Reform in Practice: Prashant Narang (TrustBridge) on De-judicializing Dispute Resolution

What is one area of regulation in India that should be deregulated?

When we talk about deregulation, we often think of some license, approval, permit, some compliances, or the red tape. I'm going to talk about deregulation in a slightly different context. I would like to call it de-judicialization of the dispute resolution process. In a purely commercial, private-private commercial world, private parties would opt for, let's say, arbitral institution to resolve their disputes. Why?

Institutional arbitration is way more efficient, it's neutral, it's credible, and it has streamlined rules. The problem arises when one of the party is a central or a state PSU. The contracts they have, they have clauses insisting on ad hoc arbitration. Typically, they would have a senior bureaucrat or a retired public official who will be appointed as an arbitrator. Now, we know that these clauses have been challenged, and the courts have invalidated these clauses for want of neutrality.

Who appoints the arbitrator? Parties have to then approach the courts, and the court would typically appoint retired high court judge as the arbitrator. The problem in such cases is then who would hold the arbitrator accountable? In ad hoc arbitration, these are per-hearing basis fee arrangements, and so it's in the interest of the arbitrator to prolong, and also the interest of one of the parties to prolong the arbitration. Hence these sort of arbitrations are often delayed.

When it is delayed, the law provides for a statutory timeline of 18 months. When it crosses that, parties have to go back to the court for extension because you can't extend arbitration without the permission of the courts. You have to go back to the court, and as per the law, the court has to then do fault finding. It has to ascertain who was responsible for the delay in arbitration. If it is the arbitrator, the court would impose, have some fee cut. If it is one of the parties that is responsible for delay, the court would impose cost on that party.

What our research finds is that the court doesn't do that. Why? The court knows that if it tries and do that, then it would take another maybe two years to find fault and ascertain who was responsible. In the first hearing itself, most judges would pass orders by consent of parties, and they grant extension. Basically, what was supposed to be a justice, civil, or a judicial function, it is converted into an administrative function. These are two touch points.

One is the appointment of arbitrator, and the other is extension, grant of extension to continue with arbitration proceeding. Both these touch points with the judiciary are either managerial or administrative functions. The question I ask is, should judiciary take up these functions? This is unnecessary. It takes up more time. The parties really gain nothing. Both the points don't really add much value to the process of arbitration.

What is the solution? The solution that we propose is that the state should amend its contract and should switch from ad hoc arbitration to institutional arbitration. What it means that it should look for a private arbitral institution that provides for neutrality, efficiency, and is cheaper than ad hoc arbitration because mostly at times it charges for a lump-sum fee.

The fee is often in long-term is actually cheaper than ad hoc arbitration. It's not a trivial matter because trillions of rupees are locked up in disputes pertaining to public procurement.

Not only this would usher in those huge quantum of amount or money which is locked up in dispute, but also ensure ease of doing business for private contractors.

What would a more effective alternative look like?

All the state needs to do is to switch from ad hoc arbitration to institutional arbitration. That would mean going for a private arbitral institution that can ensure neutrality, credibility, efficiency. It is likely to be more cheaper than ad hoc arbitration. What it does is that when parties haven't really thought about arbitrator or if they have put that arbitral institution in their contract clause, they will go and approach that institution. The institution will then appoint a suitable arbitrator, which means that they don't have to go to the court.

Institutions are much faster. They might provide for an arbitrator maybe in a week or in a couple of days. It can be as fast as that. Second is that there may not be any need for extension because institutions can be very fast. One of the institutions' data shows that 91% of their arbitrations are wrapped up in less than 18 months. What the state needs to do is to switch from ad hoc arbitration to institutional arbitration.