Ar­bi­tra­tion - a bet­ter op­tion for re­solv­ing cor­po­rate dis­putes

De­ba­jy­oti Sen­gupta, ad­di­tional direc­tor, In­dian Coun­cil of Ar­bi­tra­tion, rec­om­mends use of in­sti­tu­tional ar­bi­tra­tion for speedy set­tle­ment of dis­putes

Banking Frontiers - - Ica - me­hul@bank­ingfron­tiers.com

Costly, time-con­sum­ing busi­ness dis­putes can take a real bite out of a com­pany’s bot­tom line. That is why more and more com­pa­nies are turn­ing to the In­dian Coun­cil of Ar­bi­tra­tion (ICA). Set up in 1965 in New Delhi, the main ob­jec­tive of ICA is to pro­mote am­i­ca­ble, quick and in­ex­pen­sive set­tle­ment of com­mer­cial dis­putes by means of ar­bi­tra­tion and con­cil­i­a­tion, re­gard­less of lo­ca­tion. Dis­putes of var­i­ous forms put on hold big con­struc­tion projects, caus­ing dam­age in terms of orig­i­nal cost and profit cal­cu­la­tion. The ‘Dis­pute Board’ mech­a­nism is an ef­fec­tive an­swer to this prob­lem as it con­tin­u­ously mon­i­tors, dis­cusses and set­tles all up­com­ing agree­ments be­tween the par­ties dur­ing the con­tin­u­a­tion of pro­ject. Although the con­cept and mech­a­nism of DB has been in op­er­a­tion close to 4 decades across the world, in In­dia, the con­cept and its ac­cep­tance for no hold-up pro­ject is still in a very nascent stage. To en­sure a high stan­dard of ap­pli­ca­tion of Dis­pute Boards, ICA, with the sup­port of the World Bank, has es­tab­lished the Stan­dard Op­er­at­ing Pro­ce­dure (SOP) for In­sti­tu­tional Dis­pute Board Ser­vices in In­dia.

There are 38 Debts Re­cov­ery Tri­bunal (DRTs) func­tion­ing at var­i­ous parts of In­dia cur­rently. A new DRT will come up at Silig­uri. There are 5 Debts Re­cov­ery Ap­pel­late Tri­bunal (DRAT) func­tion­ing at Mumbai, Al­la­habad, Chennai, Delhi and Kolkata. It is pro­posed to speed up the process of re­cov­ery, be­sides mov­ing to­wards online DRTs by elec­tronic fil­ing of re­cov­ery ap­pli­ca­tions, doc­u­ments and writ­ten state­ments. DRTs will be the core of the bank­ruptcy code and will deal with all in­sol­vency pro­ceed­ings in­volv­ing in­di­vid­u­als. A se­cured cred­i­tor in In­dia re­cov­ers 25.7% on an av­er­age for ev­ery $ of credit from an in­sol­vent firm which takes 4.3 years for pro­ceed­ings to con­clude. There were 95,537 cases pend­ing in 32 DRTs as of Oc­to­ber 2016. The amount in­volved in these cases was over Rs4 lakh crore. There were about 70,000 ap­pli­ca­tions at the end of March 2016. West Ben­gal has the high­est num­ber of pend­ing cases, with 3 tri­bunals han­dling about 16,000 cases. Ahmed­abad had the high­est num­ber of large-value cases be­ing heard in debt re­cov­ery tri­bunals across the coun­try.

Me­hul Dani: How has been the en­gage­ment of ICA with banks, FIs, NBFCs & BFSI sec­tor wrt dis­pute res­o­lu­tion through ar­bi­tra­tion?

De­ba­jy­oti Sen­gupta: Un­der the present law, re­cov­ery cases filed by banks/ fi­nan­cial in­sti­tu­tions with claim amounts be­low Rs 10 lakh are filed be­fore the usual civil courts and cases with claim amounts of Rs 10 lakh and above are filed be­fore DRTs. Ac­cord­ingly, cases for re­cov­ery are filed by banks/FIs only as a last op­tion. There­fore, in most of the cases, be­ing cases of wil­ful de­fault, con­sent for al­ter­na­tive dis­pute res­o­lu­tion (ADR, ei­ther in the form of me­di­a­tion, con­cil­i­a­tion or ar­bi­tra­tion) is less likely to come from the bor­row­ers. The cases filed by the banks are based on doc­u­ments and as such, would fall un­der Track-2 of the Draft Flow of Case Man­age­ment Rules pre­pared by the Law Com­mis­sion of In­dia. Such cases should be tried by the re­spec­tive courts or the fast track courts but strictly within the time frame of 9 months as sug­gested by the Law Com­mis­sion.

