Impact of arbitration and conciliation (amendment) act, 2021 on stakeholders

Parth Goyal, Co-Author: Divya Pandey
Author:

Abstract

The process of arbitration provides a distinct and efficient mechanism for dispute resolution as compared to court proceedings. Its effectiveness could be adjudged through the yardstick of the time efficacy it provides for the successful resolution of the disputes. However, if this fundamental criterion is jeopardized, then it would be a major deterrent to opt this method of dispute resolution. The authors have thus analysed Arbitration and Conciliation (Amendment) Act, 2021, through this lens. The amendment has sparked a lot of controversy amongst academicians because of its varied ramifications, both direct and indirect. The modification includes an unconditional stay on the enforcement of the arbitral award as well as alterations to the arbitrators' qualifications. The result is also variegated in nature since some of it may be classified as positive legislation that advances the cause of arbitration. However, when the entire legislation is analysed, the negative consequences undermine any favourable modifications made. This ongoing discussion has prompted the authors to discuss the issue further in order to duly comprehend its implications on the stakeholders. The authors have thus analysed major facets of the amendment in three parts; first, the modifications relating to Section 36(3)- its conflict with CPC, the conundrum by employing ambiguous terms, issue due to admittance of new evidence, issues due to retrospectivity and the violation of the doctrine of separability; second, the changes in the Section 43J and third, an approach of comparative analysis of the modifications made to the principal act, with respect to UNCITRAL Model Law. Through this combined approach, this academic paper would help the readers understand the significant intent behind the fundamental principles used in the arbitration and the implications of the breach of the same on the stakeholders involved in the process of arbitration.


Introduction

The Arbitration and Conciliation (Amendment Act), 2021 (“2021 Amendment”) is the latest modification in the Arbitration and Conciliation Act, 1996 (“Act”), another step taken by the Central Government in making India an arbitration hub. The 2021 Amendment was passed by both the houses of the Indian bicameral parliament on 10th March 2021, repealing the Arbitration and Conciliation (Amendment) Ordinance, 2020 promulgated on November 4, 2020, by the President of India.

This article discusses the two modifications brought by the 2021 Amendment i.e., the changes to the Section 36 and the removal of the Eighth Schedule from the principal act. The authors criticise Section 36(3) as it first, is in conflict with Code of Civil Procedure; second, creates a conundrum by employing ambiguous language; third, poses a problem when new elements of evidence are introduced; fourth, creates issue regarding retrospectivity; and fifth, it violates the doctrine of separability. Further, the authors vis a vis the amendment to Section 43J discuss the intention behind insertion of the Eighth Schedule, the benefits obtained from its removal, and provide suggestions which can be kept in mind during the drafting its replacement. Lastly, both these changes are analysed through the perspective of the UNCITRAL Model Law.

The Provision for Unconditional Stay

The 2021 Amendment facilitates the award-debtor to allege fraud and corruption as justified grounds for providing unconditional stay, effectively nullifying the 2015 Amendment. It is based on the satisfaction of the court that a prima facie case is made out that the arbitration agreement, the contract which is the basis of the award or the making of the award is induced or effected by fraud or corruption, the court shall stay the award unconditionally.

Conflict with Code of Civil Procedure

The proviso to Section 36(3) of the Act states that a Court while considering the application for grant of stay in the case of an arbitral award must have due regard to the provisions of the Code of Civil Procedure (“CPC”),[1] Order 41 Rule 5(3) of which lays down the following three conditions which must be satisfied to obtain an order for stay of execution—

(a) that substantial loss may result to the party applying for stay of execution unless the order is made;

(b) that the application has been made without unreasonable delay; and

(c) that security has been given by the applicant for the due performance of such decree or order as may ultimately be binding upon him.[2]

However, now under the 2021 Amendment, mere showing of a prime facie case will entitle the party to an “unconditional” stay, thereby removing any discretion which would have been required to balance the competing equities on a case-to-case basis. Moreover, the 2021 Amendment includes new grounds of ‘fraud’ and ‘corruption’ which are not explicitly mentioned under CPC. These additional grounds separate civil proceedings from arbitral proceedings as in the latter the party has a much wider scope to contest its case. This discrimination has also been observed in Hindustan Construction Company v. Union of India,[3] where the Supreme Court noted-

