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
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’