Author: Himanshu Shembekar*
| Jurisdiction: India |
Topics: Injunctions Enforcement of Awards |
INTRODUCTION
In February 2021, the Lok Sabha passed the Arbitration and Conciliation (Amendment) Bill, 2021 (herein referred as “the bill”).[1] Previously, an ordinance titled Arbitration and Conciliation (Amendment) Ordinance, 2020 (herein referred as “the ordinance”)[2] was promulgated on November 4, 2020. The Indian Arbitration Act was amended with the objective of allowing courts to grant unconditional stay on arbitral awards. The amendment states the following:
In the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the principal Act), in section 36, in sub-section (3), after the proviso, the following shall be inserted and shall be deemed to have been inserted with effect from the 23rd day of October, 2015, namely: ––
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.
The purpose behind introducing the above amendment was to address and tackle the issue of corrupt practices and frauds which might exist in the underlying arbitration agreements or while passing of the arbitral award.[3] Therefore, it was reasoned that the stakeholders or the parties in such cases must get an opportunity to seek an unconditional stay on enforcement of arbitral awards.[4] It can be said that the amendment has introduced an additional layer of judicial scrutiny while interpreting arbitral awards. As per the Arbitration Act 1940, a court’s approval was a prerequisite before enforcement of an arbitral award. But this provision was done away with when the new Arbitration and Conciliation act 1996 was brought into force. As per the UNCITRAL Model Law,[5] an award debtor is allowed to resist an arbitral award at both the challenge stage[6] and enforcement or recognition stage.[7] The Model Law does not state anything about unconditional stay of arbitral awards at any stage, but the 2021 amendment disregards the framework provided in the Model Law.
The hon’ble supreme court in the cases of A. Ayyasamy v. A. Paramasivam & Ors,[8] Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd.[9] and Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties & Ors.[10] has ruled that matters related to frauds can be adjudicated by arbitral tribunals and accordingly tests were also laid down. Further, the hon’ble supreme court in the case of M/s. N.N. Global Mercantile Pvt. ltd. v. M/s Indo Unique Flame Ltd. & Ors[11] has stated that an arbitral tribunal can evaluate evidence that is are comprehensive and voluminous and can also scrutinize whether the arbitration agreement has been vitiated by fraud or corruption. So it can be said that 2021 amendment is an option provided to the parties to approach the courts, if either of the parties feel that the arbitral tribunal has overlooked evidence regarding fraud or corruption. Under section 34 of the Indian Arbitration Act,[12] an arbitral award can be set aside on the ground that it is against ‘public policy’ or if the arbitration agreement is not valid under the law, but not for setting aside an award or granting an unconditional stay due to invalidity of the main contract, of which the arbitration agreement is part of.
This is not the first time that unconditional stay on arbitral awards has been permitted in India. The issue of ‘automatic and unconditional stay’ has been debated for a long time. It may seem to be a reasonable and a thoughtful provision if we just take a glance at it, but there are several problems and difficulties that come along. Before addressing these issues, it is important that we take a look at the laws governing unconditional stay of arbitral award prior to the 2021 amendment.
JURISPRUDENCE ON UNCONDITIONAL STAY OF ARBITRAL AWARDS
Earlier, if an application was filed for setting aside of an arbitral award under section 34 of the Arbitration and Conciliation Act, then it would amount to an automatic stay. This provision was criticized by the hon’ble supreme court in the case of National Aluminum Company Ltd. v. Pressteel & Fabrications Ltd. and Anr., where they remarked that “this automatic suspension of the execution of the award . . . leaving no discretion in the court to put the parties on terms, in our opinion, defeats the very objective of the alternate dispute resolution system to which arbitration belongs.”[13] The 246th Law Commission Report had also addressed this issue when it was observed that the provisions for automatic stay were causing a lot of problems and recommended that the law must be changed. [14]
In 2015, an amendment was introduced[15] which completely replaced section 36 of the Arbitration and Conciliation Act, and the automatic stay of awards was done away with because the courts used to take a lot of time to deal with matters related to setting aside of arbitral awards, thus making the whole process ineffective. As per the 2015 amendment, the aggrieved party needs to file a separate application to seek a stay of the arbitral award, and while granting a stay the court must write down or record its reasons. Further, if the court had to consider stay applications for arbitral awards involving money, then the provision for grant of stay of a money decree mentioned in the Civil Procedure Code, 1908 shall be applicable. In the case of BCCI v. Kochi Cricket (P.) Ltd. & Ors.,[16] the hon’ble supreme court provided a clarification regarding the application of amended section 36 of Indian Arbitration and Conciliation Act. It was stated that the amended section 36 of the Arbitration Act shall be retrospectively applicable to any application filed in relation to section 34 of the Arbitration Act prior to and pending on 23rd October 2015 and after. Thus, the concept of automatic stay of arbitral awards was done away with by the 2015 amendment and the BCCI[17] judgement.
