The Arbitration and
Conciliation Act, 1996 (“Act”) in India has been a subject of continuous and
periodic amendments. The idea has always been to make India a pro-arbitration
hub and portrayal of her as a vibrant business destination by providing an
effective and robust dispute resolution mechanism that may send clear signal
relating to ease of doing business in India. A recent attempt to revamp the Act
vide promulgation of the Arbitration and Conciliation (Amendment) Ordinance,
2020 and subsequently replacing it by the Arbitration and Conciliation
(Amendment) Act, 2021 (“2021 Amendment”) is a step intended to achieve the
desired result. What are noteworthy is that the 2021 Amendment has added the
following text to Section 36(3) of the Act, after the proviso, which pertains
to the enforcement of the arbitral award, the same is as under:
“Provided further that where
the Court is satisfied that a prima facie case is made out that, —
(a) the arbitration agreement or contract which is the basis
of the award; or
(b) the making of the award, was induced or effected by fraud
or corruption, it shall stay the award unconditionally pending disposal of the
challenge under Section 34 to the award.
Explanation – For the removal of doubts, it is hereby clarified that the
above proviso shall apply to all court cases arising out of or in relation to
arbitral proceedings, irrespective of whether the arbitral or court proceedings
were commenced prior to or after the commencement of the Arbitration and
Conciliation (Amendment) Act, 2015.”
On 11th March, 2021, the Central
Government has notified the Arbitration and Conciliation (Amendment) Act, 2021'
and the Amendment Act is deemed to have come into effect from 4th November,
2020.
The 2021 Amendment resurrects the power of the Indian
Courts to grant an unconditional stay on the enforcement of an arbitral award,
where the underlying arbitration agreement or contract or making of the
arbitral award is induced by fraud or corruption. The 2021 Amendment, hence,
has attracted much attention, criticism, and disconcert within the arbitration
community. This is because, such power to grant an unconditional stay on the
enforcement of an arbitral award existed even prior to the Arbitration and
Conciliation (Amendment) Act, 2015 (“2015 Amendment”), which resulted in an
onslaught of challenges to delay the enforcement proceedings. It may be noted
that the probable mischief was addressed by the 2015 Amendment, which had scrapped
the unconditional stay on the enforcement proceedings and instead empowered the
courts to impose conditions on the stay of the enforcement proceedings to avoid
losing parties from filing frivolous and unwarranted challenges. It was in that
point of time was hailed as progressive and confidence boosting measure.
However, the 2021 Amendment appears to have undone the impact of the 2015
Amendment to a great extent and has revived somewhat unconditional stay regime,
again, on the vague grounds of fraud or corruption. Since the 2021 Amendment
has now already been notified by the Central Government, the implications of
the 2021 Amendment on India’s dream to become a pro-arbitration jurisdiction
and whether it contributes to making a conducive environment for the businesses
to operate in India, when the 2021 Amendment is implemented into practice is a
debatable issue, in fact this raises a concern.
There may be following
implications to the amendment:
(i)
Scheme of Addition ladder of Judicial Scrutiny
The first part of the 2021
Amendment seeks to address, inter alia,
two situations: First, unconditional stay on the enforcement of the arbitral
award, if the “arbitration agreement or the contract, which is the basis of the
award,” was induced or effected by fraud or corruption. Second, unconditional
stay on the enforcement of the arbitral award if the “making of the award by
the arbitral tribunal” was induced by fraud or corruption. What causes a
concern is the fact that existing provisions of section 34 of the Act was categorical
that any award against the public policy shall not be enforceable. However, to
amplify the issue and specifying the ground tantamount to putting spoke in the
wheel. The provision is likely to be misused by the unscrupulous element with a
view to place fetter in the way of enforcement of arbitral word. Whether, the
amendment shall aid or facilitate the solution or shall add to the woes is anybody’s
guess.
LAW
(1) In this perspective,
some judgments passed by hon’ble court may be analysed. In a matter reported as
ONGC Vs Saw Pipes Ltd 2003] 5 SCC 705,
the Supreme Court has elucidated the concept of public policy. It is held that:
“The correct position in law, in our opinion, is
that what one has to see is whether the illegality goes so much to the root of
the matter that the plaintiff cannot bring his action without relying upon the
illegal transaction into which he had entered. If the illegality be trivial or
venial, as stated by Williston and the plaintiff is not required to rest his
case upon that illegality, then public policy demands that the defendant should
not be allowed to take advantage of the position. A strict view, of course,
must be taken of the plaintiff's conduct, and he should not be allowed to
circumvent the illegality by resorting to some subterfuge or by misstating the
facts. If, however, the matter is clear and the illegality is not required to
be pleaded or proved as part of the cause of action and the plaintiff recanted
before the illegal purpose was achieved, then, unless it be of such a gross
nature as to outrage the conscience of the court, the plea of the defendant
should not prevail.
