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A Review on the Status of Arbitration in Sri Lanka

22nd November 2023
Litigation & Dispute Resolution
A Review on the Status of Arbitration in Sri Lanka Image

A key purpose of arbitration is to facilitate the swift resolution of disputes by presenting a viable and preferred alternative to the court process. However, over the last decade, arbitration in Sri Lanka as an Alternate Dispute Resolution (ADR) mechanism is becoming less popular among both local and foreign investors. A key reason for this debacle is that arbitrations in Sri Lanka tend to mirror the worst aspects of the litigation model, like rigid structure, wanton delays, and lack of access. As a result, the parties prefer to have arbitral proceedings held outside of Sri Lanka at internationally recognized arbitration institutions such as the International Chamber of Commerce (“ICC”) and the Singapore International Arbitration Centre (“SIAC”), and these are fast growing in popularity.

This article explores the context of arbitration and identifies possible adjustments to the Sri Lankan Arbitration Act, No. 11 of 1995 (“Sri Lanka Arbitration Act”), and recommendations to enhance the arbitration structure in Sri Lanka. The goal is to streamline the process and reinstate investor and public confidence to boost the investor ecosystem of Sri Lanka.

Background of Arbitration in Sri Lanka

Initially a pioneer in the region with the enactment of the Sri Lanka Arbitration Act, Sri Lanka once led the SAARC region in the arbitration processes. While similar in many ways to litigation, arbitration, however, was meant to be conducted in a more informal atmosphere than that of a court. It affords parties several advantages including “party autonomy” which litigation does not allow. The importance of having legally enforceable ADR mechanisms is that they enhance the quality of the investment ecosystem as efficient arbitration processes instill investor confidence and thereby attracts more Foreign Direct Investments (FDI).

As Sri Lanka undergoes its own economic renewal with strategically important mega projects such as the Colombo Port City project – with its own jurisdictional zone for dispute resolution governed by arbitration (i.e., its own International Arbitration Centre) - a modernized arbitration system is vital to spur economic growth. One only needs to look to the ASEAN and EU regions which are lightyears ahead in terms of ADR advancements. While other territories are showing improvements in their local arbitration processes, in Sri Lanka, arbitration appears to be losing its once lustrous reputation. Today, more and more institutions, especially financial institutions, are proposing to remove arbitration clauses from their regular agreements due to the grave inefficiencies and inconveniences associated with the current processes.

Although litigation procedures are governed by court rules, these rules are not inherently designed for individual cases or customisable depending on the circumstances. In theory, in the context of international arbitration, the parties engaged in an arbitration process possess greater flexibility. They can adapt the procedural rules to the specific nature of their dispute, even when the arbitration is conducted under specified arbitration rules. The International Bar Association guidelines on party representation in international arbitration is one amongst several guidelines created to enhance safeguards for stakeholders in an arbitral process. These guidelines incorporate punitive measures to address instances of misconduct. In essence, it is entirely the parties' choice to follow these guidelines, rendering them non-binding. Still, making these regulatory guidelines compulsory could limit the flexibility of the arbitration process.

To gain a better relative understanding and learn from arbitration practices internationally, we focus on two pioneering nations – India and Hong Kong.

Learning from our Neighbour: Arbitration in India

The Indian Council of Arbitration (ICA) manages over 400 arbitration cases annually, catering to both domestic and international disputes. It offers specialized Maritime Arbitration services and plays a role in educating and training individuals in alternative dispute resolution methods. ICA has entered into collaborative agreements with 40 prominent arbitration institutions globally and India is a signatory to the New York Convention.

As per the ICA, various entities such as chambers of commerce, trade associations, and export promotion councils have advocated for the inclusion of the ICA arbitration clause in all commercial contracts. For instance, the Expert Committee on ICA, appointed by the Ministry of Commerce of the Government of India, has suggested an increased utilization of the Council's arbitration services, especially among Public Sector undertakings and exporters, to enhance the profitability and smooth functioning of business activities. Similarly, the Abid Hussain Committee on Trade Policies, also appointed by the Government of India, has proposed the mandatory inclusion of an arbitration clause in all export contracts.

In India, arbitration is perceived to be cost effective. However, in Sri Lanka, the perception is that court-annexed arbitration has increased the cost and the delays. A key reason for this is that arbitration (as currently practiced in Sri Lanka) too often mutates into a private judicial system that behaves and costs just as the litigation it is supposed to prevent. 

Similar measures should be adopted by the Government of Sri Lanka and the various stakeholders to publicize and promote arbitral proceedings in Sri Lanka amongst the public and investors alike as a robust alternative to the court based litigation process. Further, measures should be adopted to reduce the cost of arbitral proceedings in Sri Lanka.

