Commercial dispute mechanism for foreign investment in India

The dispute redressal framework in India is a well-established system with multiple options for the resolution of disputes. The available options for a litigant include arbitration, mediation, litigation in civil or commercial courts, and specialised forums like the National Company Law Tribunal (NCLT), the National Company Law Appellate Tribunal (NCLAT), the Intellectual Property Appellate Board, etc. Parties can choose the mechanism that best suits their needs, depending on the nature and complexity of the dispute.

Disputes involving foreign entities or investors in India are primarily commercial in nature and often arise out of commercial transactions such as investment agreements, share subscription agreements, business transfer agreements, etc. Once a dispute arises in such commercial transactions, investors often seek a speedy resolution, as the outcome affects their business interests. Arbitrations or proceedings before commercial courts are usually a preferred option as they are generally quicker with specified timelines and more flexible than traditional litigation.

In recent years, India has made conscious efforts to improve investor confidence and attract foreign investment. A key aspect of this effort has been to provide for a robust and speedy dispute redressal mechanism. Acknowledging the challenges faced by foreign investors, relevant improvements have been made by the Indian legislature and judiciary, especially in matters pertaining to commercial transactions and corporate bodies.

This article aims to highlight the significant components and legislation that have been put in place to ensure a faster and more effective dispute redressal mechanism.

Statutes such as the Arbitration and Conciliation Act, 1996, and the Commercial Courts Act, 2015, aim to deliver justice in a more effective and timely manner.

ARBITRATION ACT

Arbitration is the preferred mechanism for resolving commercial disputes. Parties mostly insist on having an arbitration clause in all their commercial contracts, with institutional arbitration being the preferred choice. In India, arbitration is governed by the Arbitration and Conciliation Act, which provides a comprehensive framework for arbitration proceedings. The Arbitration Act sets out the framework for domestic arbitrations and enforcement of foreign-seated arbitral awards in India.

Under the Arbitration Act, parties to an arbitration agreement have significant autonomy in determining the scope and procedure of the arbitration proceedings. Firstly, parties are free to determine the number of arbitrators and their qualifications, as well as the seat and language of the arbitration. Secondly, parties are free to determine the substantive law that will govern the dispute, subject to certain mandatory provisions of Indian law. Thirdly, parties can determine the procedure to be followed in conducting the arbitration, including the appointment of arbitrators, the place, and the mode of hearing.

The Arbitration Act essentially recognises and upholds party autonomy, allowing the parties to tailor the arbitration proceedings to suit their specific needs and preferences.

An arbitration agreement is required to be in writing and must clearly state the intention of the parties to submit their disputes to arbitration. If an agreement contains an arbitration clause, such an arbitration clause is severable from the rest of the agreement. This is important to ensure that the intention of the party to resolve the dispute by arbitration remains intact and survives termination of the main agreement.

Recently, the Supreme Court of India, in NN Global Mercantile v Indo Unique Flame, has held that “an instrument that is exigible to stamp duty may contain an arbitration clause and, which is not stamped, cannot be said to be a contract which is enforceable in law”. Therefore, for an arbitration agreement to be enforceable in law, it must be adequately stamped.

For domestic arbitration, the Arbitration Act specifies that the award shall be made by the arbitral tribunal within 12 months (subject to certain extensions) from the completion of pleadings.

Foreign awards passed, for example, in New York Convention countries, are capable of enforcement under Indian law. Once an award is passed, a certified copy of the award along with a copy of the arbitration agreement is required to be filed in a court in India. The enforcement of a foreign award can be refused on very limited grounds provided under section 48 of the Arbitration Act, such as:

• Incapacity of parties. If the parties to the agreement, under the law applicable to them, were under some incapacity;
• Invalid agreement. If the agreement is not valid under the law to which the parties have subjected it, or under the law of the country where the award was made;
• No notice. If the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator, or of the arbitral proceedings, or was otherwise unable to present his/her case;
• Beyond the scope of the agreement. If the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration;
• Composition of tribunal. If the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, was not in accordance with the law of the country where the arbitration took place;
• Award not binding. If the award has not yet become binding on the parties or has been set aside or suspended by an authority in the country in which the award was made; and
• Other grounds. If the subject matter of the dispute was not capable of settlement by arbitration under the law of India, or if the enforcement of the award would be contrary to the public policy of India.

The test pertaining to the contravention of public policy is understood in a narrow sense, and does not entail a review of the merits of the dispute. To illustrate, Indian courts have consistently held that an award in conflict with or being non-compliant with Indian exchange control regulations would not make it unenforceable.

COMMERCIAL COURTS ACT

The Commercial Courts Act was passed with the objective of providing a mechanism for the speedy resolution of commercial disputes. The statement of objects and reasons for the Commercial Courts Act clearly reflects the government’s intent to create a positive image of the Indian legal system as being independent and responsive to investors. All stakeholders recognise that the early resolution of commercial disputes is crucial for fostering a favourable investment climate in the country.

The specially designated courts under the Commercial Courts Act have jurisdiction over all commercial disputes in a state, including interim or enforcement proceedings arising out of an arbitration agreement. These courts deal with disputes characterised as commercial disputes, which have been broadly defined to include disputes related to various commercial transactions such as contracts, shareholder and joint venture agreements, IP rights, infrastructure contracts, natural resources, etc. Commercial courts are authorised to adjudicate disputes worth at least INR300,000 (USD3,500).

The Commercial Courts Act has also introduced the concept of case management, where the court would mandatorily have to hold a meeting between the parties to decide on a timeline for the most important stages in a proceeding. Such stages include recording of evidence, filing of written arguments, commencement, and conclusion of oral arguments.

Courts are further authorised to pass a wide variety of orders at such case management hearings to ensure the smooth and effective disposal of disputes. The case management system has been introduced to ensure faster disposal of commercial disputes.

To enable a more effective dispute resolution mechanism for commercial matters, the Indian government has incorporated section 12A through an amendment to the Commercial Courts Act. Section 12A provides for a mandatory pre-litigation mediation for suits that do not contemplate any urgent relief. Parties are required to explore the possibility of a settlement through mediation before initiating legal proceedings. The object sought to be achieved by this amendment is to promote a more pragmatic and efficient means of dispute resolution while also reducing the burden on the court system.

CONCLUSION

India has witnessed a visible shift in the approach of its legislature and judiciary to make dispute resolution mechanisms more effective. As the country further opens its economy to more foreign investment, incremental changes in dispute resolution processes will be reflected within the system, offering greater ease of doing business.

Global investors are increasingly choosing India as a favourable destination, and it is imperative that India further strives to further build its judicial infrastructure to enhance its efficiency in dispute resolution.

Foreign investors looking to invest in India or deal with Indian businesses would benefit by keeping a tab on developments regarding the use of arbitrations and commercial courts in India, as these developments are expected to significantly impact legal strategy and costs of dispute resolution.

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