ARBITRATION AND CONCILIATION
(AMENDMENT) ACT, 2021: IS IT NECESSARY?
The Arbitration and
Conciliation Act, 1996 (“Act”) in India has been a subject of periodical
amendments with a view to cater to situation arising in the midst of
implementation of law. The 1996 Act was a comprehensive legislation, enacted
with a view to provide industry friendly ambience, close on the heels of
economic liberalization. It was felt then that the country has to provide a
wherewithal for a robust and effective rederessal mechanism, which should not
be time consuming. The expeditious and effective legal redressal mechanism is
perceived as essential for ease of doing business.
Recently, the Act is sought to
be revamped and Arbitration and Conciliation (Amendment) Act, 2021 (“2021
Amendment”) is in place. 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:
“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 to
the award under Section 34 of A & C Act 1996.
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.
The aforesaid amendment and
provision is the crux of the discussion. 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 amendment
has elicited 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 prior to the Arbitration and Conciliation (Amendment)
Act, 2015 (“2015 Amendment”), which resulted in an onslaught of challenges to
delay the enforcement proceedings. This mischief was addressed by the 2015
Amendment, which scrapped the unconditional stay on the enforcement proceedings
and instead empowered the courts to impose conditions on the stay of the
enforcement proceedings so as to dissuade the prospective losing parties, from
filing frivolous and unwarranted challenges. The 2021 Amendment, however, has
done the reverse, and have undone the efforts of the 2015 Amendment to a
certain extent and has revived the unconditional stay regime again. What is
more perplexing is that the stay could be granted on vague grounds of fraud or
corruption. Since the 2021 Amendment has now already been notified by the
Central Government. Whether the amendment shall aid and facilitate India as a
pro-arbitration jurisdiction and still if it accords a conducive environment
for the businesses to operate in India is question that needs answer.
It is beyond doubt that addition
of an Extra Layer of Judicial Scrutiny is envisaged. 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.
Interestingly, it is observed that such situations have already been envisioned
and adequately addressed by the existing provisions of the Act.
The hon’ble
Supreme Court has already held in ONGC
Vs Saw Pipes Ltd AIR 2003 SC 2629 that award against public policy may not
stand judicial scrutiny.
The Law Commission of India in the 246th
Report had sought to curb the wide
interpretation of ‘public policy’ in
ONGC Case (Supra) so as to insulate arbitral award from needless objections. In
that backdrop, parliament had amended
the Act effective from 23rd of October 2015. Therefore, sub-sec(2A)
in Section 34 of the Act provided patent illegality will be one of the grounds
of violating public policy only in cases of domestic arbitral awards. The
proviso added makes it more clear stating that this ground cannot be invoked in
case of erroneous application of law or by re-appreciation of the evidence.
Fraud or corruption in the arbitration agreement or contract:
If the parties intend to plead
and prove the allegations of fraud or corruption pertaining to the arbitration
agreement or the contract, the appropriate forum to raise such contentions is
the Arbitral Tribunal per se or at
the stage of reference. The Arbitral Tribunal is competent to determine the
issues of fraud alleged by the parties. The Arbitral Tribunal is competent to
evaluate comprehensive and voluminous evidence and conduct an in-depth scrutiny
to determine whether the Arbitration Agreement or the contract is vitiated by
fraud or corruption. If the parties are not satisfied with the Arbitral Tribunal’s
findings or if the Arbitral Tribunal does not consider the allegations of fraud
even after parties have raised it, the parties have an option to take recourse
to the filing of an application for the setting aside of the award under
Section 34 of the Act and even if the parties are still not content with the
decision of the Section 34 application, parties could prefer appeal against the
order of the Section 34 application under Section 37(1)(c) of the Act.
Fraud or corruption at the time of making of award:
Section 34(2)(b) [Explanation
1](i) explicitly provides an opportunity to the parties to seek setting aside
the award, if the making of the award by the Arbitral Tribunal was induced by
fraud or corruption under the ambit of the award being against the public
policy of India. If the parties are not satisfied with the setting aside
proceedings, the same is appealable under Section 37(1)(c) of the Act. The 2021
Amendment does not seem to provide any justifiable additional ground or relief
that an aggrieved party may resort to, should they face a situation of fraud as
envisioned by the 2021 Amendment. The enactment of the 2021 Amendment is merely
akin to instituting an additional level of judicial scrutiny in the form of an
extra layer of appellate review, that too in the form of an interim measure
without any adequate safeguards. The consequences of this additional scope of
interference could be catastrophic.
