What is Commercial Arbitration and How Firms Use it to Settle Business Disputes

What is Arbitration and why it is so important and how does It Take Place?

We often hear the term, Arbitration, or Commercial Arbitration, used in multiple contexts in business literature.

As the name implies, Arbitration, is a process of settling disputes that arise from differing interpretation of contracts between businesses as well as a mechanism through with negotiated settlement of outstanding issues between corporates and business partners can be actualized.

Indeed, Arbitration is very important as any contract agreed between businesses needs to have a clause that specifies where and how any disputes from failure to honour the contractual obligations can be settled through judicial means.

Arbitration involves a dispute resolution mechanism as well as a process by which the judiciary pronounces the verdict on who is at fault or who has to pay up or who has to be penalized in case of alleged reneging of contractual obligations.

In recent years, Arbitration has become that much more important as the Complexities of the Modern Businesses and their dealings with global and local partners have become so intricate that disputes are bound to arise and hence, there needs to be a specific and well laid procedure through which they are settled.

Some Real World Examples of Corporate Arbitrations and the Lessons from Them

There are many cases of Arbitration in recent years in the Indian Corporate Landscape and prominent among them are the ones involving Vodafone, Cairns, and Vedanta.

In all these cases, the dispute was between the government and the firms concerned wherein the latter felt that they were being unfairly penalized as far as taxes on business done long ago was concerned as well as disputes related to payment of royalties and penalties for non completion of contractual obligations.

An interesting aspect of these cases that went for Arbitration was that they chose Singapore as the place where they would fight their courtroom battles and this speaks volumes about the lack of trust in the Indian Arbitration and Judicial Environment.

Indeed, it has become the norm for corporates to specify Singapore as the Jurisdiction in which the disputes are to be settled as it has a well established structure and institutions that can arbitrate on the disputes.

Having said that, these cases also ended up back in the Indian Courts as the Indian Government appealed and also ensured that the appeals were ultimately handled by the Supreme Court of India and hence, brought the Ball Firmly Back into the Indian Courts.

The Complex Laws Governing Global Firms in Local Markets Gives Rise to Arbitration

Why Arbitration does has to happen and more importantly, why are so many firms resorting to this mechanism?

To start with, as mentioned earlier, business has become so complex and subject to uncertainties that reneging on contractual obligations, whether intentional or due to differing interpretations leads to disputes.

Second, the laws governing corporates have become so cumbersome and ponderous that unless there is a clear mechanism of interpretation of laws, it is often way too easy to accuse business partners of contract failures.

Third and perhaps the most important reason is that due to globalization, the borderless world exists on one hand and on the other hand, the laws governing global businesses are subject to multiple jurisdictions and a local and global melange of rules and procedures.

This gives rise to laborious contracts that can anytime lead to accusations of dishonouring and reneging on them. Indeed, modern business with all its multi layered approach to the way in which business is conducted means that lawyers on both sides and commercial litigators have a busy time drawing up contracts as well as arguing in Arbitration cases as and when disputes arise. Moreover, Arbitration is often the last resort before negotiated settlements.

A Case for Simplification of Laws and Greater Ease of Doing Business

Having said that, the above mentioned aspects need not have to be the case all the time. There is room for simpler contracts and greater ease of doing business.

For instance, in the case of Cairns, the Indian Government that was eager to open up its territorial waters for Oil and Natural Gas exploration could have provided some leeway to the Multinational just like it had done so for Reliance.

In addition, the case of Vodafone has become a Textbook case of how Governments arm twist businesses and as the Retrospective laws and the subsequent developments attest, it could have been handled better.

Indeed, we are not holding a brief for businesses here and instead, our argument is that there are ways and means of dispute resolution without rushing to Arbitration and then resorting to appeals and counter appeals that drag on for years leading to the vitiation of the business environment.

Moreover, the higher the number of cases that go to arbitration, the lesser is the confidence that the global firms have in a country as an investment decision.

Therefore, it is our point that Arbitration be used as a last resort when all other methods have completely failed.

The Need for Thorough Due Diligence

Last, there is also a case to be made for global businesses to do their Due Diligence before entering foreign markets as more often than not, the Fine Print has many details that can make or mar their chances.

Indeed, as Corporate Tax Laws and Rules become deep and dense, it makes sense to do a feasibility analysis and a thorough appraisal of the chances of success before taking the plunge.

Arbitration can be of use at a much later stage and that too when both parties are not satisfied with the initial attempts to resolve the disputes between them.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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