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Government’s another attempt to amend the Indian Arbitration Law: success or failure!

Dated: November 07, 2020

                                                                                                                                                           - By Megha Bhatia

In order to amend the Arbitration and Conciliation Act, 1996 (Arbitration Act), another ordinance was promulgated on November 4th, 2020. Without any deliberations or inviting public input on the effect of amendments, one fails to understand the teething rush in passing the ordinance, which is perhaps the reason why we have had so many amendments to the Arbitration Act since 2015.

There are two important inclusions: 

(a) Unconditional stay on the enforcement of an India seated arbitration award until the challenge to the award is determined, provided, there is prima facie finding by the Court that the arbitration agreement or contract which is the basis of the award, or the making of the award was induced or effected by fraud or corruption; 

(b) Deletion of the much debated qualifications, experience and norms for accreditation of arbitrators stipulated under the Eight Schedule of the Arbitration Act.

Although the amendments are well intended, prescribing the breadth of the stay on the service of an arbitral award seated in India will lead to unintended consequences and open the doors to a floodgate of litigation, thereby delaying the arbitral award 's compliance. The provision of a stay is narrowly worded under the current regime, and it was not appropriate to mention precisely the scenarios in which a stay could be given.

The retrospective effect of the amendment relating to the provision of a stay has been issued, as the clarification states that it extends to all court cases arising out of or in connection with arbitral proceedings, irrespective of whether the arbitral or court proceedings started before or after 23 October 2015. The parties are likely to litigate this before the courts.

Deleting the Eight Schedule is definitely a praiseworthy development and was long awaited. It contained the necessary qualifications for accreditation of arbitrators. The provision was seen as coming in the way of India getting the benefit of foreign arbitrators.

The Law Ministry ordinance said the amendment was necessary “to address the concerns raised by stakeholders after the enactment of the Arbitration and Conciliation (Amendment) Act, 2019 and to ensure that all the stakeholder parties get an opportunity to seek an unconditional stay of enforcement of arbitral awards where the underlying arbitration agreement or contract or making of the arbitral award are induced by fraud or corruption.”

I. Stay on Enforcement of the India seated arbitral award

Under the current regime and the provisions of the Code of Civil Procedure, 1908, the Court has the right to stay the functioning of the arbitral award, according to the conditions it may find necessary, having regard to the provisions for granting the stay of the money decree.

As a consequence, the Court is given broad jurisdiction to deliberate on a wide variety of topics, including, though not limited to, issues such as the arbitration arrangement or contract, or the award being caused or carried out by fraud or corruption.

(a) The arbitration agreement or contract which is the basis of the award being induced or effected by fraud or corruption:

In the particular stay application filed under Section 36 of the Arbitration Act (in the enforcement proceedings), the parties should have resolved this question, and the Court has sufficient jurisdiction to provide reasonable directions as deemed fit in the case. A respondent to the arbitral proceeding would be tempted to plead with the new collection of amendments that the underlying contract was caused by fraud and corruption, well realising that this can be used as a justification for requesting a stay on the execution of the arbitration award.

Under Section 16 of the Arbitration Act, a party always has the right to contest the jurisdiction of the arbitral tribunal, and such jurisdictional appeals have to be made before the statement of defence is filed. A party may always plead in the jurisdictional challenge that the underlying arbitration agreement has been triggered by fraud or misconduct, and the arbitral tribunal must rule on the jurisdictional challenge before continuing with the arbitral proceedings.

Under Section 37 of the Arbitration Act, the ruling on the jurisdictional challenge is not appealable and, as such, can be appealed along with the final award under Section 34 of the Arbitration Act, which must be disposed of expeditiously and, in any case, within a span of one year. Therefore, the current legal situation envisaged an appropriate settlement for the parties, and no further changes were required.

It is difficult to see how the court hearing implementation of the arbitral award would assess if the underlying contract was caused by bribery or corruption in the absence of any proof before the judge, assuming that a jurisdictional challenge was not brought before the arbitral tribunal. For the purposes of adjudication, it can be impossible to take a prima facie view of the issues of fraud and corruption, to merely read the records and to require a thorough investigation.

Importantly, at the time of implementation of the arbitral award, should a party who agreed not to contest the jurisdiction at the beginning be permitted to make an additional plea and remain operational? Of course, if a party is permitted to stir up a question of authority at such a late point, it would be incredibly unreasonable.