It was felt by everyone that the BCCI case had ended the debate regarding the automatic stay of arbitral award, but this debate was again triggered by the Arbitration and Conciliation Act amendment in the year 2019.[18] Through this amendment, section 87[19] was introduced, which provided that 2015 amendment shall be applicable to arbitral or related court proceedings which were initiated on or after the date of commencement, i.e., 23rd October 2015. It meant that the unconditional stay on arbitral awards shall be applicable only on the arbitration proceedings which were commenced before 23rd October 2015. Thus, it implied that 2015 amendment shall have prospective application and the BCCI judgement was accordingly overruled.
But the 2019 amendment was itself overruled by the decision rendered in the case of Hindustan Construction Company v Union of India.[20] It was stated by the hon’ble supreme court that by inserting section 87 in the Arbitration Act, automatic stays on arbitral awards resurrected and became permissible irrespective of the day on which the arbitration proceedings or related court matters were initiated with regard to setting aside of arbitral award under section 34 of the Arbitration Act. This resulted in delays and totally defeated the purpose and objective mentioned in the 2015 amendment. These unnecessary delays deny the award debtors from enjoying the benefits of arbitral award and they might also face the threat of insolvency due to lack of funds to pay their creditors. Therefore, it was ruled by the hon’ble supreme court that section 87 of the Arbitration Act was manifestly arbitrary under article 14 of the Indian Constitution of India[21] and hence it was declared unconstitutional.
To further explain the disadvantages of allowing unconditional stay on arbitral awards, the hon’ble supreme court in the case of Pam Developments Private Limited. v. State of West Bengal, reiterated that:
Arbitration proceedings are essentially alternate dispute redressal system meant for early/quick resolution of disputes and in case a money decree award as passed by the Arbitrator against the Government is allowed to be automatically stayed, the very purpose of quick resolution of dispute through arbitration would be defeated as the decree holder would be fully deprived of the fruits of the award on mere filing of objection under Section 34 of the Arbitration Act.[22]
To overrule the judgement passed in the case of Hindustan Construction Company and to counter the restraint on unconditional stay on arbitral awards even if the award is pending disposal under section 34, the following exception was inserted via the 2020 ordinance amendment: “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.”[23]
In the case of Kishor Shah v. Urban Infrastructure Trustees Limited[24], the hon’ble high court of Bombay laid down the proper approach a court must comply with in dealing with applications under section 36 of Arbitration and Conciliation Act. Unconditional stays of arbitral awards cannot be considered as the norm. It is mentioned under section 36(3) of the Indian Arbitration and Conciliation Act[25] that when an arbitral award is put on a stay, there must be proper reasons stated to permit such stay orders. The provisions regarding “money decree[s]” stated in the CPC must also be given due regard. The court however also stated that section 36 of Arbitration does not indicate that unconditional stay on arbitral award is impermissible. It completely depends on the facts and circumstances of the case. The hon’ble court made a reference to Order 41 Rule 5 (2) of CPC,[26] which states that “[w]here an application is made for stay of execution of an appealable decree before the expiration of the time allowed for appealing therefrom, the Court which passed the decree may on sufficient cause being shown order the execution to be stayed.” But for allowing such an unconditional stay by the appellate court, a strong and exceptional case must be made as stated in Order 41 Rule 5 (3).[27] It was stated by the hon’ble court that:
Section 36 court is not to merely look at the operative part of the arbitral award under challenge, see that it is for money, and automatically order a deposit or security. The Court must look to all the circumstances; and if it be shown that the Award is entirely vulnerable, within the frame of permissible challenges under Section 34, then in a given case a court may legitimately grant an unconditional stay.[28]
This was one of the first judgements passed after the ordinance amendment was brought in and it is interesting to note that court has taken a differing view.
PROBLEMS WITH THE UNCONDITIONAL STAY OF ARBITRAL AWARDS
Even if the 2021 amendment has been incorporated with all the good intentions to avoid the issue of fraud or corruption, there are numerous inconsistencies, uncertainties and ambiguities over its interpretation and application.
