Ronica S. Dass

Ronica S. Dass

Arbitration and Conciliation (Amendment) Act, 2021 and the Jurisprudence of arbitrability of Fraud/Corruption: Hurdle or Help to the Existing Arbitration and Conciliation Act 1996?

The Arbitration act of 1996 is the primary legislation which governs the arbitration procedure in India and the act has undergone several changes over the years and the Arbitration an conciliation (Amendment) Act, 2021 (hereinafter “2021 Amendment”) is the recent intervention.  Arbitration and conciliation (Amendment) Ordinance, 2020 was promulgated by the president of India in the year November 2020 and was later passed as a law in the year March 2021. The author seeks to discuss the changes being introduced by the Amendment Act of 2021 and the subsequent Judgements being taken place after that and as to whether the steps being taken to tinker with the intent Arbitration and Conciliation Act, 1996 (hereinafter “1996 Act”) is a step forward or step backwards.

The changes being brought with the 1996 Act is with respect to section 36 of 1996 Act which deals with the enforcement of an arbitral award. Section 36 of the Act falls under Part I of the Act and thus deals when the place of the arbitration is in India however, subject to a provision as inserted by the Amendment Act of 2015 under 2(2) as ,“Provided that subject to an agreement to the contrary, the provisions of sections 9, 27 and clause (a) of sub-section (1) and sub-section (3) of section 37 shall also apply to international commercial arbitration, even if the place of arbitration is outside India, and an arbitral award made or to be made in such place is enforceable and recognised under the provisions of Part II of this Act.”

Jurisprudence of arbitrability of Fraud/Corruption

For the enforcement of foreign arbitral award or where the place of arbitration is outside India Section 36 of the Act would not be relevant in this case and would be subject to condition as set out under Section 48 of the Act in Part II of the Act.

Research Questions

The author through this article seeks to draw the attention towards the following research questions:-

1. Whether the automatic stay on arbitral awards would further delay and be misused by the parties to their advantage or is it an arbitration friendly move?

2. Whether an application for stay of enforcement on the grounds mentioned in the newly added proviso of Section 36(3) is maintainable if the application is filed before 23 October 2015?

3. Whether the deletion of 8th schedule would prove to be a welcome move?

4. Whether the addition of new proviso in setting the award and the stay of the operation was a required amendment?

5. What happens if a prima facie determination of the arbitration agreement/underlying contract is induced by fraud/corruption is made out under Section 36(3), but the Section 34 challenge is dismissed because the award was not induced/affected by fraud/corruption?

6. If the new proviso obligates an unconditional stay upon a prima facie discovery of fraud/corruption, does it mean that an unconditional stay can be granted for no other grounds or claims?

Before addressing the above research questions, the author seeks to discuss the amendments being brought by the amendment act of 2021. The two changes being introduced by the 2021 Amendment are: –

1. Amendment to Section 36(3) as :-

“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 effected by fraud or corruption, it shall stay the award unconditionally pending disposal of the challenge under section 34 to the award. Explanation. ––For the removal of doubts, it is hereby clarified that the above proviso shall 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

2. Omission of the 8th Schedule which was introduced by the 2019 Amendment Act which specified the qualification, specification and norms for the accreditation of the arbitrators which were biased. The 2019 Amendment disqualified the foreigners such as foreign lawyer or scholar or retired officer from being the accredited arbitrator under the act.

Prior to the enactment of 2021 Amendment, the act provided that the parties could approach the court to file an application to challenge the award as per the ground provided under Section 34. As provided under Section 34 of the Act: –

“(2) An arbitral award may be set aside by the Court only if—

(a) the party making the application 1[establishes on the basis of the record of the arbitral tribunal that]—

(i) a party was under some incapacity, or

(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or

(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:

Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or

(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or

(b) the Court finds that—

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or (ii) the arbitral award is in conflict with the public policy of India”

> Amendment under Section 36 of the Act: Are the Standards vague and arbitrary?

However, Section 36(2) clarified that an application filed would not be automatically be rendering the award unenforceable and the court had power to grant the stay of the operation of the impugned award as it may deem fir provided under Section 36(3) of the Act. Now, this amendment act of 2021 has departed from the earlier position, now the current position being that where the court is prima facie satisfied that either the arbitration agreement or the contract or the making of the award was induced or effected by fraud it shall automatically stay the award unconditionally pending the disposal of the challenge to the award under Section 34. This provision will also have retrospective effect and will apply to all cases arising out of or in relation to the arbitral proceeding irrespective of whether the arbitral or court proceeding began prior to or after the commencement of the 2015 amendment. This move can be easily be misused by certain parties to delay the enforcement of the award for their advantage.