The anomaly, therefore, of Order XLI Rule 5 of the CPC applying in the case of full-blown appeals, and not being applicable by reason of Section 36 of the Arbitration Act, 1996 when it comes to review of arbitral awards, is itself a circumstance which militates against the enactment of Section 87[…] .”[4]

Conundrum of the ambiguous language

In Swiss Timing v Organising Committee, Commonwealth Games,[5]the Supreme Court held that the contentions of fraud or corruption could be arbitrated. Additionally, in A. Ayyasamy v. A. Paramasivam[6] and Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd.,[7]the courts distinctly identified two types of fraud: “fraud simpliciter” and “serious allegations of fraud”, wherein the issues relating to fraud simpliciter could be decided in the arbitral tribunal but the latter had to be adjudged by the court.

In defining the serious allegation of fraud, the court stated that the serious allegations should be “prima facie corroborated by documentary evidence so as to prima facie convince the court that there are real allegations of fraud which need to be investigated by the court.[8]Further, in the case of VentureGlobal Engg. v. Satyam Computer Services Ltd., the court held that in the cases of fraud, a causative link with the facts constituting or inducing the award should be identified by the court, before granting a stay on enforcement of the arbitral award. The emphasis, in these two instances, was put on producing a substantial and material evidence instead of merely pleading the existence of serious allegation of fraud.[9]The 2021 Amendment does not specify if in order to prove the serious allegations of fraud, the court would abide by the standard of the requirement of novus evidence. This ambiguity could be tampered with by the court to increase its interference in the arbitral proceedings, thereby violating the objective of the arbitration.

If we consider that the new evidence could be incorporated, then the amendment produces a conflict between newly added Section 36(3) and Section 34 of the principal act.

Conflict in introducing novus evidence

Section 36(3) states that to obtain an unconditional stay, a prima facie case must be made out but remains silent as to the aspect of evidence i.e., whether new ones can be brought in or not. This presents 2 situations—

I. New evidence cannot be recorded.

If this interpretation is taken then it would be in consonance with the 2019 amendment, in which the words “furnishes proof” in Section 34 were substituted with “establishes on the basis of the record of the arbitral tribunal”,[10] thus, explicitly barring any novel evidence to be brought before the Court. This leaves Section 36 equivalent to Section 34(2)(b)(ii) with a wider scope.

II. New evidence can be recorded.

If this interpretation is taken, then the applicant party is able give new evidence to present its case. In a particular case, let us assume that a prima facie case of fraud was proved, and the stay is granted. Now, the question is whether this evidence can be used for setting aside the award? If it is answered in affirmative then this creates a loophole in Section 34(2)(b)(ii), as the applicant party can bring in new evidence under the veil of Section 36(3). On the other hand, if the new evidence is barred then whilst the applicant party will be able to prove serious fraud to obtain the stay, they would fail in getting the award set aside which sounds counter-intuitive and would inevitably lead in miscarriage of justice.

The issue of retrospectivity

In Shapoorji Pallonji and Co. Pvt. Ltd. v. Jindal India Thermal Power Limited,[11]the court, for the first time, applied the amended provisions retrospectively on the pending court proceedings, which only affected the procedural aspect. The court provided more clarity on the same issue in Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd.,[12]where it allowed retrospectivity of the provisions affecting the procedural nature of the arbitration-related court proceedings, which commenced before, on or after the commencement of the amendment. The court stated that even though some amendments, which directly affect the procedural aspect of the proceedings might create new rights, obligations and duties in respect of the transactions already accomplished.[13]These amendments creating substantial change should be “construed as prospective in operation, unless otherwise provided, either expressly or by necessary implication.”[14] This negatively affects the rights of the award holder thus impacting a substantive right of the award-holder. Thus, this amendment is a deviation from the terms of retrospectivity accredited in the BCCI case.

