With the advent of the increase in trade and commerce across the global community, an array of sectors has been birthed. One such concept is the concept of Civil Aviation and allied aspects. With the presence of such an important sector, it is bound that disagreements may also arise from the same. These disagreements, primarily legal, do not just hamper the international legal arena and stability, but also affect the domestic arena. However, instead of going through the cumbersome process in Courts, the players in this sector seek Arbitration, Negotiation, and other similar Alternative Dispute Resolution modes as preferred dispute resolution methods.
Through this Blog Post, the Authors have explored the idea of Arbitration as a method of dispute resolution in the Civil Aviation sector by providing a foundation for Civil Aviation Arbitration. Following the first part, the Authors would then explore the aspects of Arbitration in the Civil Aviation sector both at the international and the domestic level.
Introduction to Civil Aviation Arbitration
The term “Civil Aviation Arbitration” describes a dispute resolution process that pertains specifically to the Aviation sector. This form of Arbitration is typically used to resolve disagreements between Airlines, Airports, and other entities related to Civil Aviation. In many cases, Civil Aviation Arbitration is seen as a more efficient and effective way to resolve disputes than traditional Litigation methods. Civil Aviation Arbitration plays a vital role in ensuring that the global Aviation industry runs smoothly. This form of dispute resolution helps avoid service disruptions and ensures that disputes are resolved promptly and efficiently. In addition, Civil Aviation Arbitration can help to avoid the high costs associated with traditional Litigation methods.
Advantages of using an Arbitrator in Civil Aviation disputes: One of the few benefits of using an Arbitrator is that it allows the parties to choose a neutral third party to hear their case and pass an Award. This can be helpful in cases where the parties have a history of conflict or a risk of bias. Further, Arbitration can be used to resolve complex or technical disputes. This is often the case in the Civil Aviation sector wherein disputes may involve complex issues such as aircraft design or maintenance. When we discuss a legal disputearising out of an aircraft design, it is essential to understand that merely proving that the aircraft’s design was the probable reason for the accident/injury is not adequate as there are other factors to consider like that of the misuse of the aircraft by the pilot, the preliminary presentation of risk by the aircraft design, and other similar factors. However, it is to be noted that these are subjective in nature, and the factors which are to be taken into consideration regarding disputes in the Civil Aviation sector vary. When we turn to the issue ofmaintenance in a legal dispute, we comprehend that maintenance becomes necessary to make sure that the novel structure and the materials employed for the better functioning of the aircraft are running smoothly and are not incurring losses (if the structure/parts are constantly malfunctioning). This includes inspection, repair process, and various maintenance programs. Now, it is not necessary that the manufacturing company of the parts (for the aircraft), and the company procuring the said aircraft, are the same. As a result of this, disputes are bound to arise in case of any malfunctioning of the aircraft/parts of the aircraft.
Disadvantages of using an Arbitrator in Civil Aviation disputes: One of the main disadvantages is that Arbitration is typically binding, which means that in certain cases, procedures, and set-ups, the parties may not be able to appeal the Arbitrator’s decision. In addition, Arbitration can be more expensive than traditional Litigation methods. This statement does not hold for all situations. Depending upon the gravity of the case involved, and the parties involved in the case, the aspect of Arbitration could be more expensive than litigation. Finally, Arbitration may not be available in all jurisdictions. This can pose a problem for parties who are based in different countries.
Selection of Arbitrator in a Civil Aviation dispute: One of the important aspects of Civil Aviation Arbitration is the selection of an appropriate Civil Aviation Arbitrator. This is because the Arbitrator will be responsible for hearing the case and passing an award. Several factors should be considered when choosing an Arbitrator. Firstly, it is important to choose an Arbitrator who is familiar with the Civil Aviation sector. This is because the Arbitrator will need to be able to understand the complex issues that may be involved in the dispute. Secondly, it is important to choose an Arbitrator who is neutral and impartial. This means that the Arbitrator should not have any personal interest in the outcome of the case. Lastly, it is important to choose an Arbitrator who is experienced in Arbitration. This is because the Arbitrator will need to be able to handle the complex legal issues that may arise during the Arbitration.