Many other disadvantages can be taken place because of this move. The author contends that firstly, in cases where an application has been filed pending adjudication before a court, the applicants would have file fresh application based upon the grounds as enlisted in new proviso which would lead to increase in delay, increase of the costs. Another situation of misuse can be where the application under Section 36(2) already stands dismissed, the applicants would claim to file a fresh cause of action on the ground that it existed since October 2015 in the statue but could not be relied upon earlier. Another issue is with regards to proving whether an arbitration agreement or contract is affected by fraud or corruption. This would be a matter of debate for the parties in the arbitral tribunal and has to be inquired in detail. Moreover, to inquire whether an award or making of a contract is induced by fraud is not a straightforward exercise and would therefore require more than just prima facie evaluation of evidence. Lastly, unconditionally staying an order in case of corruption/fraud lacks logic in cases where the court can exercise its discretion before granting any stay order. In the recent case of Supreme court in Hindustan Construction Company Limited V Union of India (2019) the court had ruled that an automatic stay on the operation of award was no longer permitted. However, this mischief has been reintroduced through the new proviso of an automatic and unconditional stay.

> Retrospective effect of Section 36(3)

The new provision to Section 36(3) makes it clear that the said proviso will have a retrospective effect and shall be deemed to have been inserted with effect from 23 October, 2015 when the 2015 Amendment came into force. The amendment also further states that the new provision would apply to all the court proceedings, irrespective of whether the court or underlying arbitral proceedings commenced before or after 23 October, 2015. Thus, the amendment acknowledges the maintainability of application for stay of enforcement irrespective of when the application was filed.

8th schedule was done away with by the 2021 Amendment and replaced Section 43 J with the following language The qualifications, experience and norms for accreditation of arbitrators shall be such as may be specified by the regulations”. The Eighth schedule specified the qualification experience and norms for accreditation of arbitrators and these n norms were largely biased towards the Indian lawyers, Government officers etc. The Eighth Schedule prescribed an list of qualifications, which an arbitrator would need to possess, which included, inter alia, an advocate, a chartered accountant/cost accountant, company secretary, , person with educational qualification at degree level with 10 (ten) years of experience in scientific or technical streams, etc. Other than setting forth the professional qualifications of an arbitrator, the Eighth Schedule also provided for general norms that would be applicable to an arbitrator for accreditation, such as:

i. “An arbitrator shall be a person of general reputation of fairness, integrity, and capable of applying objectivity in arriving at settlement of disputes;

ii. an arbitrator must be impartial and neutral and avoid entering into any financial business or other relationship that is likely to affect impartiality or might reasonably create an appearance of partiality or bias amongst the parties;

iii. an arbitrator should avoid any potential conflict; and

iv. the arbitrator should be capable of suggesting, recommending or writing a reasoned and enforceable arbitral award in any dispute which comes before him for adjudication”

This was against the nature of arbitration as it firstly, being restrictive and contrary to the intention of arbitration which sought party autonomy and secondly, it left no room for the foreign professionals to be appointed in the Indian Seated Arbitration and thus leading to comprising the freedom of the party to choose their arbitrator.

In view of the same, the 2021 Amendment addresses this concern by removing the Schedule altogether and thereby replacing it with the word “regulations” i.e., now the 8th Schedule has been replaced with the regulations and now the accreditation of the arbitrators will be governed by the criteria laid down in these “regulations”. However, the question left unaddressed over here is that what are these regulations, and by when this regulation is sought to be released. In view of the author, this regulation would ensure more diversification in terms of accreditation of the arbitrators rather than falling prey to the same limitations as had been provided in the eighth Schedule.

Analysing the Evolving nature of Arbitrability of Fraud by the Court: Pre and Post Amendment 2021

Allegation of fraud has been a matter of discussion since the arbitration act of 1940. Fraud, which is perceived to be a rather criminal offence, and the criminal offences remained outside the scope of arbitration and conciliation act of 1996. The author here examines how gradually the scope of tribunal expanded over the years from various case laws.

During the Initial years the courts opined those cases involving fraud, forgery etc arises out of criminal offences and therefore not suitable for arbitration and such allegation of fraud and malpractice could only be settled in court. In the case of Afcons Infrastructure V. Cherian Varkey Construction Ltd& Others(2010) wherein the supreme court was of the view that serious allegation of fraud arises out of criminal offence and would not be a subject matter of dispute under arbitration.  In N. Radhakrishnan v. Maestro Engineers and Others (2010), a two-judge bench of the Supreme Court observed that when the case relates to allegations of fraud and serious malpractices, such a situation can only be settled through court of law through  with a detailed evidence by either of the parties and not by any Arbitral Tribunal.

 Similar view was opined in the case of Bharat Rasiklal Ashra v. Gautam Rasiklal Ashra&Anr (2012), wherein the Supreme Court was of the view that serious allegation of fraud and fabrication when made, it is not possible for court to appoint an arbitrator without deciding such issue. It was also held in this case that just because allegation of fraud are likely to involve recording of evidence or involve delay, they are not grounds for refusing to consider existence of valid arbitration agreement. Later, in the 246th Report of Law commission, the commission also had proposed amendment of Section 16 and making fraud related issues arbitrable, however no such amendment was made under the act.

Later, in the case of A. Ayyaswami v. Paramasivam & Others (2016) wherein the Supreme court held that only when the cases involve serious nature of fraud and involves criminal doing would the parties be relegated to the civil court.

