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Arbitration and Conciliation Amendment Act 2021: Will It Interfere With Arbitral Awards?

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In March, Parliament passed the Arbitration and Conciliation Amendment Act 2021. The Act is the third amendment in six years to the Arbitration and Conciliation Act 1996 (principal Act).  This indicates that both the judiciary and government favour promoting Alternative Dispute Resolution as a consistent practice. However, the amendments also present certain shortcomings. For example, many have argued that it could interfere with arbitral awards due to the law’s vague definitions. Arindam Shit writes how the 2021 Amendment Act takes one step forward to two steps back due to its vagueness.

arbitration and conciliation amendment act 2021

By Arindam Shit, from BBA LL. B Hons. From Alliance University, Bangalore

Introduction

Alternate Dispute Resolution (ADR) is the mechanism that resolves disputes out of the court. Although this mechanism is developing, it has gained more popularity than litigation.

The emergence of ADR globally can be attributed to its efficiency and time-saving mechanism. Due to many pending cases in the Indian judiciary, justice delivery requires an optimal amount of time. However, ADR could reduce this time, providing disputing parties with broad scope for negotiation.

There are various methods of ADR, like arbitration, mediation, conciliation and negotiation. Still, there is a specific form used to resolve disputes in many parts of the world.

The process of ADR manifested its central emergence in developing countries, like India and African subcontinents, the economics of legal suit could be daunting. Thus, most parties tend towards out of the court dispute resolution.[1] Moreover, they want less interruption of courts in dispute settlements because of the delays.

In India, governance of arbitration got initiated by the Arbitration Act of 1889[2], and further, the Arbitration Act 1940 [3]compiled the law governing different methods of ADR mechanism.

After that, in 1996, a significant amendment was incorporated in the Arbitration Act.[4] The same followed through in the 2015[5] and 2019[6] Amendment Acts. Recently, amends were made to the principal Act, introducing the 2021 (Amendment) Act to match the level of International Arbitration law.

On March 10, 2021, the Parliament passed the recent amendment in Rajya Sabha, amending the Arbitration and Conciliation Act 1996.[7]

The Arbitration and Conciliation Amendment Act 2021 brought a significant change to the enforcement of arbitral awards. It was stated that the Bill would act against the increasing rate of corruption in securing arbitral awards.

Changes Brought by the Arbitration and Conciliation Amendment Act 2021

The 2021 Amendment in the Arbitration and Conciliation Act 1996  is the third amendment to the principal Act in the last six years. This reassures that the Indian legislature is updating ADR mechanisms to meet international standards.[8] The significant changes brought by this amendment Act are:

  1. The amendment allows an automatic stay on enforcement of any arbitral awards if the courts find any clear evidence that the award is influenced by fraud or corruption. This change has been incorporated under Section 36 of this Act using Section 2 of the principal Act.
  2. Secondly, it omitted the Eighth Schedule from the principal Act, which specified the arbitrator’s qualifications, experience, and norms to be followed.[9]

Effect of the Amendment on Indian Framework: Analysis and justification

The Indian judiciary has adopted a pro-arbitration approach, allowing the enforcement of almost all foreign awards in India.

Further, India is one of the signatories to the New York Convention.[10] That means if a disputing party from India received any arbitral awards from a country that is a signatory of this particular convention and that award is given in a territory that India has recognised as a convention country, then the award is enforceable in India. However, to date, there are only 50 countries that the Indian government has recognised.[11]

In India, the process of enforcing awards can be identified in two stages, initiated by filing an execution petition. The national courts must determine whether the awards strictly adhere to the Arbitration and Conciliation Act 1996.[12] So, once it satisfies these conditions, the awards become enforceable and are considered a decree passed by the court.

The Supreme Court of India, in ONGC v. Western Geco[13] and Associate Builders v. Delhi Development Authority,[14]  stated that only in the rarest of rare cases a foreign award could be successfully refused for enforcement. Otherwise, the general law is always in support of enforcement of the awards.

The 2021 amendment to the principal Act mainly targeted the provisions of arbitration awards. As per Section 34 of the principal Act, a party can request the court to set aside the arbitral award, further amended in the Arbitration and Conciliation (Amendment) Act  2015.[15]

It was decided that no automatic stay will be granted in executing an arbitral award just because of a mere application to set aside the award.

But 2021 Amendment Act is different from the decision.

The new amendment has added a  statutory provision under section 36(3) of the Act.

The new provision states that if the court has prima facie evidence that the arbitral award is affected by fraudulent activity and corruption, the court can put an unconditional or complete stay on the award.[16]  However, several members of Parliament criticised this addition.

