 "Misaligned policy incentives in cleaning arbitration")
It was a mess crying for a clean-up. Alternate dispute resolution through arbitration, aimed at unburdening the courts and improving the quality of enforcement of contracts and commercial legal disputes, has become as ineffective as the court system. Even as the new government took over last year, a Presidential Ordinance to amend the law on arbitration was planned but got shelved when the President reportedly nudged it back. Now, last month, The Arbitration and Conciliation (Amendment) Ordinance, 2015 got promulgated.
Like with many policy choices, despite the instrument of reform being well-intentioned, there is a risk that the adoption of intuition rather than empirical assessment of what ails arbitration may result in the reform not delivering results. First, the new law seeks to bring in a timeframe of 12 months within which any dispute referred to arbitration should be resolved. The means adopted to achieve that objective is to provide the timeframe as a statutory deadline. In other words, if there is no resolution of the dispute in 12 months, the mandate of the arbitrators ceases to exist in the eyes of law.
Indeed, the law enables the parties to the arbitration to extend the time by not more than six months. But it is common knowledge that most delays in litigation, in India, are caused by one of the parties to the litigation and the justice delivery system does not dis-incentivise it strongly enough. The Ordinance enables imposition of costs on parties seeking adjournments as a disincentive. Yet, it may be naïve to assume that no party to the proceedings would oppose an extension of time. If the parties cannot agree to grant extension of time of six months, or if the arbitration is not completed despite such extension having been granted, it is only the court that can grant further time for the arbitration to be completed.
When doing so, the court may replace one or all arbitrators and get the newly appointed arbitrators to continue proceedings from that stage without having to start afresh. Now, judicial discretion on replacing an arbitrator mid-course should be rarely exercised but when an opportunity to knock off an arbitrator presents itself, litigants are certain to use it and hurl allegations of ineptitude to secure more delays. These would need to be considered judicially, and could lead to further delay.
The law nudges the court too to dispose of such applications in sixty days. Historically, one of the biggest areas of backlog in arbitration-related applications lying in court has been the appointment of arbitrators - when parties cannot agree on who should be the arbitrator, the court appoints one. If courts take six months to decide on whether to grant extension of time for a private dispute resolution, the reform would be rendered quite meaningless. It would be imperative for courts to devote judicial resources to handling such applications for extension of time in a timely manner, to render this reform effective.
Second, the statutory fixation of arbitrators' fees - this is perhaps the single biggest mistake in the Ordinance. Indeed abusive charging of fees by arbitrators is a reality, but the solution cannot be for the law to prescribe what may be charged. By that token, the large-scale malpractice by lawyers in charging fees too cannot be solved by fixing lawyer fees by statute. This "reform" measure is fraught with risk. The Ordinance inserts a schedule to the law that would be the basis on which courts may make rules for how arbitrators may charge. The government may issue notifications modifying this schedule of fees from time to time - one need not go back to Parliament, but this measure itself is fraught with risk of public interest litigation on whether Parliament can delegate the power to amend a schedule to an Act of Parliament to the government. The net result could be that our best arbitrators, like with our best lawyers, could get driven to dispute resolution forums elsewhere in the world, whether they do not have to worry about artificial barriers on fees and timeframe, and get remunerated well with greater process efficiencies.
Finally, when a court grants extension of time for an arbitration matter that is not completed within twelve months or the extended eighteen months, the court may reduce the arbitrator's fees by 5 per cent for every month of delay. This would entail a judicial finding that the arbitrator is the cause of the failure and a financial penalty on the arbitrator. When such a ruling is issued, the arbitrator may simply walk of in a huff, leaving the proceedings further exposed to an even further delay. Good retired judges who do not wish to be exposed to the ignominy of a civil judge passing such judgement may shy away from arbitrations altogether.
Some empirical analysis of arbitration proceedings in which, say, the government of India has been involved in, would have been useful to justify and finesse the remedies attempted. It appears that the incentive structure has been created on the basis of anecdotal evidence - risking rendering the medicine as being more painful than the ailment.
Like with many policy choices, despite the instrument of reform being well-intentioned, there is a risk that the adoption of intuition rather than empirical assessment of what ails arbitration may result in the reform not delivering results. First, the new law seeks to bring in a timeframe of 12 months within which any dispute referred to arbitration should be resolved. The means adopted to achieve that objective is to provide the timeframe as a statutory deadline. In other words, if there is no resolution of the dispute in 12 months, the mandate of the arbitrators ceases to exist in the eyes of law.
Indeed, the law enables the parties to the arbitration to extend the time by not more than six months. But it is common knowledge that most delays in litigation, in India, are caused by one of the parties to the litigation and the justice delivery system does not dis-incentivise it strongly enough. The Ordinance enables imposition of costs on parties seeking adjournments as a disincentive. Yet, it may be naïve to assume that no party to the proceedings would oppose an extension of time. If the parties cannot agree to grant extension of time of six months, or if the arbitration is not completed despite such extension having been granted, it is only the court that can grant further time for the arbitration to be completed.
When doing so, the court may replace one or all arbitrators and get the newly appointed arbitrators to continue proceedings from that stage without having to start afresh. Now, judicial discretion on replacing an arbitrator mid-course should be rarely exercised but when an opportunity to knock off an arbitrator presents itself, litigants are certain to use it and hurl allegations of ineptitude to secure more delays. These would need to be considered judicially, and could lead to further delay.
The law nudges the court too to dispose of such applications in sixty days. Historically, one of the biggest areas of backlog in arbitration-related applications lying in court has been the appointment of arbitrators - when parties cannot agree on who should be the arbitrator, the court appoints one. If courts take six months to decide on whether to grant extension of time for a private dispute resolution, the reform would be rendered quite meaningless. It would be imperative for courts to devote judicial resources to handling such applications for extension of time in a timely manner, to render this reform effective.
Second, the statutory fixation of arbitrators' fees - this is perhaps the single biggest mistake in the Ordinance. Indeed abusive charging of fees by arbitrators is a reality, but the solution cannot be for the law to prescribe what may be charged. By that token, the large-scale malpractice by lawyers in charging fees too cannot be solved by fixing lawyer fees by statute. This "reform" measure is fraught with risk. The Ordinance inserts a schedule to the law that would be the basis on which courts may make rules for how arbitrators may charge. The government may issue notifications modifying this schedule of fees from time to time - one need not go back to Parliament, but this measure itself is fraught with risk of public interest litigation on whether Parliament can delegate the power to amend a schedule to an Act of Parliament to the government. The net result could be that our best arbitrators, like with our best lawyers, could get driven to dispute resolution forums elsewhere in the world, whether they do not have to worry about artificial barriers on fees and timeframe, and get remunerated well with greater process efficiencies.
Finally, when a court grants extension of time for an arbitration matter that is not completed within twelve months or the extended eighteen months, the court may reduce the arbitrator's fees by 5 per cent for every month of delay. This would entail a judicial finding that the arbitrator is the cause of the failure and a financial penalty on the arbitrator. When such a ruling is issued, the arbitrator may simply walk of in a huff, leaving the proceedings further exposed to an even further delay. Good retired judges who do not wish to be exposed to the ignominy of a civil judge passing such judgement may shy away from arbitrations altogether.
Some empirical analysis of arbitration proceedings in which, say, the government of India has been involved in, would have been useful to justify and finesse the remedies attempted. It appears that the incentive structure has been created on the basis of anecdotal evidence - risking rendering the medicine as being more painful than the ailment.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)
somasekhar@jsalaw.com
somasekhar@jsalaw.com