Singapore as an Arbitration Hub

In 2021, the Singapore International Arbitration Centre (SIAC) was pleased to announce that “in the latest Queen Mary University of London and White & Case International Arbitration Survey (QMUL Survey), SIAC ranked as the most preferred arbitral institution in Asia Pacific, and 2nd among the world’s top 5 arbitral institutions”.

This ascendancy aligns with Singapore's concerted endeavours to establish itself as a paramount hub for dispute resolution within the region. Coupled with Singapore’s independent judiciary, the country is well placed as a prominent centre for the resolution of commercial disputes.

During the years 2017 and 2018, SIAC experienced an influx of over 400 new cases annually. Notably, in 2020, the SIAC recorded a remarkable surge, surpassing 1,000 case filings, thereby more than doubling the average caseload observed in preceding years.

Accordingly, the allure of Singapore as a preferred arbitral seat emanates from a confluence of various factors.

1. Universal Recognition of Award Validity and Binding Nature: Singapore, as a signatory to the New York Convention, affords international enforceability to awards rendered within its jurisdiction, extending to a notable 166 countries. Additionally, the resolution of disputes in this context is characterized by a singular appellate process, which means that awards are binding on the parties to the arbitration.

2. Flexibility of SIAC Rules: These rules provide a structured framework for arbitration proceedings, emphasizing clarity and effectiveness. SIAC's rules are designed to accommodate the evolving needs of the arbitration community and ensure a robust and contemporary approach to the resolution of disputes. This commitment reinforces SIAC's standing as a leading institution in the field of arbitration, offering parties a reliable and sophisticated framework for the resolution of complex international disputes.

3. Enduring Governmental and Judicial Advocacy for Arbitration: The Singaporean government and judiciary play pivotal roles in fostering an environment conducive to arbitration. Strategic governmental policy decisions, spanning deregulation of legal services, favourable tax incentives, and a steadfast commitment to fortifying legislative frameworks, collectively contribute to Singapore's esteemed status as a premier arbitration destination.

4. Technological Integration: SIAC strategically employs advanced technology in its proceedings. This includes cutting-edge virtual hearing capabilities, ensuring seamless participation from diverse locations, and sophisticated case management systems for efficient communication and document handling. SIAC's commitment to technological advancement positions it as a global leader in arbitration, offering a streamlined and technologically advanced environment for the fair and efficient resolution of disputes.

5. Third-Party Funding Framework and Its Disconnection from the Dispute: A recent noteworthy development is the authorization of third-party funding in arbitration. This framework enhances party flexibility, facilitates more effective dispute management, and empowers economically disadvantaged entities with meritorious claims to pursue legal proceedings. Third-party funding serves as a mechanism for companies to prudently allocate capital during proceedings, mitigating financial risks associated with legal fees.

6. SIAC's Provision of Advanced Administrative and Technical Support for Hearings: SIAC distinguishes itself by offering high-calibre onsite hearing facilities and an array of ancillary services, including transcription, translation, and interpretation.

In August 2020, SIAC unveiled the "SIAC Guides – Taking Your Arbitration Remote," a comprehensive checklist designed to guide practitioners in the contemplation and execution of arbitral proceedings conducted through audio conferences, videoconferences, or alternative non-physical modes of communication. The paradigm shift toward remote hearings by SIAC has yielded notable benefits, encompassing cost efficiencies and heightened accessibility for hearings, thus catering to the needs of parties, witnesses, and arbitrators.

Sri Lanka is advised to consider adopting some of Singapore's exemplary practices, specifically tailored to facilitating remote arbitrations in a user-friendly fashion. Emphasis may be placed on the adaptation of audio conferences, videoconferences, and other non-physical communication methods within the context of arbitration cases.

Hong Kong’s Innovative Arbitration Model

The Hong Kong International Arbitration Centre (HKIAC) is a leader in developing innovative arbitration practices in Asia. Some key features for Sri Lanka to pay attention to include:

1. Structure for Payment of Arbitrator's Fees: HKIAC provides parties with a choice between paying arbitrators based on hourly rates (i.e., capped at HK$6,500/hour) or by reference to an ad valorem fee scale. For Sri Lanka, the compensation of arbitrators under section 29 of the Sri Lanka Arbitration Act can be amended accordingly to match such a system.

2. Standard Terms and Conditions: HKIAC has also introduced standard terms and conditions for all arbitrators appointed under their Rules. Similarly, the Sri Lanka National Arbitration could adopt standard terms and conditions to aid in the arbitration process.

3. Complete Mechanisms for Complex Arbitrations: The comprehensive provisions concerning the inclusion of additional parties, combining cases, and initiating a single arbitration for multiple contracts enable HKIAC to efficiently and cost-effectively manage arbitration cases that involve numerous parties or contractual arrangements. For Sri Lanka, provisions can be brought into the Sri Lanka Arbitration Act allowing for joinder, consolidation, etc.

