ARBITRATION AS A TOOL FOR RESOLVING CROSS BORDER DISPUTE RESOLUTION: OPPURTUNITIES & CHALLENGES

Abstract:

This article aims to discuss the growing importance of international commercial arbitration as an alternative to national courts in matters or cross-border disputes. It highlights the key principals of the method of arbitration, the limitations faced because of lack of trust and acceptance from the parties and the landmark judgments which have contributed to the development of this field. Further research can be conducted by considering the impact of cultural differences on the arbitration outcomes and technology to streamline the process.

Introduction:

The growing level of interdependence of the global economy has resulted in a notable surge in cross-border corporate transactions, which has raised the risk of commercial conflicts. It is imperative that these problems be resolved quickly and effectively for maintaining financial stability and fostering global commercial relations. A popular approach to resolving these conflicts is international arbitration, which gives parties access to an impartial forum outside of the traditional judicial system.

Legal scholars over time have attempted to define international arbitration, among which Rene David is one of the better ones. He explained arbitration “as the settlement of dispute between two or more parties with the help of a third party. These private parties gain their power from the agreement formed between them and not the state.” This is further emphasized by Lord Langate who prioritizes “arbitration over litigation in a Court of Justice by saying that there are many cases where the real interests of the parties will be satisfied much better through the reference of arbitration.”

Section 2(1) (f) of the Arbitration and Conciliation Act, 1996 [1] defines arbitration as a method of resolving disputes arising out of legal relationships, whether contractual or not, considered as commercial under the Indian law in force is considered “international commercial arbitration” if at least one of the parties is an individual who is a national of, or habitually resides in, any country other than India; a body corporate that is incorporated in any other country; an association or body of individuals whose central management and control is exercised in any other nation other than India; or the Government of a foreign nation.

The parties have the freedom to create a separate arbitration agreement for that purpose, or include a clause about arbitration in the parties’ primary contract. Regarding the country’s present legal situation, arbitration has gained popularity. The function and involvement of courts in arbitral procedures, as well as the jurisdiction of an arbitrator, have been the subject of extensive discourse.

Over the past ten years, international arbitration has grown manifold. It has expanded into new locations, mostly in Asia and Africa. In addition to taking on new challenges, players are also presented a wider range of options and face more competition.  The rise of new arbitrators have further aided in the development of institutional arbitration. A recent survey found that barely 10% of the institutions in existence today existed prior to 1940. Seventy percent of the institutions were established in the last thirty years, fifty percent in the last twenty years, and twenty percent in the last ten. Although the growth rate have been slow, at least two institutions of arbitration have been established in 2008, 2009 and 2010.

Background:

i. Ancient India: [2]

In India, arbitration has a long history. The first arbitrator was King Solomon, who resolved a dispute between two women claiming to be the mothers of a young boy. As early as 337 B.C., Alexander the Great’s father, Philip the Second, utilised arbitration to resolve territorial conflicts in Greece. Five Spartan judges heard a dispute between Athens and Megara about 600 B.C. about who would own the island of Salamis, and they ultimately awarded the island to Athens.

ii. Prior to Independence: Under the British Rule: [3]
In the late 1800s, India had a boom in arbitration as the Indian Arbitration Act of 1899 was limited to just three presidency towns: Bombay, Madras, and Calcutta. The Indian Arbitration Act, 1889 was deemed by the Bombay High Court to be cumbersome, complicated, and in need of revision. Section 89, schedule II of the Code of Civil Procedure 1908 further codified this by extending the arbitration act’s provisions to other parts of British India. These two actions required a great deal of inefficiency, time, complexity, and money. Legal procedures forced jurists to look for a different venue where conflicts might be resolved more quickly, cheaply, and effectively without having to deal with formalities. Their efforts resulted in the 1940 Arbitration Act.

• Back draws of the 1940 Act:

The Act of 1940 had several shortcomings, such as its limited applicability to domestic arbitrations, its lack of a provision preventing an arbitrator or umpire from resigning at any point during the arbitration proceedings, and its lack of another provision for the appointment of a new arbitrator in case of his death during the proceedings. The lengthy procedure again fell short of the Act’s primary goal.

iii. Post-Independence Era: [4]
The 1996 Act consolidated and modified laws concerning international commercial arbitration, arbitration, and the application of foreign arbitral awards. In order to ensure both domestic and international arbitration, the Act was based on the UNCITRAL Model Law on International Commercial Arbitration, 1985. The Act of 1996 was primarily presented with the intention of controlling arbitral delays.

