Decluttering the 2020 Amendment to the Arbitration and Conciliation Act, 1996

[Animesh Bordoloi is an Assistant Lecturer at the Jindal Global Law School and Hitoishi Sarkar is a III year student at the Gujarat National Law University]

The recent Arbitration and Conciliation (Amendment) Ordinance, 2020 (“Ordinance”), which amended section 36, has once again put the Indian arbitration discourse in the center stage. In a rarity, the ordinance reverses the 2015 amendments to the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’) that had amended section 36 to provide that mere filing of an application challenging an arbitral award would not be a predicament to enforcement. To those familiar with the Indian arbitration regime, prior to the 2020 ordinance, courts were provided with broad discretion to determine whether the stay was necessary once an application pursuant to section 36 was filed before it. Thus, the 2020 ordinance undoes the 2015 amendments that had put to rest the automatic stay regime whereby a challenge under section 34 of the Act meant that the award could not be enforced.

The Ordinance introduces a proviso to section 36 by virtue of which the parties can now seek for an unconditional stay without any deposit if the court is satisfied that ‘a prima facie case is made out, 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, it shall stay the award unconditionally pending disposal of the challenge under section 34 to the award.’ This post seeks to analyse the ramifications of this change while also elucidating on how these amendments are rather regressive when looked at from the standpoint of India’s aspiration to present itself as an arbitration hub.

The muddied definitional waters of “fraud”

In India, fraud is defined under section 17 of the Indian Contract Act, 1872 (‘Contract Act’). Nevertheless, when it comes to the arbitrability of fraud, a conjoint reading of the ruling in Ameet Lalchand Shah v. Rishabh Enterprises, whichheld that only ‘serious allegations of fraud’ are precluded from arbitration, and the recent ruling in Avitel Post Studioz Ltd. v. HSBC PI Holdings which laid down the test to determine such preclusion have now fairly settled the position. However, determining what constitutes “serious fraud” being done on a case to case basis grants Indian courts significant influence. Contrastingly, for cases that do not fall within the ambit of “serious fraud,” the arbitral tribunal will have the jurisdiction to adjudicate allegations of fraud or corruption by virtue of the separability doctrine. In such a scenario, it is not uncommon to find courts inferring with the jurisdiction of tribunals even in disputes where it could very well determine its own jurisdiction.

Use of prima facie and the potential conflict

The phraseology of this amendment is equally concerning as it has the potential to lead to numerous unintended domino effects. Specifically, by using the term ‘prima facie case’ in the proviso to section 36, the ordinance not only adds to further judicial intervention but also mandates the courts to look into the merits of awards. This can be affirmed from Dalpat Kumar v. Prahlad Singh, wherein the Supreme Court had clearly defined ‘prima facie case’ as ‘a substantial question raised, bona fide, which needs investigation and a decision on merits.  Consequentially, the amendment opens up a back door to allow award debtors to seek relief from courts, which would in effect cloth Indian courts with the power to act as an appellate authority by investigating into the merits of the case. Thus, the interpretation of prima facie is significant, and it will be interesting to observe if the courts would take a restrictive approach to avoid review on merits of the case at the cost of contradicting itself.

Furthermore, it is unclear as to whether the stay envisaged by the recent amendment would only be granted in cases classified as ‘serious fraud’ or whether it also extends to other cases of fraud where arbitration is allowed or which had taken place during the period of the proceedings. This is bound to cause problems to the parties trying to enforce arbitral awards as they will now have to deal with numerous applications that might trace their causation to minor procedural fallacies. The recent amendment has thus provided award debtors with a potent tool that they can use to delay and avoid enforcement of arbitral awards. Moreover, the establishment of fraud can be established on several flimsy factors, such as circumstantial evidence or facts. Thus, it is always easier for the parties to file vexatious applications and continue lengthy litigations, thereby affecting the process of enforcement.

Demystifying the need for the recent amendment

It is necessary to understand that a combined reading of section 34(2)(b)(ii) and section 36(2) already provided the parties with the remedy of applying for setting aside an award which is vitiated by fraud by claiming it to be against public policy. Post the 2015 Amendment to section 34, it is abundantly clear that the aforementioned remedies would not entail a review on the merits of the dispute, which is well in coherence to any other pro-arbitration jurisdiction’s approach. Moreover, to apply for such remedies, the parties are required to not only file a separate application but must also deposit money for filing the same.

With a robust mechanism already in place, the new ordinance seems to override the same on two counts. Firstly, it provides a remedy that already existed and secondly, it encourages unscrupulous litigation by bestowing Indian courts with a de facto appellate power that conflicts with the core principles of arbitration law.

Furthermore, with the ordinance now revoking the necessity to deposit money in these cases, it becomes easier for the losing party to now file such applications, thereby affecting the enforcement of awards. If history is anything to go by, this could be used as a tactic to delay the enforcement of the awards. This also goes against the Supreme Court’s own approach in recent cases where it affirmed that it is not for the court in appeals to sit over the award by reassessing or re-appreciating evidence.    

Concluding remarks

In Avitel, the Court had recognized that the understanding of ‘fraud’ with regard to arbitration encompasses both – contracts obtained by fraud and performance of a valid contract by fraud. For setting aside applications, the other kind of fraud or corruption which might not have been considered by the tribunal would be in the stage of the proceeding, such as, in cases of suppression of evidence, presenting forged documents or other irregularities. Although the proviso from the new ordinance does not make it clear, it can be argued that the intention of the same might have been to protect parties from such instances with the help of judicial intervention. However, the idea of ‘patent illegality appearing on the face of the award’ under section 34(2A) can be argued to have taken care of such cases. Therefore, it is quite difficult to ascertain what might have been the intention to add this proviso which not only negates the positive steps taken in the 2015 amendments but also provides leeway to the parties for affecting the enforcement.

With the interpretation of prima facie unclear, it can be assumed that the courts will have to look into the award for any such determination, thereby assenting to the ‘fraud unravels all’ principle. However, on comparing this position to established pro-arbitration jurisdictions like England, both the legislature through a restrictive interpretation of section 68 of the Arbitration Act 1996 and the judiciary in Lesotho Highlands Development Authority v. Impregilo SpA have affirmed commitment to the idea that courts cannot re-examine the merits of an award. Even though Indian courts can choose not to follow such a restrictive practice, they must be careful not to ‘unravel’ the entire award for every such unconditional stay.

Therefore, the new changes now make it imperative for the courts to strike a balance between addressing the issues of fraud or corruption while at the same time ensuring that no party uses it as a tool for delaying enforcement. If not used wisely, this change could harm India’s aspirations of trying to establish itself as a pro-arbitration destination, for, if business bleeds through the use of automatic stay, so would India’s chances.

Animesh Bordoloi & Hitoishi Sarkar

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