By: Abhishrut Singh
In this globalised era where every company or MNC is competing to be on the forefront, disputes in their business are unavoidable. With the increase in such cross-border disputes, all eyes are on international arbitration and its future, as parties are opting for arbitration due to its neutrality, confidentiality, and party autonomy. Earlier, international arbitration was primarily rooted in European and North American countries, but recent years have witnessed its rise in Asian-Pacific countries as well.
Though Europe and North America still enjoy being the pivot of arbitration, but they are facing competition from Asian-Pacific venues like Singapore and Hong-Kong whose judicial and legislative systems are quite robust and have centres (for example, the Singapore International Commercial Court) that have established their renown. But the fact remains that scepticism is voiced when it comes to arbitration in the Asia-Pacific region due to costs, anticipated delays, unavailability of skilled arbitrators, and uncertainty over the ethical conduct of arbitrators, etc. For instance, let’s take up India itself, in certain regions of India it is anticipated that legislators would be highly influenced by domestic legislative rules and procedures. Despite these setbacks, many regions in Asia-Pacific are emerging as sites of arbitration due to growing standardisation of international arbitration practices with which a modern and pro-arbitration approach from the judiciary is being expected. Arbitration in countries like Indonesia, Myanmar, South Korea, Australia and Japan is anticipated to rise significantly. The international reputation of Singapore and Hong Kong is growing as the preferred seats of arbitration, and of other venues also like Seoul, Kuala Lumpur, mainland China, Sydney and India.
This paper seeks to address the key issues and challenges that the practitioners of arbitration have observed. It deals with a number of key observations in detail, which include discussing ‘how arbitration as a dispute resolution mechanism is on the rise worldwide’, ‘the factors which contribute to growth of arbitration and the factors which are hurdles’, ‘emerging seats in the potential regions of arbitration’, and ‘developments in international arbitration like issue conflict, emergence of new institutions’ etc. The paper attempts to consider all these points and scrutinise how arbitration is expanding its focus from the west to the east.
INTERNATIONAL ARBITRATION: A CONTEMPORARY OVERVIEW
The current increasing global economy demands the need for higher participation and investment in foreign markets. Though this is incumbent with globalisation, it has resulted in companies getting engaged in a lot of disputes in international investment. The need for arbitration stems from the fact that while carrying out investments in foreign markets, companies often find it difficult to cater to resolution processes which are different from those in their domestic country. International arbitration resolves cross-border commercial and investment disputes and does not involve litigation procedures of domestic courts. These disputes are complex in nature and may amount to hundreds of millions.
Global economic crises have resulted in a sharp rise in international arbitration cases in the past two decades as supported by statistics from the Paris-based International Chamber of Commerce (ICC), the Swiss Chambers’ Court of Arbitration and Mediation (SCCAM), the London Court of International Arbitration (LCIA), etc., to name a few. According to the latest statistics by the ICC, a total of 966 new cases were filed in 2016 – involving 3,099 parties from 137 countries. Developing countries in Asia and the Middle East are fast emerging as the centres of arbitration. Thus, major law firms from around the world are relocating their arbitration specialists to these emerging hotspots of foreign marketing. The ICC stats also reveal that the parties from South and East Asia increased by 22% in 2016.
National laws hold no relevance to international arbitration measures as the parties involved are from completely varying jurisdictions. The parties thus agree to convene in a neutral venue, and they can choose the laws under which their cases will be heard. No judges, juries, courtrooms are involved. Rather, the parties get to choose their arbitrators, who in turn choose a chairman, and thus the arbitration tribunal is formed, of three arbitrators. This is done for larger disputes whilein smaller ones, the panel can have only one arbitrator. The arbitrators are usually selected according to their expertise in a specific area of law or industry. The procedures and processes of the arbitration are flexible and confidential, that is, they are not very widely known. The cases are cheaper, and take lesser time to be resolved than those in courts of the litigation system. The decisions of the arbitration tribunal are binding, and as they are international, are easier to enforce.
