Introduction
The Arbitration and Conciliation Act, 1996 (“Act”) in India has been a subject of continuous piecemeal amendments in a bid to make India a pro-arbitration hub and an effective business destination by providing a robust dispute resolution mechanism that enhances the ease of doing business in India. A recent attempt to revamp the Act instituted by an out of the blue promulgation of the Arbitration and Conciliation (Amendment) Ordinance, 2020 and replaced by the Arbitration and Conciliation (Amendment) Act, 2021 (“2021 Amendment”) is a step intended in a similar direction.
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 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.”
Effectively, 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. Unsurprisingly, the 2021 Amendment 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 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 to avoid losing parties from filing frivolous and unwarranted challenges. Interestingly, the 2021 Amendment has undone the efforts of the 2015 Amendment to a certain extent and has revived the 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 present blog does not concern with the question of how or why the 2021 Amendment is enacted but instead it focuses on the question of the aftermath and 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.
It is envisioned that the following implications may arise once the 2021 Amendment is implemented.
Addition of an Extra Layer 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. Interestingly, it is observed that such situations have already been envisioned and adequately addressed by the existing provisions of the Act.
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. It is established jurisprudence that an 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 can 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. Again, 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. Therefore, it may not be out of place to foretell that 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 are catastrophic.
Disregarding minimal judicial intervention
The 2021 Amendment’s implementation 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
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 to delay 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 fear 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 court to seek relief.
Therefore, it is likely that the 2021 Amendment is incentivising parties to approach the courts without any checks and balances, which will make the commercial parties hesitant to do or continue their business in India due to a lack of robust dispute resolution mechanism as they now most likely will have to subject themselves to the Indian courts for the resolution of their disputes.
Uncertainty in Application
Further, the 2021 Amendment seems to be marred with several inconsistencies, ambiguities, and uncertainty in its application, giving rise to certain undesirable consequences.
The additional ground at the stage of enforcement
The 2021 Amendment provides an opportunity to the parties to plead the grounds of 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 does not even invoke at any time before the application for setting aside of the award.
Lack of criteria
The 2021 Amendment prescribes no 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 induced by the 2021 Amendment. It may strongly dissuade a business entity from subjecting themselves to a dispute resolution mechanism that is not certain.
Introducing additional evidence
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. 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.
Alternatively, 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. First, 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. Second, 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.
Moreover, if the courts indeed do 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 antithetical to the intent and purpose of Section 34 and Section 36 of the Act.
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: Flurry of Challenges?
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”.
When implemented, 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 creative way to take unmerited recourse to the 2021 Amendment. 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. However, 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
While the ailments that the 2021 Amendment is attempting to cure are still not clear, the side effects of the 2021 Amendment may prove to be a disaster. The adding of an extra appellate layer of judicial intervention, the multiplicity of proceedings, uncertainty in the application, encouraging a flurry of challenges and opening the pandora’s box qua the arbitrator’s liability coupled with the dilution of the 2015 Amendment and failure in upholding the cardinal principle of the arbitration process, i.e., minimum judicial intervention through the 2021 Amendment may not augur well with India’s dream of becoming a pro-arbitration hub.
For a jurisdiction where the enforcement of a judgment or an award is already problematic, a sudden shift from Indian courts’ pro-enforcement approach to empowering the courts to grant an unconditional stay on the enforcement of an arbitral award is detrimental to the sacrosanct vested right of enforcement, finality, and binding nature of an arbitral award. This impacts the enforceability of the contracts and most likely create an unease for the businesses to operate in a regime where the parties are most likely prone to face another round of litigation at the time of enforcement of the arbitral award, depriving them of enjoying the fruits of the arbitral award.
This article has been authored by Mr. Shubham Joshi, a commercial lawyer based in Dehradun, Uttarakhand. This blog is a part of RSRR’s Excerpts from Experts Blog Series, initiated to bring forth discussion by experts on contemporary legal issues.
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