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Arbitration in SEZs: Circumventing the Unexplored Avenues and a Prospective Special Regime

Vrinda Gaur[1]


Introduction


Special Economic Zones (‘SEZs’) play a crucial role in facilitating the flow of investment in the country and propels overall economic growth in a country. All around the globe, there is a massive flux in the establishment of such special economic zones to reap their economic benefits. A major attraction for players is the lucrative exemptions granted to parties under various financial and commercial statutes, whose obligations are otherwise quite burdensome to comply with.


There are approximately 378 SEZs operational in India, amongst which the first of its kind was established in Gujarat, t, the Gujarat International Financial Tech City (‘GIFT City’).


With multiple players entering such zones to accumulate the economic incentives that come along, disputes and conflicts are inevitable. To address such disputes, it is necessary to provide participants with a robust and speedy resolution mechanism to uphold their confidence during their operations within these zones.


This article seeks to articulate the prospects of promoting arbitration as a dominant mode of dispute resolution mechanism in SEZs in juxtaposition with relevant provisions of the Special Economic Zones Act, 2005 (‘SEZ Act’).

 

Decoding the Relevant Provisions of the SEZ Act


The SEZ Act promotes the establishment of areas with special privileges to attract foreign investments in the country and facilitate trade and economic development. It aims to set up Financial Service Centres in SEZs, which are often governed by distinct laws and rules from those ordinarily applicable in a recognized state or jurisdiction.

 

 A salient feature of the SEZ Act is that it provides numerous lucrative incentives and concessions to investors in terms of legal exemption under numerous statutes. For instance, Section 26 enumerates certain exemptions from the Customs Act, 1962, Customs Tariff Act, 1975, Finance Act, 1994, and Central Sales Tax Act, 1956. Further, Section 27 provides for the applicability of the Income Tax Act, 1961 with certain modifications to facilitate investments within the region. Moreover, Section 56 of the Act, makes the applicability of the Banking Regulation Act, 1949, and the Insurance Act, 1938 subject to certain amendments and restrictions.


The SEZ Act entails certain provisions for the adjudication of disputes by the designated courts and via arbitration. For instance, Section 23 empowers to State Government, to designate one or more courts to try all suits of a civil nature and notify offences committed with the SEZs.  Section 42 provides that if no court has been designated to refer the disputes that arise within the zone, then such disputes shall be referred to arbitration. Additionally, Section 42(2) and  Section 42(3) provide for the appointment of an arbitrator by the Central Government and the applicability of the Arbitration and Conciliation Act, 1996 (‘1996 Act’) to all arbitration disputes within the zones respectively. However, extensive intervention by the central government in the appointment of arbitrators and the excessive reliance on procedural formalities and court dependency of the 1996 Act, has rendered arbitration proceedings inefficacious within SEZs. This concern was further aggravated by Ranganath Properties Private Limited v. Phoenix Tech Zone Private Limited, wherein the Telangana High Court held that the SEZ Act, being a special legislation, Section 42 of the SEZ Act would prevail over an arbitration agreement entered between the parties, thereby undermining the prerequisite of mutual consent to arbitrate.

In light of this, it becomes imperative to explore the prospective avenues of growth of arbitration within SEZs and vouch for a comprehensive special regime.

 

Prospective Framework and Suggestions


One must bear in mind that the SEZ Act, which is the dominant statute regulating SEZs is an inherently economic legislation facilitating the inflow of foreign direct investments. Unlike the 1996 Act, it does not provide for comprehensive rules for resolving disputes and little calibre was invested in framing provisions for dispute resolution via arbitration.

 

One major factor jeopardizing the growth of arbitration in SEZs is Section 42(1) of the SEZ Act. It restricts the reference of a dispute to arbitration on the designation of a court by the State Government under Section 23(1) and empowers these courts to try all civil disputes arising within the SEZs  The express use of the term “shall” in Section 42(1), makes it incumbent upon the parties to seek adjudication by designated courts, even in cases where parties have an agreement that specifically conveys their intention to resolve disputes through arbitration.    

 

Additionally, the aggravated intervention of the Central Government in appointing arbitrators when a dispute is referred to arbitration adds to the plight. Ideally, as the general principles of the 1996 Act, extend to the SEZ Act, the appointment of an arbitrator would be the discretion of the parties, mainly the developers and entrepreneurs. However,  the absolute power bestowed on the Central Government for designating an arbitrator goes against the \ arbitral principles of party autonomy and mutual consent.     

 

In light of the above concerns, there are two possible ways out. First, we need to explore the avenues for fast-tracking the process of establishing arbitration institutions within such zones. Though in 2017, a representative office of the Singapore International Arbitration Centre was inaugurated in GIFT City, Gujarat, to promote International Commercial Arbitration within the zone, it still lacks a case management office of the SIAC that would facilitate the resolution of disputes via arbitration under defined SIAC rules. All flourishing jurisdictions such as Dubai and Singapore prefer to settle disputes within SEZs through an institutional mechanism having distinct rules with limited applicability to domestic law.

