Proposed Arbitration Law May Be A Misstep For India

April 05 2019

Senior Partner Sarosh Zaiwalla discusses the climate within the Indian legal sector that has led to the proposed changes in their arbitration laws and what challenges these changes will face, if passed, in the national courts.

A proposed new law is threatening to undermine India’s ambition to become an important seat of international arbitration. Critics say the proposed law will have the effect of excluding non-Indians from acting as arbitrators, thereby leaving Indian arbitral awards open to challenge internationally.

The former United Kingdom Attorney General Lord Peter Goldsmith QC, has vociferously called on the Indian government to put the proposed new law on hold. Speaking in New Delhi last month, Goldsmith said that the proposals “appear to prohibit foreign lawyers” from acting as arbitrators in India and that the law could “set back the cause of Indian arbitration by many years, perhaps a generation.”

The proposed new law, as set out in the Arbitration and Reconciliation (Amendment) Bill 2018, states that “a person shall not be qualified to be an arbitrator unless” they are “an advocate within the meaning of the Advocates Act, 1961, having 10 years of practice experience as an advocate.” Goldsmith stated that these provisions, “appear at a stroke to prohibit the appointment of foreign [qualified] lawyers as arbitrators in Indian seated arbitrations. Because you would have to be an Indian advocate to qualify.”

The proposed legislation runs counter to a judicial trend toward more liberal interpretation of the Advocates Act, 1961 when it comes to the rights of foreign lawyers’ involvement in arbitrations in India.

In the 2018 case, Bar Council of India v. A.K. Balaji and Ors, the Indian Supreme Court decided that, while foreign lawyers could not set up offices or practice in India, they could act in international arbitrations in India on a “fly-in fly-out” basis. While the Law Society of England and Wales welcomed this development, the Bar Council of India — a party to the case — has staunchly opposed moves to permit foreign lawyers to act in arbitrations with their seat in India.

The proposed law also means that only Indian lawyers may act as arbitrators. This may impact negatively on arbitrations where the specialist knowledge of expert arbitrators such as architects, engineers and ships’ captains might be beneficial to the efficient arbitration of a dispute.

The 2018 bill’s restriction on foreign persons acting as arbitrators may also have significant repercussions for the enforceability of arbitral awards outside of India. Most of the international arbitrations conducted in India involve an Indian party and a foreign party. If the foreign party is restricted, or prevented, from appointing an arbitrator of its choice, this fact may create doubts as to the independence and impartiality of the arbitration process.

In turn, this may make the enforcement of an award difficult or open to challenge outside of India. This may harm an Indian party as much as a foreign party because a foreign party’s assets in such cases are likely to be outside India. Indeed, ironically, the Indian party is likely to be at greater risk of challenge, since they cannot easily argue that an Indian arbitrator was biased against them, whereas a foreign party can argue that bias against non-Indians was a factor.

Many arbitral institutes restrict the appointment of a sole or presiding arbitrator with the same nationality as one of the parties, precisely to avoid such accusations of bias. Examples of the sort of general requirements of fairness and equality for parties to an arbitration include Article 18 of the United Nations Commission on International Trade Law Model Law on Arbitration, which states that “all parties shall be treated with equality”, and the International Bar Association rules which set out “considerations of procedural economy, proportionality, fairness or equality of the parties.” The proposed law would mean that the outcomes of Indian international arbitrations could become routinely open to challenge on grounds of unfairness.

The 2018 bill appears to have been motivated by a protectionist desire to create more work for Indian lawyers and arbitrators. Those so motivated appear to be gravely mistaken, since the new law is likely to have the opposite effect. By creating an arbitration system open to accusations of bias, and open to legal challenge internationally, the Indian government will instead ensure that commercial actors will make efforts to avoid using India as a seat of arbitration. The resulting collapse in Indian-seated arbitrations will result in less work for Indian lawyers, not more.

In leading seats of arbitration, such as England and Wales, foreign arbitrators may operate freely. The net result is a thriving jurisdiction for international arbitration. This ultimately means more work for local lawyers and arbitrators, not less.

The London Court of International Arbitrations is just one London-based arbitration body. Its statistics for 2017 show what a dynamic hub for international arbitration can look like. Parties from outside the U.K. accounted for over 80 percent of its users. Thirty-one percent of the claims made were above $20 million in value.

India is a fast-growing economy, and a key player in global and Asian trade. The opportunity to develop India as a significant arbitration hub may be severely damaged if the Indian government goes ahead and implements the proposed new law. The net result of the new law could also be that Indian companies will face the increased cost and disruption of travelling overseas for arbitration, since their international trading partners may become increasingly unlikely to accept India as seat of arbitration.

The 2018 bill also proposes that the Arbitration Council of India will regulate all future arbitration in India. Such government regulation runs counter to the way arbitration is typically conducted internationally, where the parties are free to choose the arbitrator or arbitration body they deem most appropriate, and are not required to submit to a particular government-appointed arbitration regulator.

In England and Wales, parties to arbitration remain free to select between various arbitration bodies, and may select arbitrators as they see fit. Section 1(b) of the English Arbitration Act, 1996, sets out as a general principle that “the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest.”

This legal guarantee of freedom for the parties to agree how to best resolve a dispute enhances the attractiveness of England and Wales as a seat of arbitration. The U.K. Supreme Court case of Jivraj v Hashwani [2011] UKSC 40 underlined this fundamental principle, by upholding the parties’ rights to stipulate the characteristics of an arbitrator as they saw fit.

In that case, the parties had agreed that any arbitrator appointed by either party should be a member of the Ismaili community and a holder of high office within that community. It was argued before the court that this was discriminatory on the grounds of religion. However, the U.K. Supreme Court held the arbitration agreement to be valid.

U.K. employment law prohibits discrimination on grounds of religion, race, sex and other protected characteristics. However, the Supreme Court reached its conclusion on the basis that an arbitrator is not an employee, and so the parties remain free to choose an arbitrator on the grounds they see fit, including religious belief.

This newly proposed Indian law by contrast restricts the parties’ freedom to appoint an arbitrator of their own choice. It also arguably discriminates against both foreign arbitrators and foreign parties to arbitration. The bill has passed the lower house, but not yet the upper house. Some now hope that it will not pass before the Indian general election takes place in April and May 2019 and that a new government might amend the bill.

However, if the bill does become law, it will be interesting to see how the Indian Courts interpret it. It will also be interesting to see the impact on the volume of arbitrations taking place in India. Many international practitioners expect the volume of arbitration to fall dramatically if the 2018 bill becomes law, as parties to commercial agreements increasingly shun India as an arbitral seat.

This article was published in Law360 and can be found here (behind paywall).

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