International arbitrations mainly are of two types: commercial and investment treaty arbitrations. Commercial arbitration includes parties which have a dispute due to a pre-existing agreement. Mostly, the private companies and sometimes the State-owned enterprises are subject to commercial arbitrations. Investment treaty arbitration, which is heterogeneous in nature, is the result of disputes in various existing investment treaties. These treaties are generally signed by countries and are usually well known internationally. For instance, under the Energy Charter Treaty (ECT), Russia has faced the claims of tens of billions of dollars. Another example of such a treaty is the North American Free Trade Association (NAFTA) treaty.
The investment treaty arbitrations that countries face are majorly due to Bilateral Investment Treaties (BITs). Under BITs, pairs of countries are under reciprocal obligations towards investors from each of their respective jurisdictions. BITs are involved in heavy amounts of the sizes of the awards, and thus, with the flourishing globalised market, they are generating increasing numbers of claims. The International Centre for Settlement of Investment Disputes (ICSID) is responsible for hearing such claims, and their statistics have revealed that such cases are significantly on the rise.
The governing law and the seat of arbitration (that is, the venue) majorly determine whether the arbitration would be successful. Other than the major players two countries which are emerging as the venues for carrying out arbitration are India and South Korea. The Arbitration and Conciliation Act 1996 governs the arbitrations in the former, while in the latter, arbitrations are conducted under the Arbitrations Act (amended in 1999). These two countries are witnessing an increase in arbitration proceedings as they are signatories to the New York Convention, and the local laws and local courts are supportive of the international proceedings. In India, the Mumbai Centre for International Arbitration (MCIA) was set up in 2016 to provide a platform to resolve commercial disputes. Before this centre was established, 30% of such Indian cases were handled by the London and Singapore arbitration centres.
Last but not the least the venue selection is one of the most significant aspects of international arbitration. The venues are decided upon by the mutual agreement of the parties involved, and they should be neutral, easily accessible, and well resourced. It is essential for the parties involved to review the local laws and the jurisdictions of the local courts before choosing the venue, as it is the place of arbitration and may have repercussions if not chosen wisely. Though most of the arbitrations take place at International Chamber of Commerce (ICC) in Paris, other preferable locations include London, New York, Geneva, Washington, Vienna, and Stockholm. These locations are preferred as their legal systems are fully developed, and not susceptible to be influenced by political or any other influences. For instance, in a recent arbitration which involved an Indian sales and marketing company and a Japanese supplier, the contract between the parties by the LCIA involved a dispute arbitration clause which has its seat of arbitration in London.
FACTORS CONTRIBUTING TO MOBILE SHIFT
There are certain factors, both complimentary and depreciating, which need to be taken into consideration to analyse the rise of international arbitration in the eastern countries. In the Asia-Pacific, government support and legislative reforms are crucial to the growth of arbitration, especially in South Korea, Malaysia, Hong-Kong and Singapore. These countries can derive examples from the changes in the legislation of some European countries like Belgium, Italy, Finland, etc. which have shown to increase the instances of arbitration. Party autonomy and enforcement regime are of significance, as they allow the parties to involve democracy, procedural flexibility and transparency. In Africa and Asia-Pacific, there have been concerns over the time and cost inefficiencies associated with national courts. Political turmoil hinder the smooth functioning of courts and thus these key points are important to be considered when deciding the venue for arbitration, especially in the Asian-Pacific countries. Sector expertise, neutrality and lack of cross-border disputes drive parties towards arbitration. For instance, Singapore, Hong Kong and South Korea are emerging as the preferred seats of arbitration due to these factors. In transactions (especially those which do not use English as the foreign language), parties may not be familiar with the language and culture of their counterparties, and this is where neutrality is a major factor which is leading to increase in arbitration in Japan and South Korea. Another important factor is confidentiality, which is significant for industrial sectors like pharmaceuticals.