A. Vague definitions and test to establish ‘fraud’ or ‘corruption’
The bill has not specified the proper definition, guideline or test as to what constitutes “fraud” or “corruption.” In absence of any such criteria, it becomes difficult for the courts to establish a prima facie case for fraud or corruption. This not only acts as a tool for unnecessary judicial intervention but also requires the court to further investigate such matters. The hon’ble Supreme court in the case of Dalpat Kumar v. Prahlad Singh, has defined the term “prima facie” as “a substantial question raised, bona fide, which needs investigation and a decision on merits.”[29] Thus, the word “prima facie” has in no way expedited the process of investigating the arbitral awards.
To make the matter more complicated, the hon’ble supreme court had made a distinction between “simple” and “serious” allegations of fraud and laid down tests to determine the same in the cases of A. Ayyasamy v A. Paramasivam, Rashid Raza v Sadaf Akhtar[30]and Avitel Post Studioz Ltd. v HSBC PI Holdings (Mauritius) Ltd.[31] If the case falls within the category of “serious fraud.” then the arbitral tribunals are not allowed to adjudicate such matters and it shall be decided by the courts.[32] Thus, the courts are faced with one more task even if the existence of fraud is established.
B. Tool for delays and harassment
There is no doubt that the 2021 amendment has provided an additional ground to the award debtor to challenge the award, but it has the potential to become a tool for promoting unnecessary delays and to harass the award creditor. This will not only increase the overall financial burden on the parties but also increases the time that cases are pending in courts. The 2021 amendment defeats the purpose of having arbitration as a go-to alternative dispute mechanism model.
C. Neglecting Section 16 of the Arbitration Act
It has been stated under section 16(1) of the Indian Arbitration and Conciliation Act,[33] that an arbitration agreement shall be considered to be independent from the other terms of the contract. Further, it has also been stated that if the arbitral tribunal decides that the contract is null and void then it shall not necessitate that the arbitration clause or agreement shall also be invalid. Thus, Section 16 laid down the doctrine of severability or separability which states that an arbitration agreement has a completely different existence from the main contract. It has been emphasised in the case of Swiss Timing Ltd. v. Commonwealth Games, that:
As noticed above, the concept of separability of the arbitration clause/agreement from the underlying contract has been statutorily recognised by this country under Section 16 of the Arbitration Act, 1996. Having provided for resolution of disputes through arbitration, parties cannot be permitted to avoid arbitration, without satisfying the Court that it will be just and in the interest of all the parties not to proceed with the arbitration. Section 5 of the Arbitration Act provides that the Court shall not intervene in the arbitration process except in accordance with the provisions contained in Part I of the Arbitration Act. This policy of least interference in arbitration proceedings recognises the general principle that the function of Courts in matters relating to arbitration is to support arbitration process. A conjoint reading of Section 5 and Section 16 would make it clear that all matters including the issue as to whether the main contract was void/voidable can be referred to arbitration. Otherwise, it would be a handy tool available to the unscrupulous parties to avoid arbitration, by raising the bogey of the underlying contract being void.[34]
Thus, 2021 amendment is a departure from the well-established principle of severability/separability which is an integral part of arbitrational law’s jurisprudence.
D. Conflict with Section 34 of the Arbitration Act
Under section 34(2) of the Indian Arbitration and Conciliation Act,[35] an arbitration agreement shall be deemed to be invalid and the arbitral award shall be set aside on the ground that it was against “public policy” of India, if during the making of the arbitral award there was corruption or fraud. Whereas in the newly amended section 36 of the Indian Arbitration Act, it is when “the arbitration agreement or contract which is the basis of the award” was based on fraud or corruption.[36] It has also been observed that the 2021 amendment fails to provide any criteria on how additional evidence needs to be presented beyond tribunal’s record to prove the allegations of corruption and fraud.
So, there are two provisions which shall be scrutinizing awards at different stages for the same grounds, i.e., after passing of arbitral award and enforcement stage, thus indicating that there is no fundamental difference between both the provisions. As there already existed a provision to challenge the arbitral award on the grounds of fraud and corruption, there is no justifiable reason to provide for the same ground at a different stage.[37] In fact, this amendment has made the process illogical and has increased its overall complexity.
