Dispute Resolution in India

This chapter deals with dispute resolution and the judicial system in India. This is to give an introductory idea to the judicial system and processes to startups.

1. What is the judicial system in India?
2. What are various modes of resolving disputes in India?
3. What are the alternative methods of dispute resolution available in India?
4. What is the procedure for appointment of the arbitral tribunal?
5. How are arbitral awards enforced in India?
6. What are the grounds on which an arbitration award can be challenged in courts in India?
7. Are there any insolvency laws applicable to companies established in India?
8. Do Indian courts recognize choice of law and jurisdiction clauses?
9. How are foreign judgments enforced in India?

1. What is the judicial system in India?

The Indian Constitution assigns a crucial position to the judiciary. One of the directive principles under the Constitution is the separation of the powers of executive and judiciary. However, there may be overlap between their functions. An elaborate and extensive judicial and quasi-judicial system exists in India with courts being the judicial authority, and regulators like the SEBI (for the securities market) being quasi-judicial authorities. A separate civil and criminal system exists in each state with the High Court being the apex court for the State. Besides being an appellate Court, some High Courts also have original jurisdiction in civil and admiralty matters, such as High Courts in Mumbai, Kolkata, to name a few.
Appeals from the High Courts lie with the Supreme Court of India in appropriate cases, which is the apex judicial authority in India. The Supreme Court can also entertain special leave petitions from any court or tribunal in the country and can issue writs for enforcing fundamental rights, besides providing advisory opinions. Next to the High Court in hierarchy are district courts, headed by a District and Sessions Judge. At the bottom of the hierarchy are Court of Civil Judge (Junior Division) and Judicial Magistrate for civil and criminal cases respectively. There are also various specialized tribunals that have been set up in India for addressing issues pertaining to specialized areas, such as, the Family Court, Income Tax Appellate Tribunal, Company Law Board (till the time National Company Law Tribunal is made effective), the Central and State Administrative Tribunals, the Debt Recovery Tribunal, the Intellectual Property Appellate Tribunal and the Sales Tax Appellate Tribunal, to name a few. Subsequent to the enactment of the Legal Services Authorities Act, 1987 (LSA Act), different States have also established State level Legal Services Authorities to conduct legal aids to economically poor people, as well as to conduct Lok Adalats.

2. What are various modes of resolving disputes in India?

The majority of the cases in India are settled by way of litigation, with the active involvement of the courts or tribunals. However, with the ever-evolving legal scenario, alternate modes of resolving disputes are also gradually gaining prominence, especially in resolution of commercial disputes. The Indian law also recognizes, arbitration, conciliation, judicial settlement including settlement through Lok Adalat and mediation as the mechanism of settlement of disputes, besides litigation. Some of the reasons for the growing popularities of these alternative modes include, time efficiency, cost efficiency and specialized adjudicator for resolving disputes. In certain cases, arbitration is the statutorily prescribed method of resolving any dispute, such as Section 7B of the Indian Telegraph Act, 1885.

3. What are the alternative methods of dispute resolution available in India?

As mentioned in para 9.2, statutorily recognised alternative methods of dispute resolution are arbitration, conciliation, judicial settlement including settlement through Lok Adalat and mediation. While arbitration and conciliation are governed under the Indian Arbitration and Conciliation Act, 1996 (Arbitration Act), Lok Adalats are governed under the LSA Act.

4. What is the procedure for appointment of the arbitral tribunal?

Under the Arbitration Act, the disputing parties are free to determine the number of arbitrators, which has to be an even number and in the absence of such agreement, the arbitral tribunal is required to be composed of a sole arbitrator. The parties are also allowed to decide on a procedure for appointing the arbitrator or arbitrators, however, if an agreed procedure had not been acted upon, the parties could approach the Chief Justice of the High Court (Chief Justice of India in the matter of an international commercial arbitration), or his designate for appointment of an arbitrator. In absence of any agreement to appoint an arbitral tribunal, the Arbitration Act requires, in arbitration with three (3) arbitrators, each party to appoint one (1) arbitrator and the two (2) appointed arbitrators to appoint the third arbitrator, as the presiding arbitrator. If one of the parties does not appoint an arbitrator within thirty days, or if two (2) appointed arbitrators do not appoint third arbitrator within thirty days, the party can request Chief Justice to appoint an arbitrator. However, depending upon the choice of the governing rules, the appointment of the tribunal would also vary.

5. How are arbitral awards enforced in India?

The enforcement mechanism varies depending upon whether the arbitration can be termed as domestic award or a foreign award. Under the Arbitration Act, if the place of arbitration is in India and the award is given under Part I of the Arbitration Act, the same is treated as a domestic award. A domestic award, which is final, are treated as a decree of the Court and is capable of being enforced by initiating an execution proceeding. However, prior to execution of the decree, care must be taken to ensure that the award is registered (if the purports or operates to create, declare, assign limit or extinguish any title, right or interest in any immovable property) and proper stamp duty has been paid on the same.

