The Singapore Law Gazette

Enforceability of Awards is Key, if Arbitration is to Deliver its Benefits in India

India remains an attractive destination for trade and investment. Its growing population, combined with a young labour force and an expanding consumer market are set to propel India to be the third largest economy in the world. Sectors such as technology, infrastructure and manufacturing continue to see a surge in foreign investments. With such economic growth, the complexity of transactions are expected to increase, which in turn will lead to more complex disputes.

When disputes are managed carefully and resolved with an impartial and effective mechanism, such as arbitration under the International Chamber of Commerce (ICC) Arbitration Rules, business partners may be able to preserve their relationships and protect their economic interests. While arbitration offers many advantages including neutrality and efficiency, the promise of a simple and predictable enforcement procedure is one of the main reasons why companies worldwide choose arbitration to settle cross-border disputes. Without an effective enforcement mechanism, even the most favourable arbitral award may be a pyrrhic victory and undermine the benefits of the entire arbitration process.

Arbitral awards are enforceable around the world because of the near-universal adoption of the Convention on the Enforcement and Recognition of Arbitral Awards, also known as the New York Convention, which has now been signed by over 170 countries, including India. The Convention guarantees that arbitral awards rendered in one state can be recognised and enforced in another, subject to limited grounds for challenge. Notably, the ICC played a significant role in drafting the first version of what later became the New York Convention and was instrumental in its global adoption.

Over the last decade, India has also had significant legislative reforms to promote the use of arbitration. India has enacted its own arbitration law, the Arbitration & Conciliation Act 1996 (Act). To date, three amendments have been made to the Act; in 2015, 2019, 2021 respectively, to ensure that the Act aligns with the evolving trends and best practices of international arbitration. Recently, the Indian Government has proposed a new round of changes to the Act that seeks to promote institutional arbitration, further reduce court intervention, and facilitate the timely conclusion of arbitration proceedings in India. 

However, despite the widespread adoption of the New York Convention and legislative reforms, the reality of enforcement is far from simple. Arbitral awards are now increasingly being disputed, leading to lengthy proceedings around enforcement.

To maximise the likely enforcement of an award, businesses should begin focusing on enforcement at the contract drafting stage and give careful thought to where and which assets to enforce against.

A Well-drafted Arbitration Clause

Drafting the arbitration clause sets the stage for how disputes will be resolved. A well-drafted arbitration clause in contracts and/or a separate arbitration agreement (should the contracts contain no arbitration clause) is the start of an efficient and eventually – a successful arbitration. An arbitration clause must be clear and precise to avoid creating an ambiguity which may render the clause pathological and contentious in its application. 

An essential part of drafting an arbitration clause is selecting the seat of arbitration. The seat of arbitration refers to the jurisdiction under which the arbitration will be conducted and is the legal location where the award will be considered to have originated. The seat is vital because it is also the where the award can be challenged.

Choosing a seat in a country that is a signatory to the New York Convention is an important step. While most countries are signatories to the New York Convention, some countries including in the Middle East and Africa, are not. Therefore, if the seat is not in a New York Convention country, the parties must thoroughly consider other statutory frameworks or alternative methods for enforcement in countries which have not signed the New York Convention.

It is pertinent to mention that if a foreign arbitral award is to be enforced in India, Indian courts will only do so in accordance with the New York Convention if the seat of arbitration has been notified in India’s official gazette. Determining whether the arbitration’s seat has been notified is therefore essential.

Procedural Requirements in Arbitration

An arbitration award may be challenged based on procedural deficiencies which may be invoked by the losing party in its setting aside application before the domestic courts. These include:

1. Improper notice: A fundamental principle of due process in arbitration is ensuring that all parties are given proper notice of the proceedings. This is done to ensure that the other party was given the opportunity to defend itself and reasonable efforts were made in this regard. To avoid the other party alleging a deficiency in notice, one should ensure compliance with all relevant requirements which could potentially be in three possible sources, namely, the arbitration agreement, institutional rules or applicable procedural law which often mandate requirement and procedure for delivery of notices of arbitration. Other severe consequences of improper notice may include lapse of limitation periods or jurisdictional challenge, typically in multi-party contracts where one single notice asserts multiple contracts claims pursuant to separate arbitration agreements.

2. Jurisdictional issues: A jurisdictional challenge can be brought against the arbitrator. The foundation for that claim is twofold: it could either be that the aggrieved party might assert that the arbitration agreement is invalid and the arbitrator did not have the jurisdiction to adjudicate upon the matter, or as provided under the Model Law, that the arbitrator exceeded the mandate and dealt with a dispute not contemplated by, or not falling within, the terms of the parties’ submissions; or the award contained decisions on matters beyond the scope of the parties’ submissions. A party or arbitrator must therefore strictly rely on a specific arbitration agreement must therefore strictly adhere to its terms to avoid leaving itself vulnerable to potential jurisdictional challenges in the future.
3. Composition of tribunal: One of the benefits of arbitration is the ability of parties to select their arbitrators. However, it is essential that the process meets the requirements specified in the agreement or, in the absence of such an agreement, of the law of the arbitral seat i.e. lex arbitri. These include number of arbitrators, their method of appointment, time limit for appointment and qualifications. This ensures not only enforceability but also avoids delays in the process.