 In order to address the deficiencies of the previous statute, the Arbitration and Conciliation (Amendment) Act, 2015 later made significant revisions to the 1996 act. With a more progressive stance, the 2019 Amendment Act clarified the 2015 Amendment Act’s contents. The Act sought to lessen judicial intrusion and address the issues raised by the Act of 1996.

International Commercial Courts vs. Arbitration from the European Perspective [5]:

The “vanishing trial” phenomenon—which describes how parties prefer alternative dispute resolution techniques and how the backlog of cases in US federal and state courts is decreasing—led to the creation of international commercial courts in Europe. The growing popularity of arbitration as a rival to arbitration was a major consideration in the Council for the Judiciary’s intention to establish the Netherlands Commercial Court (NCC).

The NCC Plan made clear that foreign courts or arbitration are increasingly being used to settle high-value and complicated international economic disputes. The knowledge and capacity of national courts to create and mould law is adversely affected by this. The NCC Plan also examined the financial benefits that the NCC’s formation would yield, including the development of a business-friendly atmosphere and increased revenue for neighbourhood taverns and other service providers.

The NCC was established with the growing acceptance of arbitration as a key factor. The recurrent legislative proposals for the establishment of Commercial Courts and Chambers for International Commercial Disputes in Germany are motivated by similar grounds. The German proposals emphasise that parties prefer foreign courts or arbitration, even if the German legal system is recognised internationally. It is anticipated that the use of English will lure major international commercial disputes, increase the appeal of the German justice system overall, and make German courts more accessible to litigants from other countries.

Nonetheless, this does not imply that the host countries and the international commercial courts that have been established in Europe are unfriendly to arbitration. European nations with developed arbitration markets, including Germany and the Netherlands, have up-to-date arbitration laws. In addition, many European international commercial courts have the authority to hear cases involving international arbitration; these courts encourage arbitration rather than oppose it. For instance, the jurisdiction over arbitration-related proceedings belongs to the Netherlands Commercial Court of Appeal (NCCA), provided that the dispute is international, the arbitration will take place in the Amsterdam district, and the parties have expressly chosen the NCCA.

Other international commercial tribunals’ rules have comparable clauses. All of this shows that the international arbitral seats and institutions, as well as their growing popularity among domestic parties, were the primary targets of the competition with arbitration. The Netherlands and Germany made clear that their goal was to modernise the public court system by creating specialised courts that would be appealing to parties engaged in international business activities. As a result, disputes would often escape their borders, eventually erasing state court case laws.

International Commercial Courts & Arbitration from the Asian Perspective [6]:

Although the Asian courts have a distinct approach to arbitration, the motivations for the creation of these courts are diverse. They market themselves as an additional means of resolving conflicts that seeks to draw cases more appropriate for legal proceedings in public. The DIFC Courts were founded by the Emirate of Dubai in 2005 with the intention of providing prospective investors with a dependable forum for resolving disputes. The QIC, the ADGM Courts, and the AIFC Court were subsequently established with the same goal in mind: to draw in foreign direct investment. With the aim of advancing its status as a hub for Asian dispute settlement, Singapore founded the SICC in 2015.22 2019 saw China follow suit and create the CICC. Commentators claim that the CICC, a branch of the Supreme People’s Court.

These jurisdictions strive to attract conflict resolution in its various forms, notably litigation, arbitration, or mediation, despite having quite varied motivations for establishing these courts. Specifically, Singapore is home to the rapidly expanding Singapore International Arbitration Centre (SIAC) and the Singapore Mediation Centre (SMC), which both encourage mediation. Comparably, the CICC houses Chinese arbitration organisations under its auspices, offering parties a “one-stop” venue for resolving disputes. Additionally, the CICC has tasked its Expert Committee with mediating conflicts. International commercial courts were established as one of several possibilities in a diverse portfolio of dispute resolution, these nations support, in turn, the more general objectives of attracting investment, developing a market for dispute settlement, or strengthening state authority. This could help to explain why the SICC used arbitration’s drawbacks to justify its foundation and portray itself as arbitration’s only adjunct. A visit to the SICC’s official website demonstrates how the court targets the weak points in arbitration. The website states that although if parties might pursue their claims in international business arbitration, they can still want to settle their disagreement in the SICC in an effort to steer clear of some of the issues that arise in arbitration. The excessive formalisation of arbitration, commonly referred to as the “judicialization” of international commercial arbitration, raises questions of legality and ethics, is devoid of an appeals process, and makes it impossible to include third parties who have not given their agreement to arbitration proceedings.