Violation of the Doctrine of Separability

There is a direct impact on the doctrine of separability with respect to the 2021 Amendment. The doctrine of separability was summarised in SMS Tea Estate,[15]wherein the court stated that arbitration agreement is unrelated to the substantive terms of the contract, thus, in order to invoke it, the performance of the contract is not a necessity. This was further upheld in the case of Swiss Timing v. Organising Committee, Commonwealth Games.[16]The court in this case observed that “the allegation of fraud does not undermine the validity of the arbitration agreement”.[17]Thus, the arbitral tribunal, in this respect, captures the principle of kompetenz-kompetenz under which it can rule on the viability of an arbitration agreement.[18] The 2021 Amendment violates this fundamental doctrine by providing an unconditional stay on the entire contract, inclusive of the arbitration agreement, if the contract was induced or effected by fraud or corruption.

If this doctrine is vitiated, then it gives an opportunity to the parties to evade their obligation towards the successful arbitration by denying the validity or existence of the main contract. In turn, the parties would resort to litigation for dispute resolution, which would be against the prior resolve of the parties to resort to arbitration. It would also lead to the decrease in the power of the arbitrators to rule on their own jurisdiction. Further, this provides an additional layer of judicial scrutiny by first analysing the arbitration agreement and then the whole contract, thereby infringing the minimal judicial intervention as enumerated under Section 5 of the Act.

Removal of the Eighth Schedule

The Arbitration and Conciliation (Amendment Act), 2019 (“2019 Amendment”) was lauded for taking a step forward in institutionalizing arbitration in India and realising the dream showed by the 2015 Amendment. Amongst others, it introduced the Eighth Schedule based on the recommendations of the report of the High-Level Committee under the Chairmanship of Justice B.N. Srikrishna[19] (“Committee”) which was set up to review the institutionalization of arbitration mechanism in India. It found that many stakeholders perceived the poor quality of domestic arbitrators and the lack of professionalism amongst arbitrators as a problem affecting the growth of arbitration in India.[20] For this, the Committee recommended the creation of a pool of young, qualified, experienced, and well-trained arbitrators through accreditation, which will also act as a reliable standard for parties wishing to appoint arbitrators.

Though the intention was good, nevertheless, it was criticised for specifying nine criteria which stated, inter alia, that only those persons who are an advocate, or a chartered accountant, or a cost accountant, or a company secretary, or an engineer, practicing under the Indian law for at least 10 years are qualified to be appointed as an arbitrator. This effectively resulted in the disqualification of foreign arbitrators from being accredited under the Act.

This posed two problems, first, it restricted party autonomy as the parties were barred from appointing a foreign national to adjudicate, which in cases could be guarantee neutrality of arbitrators in a domestic arbitration; and second, it discouraged foreign parties from opting for Indian institutional arbitration as their choice of arbitrator was limited by nationality, likelihood of lack of specialization and experience in handling international arbitrations.

Fortunately, these concerns have been directly addressed by 2021 Amendment, at it completely removes the Eighth Schedule from the Act and substitutes Section 43J with “The qualifications, experience and norms for accreditation of arbitrators shall be such as may be specified by the regulations.” This prima facie removes the basic requirement of being an experienced professional under the Indian system, however, remains silent about the nature of these “regulations.” As in who will be making these “regulations” and the date of their release.

As accreditation of arbitrators is paramount and will enhance the faith of the stakeholder, it becomes imperative that these regulations be drafted promptly with utmost care, keeping in mind the accreditation norms adopted by international accreditation institutions such as the Chartered Institute of Arbitrators, the Singapore Institute of Arbitrators, the Resolution Institute, and the British Columbia Arbitration and Mediation Institute. Some of these norms, which can serve as a benchmark for these “regulations”, are experience,[21] professional education,[22] professional and moral standing,[23]qualifying examinations,[24] peer interviews/ assessments by a panel of approved arbitrators,[25] and continuing professional development (“CPD”) requirements.[26] Moreover, it is suggested that scholars, practitioners, and key stakeholders be consulted in finalizing these regulations to prevent any further controversy.[27]

The 2021 Amendment - an instrument of disharmony with model law?

The United Nations Commission on International Trade Law Model Law (“Model Law”) reflects a global consensus on the principles underlying the process of arbitration around the world. This consensus aids in safeguarding the best interest of the users of the international arbitration. Furthermore, the key objective of the Model law is to provide a sound and promising foundation for desired harmonisation and improvement of the national laws.[28]A significant departure from the Model Law’s fundamental principles would result in a lack of standard law, causing distrust in the entire arbitration process. In accordance with it, the 2021 Amendment is further examined below.