(b) The making of the award was induced or effected by fraud or corruption:

The second leg of the amendment to the proviso of Section 36 of the Arbitration Act enabling the operation of the award to remain unconditional if it is proven prima facie that the award, fraud or corruption has been caused or carried out, is at par with international standards.

In making the arbitral award, there might be several concerns related to fraud or corruption. It will require greater accountability for the role of arbitrators in adjudicating issues related to corruption and also on the arbitral institutions to make the award caused by fraud or corruption as a basis for stay. The conduct of the parties, or the intervention of the arbitral tribunal, may lead to such problems. Although the institutional rules aim to remedy the actions of the parties, there is no clarification as to whether the complaints are directed against the arbitral tribunal, how they should be adjudicated, or whether arbitral institutions should play an active role in deciding corruption issues. 

Although there are general provisions to appeal the arbitrator’s appointment before the arbitral institution, this may be caused in restricted situations, and a timetable is always attached. It is therefore critical that the substantive arbitration law stipulates such express criteria.

Under the new Arbitration Act scheme, a challenge to an arbitral award can be filed if making of the award was induced by fraud or corruption, as that would offend the public policy.

In the case of Venture Global, the Supreme Court’s decision clarified fraud in the form of an award and held that the omission of facts before the arbitral tribunal can be perceived as fraud when the award is made, but the facts concealed must have a causative connection, and if, after the award, the concealed facts revealed have a causative connection with the facts that constitute or induce the award, those facts are important in the setting aside proceedings and the award may be set aside as impacted or induced by fraud.

Furthermore, the scope of compliance proceedings pursuant to Section 36 is limited to implementing the arbitral award only as a decree of the court. As a result, there needs to be clarification about how to take a prima facie view of charges of fraud and whether proof must be given in the proceedings under Section 36. In making an arbitral award, there seems to be no guidelines about what could lead to wrongdoing, and again how a prima facie decision can be taken.

Therefore, the question is was there a need to introduce a specific provision for stay of the operation of the arbitral award. Under Section 36(3), the court already had the power to grant a stay after documenting the reasons in writing, if necessary, pending the challenge to the arbitral award. Recalcitrant respondents, who will make every effort to postpone the implementation of the arbitral award, may theoretically misuse the new insertion. As a result, along with the opposition to the arbitral award, we should expect endless requests requesting a stay on the service of the arbitral award.

A potential remedy to limit the complexity of the case would be to place heavy costs on unsuccessful attempts to allege and demand a stay on the service of the award, on the assumption that fraud or corruption caused the award.

II. Deletion of qualifications, experience and norms for accreditation of arbitrators stipulated under the Eight Schedule:

Since its beginning, the adoption of the Eight Schedule has been a bone of contention. Many have argued that it undermines party equality, as it limits the parties’ right to select their arbitrators. Owing to the introduction of arbitrary limitations on the right to appoint a non-Indian arbitrator sitting in India, the Eight Schedule has been widely criticised. It also prohibited foreign parties from seating their arbitration in India because of the inability to nominate foreign legal experts and the restriction of their preference by nationality of possible arbitrators, the possibility of lack of expertise in international arbitration handling. Likewise, the conditions that the arbitrator could comply with the Indian Constitution, labour rules, etc., did not help at all.

Although on the other end of the pendulum, some practitioners and scholars thought it was necessary for the Eight Schedule to comply with the basic requirements to improve the consistency of arbitral appointments. The Government did not notify the Eight Schedule as the debate proceeded, and thus, while it was prescribed, it never had the force of law and was limited to academic debates.

Party autonomy is the hallmark of arbitration. The amendment is a welcome development, and the abolition of the Eight Schedule is in the right direction and clearly reflects the message of India to the worldwide arbitration community. Although the parties should bear in mind that there can be informal guidelines on the conditions, while appointing the arbitrator, such requirements should definitely not be made obligatory.

Conclusion

Overall, the amendment was well intended and worthy of praise and yet another effort to make India an arbitration friendly country, save and except, if there is a prima facie finding that the underlying contract or the award was included through fraud or corruption, the remainder of the award process.

The amendment had no context, and it is not clear why, at this point, such an amendment was necessary. As mentioned above, this clause is likely to be misused by the parties, given that the current laws were already capable of dealing with such situations and there was no need to amend the law directly.

The 2015 amendment explained that fraud and corruption in making an arbitral award constituted an offence against India's public policy and was part of the provisions, and there was no need to make clear references in relation to the stay of award.