By Vijay L. Kelkar , Pradeep S. Mehta
The lack of timely resolution and the tendency of domestic courts to overturn foreign arbitral awards are major deterrents for potential investors.
After losing one or two cases on international investment matters a few years ago, the government of India (GoI) suspended all their bilateral investment treaties. These had earlier contained international arbitration. It decided to redraft them with the caveat that local remedies will need to be exhausted before approaching any international tribunal. In theory there is no problem but knowing our court system, foreign investors were turned off. Consequently, our foreign direct investment (FDI) flows fell.
According to the UN Trade and Development World Investment Report 2024, FDI in India saw a 43% decline in 2023, mirroring a broader global drop of 2% to $1.3 trillion, due to the change in the dispute settlement system along with trade tensions and geopolitical issues. Currently, approximately `50,000 crore is tied up in installed projects and investments embroiled in disputes awaiting resolution.
One reform that was carried out a few years ago is the passage of the Commercial Courts Act, which provides for establishing exclusive courts and benches in high courts to deal with commercial matters. The GoI touted this change to assure investors that their disputes, if any, can be resolved faster. Alas, in many cases commercial courts have not been established and thus the purpose is defeated.
Many studies indicate that these courts have not yet met expectations. One significant concern is the reflexive granting of injunctive orders in adversarial proceedings, as per our litigation culture. This approach creates a considerable deterrent for foreign investment, as delays in enforcing commercial obligations can lead to substantial losses in time, money, and business opportunities.
According to the World Bank’s Doing Business Report 2020, Indian courts took an average of 1,445 days (around four years) to resolve commercial disputes, highlighting significant challenges within the judicial system that deter investment and create obstacles for businesses. This lengthy resolution period not only imposes high direct costs through legal fees but also leads to substantial indirect costs from lost opportunities and reputational damage.
The current judicial infrastructure is strained, leading to delays, higher litigation costs, and flawed judgments, all of which harm the judiciary’s reputation and deter investors. Adequate financial and human resources should be allocated to prevent further congestion and inefficiencies in the system. Like other special courts, these too could be treated on a priority.
Additionally, strengthening judges’ expertise in commercial law and behavioural economics is critical to deal with commercial matters. This can be achieved through specialised training, continuous legal education, and workshops focused on complex commercial transactions and market practices. The National Judicial Academy at Bhopal can be the lead institution for this purpose.
As an alternative for settlement, arbitration is a preferred method for resolving commercial disputes, with parties commonly including arbitration clauses in contracts, favouring institutional arbitration. While this system is on the rise, many disputes are still settled through ad hoc methods. There is a significant divide. International institutions like the Singapore International Arbitration Centre are thriving, whereas domestic institutions struggle.
Users of domestic arbitration often express dissatisfaction due to the dominance of retired judges in appointments, who may charge high fees without delivering timely and effective resolutions. Also, a persistent lack of trust and consistency hampers India’s appeal as an arbitration venue. For domestic arbitration to thrive, several critical issues must be addressed, including concerns about systemic and institutional bias and the lack of transparency in investor-state arbitrations.
Acknowledging the historical dominance of ad hoc arbitration, experts stress the importance of a collective push towards institutional methods. In this context, the planned establishment of a world-class arbitration centre at GIFT City is a significant and positive step. India has the potential to compete with renowned global arbitration hubs like Singapore, London, Paris, and Dubai.
However, for GIFT City to realise this vision, it must offer high-quality, efficient, and cost-effective services, providing a comprehensive range of alternative dispute resolution (ADR) options including arbitration, mediation, and hybrid models. Strategically positioned, it has the potential to redefine India’s role in the ADR landscape, transforming it into a hub for international arbitration and reducing Indian companies’ reliance on foreign arbitration centres. The discourse is now shifting to mediation and/or conciliation which are less legal. Another measure could be the appointment of ombudsmen drawn from among respected retired bureaucrats or politicians. In many countries, they have proved to be good arbiters of disputes without involving any legal processes.
In light of the above, it is evident that promoting India as an investment-friendly destination is a critical priority for the GoI. Despite several relaxations in the FDI policy, India continues to fall short of attracting substantial financial investments. The lack of timely resolution and the tendency of domestic courts to overturn foreign arbitral awards are major deterrents for potential investors.
The decline in inbound foreign investment can be traced to both policy issues and the traditional judicial culture in India. At this pivotal moment, when India is the fastest-growing large economy, it is crucial to foster international investments by creating a more positive and dynamic commercial environment with the best possible dispute resolution system.
The authors are vice president, Pune International Centre and secretary general, CUTS International.
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