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  • Arbitration Ordinance 2020: One step forward, several steps back

Arbitration Ordinance 2020: One step forward, several steps back

The Ordinance has reversed the effect of the 2015 amendments to the Act which had done away with the automatic stay on enforcement of arbitral awards upon a challenge being made under Section 34 of the Act. Most certainly, a regressive step, the Ordinance has inserted a further proviso to Section 36(3) of the Act, by which an award shall be ‘unconditionally’ stayed pending disposal of the challenge under Section 34.

The Arbitration and Conciliation (Amendment) Ordinance, 2020, (“Ordinance”) promulgated recently is best described as bitter-sweet. On one hand, it has substituted section 43J of the Arbitration and Conciliation Act, 1996 (“Act”) by noting that the “qualifications, experience and norms for accreditation of arbitrators shall be such as may be specified by regulations.” Consequently, the Eighth Schedule of the Act has been omitted. While stipulations in the Schedule, as regards minimum qualifications and eligibility requirements for arbitrators, were perhaps necessary, this Schedule was subject to rigorous academic debate inter-alia for taking-away party autonomy in relation to appointment of foreign arbitrators in India-seated arbitrations. Notably, section 43J and the Eight Schedule had been introduced only in 2019 with a view to make India a hub of domestic and international arbitration and for the faster resolution of commercial disputes. The stipulations perhaps didn’t help.

On the other hand, the Ordinance has reversed the effect of the 2015 amendments to the Act which had done away with the automatic stay on enforcement of arbitral awards upon a challenge being made under section 34 of the Act. Most certainly, a regressive step, the Ordinance has inserted a further proviso to section 36(3) of the Act, by which an award shall be “unconditionally” stayed pending disposal of the challenge under section 34, “where the Court is satisfied that a prima facie case is made out, (a) that the arbitration agreement or contract which is the basis of the award, or (b) the making of the award, was induced or effected by fraud or corruption.” To avoid the flurry of litigation, that had followed the 2015 amendment, the Ordinance clarifies that the proviso shall be retrospective in nature and shall be applicable 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 insertion of this proviso raises many legal questions foremost being that could not the relief which the proviso seeks to provide be achieved without the Ordinance?

Let us begin by examining fraud which is defined under section 17 of the Indian Contract Act, 1872 (“Contract Act”) and section 447 of the Companies Act, 2013. Both these sections provide an inclusive definition which encompasses acts of deception, concealment of facts, and inducement with the intent of wrongful gain or causing wrongful loss. Additionally, per section 19 of the Contract Act, any party whose consent to an agreement was caused by such fraud may, at such party’s option, deem such agreement to be void and thus, such party would not be obligated to perform its obligations under the said agreement. Similar protection is also afforded under section 18 of the Specific Relief Act which provides for exceptions to performance in cases of fraud, mistake of fact or misrepresentation.

In such case, if a dispute were to arise between the parties, and if such agreement were to include an arbitration clause, the parties would, likely, proceed to have the same resolved through arbitration. During the arbitral proceedings the party raising the issue of fraud simpliciter or corruption in inducement of the contract or the arbitration agreement could plead the same before the tribunal, which can adjudicate on the same.

At the same time, one shouldn’t lose sight that the Supreme Court in A. Ayyasamy v. A Paramasivam & Ors. held that a reference to arbitration may be refused by the Court if (i) the Court finds serious allegations of fraud which virtually make a case of a criminal offence, (ii) where the allegations of fraud are so complicated that it becomes essential that such complex issues can be decided only by civil court on appreciation of voluminous evidence, (iii) where serious allegations of forgery/fabrication of documents in support of the plea of fraud.

If, however, the tribunal determines the arbitration agreement or contract was not induced or effected by fraud or corruption, then the tribunal would adjudicate the dispute and eventually pass an award. In such instance, it is still open to the aggrieved party to challenge the award under section 34(2)(a)(ii) of the Act, and also under section 34(2)(b)(ii) as it would be open to such party to contend that the award is in conflict with the public policy of India. Thus, again, to this extent, the existing provisions covered such situations.

But where the plea of fraud or corruption has been refused by the arbitral tribunal after evaluating the material produced before it, then will not the Court hearing challenge to the award be reappreciating the evidence contrary to the law as enumerated by the Supreme Court in the celebrated decision of Associate Builders v. DDA which has stipulated that the Court cannot sit in appeal over the award by reassessing or reappreciating evidence? This principle now forms the bedrock of multiple subsequent decisions of the Supreme Court such as Ssangyong Engg & Construction Co. Ltd. v. NHAI and Parsa Kente Collieries Ltd. v. Rajasthan Rajya Vidyut Utpadan Nigam Ltd. In fact, post the 2015 amendment to the Act, section 34 has been amended to preclude a review on merits or reappreciation of evidence. It, therefore, begs the question- how is the Court to establish, even prima facie, that there was any fraud? Will this not, therefore create an anomalous situation for Courts who cannot look beyond the arbitral record or review the case on the merits of the dispute, including on the ground of an erroneous application of the law?