According to them, this change will affect the pro-arbitration approach taken by the Indian judiciary towards enforcement of the foreign awards. The concern is that one party to the dispute will forever have a disadvantage. Thus, it could lose due to corruption allegations, which will result in staying the award. [17]

It is also argued that implementing this change will affect the sole feature of ADR, and it will no longer be considered an out-of-court settlement. But the major concern to this amendment is that the particular legislation doesn’t even define fraud and corruption, based on which the change has been brought.

So, it is clear that the definition will vary according to the merits of the cases, creating a challenging situation for the defendant on whom the allegation of fraud gets imposed.

Rationale Behind the Controversy

With the introduction of the new clause in section 36 of the Arbitration and Conciliation (Amendment) Act, 2021, it has become essential to check whether there is prima facie evidence of fraud and corruption, resulting in a barrier to the enforcement of the arbitral award. Which ultimately altered the scheme of the Act of 1996.

Supreme Court of India has discussed the issue in the case of Hindustan Construction Company Limited v. Union of India.[18] Para 3 of the judgement shows that challenges made under Sections 34 and 37 of the Arbitration and Conciliation Act 1996 resulted in the stay on the arbitral award, and it ate six years to enforce that award.

This shows how difficult it will be to enforce an award if any prima facie evidence of fraud and corruption comes before the court regarding that award.

Another point of controversy arises with the term ‘fraud’ and ‘corruption’. These terms are not examined under Civil Procedure Code to put a stay on any decree. So, the 2021 amendment included a new ground to resist the award, whereby we can expect that a party in a disadvantageous position as per the arbitral award will make every attempt to uphold that the agreement of the arbitration outcome is affected by fraud and corruption.

Supreme Court of India, in Swiss Timing Ltd. v. Commonwealth Games,[19] held that if the contract or the agreement is alleged to be influenced by the fraud, it will not affect the arbitration clause contained in it.

The contract may become void or voidable, but the arbitration agreement remains unaffected. Further Supreme Court of India also distinguished ‘fraud simpliciter’ and ‘serious allegation of fraud’ [20] in A. Ayyasamy v. A. Paramasivam [21]and after that in Avitel Post Studioz Ltd. v. HSBC PI Holdings Ltd.[22]

This distinction also determines whether the case is under the competence of the arbitral tribunal. But the amendment Act of 2021 didn’t deal with this distinction and failed to categorise the seriousness of the fraudulent activity to grant an unconditional stay on the arbitral award.

The 2015 Amendment Act affected the rights of the award debtor by abolishing the automatic stay on the arbitral award. In contrast, the 2021 Amendment Act affects the rights of the award holder by including the clause in section 36 under which the court can grant a stay on the arbitral award, provided prima facie evidence of fraud and corruption. Moreover, the recent change affected the procedure and substantive rights of the award holder.

Effect on The Scope of Qualification of Arbitrator

The qualification of the arbitrator is a point of contention while dealing with the process of arbitration in dispute settlement. However, Arbitration and Conciliation (Amendment) Act 2019[23] had introduced Section 43J in the parent Act, which dealt with the eligibility, qualifications, and norms to be followed for recognising a person officially as an arbitrator.

This Section further developed the Eighth Schedule of the Act[24], which provides us with a comprehensive list of eligibility criteria that an arbitrator needs to possess.

This Schedule talks about specific educational qualifications such as ten years of experience in recognised fields like science and technology.[25] Apart from those, certain norms and guidelines are mentioned in the Schedule to abide by the arbitrator being neutral while settling disputes. Although these guidelines are broad, it was viewed as a limitation for foreign lawyers to Act as arbitrators in India.

The 2021 Act substituted section 43J and simultaneously removed Eighth Schedule from the parent Act. This indicates that the parties are now free to appoint their arbitrator from any domain irrespective of their educational and professional qualifications.

The members of the Lok Sabha have appreciated this approach. They have stated that it will facilitate India with international arbitrators, further raising the commitment level of Indian arbitration at the global stage. Amendment of section 43J provided the freedom to appoint an international arbitrator as per the provisions of United Nations Commission on International  (UNCITRAL) Model laws.[26]

Challenges to applicability in India

Arbitration and Conciliation (Amendment) Act, 2021 has several inconsistent and ambiguous characteristics that may affect its application in India.

The uncertain nature of the new changes incorporated in the parent Act may lead to an undesirable consequence. For example, the 2021 Act added a new ground, fraud and corruption. As a result, the arbitral tribunal has to enforce an award irrespective of any plea advanced in this context.

This Act doesn’t categorise these grounds, which implies that every case will be viewed differently. Therefore, it will depend upon the tribunal to decide the degree and extent of the fraud and corruption to put an unconditional stay on that award.

The 2021 Amendment Act[27] also restricts the parties from adducing evidence before the arbitral tribunal during the enforcement stage of the award. This approach leads to two significant complexities.

