Navigating commercial disputes in India

No one likes the idea of having to dispute outside one’s known territories. However, when a corporation takes on a global footprint, it needs to anticipate being dragged into litigation in unfamiliar waters. In this briefing, the authors present a snapshot of navigating disputes in India.

JUDICIAL SYSTEM

India is a vast country and diverse in every imaginable way. Politically, India has a quasi-federal structure. The judiciary, however, is unified. Broadly, it has a three-tier structure. Each administrative district (there are more than 600 districts in India) is headed by a district court and each state by a high court. There are 26 high courts in all (some states, like Punjab and Haryana, share a high court). At the apex is the Supreme Court of India, situated in New Delhi.

The high courts have very diverse characteristics. For instance, the high court for the small hill state of Sikkim has a strength of only two judges, whereas the high court for the state of Uttar Pradesh has more than 100 judges. The language of all high courts and the Supreme Court is English. Some high courts, however, like Rajasthan, Madhya Pradesh and Bihar, allow parallel use of Hindi as its official language.

Besides the regular courts, there are a large number of quasi-judicial or judicial tribunals. Some of the significant ones are the National Company Law Tribunal; Competition Commission; Consumer Protection Courts; and the Debt Recovery Tribunals for claims by any bank or financial institution against debtors.

BAR AND COMMERCIAL LAWS

India has an all-India bar, which means that an advocate enrolled with any state bar council can represent anywhere in the length and breadth of the country, including the Supreme Court of India.

All significant commercial laws are derived from English Common law and have an all-India application. These include the Contract Act, Sale of Goods Act and Arbitration Act, as well as the Code of Civil Procedure and Code of Criminal Procedure. English Common law is routinely referred to and relied on in Indian courts.

JUDICIARY AND JUDICIAL DELAYS

India’s judiciary is robust, independent and enjoys extensive powers. It is also totally unbiased vis-à-vis foreign companies. However, there is a huge problem of judicial delays and a near absence of case management. Coupled with this, Indian courts do not grant any realistic costs. Court proceedings can thus be frustratingly prolonged and expensive. Therefore, it is of utmost importance to have an arbitration agreement in all commercial contracts.

WRIT JURISDICTION

While normal court proceedings take an inordinate time, a writ petition is an effective and expedient remedy. By invoking the writ jurisdiction, a company can seek relief, including interim relief, against any arbitrary, discriminatory or grossly unreasonable action by the state.

For the purposes of a writ jurisdiction, “state” includes the government, its instrumentalities and agencies, such as public sector units (PSUs) or statutory entities, and any organisation controlled directly or indirectly by the state. A writ petition lies to the concerned high court, and in some exceptional cases directly to the Supreme Court.

A writ petition remedy is expeditious as the courts are not bound by the normal rules of procedure or evidence. In exercise of its writ jurisdiction, the courts can strike down any state action or issue a mandate to the state authority. The court’s power extends even to striking down (or reading down) legislation.

However, a writ remedy is not available for breach of contract or damages or enforcement of a contract. For commercial disputes, arbitration is the best judicial remedy in India.

NAVIGATING ARBITRATION

Arbitrations are a straightforward method of dispute resolution, especially for cross-border disputes. At the same time, they require expertise for efficient handling. A faulty approach or an inadequate or defective arbitration clause can render the entire arbitration unproductive and ineffective.

INDIAN ARBITRATION ACT

The Indian Arbitration Act is based on the 1985 Model Law and the UN Commission on International Trade Law (UNCITRAL) Rules of 1976. It is thus in sync with international arbitration jurisprudence. Being fully aware of normal court delays, the Arbitration Act keeps court intervention to the bare minimum. Essentially, an approach to a court is permitted for granting of interim or injunctive relief, the appointment of an arbitrator (if the parties’ stipulated mechanism fails), and assistance in taking evidence if requested by the arbitral tribunal.

The act has two main parts: Part I applies if an arbitration takes place in India, irrespective of parties’ nationality; and Part II provides for enforcement of foreign awards.

Certain provisions of part I can be resorted to even for a foreign-seated arbitration. These include section 9 (recourse to a court for injunctive or interim relief) and section 27 (court assistance in taking evidence at the request of the tribunal).

The Arbitration Act (part III) also provides for conciliation. The advantage of having conciliation under part III is that the settlement agreement, if arrived at, has the same effect as an arbitral award and is therefore enforceable as a decree of the court.

INTERNATIONAL ARBITRATION

The act confers certain advantages on an arbitration, which qualifies as an international commercial arbitration. The chief benefit is that the grounds of challenge to an award in an international commercial arbitration are narrower compared to those prescribed for a domestic arbitration. A domestic award is capable of being challenged on the “patent illegality” ground, although not on the merits of the dispute. This ground is not available in relation to an international commercial arbitration.

However, an arbitration is not considered to be an international commercial arbitration merely because a party may be owned and controlled from outside India. If the entity is incorporated in India, it is deemed to be an Indian company, and its arbitration will not be considered to be an international commercial arbitration. At the same time, even if one party is incorporated in a foreign country, or the concerned individual is a foreign citizen or normally resides outside India, the arbitration qualifies as an international commercial arbitration.

ARBITRATION AGREEMENT

Proper drafting of an arbitration agreement is of utmost importance as it contains the seed of how the arbitration will be conducted. There are two specific aspects to be taken care of.

Seat of arbitration. Every arbitration must have a designated seat, which is agreed to in the agreement between the parties, or failing that, determined by the tribunal. The seat designation is critical, as in turn it determines the court that would have jurisdiction in relation to the arbitration.

It is therefore important to not merely specify the country, (as that can be vague). The city where the arbitration will be seated must be specified in the arbitration agreement. Any court proceeding in relation to the arbitration can only be taken at its designated seat. For instance, if an arbitration is agreed to be seated in Delhi, the High Court of Delhi would have jurisdiction in relation to all matters where court intervention is permitted, and any challenge to the award will lie before Delhi High Court, to the exclusion of all other courts of India.

Sometimes, parties unwittingly agree to a seat, which is distinctly disadvantaged. For instance, parties may designate a commercially unsophisticated seat, or a jurisdiction where the relevant court is the district court, and not the high court, or where the official language is not English, or where the arbitrators or lawyers would need to travel to.

All of these factors can conspire together if sufficient attention is not directed to specifying an appropriate seat in the arbitration clause. So it is especially important in a diverse jurisdiction like India to select the seat carefully. The seat need not have any connection with the location of the parties or where the cause of action may arise.

Overall, one can say that Delhi and Mumbai have a distinctive edge over others when it comes to the seat selection.

Ad-hoc arbitration. Contracts in India tend to provide for ad-hoc arbitrations, namely without the involvement of any arbitral institute. But this is not desirable as institutional oversight lends efficiency and transparency to arbitrations, especially in relation to appointing arbitrators, determining their fees, and handling challenges (if any) to an arbitrator.

A reputable internationally recognised institute should be insisted on in the contract. There is a precedent in Indian PSUs accepting arbitration under the International Chamber of Commerce (ICC) Arbitration Rules.

CONCLUSION

India has several factors lending comfort to a foreign litigant. It has an English-speaking bar and sophisticated legal talent. Its commercial laws are based on the English law. The traditions of the Indian bar are derived from the British judicial system and are familiar to the international legal fraternity. The courts are independent and robust, and do not allow the state to cross the limits of fair and reasonable conduct.

At the same time, there is a problem of judicial delays that impacts civil suits the most. This can be addressed to a large extent by recourse to writ remedies (where applicable), or an effective arbitration agreement stipulating arbitration under the auspices of a sophisticated arbitral institute.