Article 35 of the Model Law deals with the recognition and enforcement of the arbitral award. If the conditional criterion enlisted in the Article is fulfilled, then a favourable assumption is made for the enforcement of the arbitral award, unless the other party is not able to establish any grounds for refusal of the enforcement of the award.[29] This provision provides equal treatment of both the parties, which is enshrined under Article 18 of the Model Law,[30]by providing full opportunity to each party to contend the arbitral award on substantial ground. The 2021 Amendment, when analysed from the combined lens of Article 35 and Article 18 of the Model Law could be regarded as a negative legislation as it vitiates the pro-enforcement stance of the Model Law. Further, the grounds of fraud or corruption could already be construed for providing a stay under Section 36 read with Section 34 of the Arbitration Act, 1996. Moreover, the amendment provides a distinct opportunity for the same issue without justifiable reasons. It creates a bias towards the award-debtor by providing an opportunity of contention on the same ground twice. This would open a floodgate of cases, resulting in considerable delays. This danger of unpredictability would lead to forum shopping. This is a deviation from the favourable assumption for the enforcement of the award, which has been propagated by the Model Law.

The Model Law in Article 35(b)(ii) recognises that the arbitral award should be set aside only if the court finds that the recognition or the enforcement of the arbitral award would be contrary to the public policy of the state.[31]The defence of public policy has, time and again, been judged to be narrowly construed. It is usually interpreted to favour the side of the enforcement, which is termed as pro-enforcement bias, which itself constitutes public policy.[32]Thus, the 2021 Amendment violates one public policy in order to uphold the other. There is a conflict between the enforcement of the arbitral award in favour of the award holder and the new contentions of fraud and corruption, which the award debtor already is given the opportunity to challenge under Section 34 of the Arbitration Act. Therefore, it vitiates the provision of public policy when a wider context of the amendment is analysed.

The Model Law, further in Article 36(2) specifies that even in the Model Law,[33]whenever the application for setting aside or the suspension of the arbitral award is taken up, it is always conditional in nature in order to avoid any kind of misuse or delay. This forwards the pro-conditional stay stance of the Model Law. There is no other provision which forwards the unconditional stay on the enforcement of the arbitral award. The 2021 amendment further transgresses from the fundamentals of the Model law by advocating unconditional stay on mere allegations of fraud or corruption.

The amendment also violates the doctrine of separability, which the Model Law embodies under Article 23(1) and Article 16(1), by not making a distinction between the contract and arbitration agreement under Section 36(3).

Article 12 of the Model Law states that in few cases, the qualification of the arbitrators is based on the nationality of a person. The 2021 Amendment in Section 3 amends Section 43J, which provides the freedom to consider the appointment of the arbitrators from foreign nationals. This is a positive step towards harmonising the laws.

Though there exists a positive initiative toward harmonization with Model Law by amending Section 43J, but after considerable analysis of the impact of the 2021 amendment on the other provisions of arbitration law, we can conclude it to be disadvantageous in nature. Thus, this amendment acts as a tool, which further creates a lot of incongruence in respect of Model Law. This would undermine the efforts of even the positive modification brought out in Section 43J and would further act as a disincentive to both the domestic and foreign stakeholders in choosing Indian arbitration laws.

Conclusion- Boon and Bane

While the 2021 Amendment brings the legislative antidote to the 2019 Amendment, by opening accreditation to foreign arbitrators, it reopens the old wounds by reintroducing unconditional stay, thereby undermining the 2015 Amendment. This would be antithetical to India’s objective of becoming a pro-arbitration hub and will further put an additional strain to the already overburdened court in order to get the arbitral award scrutinized by the judicial authority. The ambiguities posed by the amendment would further result in functional overlap, inconsistency, and wastage of resources. As a result, it would make matters under arbitration prone to litigation. This conflict of the 2021 Amendment with the existing statutes, amendments and unamended provisions purports a stance which can rightly be summed up by G. K. Chesterton, “Don’t ever take a fence down until you know the reason it was put up.” Therefore, the legislature should take steps after construing its subsequent implication to effectively make India a pro-arbitration hub.

[1] Arbitration and Conciliation Act, No. 26 of 1996, §36(3) (Ind.)

