Critical Analysis of The Arbitration and Conciliation (Amendment) Act, 2021

Introduction:

After receiving Parliamentary approval, the Arbitration and Conciliation (Amendment) Ordinance, 2020 was superseded by the Arbitration and Conciliation Amendment Act, 2021. Many claims that the new statute modifies the 1996 Act’s framework by complicating the execution of arbitral rulings. It limits the interference and discretion of the courts, which the 1996 statute had allowed in certain instances. There is the emergence of ill-defined criteria, which makes award enforcement more difficult and opens the door to dispute an award.^[1]

The 2021 Amendment added the following text to Section 36(3) of the Act, after the proviso regarding the enforcement of the arbitral award: “Provided further that where the Court is satisfied that a prima facie case is made out that, — (a) the arbitration agreement or contract which is the basis of the award; or (b) the making of the award, was induced or affected by fraud or corruption, it shall stay the award unconditionally pending disposition of the challenge.”^[2]

Explanation – For the avoidance of doubt, it is hereby clarified that the above proviso shall apply to all court cases arising out of or in relation to arbitral proceedings, regardless of whether the arbitral or court proceedings were commenced prior to or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015.”

Surprisingly, the 2021 Amendment drew a lot of attention, criticism, and concern from the arbitration community. This is due to the fact that the ability to give an unconditional stay on the implementation of an arbitral judgement existed before the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”), which resulted in a flood of challenges to postpone the enforcement procedures. This blunder was remedied by the 2015 Amendment, which eliminated the unconditional stay of enforcement procedures and instead authorised courts to set restrictions on the stay of enforcement actions in order to prevent losing parties from initiating frivolous and unnecessary challenges.

Surprisingly, the 2021 Amendment has partially undone the work of the 2015 Amendment and has resurrected the unconditional stay regime on the flimsy grounds of fraud or corruption. Since the 2021 Amendment has already been notified by the Central Government, the current blog does not concern itself with how or why the 2021 Amendment is enacted, but rather with the aftermath and implications of the 2021 Amendment on India’s dream of becoming a pro-arbitration jurisdiction, and whether it contributes to creating a conducive environment for businesses to operate in India when the 2021 Amendment is implemented. Following the implementation of the 2021 Amendment, the following consequences are expected.^[3]

Addition of An Extra Layer of Judicial Scrutiny^[4]

The first section of the 2021 Amendment aims to address, among other things, two situations: First, an unconditional stay on the implementation of the arbitral award if the “arbitration agreement or contract on which the award is based” was induced or achieved by fraud or corruption. Second, if the “making of the award by the arbitral tribunal” was driven by fraud or corruption, the implementation of the arbitral award is subject to an unconditional stay. Surprisingly, such circumstances have previously been anticipated and effectively addressed by the Act’s current provisions.

Fraud or Corruption in the Arbitration Agreement or Contract

If the parties wish to plead and prove claims of fraud or corruption relating to the arbitration agreement or the contract, the appropriate place to do so is the arbitral tribunal itself or at the stage of referral. It is a well-established doctrine that an arbitral tribunal is competent to resolve the parties’ allegations of fraud. The arbitral tribunal has the authority to assess extensive and voluminous information and undertake an in-depth examination to decide if the arbitration agreement or contract is tainted by fraud or corruption. If the parties are dissatisfied with the arbitral tribunal’s findings or if the arbitral tribunal does not consider the allegations of fraud even after the parties have raised them, the parties have the option of filing an application for the setting aside of the award under Section 34 of the Act, and if the parties are still dissatisfied with the decision of the Section 34 application, the parties can appeal the order of the Section 34 application.

Fraud or Corruption at the time of the Making of Award

[Explanation 1] Section 34(2)(b) I expressly allow the parties to seek reversal of the award if the arbitral tribunal’s decision was influenced by fraud or corruption within the scope of the judgment’s violation of Indian public policy. Again, if the parties are dissatisfied with the setting aside procedures, they have the right to appeal under Section 37(1)(c) of the Act. The 2021 Amendment does not appear to give any plausible new cause or remedy to which an aggrieved party may resort if they are confronted with a scenario of fraud as envisioned by the 2021 Amendment. As a result, it is not unreasonable to predict that the implementation of the 2021 Amendment amounts to imposing an additional degree of judicial scrutiny in the form of an extra layer of appellate review, although in the shape of an interim measure without proper protections. The effects of this expanded breadth of influence are disastrous.

Disregarding Minimal Judicial Intervention

The implementation of the 2021 Amendment may result in an increase in excessive judicial intervention in an arbitration proceeding, which is contrary to the very purpose of choosing arbitration as a method of dispute resolution, i.e., minimal judicial intervention as enshrined in Section 5 of the Act to avoid the ordeals of a traditional litigation process. Furthermore, it will place an enormous strain on India’s already overloaded courts and the backlog of cases. This will very certainly contribute to the delay in enforcing arbitral rulings in India.