Disregarding minimal judicial intervention:
The A & C Act 1996 was
enacted to secure the object of minimum judicial interference and relative ease
in the judicial rederesal mechanism that was envisaged under it. However, 2021
Amendment could lead to an increase in the excessive judicial interference in
an arbitration proceeding which is antithetical to the very purpose of opting
for arbitration as a method of dispute resolution, i.e., minimal judicial
intervention as enshrined under Section 5 of the Act to avoid the ordeals of a
traditional litigation process. Moreover, it will put an immense strain on already
overburdened courts and the pendency of cases in India. This will most likely
add to the delay in enforcing the arbitral awards in India.
Tool for harassment:
If seen from another
yardstick, the 2021 Amendment may become a potent tool for the losing parties
to harass the opponents by pleading fraud or corruption in every arbitration
proceeding so as to procrastinate the enforcement of the Arbitral Award, just
as most applications under Section 34 of the Act allege a violation of public
policy. This may not only add to the costs, inconvenience, and delay of the
dispute resolution process but may also end up increasing the misery of the
innocent parties. This may discourage the parties to opt for arbitration as a
dispute resolution mechanism, as the parties will eventually have to subject
itself to the ordeals of the delayed court proceedings to seek relief. The moot
point therefore is whether the 2021 amendment is incentivizing the delinquent?
The check and balance is already part of the Act in as much as Section 34 of
the 1996 Act is otherwise self contained. The robust dispute resolution
mechanism is always perceived as the need and the same had been well entrenched in the act even before the
current amendment and therefore the moot question is that whether the amendment
was at all necessary in the aforesaid context.
Prospective Uncertainty
The 2021 Amendment seems to be
marred with several inconsistencies, ambiguities, and uncertainty in its
application, giving rise to certain undesirable consequences. As stated, the additional
ground at the stage of enforcement is accorded to an aggrieved party and the
latter may plead fraud or corruption at the time of the enforcement
proceedings, even when the parties did not plead fraud or corruption before the
Arbitral Tribunal. This potentially means that a party can get an unconditional
stay on the enforcement of an award on a ground which that party might not even
have invoked at any time, before, the application for setting aside of the
award.
Lack of criteria:
What is ironical is that the
2021 Amendment does not stipulate any standard or criterion on which fraud or
corruption is to be assessed, unlike the standards laid down under Section 34
of the Act, which mandates a party to “establish on the basis of the record of
the Arbitral Tribunal” should the parties seek to invoke the grounds under
Section 34 for the setting aside of the Arbitral Award. 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 introduced by
the 2021 Amendment. In effect it may unwittingly dissuade a business entity
from subjecting themselves to a dispute resolution mechanism owing to
uncertainty. Moreover, the 2021 Amendment presents no clarity with respect to
parties adducing additional evidence beyond the Tribunal’s record to plead and
prove the allegations of fraud or corruption, especially at the enforcement
stage. If a party is allowed to adduce additional evidence at the stage of
filing an application for stay of the award, effectively, the Act will then ingrain
two-time scrutiny of an Arbitral Award with similar grounds, but different
standards and at different stages. The predicament in this context could be
galore, as, while, under a Section 34 of the Act, challenge by a party may only
relate to the record of the Tribunal, but. now, under a Section 36(2)
proceeding, a party can adduce additional evidence. This will create an
unwarranted hierarchy and may lead to complexity of the process resulting into prolonging
the enforcement of the award.
Now, if we take a situation
that if the court does not allow the parties to adduce additional evidence and
restricts their pleading to the record of the Arbitral Tribunal, there may be
two implications. It may in the context 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 recourse
to, is antithetical to the intent and
purpose of Section 34 and Section 36 of the Act. Secondly, it will be
challenging to plead and prove fraud or corruption without adducing any
additional document or evidence, especially if the plea is being taken for the
first time at the enforcement stage due to its inherent nature and wide ambit. What
may further add to the dilemma in as much as there may not be any fundamental
difference between a Section 34 proceeding and a Section 36 proceeding and this
may eventually lead to multiplicity of proceedings.
Risk
to arbitrator’s reputation:
There is also a risk of
tainting the Arbitrator’s reputation if the courts are in a rush to grant an
unconditional stay merely on a prima
facie view that the making of the award was induced by fraud or corruption.
