RECOGNISING ARBITRAL CORRUPTION

The Arbitration and Conciliation (Amendment) Ordinance 2020 addresses a pressing need today; it recognises the field reality of corruption and fraud beyond that of the dispute, but of the tribunal arbitrating the dispute. The Ordinance targets the cases where the arbitration awards or the underlying contracts are induced or secured by fraud or corruption and further aims to give an opportunity to all the parties to seek an unconditional stay on execution till the challenge to the award under Section 34 is decided, where the court is prima facie satisfied of the existence of fraud or corruption.

The effect of the Ordinance is that it has reversed the 2015 amendment to a certain degree. Where the 2015 Amendment had done away with the concept of automatic stay on enforcement of awards as soon a challenge was made to the award under Section 34, the 2020 Amendment provides for an unconditional stay as long as the award is vitiated by allegations of corruption or fraud on the part of the tribunal itself. The mandate of the Ordinance is that 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.”

The reasons for what necessitated this judgment have been apparent to us in the legal fraternity for a while now. Corruption and fraud have led to bleeding of the national exchequer. Most recently in the recent landmark case of HCC v. Union of India, the Supreme Court categorically noticed the arguments made by the Government of India that the means employed to get such awards was less than honourable.

Another reason that necessitated this amendment was that after the 2015 Amendment Act, execution of an award is stayed by Courts on conditions which are same as that for the grant of stay of a money decree under the CPC. The idea behind this was that the award holder is not denied the fruits of the award due to unecessary litigation, therefore invariably stay of award is granted only on deposit of award amount which can be withdrawn by the award holder subject to the outcome of the Section 34 application. However, as is with most things, the other side of the coin are the cases where the award or the underlying agreement is induced by corruption and fraud, in which case, the beneficial legislation becomes an unjust burden on the petitioner under Section 34.

In Arbitrations involving construction contracts/infrastructure projects between private concessionaires and PSUs like the NHAI, etc. or Government departments like the CPWD etc., the awards are invariably in the favour of the private concessionaire. As an example Hindustan construction company, in the above case, claimed to have awards against the government undertakings and PSUs amounting to a whopping Rs. 6000/- crore and in some cases the awards were more than 100% of the value of the contract.

One would argue that the functioning of PSUs and other government authorities is marked by pachyderm pace, red-tape and bureaucratic approach, in sharp contrast with the professional and “time is money” approach of the private corporations, which results in cost overruns and loss of profit, being the two favourite heads of claim against the government/PSUs.

But as an Arbitration practitioner and having been a law officer for the Union of India, I have to accept the sentiment that more often than not there is corruption in arbitral proceedings and the submissions of the Government resonate across. As a concept, corruption or fraud in arbitration law means employing corrupt practices in securing the contract and the discussions have always centred around the jurisdiction of a tribunal to decide such disputes where corruption is alleged in the process leading to the entering into of a binding contract.

For example, the Agusta Westland case, where a contract for supply of 12 VVIP helicopters was secured by corrupt means. Augusta Westland invoked arbitration against the Government of India alleging breach of contract. In this case the defence of Government of India before the Arbitral tribunal and later before the High Court of Delhi rested primarily on the fact that the contract was secured by fraud and corrupt means by Agusta and others and therefore the dispute was not arbitrable.

The jurisprudence on whether corruption in arbitrable or not is more or less settled.

In Rashid Raza vs. Sadaf Akhtar, the Supreme Court clarified the scope of arbitrability of disputes involving allegations of fraud. Relying upon the landmark ruling in the case of A. Ayyasamy vs. A. Paramasivam (“Ayyasamy”), Justice R. F. Nariman set out the working tests for determining whether an allegation of fraud is arbitrable. In Rashid, the Supreme Court held that since the dispute pertains to a ‘simple allegation of fraud’, the same is arbitrable.

Analysing the law laid down on arbitrability of disputes involving fraud in the case of Ayyasamy the Supreme Court held that a simple allegation of fraud may not be a ground to nullify the effect of an arbitration agreement. However, when serious allegations of fraud are involved, held that courts can dismiss an application to refer a dispute to arbitration under Section 8 of the Act. Serious allegations of fraud would involve:

Allegations which would make it a case of criminal offence;

Allegations of fraud are so complicated that it becomes essential that such complex issues can be decided only by civil court on the appreciation of the voluminous evidence that needs to be produced;

In Ayyasamy, the Supreme Court further held that in the scenario where there are simple allegations of fraud touching upon the internal affairs of the parties inter se without any implication in the public domain, the arbitration clause need not be avoided and the parties can be relegated to arbitration.

Applying the relevant principles from Ayyasamy to the allegations of siphoning and improprieties, the Supreme Court held that a distinction must be drawn between ‘serious allegations’ of forgery or fabrication supporting the plea of fraud, and ‘simple allegations’ – to determine arbitrability. The Supreme Court held that the allegations are arbitrable as they fall within the ambit of ‘simple allegations’. It set aside the judgment of the High Court and proceeded to appoint an arbitrator under Section 11 of the Act to resolve the disputes between the parties.

In any event, the Supreme Court’s ruling does set a positive precedent ensuring cautioned and minimum interference by courts in matters involving arbitration and allegations of fraud. It also reposes faith in the arbitral tribunal to determine these allegations to fruition.

What has not found place in the popular legal discourse is the corruption in adjudication of disputes.There is no statutory code of conduct for arbitrators apart from what has been broadly stated in the Arbitration Act 1996 about impartiality and fairness of arbitrator. Recently however international arbitral institutions have been actively considering transparency in arbitral process. The ICC task force on “Addressing issues of corruption in International Arbitration” is still to put forth its recommendations.

The question of impropriety in arbitral process is not one merely of academic interest nor it is in the realm of impossibility. Although there are measures to shield a party from such awards under Section 34, but there is no repercussion for the Arbitrators engaging in such exercise.The Amendment ordinance of 2020 is a pioneering step taken by the government for this recognises the fact thatposition of the arbitrator is that of Caesar’s wife who should be above all suspicion, given the fact that under the Act, the challenge to arbitrator is to be made to the arbitral tribunal itself.

The Law Ministry Ordinance said the amendment was necessary “to address the concerns raised by stakeholders after the enactment of the Arbitration and Conciliation (Amendment) Act, 2019 and to ensure that all the stakeholder parties get an opportunity to seek an unconditional stay of enforcement of arbitral awards where the underlying arbitration agreement or contract or making of the arbitral award are induced by fraud or corruption.”

In Section 36 of the Arbitration and Conciliation Act, Arbitrators are adjudicators under the Act, they decide disputes between the parties and their findings are binding. Arbitration is not merely a mechanism to settle disputes, it is a machinery of justice and the aspiration of making India a preferred destination for arbitration cannot overwhelm the pursuit of justice, the concepts of party autonomy and minimal interference of courts in arbitration etcnotwithstanding.

Sr. Adv. Pinky Anand has served as the Additional Solicitor General of India

Latest news

Related news