The Arbitration And Conciliation (Amendment) Bill 2021 – Forwards Or Backwards?

The first amendment proposed by the Bill seeks to remove the existing restriction in the Act which ousted foreign individuals from taking up arbitrator appointments in India-seated arbitrations. This restriction had been introduced by the introduction of Section 43J into the Act and the Eighth Schedule in 2019. Presently, Section 43J requires that arbitrators must meet the specifications set out in the Eighth Schedule of the Act. The Eighth Schedule in turn lays down categories of persons qualified to be an arbitrator and inter alia categorically ousts lawyers registered in bars of overseas jurisdictions, foreign academicians, and officers from taking up arbitrator appointments. This introduction was criticized as restrictive because it curtailed parties' choice to appoint foreign individuals as arbitrators in India-seated arbitrations. This introduction was also not in sync with India's position as an arbitration-friendly hub, as parties were restricted from appointing foreign persons as arbitrators on the ground of nationality. Therefore, the Bill proposes to omit the Eighth Schedule and modifies Section 43J which, post amendment, will provide that the qualifications, experience, and norms for accreditation of arbitrators will be such as may be specified by regulations. The Statement of Objects and Reasons prefacing the Bill also acknowledges that an amendment was required to promote India as a hub of International Commercial arbitration by attracting eminent arbitrators to the country's arbitration space. The Bill, by doing away with the Eighth Schedule has removed the restrictive stipulations. It is expected that nationality restrictions will not be included in the regulations, which may be issued later.

The second amendment proposed by the Bill relates to staying the enforcement of an arbitral award when it is under challenge under Section 34 of the Act. Section 36 of the Act governs the grant of stay of an arbitral award when it is under challenge. It may be noted that Section 36 was amended in 2015^[1] to remove the provisions for an automatic stay on enforcement of an arbitral award while the same is being challenged under Section 34 of the Act. Therefore, pursuant to the 2015 amendment, the Enforcement Court was vested with the discretion to grant stay on the award as may be required in the interest of justice. The Enforcement Court, while granting such stay could also stipulate conditions (such as deposit of substantial part of the arbitral award amount) to ensure that the challenge is not used for unduly delaying the final implementation of the award.

The Bill, through a proviso to Section 36(3) of the Act, proposes an amendment which mandates the Enforcement Court to stay the award unconditionally pending disposal of the challenge to the award under Section 34, if a prima facie case is made out to establish that either:

(a) the arbitration agreement or contract which is the basis of the award; or

(b) the making of the award itself

was induced or effected by fraud or corruption.

The Bill clarifies that the proviso shall be retrospective in nature and 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 proposed amendment is a welcome development to the extent that it clarifies that fraud in "making of an award" is a ground for availing an unconditional stay on the enforcement of an arbitral award. Since an allegation of fraud in the making of the award can only be made post-delivery of the award, every opportunity must be afforded to the aggrieved party to obtain a stay on the execution of the award before serious and irreparable harm is caused and the award-holder who is a party to the fraud/corruption, gains unjust enrichment.

It may be noted that currently, a challenge on account of fraud or corruption in the making of an arbitral award has to fall back on Section 34(2)(b), which allows setting aside of the arbitral award if the court finds that it is in conflict with the public policy of India. The explanation to Section 34(2)(b) clarifies that an award will be treated as conflicting with the public policy of India if the making of the award was induced or affected by fraud. Therefore, the relief under Section 34(2)(b) suggests that for a court to set aside an award on the ground of its conflict with the public policy of India, the court must first come to a conclusive finding that a fraud has occurred. Given that there would be a significant time lapse for a court to come to such a finding, it left it to the discretion of the Enforcement Court to not interfere with the enforcement of the award even while the award itself is under such a fundamental challenge. This created the possibility for irreparable harm to the aggrieved party, particularly given the increasing judicial propensity to treat the arbitral awards with sanctity unless set aside under Section 34 of the Act.

