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Introduction:
Arbitration has emerged as the forerunner as a means of dispute resolution in recent times. The primary attractions for contracting parties to opt for arbitrations include time and cost efficiency, flexibility of procedures and most importantly, the minimal judicial intervention. In all legal systems, any challenge to arbitral awards is limited to maintain the essence of the arbitral process.
The Arbitration and Conciliation Act, 1996 (Act) regulates the arbitrations conducted in India and it has been subjected to endless piecemeal tinkering by the Legislature to project India as a pro-arbitration venue and an attractive business destination with a robust dispute resolution mechanism. The most recent step in this regard is the enactment of the Arbitration and Conciliation (Amendment) Act, 2021 (2021 Act) which has brought back the “Automatic Stay” of arbitral awards (albeit in circumstances of fraud and corruption), undoing the change brought about by the Arbitration and Conciliation (Amendment) Act, 2015 (2015 Act).
Therefore, in effect, the 2021 Act has opened the floodgates for challenge to an arbitral award on grounds of fraud and corruption, and further, revived the power of the Court to grant an unconditional and automatic stay of the arbitral award, where a prima facie case of fraud and corruption has been established. Inevitably, the 2021 Act has been subject of much criticism and has been considered a regressive step for the Indian Arbitration regime.
Evolution of the automatic stay provisions in the Act
Original Legal Position:
Since its inception, the Act suffered a major drawback. Any award passed in an arbitration governed under the Act, could automatically stayed merely by filing of an appeal under Section 34 of the Act. Originally, Section 36 of the Act[1] dealt with enforcement of awards and although, Section 35 of the Act categorically provides that arbitral awards shall be final and binding on the parties, Section 36 mentioned the limited scenario whereby the award shall be enforced. Interpreting Section 36 of the Act, the Supreme Court in National Aluminium Company Ltd. v. Presstel & Fabrications (P) Ltd. & Anr[2] held that an award can be enforced as if it was decree of a court under Civil Procedure Code, 1908 (“CPC”), but only on the expiry of the time for making an application under Section 34 or when such application has been made and refused. The Supreme Court further held the language of Section 36 allowed no discretion in the court to put the parties on terms which defeated the very objective of the alternate dispute resolution system.
Thus, prior to the enactment of the 2015 Act, mere filing of a petition under Section 34 of the Act, would lead to an automatic stay of the award, and thus led to all awards being challenged as it automatically stayed any payment under the award.
Legal position after the 2015 Act:
The problem of the “Automatic Stay” was resolved by the 2015 Act, which amended Section 36[3] and the amended Section 36 provided that:
- Filing of Section 34 application shall not by itself render the award unenforceable unless the Court grants a stay on a separate application seeking stay of the award.
- The stay is not to be granted as a matter of right, but the Court may in its discretion grant such a stay, subject to such conditions, and by recording specific reasons for granting such stay.
- While granting such stay, provisions of the CPC regarding stay of money decree needs to be observed by the Court.
Therefore, the 2015 Act scrapped the notion of an automatic stay pushing the arbitration towards a more business friendly environment.
Unconditional stay under the 2021 Act – the Current legal position:
The statement of object and reasons of the 2021 Act state that the amendment was brought in to tackle the issues of corruption and fraud in securing contracts or arbitral awards. In that light, Section 36 was further amended by the 2021 Act[4] introducing a new proviso to sub-section 3 of Section 36 of the Act, whereby, the Court has the power to unconditionally stay an arbitral award from being executed when there is prima facie evidence that the award itself, or the contract on which such award is based, was affected by fraud or corruption. It is important to note here that the amended Section 36, has completely ignored the basic structure of any arbitration agreement, that is, the arbitration agreement is severable from the contract itself. It is a settled principle of law that notwithstanding the invalidity of the contract, the arbitration agreement stands on an independent footing and is severable from the contract. The 2021 Act uses the language “arbitration agreement or contract which is the basis of the award” which is in direct conflict of the settled legal position, because invalidity of the contract does not necessarily affect the arbitration agreement which is severable in law.
A careful reading of the provisions further illuminates the use of the terms “it shall stay”. Therefore, the Courts are not allowed a discretion in the matter. In other words, in the event a prima facie case is established that an arbitral award or the contract was affected by fraud or corruption, the Court must mandatorily impose an unconditional stay of the award pending disposal of the challenge under Section 34 to the award.