Tool for Harassment

The 2021 Amendment might become a powerful weapon for losing parties to harass opponents by alleging fraud or corruption in every arbitration case in order to postpone the implementation of the arbitral ruling, just as most applications under Section 34 of the Act allege a breach of public policy. This may not only increase the expenses, discomfort, and delay of the dispute resolution process, but it may also increase the dread of innocent parties. This may dissuade the parties from using arbitration as a conflict settlement tool, as the parties will finally have to go through the ordeals of the court to get relief. As a result, the 2021 Amendment is likely to incentivize parties to approach the courts without any checks and balances, which will make commercial parties hesitant to do or continue their business in India due to a lack of robust dispute resolution mechanisms, as they will now most likely have to subject themselves to the Indian courts for the resolution of their disputes.

Uncertainty in Application^[5]

Furthermore, the 2021 Amendment appears to be riddled with inconsistencies, ambiguities, and uncertainties in its implementation, potentially leading to unfavourable outcomes.

Additional Ground at the Stage of Enforcement

The 2021 Amendment allows the parties to plead the grounds of fraud or corruption during the enforcement procedures, even if they did not allege fraud or corruption before the arbitral panel. This possibly suggests that a party can get an unconditional stay of enforcement of an award based on a basis that the party did not even raise prior to filing the application for setting aside the award.

Lack of Criteria

Unlike Section 34 of the Act, which requires a party to “establish on the basis of the record of the arbitral tribunal” if the parties seek to invoke the grounds under Section 34 for the setting aside of the arbitral award, the 2021 Amendment prescribes no standard or criterion on which fraud or corruption is to be assessed. There is ambiguity, uncertainty, and vagueness in invoking and justifying the grounds under Section 36 of the Act generated by the 2021 Amendment in the lack of clearly defined criteria. It may significantly discourage a corporate entity from submitting itself to an uncertain dispute resolution procedure.

Introducing Additional Evidence

The 2021 Amendment provides no guidance on parties presenting additional evidence beyond the tribunal’s record to plead and establish claims of fraud or corruption, particularly at the enforcement stage. This is significant because, if the parties are permitted to provide additional evidence at the point of filing an application for the stay of the judgment, the Act essentially allows for a two-time review of an arbitral award on identical grounds but with different standards and at separate times. Since, in a Section 34 challenge, a party may only rely on the tribunal’s record, in Section 36(2) procedure, a party may provide new evidence. In practice, this may look nonsensical, create an unnecessary hierarchy, raise the complexity of the procedure, and, of course, prolong the enforcement of the award. Alternatively, if the court does not allow the parties to present further evidence and limits their argument to the arbitral tribunal’s record, there may be two consequences. First, owing to its intrinsic nature and broad scope, it will be difficult to plead and show fraud or corruption without adducing any further documents or evidence, especially if the plea is being accepted for the first time at the enforcement stage. Second, there may be no essential difference between a Section 34 and a Section 36 procedure, resulting in an unreasonable and incomprehensible multiplicity of processes. Furthermore, if the courts do not allow the parties to present additional evidence, it will be practically impossible for the courts to form a prima facie view and satisfy themselves that the arbitration agreement or contract that is the basis of the award, or the making of the award itself, were induced by fraud or corruption, unless the courts examine the dispute on merits, which, if used, is antithetical to the intent and purpose of Sections 34 and 34.1.

Risk to Arbitrator’s Reputation

There is also a danger of tainting the arbitrator’s image if the courts issue an unconditional stay based only on a prima facie assumption that the verdict was influenced by fraud or corruption. In reality, it may have substantial ramifications for arbitrators’ functioning and concerns of arbitrator immunity if they are constantly under pressure that their award would be unconditionally delayed on the basis of fraud or corruption without a thorough review by the courts.

Retrospective Applicability: Flurry of Challenges?^[6]

The second portion of the 2021 Amendment, which mentions the explanation to the extra proviso, is concerned with the 2021 Amendment’s retrospective applicability. In essence, it grants the parties a free licence to file an application under Section 36(2) of the Act and invoke the grounds of fraud or corruption contemplated by the additional proviso to Section 36(3) of the Act in “all court cases arising out of or in relation to arbitral proceedings, regardless of whether the arbitral or court proceedings were commenced prior to or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015.”When implemented, this might possibly lead to a number of problems due to a lack of procedural clarity. First, the parties may allege new grounds of fraud and seek unconditional stay under the 2021 Amendment in pending Section 36(2) of the Act cases where the plea of fraud was not first raised. Second, the parties may submit an application to withdraw their ongoing Section 36(2) application with leave to file a new Section 36(2) application, which may allow the parties to integrate the grounds of fraud and employ the 2021 Amendment. Third, the parties may consider filing a new Section 36(2) application with a new cause of action in an ongoing arbitration procedure when another Section 36(2) application has already been disposed of in order to postpone the execution of the arbitral verdict. The possibilities outlined above are not complete, and the parties may devise a novel means to invoke the 2021 Amendment without justification. In the absence of controls to prevent fraudulent, vexatious, and frivolous enforcement petitions for an unconditional stay, this might result in a flood of Section 36(2) applications.

