Author : Riti Kitawat, A student at D.M. Harish School of Law

To the Point

International arbitration is a private, binding process of settling disputes which arise from international commercial transactions. This enables the parties from different nations to settle their disputes through an independent tribunal rather than courts in the respective nations. The process is favored due to its benefits of neutrality, procedural flexibility, confidentiality, cross-jurisdictional enforcement of awards, and party autonomy. The international laws concerning international arbitration are drawn majorly from the UNCITRAL Model Law on International Commercial Arbitration, 1985; the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (New York Convention); and the domestic legislation such as India’s Arbitration and Conciliation Act, 1996. Judicial decisions and legislative changes have made India a favorable destination for arbitration. Thus, international arbitration is an integral part of global trade.

Abstract

With the advent of globalization, there has been an increase in commercial transactions between entities operating in different jurisdictions, thus creating a necessity for settling disputes arising out of such transactions. The traditional mode of litigation in domestic courts is not suitable due to various reasons including jurisdictional issues, procedural problems, foreignness of law, and impartiality of the judiciary. Consequently, international arbitration has become the most common means of dispute resolution as it provides for a neutral venue, procedural flexibility, confidentiality, expertise of arbitrators, and enforceability of awards internationally. The current paper attempts to discuss the principle of international arbitration, its legal principles, procedures, and importance, and analyzes the developing arbitration law of India.

Use of Legal Jargon

Party autonomy forms the basis of international arbitration because it gives the contracting parties powers to decide on the applicable law, place of arbitration, language, procedure of arbitration, and the appointment of the arbitrator. The arbitration agreement is treated as self-contained through the doctrine of separability meaning that the agreement for arbitration will survive even if the main contract is invalid or unenforceable.

There is the doctrine of Kompetenz-Kompetenz where the arbitration tribunal has the power to determine its jurisdiction without any preliminary intervention by the court of law. The juridical seat of arbitration helps in determining the procedural law governing the arbitration as well as determining which courts have jurisdiction while the venue of the arbitration means the actual place where hearings are carried out.

The decision made by the arbitration tribunal is termed as an arbitral award which is binding and enforceable under the international conventions. The intervention of the courts is kept to the barest minimum following the idea that arbitration should be an independent way of resolving disputes.

The Proof

International arbitration has emerged as one of the most successful tools for settling disputes emanating from international commercial transactions. In contrast to litigation, arbitration obtains its powers from the consent of both the parties and not from the sovereignty of the State. Therefore, arbitration is valid depending on whether there is an arbitration agreement that is legally binding between the disputing parties.

The major international convention regulating international arbitration is the New York Convention of 1958, requiring contracting states to recognize the arbitration agreement and enforcement of foreign arbitral awards with only few exceptions. Currently, over 170 states are parties to the New York Convention, making it one of the most successful international commercial conventions. The New York Convention has greatly boosted the confidence of foreign investors since arbitral awards under the Convention can now be enforced in different jurisdictions without re-examining the facts of the case again.

Similarly important is the UNCITRAL Model Law of International Commercial Arbitration of 1985 as amended in 2006, providing a uniform law for arbitration legislation. Jurisdictions including India, Singapore, Australia, Canada, and Hong Kong have incorporated arbitration legislation based on the Model Law.

International commercial arbitration in India falls within the purview of the Arbitration and Conciliation Act, 1996, passed with the objective of harmonizing domestic arbitration laws in line with international standards. The Act largely adopts the principles enshrined in the Model Law promulgated by UNCITRAL and provides for minimum interference by the judiciary in the arbitral process.

Section 2(1)(f) of the Arbitration and Conciliation Act defines international commercial arbitration as any arbitration which arises out of legal relationships regarded as commercial in accordance with the Indian law wherein at least one of the parties is an alien individual, an alien corporate body or an association of individuals which has its management outside India, foreign resident, foreign government.