 

Though the Union Finance Minister in the 2022-23 budget speech announced the establishment of an International Arbitration Centre in GIFT City in line with the Singapore International Arbitration Centre, and the London Commercial Arbitration Centre, progress seems stagnant on this front.  Additionally, the government’s efforts seem sparse in facilitating the establishment of similar centres in multiple other SEZs spread across the country. Promoting arbitration through arbitral institutions, governed by its distinct rules especially when one party to the dispute is a foreign party, would ameliorate the burden of meddling within the intricacies of the 1996 Act. t.

 

While the government continues to scuffle to make state-of-the-arbitral institutions functional within the SEZs in India, exploring alternative avenues could bring much relief to the aggrieved investors for the time being.  For instance, Parties may resort to a framework prescribed within a Bilateral Investment Treaty(BIT) to which the Government and the country of which the investor is a national are parties.  Most BITs entail either resolution through consultation or give investors a prerogative to submit an investment dispute directly for International Arbitration under an Institution as agreed between the parties, guaranteeing a neutral and time-efficient resolution.


Next, though the promotion of institutional arbitration is likely to accord speedier resolutions and evade the intricacies of the court-facilitated process, one issue that is likely to arise is the enforcement of an award. This can be addressed by establishing a special arbitration division, within the jurisdictions of the High Courts where the SEZ is operational. Their functions would entail assisting in the enforcement of awards and playing a supervisory role to the arbitral institutions established within the SEZs.


Another aspect worth incorporating is a dual model of dispute resolution, i.e. mandatory mediation followed by arbitration. The present Indian regime has made mediation optional irrespective of express declaration regarding the same in the contract between the parties. A mandatory approach is beneficial, especially within SEZs for two common reasons. One, SEZs often involve multinational enterprises with diverse cultural backgrounds. Mediation allows for a more culturally sensitive approach than Arbitration, fostering better understanding between parties via adopting different negotiation tactics. Two, mediation offers a more collaborative and less adversarial outcome as compared to arbitration. In SEZs, where businesses often operate in close proximity and may have multiple ongoing dealings either within or outside the SEZs, maintaining cordial relationships is crucial to maintaining the flow of investments within such regions and beyond.

 

Key Takeaways from the Expert Committee Report


The Expert Committee Report suggesting reforms to the 1996 Act, entails certain recommendations for promoting arbitration within SEZs.


The report suggests that with the promotion of institutional arbitration and adopting investor-friendly tactics for settlement show great prospects of emerging as neutral seats for International commercial arbitration. This would not only benefit the Indian lawyers in expanding professional opportunities but also encourage foreign lawyers/firms to arbitrate and expand their firm offices in the special zones, and subsequently in other parts of India.    

 

An unfortunate aspect owing to which foreign lawyers are hesitant to practice in India is the painstaking practice of visa issuance as also expressed in the  Justice B.N. Krishna Report. On the other hand, jurisdictions such as Singapore, allow foreign lawyers involved in arbitration and mediation activities to get short-term visa passes at immigration checkpointswhich are valid for a maximum duration of 60 days in addition to tax exceptions for non-resident arbitrators.

 

Conclusively, the report suggests that non-desirability of India as a seat for International commercial arbitration owing to its entangled arbitration regime. However, a special regime that enfeebles the applicability of the 1996 Act to some extent in addition to the proposed incentives of tax exemptions and visa relaxations to lawyers and arbitrators, SEZs will most likely act as icebreakers in attracting parties to India as desirable seats for international commercial arbitration in the future.

 

Looking Forward


While the prospects discussed above are promising, they necessitate a certain degree of legal recognition. Currently, India lacks distinct guidelines and rules both within the SEZ Act and separately for efficiently conducting arbitration proceedings within SEZs. Recognising the need for a distinct arbitration regime within SEZs, as highlighted by the recently released arbitration report, it would be prudent for India to adopt a balanced approach similar to that of Dubai.Dubai’s approach to framing such rules does not completely oust the applicability of general arbitration principles, such as the doctrine of party autonomy, fairness, and non-intervention by the courts. Further, it has recognized the intervention of DIFC courts in exceptional instances. Similar power could be bestowed upon the special arbitration divisions formed for facilitating arbitration within SEZs.


Implementing similar reforms in GIFT City, to start with, would significantly enhance its appeal as an arbitration hub and reinforce the primary aim of attracting foreign investments by promoting confidence in the dispute settlement process.

 

[1] Vrinda Gaur is a 4th Year law student from National Law University Lucknow.

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