Role of other individuals in Civil Aviation Arbitration: Apart from the Arbitrator, all related persons have roles to play in the Civil Aviation Arbitration process and the same will be dealt with below.
a. Mediators: Mediators, in cases where applicable, have an important role to play in Civil Aviation Arbitration. This is because they are typically responsible for helping the parties settle. The Mediator’s role is to act as a neutral third party who will facilitate the Mediation between the parties. In addition, the Mediator may also be responsible for providing legal advice to the parties.
b. Parties: Another important aspect of Civil Aviation Arbitration is the role of the parties themselves. The parties to the Arbitration are typically the airline and the passenger. However, other parties may be involved in the Arbitration, such as the aircraft manufacturer or the aircraft maintenance company. The role of the parties is to present their case to the Arbitrator and to provide evidence to support their arguments. The party that is successful in the Arbitration will typically be awarded damages.
c. Lawyer: The role of the Lawyer in Civil Aviation Arbitration is also an important one, as they are typically responsible for representing the parties in the Arbitration. The Lawyer’s role is to provide legal advice to their client and to represent them in Arbitration. In addition, the Lawyer may also be responsible for preparing legal documents that are required for the Arbitration.
d. Experts: Expert witnesses play an important role in Civil Aviation Arbitration because they are typically responsible for providing expert testimony. The expert witness’s role is to provide their expert opinion on the issues that are involved in the case. In addition, the expert witness may also be required to provide evidence to support their argument.
Civil Aviation Arbitration Sector at the International Level
As mentioned above, the aspect of Civil Aviation Arbitration at the international level is still in a nascent state. The very aspect of Arbitration, in general, revolves around “dispute.” The definition of the term “dispute” was given by the International Court of Justice (ICJ) in the landmark case ofGreece v. U.K. (Mavrommatis Palestine Concessions). It enumerated certain facets of “dispute,” which include – conflict of legal views or interests between two parties or persons. These two parties could be either Governments, Institutions, or private individuals, as per the facts and circumstances of the case. For the readers, although it would seem that the idea is not relevant to the topic at hand, this concept has been put to familiarize the readers with the definition and scope of “disputes” at the international fora.
Before the inception of theChicago Convention, in 1944, three important agreements were signed. Out of these three, theHavana (Pan-American) Convention on Commercial Aviation of 1928 is an important one, as this Convention gavebirth to the provisions of Arbitration in the Civil Aviation sector. However, after many tussles regarding the disparities in the three Conventions, 55 States came together for a meeting in 1944 as part of the Chicago Convention, which, in turn, wasdrafted to promote friendliness, cooperation, and understanding the relations among the countries, establish fundamental principles for transit via the air route, and to create the famousInternational Civil Aviation Organization (ICAO). Under the Chicago Convention, Articles 84 to 88 enumerate the dispute settlement mechanism in the Civil Aviation sector. In turn, ICAO serves as a coordinator in the Civil Aviation sector on an international stage.
The disputes in theinternational community are bifurcated into two parts, i.e., commercial and non-commercial disputes. Non-commercial disputes are those which are governed by the clauses of the bilateral agreements. However, on the other hand, the aspect of commercial disputes is governed by the Chicago Convention, 1944, and usually occurs because of the following reasons:
- Imposition of restrictions in sectors like airline marketing, selling of tickets, and remittance of currency (with regards to net surplus revenue of the airlines).
- Dumping of air transport services.
- Providing limited access to travel agents, and computer reservation systems.
- Rising discrimination about frequency and operating limitations.
- Unequal charges for Air Traffic Control (ATC), and Air Traffic Navigation (ATN).
- Restrictions are placed upon the group handling and unequal taxation systems.
As mentioned above, the legal framework for the redressal of disputes arising in the Civil Aviation sector can be classified both into legal methods (Arbitration, judicial settlement, and treaty agreements) and non-legal methods (Negotiations,good offices). A proper elaboration for the same would open the gates for another topic or a deviation from the current topic.
As far as this Blog Post goes, we would focus solely on the aspect of Arbitration, which comes under the legal methods for dispute resolution. It refers to a process under which the parties agree to refer the dispute to an independent and impartial Arbitrator(s) who would pass an Arbitral Award. “Arbitration” has been enumerated under Articles 16 and 38 of theHague Convention of 1899 and1907.