In practice, it may have significant implications on the functioning of the Arbitrators
and issues of Arbitrator immunity if they are under constant pressure that
their award is going to get unconditionally stayed on the grounds of fraud or
corruption without comprehensive scrutiny by the courts.
Retrospective Applicability?
The second part of the 2021
Amendment, which mentions the explanation to the additional proviso, pertains
to the retrospective applicability of the 2021 Amendment. In essence, it gives
a free license to the parties 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 in “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”. This could potentially give rise to multiple scenarios over
lack of procedural clarity. First, the parties may invoke the fresh grounds of
fraud and seek unconditional stay under the 2021 Amendment, by way of an
amendment application, in the pending applications of Section 36(2) of the Act
where the plea of fraud was not initially taken. Second, the parties may move
an application to withdraw their pending Section 36(2) application with leave
to file a fresh Section 36(2) application that may possibly give the parties an
opportunity to incorporate the grounds of fraud and make use of the 2021
Amendment. Third, the parties may also look to file a fresh Section 36(2)
application with a fresh cause of action in a pending arbitration proceeding
where another Section 36(2) application has already been disposed of, to take
another shot at delaying the enforcement of the arbitral award. The scenarios
mentioned above are not exhaustive, and the parties may find a novel way to seek
recourse to the 2021 Amendment, though, that may not really be necessary. This
may lead to a flurry of Section 36(2) applications in the absence of safeguards
for eliminating false, vexatious, and frivolous enforcement applications for an
unconditional stay.
Of course, a lot will depend
on how courts will interpret the explanation to the additional proviso and how
much leeway the Courts are going to give to the parties to introduce the pleas
of fraud and corruption empowered by the 2021 Amendment in the above-mentioned
scenarios. Moreover, what uniform standards various Commercial Courts, High
Courts and the Supreme Court are going to establish will be crucial since there
will always be a risk of conflicting standards and jurisprudence, which may
lead to a catastrophic result of opening floodgates of litigation, thereby
breaking down the very soul of an arbitration proceeding, i.e., effective,
speedy, user friendly, and cost-effective dispute resolution. Interestingly,
the arbitration statutes of the pro-arbitration jurisdictions such as
Singapore, Hong Kong, or England or even the UNCITRAL Model Law on
International Commercial Arbitration do not offer any provisions for
unconditional stay of the domestic arbitral award at the stage of enforcement.
In fact, the Indian
jurisprudence also emphasises the fact that there is no scope for an
unconditional stay on the enforcement of an arbitral award under the Act and
that any such unconditional stay can thwart the execution of the arbitral awards
for many years, thereby defeating the purpose and effectiveness of the
arbitration proceedings.
Conclusion
The A7 C Act
1996 was amended in 2015 with a view to redress the problems of high costs and
long timeframes that dispute resolution entailed. Through this amendment of
2015, the provision of an automatic stay of an arbitral award under Section 36
of the act was taken away, in case of admission of a Section 34 application. The
2021 Amendment of Section 36 stipulates an automatic stay on an arbitral award
if the court is satisfied that there is a prima facie case for fraud or
corruption in the relevant Arbitration Agreement, contract or making of the
award. This is a step back from the 2015 amendment as it brings back automatic
stay, though with the caveat, as stated.
While the ailments that the
2021 Amendment is attempting to cure is unclear and ambiguous. The side effects
of the 2021 Amendment appears to be comprehensive. The provision of judicial
intervention in execution /enforcement through stipulated unconditional stay may
lead to the multiplicity of proceedings. This may encourage some frivolous
challenges. Apart from that the prescription of arbitrator’s liability coupled
with the dilution of the 2015 Amendment and failure in upholding the basic
principles of minimum judicial intervention by virtue of the 2021 Amendment may
not augur well with India’s objective of becoming a pro-arbitration hub. We
know that already road blocks are felt while seeking the enforcement of a
judgment or an award, still, the amendment shall lead to a sudden shift from
Indian courts’ pro-enforcement approach. The empowering of the courts to grant
an unconditional stay on the enforcement of an arbitral award is therefore detrimental
to the vested right of enforcement, finality, and binding nature of an arbitral
award. The safeguards to the aggrieved parties already existed in A & C Act
1996 and also through 2015 Amendment Act and the 2021 amendment should have
been avoided.
Anil K Khaware
Founder & Senior Associate
Societylawandjustice.com ----
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