The Bill, however, mandates that where a plea of fraud in the making of the award is prima facie established, the Enforcement Court shall be under a statutory obligation to stay the enforcement and without any conditions whatsoever. It, therefore, places the plea of fraud on a higher pedestal than any other ground of challenge available under Section 34 by taking away the discretion of the Enforcement Court both with respect to stay of the enforcement proceedings and the conditions of such stay. An allegation of fraud in the making of the award can be mounted only post-making of the award and also strikes at the root of the arbitral award. In view of this, the proposed amendment balances the interest of the award-holder as well as the aggrieved party by mandating the stay, but at the same time making such mandate applicable only if there is a prima facie case made out before the Enforcement Court establishing fraud.

On the other hand, the provision of the Bill which makes such stay mandatory where there is prima facie view on the occurrence of fraud in the underlying arbitration agreement or the contract, warrants closer examination. It is to be expected that allegations of fraud in respect of the underlying arbitration agreement or contract would have been agitated at various stages of the arbitration process. As observed by the Supreme Court in A. Ayyasamy v. A. Parmasivam^[2], a mere allegation of fraud would not take the dispute out of the arbitration and only where the alleged fraud was of such complicated and serious nature that it was thought fit only for a civil court to appreciate the evidence, could a reference to arbitration be refused. Where a court concludes that the allegations of fraud are suited to be dealt in arbitration, the reference becomes mandatory. Again, in Vidya Drolia & Ors. v. Durga Trading Company & Ors.^[3] the Supreme Court declared that the courts while deciding Section 8 and Section 11 applications can take a prima facie view regarding the validity of the agreement/ contract. Therefore, it is logical to expect that allegations of fraud would have been agitated at the stage when the matter was submitted for arbitration in order to determine the arbitrability of the dispute. Further, even after a court refers a matter to arbitration turning down the plea of fraud, it is still available to a party to allege fraud in the underlying contract before the tribunal at any time before filing its statement of defence under Section 16(2). In fact, the Supreme Court has been emphatic in its view that the Arbitral Tribunal is the preferred authority to decide all questions of non-arbitrability^[4], which will include non-arbitrability on the ground of fraud or corruption plaguing the arbitration agreement. In addition, under Section 37(2) the fraud aspect with respect to the underlying contract can again be examined by a court sitting in appeal over a decision by the arbitral tribunal conceding its jurisdiction to a plea of fraud. Therefore, fraud or corruption in the underlying contract could potentially be examined and decided at various stages, before the tribunal is set up as well as before the tribunal itself, prior to the final stage of execution of the award. While fraud in the making of the award can be agitated only after the making of the award, fraud in the agreement underlying the arbitration award would have gone through multiple tests of fire until the enforcement stage. Therefore, a mandatory provision that puts a fraud in the agreement on the same footing as fraud in the making of an arbitral award is perhaps not only unnecessary but also detrimental to justice by giving new lease of life to contentions which ideally should have obtained quietus by the time the arbitration award is pronounced.

Further, the aforesaid proviso would result in an interesting offshoot by widening the scope of the grounds available under Section 34 for challenging the award. As mentioned above, Section 34 includes fraud or corruption in the making of the award as a ground of challenge. However, there is no express provision that enumerates fraud in the underlying contract as an available ground to set aside the award. Though a finding or discovery of fraud would strike at the very root of the transaction, the intent of the legislature seems to have been to restrict the scope of Section 34 to objections concerning fraud or corruption in the making of the award only, and not the arbitration agreement or the contract itself. Arguably, such restrictive scope was underscored by the fact, as highlighted above, that there would have been multiple opportunities to agitate and settle the issue of fraud in the underlying agreement prior to the issuance of the award. However, the amendment proposed by the Bill allows an award-debtor once again, the opportunity of setting up a prima facie case before the Enforcement Court with respect to fraud or corruption in the underlying contract. On establishing such prima facie case, the Enforcement Court must stay the enforcement proceedings until the court exercising jurisdiction under Section 34 of the Act has finally decided that challenge. What can be culled out from this is that the fraud or corruption plea must be made under Section 34 in the first place to obtain a stay under the amended Section 36. Therefore, though fraud or corruption in the underlying contract is not an express ground under Section 34, by virtue of the amended Section 36 it must now be read into the ambit and import of Section 34.

