[Ramkishore Karanam is a senior associate at AK Law Chambers and practices at the Madras High Court]
The Arbitration and Conciliation (Amendment) Ordinance, 2020, which was promulgated on 4 November 2020 (“2020 Ordinance”), has currently created a furore. The 2020 Ordinance essentially seeks to make the following amendments: a) to grant unconditional stay of the arbitral award under section 36 till the disposal of section 34 application under the Arbitration and Conciliation Act, 1996 (as amended) (“1996 Act”) when the party prima facie satisfies the Court that the arbitration agreement which forms the basis of the award, or the making of the award itself is induced or effected by fraud or corruption; b) deletion of schedule 8 which was introduced by the Arbitration and Conciliation (Amendment) Act, 2019 (“2019 Amendment Act”). This post analyses the pros and cons of the proposed amendments and whether the said amendments create more ambiguity in the disposal of setting aside applications. Further, it also throws some light upon the impact of the amendments on International Commercial Arbitrations.
Amendment to Section 36 – A Critical Analysis
Position of law pertaining to execution of arbitral award
The 1996 Act, prior to the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment Act”), contemplated automatic stay on the execution of arbitral award upon filing of section 34 application before the Court. [However, in 2019 this position was over ruled in HCC v. UOIAIR 2020 SC 122 (para 30).] Subsequently, the 2015 Amendment Act removed the automatic stay and the stay on execution of arbitral award was made subject to satisfaction of criteria set out in section 36(3) of the 1996 Act. However, the 2015 Amendment Act did not provide any grounds for unconditional stay of the award till the disposal of section 34 application.
As stated above, the 2020 Ordinance, for the first time, seeks to introduce two grounds for grant of unconditional stay under section 36(3) of the 1996 Act, i.e. a) when the party prima facie proves that the arbitration agreement or contract, which is the basis of the award, is induced by fraud or corruption; b) or the making of the award itself was induced by fraud or corruption.
Inherent flaws in the proposed amendments to section 36
In my opinion the introduction of such a proviso (a), i.e. “that the arbitration agreement or contract which is the basis of the Award” is redundant for the following reasons:
Scenario 1: When objection raised before the tribunal
If one of the parties raise the objection that the arbitration agreement or contract which is the basis of the award is induced by fraud or corruption before the arbitral tribunal and the arbitral tribunal after considering such plea rejected the same, then there would be no instance of a prima facie case in favour of the party raising such an objection. In this regard, the Delhi Court in Steel Authority v. AMCI Pty Ltd. andVLS Finance Ltd. vs. BMS IT Institute Private Limited held that having an award in favour of one-party by itself acts as a prima facie case in a stay application. The said judgments, although held in the context of a section 9 application filed after the pronouncement of award, the principles enumerated therein would squarely be applicable even to stay applications filed under section 36.
Hence, unconditional stay cannot be granted since the prima facie case will already be in favour of award holder. Therefore, unconditional stay cannot be granted when the tribunal considers and rejects the plea of fraud or corruption raised before it.
In the event, the arbitral tribunal allows the plea of fraud or corruption, then the question of unconditional stay would not even arise since the proceedings would come to an end thereafter.
Scenario 2: When objection was not raised before the tribunal
If a party fails to raise the plea of fraud or corruption before the arbitral tribunal, then such a plea cannot be raised for the first time at the stage of section 34 proceedings. Consequently, the parties cannot seek for unconditional stay under section 36. However, one may argue on the basis of decision of the Supreme Court in Lion Engineering Consultants v. State of Madhya Pradesh (“Lion Engineering”) that a plea which is not raised before the arbitrator can be raised for the first time at the stage of section 34. It is pertinent to note that the exception carved out in Lion Engineering is restricted purely to a legal plea. Therefore, the said judgment would not be an authority for a plea pertaining to fraud, which involves the mixed question of law and fact. In State of Jharkhand v. Shahi Constructions, Lion Engineering was distinguished on the same grounds.
The issue of fraud is a mixed question of law and fact and this is the sole reason that Order VI Rule 4 of Civil Procedure Code, 1908 (“CPC”) states that the plea of fraud must be specifically pleaded and proved by the Parties. This position of law has been reiterated by the Supreme Court in various cases. Although, provisions of CPC are not applicable to arbitrations, the courts have taken the view that the plea of fraud must be pleaded and proved even in arbitrations. Hence, the plea of fraud cannot be taken for the first time in a section 34 proceeding.
Furthermore, the scope of section 34 is not in the nature of an appeal and hence the Court in a section 36 proceedings cannot review the matter on merits. Therefore, even in this scenario, an unconditional stay cannot be granted as it is beyond the scope of sections 34 and 36 and the objection would be in the nature of an afterthought.
In so far as proviso (b) i.e. “the making the award” is concerned, it is pertinent to note that it is impossible to establish before the Court from the documents placed before the arbitral tribunal that award was induced by fraud or corruption while making the award. The parties would have to lead additional evidence or produce additional documents in support of such defence in a section 34 proceedings. Hence, it is practically impossible to determine a prima facie case at the stage of section 36 in relation to this plea.
In light of the above analysis, the introduction of the aforesaid amendment would only lead to further ambiguity and the Courts would be flooded with numerous applications to determine the scope of the said amendment. This will defeat the object of the 1996 Act i.e. minimal judicial intervention.
Applicability of the 2020 Ordinance to pending proceedings
Although the 2020 Amendment to section 36 comes with an explanation stating that it would 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 2015 Amendment Act, it would necessarily apply only to all section 36 applications filed after the Ordinance and to applications where such plea has already been taken by the parties. The rationale behind such an application is that an additional plea cannot be raised in pending section 36 applications and such a plea is likely to get dismissed as an afterthought. This interpretation would further the object of the 1996 Act i.e. to allow the award holder to enjoy the fruits of the arbitral award.
Removal of Schedule 8 – A step towards right direction
The inclusion of additional clauses to section 43 and schedule 8 through the 2019 Amendment Act had received a lot of criticism internationally mainly for two reasons. Firstly, the idea of government appointed authority regulating the arbitration and the arbitrators would fly in the face of parties’ autonomy; secondly, the qualifications for arbitrators set out in schedule 8 would not allow appointment of foreign lawyers/engineers/chartered accountants etc. in India seated arbitrations. However, the amendments to section 43 and schedule 8 will only apply when the appointment of arbitrator is made under section 11 of the 1996 Act. This would discourage the foreign parties to agree for India seated arbitrations due to the conservative approach adopted by the 2019 Amendment Act.
However, the removal of the schedule 8 and the amendment to section 43J would now reflect the progressive approach adopted by India. The removal of schedule 8 would set a broad criterion for qualification of arbitrators. Therefore, the embargo on the foreign lawyers/engineers/chartered accountants, etc. will not apply while making appointment of arbitrators in Indian seated arbitrations.
While the amendment to section 36 may have negative implications in practice, as set out above, the changes brought to section 43 and removal of schedule 8 certainly reflects the pro arbitration approach adopted by India. This would give more freedom to the foreign parties to appoint arbitrators based on a broad-based panel and further the principle of parties’ autonomy. However, we will have to wait for the notification and constitution of the Arbitration Council of India to understand the impact it may have on domestic and international commercial arbitrations.
– Ramkishore Karanam