Arbitration Realities: Patterns of Challenges and Judicial Responses

[Madhav Goel, Karan Gulati, Sonam Patel, and Anjali Sharma are researchers at the TrustBridge Rule of Law Foundation]

Arbitration has become a widely used mechanism to resolve contractual disputes in India. It offers greater flexibility and better alignment with parties’ incentives than courts. Since the parties voluntarily choose arbitration, they are generally expected to accept the outcomes, challenging them only on substantive grounds. Even in cases of challenge, courts are expected to exercise restraint as stipulated by the Arbitration and Conciliation Act 1996 (hereinafter, “the Act”). This restraint seeks to create a feedback loop that ensures fewer challenges are brought to the Court. In this setting, arbitration can enhance contract enforcement efficiency and reduce judicial burden.

Three questions must be answered to determine if the practical application of arbitration aligns with these expectations: First, what proportion of arbitration awards get challenged in courts? Second, how long do courts take to resolve these challenges, and what are their decision-making patterns? Third, is there a difference in how government entities and private parties challenge arbitration outcomes?

Publicly available information is insufficient to answer the first question. There is no baseline data on the total arbitrations conducted in India. However, the second and third questions can be answered by analysing court orders. This article examines a sample of High Court final orders on arbitration challenges, contributing to the expanding body of research that extracts structured information from subjective court orders to identify patterns in the behaviour of litigants and courts (Datta et al. 2017; Sharma and Zaveri 2020; Damle et al. 2022), and research that contrasts the government’s behaviour with that of private parties (Damle et al. 2021; Mehta and Thomas 2022; Goel et al. 2023). The findings, based on the inherent differences in incentive structures of parties, highlight the need to reassess the suitability of arbitration as a dispute resolution mechanism for different parties.

Data and Method

The Act outlines a two-stage process for challenging an arbitral award. Initially, an award can be contested under section 34 on limited procedural grounds, or for non-arbitrability, conflict with public policy, and patent illegality. The outcome of a section 34 challenge may then be appealed under section 37 of the Act.

Data was collected from final orders in sections 34 and 37 challenges to arbitration in the Delhi and Bombay High Courts for one year, i.e., from 1 September 2022 to 30 August 2023. These judgements were sourced from Manupatra, a comprehensive database of High Court decisions. The two High Courts were selected for their prominence in handling commercial disputes. They preside over major economic hubs and accounted for the highest number of cases under sections 34 and 37 during the analysis period. The dataset for analysis includes 279 orders: 241 from Delhi and 38 from Bombay.

Data was collected on three aspects of the challenge: (i) the types of parties initiating the challenge, (ii) the success of such challenges, and (iii) the time taken from the date of the award to the date of the final order. It was then analysed at two levels. First, at an overall level, to determine the success rate of challenges and the time taken. Second, at an entity level, focusing on combinations of petitioner-respondent types, specifically Government-Non-government (G-NG), Non-government-Government (NG-G), and Non-government-Non-government (NG-NG), to explore variations across different party types. Due to the limited sample size at the Bombay High Court, entity-level analysis was conducted only for the Delhi High Court.

Findings

Figures 1 and 2 show the principal findings of the analysis.

Figure 1: Entity-level analysis; Delhi High Court

Figure 2: Overall-level analysis; Bombay High Court

How do Courts Respond to Arbitration Challenges?

Overall, the analysis highlights three key insights: First, in a steady state, there is a significant flow of cases from the initial challenge under section 34 to the subsequent appeal under section 37. In Delhi, nearly 70% of the cases proceed to a section 37 challenge, indicating that most matters undergo both stages of judicial review. In Bombay, this figure rises to 90%, suggesting that most arbitral awards challenged in the Court are scrutinised under both section 34 and section 37 before reaching finality. Second, challenging an arbitral award significantly extends the process until its finality. A section 34 challenge typically adds 3.6 years, while a section 37 challenge extends the process by 5.8 years. Third, there is a noticeable variation in how courts handle challenges to arbitral awards. The Delhi High Court generally exhibits restraint, upholding the award in 80% of cases under section 34 or 37. In contrast, the Bombay High Court is more likely to alter the outcome of an arbitration, upholding awards in only 53% of cases. The Bombay High Court typically also takes longer than the Delhi High Court to resolve challenges to arbitral awards, whether initial challenges under section 34 or appeals under section 37.

How do Arbitral Challenges Vary Across Government and Private Parties?

At the Delhi High Court, the government was a party to 73% of the cases, either as a petitioner (47%) or a respondent (26%). This figure is significant compared to the expectation that a larger proportion of arbitrations would involve only private parties (27%). The relatively low count of NG-NG cases could be because private parties are more cautious about challenging arbitration outcomes than the government.

The government’s propensity to litigate may be influenced by factors such as government officials’ incentive to ‘let the courts decide’ or because the state treasury bears litigation costs. In contrast, the incentives for private parties are markedly different. For them, challenging an award is primarily an economic decision. Litigation is justified only when the potential benefits outweigh the costs. For example, private parties may challenge an arbitral award if it is reasonably certain that the Court will overturn the award or if it seeks to delay the enforcement of the award. Consequently, they are likely to challenge awards more cautiously, and when they do, their challenges tend to have substantial merit that the courts recognise. However, this hypothesis requires further investigation over a larger dataset and across multiple courts to determine if other factors might also explain this trend.

Entity-level analysis also indicates that the government tends to be an unsuccessful litigant. It suggests that the nature of the parties affects the duration and complexity of arbitration proceedings. In 90% of cases where the government challenges an award, the courts dismiss the challenge and uphold the award. Conversely, when an award favours the government, it is overturned in 56% of the cases. Additionally, the time taken to dispose of appeals varies depending on whether the award involves government or private parties. Challenges to government-related awards add 3 years to the arbitration process; a subsequent appeal adds another 5.6 years. In contrast, challenges involving only private parties add 3.5 years; however, a subsequent appeal adds 4.4 years.

Conclusion

This analysis provides early quantitative insights into the behaviour of government and private parties as litigants and courts’ performance in handling challenges to arbitral awards. For example, despite often being unsuccessful, the government is more litigious than private parties. The data also suggests that parties prefer to select courts known for consistently upholding arbitration outcomes as the seat of arbitration. By identifying patterns in challenges and judicial responses, this analysis established a foundation for policy considerations regarding the suitability of various dispute resolution mechanisms for specific types of parties or disputes. For example, if analysis shows that the government consistently challenges adverse arbitration outcomes in the Court, it might be more efficient to direct these disputes to court-led resolution from the outset. This approach could save the time and expense involved in the sequential process of arbitration followed by a court challenge. Pushing the government into arbitration without considering its incentives only prolongs dispute resolution. This approach imposes costs on the government and the private parties that contract with it. Ultimately, the goal of public policy is not merely to promote arbitration but to create a more effective system for contract enforcement. This can be achieved by making informed policy choices about which dispute resolution mechanisms best align with the nature of the dispute and the parties’ incentives.

– Madhav Goel, Karan Gulati, Sonam Patel, and Anjali Sharma