The arbitration agreement is the cornerstone of all arbitral proceedings. Section 7 of the Act lays down that the said agreement must be in writing. It may be part of the main commercial agreement or can even be in the nature of a separate agreement. The agreement usually stipulates the applicable law, place of arbitration, language, number of arbitrators, institutional rules, and the mode of appointment of arbitrators. 

Arbitration procedure usually begins with the issuance of a notice citing the arbitration agreement. Following that, the arbitral tribunal is formed either by agreement or in accordance with the institution’s rules. The tribunal holds preliminary hearings for fixing procedural schedules, including time periods for disclosure, pleadings, productions of evidence, witness testimony, and hearings.

Arbitration is procedurally flexible, unlike civil litigation. The arbitral tribunal is not strictly governed by the procedural rules set out in the Code of Civil Procedure, 1908 and the Indian Evidence Act, 1872, unless the parties have agreed otherwise. This flexibility allows for the efficient resolution of disputes from technical industries like construction, infrastructure, shipping, intellectual property, telecommunication, and energy sectors.

One of the main benefits of arbitration is party autonomy. The parties have great control over the dispute resolution process, having the ability to appoint expert arbitrators in relation to the specific commercial area of the case, to determine the applicable substantive law, arbitration rules, time limits and confidentiality requirements. Such flexibility cannot be found in traditional national court litigation.

Confidentiality may be considered an important benefit. Confidential commercial information, trade secrets, pricing policies, innovations, financial information and confidential data regarding the business operation stay undisclosed in public. It is especially important for multinational companies which try to protect their commercial reputation and competitive position.

The possibility to recognize and enforce foreign arbitral awards is another distinctive characteristic of arbitration. In accordance with New York Convention, foreign awards can be recognized and enforced in contracting states except the cases of the absence of arbitration agreement, denial of a fair trial, exceeding of the scope of jurisdiction of arbitrators, procedural violations and the awards conflicting with the public policy of the state where the enforcement takes place.

India has enacted a number of legislative amendments to improve its arbitration laws. First, the Arbitration and Conciliation (Amendment) Act, 2015 included stringent timelines for the process, limited judicial intervention, and provided clarification of certain aspects related to interim measures. Second, the 2019 Amendment attempted to foster institutional arbitration through the creation of the Arbitration Council of India, but some clauses have been revised later on. Third, the 2021 Amendment allowed courts to refuse to enforce any award obtained through fraud or corruption, striking a balance between finality and procedure.

Despite numerous benefits, international arbitration is not immune to criticism. Primarily, the main drawback of the process is associated with the high cost of the process, especially in cases involving complex claims that include several parties, experts, and institutional administration. Fees paid to arbitrators, lawyers, and costs of administration can reach up to those charged in litigation cases.

Delays can also be viewed as a disadvantage. Although arbitration is supposed to bring about a quick decision, the lengthy process is associated with high-value commercial disputes that may require numerous documents, expert reports, and jurisdictional issues. However, arbitration still usually takes less time compared to litigation.

The principle of non-interference in arbitration by courts is contained in section 5 of the Arbitration and Conciliation Act, 1996. The courts can intervene in matters concerning the above principles only in circumstances where the court is given powers by the act itself to do so. Such circumstances include appointment of arbitrator in accordance with Section 11 of the Act, issuance of interim measures of protection in Section 9 of the Act, setting aside of arbitral award under Section 34 of the Act, and the enforcement of arbitral award in accordance with Section 36 of the Act.

International arbitration has also emerged to be an extremely significant method for the resolution of disputes concerning foreign direct investment, construction agreements, infrastructure development contracts, maritime trade, joint ventures, and technology transfer agreements. International companies choose international arbitration since the disputes between them can be tried in international forum rather than the local courts which are less familiar to them.

India has been trying to create a reputation for itself as an international center for arbitration. Organizations like the Mumbai Center for International Arbitration (MCIA) and the India International Arbitration Centre (IIAC), New Delhi have been set up for the purpose of promoting.