[2] Code of Civil Procedure, No. 5 of 1908, §Order XLI Rule 5(3) (Ind.)

[3]Hindustan Construction Company v. Union of India, (2019) SCC OnLine SC 1706 (Ind.)

[4] Id, para 50.

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

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

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

[8] RRB Energy Limited v. Vestas Wind Systems, (2015) SCC OnLine Del 8734 (Ind.)

[9] Svenska Handelsbanken v. Indian Charge Chrome, (1994) 2 SCC 155 (Ind.)

[10] Supra note 1 §34.

[11] Shapoorji Pallonji and Co. Pvt. Ltd. v. Jindal India Thermal Power Limited, O.M.P. (MISC)(COMM) 512/2019.

[12] BCCI v. Kochi Cricket Pvt Ltd., (2018) 6 SCC 287.

[13] Hitendra VishnuThakur v. State of Maharashtra, (1994) 4 SCC 602 at 633.

[14] Id.

[15] SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Company Pvt. Ltd., (2011) 14 SCC 66.

[16] Supra note 5.

[17] World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) Pte. Ltd., AIR 2014 SC 968.

[18] Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd., (2020) 2 SCC 455.

[19] Department of Legal Affairs, Govt. of Ind., Report of the High Level Committee to Review the Institutionalisation of Arbitration Mechanism in India (2017-18), https://legalaffairs.gov.in/sites/default/files/Report-HLC.pdf.

[20] Id.

[21] For instance, CIArb mandates that to become a member, the applicant must have five years’ experience in arbitration, construction adjudication or mediation in a lead/sole capacity; including settlement agreements, the management of proceedings, and attending hearings which have resulted in the publication of a reasoned award or decision and have been a party representative in at least five (5) arbitrations/mediations/adjudications, available at https://www.ciarb.org/membership/routes-to-membership/.

[22] For instance, see the educational requirements for the Singapore Institute of Arbitrators membership, available at https://siarb.org.sg/index.php/membership/categories.

[23] See ‘Criteria & Application Procedure’, Hong Kong International Arbitration Centre website, available at http://www.hkiac.org/arbitration/arbitrators/criteria-application.

[24] For instance, CIArb mandates that to become a member, the applicant must have completed Module 1 training and assessment components on one of CIArb’s Pathways, and the completion of CIArb’s Accelerated Route to Membership (ARM) Programme or an equivalent course, available at https://www.ciarb.org/membership/routes-to-membership/.

[25] See Section 7 of the Policy for the Registration of Practising Arbitrators of the Resolution Institute, available at https://www.resolution.institute/documents/item/2306.

[26] See CPD Points Guidelines of the SIArb, available at http://siarb.org.sg/index.php/panel-ofarbitrators/cpd-points-guidelines.

[27]Subhiksh Vasudev, The 2019 amendment to the Indian Arbitration Act: A classic case of one step forward two steps backward?, Kluwer Arbitration Blog (Aug.25, 2019) http://arbitrationblog.kluwerarbitration.com/2019/08/25/the-2019-amendment-to-the-indian-arbitration-act-a-classic-case-of-one-step-forward-two-steps-backward/

[28] Note by the Secretariat – A/ CN.9/309.

[29] O Ozumba, Enforcement of Arbitral Awards: Does the Public Policy Exception Create Inconsistency?’, 5 Transnational Dispute Management, 9(2011).

[30] United Nations Commission on International Trade Law, UNCITRAL Model Law on International Commercial Arbitration 1985: with amendments as adopted in 2006 (Vienna: United Nations, 2008), art. 18 available from www.uncitral.org/pdf/english/texts/arbitration/ml-arb/07-86998_Ebook.pdf.

[31] Id art. 35(b)(ii).

[32] O Ozumba, Enforcement of Arbitral Awards: Does the Public Policy Exception Create Inconsistency?, University of Dundee, www.dundee.ac.uk.

[33] United Nations Commission on International Trade Law, UNCITRAL Model Law on International Commercial Arbitration 1985: with amendments as adopted in 2006 (Vienna: United Nations, 2008), art. 36(2) available from www.uncitral.org/pdf/english/texts/arbitration/ml-arb/07-86998_Ebook.pdf.