However, much will rely on how the courts read the explanation to the extra proviso and how much discretion the Courts would grant the parties to bring the pleas of fraud and corruption authorised by the 2021 Amendment in the conditions described above. Furthermore, what uniform standards various Commercial Courts, High Courts, and the Supreme Court will establish will be critical because there will always be a risk of conflicting standards and jurisprudence, which may lead to a catastrophic result of opening floodgates of litigation, thereby breaking down the very soul of an arbitration proceeding, i.e., effective, quick, user-friendly, and cost-effective dispute resolution. Surprisingly, the arbitration statutes of pro-arbitration countries such as Singapore, Hong Kong, or England, as well as the UNCITRAL Model Law on International Commercial Arbitration, do not provide for an unconditional stay of the domestic arbitral ruling during the enforcement stage. Indeed, Indian jurisprudence emphasizes that there is no scope for an unconditional stay on the enforcement of an arbitral award under the Act and that any such unconditional stay can stall the execution of arbitral awards for many years, defeating the purpose and effectiveness of the arbitration proceedings.

Analysis

We can observe that several revisions and laws have been introduced over the last six years to make India more arbitration-friendly in the realm of ADR. Many people welcome and oppose the alterations and revisions. Some perceive this as a shift toward greater international engagement and assistance, while others see it as a simple desire to address the goals of ADR.

These ongoing revisions and adjustments also demonstrate how Indian laws have failed to stand on their own and have been ambiguous and arbitrary in their previous decisions and legislation. The grounds for what constituted “fraud” and “corruption” are imprecise, leaving it unclear how the court would treat prima facie evidence.^[7]

Conclusion

While the diseases that the 2021 Amendment is seeking to heal are yet unknown, the 2021 Amendment’s negative effects might be disastrous. The addition of an additional appellate layer of judicial intervention, the multiplicity of proceedings, uncertainty in the application, encouraging a flurry of challenges, and opening Pandora’s box qua the arbitrator’s liability, combined with the dilution of the 2015 Amendment and failure to uphold the cardinal principle of the arbitration process, i.e., minimum judicial intervention, may not bode well for India’s dream of becoming a pro-arbitrator country. In a jurisdiction where the enforcement of a judgement or award is already problematic, a sudden shift from Indian courts’ pro-enforcement approach to empowering courts to grant an unconditional stay on the enforcement of an arbitral award is detrimental to the vested right of enforcement, finality, and binding nature of an arbitral award. This has an influence on the enforceability of contracts and is likely to cause companies to be uneasy about operating in an environment where the parties are likely to face another round of litigation when the arbitral award is enforced, depriving them of the benefits of the arbitral judgement.

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References:

[1] View: Effective arbitration process can make India a sought after business destination, The Economic Times, https://economictimes.indiatimes.com/news/economy/policy/view-how-proper-arbitration-mechanism-can-make-india-a-sought-after-business-destination/articleshow/70368747.cms?from=mdr 

[2] MINISTRY OF LAW AND JUSTICE (Legislative Department), https://egazette.nic.in/WriteReadData/2021/225832.pdf

[3] India Update: Arbitration and Conciliation Ordinance (Amendment), 2020 | Insights | DLA Piper Global Law Firm DLA Piper, https://www.dlapiper.com/en/japan/insights/publications/2020/11/arbitration-and-conciliation-ordinance/

[4] IMPLICATIONS OF THE ARBITRATION AND CONCILIATION (AMENDMENT) ACT, 2021: ENSURING (UN)EASE OF DOING BUSINESS IN INDIA? RGNUL Student Research Review (RSRR), http://rsrr.in/2021/04/20/implications-of-the-2021-arbitration-amendment-act/

[5] The Arbitration and Conciliation (Amendment) Bill, 2021 PRS Legislative Research, https://prsindia.org/billtrack/the-arbitration-and-conciliation-amendment-bill-2021

[6] Arbitration and Conciliation (Amendment) Act, 2021 SCC Blog, https://www.scconline.com/blog/post/2021/03/16/arbitration-and-conciliation-amendment-act-2021/

[7] Impact Of The Arbitration And Conciliation (Amendment) Act, 2021 on India’s Pro Arbitration Outlook Bar and Bench – Indian Legal news, https://www.barandbench.com/apprentice-lawyer/impact-of-the-arbitration-and-conciliation-amendment-act-2021-on-indias-pro-arbitration-outlook