On November 04, 2020, the President of India promulgated the Arbitration and Conciliation (Amendment) Ordinance, 2020 (“Ordinance”). The Ordinance was promulgated to ensure that all parties get an opportunity to seek 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 corruption1.
Prior to the Ordinance, under Section 36 (3) of the Arbitration and Conciliation Act, 1996 (“Act”) a party could file an application seeking a stay of the arbitral award when challenging the arbitral award under Section 34 of the Act. This application could be granted by a Court subject to conditions as the Court deemed fit. The Ordinance inserted a proviso to Section 36 (3) to state that the Court can unconditionally stay an arbitral award pending the disposal of the challenge to the arbitral award provided that 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 Ordinance also clarified that this amendment to Section 36 (3) would 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 (“2015 Amendment Act”).
The History of Section 36
The power of granting a stay on an arbitral award pending a challenge under Section 34 of the Act has undergone multiple changes over the years. Until the 2015 Amendment Act, Section 36 of the Act as it stood then provided for an automatic stay of an arbitration award as soon as a petition under Section 34 of the Act was filed. The wordings of Section 36 of the Act effectively led to a scenario where an admission of a Section 34 petition would virtually paralyze the process for the winning party/award creditor. In 2009, the Supreme Court of India had observed that “until the disposal of the application under Section 34 of the Act, there is an implied prohibition of enforcement of the arbitral award. The very filing and pendency of an application under Section 34, in effect, operates as a stay of the enforcement of the award.”2
Section 36 before the amendments read as follows:
“36. Enforcement.-Where the time for making an application to set aside the arbitration award under section 34 has expired, or such application having been made, it has been refused, the award shall be enforced under the code of Civil Procedure, 1908 in the same manner as if it were a decree of the Court.”
The 2015 Amendment Act, amended Section 36 and the provision for automatic stay being granted to parties upon filing of a petition under Section 34 was removed. The 2015 Amendment Act ensured that a stay would only be granted upon a separate application being filed and deemed by the Court to merit a stay to be granted.
Revisiting the Apex Court’s take on Fraud and Arbitrations
The Supreme Court in A. Ayyasamy vs. A. Paramasivam and Ors.3 (“Ayyasamy”) had observed that it may not be necessary to nullify the effect of the arbitration agreement between parties where there were allegations of fraud simpliciter and such allegations were merely alleged, as such issues could be determined by the arbitral tribunal. While relying upon the Ayyasamy decision, it was subsequently held by the Supreme Court that only where serious questions of fraud are involved, could an arbitration be refused4.
With respect to serious allegations of fraud, two tests are required to be satisfied. The first, being whether the plea permeates the entire contract and above all, the agreement of arbitration, rendering it void. The second being, whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain5. “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.”6
The Supreme Court in Avitel Post Studioz Limited and Ors. vs. HSBC PI Holdings (Mauritius) Limited and Ors. also examined the meaning of fraud in Section 17 of the Indian Contract Act, 1872 (“Contract Act”) and observed that the expression “or to induce him to enter into the contract” refers to the stage of formation of the contract. It was observed that even Section 17(5) of the Contract Act, which speaks of “any such act or omission as the law specially deals to be fraudulent” refers to an act or omission under such law at the stage of entering into the contract.
Thus, if a party can establish, that at the very stage of entering into the arbitration agreement, that the opposite party had (i) made a suggestion as a fact, which the opposite party knew was not true; (ii) actively concealed a fact despite having knowledge or belief of the fact; (iii) a promise made without any intention of performing it; or (iv) committed any other act fitted to deceive, can a party seek unconditional stay of the arbitral award as a result of the Ordinance.
Accreditation of Arbitrators
The Ordinance is also significant for future arbitrators in the country. The Arbitration and Conciliation (Amendment) Act, 2019 (“2019 Amendment Act”) had introduced Part 1A to the Act pertaining to the Arbitration Council of India. Section 43J under this part specified the norms for accreditation of arbitrators and accordingly inserted Schedule 8 in the Act. Under Schedule 8, an individual either had to be (i) an advocate with ten years of experience; (ii) a chartered accountant with ten years of experience; (iii) a cost accountant with ten years of experience; (iv) a company secretary with ten years of experience; or (v) an officer of the Indian Legal Service amongst others to qualify as an arbitrator.
The Ordinance has now substituted Section 43J and has omitted Schedule 8 of the Act. The substituted Section 43J now states that the qualifications, experience and norms for accreditation of arbitrators shall be specified by regulations, which could be made by the Arbitration Council of India in due course.
1 The Arbitration And Conciliation (Amendment) Ordinance, 2020
2 2009) 17 SCC 796 2009
3 (2016) 10 SCC 386
4 (2018) 15 SCC 678
5 2019) 8 SCC 710
6 MANU/SC/0601/2020
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