Impact of the 2021 Act
A step in the wrong direction:
Historically, the Arbitration Act, 1940 had adopted a circumspect approach as regards the enforcement of arbitral awards, and accordingly, a confirmation of the award by the Court was a mandatory pre-requisite for enforcement. This led to excessive judicial intervention in the matters to the extent of revalidation of the merits of the case. This was cured by the Act, which brought in direct enforceability of the arbitral awards in conformation with the UNCITRAL Model Law. However, unlike the UNCITRAL Model Law, the Act did not permit a challenge to the award at the stage of enforcement, thereby ensuring quicker enforcements and minimal judicial intervention. The 2021 Act has undermined this aspect by opening fresh grounds of challenge at the stage of enforcement.
Because of the 2021 Act, any execution/enforcement proceedings under the Act would in most cases compel the Court to examine if there is prima facie evidence of fraud and corruption in securing the contract or in the making of the award. The 2021 Act thus reintroduces judicial confirmation for enforcement of awards, which adds an extra layer of judicial scrutiny. The 2021 Act is thus a regressive step for the Indian arbitration regime.
Redundancy of the Amended Section 36:
Fraud and corruption go against the very basic notions of public policy of our country. Hence, any arbitral award which is marred by fraud or corruption can be directly challenged on those grounds under Section 34 of the Act itself. Further, Explanation 1 to Section 34 (b) of the Act, explicitly grants a right to the parties to challenge the arbitral award if the making of the award was induced or affected by fraud or corruption, being against the public policy of India. The 2021 Act does not seem to complement or add to the existing provision of the Act. Furthermore, the 2021 Act does not provide any flexibility to the Court to impose any conditions based on the facts and circumstances of each case. Such blanket stay as an interim measure without any flexibility to the court will severely erode the efficiency of the arbitration process.
Reversal of the 2015 Amendment:
The 2015 Act brought about a much-needed relief to parties opting for arbitration in India by categorically clarifying that an automatic stay cannot be granted merely for filing a petition under Section 34 of the Act. The 2015 Act further clarified that powers of the Court to enforce an award was akin to those provided under Order 41 Rule 5 of the CPC. In other words, the enforcement of an award may be stayed by a Court where substantial loss may result to the party applying for stay of execution.
With the 2021 Act, merely establishing a prima facie case would entitle the party to procure an unconditional stay, thereby eliminating any discretion of the Court to balance the competing equities which would almost certainly vary depending on the facts and circumstances in each case. In this respect, the 2021 Act re-introduces the very reason which led to the 2015 Act in the first place.
Low burden of proof and vague standards:
The unconditional stay introduced by the 2021 Act demands a very low standard of proof. Establishing a mere prima facie case of fraud or corruption would compel the Court to mandatorily grant an unconditional stay of the award. The Supreme Court in the case of United Commercial Bank vs. Bank of India & Ors.[5] has held a prima facie case to mean that in the facts and circumstances of the case, there is a bona fide contention between the parties and a serious question is to be decided. Thus, with such low standard of proof to obtain an unconditional stay, the 2021 Act has the possibility of becoming a potent tool for harassment to the award holder.
Moreover, the 2021 Act does not provide for any guidance in respect of prima facie determination of the existence of fraud or corruption. It is one of the cardinal principles of arbitration that the Courts cannot enter the merits of the dispute. The allegations of fraud or corruption are serious in nature and cannot be established without examining the merits and evidence adduced thereto. Thus, the 2021 Act runs in conflict to one of the foundational principles of the arbitration laws. Section 36 of the Act was enacted to balance the equities between the parties in consonance with Section 34 of the Act. However, with the enactment of the 2021 Act, the fundamental difference between Section 34 and Section 36 has been diluted, which may amount to unnecessary and multiplicity of proceedings.