The aforementioned examples show how the SICC sets itself apart from arbitration to emphasise its benefits as a public court and, as a result, its special qualities. While the SICC focuses on the flaws of arbitration, different parties emphasise that the court does not want to reduce the volume of cases using arbitration.

Key Principles of International Arbitration [7]:

In international arbitration, party autonomy is a basic concept that is necessary for the smooth operation of the arbitration process. It is a guiding principle that guarantees parties significant autonomy and influence over the dispute resolution procedure. The flexibility to customise the dispute resolution process to the needs of the parties and choose arbitrators who are knowledgeable about the subject matter of the dispute make arbitration particularly appealing. Arbitration offers a neutral forum where each side believes it will have a fair hearing.

One of the most important concepts as stated by UNCITRAL is party autonomy, which is why the UNCITRAL model law allows for a broad range of it.. The ability of parties to modify the rules of the game to suit their unique requirements is the most crucial tenet upon which the model law should be built. The model law clearly gives the parties the ability to define the nature of the arbitrable matter as international, select institutionalised arbitration and its rules, decide how written communications will be deemed received, decide on the procedure for arbitrator appointment, decide on a procedure for arbitrator challenge, choose the language to be used, agree on the format and timeliness of claim presentation, consent to oral hearings, agree on defaults and experts appointed by the tribunal, and select the law or laws that will govern the arbitral proceedings and give the arbitrators permission to provide a decision as amicable compositeurs, or ex aequo et bono.
The parties have considerable latitude in designing a dispute resolution mechanism of their choosing prior to the start of the arbitration. The parties often select one or three arbitrators to serve as decision-makers. They also choose whether the arbitration will be conducted ad hoc, meaning no institution will be engaged, or under the supervision of an international arbitral institution. A dispute resolution technique is one of the many options available to the parties to an arbitration agreement. Specifically, the establishment of an arbitral tribunal results in the creation of a new set of contractual obligations for the arbitrators. There aren’t many restrictions on the parties’ ability to choose the arbitration regime they want and the process to be followed.

In international arbitration, separability and competence-competence are two crucial concepts. According to the separability/autonomy concept, an arbitration clause’s consent to arbitrate is viewed as a separate agreement from the remainder of the parties’ contract and may therefore remain in effect after the contract expires. This aspect of arbitration is known as the separability/autonomy concept, which is interdependent with the competence-competence principle, which states that the arbiter can decide its own competence.

Case laws of International Arbitration:

Arbitration proceedings under the rules of the International Chamber of Commerce (ICC) were conducted in Paris in the Bhatia International v. Bulk Trading SA case. [8] A request for an order of injunction prohibiting the transfer, alienation, or establishment of third-party interests on the property was made in accordance with Section 9 of the 1996 Act. The court decided that even though the arbitration would take place outside of India, Part I of the 1996 Act would still apply. The court held that the use of the ICC Rules of Arbitration does not exclude remedies under Section 9 of the 1996 Act. In the matter of Kaiser Aluminium Technical Services Inc. v. Bharat Aluminium Co.[9], the Supreme Court of India (2012) put an end to all legal rumours.

The BALCO judgement significantly overruled the Bhatia case because it revoked the Bhatia case’s precedent regarding the application of Part I of the 1996 Act to international commercial arbitrations on a prospective basis. Accordingly, the Bhatia case remains valid and is applicable prospectively to agreements made between the parties before September 6, 2012.

