Lack of trustworthy and competent arbitrators is the main crisis in Indian arbitration: Gourab Banerji

I have several thoughts on the proposed amendments. The government set up a fifteen-member expert committee, but only six of us were non-government participants. While we submitted a comprehensive proposal, many of our recommendations haven’t been incorporated in the draft amendment.

The Arbitration and Conciliation Act, 1996 was enacted under unusual circumstances during the post-liberalisation era. It was based on the UNCITRAL Model Law, designed for international commercial arbitration, and even some safeguards in the Model Law were removed. The law doesn’t account for India’s unique arbitration dynamics.

We need separate legislation - one for international commercial arbitration and enforcement of foreign awards, and another for domestic arbitration. The domestic legislation can allow broader court intervention.

Additionally, India has imported concepts like the "seat of arbitration" from other jurisdictions, leading to confusion. In domestic arbitration, the notion of a "seat" between Indian cities is unnecessary and creates jurisdictional chaos. These issues arise because we have mixed concepts meant for international arbitration with domestic disputes.

We must fundamentally rethink our arbitration framework to avoid the current chaos and ensure clarity and efficiency.

I think the judgment is very interesting, not only for what the majority says, but also, in some ways, for what the minority says because there is a disagreement. What is important about the judgment is that all the judges agree that the principle of equality applies even at the stage of appointment of arbitrators. This is very important because the main crisis in India today, according to me, is the lack of trustworthy and competent arbitrators.

This judgment has many facets. You should not just view it from the perspective of the government; there are other angles too. I believe it will have ramifications for the government, as many of the matters brought before the Supreme Court were arising from railway disputes. The panels of arbitrators in these cases were often tilted and unilateral. For instance, even in the infamous Delhi Metro Rail Corporation (DMRC) case, the process of appointing three engineers as arbitrators was unusual, all from a panel curated and controlled exclusively by the DMRC. This process is fundamentally flawed, as no party, including the government, should have the power to unilaterally appoint arbitrators.

The logic of this judgment would also extend to disputes involving finance companies, builders and allottees, consumers signing standard-form contracts, and large corporations. The main takeaway for me is that the principle of equality has been firmly established at the stage of appointments.

You have to realise that there is genuine pushback from the government in light of some major awards that have gone against them. Now, I am not delving into why these awards went against them. The government has its concerns, and private parties have theirs. However, the solution initially proposed by the government - to have unilaterally constituted arbitral tribunals that would generally decide in their favour - was flawed because it does not inspire confidence in the other party.

While the government’s concerns are valid, unilateral appointment of arbitral panels was not the solution. The OM issued by the Finance Ministry reflects a more drastic step, indicating conflicting directions within the government. On one hand, there is enthusiasm to position India as an international arbitration hub, with active efforts at the highest levels. On the other hand, when the government becomes a litigant, it seems to move away from arbitration.

The only viable solution is to establish credible arbitral institutions. The more ad hocism persists, the more problems multiply. There has been criticism of retired judges being appointed as arbitrators—some of it justified, but not all. At a policy level, the government must introspect and avoid discarding arbitration altogether. While industries are unhappy with the OM, with some using harsh language, I believe the government’s concerns are genuine. However, the solution offered appears worse than the problem.

I don’t believe the intent of the OM was to compare mediation and arbitration directly. That being said, mediation is undoubtedly the path forward, and arbitrators need to familiarise themselves with it. While commercial mediation has shown promise in some areas, it hasn’t been universally successful.

The OM reflects the government’s frustration with losing cases, citing frequent changes in officials, and a sense of imbalance in the process. However, large claims in the industry are unlikely to be resolved through mediation alone. The solution is not to abandon arbitration as a process, but to improve the system. 

It’s a chicken-and-egg situation. Disputes typically arise after contracts are signed, and arbitration clauses are drafted during contract execution. If the clause is for ad hoc arbitration, parties almost inevitably end up with ad hoc proceedings; very few transition to institutional arbitration later.

If we have credible institutions, private parties will likely opt for arbitration clauses tied to these institutions. The government also needs to back institutions like the India International Arbitration Centre (IIAC), which has been designated as an institution of national importance. Unfortunately, such institutions are often treated like stepchildren. The government must lead by example and support credible institutions for arbitration.

A list of arbitrators is maintained by SAROD (Society for Affordable Redressal of Disputes) but it is unilateral, which undermines its credibility. The government needs to accept adverse rulings by panels of credible arbitrators. Institutional arbitration must be implemented, almost mandatorily, to address these issues.

I don’t think it’s a cultural tendency to avoid institutional arbitration. The issue lies in the performance of existing institutions. Many domestic institutions have not fared well, and international institutions have sometimes been perceived - justifiably or otherwise - as biased against Indian parties.

Parties in India are today sophisticated enough to understand that institutional arbitration is cheaper and more effective than ad hoc arbitration. For instance, the Delhi International Arbitration Centre (DIAC) is inundated with cases, which shows there is demand. If we establish credible institutions that gain the trust of both industry and the government, the shift to institutional arbitration will happen organically. Some domestic institutions like the Mumbai Centre For International Arbitration (MCIA) have gained traction.

I’m unsure how this model would work, because arbitration is fundamentally a confidential process. I don’t think merely publishing institutional data will encourage parties to switch from ad hoc arbitration to institutional arbitration.

What we need are two or three highly credible institutions to set the standard. Transparency can enhance an institution’s credibility, but it isn’t sufficient on its own.

There’s also a need for some degree of regulation of ad hoc arbitration and the arbitration ecosystem in general. While there is resistance to government oversight, many in the government perceive arbitration as somewhat of a problem. I am in favour of increased oversight in domestic arbitration, whether by government or by courts.

Such schemes are undoubtedly helpful. Many small players experience arbitration fatigue, especially with legacy matters. Although arbitration timelines have improved to around 1–1.5 years, a settlement under such schemes provides a welcome resolution.