Foreign awards under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and under the Geneva Protocol on Arbitration Clauses are enforceable in India, treated as decrees of an Indian Court. It has further been held by the Supreme Court that, under the Arbitration Act, there is no requirement for a separate decree to be passed by a Court of competent jurisdiction for the foreign award to be enforced. All other foreign awards will need to be ratified by the courts and a decree passed by the court, which will then become enforceable.

6. What are the grounds on which an arbitration award can be challenged in courts in India?

The grounds on which an arbitration award can be challenged in the courts are limited to the following:

1. The party challenging the award was under some incapacity to perform an obligation;
2. The arbitration agreement is invalid under the governing law;
3. The applicant establishes that it did not receive adequate notice of the appointment of the arbitrator or of the arbitral proceedings or to present his case;
4. The dispute is outside the scope of the arbitration agreement;
5. Composition of the arbitral tribunal was not in accordance with the provisions of the arbitration agreement;
6. If the court finds that the subject matter of dispute is not capable of arbitration; or
7. The arbitral award is in conflict with public policy of India.

Further, a domestic award can be challenged by a party, who was unsuccessful in his/her challenge to the appointment of an arbitrator; or on the ground, that arbitral tribunal granting such award was beyond the scope of its jurisdiction in doing so.

7. Are there any insolvency laws applicable to companies established in India?

The Companies Act provides for the winding up of a company on the petition of a creditor if the company is unable to pay its debts. The Companies Act raises a presumption of inability to pay if:

A creditor, claiming in excess of `Rs. 1,00,000 (Rupees One Lakh only), serves a written demand upon the company and within three (3) weeks of the receipt of such demand the company fails to make payment or compound for the same to the reasonable satisfaction of the creditor;
Execution or other process issued on a decree or order of any Court in favor of a creditor of the company is returned unsatisfied in whole or in part. However, it may be noted that winding up is not a legitimate means of seeking payment; a petition ostensibly for a winding up order but really to exercise pressure is liable to be dismissed. A winding up petition on the ground of inability to pay the debt, would also be dismissed if the company bona fide disputes its liability or puts up a counter-claim against the creditor. Also note that, even a solvent company can go for a voluntary winding up.

Apart from asking for a winding up of the company for its failure to pay its debts, a secured creditor, who is a bank or a financial institution, is permitted under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), to enforce its security interest, provided the outstanding dues is not less than `Rs. 1,00,000 (Rupees One Lakh only). If the amount of debt due to any bank or financial institution or to a consortium of banks or financial institutions is not less than `10,00,000 (Rupees Ten Lakhs only), such creditors would also have recourse under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBAct). Note that, the remedies under the SARFAESI Act and RDDB Act are not mutually exclusive, and two different and simultaneous proceedings can be initiated by a secured creditor against the company.

8. Do Indian courts recognize choice of law and jurisdiction clauses?

Indian courts do recognize and enforce a choice of law and jurisdiction made by parties subject to such choice being bona fide and not being opposed to public policy. However, Indian courts may refuse to enforce a stipulation as to the choice of forum where it is of the opinion that such choice is oppressive, unfair or inequitable and does not bear any real or substantial connection to the subject matter of the dispute. The Court may also take into account the balance of convenience, interests of justice and like circumstances such as where the evidence is available etc., for upholding the exclusive jurisdiction clause of an agreement.

9. How are foreign judgments enforced in India?

A judgment rendered by a court outside India is conclusive as to any matter thereby directly adjudicated upon, except:

Where the judgment has not been pronounced by a court of competent jurisdiction;
Where the judgment has not been given on the merits of the case;
Where the judgment appears on the face of it to be founded on an incorrect view of international law or that there has been a refusal to recognize the law of India in cases in which such law is applicable;
Where the proceedings in which the judgment was obtained are opposed to natural justice;
Where the judgment has been obtained by fraud; or
Where the judgment sustains a claim founded on a breach of any law in force in India

Where a foreign judgment has been rendered by a superior court in any country or territory outside India, which the Government of India has by notification declared to be a reciprocating territory, it may be enforced in India by proceedings in execution as if the relevant court in India had rendered the judgment. Various countries including the United Kingdom and the Republic of Singapore have been declared by the Government of India to be reciprocating territories, but the United States of America has not been so declared. A judgment of a court in a jurisdiction, which is not a reciprocating territory, has only evidentiary value and may be enforced only by a new suit upon the judgment and not by proceedings in execution. The suit must be brought in India within three (3) years from the date of the judgment in the same manner as any other suit filed to enforce a civil liability in India.