In order for better arbitration practises, the domestic laws need to be brought to the international standards. The New York Convention, adopted in 1958 and now recognized by 149 States and non-state territories is the standard for these arbitral proceedings and has been hailed as “the most successful multilateral instrument in the field of international trade law.” Given the fact that the legal system everywhere is diverse, it is important that awards can be enforced under the New York Convention (the Convention on the Recognition and Enforcement of Foreign Arbitral Awards).The member nations of the Convention agree on two principle promises: honouring the agreement in writing through which parties agree to settle the disputes privately, and recognising and enforcing arbitral awards within the scope of the Convention. These promises provide “additional measure of commercial security for parties entering into cross-border transactions.” Another standardisation has been provided by the UNCITRAL Model Law on International Commercial Arbitration of 1985 with Amendments as adopted in 2006 (Model Law). Though the Model Law is not in the form of a treaty, legislators take it into due consideration before settling any arbitral proceeding, and now sixty-eight States and non-state territories have adopted or adapted the Model Law. A contractual technique can also be used which means a standard dispute resolution clause is present in the contract which refers to the use of international standard rules for the settlement of the dispute. One such example of internationally recognized uniform rules is the UNCITRAL Arbitration Rules (as amended in 2010).
Apart from the numerous factors which support arbitration, there are also many which are considered as hurdles. It has been witnessed that in MENA, Africa, and countries like Malaysia in Asia, significant legislative reforms are needed as international arbitration is not as prevalent in these areas as in the Western and European countries. There is often lack of support and often they are exposed to hostility in these areas, as has been observed in courts in some regions of Asia. Most of the countries, when looking for the settlement of a political cross-border dispute, are reluctant to opt for arbitration when their political influence can more or less guarantee a settlement in their favour, which would not be possible if they opted for arbitration. For example, in a maritime dispute with Brunei, Malaysia opted for bilateral negotiations instead of arbitration because it had a weak legal claim, and little chance of getting a settlement in their favour with arbitration. The high-cutting cost of arbitration due to extensive disclosure and lengthy submissions deter its growth. Though some optimism has been expressed that this would be checked by cost guidelines and expedited timetables, it still remains a big deterrence in regions like Africa and Asia-Pacific. The limited pool of arbitrators, who are unbiased and proactive enough for hearings, is also an issue. In Europe, North America and Asia-Pacific, this has been of concern and has often led to delays in proceedings and thus the rendering of awards. Even when the New York Convention provides a broad range of geographical arbitration structure for the enforcement of awards, in several countries like Vietnam, Indonesia, Argentina, Mexico, etc. practitioners have raised concern over the difficulties in rendering of arbitration awards. In many countries, arbitration courts face competitions from national courts which have revised their legislation and established their pre-eminence in resolving cross-border disputes. Thus, arbitration courts need reforms, particularly in Asia-Pacific, in order to be at par with national courts. Transparency in arbitration proceedings has been looked at with questions marks as it has been said to rendering arbitration less confidential. Another factor which has been said to be endangering arbitration is Judicialisation. The term ‘Judicialisation’ refers to the metamorphosis of international arbitration to become very similar in methods to judicial litigation. As the arbitration process moves towards law firms, it becomes more sophisticated and regulated, deterring the actual users of the arbitration proceedings. There have been questions as to whether this Judicialisation actually exists or not, and if it does, there may be more positive impacts derivable from it. However, corporations identify it as an encroachment, which is steering arbitration away from its nature and purpose.
These are the major factors important to be taken into account by nations for an international consensus on arbitral proceedings is to be reached. Many Asian-Pacific nations lack one or the other. For instance, even when India is a signatory member nation of the New York convention, the arbitral proceedings adopted are not up to the mark of international proceedings.
