Anjali Patel and Divyal[i]
The sudden promulgation of the Arbitration and Conciliation (Amendment) Ordinance, 2020 has raised many questions. The prime objective behind passing this ordinance was to provide an opportunity to the parties to seek an unconditional stay on enforcement of arbitral awards. Therefore, in order to facilitate this objective, the ordinance amended Section 36 and allowed the stay if it is prima facie proved that, the arbitration agreement or the underlying contract – is induced by fraud or corruption. Additionally, the proposed amendment has a retrospective effect and it shall apply to all the cases arising from arbitral proceedings either prior to or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015.
This article proposes to dissect the changes brought by this ordinance in Section 36. It further analyses the implication of such changes given the fact the retrospective effect of this ordinance. Lastly, this article tries to take a glance at the overall impact of this amendment along with the ambiguity created by it, and what will be the future course of action?
Implications of Unconditional Stay
Prior to the 2015 amendment, Section 36 directly came into play wherein application of Section 34 had been made and consequently, the unconditional stay was imposed on arbitral award until the party’s application is concluded. This resulted in a delay in enforcement of the arbitral award and this was also reiterated in the 246th Law Commission Report . It was suggested that in order to rectify this mischief, it is important to amend Section 36. In similar lines, the court in National Aluminium Co. Ltd v. M/S. Press steel & Fabrications (P.) Ltd, held that the automatic suspension of the execution of the arbitral award defeats the very objective of the alternate dispute resolution system to which arbitration belongs. Pursuant to this recommendation, the Arbitration, and Conciliation (Amendment) Act, 2015 was enacted wherein it was explicitly stated that filing of an application under Section 34 is not sufficient to render an arbitral award unenforceable unless the court granted a stay. This amendment ensured that a stay would be operational only when a separate application has been filed and the court was satisfied that the situation warrants a stay.
After the 2020 Ordinance came into effect, it brought back the regime of unconditional stay. The primary problem with unconditional stay is that it defeats the very purpose of the arbitration. Arbitration is preferred as a suitable alternate method of dispute resolution for the reason that it provides a timely remedy compared to litigation. But post this amendment, the party against the award will be inclined to delay the enforcement of the award by claiming that the underlying contract is induced by fraud or corruption. Also, the ordinance made it mandatory for the courts to grant an unconditional stay if a prima facie case is made out regarding the existence of fraud or corruption. However, the ordinance failed to provide a clear guideline to the level of enquiry to be undertaken by a judge before reaching a prima facie opinion. Before the ordinance, Indian Courts were taking a pro-enforcement approach while dealing with enforcement of arbitral awards by measures such as disclosure of assets by the judgment debtor and 100% deposit of the award amount before granting stay. That will now come to a halt.
Establishing Prima Facie Fraud – the journey from Discretionary to Mandatory
Before the promulgation of the ordinance, the granting of stay was a discretionary power of the court and the court could grant a stay only when grounds raised by parties were justified. Now the ordinance has made it mandatory to grant a stay if a prima facie case is made out regarding fraud or corruption. It becomes difficult to imagine how courts would form a prima facie opinion regarding a complex subject such as fraud without delving into the merits of the case.
As per the latest decision of the Supreme Court in Avitel Post Studioz Limited v. HSBC PI Holdings, the issue of whether the underlying contract is impaired by fraud is one that has to be ascertained by the arbitral tribunal. Thus, a party attempting to resist enforcement of an award on such basis would, therefore, be required to weigh into the findings of the tribunal, on merits. Nevertheless, according to the scheme of the Act and settled law, the extent for court interference to set aside arbitral awards is immensely restricted. Any aforesaid judicial inquiry would be limited only to the highly confined test of ‘patent illegality’, as interpreted by the Supreme Court recently in Patel Engineering Ltd v. North Eastern Electric Power Corporation Ltd. In any case, courts are not allowed to review such awards on merits, or re-appreciate evidence to conclude the matter.
Other jurisdictions have also found it rather challenging to establish prima facie fraud and the same was witnessed in the case of BVU v BVX where the Singapore High Court denied an application to set aside enforcement of an award on the ground of fraud and ruled that fraud would only be inferred with cogent and strong evidence. Additionally, if new evidence is being proposed to establish fraud at the setting aside stage, the applicant would have to exhibit why, at the time of the arbitration, the evidence was not available or could not have been obtained with reasonable diligence.
Challenge proceedings are restricted to summary proceedings and documents that are already submitted. The parties are not allowed to produce additional documents and evidence in Section 34 proceedings and this would make it extremely challenging for the court to determine a prima facie case.
Arbitrability of Fraud
The Supreme Court has opined that only where serious allegations of fraud are involved, arbitration of a dispute may be refused. In order to determine these serious allegations of fraud, the Apex court in A. Ayyasamy v. A. Paramasivam & Ors has laid down two tests that are to be satisfied. The first being, whether the plea pervades the entire contract or agreement of arbitration and the second being whether the allegation of fraud touch upon the internal affairs of the party inter se and it has no implication in the public domain. The complexity of dealing with the subject matter of a fraud was further observed in the case of N. Radhakrishnan vs M/S. Mastero Engieers & Ors, where the court stated that matters involving serious allegations of fraud require extensive evidence in comparison to mere allegations of fraud.