Further, Articles 16 and 38 of the Hague Convention of 1899 and 1907term Arbitration as one of the “most efficient, and peaceful means of redressal of disputes.” The very first instance of invoking Civil Aviation Arbitration as a way of dispute resolution was inUnited States of America v. France. The dispute arose between the two countries due to the differences concerning the interpretation of the traffic rights established via theUnited States France Air Transport Services Agreement, 1946. Although the nature of the Agreement was bilateral, and the decision of the Arbitral Tribunal (which was composed of three members) was advisory, the Arbitral Tribunal failed to resolve the said case. The reasons for the same were termed as lack of jurisdiction of the Tribunal, the discovery of new facts, and other similar reasons. In the same manner, both the French Government and the U.S. Government disagreed with theinterpretation given by the Arbitral Tribunal and decided to pursue the clarification for the same, as per Article 7 of theArbitration Agreement of 1963, that both the countries involved in the dispute had signed. Although the aspect of Arbitration had failed for the above-mentioned case, it sure opened the possibility of using Arbitration as an instrument for future Civil Aviation disputes. The effectiveness of Arbitration proved useful when a dispute between UAE and Sri Lanka erupted in 2015. It was this very case where the parties sought Arbitration as a way of concluding their disputes. The International Chamber of Commerce (ICC) International Court of Arbitration passed its award in June 2017, after almost two years of pleadings. The Arbitral Tribunal found that Emirates Airlines hadbreached the Fifth Freedom rights enshrined in the bilateral Air Services Agreement between UAE and Sri Lanka. As a result, Emirates Airlines was ordered to compensate Sri Lankan Airlines for the losses the latter had incurred. This is not the first time that Civil Aviation Arbitration has been used to resolve disputes between airlines. It has become increasinglycommon or airlines to resort to Arbitration to settle their differences since Arbitration offers several advantages over other dispute resolution methods.
Seeing the growing popularity of Arbitration in the Civil Aviation sector, two famous organizations (apart from the ICJ and ICAO) were specifically formed to resolve disputes via Arbitration in the Civil Aviation sector. They are:
- Shanghai International Aviation Court of Arbitration (SIACA): This international forum was established in 2014. It served as an Arbitral Institution for issues relating to the subsets of the Civil Aviation sector, which includes aircraft manufacturing, sales, insurance, and other similar aspects. The Arbitral panel under this is composed of 71 domestic and international experts with a strong knowledge of both aviation and the Arbitration sectors. TheSIACA was formed to utilize Arbitration in the Civil Aviation sector on a domestic and international front. This was made possible with the help of trilateral cooperation between the China Air Transport Association (CATA), the International Transport Association (IATA), and the Shanghai International Arbitration Commission (SHIAC). The SHIAC has played an important role in establishing precedents, which have aided in the redressal of disputes in the SIACA as well. They include – the use of expert witnesses in Arbitration from the perspective of SHIAC (WADA v. Sun Yang) and other notable disputes.
- American Arbitration Association (AAA): This Arbitral Institution was established in 1926. Although the name can deceive people into believing that the Association has jurisdiction limited within the U.S., the same is not the case. Under the AAA, an international division named International Centre for Dispute Resolution (ICDR) has been formed, which caters specifically to the dispute redressal system for the parties located outside the U.S. As mentioned above, there are an array of disputes regarding the maintenance and design of the aircraft where the manufacturer and the purchaser may not be located in the same place. Considering the same, the ICDR assists towards dispute resolution promptly with the help of its allied rules and procedures.
Civil Aviation Arbitration Sector under Indian Law
Unlike the array of laws at the international forum for the resolution of disputes at the international forum, the law relating to Arbitration in India is confined within the boundaries of theArbitration and Conciliation Act, 1996 (hereinafter “1996 Act”). Before discussing the Indian Arbitration sector, it is of paramount importance that we also understand the market share of the airlines.
