore, between 2012 and 2016, India revisited its BIT regime, which led to two main outcomes. The first was the adoption of a new model BIT in December 2015 with the twin objectives of: one, affording appropriate protection to foreign investors in India and two, maintaining a balance between investors’ rights and the government’s obligations.

The objective was to terminate old BITs where the initial duration had concluded or issue joint interpretative notes/statements for renegotiation based on the model BIT where the initial term of the BIT was still in effect. Since 2016, India has terminated 77 bilateral investment treaties. It has entered into several new generation BITs with the states such as Belarus, Brazil, Taiwan and Kyrgyzstan. In May 2022, India entered into a Comprehensive Economic Partnership Agreement (CEPA) with the United Arab Emirates; and Economic Cooperation for Trade Agreement (ECTA) with Australia on 29 December 2022.The current model BIT of 2016 comprises 38 articles and seven chapters, designed to strengthen the negotiating position of states. This model BIT incorporates the Solini criteria, established in a landmark case involving Solini and the Kingdom of Morocco. The Solini test is utilised by tribunals to interpret the term “investment” under Article 25(1) of the ICSID Convention. To meet the Solini test, an investment must fulfill four criteria: (1) a contribution, (2) a certain duration, (3) risk, and (4) a contribution to the economic development of the host state. The model BIT now excludes pre-investment activities from the purview of investments and has eliminated the Most Favoured Nation (MFN) clause. Another provision that has come under criticism is Article 15.2 of the model BIT, which mandates that an investor must first seek legal remedies from the domestic courts of a host state for an initial period of five years before initiating a claim under the model BIT. The model BIT of 2016 has also introduced a distinction between direct and indirect expropriations.

Criticisms and Challenges
India’s model BIT has faced significant criticisms for being overly focused on protecting the interests of the host state. Some critics argue that India’s actions post-2016 have led to a decline in foreign direct investment (FDI) inflows into the country, while others dispute this claim. In the budget speech for 2024-25, the Union Finance Minister highlighted that FDI inflows from 2014 to 2023 amounted to $596 billion, twice the amount recorded during 2005 to 2014. Interestingly, the finance minister also introduced a different interpretation of the acronym FDI: “First Develop India.”

Three areas that persistently challenge the BIT arbitration regime are public health, human rights, and environment. When arbitral awards involve these areas, there is often significant outcry alleging that such awards favour powerful entities at the expense of democratic principles, leading to perceived discrimination between nationals and foreigners. Critics argue that multinational corporations can exert undue pressure on governments to protect polluting industries, thus harming the environment. This theory is advanced by opponents of the regime, particularly concerning issues of public health and environmental protection. Therefore, the investors, lawyers in the arbitration circuit and the arbitrators have a duty to strike a balance.

I’m not sure how many of you have heard about Mr. Samuel Gompers, a Jewish immigrant and trade union leader who founded the American Federation of Labour. He made a notable remark about arbitration. He said, “Do I believe in arbitration? Yes, I do. But not in the arbitration between the Lion and the Lamb, in which the lamb is in the morning found inside the lion.” Although he spoke in the context of arbitration between workers and management, such a scenario should not happen in investment arbitrations also.

Mr. Jainil Bhandari
Partner, Rajah & Tann Singapore

Arbitration is a consensual dispute resolution process based on the parties’ agreement to submit their disputes to an arbitral tribunal, usually composed of one or three independent arbitrators appointed by or on behalf of the parties. The parties’ agreement is paramount. It is flexible and there are no specific rules of evidence and there are no strict rules on the form of documents. The result is an award, that is the final decision and legally binding on the parties. Unlike court proceedings, arbitration is flexible. There are two approaches:

a) Pleadings approach, where one party makes the claim and the other party makes counter claims. The evidence comes later.

b) Memorial approach where the claimant submits the entire case, with all the evidence that is relied upon. There are many advantages of arbitration:

1. Timelines: It is faster. Once the hearings are completed, the tribunal has to come out with an award within 3 months. Typically, within 6 to 12 months of initiation of proceedings, an award is given.
2. Costs: There is greater recoverability of costs. The winning party is able to recover almost the entire cost incurred whereas in court proceedings, the recoverability of costs may vary from 10 to 30% only.
3. Convenience/Cooperation: As arbitration is not held in front of a judge in a courtroom, the process can be simpler and more convenient for the parties involved.
4. Unlike court judgements which only apply in the host country, the arbitration award is enforceable internationally as most countries are signatories to the New York convention for arbitration.

You can choose a lawyer who is an expert in a particular industry. Arbitration is the optimal approach in handling cross-border disputes, because of its superiority over traditional legal proceedings. There are sector specific arbitration clauses too. For example, The Singapore Chamber of Maritime Arbitration (SCMA) has established rules for arbitration in maritime disputes. It is suggested that arbitration clauses must be incorporated in contracts as opposed to litigation clauses.