The Apex court in Avitel Post Studioz Ltd. & Ors. v. HSBC PI Holdings Ltd. again delved into the scope of arbitrability of fraud. Relying on an examination of the decision in Ayyasamy, the Supreme Court concluded that “serious allegations of fraud” suggesting the exclusion of arbitration could emerge only on the fulfilment of two tests: firstly, the party against whom breach is alleged could not have entered into an arbitration agreement in the first place, and consequently, the arbitration clause or agreement cannot be assumed to exist, and secondly, the allegations of arbitrary, fraudulent or mala fide conduct are alleged against the state or its instrumentalities, in which case, the questions lie in the public domain and must be ascertained by a writ court. The court then held that serious allegations of fraud can only emanate in cases where either of the aforesaid two tests were satisfied, and not otherwise.
Thus, it is apparent from the take of the apex court in these judgments that there is reluctance in staying arbitral awards on a mere allegation of fraud. Now that it is clear that the court cannot review the matter under Section 36 on merits, the amendment is only going to increase ambiguity and interfere with the judicial intent of seeking minimum interference in arbitral proceedings.
Consequences of the retrospective effect
The Explanation added by the new ordinance, to the new Proviso to Section 36 of the Act makes it quite clear that the said Proviso shall have retrospective effect. It shall be deemed to have been inserted with effect from 23rd October 2015. Therefore, it is evident that through this amendment the legislature is trying to restore the status that was before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015. This was also suggested in the decisions of BCCI v Kochi Cricket Pvt. Ltd. and Hindustan Construction Co. v Union of India, wherein it was affirmed that Section 36 of the Act is retrospective in its applicability.
The 2020 Amendment further mentions about the applicability of the new proviso to all court proceedings, regardless of the fact whether the court or underlying arbitral proceedings commenced before or after 23rd October 2015. However, it will necessarily apply only to all Section 36 applications filed after the ordinance and to applications where such a plea is already made by the parties. This new ordinance formally acknowledges that an application for stay of enforcement on the grounds mentioned in the newly added Proviso to Section 36(3) of the Act is maintainable, irrespective of the date when that application was filed. Therefore, it is probable that the Indian courts may witness a floodgate of new applications seeking to stay enforcement proceedings involving arbitral awards that were passed after that date which are presently challenged on the grounds incorporated under section 34 of the Act. However, the primary objective behind the retrospective application is that an additional plea cannot be raised in pending Section 36 applications. Additionally, such a plea is likely to get dismissed after reconsideration. This interpretation is a step ahead in upholding the primary objective of the 1996 Act, as it allows the award holder to enjoy the
fruits of the arbitral award.
However, this provision may be subject to abuse as section 36 was used to delay the operation and enforcement of arbitral awards before the 2015 amendment. Furthermore, the retrospective effect of this provision may offer few challenges as it is providing an abundant opportunity to the applicants to reach out to the tribunal. This might result in delays and increased costs unless the courts take notice of this new Proviso on its own accord and dispense with the filing of fresh applications. Therefore, the responsibility is on the courts to interpret this provision in a way to promote the objective of 1996 Act.
There are already adequate provisions for an award debtor to reach out to the courts under the pre-Ordinance regime to stay an arbitral award induced due to fraud or corruption. The re-introduction of a previous provision of automatic stay through this ordinance has once again backpedaled the law of arbitration to the pre-2015 Amendment scenario, wherein the award holder is supposed to await the disposal of the challenge to the award before being able to enjoy the fruits of the award after the granting of an automatic stay. As it is observed that the dispute resolution process largely affects the Indian economy and global perception on “doing business” in India. The present government is interested in introducing certain machinery so that our nation may achieve the goal of coming forward as a hub for international commercial arbitration. And to make this happen, the government should do the needful to proceed towards an approach of minimal judicial interference with arbitral awards as well as a speedy resolution of challenges in Court to such awards. However, the consequences of this ordinance within the Indian arbitration regime is yet to be observed. This will majorly depend on how this provision is interpreted by the courts as well as the ease with which this relief is granted. Furthermore, the enforcement regimes directly impact the ease of doing business in India which in turn affects the inflow of foreign investment. Therefore, we can only hope that the amendments brought by this ordinance under Section 36 are not misused in a way that might set the clock back on India’s progress in an attempt to align itself with international arbitration jurisprudence.
[i] Anjali Patel and Divya are Penultimate year law students at NUSRL Ranchi. For any discussion related to the article, they can be contacted via firstname.lastname@example.org.
Preferred Citation – Anjali Patel & Divya, “Arbitration Ordinance 2020: Setting the Clock Back on India’s Progress?”, Arbitration & Corporate Law Review, Published on 18th January, 2021.