Firstly, it will be difficult to plead and prove the influence of fraud and corruption without adducing evidence before the tribunal. Secondly, there will be no primary separation between Section 34 and Section 36 proceedings, resulting in multiple uncertain proceedings.[28]

For arbitrators, the other major drawback is if the awards granted by the arbitrator is going to get constant unconditional stay based on the charge of fraud and corruption without justifiable inspection over the matter, their reputation and efficiency could be questioned.

Conclusion

India needs to strengthen out-of-court settlements given the overburdening cases. Moreover, these settlements have various advantages for litigation.

Although they are still considered a secondary mechanism to solve disputes, their adequacy has been questioned several times. As a result, the awards arising out of these proceedings cannot be enforced.

Arbitration is an alternative dispute resolution process, which is very similar to litigation. Even binding arbitration is nowadays considered part of litigation. But, arbitral awards are in question when the turn of enforcement comes into the picture.

The Arbitration and conciliation Act has been amended several times to match up with the current environment.

Recent amendments have been incorporated in the parent Act to meet the level of international arbitration law. Two significant changes have been incorporated by virtue of the amendment Act of 2021, due to which several doubts and questions were raised.

The recent change in the Act added that if the court has prima facie evidence of fraud and corruption on the arbitral award, then an unconditional stay will be executed over that award, ultimately acting as a restriction over arbitral awards.

This can lead to many other issues while dealing with such matters. However, the omission of the Eighth Schedule opens up a wide scope for the international arbitrator to practice arbitration in India, which meet the level of UNCITRAL Model laws.

Cases

  1. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386.

Associate Builders v. Delhi Development Authority (2015) 3 SCC 49 (India).

Avitel Post Studioz Limited v. HSBC PI Holdings (Mauritius) Limited, 2020 SCC OnLine SC 656.

Hindustan Construction Company Limited v. Union of India, 2019 SCC OnLine SC 1520.

ONGC v. Western Geco (2014) 9 SCC 263 (India).

Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee, (2014) 6 SCC 677.

References

Arbitration and Conciliation Act, 1996, https://legislative.gov.in (last visited July 5, 2021).

Arbitration and Conciliation (Amendment) Act, 2015 https://lawmin.gov.in (last visited July 7, 2021).

Arbitration and Conciliation (Amendment) Act, 2019 https://legislative.gov.in (last visited July 10, 2021).

Arbitration and Conciliation (Amendment) Act, 2021 https://legislative.gov.in (last visited July 2, 2021).

New York Convention, In brief, New York Arbitration Convention, https://www.newyorkconvention.org/in+brief (last visited July 10, 2021).

UNCITRAL Model laws, https://uncitral.un.org (last visited July 10, 2021).

Articles/Blogs/Journals

Alipak Banerjee & Payel Chatterjee, Enforcement of Foreign Awards in India: overview and recent developments, Nisihit Desai Associates (Legal and Tax counselling worldwide), Article from member company

Arbitration and Conciliation (Amendment) Act’21: Commentary Academike, https://www.lawctopus.com/academike/arbitration-act-21/ (last visited July 6, 2021)

Arb-Med-Arb: what is it and how can it help the parties to solve their disputes efficiently? Global Arbitration News, https://globalarbitrationnews.com/arb-med-arb-what-is-it-and-how-can-it-help-the-parties-to-solve-their-disputes-efficiently/ (last visited July 12, 2021)

Ashima Obhan, The Arbitration and Conciliation (Amendment) Act, 2021 – litigation, Mediation & Arbitration – India Welcome to Mondaq (2021), https://www.mondaq.com/india/arbitration-dispute-resolution/1048504/the-arbitration-and-conciliation-amendment-act-2021 (last visited July 8, 2021).

Changes to arbitration law get Lok Sabha nod, The Indian Express (2021), https://indianexpress.com/article/india/changes-to-arbitration-law-get-lok-sabha-nod-7186439/ (last visited July 15, 2021).

Gitanjali Bajaj & Sanjna Pramod, India Update: Arbitration and Conciliation Ordinance (Amendment), 2020: Insights: DLA piper global law firm DLA Piper (2020), https://www.dlapiper.com/en/japan/insights/publications/2020/11/arbitration-and-conciliation-ordinance/ (last visited July 16, 2021).

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 (last visited July 10, 2021)

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/ (last visited July 13, 2021)

India’s Arbitration And Conciliation (Amendment) Act, 2021: A Wolf In Sheep’s Clothing? Kluwer Arbitration Blog, http://arbitrationblog.kluwerarbitration.com/2021/05/23/indias-arbitration-and-conciliation-amendment-act-2021-a-wolf-in-sheeps-clothing/ (last visited Jul 4, 2021)

Recent developments in the alternative dispute resolution (ADR) iPleaders, https://blog.ipleaders.in/recent-developments-alternative-dispute-resolution-adr/ (last visited July 5, 2021)

Riya Dani, Latest news The Role of Alternative Dispute Resolution in Developing Countries | VIA Mediation Centre, https://viamediationcentre.org/readnews/NTcy/The-Role-of-Alternative-Dispute-Resolution-in-Developing-Countries (last visited July 5, 2021).