(2) The Supreme Court further
held
“in our view, the
phrase 'Public Policy of India' used in Section 34 in context is
required to be given a wider meaning. It can be stated that the concept of
public policy connotes some matter which concerns public good and the public
interest. What is for public good or in public interest or what would be
injurious or harmful to the public good or public interest has varied from time
to time. However, the award which is, on the face of it, patently in violation
of statutory provisions cannot be said to be in public interest. Such
award/judgment/decision is likely to adversely affect the administration of
justice. Hence, in our view in addition to narrower meaning given to the term
'public policy' in in Renusagar Power Co. Ltd Vs .General Electric Co. [1994 Supp. (1) SCC 644],
this Court considered Section 7(1) of the Arbitration (Protocol and
Convention) Act, 1937 which inter alia provided that it is required to be
held that the award could be set aside if it is patently illegal. Result would
be - award could be set aside if it is contrary to: -
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal.
Further, illegality must go to the root of the matter and if the
illegality is of trivial nature it cannot be held that award is against the
public policy. Award could also be set aside if it is so unfair and
unreasonable that it shocks the conscience of the Court. Such award is opposed
to public policy and is required to be adjudged void.
(3)
The
trend that has emerged post amendment (2015 amendment) that courts are somewhat
reluctant in according a wide interpretation to "public policy" or courts
were hardly interfering the merit of the case. The Supreme Court Judgment reported
as Venture
Global Engineering LLC and Ors v Tech Mahindra Ltd. and Ors [2017] 13 SCALE 91 (SC) is a pointer in
that regard. The Court observed –
"The Award of an arbitral Tribunal can be set aside
only on the grounds specified in Section 34 of the A&C Act and on no other
ground. The Court cannot act as an Appellate Court to examine the legality of
Award, nor it can examine the merits of claim by entering in factual arena like
an Appellate Court."
(4) Similarly, in Sutlej Construction v. The Union Territory of Chandigarh. 2017] 14 SCALE 240 (SC), the hon’ble Supreme Court has held:
“It
has been opined by this Court that when it comes to setting aside of an award
under the public policy ground, it would mean that the award should shock the
conscience of the court and would not include what the court thinks is unjust
on the facts of the case seeking to substitute its view for that of the
arbitrator to do what it considers to be “justice.”
These judgments, even on the basis of cursory perusal
shall reveal that the courts has often been interpreting "public policy "by
keeping in mind that arbitral award should not be examined on merit and if two
possible views are possible and one is adopted by the arbitrator, may be less
plausible, then too, the award shall not be interfered with, unless, it shocks
the conscience of court.
The present amendment of 2021 however, opens the vista
completely, in as much as in its purview comes, even awarding of contract and
if it is properly obtained or not and whether fraud and corrupt practices was adopted
in obtaining contract or award. Even the making of award itself may be subject
to scrutiny , thus, it implies that even it is to be ascertained if making of
the award is vitiated due to corrupt practices. The amendment therefore has
ominous portent.
DECIPHERING FRAUD IN CONTRACT
The net result of the aforesaid amendment is that the
arbitration regime, post amendment, is beset with “spoke in wheel” and timely enforcement of award may suffer and thus
upholding the legislative mandate of "minimal intervention of the Courts
in the arbitral process" as reflected by the changes brought by the
Arbitration and Conciliation (Amendment) Act, 2015 appears to have been
relegated.
The Section 16 of A & C
Act 1996 is a forum where itself the allegations of fraud or corruption
pertaining to the arbitration agreement or the contract could be raised i.e at
the stage of reference or before the statement of defence. It is also no longer
res integra that an arbitral tribunal
is competent to determine the issues of fraud alleged by the parties. Thereafter,
appeal objection u/s 34 of A & C to the award can be preferred and yet
again second appeal u/s 37 of A & C Act shall also lie.
What is of pertinence is that
award was challengeable, if it was found to be contrary to public policy. The
public policy was categorically defined and its ambit was amplified in various
judicial pronouncements. To add further fetter in the Act is therefore not
desirable in the face of the twin objective i.e early resolution of disputes
may suffer due to laches, in view of amendments and secondly, when public
policy was well defined over the years, adding further ladder of adjudication
may be prone to causing more obstacles in the way of enforcement of award. The
2021 Amendment does not seem to provide any justifiable additional ground or relief
that an aggrieved party Therefore it appears that enactment of the 2021
Amendment is merely akin to instituting an additional level of judicial
scrutiny in the form of an extra layer of judicial review and that too in the
form of an interim measure without any worthwhile, necessity.
The very object of doctrine of
minimal judicial intervention shall therefore take a body blow. The invocation
of 2021 Amendment may lead to an increase in the excessive judicial
interference in an arbitration proceeding which is contrary to what was
envisaged under the scheme of the Act. The object of minimal judicial
intervention is set out under section 5 of the Act. The likely strain on
already overburdened courts with huge backlogs of cases piled up should have
been factored. The protracted arbitral process and enforcement of the arbitral
awards shall be more likely in this backdrop. The 2021 Amendment may provide a
delinquent party a handle, to beat the successful party with. The probable
costs inconvenience and delay of the dispute resolution process shall be the
obvious fallout, besides it may aid in accentuating the trauma of the innocent
parties.