Conclusion
The 2021 Act seeks to address the prevalent corruption in the system however, it appears that the lawmakers of the country have not fully considered the side-effects of this amendment. India ranks at a miserable 163 among 193 countries in terms of enforcement of contract and the 2021 Act does very little to inspire further confidence in the Indian arbitration regime. Enforcement of awards in India was already mired in complications and delays, and a sudden volte-face of the lawmakers to introduce an unconditional stay of arbitral awards erodes the very sanctity of an arbitral award. The Indian courts are yet to provide the guiding principles to address the issues contemplated herein, and we sincerely hope that the judiciary will persevere to address the many ambiguities introduced by the 2021 Act.
Author details
Mr. Soumitra Bose, Principal Associate
Soumitra is a principal associate at TMT Law Practice. He graduated from NALSAR University of Law in 2016 and was gold medallist in Arbitration and Ethics. After graduation, he was an Associate at Luthra & Luthra Law Offices, New Delhi in the Mergers & Acquisitions Team and worked with them for a year. During his engagement with Luthra & Luthra Law offices, he garnered knowledge and experience of general corporate advisory, mergers and acquisitions, and commercial contracts, and advised extensively on the acquisition of several Indian ITeS companies by US based entities.
After that he shifted to litigation practice in the High Court of Orissa in 2017, working with the Chambers of Advocate Subir Palit. As a practicing advocate, he specializes in all kinds of corporate and commercial litigation. he has worked extensively on petitions in relation to mining leases and mining tenders under the Mineral Concession Rules, in respect of education laws, including Joint Entrance Examinations, admissions, and vires of applicable regulations as well as in respect of various employment disputes, including retirement benefits, illegal terminations, and promotion matters with regular appearance before the High Court of Orissa, Civil Courts and Tribunals. He has also advised, drafted, and appeared in matters relating to illegal mining before the National Green Tribunal as well as the Supreme Court. He has further advised, drafted, and appeared in several arbitration matters and proceedings. Additionally, he has also advised, drafted, and appeared in criminal matters, relating to white collar crimes under the GST Act.
He is a member of the Odisha State Bar Council and the High Court Bar Association.
Email: Soumitra.bose@tmtlaw.co.in
[1] “36. Enforcement – Where the time for making an application to set aside the arbitration award under section 34 has expired, or such application having been made, it has been refused, the award shall be enforced under the Code of Civil Procedure, 1908 in the same manner as if it were a decree of the Court.”
[2] (2004) 1 SCC 540
[3] “36. Enforcement –
- Where the time for making an application to set aside the arbitral award under section 34 has expired, then, subject to the provisions of sub-section (2), such award shall be enforced in accordance with the provisions of the Code of Civil Procedure, 1908 (5 of 1908), in the same manner as if it were a decree of the court.
- Where an application to set aside the arbitral award has been filed in the Court under section 34, the filing of such an application shall not by itself render that award unenforceable, unless the Court grants an order of stay of the operation of the said arbitral award in accordance with the provisions of sub-section (3), on a separate application made for that purpose.
- Upon filing of an application under sub-section (2) for stay of the operation of the arbitral award, the Court may, subject to such conditions as it may deem fit, grant stay of the operation of such award for reasons to be recorded in writing:
Provided that the Court shall, while considering the application for grant of stay in the case of an arbitral award for payment of money, have due regard to the provisions for grant of stay of a money decree under the provisions of the Code of Civil Procedure, 1908 (5 of 1908).”
[4] “36.
- Where the time for making an application to set aside the arbitral award under section 34 has expired, then, subject to the provisions of sub-section (2), such award shall be enforced in accordance with the provisions of the Code of Civil Procedure, 1908 (5 of 1908), in the same manner as if it were a decree of the court.
- Where an application to set aside the arbitral award has been filed in the Court under section 34, the filing of such an application shall not by itself render that award unenforceable, unless the Court grants an order of stay of the operation of the said arbitral award in accordance with the provisions of sub-section (3), on a separate application made for that purpose.
- Upon filing of an application under sub-section (2) for stay of the operation of the arbitral award, the Court may, subject to such conditions as it may deem fit, grant stay of the operation of such award for reasons to be recorded in writing:
Provided that the Court shall, while considering the application for grant of stay in the case of an arbitral award for payment of money, have due regard to the provisions for grant of stay of a money decree under the provisions of the Code of Civil Procedure, 1908 (5 of 1908).]
Provided further that where 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.”
[5] (1981) 2 SCC 766