The Indian Government is trying to make India an arbitration hub, but much investment and political change is still needed, say Stephenson Harwood's Kamal Shah and Jide Adesokan

Over the last decade, the Indian legal industry has witnessed a number of developments in the arbitration arena which have attracted the attention of lawyers and non-lawyers alike. As a result of the liberalisation of many sectors and the significant increase in foreign direct investment, this has become an important area for international observers as it has significant implications for foreign companies investing in India.

Unsurprisingly, in a 2011 study carried out by Ernst & Young on arbitration in India, 74% of respondents, mainly large corporate and leading law firms, said that an arbitration clause was an essential part of their legal contracts.

Government and private measures to promote arbitration

Until recent times, most Indian arbitration had been ad hoc and a large number of cases were plagued by negative factors including inexperienced arbitrators, lack of predictability in costs and fees and a general lack of case management by the arbitrators.

In recognition of this, the Government and private institutions have seized the opportunity and increased efforts to promote arbitration and provide viable alternatives, with the Government having lofty ambitions to promote India as an international arbitration hub along the lines of Singapore. The institutions see the commercial attractiveness of India to grow their business through an increased caseload.

Among the private institutions, the India branch of the London Court of International Arbitration (LCIA India) launched in April 2009. It introduced India-specific arbitration rules in April 2010, thereby offering a tried and tested alternative to ad hoc arbitration, and has also since made significant efforts to promote arbitration among the business and legal community.

The opening of the LCIA India was followed closely in November 2009 by the opening of the first arbitration centre in the High Court of Delhi (pictured), which also coincided with the opening of a Chartered Institute of Arbitrators (CIArb) arbitration centre in New Delhi.

Policy change

In terms of regulation, the Government has recognised the need for an update to the legislative regime and launched a consultation paper in 2010 recommending changes to the Arbitration Act. Some of the notable proposals are:

  • excluding the application of Part I to international commercial arbitration outside India. This was in light of the controversial decisions of, inter alia, the Supreme Court in Bhatia International v Bulk Trading SA [2002] 4 SCC 105 and Venture Global Engineering v Satyam Computer Service Ltd [2008] 4 SCC 190 which held that Part I of the Arbitration Act applied not just to arbitrations with their seat in India, but also to international commercial arbitrations taking place outside India, unless the parties expressly or impliedly excluded any or all of its provisions;
  • promoting institutional arbitration; and
  • rectification of the extended definition given to 'public policy' in the Supreme Court's judgment in OGNC Ltd v Saw Pipes Ltd, AIR 2003 SC 2629, which has resulted in subsequent awards regularly being challenged for breach of public policy on the ground of patent illegality. The proposed amendments seek to rectify this situation by removing the ground of patent illegality from the definition of public policy while retaining it as a separate ground in a modified form.

No significant progress appears to have been made since the consultation paper was launched.

In June 2010, the then Law and Justice Minister, Dr Veerappa Moily, announced the National Litigation Policy Document, which is formulated to reduce the average length of proceedings from 15 years to three years. The policy recommended the use of arbitration as a cost-effective and expeditious way to resolve disputes.

Court interference and approach to the enforcement of awards

A common gripe has been the inclination of courts in India to interfere in arbitration proceedings. This trend, however, appears to be changing, with courts more reluctant to interfere.

Another gripe also heard frequently has been in relation to the courts' reluctance to enforce arbitral awards and instead entertain spurious challenges based on public policy grounds. The 2003 decision of the Supreme Court of India in Saw Pipes, a domestic arbitration case, appeared at the time to set a new tone for the interpretation of the public policy ground.

The Saw Pipes decision was widely criticised by commentators, many of whom saw it as introducing a new means by which awards could be challenged on the merits. The decision threatened India's reputation as an arbitration-friendly jurisdiction. In subsequent decisions, Indian High Courts appeared to distance themselves from Saw Pipes.

Importantly, a narrow construction of public policy has also been applied to the enforcement of foreign awards: in what was seen as a significant decision in Penn Racquet Sports v Mayor International Limited, the Delhi High Court dismissed a challenge to the enforcement of an ICC award, holding that the award was not contrary to the public policy of India.

The Court held that public policy for the purposes of Section 48 of the Arbitration Act (which provides grounds for refusing enforcement of foreign awards) has a narrow meaning when compared to the same expression under Section 34 of the Arbitration Act (which provides grounds for setting aside an award).

While the above decision is encouraging, it is debatable whether the 'patently illegal' aspect of the public policy ground is a thing of the past. Time will tell.

Foreign lawyers practising in India?

The question of foreign lawyers practising in India raises debate and it appears that this will not be resolved in the near future. However, the good news is that on 1 February 2012, the Chennai High Court in AK Balaji v The Government of India, Ashurst LLP, White & Case et al, ruled that although foreign law firms are not generally allowed to practise in India, they are not debarred from coming to India and conducting arbitration proceedings in respect of disputes arising out of a contract relating to international commercial arbitration.

The general trend in recent years has been one of positive change, with some setbacks along the way. However, to achieve the dream of making India an international arbitration centre, much effort, investment and political change will be needed by all the relevant stakeholders involved, and one only has to look to Singapore to see how it can be done, albeit on a smaller scale.

Kamal Shah is a partner and Jide Adesokan a legal assistant at Stephenson Harwood.