Case Laws

1. Bhatia International v. Bulk Trading S.A. (2002) 4 SCC 105

The Supreme Court ruled that Part I of the Arbitration and Conciliation Act, 1996 would apply to international commercial arbitrations taking place outside India as well unless expressly or implicitly excluded by the parties. While this ruling increased judicial interference, it generated a lot of uncertainty with regard to foreign-seated arbitrations and was subsequently overruled.

2. Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. (BALCO), (2012) 9 SCC 552

In this landmark decision, the Constitutional Bench overruled Bhatia International and declared that Part I of the Arbitration and Conciliation Act only applied to arbitrations seated in India. The Court emphasized on the principle of territoriality in arbitration wherein it has been observed that juridical seat governs arbitration proceedings. The decision has been hailed as the bedrock of Indian arbitration jurisprudence.

3. BGS SGS Soma JV v. NHPC Ltd., (2020) 4 SCC 234

The Supreme Court laid down the difference between the seat of arbitration and the venue of arbitration. Once the seat of arbitration has been fixed, then only the court having jurisdiction over that seat had exclusive supervisory jurisdiction. The judgment clarified many ambiguities in arbitration agreements.

4. PASL Wind Solutions Pvt. Ltd. v. GE Power Conversion India Pvt. Ltd., (2021) 7 SCC 1

The Apex Court ruled that the parties residing in India were free to select a foreign seat of arbitration and the foreign award passed on such basis was enforceable under Part II of the Arbitration and Conciliation Act, 1996.

5. Enercon (India) Ltd. v. Enercon GmbH, (2014) 5 SCC 1

The Court made it clear that the agreements pertaining to arbitration should be construed in such a way that the intent behind the same is given priority, instead of making the agreement itself ineffective.

Conclusion

The most significant advantage of international arbitration is that it allows neutral, flexible, confidential, expert, and globally enforceable dispute resolution. The process of international arbitration gives an opportunity for the parties to tailor their dispute resolution process considering their commercial needs with minimum involvement of judicial system. International conventions like the New York Convention, 1958, along with the UNCITRAL Model Law, have developed a harmonized legal regime that generates confidence of the business and investor community.

India has done tremendous work by way of reforming its arbitration laws through the Arbitration and Conciliation Act, 1996 and subsequent amendments to it made in 2015, 2019, and 2021. Decisions such as BALCO, BGS SGS Soma, and PASL Wind Solutions have reinforced the concepts of party autonomy and territoriality, bringing Indian arbitration law on par with the international standard.

Legal Opinion: Although India has emerged as a strong pro-arbitration jurisdiction, there are still some steps to be taken by India for reduction of procedural delays, improvement of institutional arbitration, and proper interpretation of arbitration laws by judges. Further investment in arbitration facilities and creation of specialist tribunals will contribute to building up India as a leading international centre of international commercial arbitration.

FAQ

1. What is international arbitration?

International arbitration is a private dispute resolution process in which parties from different countries agree to submit their commercial disputes to an independent arbitral tribunal instead of national courts.

2. Which law governs international commercial arbitration in India?

International commercial arbitration in India is primarily governed by the Arbitration and Conciliation Act, 1996, which is based on the UNCITRAL Model Law on International Commercial Arbitration.

3. Why is the New York Convention important?

The New York Convention, 1958 facilitates the recognition and enforcement of foreign arbitral awards in over 170 contracting States, making arbitration an effective mechanism for international dispute resolution.

4. What is the difference between the seat and the venue of arbitration?

The seat determines the legal jurisdiction and procedural law governing the arbitration, whereas the venue is merely the physical location where hearings are conducted.

5. Why do businesses prefer international arbitration over litigation?

Businesses prefer international arbitration because it offers neutrality, confidentiality, procedural flexibility, expert decision-makers, limited judicial interference, and easier international enforcement of arbitral awards.