What are the cur­rent trends in dis­pute res­o­lu­tion through ar­bi­tra­tion among cor­po­rates, SMEs, firms etc? What are the changes ob­served in last 3 years?

About cor­po­rates and firms, the agree­ment be­tween the par­ties must have a dis­pute res­o­lu­tion clause in the ab­sence of which none of the par­ties can ar­bi­trate dis­pute ex­cept in the case of sub­se­quent con­sen­sus be­tween the par­ties which is very dif­fi­cult af­ter the dis­pute arises.

In In­dia, most of the MSME units be­come un­vi­able mainly be­cause of the de­layed pay­ment re­ceipts. Due to huge pen­dency of cases, nor­mal com­mer­cial lit­i­ga­tion takes very long time to get fi­nal­ity. Most of the MSMEs do not un­der­stand the im­por­tance of ar­bi­tra­tion clauses while en­ter­ing con­tracts and hence when dis­putes arise they are left with lit­i­ga­tions only. One gov­ern­ment en­deav­our is the dis­pute res­o­lu­tion mech­a­nism pro­vided un­der S 19 of the Mi­cro Small Medium En­ter­prises Devel­op­ment Act 2006. If the sup­plier could not get the pay­ment within the stip­u­lated time of 45 days from the date of re­ceipt of such ser­vice or goods,

they can ap­proach the MSMED coun­cil. If the op­po­site side is not ready and will­ing to co­op­er­ate with the con­cil­i­a­tion or for what­ever rea­son the con­cil­i­a­tion fails, then the said fa­cil­i­ta­tion coun­cil shall ei­ther act as an ar­bi­tra­tion tri­bunal or re­fer the mat­ter to an ar­bi­tral in­sti­tu­tion (even if there is no ar­bi­tra­tion clause be­tween the par­ties) for res­o­lu­tion of dis­putes by way of ar­bi­tra­tion.

Can you cite any im­por­tant case or judg­ment?

In a re­cent case, GET & D In­dia Vs Re­li­able En­gi­neer­ing, which came up be­fore Jus­tice Mu­ralid­har of Delhi high court, the par­ties had 2 sup­ply con­tracts and one had an ar­bi­tra­tion clause. On the com­plaint of the re­spon­dent small in­dus­try, af­ter hear­ing both the par­ties, the MSMED coun­cil passed an ar­bi­tra­tion award and the ap­pel­lant chose to chal­lenge the said award be­fore the Delhi high court un­der S.34 of the Ar­bi­tra­tion & Con­cil­i­a­tion Act (ACA), 1996. The re­spon­dent chal­lenged the said award on var­i­ous grounds, out of which 3 ques­tions are rel­e­vant here: (i) Whether the dis­pute res­o­lu­tion over­rides the ar­bi­tra­tion clause in the con­tract? (ii) Whether the re­quire­ment of de­posit of 75% of the value of the MSME award can be waived by the high court, on its dis­cre­tion? (iii) Whether an in­dus­try which could not reg­is­ter it­self un­der the MSME Act, within the 180 days’ time given in the Act, can claim the benefits by regis­ter­ing later?

The court held that the dis­pute res­o­lu­tion mech­a­nism pro­vided in the MSME Act over­rides the ar­bi­tra­tion clause in­cor­po­rated in the con­tract. It also held that the pre-de­posit of 75% which is the pre-con­di­tion for chal­leng­ing the ar­bi­tra­tion award can­not be waived by a court in In­dia. The court held that waiv­ing the above said pre­con­di­tion to waive the pre-de­posit pro­vi­sion, is not within the dis­cre­tionary pow­ers of the high court. In the present case, the re­spon­dent in­dus­try was ex­isted at the time of en­act­ment of the Act but did not reg­is­ter un­der the said Act at that point of time but got reg­is­tered while the sub­ject mat­ter con­tracts were un­der progress. The Court held that the benefits of the said Act would be avail­able only af­ter the regis­tra­tion of the in­dus­try un­der the said Act but regis­tra­tion of the old in­dus­tries can be done later also. This is a ben­e­fi­cial clarification in favor of MSMEs of In­dia.

