Arbitration law needs to tackle a key concern
The arbitration law has undergone repeated amendments with only one aim — making India the hub of international arbitration.
Last month, the government set up an expert panel headed by former law secretary TK Viswanathan to suggest reforms in the 1996 Arbitration and Conciliation (A&C) Act. The A&C Act is the primary legislation regulating domestic and foreign arbitration in India. It gives effect to the International Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention), which India signed in 1960. Thus, it provides a mechanism for the enforcement of foreign arbitral awards in India. In the last few years, several recommendations have been made to reform the A&C Act including by the Law Commission of India. Indeed, the arbitration law has undergone repeated amendments with only one aim — making India the hub of international arbitration.
Most talk about reforming arbitration law is centred on commercial arbitration. While this is understandable, another important component of international arbitration that emanates from international investment treaties (IITs) gets the short shrift. IITs empower foreign investors to bring claims against host States before international arbitration tribunals, and challenge their sovereign regulatory action as treaty breaches. This investment treaty arbitration is popularly known as investor-State dispute settlement (ISDS) — the source of some of the most contentious arbitration cases in India. A critical question is whether the A&C Act applies to ISDS. Ordinarily, this question should not raise eyebrows. Although the A&C Act does not specifically refer to ISDS, the presumption is that it applies to ISDS, which will qualify either as domestic (if seated in India) or foreign (if seated outside India) arbitration. However, this question assumed salience because the Delhi high court in two recent cases — Union of India vs Vodafone Group and Union of India vs Khaitan Holdings - held that the A&C Act does not apply to ISDS.
In the Vodafone case, the high court held that the A&C Act does not apply to ISDS because such disputes cannot be considered commercial under Indian laws. India signed the New York Convention with an important reservation — which limits the convention’s application “only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such declaration”. The A&C Act incorporates this aspect, but, interestingly, does not define the term commercial. This has created some uncertainty regarding the meaning of the term itself, and consequently, its applicability.
The high court held that since ISDS owes its origin to international law, it is different from commercial arbitration. Thus, it is not a subject matter of the A&C Act. While the high court is correct in drawing a distinction between ISDS and commercial arbitration — an aspect not always fully appreciated in India — its reasoning that ISDS is not commercial is specious. The court may have been confused between the cause of action and the commercial relationship between the parties to the dispute. While an IIT breach arises due to a sovereign action of the State, the relationship between the State and the foreign investor remains commercial. The high court order narrowly defines the term commercial. It ignores the global practice of broadly interpreting the term “commercial” and including “investment” in it, something that is recognised by model laws on international commercial arbitration, India’s model bilateral investment treaty, and various foreign judicial decisions. The Supreme Court is yet to clarify the law on this point. Consequently, the decision that the A&C Act is not applicable to ISDS has created ambiguity, both for foreign investors and the State, regarding issues such as the enforcement of ISDS awards in India and the supervisory jurisdiction of courts in India.
This does not augur well for India’s aspiration to be a global hub for international arbitration. The Vishwanathan committee should grapple with this vexed question when it submits its recommendations for legislative reforms. There are two options worth considering.
First, the A&C Act can offer a broad definition of the term commercial to include investment. Second, the A&C Act can be amended on the lines of Canada’s Commercial Arbitration Act, which specifically states that commercial arbitration includes ISDS under the investment chapters of various free trade agreements that bind Canada.
Prabhash Ranjan teaches at the Faculty of Legal Studies, South Asian University. The views expressed are personal