Even prior to the Ordinance, in every situation it would be open to a party to seek a stay, subject to such conditions as the Court may deem fit, under section 36(3) of the Act, subject to satisfying the Court that a prima facie case is made out. Therefore, would not the extent provisions, prior to the Ordinance, have adequately protected the party seeking a stay on an award’s enforcement? Interestingly enough, the Court whilst determining whether to grant such stay would of course need to take a prima facie decision.

The above analysis now takes us to the point reiterated by the Supreme Court that fraud itself is not always possible to establish by positive and tangible proof, as by its very nature it is secretive, and in most cases circumstantial evidence is the only way to establish the existence of fraud. In the Alva Aluminium Limited, Bangkok v. Gabriel India Limited, judgment the Supreme Court has held that a heavy duty lies upon a party who wishes to rescind a contract on the ground of fraud, and not just does the fraud need to be specifically pleaded, but the fraud shall also have to be established on the entire bundle of facts. In the context of arbitrations, the Supreme Court recently held in Avitel Post Studioz Limited v. HSBC PI Holdings (Mauritius) Limited, that serious allegations of fraud only arise if the following two test are satisfied: “The first test is satisfied only when it can be said that the arbitration clause or agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all. The second test can be said to have been met in cases in which allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or malafide conduct, thus necessitating the hearing of the case by a writ court in which questions are raised which are not predominantly questions arising from the contract itself or breach thereof, but questions arising in the public law domain.”

More recently, in Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties & Ors., the Supreme Court clarified the question of arbitrability of disputes involving allegations of fraud and reiterated its previous view that if the dispute between parties fell within section 17 of the Contract Act, or involved fraud in the performance of the contract amounting to deceit, such would be a civil wrong and would be arbitrable. Furthermore, simply because a particular transaction may have certain criminal elements, it would not ipso-facto mean that the subject-matter thereof is non-arbitrable.

Regrettably, the Ordinance does not provide any checks and balances against unscrupulous litigants from repeatedly raising the plea of fraud or corruption with a view to escape their obligations. Of course, the burden of proof would always be on the party alleging fraud or corruption, and in the case of multi-member tribunals this burden would be more onerous. However where the tribunal consists of a sole arbitrator, false pleas of corruption are likely to be taken thereby tarnishing the very basis that arbitration rests upon- a voluntary, binding, speedy and cost effective dispute redressal mechanism. One way to ensure that such a situation is avoided is to devise a system of deterrence- primarily through a regimen of imposing heavy costs against those who take mischievous pleas. Section 31A of the Act empowers the arbitrators in this regard.

As detailed above, sufficient provisions existed for an award debtor to approach the Court under the pre-Ordinance regime for seeking stay of the arbitral award if it could be demonstrated that there existed a case of fraud or corruption. The Ordinance and the re-introduction of a provision of automatic stay, has once again taken the law of arbitration back to the pre-2015 Amendment scenario, where upon an automatic stay being granted, the award holder would continue to have to await the disposal of the challenge to the award before being able to enjoy the fruits of the award. Also, will not the stay of an award “unconditionally” create its own challenges especially in situations where the Court while disposing off a section 34 challenge holds that no fraud, as alleged, is made out?

As observed, “the dispute resolution process has a huge impact on the Indian economy and global perception on “doing business” in India.” The current government is keen to push our nation to achieve the goal of becoming a hub for international commercial arbitration. To achieve this, we need to move towards an approach of minimal judicial interference with arbitral awards and speedy resolution of challenges in Court to such awards. Of course this requires a strong pool of arbitrators and it would also be wise to move towards institutional arbitrations as opposed to the largely ad-hoc arbitrations which we currently follow. Hopefully, the soon to be established Arbitration Council of India will work towards accomplishing all of the above. Till then, legislation, in the form of the present Ordinance, need to be avoided as the cure cannot be worse than the problem itself.

Even prior to the Ordinance, in every situation it would be open to a party to seek a stay, subject to such conditions as the court may deem fit, under Section 36(3) of the Act, subject to satisfying the court that a prima facie case is made out. Therefore, would not the extent provisions, prior to the Ordinance, have adequately protected the party seeking a stay on an award’s enforcement? Interestingly enough, the court whilst determining whether to grant such stay would of course need to take a prima facie decision.

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