Further complications can also arise on the ground of procedure. It has been stated in the case of Venture Global Engineering LLC and Ors. v Tech Mahindra Ltd.,[38] that “[t]he Award of an arbitral Tribunal can be set aside only on the grounds specified in Section 34 of the AAC 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.” It has also been stated in the case of Ssangyong Engineering & Construction Co. Ltd. v. NHAI,[39] that section 34 is more of a summary procedure. Under a section 34 application, the court does not have to reappreciate or record new evidence. The court makes a decision to set aside the arbitral award based on the findings of the arbitral tribunal. Therefore, in light of such a restricted scope of interference under section 34, it is difficult to understand how the amended section 36 application can avoid a jurisdictional conflict with the section 34.
E. Retrospective application
The 2021 amendment has provided that the unconditional stay of arbitral awards shall be applied retrospectively. This retrospective application is in total disregard to the observation made in the case of Hindustan Construction Company case, wherein it was stated that:
When the mischief of the misconstruction of Section 36 was corrected after a period of more than 19 years by legislative intervention in 2015, to now work in the reverse direction and bring back the aforesaid mischief itself results in manifest arbitrariness. The retrospective resurrection of an automatic-stay not only turns the clock backwards contrary to the object of the Arbitration Act, 1996 and the 2015 Amendment Act, but also results in payments already made under the amended Section 36 to award-holders in a situation of no-stay or conditional-stay now being reversed.[40]
The hon’ble supreme court has held in the case of BCCI[41] and Monnet Ispat & Energy Ltd. V. Union of Indian & Ors.,[42] that if there is any amendment made to the substantive laws and they affect the rights and liabilities of the parties or in any way imposes disability, then it must be prospective in nature unless there is a contrary intention of the legislature. Therefore, if we take a look at the preamble of 2021 amendment/2020 ordinance, the main purpose was to tackle the issue of fraud and corruption involved during the enforcement of arbitral award, but this fails to address how unconditional stay and its retrospective application shall help in tackling the above-mentioned issues. Further, this shall also lead to the reopening of several matters which have been already been settled by courts in India which could have catastrophic effect. The lawmakers have failed to properly explain the ‘intention’ behind such an amendment. It needs to be understood by the lawmakers that retrospective application of unconditional stay will not only adversely affect the procedural law but shall also substantially affect the rights of the award creditors.
CONCLUSION
The lawmakers may take a stand that the unconditional stay of arbitral awards has been implemented once again to ensure that there is justice and fairness when courts are dealing with the issue of fraud or corruption during the enforcement stage of the arbitral award, but in the absence of a clear framework it shall be a tough task for the courts. Unlike India, other jurisdictions such as England, Singapore, Hong Kong or even the UNCITRAL Model Law on International Commercial Arbitration do not have any provisions which allows the unconditional stay on arbitral awards.[43]
Already there are several problems in India relating to the enforcement of judgements or arbitral awards impacting the ease of doing business and adversely affecting the economy. It looks like that the lawmakers have not foreseen the complexities and the problems that may arise due to such an amendment. Further, when laws are drafted for setting aside of arbitral awards, there must be reasonable grounds for judicial interference or else the objective behind having arbitration as an alternative dispute resolution mechanism shall be defeated. Additionally, the retrospective application of unconditional stay shall foreseeably cause more problems, as several award debtors will challenge the arbitral award on the grounds of fraud or corruption, thus defeating the core principles of arbitral process. Therefore, to promote a pro-arbitration approach in India, it is important that the retrospective application of unconditional stay must be done away with. If the lawmakers choose to prospectively allow unconditional setting aside of awards on the grounds of fraud or corruption, the following suggestions should be considered:
- Proper definitions must be provided for the terms ‘fraud’ and ‘corruption’ to avoid any confusion and delays by the courts while considering the application.
- The term ‘unconditionally’ must be defined properly as, in its absence, there shall be a lot of uncertainty and confusion as to how long the arbitral award shall be put on hold.
- Clarification or explanation regarding the time within which an objection regarding fraud or corruption can be raised after passing of the arbitral award.
- Penalty must be imposed on parties if the courts find that objections were raised on frivolous grounds.[44]
Until the time any clarification is provided by the lawmakers, the courts have an enormous task to tackle this issue as they have to ensure that the provisions regarding unconditional stay on arbitral awards are not being misused to delay the enforcement and genuine issues are being addressed.[45]
* Himanshu Shembekar is a final-year B.B.A LL.B. (Hons.) student at National Law University Odisha and has keen interest in Arbitration.
[1] Arbitration and Conciliation (Amendment) Bill, 2021.
[2] Arbitration and Conciliation (Amendment) Ordinance, 2020.
[3] Preamble to the Arbitration and Conciliation (Amendment) Ordinance, 2020.
[4] Id.
