Is India Truly Arbitration-Friendly? A Legal and Practical Appraisal Post-2021

In the last two decades, India has undergone a transformation process to become arbitration arbitration-friendly country. Based on the Arbitration and Conciliation Act of 1996, and following the UNCITRAL Model Law, the legislative framework initially was to reduce judicial intervention, maintain the freedom of the parties, and have an efficient approach to the settlement of disputes. The 2015 and 2019 amendments further strengthened these ideals as they attempted to align Indian arbitration law with global best practices. However, efforts notwithstanding, India has not been able to move beyond the shortcomings that undermine the increase in the arbitration-friendliness of the country, especially against the backdrop of the unpopular 2021 amendments and a prevailing ambiguity of the public policy exception.

The development of the exception of public policy by the judiciary has been the key in the direction accorded to arbitration in India. The narrow construction of the element of public policy, which was used in the case Renusagar Power Co. v. General Electric Co., adopted by the Supreme Court, reduced the position to only items that touched on fundamental policy of the Indian legislation, the interest of India, or grounds of justice and morality. This practice met the international norms very much and gave confidence to foreign investors that India will be ritual to arbitration. This was, however, not clear when the ONGC Ltd. v. Saw Pipes Ltd. case broke in, where the Court added to a ground under public policy, the concept of patent illegality, effectively widening the scope of judicial review under Section 34 to a large extent. Such judicial usurpation made the arbitral review quasi-appeal in nature, which does not serve the determined termination and productivity that arbitration is aimed at.

This damage to the level of broad interpretations led to the sad realization that there is a need to restrict grounds upon which an award can be impounded on grounds of public policy, and this led to an amendment of the Arbitration and Conciliation Act in 2015. The modified provisions stated that only those cases of fraud or corruption, a violation of a basic policy, or a violation of some fundamentals of morality and justice would be acceptable. Moreover, the scope of public policy included no legal mistakes other than patent illegality. These explanations have been reconfirmed in Ssangyong Engineering & Construction Co. Ltd. v. NHAI, where the Supreme Court reemphasized a limited & internationally-compatible interpretation of the understanding of the concept of public policy and asserted judicial restraint in the decision of awards being set aside.

Regardless of these changes, the latest amendments of the Act introduced in 2021 have caused another commotion. Section 36 has been modified in order to allow an automatic stay when it is decided by the court it exist a prima facie that the arbitration agreement was induced or otherwise influenced by fraud or corruption or the decision and award was made as a result of fraud or corruption. This, despite being well intended, allows tactical litigation and forum shopping to walk through the door once again. It introduces the danger of abuse that the previous reforms were aimed at suppressing, since the burden of satisfaction with the criteria satisfaction of a prima facie nature is low and subjective, and accordingly enables parties to avoid enforcement by presenting unfounded claims.

Discordant judicial interpretation of the exception of public policy remains a nagging problem. The Supreme Court has laboured in the past few years to take a more restrained and disciplined approach to the law, but lower courts have tended to backslide towards more expansive interpretations more akin to Saw Pipes. The concepts of morality and justice as well as the basic policy of Indian law are not defined by the statute so, in each case, there exists a judicial discretion which is highly different in different jurisdictions. This lack of uniformity creates unpredictability, discourages foreign investors, and undermines the effectiveness of arbitration as a mode of dispute resolution.

A comparative point of view however demonstrates that more receptive jurisdictions to arbitrations like the United Kingdom, Singapore, Switzerland amongst others have established a much more restrained outlook on the issue of public policy. UK courts are not quick to question the decisions made by arbitral tribunals and will only do so when such enforcement amount to trampling over the fundamental principles of justice. The Singaporean courts have not been an exception as they have always believed that the cases that pose a public policy challenge are only to be left in cases of serious gross abuse appalling to the court. In the UNCITRAL Model Law on which arbitration law in more than 100 jurisdictions is based, the public policy exception is understood in a limited way. These jurisdictions have shown that there are ways to protect national interest without violating the arbitral autonomy and finality.

Such ambiguity still exists in India however, and the relapse of such a provision as the automatic stay puts at risk the reputation of India as a viable place of arbitration. The effect is especially severe in international commercial arbitration where predictability and enforcement is of the essence. Foreign parties are also usually reluctant to use India as a place of arbitration, not over the absence of the legal framework, but fear the lack of consistency and unreasonable meddling by the court.

There are a number of reforms that must be made in order to regain the lost confidence in the arbitration regime in India. To begin with, there is a burning need that an exhaustive statutory definition of the term public policy is made as fully as possible and be applied only under exceptionally circumstances like fraud, corruption and breach of constitutional ideals. Second, High Courts and the Supreme Court should have specialized arbitration benches that guarantee uniformity and well informed decision making on matters associated with arbitration. The international arbitration should be trained and practiced by the judges within such benches so as to make the Indian jurisprudence similar to the international standards. Third, institutional arbitration should be encouraged by resorting to further utilization of centers like the Mumbai Centre for International Arbitration (MCIA) and India International Arbitration centre (IIAC). Institutional arbitration should be imposed by government contracts in an effort to promote regularity and procedure rigor. Lastly, arbitrators have to be trained to provide reasonable and full-fledged awards regarding arbitration so as to reduce room to challenge.

Public policy exception should only be considered as a safety valve and not a means of re litigation or re examination of the strength of an arbitral award. The interference by the judicial should be done carefully and in a manner that concurs with the opinion of the legislature to create finality and precision. The wish of India to develop into a major arbitration jurisdiction is not to be fulfilled until the uniform application of the law, restricting intervention by the courts and a narrow and consistent interpretation of the public policy are achieved.

To sum up, India is currently at the junction in the arbitration process. The building blocks of a healthy arbitration ecosystem are in place already: favourable laws, vibrant reform initiatives, and a maturing scheme of institutionalization. But, as long as the judicial interpretation and procedural uniformity do not respond to the global best practices, then a country runs the risk of losing competitive advantage in the international arbitration scene. Arbitration flourishes based on certainty, neutrality, and finality. It should be these values that should inform the future of arbitration in India in order to make it be in a real sense arbitration-friendly.