Source: Business Standard (It can be accessed by the link here)
As we can understand from the above pie chart, the Indian airline sector is dominated by companies that are of Indian origin. One or two more companies have entered the Indian airline sector, like Vistara and Akasa Air. However, even with their entry, the airline sector has not changed as much as these two entrants do not smell of any complete foreign origin whatsoever. This is because Vistara is a 51:49joint venture between Tata Group and SIA (Singapore Airlines) and Akasa Air is a complete example of a make-in-India company. By presenting the share of airlines (with regards to nationality), the authors aim to establish that the aspect of Arbitration in the Civil Aviation sector would be limited to that of domestic Arbitration, rather than swinging towards International Commercial Arbitration, due to the absence of companies of foreign origin. A detailed analysis of this aspect has been presented in the following paragraphs.
Coming to the aspect of Arbitration under the1996 Act, the main purpose for the creation of the 1996 Act was to cater to the needs of the Indian commercial sector. The two reasons which led to the formation of the 1996 Act were:
1. The NEP (New Economic Policy) of 1991 opened the gates for private players at a domestic and international level. This resulted in the inflow of foreign investors in the Aviation sector. Now, with the inflow of foreign investors, it is natural that disputes also entered this sphere. Hence, to bring the domestic and commercial disputes under the garb of the said economic reforms, the 1996 Act was formed.
2. The formation of the UNCITRAL Model Law on International Commercial Conciliation by the United Nations in 1985 urged the member nations to provide paramount importance to the aspect of Arbitration and Conciliation.
Although the objectives for the formation of the 1996 Act are several, the most crucial ones have been enumerated above. It is pertinent to note at this stage that although the aspect of Arbitration has gained international recognition in the context of the Civil Aviation sector, the market for the same in India has not gained momentum as it could and should have. However, the 1996 Act does cater to the aspect of “International Commercial Arbitration” underSection 2(1)(f) of the Arbitration and Conciliation Act, 1996. The essence of International Commercial Arbitration circumnavigates around certain crucial aspects. These crucial aspects/ important elements include – at least one individual/body corporate/association alien to the citizenship of India or the government of a foreign country. International Commercial Arbitration takes into cognizance cross-border disputes (because as mentioned under the crucial aspects, to avail the international commercial arbitration, an individual/association/corporation must have non-Indian citizenship), where the parties to the legal/contractual relationship refute the process of approaching the domestic Court(s) of the country and resort to Arbitration. Now, it could be the case that disputes arising in the Civil Aviation sector could be covered under international commercial arbitration. However, as noted above, the Indian airline market is heavily dominated by airlines of Indian origin. Consequently, the process of Arbitration involved doesn’t need to come under the garb of “International Commercial Arbitration.” But again, the 1996 Act does not make any distinction with regards to different sectors (like that of Civil Aviation), even if the airline companies resort to the aspect of domestic Arbitration. The distinction that is being emphasized by the authors revolves around the nature of disputes arising in the civil aviation sector. The disputes arising in the civil aviation sector arise not just of commercial nature, but also involve facets like aircraft maintenance and design. The law does not shine a light on such aspects, which plays a crucial role. Furthermore, due to the lack of required experience and knowledge for the ‘amicable’ resolution of disputes, the matter gets dragged on for a long time.
Another important aspect that is to be taken note of are Selected Airline Operator Agreements (SAOA) and Communication Navigation Surveillance (CNS) and Air Traffic Management (ATM) Provision Agreements. TheCNS/ATM system is employed to maintain the ATM System. With regards to the CNS/ATM, clause 12 of the CNS ATM Agreement enumerates the concept of dispute resolution. The above-mentionedclause implores the parties to primarily resort to negotiation and if the dispute persists, then the parties can go ahead and resort to arbitration. Another aspect here is theSAOA, which is signed between the Airport Authority of India (AAI) and the Selected Airline Operator. Clause 19 of the SAOA does envisage the concept of Negotiation and Arbitration as per the 1996 Act. Thisclause primarily urges the parties to amicably settle the disputes within 30 days. However, if the parties fail to amicably settle, the parties may turn towards Arbitration. Further, this Clause (along with its allied sub-clause) mentions that the Award/decision passed by the Arbitral Tribunal — which would be appointed via the said Clause — would be final and binding. Now, it is important to note that although this Clause takes into consideration the 1996 Act, the governing provisions are not necessarily meant for the Civil Aviation sector, which is completely different from the other sectors. An argument about the nature of the civil aviation sector has already been put forth above. However, it is to be noted that this binding nature of the clause(s) mentioned above completely ignores the possibility of foreign investors investing in the country. Although the Indian airline sector is dominated by Indian players, the possibility of foreign investors entering the Indian Civil Aviation industry cannot be ignored completely. Furthermore, with the aspect of ‘commercial reservation’ under the Arbitration and Conciliation Act of 1996, it becomes a bit difficult for the civil aviation industry in India to breathe freely.