4. Availability of Emergency Arbitration: HKIAC rules provide for emergency arbitrator procedures which allow parties to apply for enforceable urgent interim relief before the tribunal is constituted (e.g., at times reducing wait times from 60 days to 30 days). In Sri Lanka, even though interim measures of protection are included under section 13 of the Sri Lanka Arbitration Act, more streamlined emergency arbitration provisions could be included for an expedited procedure.

5. Simplified Procedures: Additionally, a determination procedure has been introduced to explicitly authorize an arbitral tribunal to dismiss a legal or factual point that is evidently lacking in merit or falls outside the tribunal's jurisdiction. The expeditious handling of proceedings also calls for a streamlined document and witness requirement; unlike in Sri Lanka, where the arbitration process has needlessly outgrown itself to include numerous additional elements, such as motions, briefs, discovery, depositions, judges, legal counsel, reporters and recorders, and expert witnesses.

6. Technology Innovations: The arbitration rules emphasize the adoption of technology to enhance procedural efficiency. Additionally, they feature specific provisions designed to effectively manage disputes that encompass multiple parties and contracts. These measures are essential for streamlining complex arbitration processes and adapting to the intricacies of modern legal disputes.

Arbitration in Hong Kong has granted parties the freedom from the constraints of a court structure. On the contrary, when it comes to enforcing arbitration decisions in Sri Lanka, disputing parties are invariably compelled to resort to the court system. In cases where an arbitral award is not honoured, parties often find themselves returning to the very court system they initially tried to circumvent by opting for arbitration. Since arbitration clauses in contracts exclude litigation, parties may view the arbitration process as futile in cases of noncompliance with an arbitral award. Consequently, amending section 41 of the Sri Lanka Arbitration Act to provide some assurance of compliance with arbitral awards could significantly alter the perception of arbitration in Sri Lanka.

Key Recommendations to Improve Arbitration Practices in Sri Lanka

As with any critical review, several key recommendations are offered for Sri Lanka to consider when modernizing its arbitration processes. These recommendations include the following:

1. Introduce new administrative bodies: The 2018 ICC rules introduced several notable innovations, including the establishment of new administrative bodies and provisions pertaining to multi-party and multi-contract arbitration. These changes encompass a range of initiatives aimed at enhancing the speed and efficiency of the arbitration process. 

2. Increase arbitrator efficiency: Arbitral centres should possess the authority to oversee proceedings and impose suitable sanctions when deemed necessary. They should also be empowered to avert procedural delays and unnecessary costs. 

3. Review hostile practices to reduce intentional procedural delays: Some parties utilize hostile practices in arbitration to gain an advantage over the opposing party. Some examples include:

(a) Changing legal representation during the proceedings.

(b) Abusing the discovery process.

(c) Making excessive requests for document disclosure.

(d) Introducing evidence late in the proceedings.

(e) Initiating injunction proceedings in regular courts.

(f) Attempting to intimidate witnesses.

To address these issues effectively, it is essential to introduce appropriate amendments to the Sri Lanka Arbitration Act. Furthermore, arbitral institutions should implement necessary measures to curb such abuses and adversarial practices within their respective frameworks. These actions can help ensure a fair and balanced arbitration process for all parties involved.

4. Appropriate Terms of Reference: the Terms of Reference should not only incorporate a framework for the conduct of the arbitration, but also include the repercussions for failure to adhere to this binding framework. Further, the Terms of Reference should clearly set out the financial and other consequences of noncompliance, with directions contained in the Terms of Reference or procedural orders. 

5. Embracing Technological Innovations: the incorporation of contemporary virtual arbitration technologies, comprising a comprehensive range of services such as remote transcription and interpretation services, integrated document management, and fully digitized hearing solutions, serves to optimize the efficacy and efficiency of hearings for international parties, irrespective of their geographical locations.

Final Thoughts

As explained above, there exists a prevailing expectation among foreign investors that the arbitration process should function as a conduit for the prompt and cost-effective resolution of conflicts emanating from commercial contracts. In light of this, the imperative to refine and fortify legally enforceable Alternative Dispute Resolution (ADR) structures becomes paramount, as it inherently augments the overall quality and reliability of the investment environment in Sri Lanka.

Now is a good time to thoroughly update and go for a comprehensive overhaul of the arbitration framework in Sri Lanka. This is not merely a pragmatic necessity but is underscored by its pivotal role in fostering and advancing Sri Lanka's strategic positioning as the preeminent regional centre for arbitration within the dynamic landscape of the South Asian region. This proactive step is indispensable to not only meet the evolving expectations of the global business community but also to underscore Sri Lanka's commitment to providing a robust and sophisticated platform for dispute resolution in commercial matters.