A Well-drafted and Reasoned Arbitral Award 

While the ability to decide the decision maker is an advantage of arbitration, compared to litigation, it is also a risk because it can greatly impact the outcome and efficiency of the process. It is therefore extremely important that the chosen arbitrator possesses proficiency in the governing law and the subject matter of the dispute, and can provide a legally binding decision.

The scrutiny of awards with the objective of ensuring enforceability is one of the distinctive features of ICC arbitration. This three-level process involves scrutiny of the draft arbitral award by the case management team in charge, the management of the ICC Secretariat and finally by the ICC International Court of Arbitration comprised of renowned legal practitioners from around the world who may either approve the award as drafted, approve the award with comments or not approve the award.

Many arbitrations in India are either ad-hoc or under the rules of institutions that do not provide such rigorous scrutiny, therefore putting them at risk of being challenged in the absence of not having this extra layer of oversight to ensure enforceability. Issues frequently identified during scrutiny of a draft award under the ICC rules include but are not limited to:

1. Missing basic information such as details of the parties, absence of procedural history.
2. Lack of attention and caution in case of non-participating entity and recording opportunity provided to be heard.
3. Not addressing dissent of a third arbitrator in cases of three-member tribunals.
4. Not addressing all claims or keep track of claims made or withdrawn.
5. Not paying attention to interest sought and factors such as interest on amounts awarded, including arbitration costs, or only on certain amounts, the start and end dates for the calculation of interest, the applicable rate, whether interest should be simple or compound. 

Further information on this process can be read here – Ten Tips on How to Make an Arbitration Award Work: Lessons from the ICC Scrutiny Process, published in ICC Dispute Resolution Bulletin 2022 No. 2 – 2022 – No. 2. 

Where an Arbitration Award Should be Enforced, and Against Which Assets?

In a situation where the party against whom the arbitration award is notified fails to comply, the winning party needs to be thinking of, the jurisdiction where the award needs to be enforced and the assets against which it can be enforced. This typically depends on the following factors:

1. The location, nature, and extent of the assets of the losing party: Enforcement becomes much more feasible if the losing party has identifiable assets in jurisdictions where enforcement is recognised and supported. These assets can range from real estate and bank balances to shares or intellectual property. The process of asset recovery involves identifying, locating, and seizing the assets of the losing party. This can be a complex and time-consuming process, particularly if the losing party has taken steps to obscure their assets. It is also important to ensure that the enforcement is against the actual party and not a third party such as affiliates, parent company or other group companies. Lastly, the financial health of the counterparty is crucial – if the party is insolvent or on the verge of it, arbitrating itself may be an issue to think before or during the arbitration.
2. Where the assets are located: The state in which the assets are located must be a signatory to the New York Convention, as this will facilitate the international recognition and enforcement of the award. If the assets are in a non-signatory state, enforcement may become more complicated, requiring alternative legal mechanisms. In cases involving international holdings, asset tracing can become particularly complex. For example, companies or individuals may attempt to move assets across borders to jurisdictions with more favourable legal environments. Local legal counsel should be sought for their local legislative knowledge and professionals who can assist with asset tracing must be engaged early on.
3. The local environment: The effectiveness of enforcement will depend significantly on the attitude of local courts toward arbitration and their track record of enforcing arbitral awards. In Singapore, for example, arbitral awards benefit from minimal court intervention, save for very limited circumstances. It is not uncommon to see the losing party in an arbitration seek to re-litigate the dispute, given the limited circumstances which exist for setting aside an award and the narrow grounds for non-enforcement. While many jurisdictions are strongly supportive of arbitration and enforce awards promptly, there are jurisdictions in Asia and globally where enforcement can be delayed or obstructed. It is important that parties involved in enforcement proceedings consider and understand the local judicial environment, including the courts’ historical approach towards arbitration and enforcement of awards.

Conclusion

In any arbitration, the primary objective of the party bringing the claim is enforcement. Without a robust enforcement mechanism, even the most well drafted arbitral award will be meaningless. Parties entering into international contracts should plan and prepare for enforcement well in advance. Although arbitration is becoming more popular in India, if the enforcement procedure is unsuccessful, it will not fulfil its intended goal of providing a streamlined, equitable, and unbiased means of resolving disputes outside of the traditional judicial system, which in turn will discourage investors and increase reliance on litigation which continues to burden the court system. Successful enforcement therefore requires well-drafted awards, counsel with specialized arbitration knowledge and experience, and a court system that understands the importance of not intervening in the merits of an arbitral award.