Conclusion: Challenges Faced by the Civil Aviation Sector and the Way Ahead
The challenges facing Civil Aviation Arbitration are not just legal but also stem from the commercial, economic, and political arenas. In such a scenario, it is important to understand the role that Civil Aviation Arbitration plays in global trade and commerce. With the increase in trade and commerce across the globe, there has been a significant increase in the number of disputes that have arisen in the Civil Aviation sector. These disputes range from issues relating to aircraft financing and leasing to operational matters such as safety and security. Leasing essentially takes place when an asset/commodity is possessed by the individual/corporation/government of a country for a fixed term, without actually being the owner of the said commodity/asset.Leasing might become one of the most frequent sectoral disputes because of financial bottlenecks between international aircraft leasing companies and various Indian airlines. The Ministry of Civil Aviation hasplanned on proposing the Protection and Enforcement of Interests in Aircrafts Objects Bill, 2022, which would allow international aircraft leasing companies to repossess and transfer the planes in case a financial dispute arises with an Indian airline. Though not an Act yet, the Bill is to see the day of light and the allied loopholes. In addition, the global economic downturn caused by the COVID-19 pandemic and the Russia-Ukraine war has also hurt the Civil Aviation industry, with several airlinesfiling for bankruptcy. This has led to several contractual disputes between airlines and their creditors.
Thus, the role of Civil Aviation Arbitration in resolving these disputes is crucial, as it provides a forum for the parties to resolve their differences without resorting to Litigation. In addition, Civil Aviation Arbitration is also an important tool for promoting industry-wide stability and growth. However, the Civil Aviation sector faces several challenges which need to be addressed to ensure its long-term viability. These challenges are as follows:
- High cost of Arbitration: The costs associated with Civil Aviation Arbitration can be extremely high, especially if the case is complex and requires the services of expert witnesses. In addition, the fees charged by the Arbitrators can also be very high, which can deter parties from seeking Arbitration. The Fourth Schedule of the 1996 Act enumerates the cost of Arbitration as per the sum in dispute. It is as follows:
Sum in dispute
|Up to Rs. 5,00,000||Rs. 45,000|
|Rs. 5,00,00-20,00,000||Rs. 45,000 + 3.5% of the claim amount over and above Rs. 5,00,000|
|Rs. 20,00,000-1,00,00,000||Rs. 97,500 + 3% of the claim amount over and above Rs. 20,00,000|
|Rs. 1,00,00,000-10,00,00,000||Rs. 3,37,500 + 1% of the claim amount over and above Rs. 1,00,00,000|
|Rs. 10,00,00,000-20,00,00,000||Rs. 12,37,500 + 0.75% of the claim amount over and above Rs. 10,00,00,000|
|Above Rs. 20,00,00,000||Rs. 19,87,500 + 0.5% of the claim amount over and above Rs. 20,00,00,000 with a limit of Rs. 30,00,000|
As can be seen from the above table, the Arbitrator’s fee starts from Rs. 45,000/- and goes up to Rs. 19,87,500/- with a maximum cap of Rs. 30,00,000/-. It is pertinent to note that it has also been mentioned in the Fourth Schedule that if the Arbitral Tribunal consists of a Sole Arbitrator, the fees payable would be hiked by an additional 25% on the above-mentioned prices. On the other hand, if the matter is referred to theIndian Council of Arbitration, Rules 31, 32, and 33 of the same impose heavy Arbitrator fees. Although Arbitration is considered one of the recourses where money is not shed like water, it is pertinent to note that this dispute resolution mechanism is not as cheap as it has been portrayed. However, in comparison to Litigation, it still stands on a better footing.
