Solutions to invigorate India’s lacklustre arbitration system

Challenges in India’s arbitration landscape.

By Prashant Narang 

Arbitration in India stands at a crossroads. Conceived as a swift, party-driven forum for resolving disputes, it has instead become a labyrinth—marked by chronic delays, spiralling costs, and a closed circle of retired judges dominating the landscape. India’s system remains so inefficient that the Union Government, in an Office Memorandum dated June 3, 2024, advised PSUs and government departments to avoid arbitration clauses in contracts for claims exceeding Rs 10 crore, preferring mediation instead. That’s a stunning indictment of a system designed to ease the burden on courts.

Despite recent reforms, including the rise of institutions like the Mumbai Centre for International Arbitration (MCIA), arbitration in India remains a slow and expensive ordeal. Parties still face exorbitant fees and years of waiting. While the government aspires to position India as an arbitration hub, the reality is painfully different—disputes that start in arbitration often end up languishing in the very courts that arbitration was meant to bypass.

These inefficiencies underscore the need for a radical overhaul—something as transformative as ride-hailing services were to transportation. India’s arbitration sector is overdue for disruption by market forces. Thirty years of state interventions—ranging from legislative reforms to court-driven initiatives—have accomplished little. It’s time to let choice and competition achieve what laws and regulations have failed to deliver.

Structural challenges in India’s arbitration landscape

When parties cannot agree on arbitrators, they must approach the courts, which then appoint arbitrators—usually retired judges. India may well be the only country where judges appoint judges, who then appoint their retired colleagues as arbitrators. While their legal expertise is undisputed, this system creates a predictably small pool of decision-makers, many of whom juggle multiple cases, leading to exorbitant fees and painfully slow proceedings. In practice, arbitration often starts to resemble litigation.

The Supreme Court acknowledged this issue in Union of India v. Singh Builders Syndicate, noting that arbitration fees can sometimes rival—or surpass—the disputed amounts themselves. This disproportionately affects smaller businesses, making it more economical to either abandon claims or revert to traditional courts rather than pay exorbitant fees for an “alternative” resolution. Limited arbitrator availability and mounting backlogs only exacerbate the problem, leaving companies stuck between a rock and a hard place.

Though India has a vast pool of qualified professionals, court-led appointments rarely tap into this talent, perpetuating an oligopoly of the same retired judges. Institutional arbitration was supposed to address these inefficiencies. While certain high courts have made improvements, the system remains dominated by the same old faces. So far, the “solutions” have merely recycled state-affiliated institutions or statutory bodies—a Phase I reform that amounts to changing the wallpaper without altering the room’s structure.

Foreign arbitral hubs like SIAC thrive on high-stakes, international disputes involving corporate giants. While such models work in jurisdictions with robust legal frameworks, India’s massive domestic market presents different challenges. High-value Indian cases may find their way to SIAC or MCIA, but for the vast majority of businesses, high adjudication fees and frequent extension requests make arbitration financially unviable.

Moreover, uniform fee slabs and rigid procedures might suit corporate heavyweights, but they do little to foster innovation or accommodate smaller-scale disputes. It’s like trying to fit both a Mercedes and an autorickshaw into the same narrow parking space. India needs innovation, flexibility, and more choices.

The first wave of reforms sought to reduce judicial intervention by shifting dispute resolution from ad hoc arbitrators to arbitration institutions. In theory, this was meant to expand the arbitrator pool and expedite appointments. In practice, the same old faces keep getting appointed. Are we really changing anything beyond the official letterhead?

Phase II Reforms: From courtroom to ‘clickroom’

After three decades of ineffective interventions, it's time for a fundamental shift in how arbitrators are appointed when parties fail to agree. The solution is threefold: remove this function from courts entirely, make the selection process objective, and dramatically expand the pool of arbitrators.

To achieve this, the Arbitration Council of India (ACI) should take over arbitrator appointments from courts—but only as a transitional measure. ACI should not become another bureaucracy; instead, it should:

• Develop an algorithm-driven platform that matches disputes with arbitrators based on qualifications, expertise, availability, and cost.
• Maintain a diverse pool of arbitrators, including domain experts, senior advocates, engineers, and other professionals—not just retired judges.
• Ensure rating systems and feedback mechanisms to incentivize arbitrator efficiency.

To prevent manipulation, ACI’s matching algorithm should be transparent. If multiple suitable arbitrators are found, the system should randomly allocate one—ensuring fairness while avoiding human bias.

The result? Objective, faster, cheaper, and more accessible arbitration.

Some businesses might still prefer ad hoc arbitrations or established institutions like MCIA or DIAC for high-value disputes, but this reformed system would particularly benefit smaller businesses and PSUs by providing access to a fairer, more efficient marketplace for dispute resolution.

For lasting reform, India needs to foster a vibrant market of arbitration service providers. Ad hoc arbitration remains elitist and unsuitable for most businesses, while existing institutions may not serve all needs. Like any healthy market, arbitration requires providers of various sizes and specialties to serve diverse business needs.

Seizing the moment for meaningful reform

India’s arbitration ecosystem is overdue for a renaissance—one that moves beyond superficial, state-sponsored reform and truly fosters competition. The problem isn’t market failure; rather, 30 years of top-down tinkering have failed to create a dynamic, inclusive, and competitive dispute-resolution system. The government’s own June 3, 2024, advisory discouraging arbitration for claims over Rs 10 crore proves that the current system is broken.

In the long term, multiple competing platforms should emerge—because monopolies are bad. Imagine a robust ecosystem of arbitration aggregators, each leveraging their strengths and transparent rating systems to cater to India’s diverse commercial landscape.

Arbitration in India must evolve into a system that serves both a micro-entrepreneur with a few lakh on the line and a multinational negotiating a billion-dollar contract. If India truly wants to become a global economic powerhouse, it must unshackle arbitration from state control and let innovation lead the way.

(Prashant Narang is a researcher at TrustBridge Rule of Law Foundation.)

Views are personal and do not represent the stand of this publication.