What are the scope and am­bit of dis­pute res­o­lu­tion through ar­bi­tra­tion that, ICA feels, should ap­peal to busi­nesses and in­dus­tries to adopt ar­bi­tra­tion?

Con­sul­tancy firm PWC, some years back, con­ducted a study on ar­bi­tra­tion in busi­ness and in­dus­try which showed that ma­jor cor­po­ra­tions, across dif­fer­ent in­dus­try sec­tors, con­tinue to af­firm the benefits of ar­bi­tra­tion to re­solve transna­tional dis­putes. Con­cerns over costs and de­lays in pro­ceed­ings per­sist and in-house coun­sels are in­creas­ingly fo­cused on get­ting value from the ar­bi­tra­tion process. The ev­i­dence of ar­bi­tra­tion be­com­ing more em­bed­ded in cor­po­ra­tions should be seen as a pos­i­tive sign for the fu­ture of ar­bi­tra­tion from a de­mand­ing seg­ment of the mar­ket.

Although in for­eign ju­ris­dic­tions, leg­is­la­tion and special rules of pro­ce­dure have re­cently been in­volved for ar­bi­trat­ing fi­nan­cial and bank re­lated dis­putes, our coun­try does not have such mech­a­nism so far. ICA has show­cased to the gov­ern­ment how ar­bi­tra­tion is a bet­ter op­tion for re­solv­ing cor­po­rate dis­putes in­clud­ing the dis­putes where the gov­ern­ment or­ga­ni­za­tions are in­volved.

What are the par­al­lels ICA can draw be­tween In­dian ar­bi­tra­tion pro­vi­sions and other re­lated global stan­dards?

As far as ar­bi­tra­tion law is con­cerned, In­dia is go­ing in the right di­rec­tion. It is the in­fra­struc­ture and mind­set of the stake­hold­ers which are lack­ing in our coun­try to cre­ate good ecosys­tem of ar­bi­tra­tion. ICA has all along been the leader of in­sti­tu­tional ar­bi­tra­tion for the last over 50 years. Over the decades, ICA has re-in­vented it­self through changes in its sys­tem, rules, in­fra­struc­ture to be com­pet­i­tive in the global mar­ket of ar­bi­tra­tion. It tries to main­tain global stan­dards in its ser­vice and out­reach. It does not only con­duct com­mer­cial ar­bi­tra­tion, but also mar­itime ar­bi­tra­tion and con­cil­i­a­tion. Be­sides, for en­gi­neer­ing dis­putes, it has created a special cell called Dis­pute Board mech­a­nism which func­tions in sup­port and col­lab­o­ra­tion of the World Bank.

What are the ways and means ICA have de­ployed to spread aware­ness about ar­bi­tra­tion, amongst oth­ers, SMEs, shop­keep­ers and traders across the na­tion?

ICA or­ga­nizes con­fer­ence, seminar, sym­po­sium, train­ing pro­gram, and in­ter­ac­tive ses­sions, etc. for pro­mot­ing aware­ness about ar­bi­tra­tion, es­pe­cially in­sti­tu­tional ar­bi­tra­tion. These pro­grams are largely aimed at ed­u­cat­ing the busi­ness and in­dus­try about the ad­van­tages of ar­bi­tra­tion over other modes of dis­pute res­o­lu­tion and ad­vis­ing on cor­rect draft­ing of ar­bi­tra­tion clause be­sides other sur­round­ing fac­tors im­por­tant for do­mes­tic and in­ter­na­tional ar­bi­tra­tion.

ICA has no spe­cial­ized pro­gram for any par­tic­u­lar sec­tor, ex­cept ship­ping, con­struc­tion, and en­ergy, where the tech­nique and modal­ity of ar­bi­tra­tion is some­what dif­fer­ent from usual com­mer­cial ar­bi­tra­tions. Shop­keep­ers and small traders have their own as­so­ci­a­tions for res­o­lu­tion of dis­putes.

De­ba­jy­oti Sen­gupta ad­vo­cates ar­bi­tra­tion over other modes of dis­pute res­o­lu­tion

Jus­tice BN Srikr­ishna, for­mer Supreme Court Judge, gave key­note ad­dress at a re­cent Ficci-ICA sym­po­sium on ‘Build­ing the Fu­ture of Do­mes­tic and In­ter­na­tional Ar­bi­tra­tion in In­dia’

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