Unconditional Stay on Arbitral Award- Assessing the Arbitration and Conciliation (Amendment) Act, 2021

Avesh Harshan*

Abstract

In order to make India an arbitration-friendly regime at an international level, there have been many amendments that have been incorporated into the Arbitration and Conciliation Act, 1996(“the Act”) especially over the past few years. The latest being the Arbitration and Conciliation (Amendment) Act, 2021 which has amended Section 36 and Section 43 J of the original act. This article will analyse of pros and cons which will follow the amendment and also throw light on how the amendment will affect the setting aside of the arbitral awards.

Introduction

The much-anticipated Arbitration and Conciliation (Amendment) Act, 2021 (“the 2021 Amendment”) was notified by the Central Government on 11th March 2021. This Act has replaced the Arbitration and Conciliation (Amendment) Ordinance, 2020 (“the Ordinance”) which was promulgated by the President on 4th November 2020. The 2021 Amendment has been deemed to have come in effect from 4th November 2020 itself.

By way of the 2021 Amendment, two major changes have been brought about. Firstly, Section 36 has been amended which provides for an unconditional stay on the enforcement of an arbitral award. Secondly, Section 43 J has been substituted and Schedule 8 has been omitted which deals with the aspect of appointment of Arbitrators.

Analyzing Section 36

Before the Arbitration and Conciliation (Amendment) Act, 2015 (“the 2015 Amendment”), the party challenging the enforcement of arbitral award could avail the benefit of an automatic stay by challenging the said arbitral award under Section 34 of the Act. However, through the 2015 Amendment, Section 36 of the Act was amended which now provided for a conditional stay of the arbitral award by the courts and also ensured that the arbitral award in question was enforceable even though an appeal against it was pending in the court. There was also no ground provided for an unconditional stay of the arbitral award till the appeal pending under Section 34 of the Act was disposed of. In 2019 the Supreme Court overruled this in the case of Hindustan Construction Company v. Union of India. In the present case, the arbitral award which was passed in favour of the petitioner were challenged under Section 34 of the Act. The newly inserted Section 87 provided for an automatic stay on the execution proceedings, the petitioner contended that this would lead to further delay in the enforcement of the arbitral award. While striking down Section 87 of the Act as unconstitutional for being manifestly arbitrary, it was clarified that unless a separate application for stay of arbitral award is filed by the award-debtor, there can be no automatic stay of arbitral award under Section 34 of the Act.

The Ordinance and now the 2021 Amendment has now introduced two grounds through which an unconditional stay can be granted to an arbitral award under Section 36(3) of the Act which is: (i) when the party proves prima facie that the agreement or contract based on which the award has been granted was induced by fraud or corruption; (ii) or the arbitral award so granted was induced by fraud or corruption.

The relief under Section 36 would apply only to those arbitrations which are seated in India and therefore, such arbitral awards would be subjected to provisions under the Code of Civil Procedure,1908(“CPC”). Order VI Rule 4 of CPC provides for the parties to specifically plead and prove in case of a plea of fraud and this position has also been confirmed by the Supreme Court. Even though the provisions of the CPC are not applicable to the arbitration proceedings, the courts on the other hand have taken a different view on the same and held that if there is an instance of fraud in arbitration, it should be pleaded and proved. It is to be noted here that in a Section 34 proceeding, the plea of fraud cannot be taken for the first time. Hence, the nature of Section 34 is not in the form of appeal, and so the court cannot review the appeal on merits in proceedings under Section 36.

In addition to this, the 2021 Amendment has also been given a retrospective effect with respect to the 2015 Amendment. This implies i.e., the 2021 Amendment would be applicable on all the arbitration proceedings and even to those arbitration proceedings which commenced prior to or after the enactment of the 2015 Amendment. The reason behind this being that an extra plea cannot be raised in pending Section 36 applications and such a plea is likely to be rejected. This understanding would help extend the 1996 Act’s aim by enabling the award holder to reap the rewards of the arbitral award.

The most concerning facet of this amendment is that it conjures up the notion of corruption for the purpose of granting an automatic permanent stay on an arbitral award. And if the court later agrees with the arbitral tribunal’s decision, the award will not be implemented until the final judgment is pronounced. And, since the Act does not have a definition of fraud, half of the time spent on arbitration would be spent determining whether the award comes into the scope of fraud or otherwise.

With the above said, introducing the above provision would only add to the ambiguity, and the courts would be swamped with applications seeking to decide the extent of the amendment. This will negate the purpose of the Act, which was to provide as little judicial interference as possible. In the contemporary time when majority of contracts and agreements incorporate an arbitration clause to avoid the hurdles of litigation, this amendment will seek to fail the fundamental aspect of arbitration process, as the delivered award can be subjected to an order of indefinite stay. This would in turn can potentially harm the “Arbitration- Friendly” image of India.

Section 43 J and Schedule 8

The Arbitration and Conciliation (Amendment) Act, 2019 saw the addition of an additional clause J to Section 43 and Schedule 8. Clause J to Section 43 provided for qualifications, experience and norms for accreditation of arbitrators whereas Schedule 8 laid down criteria for qualification and experience of an arbitrator. That move was heavily criticized for two main reasons. Firstly, the government-appointed authority would regulate the arbitrations that would ultimately question the autonomy of the parties. Secondly, the appointment criteria laid down in Schedule 8 would narrow down the scope of the appointment of arbitrators in Indian seated arbitrations. However, the provisions of these provisions would be applicable only in case an application under Section 11 was made.

The 2021 Amendment took note of these criticisms and subsequently Section 43J was substituted and the Schedule 8 was omitted from the Act. With the removal of Schedule 8, it would now open a broad prospect for the appointment of Arbitrators in the Arbitration proceedings. This move would now allow even foreign lawyers to be the arbitrators.

Conclusion

While omitting Schedule 8 and substitution of Section 43J would bring India one-step ahead in its pro-arbitration stance, the amendment to Section 36 may have a negative impact. As a result of the recent changes, courts must also find a balance between dealing with matters of fraud or corruption and still ensuring that no side uses it as a means of delaying the enforcement. If not well implemented, this move could jeopardize India’s efforts to develop its pro-arbitration stance.


* The author is a student at National Law University & Judicial Academy Assam. He can be reached via LinkedIn.


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