The Harmony Innovation Shipping Limited v. Gupta Coal India Limited and Others [10] ruling is a succinct summary of the seminal decisions made prior to BALCO about “what would constitute ‘implied’ and ‘express’ exclusion.” According to the agreement, arbitration would take place in accordance with the London Maritime Arbitration Association’s small claims procedure if a dispute emerged involving less than USD 50,000. The inclusion of several phrases such as “arbitration in London to apply,” “arbitrators are to be the members of the London Arbitration Association,” and “contract is to be governed and is to be construed following English law” seemed to indicate that Indian laws were explicitly excluded, even though this was not explicitly stated in the 1996 Act. Because the deal was signed during the pre-BALCO era, it would not be governed by the BALCO principles. However, the language used in the agreement indicated the parties intended to exclude Part I of the 1996 Act’s applicability, making the implied exclusion of the Act evident.

In the Enercon (India) Ltd. & Ors v. Enercon GmbH & Anr [11], the Supreme Court ruled that the “venue” of an arbitration is a site selected by the parties for convenience and is distinct from the “seat” of arbitration, which determines the relevant jurisdiction. India was declared the “seat” since the court could find no other connecting circumstance that would have favoured London. The only courts with the authority to supervise the arbitration process are those in the “seat” of arbitration. Concurrent jurisdiction between the courts of the arbitration’s “venue” is not permitted.

The Supreme Court distinguished between challenges to set aside an award under Section 34 of the 1996 Act and objections to the enforceability of a foreign award under Section 48 of the 1996 Act in the case of V. Shri Lal Mahal Ltd. vs. Progetto Grano Spa)[12]. The Supreme Court significantly limited the meaning of the term “public policy.”

Section 34 [13]of the 1996 Act is the only place where the ground of “patent illegality” can be used, and only in cases where the question is whether or not the award should be set aside. Under Section 48 of the 1996 Act, the term “public policy” would not include the concept of “patent illegality.” The use of the notion of “public policy” is relatively restricted in situations involving conflicts of legislation, foreign-seated arbitrations, or any other foreign element.

The Supreme Court made it clear that Section 48 [14]of the 1996 Act does not provide for a review of a foreign award on its merits or a chance to take another look at the decision while it is still being enforced. The court permitted enforcement and rejected a challenge based on “patent illegality.”

To sum up, the Supreme Court has ruled that the “venue” of an arbitration is a site selected by the parties for convenience and is distinct from the “seat” of the arbitration, which determines the valid jurisdiction. While the courts in the “venue” of arbitration are not permitted to have concurrent jurisdiction, the courts of the “seat” of arbitration have the only authority to supervise the arbitration procedure.

Limitations of Arbitration: [15]

A technique for settling disagreements arising from cross-border business transactions between parties is international commercial arbitration. It provides an adaptable and impartial means of resolving conflicts apart from national legal frameworks. It does, however, have its own set of problems and difficulties, just like any other dispute resolution procedure. Some of the main concerns in international business arbitration are as follows:

• Selecting the Arbitral Tribunal and Regulations: The arbitration will be governed by a set of rules and an appropriate arbitral institution selected by the parties. Selecting the appropriate organisation and regulations might be difficult because different organisations provide different policies and services.
• Choosing an Arbitrator: Selecting arbitrators is a crucial step in the arbitration process. The arbitrators’ choice, which takes into account their qualifications, objectivity, and any conflicts of interest, must be agreed upon by the disputing parties. It can be challenging to find the appropriate arbitrators at times.
• Cost: The costs of conducting international arbitration can be high, including those related to hearings, administrative fees, legal counsel, and arbitrator fees. Parties may be discouraged from selecting arbitration over other forms of dispute resolution by the expense consideration.
• Enforcement of Awards: Because arbitral awards are subject to both national law and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, their enforceability may be a source of concern. Local courts may occasionally oppose the enforcement of awards, which makes the procedure difficult.
• Lack of Confidentiality: While arbitration provides a certain level of confidentiality, it may not be absolute, and there may be situations in which material is made public. Confidentiality maintenance can be difficult, particularly in complicated circumstances.
• Lack of Precedent: Unlike court rulings, arbitration rulings do not establish legally enforceable precedents.The law in international business arbitration may become less predictable as a result of this lack of precedent.
• Restricted Appellate Process: It might be tricky to appeal a ruling that is not favourable because there are usually few grounds for contesting arbitral awards. This finality may work against parties who feel they were treated unfairly during the arbitration procedure.
• Choice of Law: When deciding the law to apply to an arbitration, parties may disagree over that law. This is particularly common in intricate, international transactions.
• Postponements: Arbitration processes may occasionally be delayed for a number of reasons, such as procedural issues and the parties’ and arbitrators’ availability.