Mr. Avinash Pradhan
Deputy Head, International Arbitration

With significant sums of money involved, multiple stakeholders and close government scrutiny, the Construction & Projects sector, gives rise to large disputes. Most of them arising from international projects are resolved by arbitration. Major arbitral institutions like the SIAC (Singapore International Arbitration Centre), ICC (International Chamber of Commerce) and HKIAC (Hong Kong International Arbitration Centre) among others are well placed to deal with complex international disputes arising out of this sector. Lawyers accredited under the SAL (Singapore Academy of Law) Scheme for building and construction law demonstrate their market leadership and expertise in that field.

Key Concepts in Arbitration
The aim of arbitration is to prevent the parties from going to the court. But arbitration cannot exist independent of the judicial system.

The Law of the Seat of Arbitration is fundamentally important as it acts as a bridge between the arbitration agreement and the legal systems worldwide. It ensures that whatever the parties have agreed upon in arbitration carries legal weight. The seat primarily determines the procedural law governing the arbitration and designates courts with supervisory jurisdiction. For instance, if the parties cannot agree on an arbitrator, the supervisory courts will appoint one. These courts also handle interim measures and challenges to awards.

Another crucial role of the seat’s law is determining the nationality of the award for enforcement purposes. This is pivotal for availing benefits under the New York Convention, which requires the arbitration award to have a legal seat in a convention country. The seat does not refer to the physical location of arbitration hearings. For instance, arbitration could be seated in Singapore even if all hearings take place in India. The governing law of the arbitration clause itself is not automatically determined by the legal seat; it could be governed by a different law specified in the contract.

When choosing a seat for arbitration, several key considerations should be taken into account:

1. Arbitration Friendliness: It’s crucial to select a jurisdiction that is supportive of arbitration and does not unduly interfere in the process. This includes having well-established arbitration laws and a judiciary that respects and enforces arbitral awards.
2. Neutrality: The seat should be perceived as neutral by both parties involved in the arbitration. This neutrality ensures that neither party has an undue advantage due to local biases or influences.

Geographic Convenience: While less critical than arbitration friendliness and neutrality, geographic convenience can still be a factor. This includes factors such as ease of travel for the parties and their representatives, as well as the availability of amenities and infrastructure for conducting arbitration proceedings.

Commonly chosen seats for international arbitration include London, Singapore, Paris, Stockholm, New York, Hong Kong, and several others.  

Stay of Proceedings: When a party to an arbitration agreement initiates court proceedings, the effect of the arbitration agreement mandates that the court must stay these proceedings. This ensures that the court does not proceed further, allowing the dispute to be resolved through arbitration. This safeguard is essential for upholding the integrity of the arbitration agreement.

In Singapore, two distinct statutes govern arbitration. The Arbitration Act applies to arbitrations agreed upon by domestic parties. Conversely, for international arbitration, the International Arbitration Act provides a separate regulatory framework. According to this act, if a party initiates court proceedings in violation of an arbitration clause, these proceedings must be automatically stayed, unless there are issues with the arbitration clause itself or if one party has waived its rights under the arbitration clause.

Ad Hoc vs. Institutional Arbitration
Ad hoc arbitration is conducted without the supervision of an arbitral institution. The parties agree to arbitrate and typically appoint an appointing authority. This is governed by the UNCITRAL Arbitration rules. In contrast, institutional arbitration involves arbitration managed by an arbitral institution such as ICC, SIAC, or HKIAC. One significant advantage of institutional arbitration is that the institution assists in resolving disputes that may arise between the parties. For instance, if the parties fail to agree on an arbitrator, the institution steps in to appoint one. This ensures the arbitration proceeds smoothly. Another advantage of institutional arbitration is the specialisation of arbitrators. Institutions often maintain panels of arbitrators with expertise in various fields, which can be crucial in complex disputes. Institutional arbitrations also offer benefits in terms of cost management. For example, institutions like SIAC provide fee scales that outline average costs for arbitrations of specific values, along with maximum arbitrator fees. SIAC even offers a fee calculator on its website to estimate arbitration costs accurately.

While ad hoc arbitration offers flexibility in procedure and choice of arbitrators, institutional arbitration provides structured support, specialized expertise, and cost predictability, making it advantageous for parties involved in international disputes.

Finality of Award: Parties typically agree that the arbitration award will be final and binding. However, the losing party retains certain rights. Unlike appealing a court judgment, challenging an arbitration award is limited. It is not possible to argue that the arbitrator erred in law or made a factual mistake. Challenges to an award are restricted to specific grounds outlined in the UNCITRAL Model Law and the New York Convention. These grounds include:

• Invalidity of the arbitration agreement.
• Lack of due process and procedural fairness.
• Arbitral tribunal exceeding its authority in issuing the award.
• Improper constitution of the arbitral tribunal as per the arbitration agreement.
• Disputes that cannot be arbitrated (e.g., criminal allegations).
• Violation of the public policy of the seat state.