THE ASIAN SCENARIO: EMERGENCE OF ASIAN ARBITRAL FORUMS
Over the years, Asia has witnessed a significant rise in international arbitration. There are several causes of this trend, the principal ones being the growing trade between Asian and non-Asian countries, and the lack of confidence in the judicial system in Asia. Asian countries have strengthened their arbitral infrastructure, and a majority of them have adopted the UNCITRAL Model Law. The Hong Kong International Arbitration Centre (HKIAC) has been cited as one of the best examples of a strengthened arbitration legislative framework in Asia.
A concern often raised by this flourishing of international arbitration in Asia is whether it is affecting international arbitration practice, and causing an “Asianisation”. The burgeoning of economic trade in Asia has made Asian regions emerge as the higher bargaining powers, thus sparking the confidence that they are at positions at best to opt for their preferred applicable law and the venue for arbitration. However, this Asianisation has been viewed as a ‘culturalisation’ and thus has been looked upon with uncertainty, as practitioners have suggested to look while keeping in mind certain cultural factors to prevent any faux pas during the course of the arbitration. An universal arbitration is desirable without any lingual or cultural clashes. According to Mr. Jan Paulsson at the Chartered Institute of Arbitrators’ (CIArb) Alexander Lecture entitled ‘Universal Arbitration–what we gain, what we lose’ in November 2012, “overcoming the clash of cultures as well as the ability to bring arbitrators from all over the world together is what is gained from universal arbitration.” The points raised in this lecture continue to be strong arguments against Asianisation of arbitration.
But when pondered upon with an unbiased mind, it is still not understandable how the shifting of arbitration to Asia will affect international arbitration as a whole. Cultural factors do affect arbitration process, but Asian countries have worked, and are still working to strengthen their arbitral framework as per the international standards. Asia is a continent of diverse and wide regions, cultures and practices. No two regions of Asia are alike, so it still remains to be seen as to which region of the continent ‘Asianised’ arbitration has, and if there is just a relative unease in the international arbitration community, this Asianisation may not be viewed as a development at all.
THE INDIAN PERSPECTIVE: DEVELOPMENT OF AN ARBITRAL INFRASTRUCTURE
“We must make a collective choice to move the best possible location in Asia and then to expand arbitration centres into smaller nations with smaller trading activities. My suggestion is India.”
– Honourable Chief Justice of India J. S. Khehar on International Arbitration in India.
There have been a considerable number of discussions and debates over the issue of whether two Indian parties can choose a foreign seat of arbitration. There have been many cases and ruling regarding the same, but no consensus has been reached. For instance, in Addhar Mercantile Private Limited v. Shree Jagdamba Agrico Exports Pvt. Ltd., it was expressed by the Bombay High Court that if two Indian parties chose a foreign seat and a foreign law governing the arbitration agreement, it would be considered against the public policy of the country. However, in the recent case of Sasan Power Ltd v. North America Coal Corporation India Pvt. Ltd. it was opined by the Madhya Pradesh High Court that two Indian parties may conduct arbitration in a foreign seat under English law. This opinion by the Madhya Pradesh High Court was based on the ruling in the case of Atlas Exports Industries v. Kotak & Company. In this case, the Supreme Court had ruled that two Indian parties could contract to have a foreign-seated arbitration, but this judgement was given in the context of the 1940 Arbitration Act, and did not reflect the opinion of the Supreme Court. As per the judgement in TDM Infrastructure, two Indian parties agreeing to conduct arbitration with a foreign seat and a foreign law cannot derogate from Indian law.
Another important issue faced in Indian legislation over arbitration is over disputes regarding oppression and mismanagement. As per the judgement by the Bombay High Court in Rakesh Malhotra v. Rajinder Kumar Malhotra, such disputes cannot be arbitrated and must be adjudicated upon by the judicial authority itself. But under the condition that the petition is mala fide or vexatious and is an attempt to avoid an arbitration clause, it must be referred to arbitration. According to the Bombay High Court, a petition under Sections 397 and 398 of the Companies Act, 1953 may comprise conducts arising from clandestine non-contractual actions, which in turn result to mismanagement of the company’s affairs or in the oppression of the minority shareholders, or both. Under such a case, even when there is an arbitration agreement, it is not incumbent that every single act must, ipso facto, relate to that arbitration agreement. Additionally, if the dispute affects the rights of the third parties which are not involved in the arbitration agreement, it will render the case non-arbitrable.