Conclusion:

Arbitration is perceived as a means of resolving conflicts that have escaped the purview of public justice, and international business courts in Europe and Asia have been presented as an adjunct to arbitration. Notwithstanding these variations, the development of courts has been greatly influenced by international commercial arbitration, which is reflected in the organisational and operational characteristics of these courts. In an effort to effectively compete with arbitration as the favoured means of resolving disputes, international commercial courts are modelling some of the most highly regarded characteristics of arbitration in order to draw cases.

Nonetheless, the small number of cases that international commercial courts handle highlights the fact that parties have not yet given them much impetus and that they represent a very small obstacle to arbitration. It will take some time for international commercial courts to build a positive reputation and convince parties to rewrite their dispute resolution clauses in their favour, as the reputation of a national justice system and established market practices play a major role in the choice of court and dispute resolution methods.

Party autonomy is a typical characteristic of international business courts, allowing parties to customise proceedings and enhancing flexibility. But party autonomy can also, in some cases, add to the costs and duration of the legal process.

Certain aspects of international commercial courts’ arbitration practices have the potential to compromise procedural justice and overstep the bounds of “arbitralization.” These characteristics include the forced participation of other parties, the system of appointment and compensation for certain international judges, and the secret and confidential nature of the proceedings. The protection of the right of third parties to a fair trial, the maintenance of the judiciary’s independence and impartiality, and the public nature of court proceedings are fundamental components of international procedural justice policy that ought to be excluded from the ‘arbitralization’ movement.

Reference(s):

[1] Arbitration and Conciliation Act § 48 (LexisNexis 1996).

[2] Julian Lex, The Development of International Arbitration as a Mechanism For Determining International Business Disputes, Kluwer Arbitration Blog (June 2, 2021), https://arbitrationblog.kluwerarbitration.com/2021/02/06/the-development-of-international-arbitration-as-a-mechanism-for-determining-international-business-disputes/.

[3] Julian Lex, The Development of International Arbitration as a Mechanism For Determining International Business Disputes, Kluwer Arbitration Blog (June 2, 2021), https://arbitrationblog.kluwerarbitration.com/2021/02/06/the-development-of-international-arbitration-as-a-mechanism-for-determining-international-business-disputes/.

[4] Julian Lex, The Development of International Arbitration as a Mechanism For Determining International Business Disputes, Kluwer Arbitration Blog (June 2, 2021), https://arbitrationblog.kluwerarbitration.com/2021/02/06/the-development-of-international-arbitration-as-a-mechanism-for-determining-international-business-disputes/.

[5] Georgia Antonopoulou, The ‘Arbitralization’ of Courts: The Role of International Commercial Arbitration in the Establishment and the Procedural Design of International Commercial, 14 Journal of International Dispute Settlement (2023).

[6] Georgia Antonopoulou, The ‘Arbitralization’ of Courts: The Role of International Commercial Arbitration in the Establishment and the Procedural Design of International Commercial, 14 Journal of International Dispute Settlement (2023).

[7] Margaret L Moses, Principles and Practices of International Commercial Arbitration, Cambridge University Press (2017).

[8] Bhatia International v. Bulk Trading SA, SCC (Supreme Ct. India 2002).

[9] Kaiser Aluminium Technical Services Inc v. Bharat Aluminium Co, SCC (Supreme Ct. India 2008).

[10] Harmony Innovation Shipping Limited v. Gupta Coal India Limited, SCC (Supreme Ct. India 2015).

[11] Enercon (India) Ltd. & Ors v. Enercon GmbH & Anr, SCC (Supreme Ct. India 2014).

[12] V. Shri Lal Mahal Ltd v. Progetto Grano Spa, SCC (Supreme Ct. India 2014).

[13] Arbitration and Conciliation Act § 34 (LexisNexis 1996).

[14] Arbitration and Conciliation Act § 48 (LexisNexis 1996).

[15] Mohit Bhardwaj, Arbitration and International Commercial Arbitration: A Critical Analysis, 14 Social Science Research Network (2023).