A BRICS-only arbitration forum will not be the panacea imagined

An increasing number of businessmen in BRICS' countries favour arbitration over overburdened litigation systems in resolving domestic disputes.

 Shanghai, BRICS, BRICS 2016, Arbitration, Litigation,

Although the importance of intensified cooperation among BRICS countries in the field of arbitration cannot be overestimated, a separate dispute resolution centre for the five emerging economies, as proposed by finance minister Arun Jaitley at the Conference on International Arbitration in BRICS on August 27, is not necessarily the most efficient way to address the deficiencies of the existing arbitration system.

Comparing arbitration with traditional litigation, Aristotle said: “An arbitrator goes by the equity of a case, a judge by the law, and arbitration was invented with the express purpose of securing full power for equity.” In a similar spirit, various advantages of arbitration were discussed during the ‘Conference on International Arbitration in BRICS — Challenges, Opportunities and Road Ahead’ hosted by India on August 27 in the run-up to the BRICS summit scheduled to take place in Goa in October. The conference outlined opportunities for further collaboration among the emerging economies in the field of arbitration and explored the possibility of setting up a specialised institution to settle disputes between BRICS partners.

Each of the BRICS countries already has a legal framework based on international standards in place. When it comes to resolving domestic disputes, an increasing number of businessmen favour arbitration over the overburdened domestic litigation systems in their countries. Notably, a number of Indian businesses are actively involved in various international arbitration institutions. In 2015, India was the top foreign user of the Singapore International Arbitration Centre (SIAC), followed by China. Although arbitration rules have not always conformed with international practices in the past, a recent push for arbitration from the judiciary along with some legislative reforms is changing things for the better. For instance, last year India amended the Indian Arbitration and Conciliation Act 1996, significantly altering its arbitration landscape while also bringing it in line with international norms.

When it comes to resolving domestic disputes, an increasing number of businessmen favour arbitration over the overburdened domestic litigation systems in their countries.

Cohesion problems

Despite the growing popularity of arbitration within each country, international cooperation among BRICS countries has been limited. To start with a particularly obvious example of limited cooperation, some countries in the bloc do not recognise each other’s arbitral awards. In India’s case, local courts will only enforce a foreign arbitral decision if the country the decision comes from meets certain requirements. The country where the award was issued has to have ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards for Indian courts to consider it valid. Additionally, the central government has to declare that particular country a territory that falls under the purview of the convention. Thus far, only 48 countries have been listed by the government. Although all BRICS countries have ratified the convention, India has not officially notified Brazil or South Africa yet. Consequently, arbitral awards issued in these two countries are not enforceable under India’s Arbitration Act.

In addition to this, many countries take a long time with enforcement proceedings, leading to judicial delays. For instance, the process can take up to four years in China. The execution of foreign awards is a major issue for business operators and so making arbitration a speedier mechanism will ensure that they consider it a more attractive option than domestic litigation.

A reliable and representative dispute resolution process is essential for the expanding economies of BRICS countries.

According to World Bank data, the BRICS countries combined account for over 20% world GDP, while their share in world merchandise trade, has increased from 7% in 2001 to over 17% in 2015. Also, last year, the group received $256 billion of investment inflows, i.e. 15% of world total. The UN Conference on Trade and Development (UNCTAD) expects that as the emerging economies continue growing, the number of disputes between them will also increase. This is concerning since developing countries are hugely under-represented in existing arbitration institutions, which are dominated by experts and practitioners from the West. This under-representation points to negative implications for ensuring inclusive and sustainable growth in developing countries, since the structural bias of the current mechanism could pose trouble in solving disputes involving developing countries’ socio-economic and public interests. Coordination among the BRICS countries may help address some of these concerns and help to bridge some of the cultural, regulatory and judicial disparities in their approaches to arbitration. Which in turn will fuel investment and trade in these countries.

A golden solution?

Yet, the question arises of whether a separate arbitration forum, designated for business partners from BRICS countries, is the best way to approach these problems. Despite demonstrated political support for the initiative, the modest figures for intra-BRICS trade undermine the economic raison d’être of such a centre. Although intra-BRICS commerce has doubled as a percentage of total BRICS trade since 2001, it still accounted for only 12% in 2015. Also, the nations are not actively investing in each other’s economies: according to the UNCTAD World Investment Report, the share of intra-group investment in total FDI flows to the BRICS countries was less than 1% between 2010 and 2014.

Arbitration institutions are facing a number of challenges when it comes to ensuring long-term stability for themselves. Most recently, the London Court of International Arbitration (LCIA) decided to close its Delhi office due to an insufficient number of cases. Another example is the BRICS Dispute Resolution Centre Shanghai, which was established by the Shanghai International Economic and Trade Arbitration Commission last year for hearing commercial disputes between partners from BRICS countries. It has not received a single arbitration application since its inception. Finally, the existence of other reputed and well-trusted arbitration forums such as the International Court of Arbitration, LCIA or SIAC, poses a major challenge to these new institutions. Thus, it might be more preferable to advocate structurally reforming the existing platforms as that would ensure developing countries are adequately represented on arbitration panels.

The BRICS countries are evidently suffering from insufficient cooperation in the field of arbitration; however, setting up a separate institution designed specifically for them is not necessarily going to be the golden solution to all their problems.

The author is a fellow at the Observer Research Foundation, New Delhi. This commentary originally appeared in The Wire.

The views expressed above belong to the author(s).

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