Further, in order to obtain an unconditional stay under the amended provision, it is enough that the award-debtor has to only establish a prima facie case. This means that the case need not be proved to its hilt, but a case which can be said to be established if the evidence which is led in its support were believed^[5]. The High Court of Delhi in the case of Gopal Krishan Kapoor v. Ramesh Chander Nijhawan & Ors.^[6] observed that "prima facie case" would mean a case which is not likely to fail on account of any technical defect and is based on some material which if accepted by the court, would enable the plaintiff to obtain the relief prayed for by him and would, therefore, justify an investigation. The High Court of Bombay, in H.R. Gokhale v. Bharucha Noshir C. & Ors.^[7] held that in arriving at its conclusion as to whether a prima facie case concerning a particular point has been made out, a court of law is not bound to weigh the evidence or to judge the credibility of the witnesses, but has only to see whether that case could be said to be established if the evidence led by the party concerned on the point were believed, taking it at its 'face value'. Based on the law laid down by the Supreme Courts and various High Courts regarding the establishment of a prima-facie case, it is crystal clear that the threshold to make out a prima-facie case is low as no evidence has to be led or point has to be proved to secure interim relief. It can therefore be argued that even after all the multiple checks, where the issue of fraud in the underlying agreement would have gone through more rigorous tests and challenges prior to reaching the stage of arbitral award, an award-debtor would yet again be provided with a remedy to obtain an unconditional stay on the execution of the award, by reaching the low threshold of establishing a prima-facie case.

The amendment has also convoluted the process and resulted in a somewhat complex structure where the award-debtor takes the plea of fraud or corruption as a ground before the court exercising jurisdiction under Section 34 and sets out a prima facie case before the Enforcement Court under Section 36 to obtain the unconditional stay on enforcement. The simpler layout would have been to set out a prima facie case before the court under Section 34 and having established a prima facie case there, to make a representation before the Enforcement Court and obtain the stay. In this manner, the prima facie case for fraud and the furnishing proof in support of the fraud plea would both lie before the same court. Allowing the Enforcement Court to decide the prima facie plea of fraud while giving concurrent power to court under Section 34 to reach a conclusive finding on the same plea may have an undesirable effect on the efficaciousness and efficiency of alternative dispute resolution. One must also not lose sight of the fact that an award is akin to a decree of a civil court and the law is settled that an Execution Court cannot travel beyond or go behind the decree to refuse enforcement. The Bill militates against this tenet as the Enforcement Court will now have the power to form a prima facie opinion on the allegation of fraud even on the contract which forms the genesis of the substantive dispute between the parties, after appreciation of all evidence and antecedent findings by the courts and the arbitral tribunal.

There are additional collateral risks. Two separate forums for the same issue could lead to anomaly as two separate courts shall hear the same plea concurrently. The Bill fails to factor in the risk of the court hearing the application for setting aside under Section 34, coming under the influence by the prima facie case established before the Enforcement Court. On the other hand, where an award-debtor obtains a stay by setting up a prima facie case it would be prudent for the court adjudicating the Section 34 application to operate under a statutory timeline. Otherwise, an award-holder may be left with a stay order on the enforcement of the award for any length of time until the Section 34 application is finally decided. This defaces the speediness of arbitration proceedings.

It is no secret that India has been relentlessly attempting to mark its presence in the global arbitration domain. The discernible intent behind the amendment is to not allow the perpetuation of fraud. However, the manner in which it is proposed runs the risk of stultifying the progress made so far by India in the Arbitration domain and in its intent to do good, is perhaps dragging the process a few steps behind.

Kinshuk Chatterjee is the Partner (Litigation and Disputes Resolution) and Shubham S. Saxena is a Senior Associate at Amicus Services.Views are personal