[5] UNCITRAL Model Law on International Commercial Arbitration, reprinted in Report of the United Nations Commission on International Trade Law, 40 U.N. GAOR Supp. (No. 17), Annex 1, at 81-93, U.N. Doc. A/40/17 (1985).
[6] Id. at § 34.
[7] Id. at § 36.
[8] A. Ayyasamy v. A. Paramasivam and Ors, AIR 2016 SC 4675 (2016) (India).
[9] Avitel Post Studioz Limited and Ors.v. HSBC PI Holdings (Mauritius) Limited, (2020) SCC OnLine SC 656 (India).
[10] Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties and Ors., (2020) SCC OnLine SC 655 (India).
[11] N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. and Ors., (2021) SCC OnLine SC 13 (India).
[12] The Arbitration and Conciliation Act 1996, § 34.
[13] National Aluminum Company Ltd. v. Pressteel & Fabrications Ltd. and Anr, (2004) 1 SCC 540 (India).
[14] Law Commission of India, Amendments to the Arbitration and Conciliation Act 1996, (Law Comm No 246, 2014) paras 43-45.
[15] Arbitration and Conciliation (Amendment) Act, 2015, § 19.
[16] BCCI v. Kochi Cricket (P.) Ltd. & Ors., (2018) 6 SCC 287.
[17] Id.
[18] Arbitration and Conciliation (Amendment) Act 2015.
[19] Id., § 13.
[20] Hindustan Construction Company v Union of India, (2019) SCC OnLine SC 1520.
[21] India Const. art 14.
[22] Pam Developments Private Limited. v. State of West Bengal, (2019) 8 SCC 112 at ¶ 26.
[23] Arbitration and Conciliation (Amendment) Bill, 2021.
[24] Kishor Shah v. Urban Infrastructure Trustees Limited, (2020) SCC OnLine Bom 4098.
[25] The Arbitration and Conciliation Act 1996, § 36 (3).
[26] The Code of Civil Procedure 1908, order 41 r 5 (2).
[27] The Code of Civil Procedure 1908, order 41 r 5 (3).
[28] Kishor Shah, (2020) SCC OnLine Bom 4098 at ¶ 9.
[29] Dalpat Kumar v. Prahlad Singh, AIR 1993 SC 276 at ¶ 5.
[30] Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710.
[31] Supra note 9.
[32] Ameet Lalchand Shah v. Rishabh Enterprises, (2018) 15 SCC 678 at ¶ 37.
[33] The Arbitration and Conciliation Act 1996, § 16 (1).
[34] Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee, (2014) 6 SCC 677 at ¶ 25.
[35] The Arbitration and Conciliation Act 1996, § 34 (2).
[36] Arbitration and Conciliation (Amendment) Bill, 2021, § 36.
[37] Ashish Dholakia, Ketan Gaur, and Kaustub Narendran, India’s Arbitration And Conciliation (Amendment) Act, 2021: A Wolf In Sheep’s Clothing?, Kluwer Arb. Blog (23 May 2021), http://arbitrationblog.kluwerarbitration.com/2021/05/23/indias-arbitration-and-conciliation-amendment-act-2021-a-wolf-in-sheeps-clothing/.
[38] Venture Global Engineering LLC and Ors. v Tech Mahindra Ltd., (2018) 1 SCC 656 at ¶ 121.
[39] Ssangyong Engineering & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131.
[40] Hindustan Construction Company, (2019) SCC OnLine SC 1520 at ¶ 56.
[41] Supra note 16.
[42] Monnet Ispat & Energy Ltd. V. Union of Indian & Ors., (2012) 11 SCC 1.
[43] Shubham Joshi, Implications of The Arbitration And Conciliation (Amendment) Act, 2021: Ensuring (Un)Ease Of Doing Business In India?, RGNUL Student Law Review (Apr. 20, 2021), http://rsrr.in/2021/04/20/implications-of-the-2021-arbitration-amendment-act/.
[44] Alishan Naqvee and Swet Shika, India: Unconditional Stay On Arbitral Awards, Mondaq (Mar. 3, 2021), https://www.mondaq.com/india/trials-appeals-compensation/1042098/unconditional-stay-on-arbitral-awards.
[45] Animesh Bordoloi and Hitoishi Sarkar, Decluttering the 2020 Amendment to the Arbitration and Conciliation Act, 1996, IndiaCorpLaw (Jan. 4 2021), https://indiacorplaw.in/2021/01/decluttering-the-2020-amendment-to-the-arbitration-and-conciliation-act-1996.html.