In the case of Vidya Drolia and Ors. v. Durga Trading Corporation (2021), Supreme Court headed by a three-judge bench observed that allegations of fraud can be made a subject matter of arbitration when they relate to a civil dispute. The court further observed that “it would be very much irrational and completely wrong to mistrust and treat arbitration as a flawed and inferior adjudication procedure unfit to deal with the public policy aspects of a legislation”. Arbitrators, like the courts, are bound equally to resolve and decide upon the disputes in accordance with the public policy of the law.

In another case of N. N. Global Mercantile Pvt. Ltd v. Indo Unique Flame Ltd. and Others (2020), which was headed by a three-judge bench, the Supreme Court reiterated that the civil aspect of fraud is arbitrable except in those cases, where fraud strikes upon the root of the Agreement and impeaches the arbitration clause itself.

The Delhi High Court has; in its very recent judgment in M/s IMZ Corporate Pvt. Ltd. versus MSD Telematics Pvt. Ltd (2021), while relying upon Vidya Drolia case and N.N. Global case has observed that mere allegation of fraud is not enough and the Court will embark on a judicial enquiry only when ex-facie, the document containing the arbitration clause appears to be fabricated.

> Hurdles to be created as a result of inclusion of unconditional stay of the award in the proviso

Now, the author is of the view that these new provisions adding the scope of  unconditional stay of the when the arbitration agreement or the contract is  induced or effected by fraud or corruption is unnecessary because (i) when reading Section 34(2)(b)(ii) Explanation 1 and Section 36(2) it is clear that an award could be set aside on the grounds of fraud even under the 2015 Amendment and further, through the above mentioned cases it was clear that amendment relating to “agreement or making of award was induced by fraud was already open to adjudication in arbitration even under 2015

“Explanation 1. —For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if, —

(i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81;”

The author contends that with the insertion of the new amendment on the aspect of “fraud” will be exposed to being appealable on merits which would then violate the provision of Section 34, Explanation 2 of the Act which states “that the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.” Pursuant to the amendment while the award cannot be set aside on the ground of the underlying contract being affected by fraud/corruption but the operation of the award can be stayed on the same ground available.

> Unclear Vision caused by the insertion of the provision under Section 36(3): Questions to be raised to the regulatory authorities

Certain questions which are unclear with new proviso with the aspect of fraud are,

√ What if a prima facie determination of the arbitration agreement/underlying contract being induced by fraud or corruption is brought under the provision of Section 36(3) of the Act, but the Section 34 challenge is dismissed because the award was not induced/affected by fraud/corruption?

√ Would the award-holder be able to get the award enforced despite the determination under the stay application?

√ If the new proviso obligates an unconditional stay upon a prima facie discovery of fraud/corruption, does it mean that an unconditional stay can be granted for no other grounds or claims?

Being forced to grant an unconditional stay in the face of allegations as that of fraud/corruption could result in the misuse of the provision, since the interests of the both parties i.e., the award-holder and the conduct of the award-debtor may be difficult to accommodate. Now again, since there is no limit with respect to filing of Section 36 application, one can claim a prima facie case discovery of fraud/corruption well after the filing as well. Another issue is with regards to the doctrine of severability, i.e., for a Section 34 Application the making of the award was to be induced by fraud/corruption however as per the new provision a stay can brought up under Section 36(2) even when the contract/arbitration agreement is induced by fraud/corruption. Thus, this amendment violates the doctrine of separability which postulates that an arbitration agreement is separate from contract between the parties, because if the contract is invalidated by fraud, then the award that is based on arbitration agreement would be stayed automatically as well. Further consequences will come into picture when actual cases in matter of the aforesaid amendment. Thus, while the Amendment Act of 2021 can be a welcome step in certain aspect such as the aspect of omission of 8th Schedule but in the aspect of Section 36 much is leaved upon speculation and interpretation.

End Notes

1. 246th Law Commission Report. Can be accessed here:-

https://lawcommissionofindia.nic.in/reports/report246.pdf

2. Arbitration and Conciliation (Amendment) Act of 2021

3. Afcons Infrastructure V. Cherian Varkey Construction Ltd& Others (2010) SC.

4. Radhakrishnan v. Maestro Engineers and Others (2010), SC.

5. Bharat Rasiklal Ashra v. Gautam Rasiklal Ashra & Anr. (2012), SC.

6. Ayyaswami v. Paramasivam & Others (2016), SC.

7. Hindustan Construction Company Limited V Union of India (2019), SC.

8. Vidya Drolia and Ors. v. Durga Trading Corporation (2021), SC.

9. N. Global Mercantile Pvt. Ltd v. Indo Unique Flame Ltd. and Others (2020),SC.

10. M/s IMZ Corporate Pvt. Ltd. versus MSD Telematics Pvt. Ltd (2021), SC.

*****

The author has contributed this write-up during her research assistantship at M/s. Black Robes Legal. The views, thoughts, and opinions, as are so expressed, belong solely to the author, and not to any other person in any manner whatsoever.

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