- The lack of uniformity in Arbitral rules: There is currently no uniform set of rules governing Civil Aviation Arbitration. This can lead to significant confusion and delay in the proceedings. It is so because, although the CNS/ATM and SAOA agreements mention Negotiation and Arbitration as dispute resolution methods, they only consider the 1996 Act. The problem with this is that the 1996 Act does not differentiate between disputes in the Civil Aviation sector and other sectors, as mentioned above.
- The need for specialized knowledge: Many of the issues that are typically dealt with in Civil Aviation Arbitration require a great deal of specialized knowledge. This can be a barrier for parties ensure justice for the arbitrators, who might not have access to such expertise. Further, if the Arbitral Tribunal so appointed does not possess the required knowledge to adjudicate upon matters related to the Civil Aviation sector, the nature of the Arbitral Award may become incoherent.
- The lack of enforcement mechanisms: There is currently no international body that has the power to enforce Arbitral Awards in the Civil Aviation sector. This can make it very difficult for parties to enforce their rights under an Arbitral Award. This is because even after the formation of ICAO (International Civil Aviation Organization) under the Chicago Convention, the role of ICAO is limited to just being a mere coordinator. ICAO does not have any powers which would bind the parties to enforce the Arbitral Award.
The above-mentioned challenges do not consider the social issues involved in the same. When looking at Indian customers, we find long Court battles over trivial issues like the mishandling of luggage, bad quality of food items being served, and other similar issues. This invites long and cumbersome Court battles if the person decides to sue the airline. Due to this, the parties in the dispute engage in a Court battle which not just prolongs the issue for a considerable time but also makes both the parties involved in the dispute bleed money. Matters like these could be very well taken up via Arbitration, or even Mediation for that matter. The best example of this could be the functioning of Lok Adalat in the modern-day scenario. Additionally, the Civil Aviation sector until 10 August 2022, had not opened its doors to the transgender community, making it an exclusive field for the cis-gender community. However, aLetter from the Ministry of Social Justice and Empowerment called out the denial of such admission violative of the Transgender Persons (Protection of Rights) Act, 2019 on the part of the Directorate General of Civil Aviation (DCGA). Although the victim (who is a trans person) does not approach the Court, such matters can take multiple years to be disposed of had they been taken up in a Court. Further, the composition of the Arbitral Tribunal could also be proven as a hindrance to the cases presented and argued by individuals from the LGBTQIA+ community as the Arbitral Tribunal may generally consist of cis-gender individuals who may not always be allies to the LGBTQIA+ community. Due to this, the chances of discrimination and prejudice against the LGBTQIA+ community may increase manifold.
However, it is to be remembered that Civil Aviation Arbitration is expected to grow significantly in the future because it primarily handles several important legal matters about trade and commerce across the globe. With the increase in trade and commerce, it is only natural that Civil Aviation disputes are likely to rise in number. Thus, Civil Aviation Arbitration provides a mechanism for dispute resolution by reducing the need for Litigation. Additionally, Civil Aviation Arbitration is expected to benefit from the increasing awareness of the importance of Arbitration among businesses and other organizations. Lastly, at the domestic level too, the onus lies upon the Indian Civil Aviation Ministry and the Law Ministry to take active steps to secure Arbitration as an essential part of the Civil Aviation sector in India.
About the Authors
Mr. Yazad Udwadia is an Advocate practising Litigation and Dispute Resolution in Mumbai, while simultaneously pursuing a Post Graduate Diploma in Business Management (December, 2022) and a Post Graduate Diploma in Arbitration and Mediation (March, 2023).
Mr. Abeer Tiwari is a 4th-year B.A. LL.B student from Balaji Law College, Pune, and an Associate Editor at IJPIEL.
Managing Editor: Naman Anand
Editors-in-Chief: Muskaan Singh & Hamna Viriyam
Senior Editor: Pushpit Singh
Associate Editor: Abeer Tiwari
Junior Editor: Intisar Aslam
Preferred Method of Citation
Yazad Udwadia and Abeer Tiwari, “Analysis of the Civil Aviation Arbitration Sector: A Dynamic State-of-Affairs of What Was, What Is, and What Can Be” (IJPIEL, 7 September 2022)