With the setting up of the first International Arbitration Centre (IAC) in Mumbai on October 2016, the ecosystem for international arbitration in India set its roots. It was hailed as the first State after Singapore to have a transparent policy on arbitration in Asia. The setup of this IAC was possible because India has witnessed an increase in foreign investment in the recent years and in such cases it became incumbent for the country to have its own arbitration centre which can operate without any Government interference. With the Mumbai Centre for International Arbitration (MCIA), the global disputes which earlier used to land in Singapore can now be dealt with in the country. This big step has also transformed Mumbai into an International Financial Centre. The Chief Justice of India has expressed his confidence that subsequently, the confidence of parties in India as an arbitration venue will grow because of two important initiatives- first, zero interference by the government, and next, the flexibility given to courts to appoint arbitrators from a neutral country.
Recently in 2017, the setting up of an IAC in Gurgaon has been approved by the Punjab and Haryana High Court. Gurgaon houses the topmost firms in India, and an IAC there will provide a platform for negotiating commercial disputes, and will be cost-effective and time-saving for companies, firms and MNCs located not only in the city but also in the country.
The future of international arbitration in India appears to be promising as the Indian Council of Arbitration (ICA), which provides legal and arbitration facilities, has established a high international profile. It has made India a signatory to the New York convention and has signed cooperation agreements with 40 major arbitral centres worldwide.
International arbitration takes prominence over court legislation as the parties involved get to choose their arbitrators, and the process is less cumbersome than court proceedings. It is always ensured that the arbitration takes place in a neutral venue where it cannot be influenced by political and local disturbances.
Lately, with the emergence of Singapore and Hong Kong as the preferred location for arbitration proceedings, international arbitration is being gradually shifted from Europe and North America to Asia-Pacific. Arbitral institutions play a key role in increasing the confidence for a location to be considered as an arbitral venue, and the setting up of the international arbitration centres (IACs) like the Singapore International Commercial Court is majorly responsible for this shift. Though countries in Asia-Pacific, India included, have voiced their confidence that the disputes involving their regions, most of which move to European and North American arbitral centres, will soon in the due course of a few years will be based in Asia-Pacific. Venues like Japan and South Korea are being preferred due to sector expertise of arbitrators available there. India has established a functional IAC in Mumbai, and another IAC in Gurgaon has been proposed to roll. But the fact remains, there are a lot of hurdles that countries in the Asia-Pacific face, which are needed to be addressed if these venues are to strive to become the hub of international arbitration. An effective pro-arbitration system needs to be developed in order to monitor tribunal availability, be time-saving and cost-efficient. The East also needs to focus on appointing arbitrators who would not be prone to biases and other political influences, as this scepticism has been expressed about the arbitrators of some of the regions which are highly in political and regional turmoil. Another factor which needs to be taken into account is enforcement and the setting aside of awards. Parties fear that the awards by IACs in the east will be influenced by the intervention of the government, and thus prefer not agreeing to such venues. But practitioners have argued that these are isolated instances, and are not likely to be repeated. Some regions in India and China are primarily notorious for lack of support and hostility on occasions. All these hurdles need to be overcome if the east is to acquire as good, and even better international arbitration system than the west.
Courts and legislators in India and other Asian-Pacific countries are working towards making the arbitration in their country in line with the international practice. Due to many laudable significant positive changes in approach towards arbitration, practitioners have predicted that international arbitration will shift from Western countries to Asian-Pacific ones in almost half a decade, but there are many milestones which need to be crossed before this shift is significantly possible.
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(Abhishrut is currently a student at National University of Study and Research in Law, Ranchi.)