Key Features of SIAC Rules

• Early Dismissal: A party can apply for early dismissal if the claim is ‘manifestly without legal merit’ or clearly falls outside the tribunal’s jurisdiction.
• Consolidation of Arbitrations: SIAC allows for the consolidation of multiple arbitrations if the disputes and arbitration agreements are compatible. This includes disputes arising from multiple contracts being resolved in a single arbitration proceeding.
• Emergency Arbitrator: The SIAC Registrar can appoint an Emergency Arbitrator within one day of receiving an application for emergency interim relief, providing swift resolution in urgent cases.

Expedited Procedure: SIAC provides for Expedited Procedure in certain cases, ensuring efficient and expedited resolution of disputes.

Drafting

When drafting an arbitration clause, the essential elements include:

• Submission to Arbitration: Agreement to arbitrate in writing.
• Seat of Arbitration: Specifies the legal jurisdiction where the arbitration will be conducted.

Additionally, it is advisable to include:

• Specification of Procedural Rules: Whether institutional (like SIAC) or ad hoc.
• Arbitrators: Number of arbitrators, method of appointment, and qualifications.
• Language of the Arbitration: Language in which proceedings will be conducted.

Any Other Points to Consider: Specific procedural aspects, interim measures, governing law of the contract, etc.

Panel Discussion
The panellists included:
Jainil Bhandari, Partner, Rajah & Tann Singapore
Avinash Pradhan, Deputy Head, International Arbitration
Ganesh Chandru, Partner, Dua Associates, India
Srikanth B Navale, Independent Arbitrator, Singapore & India
V Bala, Deputy Head, Shipping & International Trade, Partner, Rajah & Tann Singapore LLP

Avinash Pradhan: Ganesh, we’ve discussed how arbitration is expected to be faster than court proceedings. Based on your extensive experience in international arbitration, arbitration in India, and court proceedings in India, could you give us an idea of how long international arbitrations typically take? Are they genuinely faster than court proceedings?

Ganesh Chandru: In arbitration, the emphasis is on negotiation and settlement, similar to mediation or conciliation. While the Arbitration Act includes provisions for conciliation, there is also a separate Mediation Act. These terms have become almost interchangeable. Unlike a mediator, who doesn’t issue a binding decision, arbitration is comparable to a civil suit conducted in a private setting, with enforceable outcomes.

Traditionally, arbitration was considered a cost-effective alternative to litigation. However, there are now concerns that it has become as expensive or even more costly than court proceedings. Fortunately, the Arbitration and Conciliation Act in India was amended to include section 29A, which mandates that arbitral awards in domestic arbitrations must be issued within 12 months after the close of pleadings. Pleadings themselves must be completed within six months under the Arbitration Act. Parties can mutually agree to extend this deadline by an additional six months. Any further extensions require court approval.

As a result of these provisions, domestic arbitrations in India are now concluding within approximately a year to a year and a half. It’s important to note that international arbitrations seated in India are exempt from the requirements of section 29A. On average, international arbitrations in India typically take about two years to conclude, unless the case is particularly complex.

Avinash Pradhan: How frequently do arbitration awards get contested in practice?

Jainil Bhandari: In Singapore-seated arbitrations, challenges are quite rare. There are very limited avenues to contest awards, as appeals cannot be made on the merits of the award itself. The Singapore courts strongly support arbitration. Essentially, the courts maintain that parties must abide by the tribunal’s decision once they have agreed to arbitration. Even if the decision seems incorrect, interference by the courts will only occur if a compelling case for a legitimate challenge is presented.

Avinash Pradhan: Can you elaborate on the challenges and strategies for enforcing foreign arbitration awards in India?

Srikanth B Navale: India follows standards similar to the UN Convention on the grounds for challenging arbitration awards, which are very limited. However, there’s an important distinction regarding the enforcement of awards based on public policy. Unlike jurisdictions like Singapore, Indian courts tend to interpret public policy grounds slightly more broadly. Over time, court rulings have helped standardize this interpretation.

It’s crucial to note the distinction between international and domestic arbitrations seated in India. In international arbitrations seated in India, challenges based on patent illegality on the face of the award are not permissible. However, for purely domestic arbitrations seated in India, such challenges are recognised. Indian courts allow foreign arbitration awards to be enforced as if they were orders of the Indian court, subject to specific procedural requirements.

Avinash Pradhan: Bala, one of the benefits of arbitration is confidentiality. What should parties bear in mind in considering confidentiality as a facet of international arbitration?

Bala: In many jurisdictions, confidentiality is typically addressed within the Arbitration Act of the country. Surprisingly, in Singapore, confidentiality is not expressly provided for in the Arbitration Act but is implied under common law. This means that confidentiality of arbitration proceedings, including the documents used in arbitration, is presumed.

Avinash Pradhan: Bala discussed Singapore. Ganesh, can you elaborate on the Indian experience?

Ganesh Chandru: In India, the Arbitration Act of 2019 introduced a new provision, section 42A, which mandates confidentiality in arbitral proceedings. It requires arbitrators, arbitral institutions, and parties to maintain confidentiality, except when enforcing or implementing the award. However, despite this legal provision, there are challenges. In practice, maintaining confidentiality in arbitral proceedings in India remains a challenge and can be seen as more of a myth than a reality.