India has over the years
provided good business ambience and 1996 Act was a pointer and in fact a fillip
in that direction. Though, the 2021 Amendment may end up only accord incentive to
procrastination. It may be unintentional, but proper remedy is awaited. The
unscrupulous element should be discouraged to approach the courts without any
checks and balances. The commerce and global business has to thrive with proper
and effective judicial ladder which may lead commercial parties to have
confidence over continuing their business in India and robust dispute
resolution mechanism should not be compromised. The 2021 Amendment seems to be
marred with several inconsistencies and ambiguities and that may be prone to undesirable
consequences. It is worthwhile to point out that the 2021 Amendment may provide
option to the parties to plead fraud or corruption even at the time of the enforcement
of award proceedings, though, the parties might not have pleaded fraud or
corruption before the arbitral tribunal. In this backdrop, order of unconditional
stay on the enforcement of an award may be passed, though, it may have been
raised for the first time. Moreover, just when the succeeding party was to reap
the fruit of success, further impediment is carved out, which is not desirable.
In the absence of a clear prescribed standard, there is ambiguity, uncertainty,
and vagueness in invoking and justifying the grounds under Section 36 of the
Act induced by the 2021 Amendment. This is important, because if the parties
are allowed to adduce additional evidence at the stage of filing an application
for stay of the award, effectively, the Act will then enable two-time scrutiny
of an arbitral award with similar grounds but different standards and at
different stages. Since, under a Section 34 challenge a party may only rely on
the record of the tribunal, but under a Section 36(2) proceeding, a party can
adduce additional evidence. This may appear illogical in practice, create an
unwarranted hierarchy, increase the complexity of the process, and of course,
prolong the enforcement of the award. Moreover, there may not be any
fundamental difference between a Section 34 proceeding and a Section 36
proceeding which may amount to an unjustified and inexplicable multiplicity of
proceedings. Assuming that the courts does not allow the parties to adduce
additional evidence, it will be practically difficult for the courts to form a
prima facie view and satisfy itself that the arbitration agreement or the
contract which is the basis of the award, or the making of the award itself are
induced by fraud or corruption, unless the courts examine the dispute on merits
which, if taken resort to, is inimical to the pith and substance of Section 34
and Section 36 of the Act.
The arbitrator’s reputation
and that being sullied, some time for no reason may be one such consequence, if
the courts rushes to grant an unconditional stay merely on a prima facie view
that the making of the award was induced by fraud or corruption. The immunity
to arbitration and arbitrator may be diluted and the arbitrator may remain under
constant pressure of prospective unconditionally stay on the grounds of fraud
or corruption. What is further worrisome is that the Act is sought to be
applied retrospectively. That may open lid of Pandora box as a party may have license
to make an application under Section 36(2) of the Act and invoke the grounds of
fraud or corruption envisaged under the additional proviso to Section 36(3) of
the Act. It states: “all court cases
arising out of or in relation to arbitral proceedings, irrespective of whether
the arbitral or court proceedings were commenced prior to or after the
commencement of the Arbitration and Conciliation (Amendment) Act, 2015”.
The 2021 Amendment, when
implemented may give rise to multiple scenarios owing to lack of procedural
clarity. Firstly, the parties may invoke the fresh grounds of fraud, though,
may not have been alleged before, and seek unconditional stay under by way of
an amendment application. The application may be filed in the pending applications
u/s 36(2) of the Act. What may further be taken recourse to, is that a party
way withdraw the section 36(2) application with liberty to file fresh plea and
the fresh grounds may be incorporated such as fraud by invoking 2021 Amendment.
Yet another mode may be by way of filing a fresh Section 36(2) application claiming
a fresh cause of action.al such measures may result into delaying the
enforcement of the arbitral award. The safeguards for eliminating false and
frivolous pleas to filter out vague application replete with mala fide shall be
the need of the hour. What is of utmost importance is that the uniform
standards amongst various Commercial Courts, High Courts and the Supreme Court shall
be crucial, so that floodgates of cases are not opened. The object of A& C
Act i.e speedy disposal of disputes are the very theme and that should not be
allowed to be compromised. The corresponding situation and provisions across
the globe, if analysed, then what is of significance is that no corresponding
provisions existed in many arbitral friendly regime and there are no provisions
for unconditional stay of the domestic arbitral award at the stage of
enforcement.
REMARK
It appears that what the
Arbitration & Conciliation ( Amendment) Act 2015 had achieved, has subtly
been undone by the 2021 enactment. The focus on arbitration and leveraging the
arbitral process with more sanctity and least space for challenge should be the
theme, but vide the 2021 amendment, rule of the game appears to have changed.
The holistic impact of the amendment shall only be felt in due course. Probably,
the 2021 amendment appears to be treating an ailment with antibiotic with
probable side effect to accentuate the malaise further, whereas the ailments
may remain. The probable delay in resolution of dispute, in the ultimate
analysis, appears to be a foregone reality. The dilution of the 2015 Amendment,
which is the obvious effect of 2021 amendment is not warranted. An unconditional
stay on the enforcement of an arbitral award is detrimental to the prospect of finality
and binding nature of an arbitral award. The provisions by way of 2021
amendment, therefore, deserve a fresh
look.
ANIL
K KHAWARE
Founder & Sr Associate
societylawandjustice.com
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