Endnotes

[1] Riya Dani, Latest news The Role of Alternative Dispute Resolution in Developing Countries | VIA Mediation Centre, https://viamediationcentre.org/readnews/NTcy/The-Role-of-Alternative-Dispute-Resolution-in-Developing-Countries (last visited July 5, 2021).

[2] Arbitration and Conciliation Act, 1889, https://legislative.gov.in (last visited July 5, 2021).

[3] Arbitration and Conciliation Act, 1940, https://legislative.gov.in (last visited July 5, 2021).

[4] Arbitration and Conciliation Act, 1996, https://legislative.gov.in (last visited July 5, 2021).

[5] Arbitration and Conciliation (Amendment) Act, 2015 https://lawmin.gov.in (last visited July 7, 2021).

[6] Arbitration and Conciliation (Amendment) Act, 2019 https://legislative.gov.in (last visited July 8, 2021).

[7] Arbitration and Conciliation (Amendment) Act’21: Commentary Academike, https://www.lawctopus.com/academike/arbitration-act-21/ (last visited July 6, 2021)

[8] Ashima Obhan, The Arbitration and Conciliation (Amendment) Act, 2021 – litigation, Mediation & Arbitration – India Welcome to Mondaq (2021), https://www.mondaq.com/india/arbitration-dispute-resolution/1048504/the-arbitration-and-conciliation-amendment-act-2021 (last visited July 8, 2021).

[9] Recent developments in the alternative dispute resolution (ADR) iPleaders, https://blog.ipleaders.in/recent-developments-alternative-dispute-resolution-adr/ (last visited July 5, 2021)

[10] New York Convention, In brief New York Arbitration Convention, https://www.newyorkconvention.org/in+brief (last visited July 10, 2021).

[11] Alipak Banerjee & Payel Chatterjee, Enforcement of Foreign Awards in India: overview and recent developments, Nisihit Desai Associates (Legal and Tax counselling worldwide), Article from member company

[12] Arbitration and Conciliation Act, 1996, https://legislative.gov.in (last visited July 5, 2021)

[13] ONGC v. Western Geco (2014) 9 SCC 263 (India).

[14] Associate Builders v. Delhi Development Authority (2015) 3 SCC 49 (India).

[15] Arbitration and Conciliation (Amendment) Act, 2015, Supra Note 5.

[16] Ashish Dholakia et al., India’s arbitration and conciliation (amendment) act, 2021: A Wolf in Sheep’s clothing? Kluwer Arbitration Blog (2021), http://arbitrationblog.kluwerarbitration.com/2021/05/23/indias-arbitration-and-conciliation-amendment-act-2021-a-wolf-in-sheeps-clothing/ (last visited Jul 12, 2021).

[17] Changes to arbitration law get Lok Sabha nod, The Indian Express (2021), https://indianexpress.com/article/india/changes-to-arbitration-law-get-lok-sabha-nod-7186439/ (last visited July 15, 2021).

[18] Hindustan Construction Company Limited v. Union of India, 2019 SCC OnLine SC 1520

[19] Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee, (2014) 6 SCC 677

[20] India’s Arbitration And Conciliation (Amendment) Act, 2021: A Wolf In Sheep’s Clothing? Kluwer Arbitration Blog, http://arbitrationblog.kluwerarbitration.com/2021/05/23/indias-arbitration-and-conciliation-amendment-act-2021-a-wolf-in-sheeps-clothing/ (last visited Jul 9, 2021)

[21] A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386

[22] Avitel Post Studioz Limited v. HSBC PI Holdings (Mauritius) Limited, 2020 SCC OnLine SC 656

[23] Arbitration and Conciliation (Amendment) Act, 2019, Supra Note 6.

[24] Gitanjali Bajaj & Sanjna Pramod, India Update: Arbitration and Conciliation Ordinance (Amendment), 2020: Insights: DLA piper global law firm DLA Piper (2020), https://www.dlapiper.com/en/japan/insights/publications/2020/11/arbitration-and-conciliation-ordinance/ (last visited July 16, 2021).

[25] 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 (last visited July 10, 2021)

[26] UNCITRAL Model laws, https://uncitral.un.org (last visited July 10, 2021)

[27] Arbitration and Conciliation (Amendment) Act, 2021 https://legislative.gov.in (last visited July 2, 2021).

[28] 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/ (last visited July 13, 2021)

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