- Apprentice Lawyer
The first Arbitration Act in India was enforced in 1899. It has been more than 120 years, and India is still viewed as an archaic system of arbitration rules. However, the judgements and amendment in the Principal Act of 1996 have clearly expressed the lawmaker's intention to progress India as an arbitration-friendly regime.
The recent addition to the pro-arbitration outlook is the Arbitration & Conciliation (Amendment) Act 2021. This is the third amendment to the Act of 1996 in the past six years, and shows the legislative intent to reform the Arbitration Act of 1996, making India an arbitration-friendly regime.
The amendment has two primary changes in the Act. The first is to enable automatic stay on awards in certain cases where the court has prima facie evidence that the contract on which award is based was affected by 'fraud' and 'corruption'. The second change is the Eighth Schedule's omission from the principal Act, which specifies the regulations, qualifications, experience, and norms for accreditation of arbitrators. This article will analyse the impact of these amendments on India's pro-arbitration outlook.
AUTOMATIC STAY ON AWARDS
The amendment in Section 34 on automatic stay of the Principal Act's awards is the most significant change in the Amendment Act of 2021. In the present system, a party can file an application before the Court under Section 34 of the 1996 Act for setting aside an arbitral award. However, after the 2015 amendment to the Act, an automatic stay would not be granted on the award's operation by merely filing an application for setting it aside.
The 2021 Amendment has introduced a material change by adding a proviso under section 36(3) to ensure that if courts are prima facie satisfied by the case made out of either (i) the arbitration agreement or contract, which is the basis of the award; or (ii) the making of the award, was induced or affected by fraud or corruption. It shall stay the award unconditionally pending disposal of the challenge. This has a retrospective effect, deemed to be effective from October 23, 2015.
Many parliamentarians criticised the unconditional stay during introduction of the Bill In Lok Sabha. Experts also point out that an unconditional stay amounts to a blanket stay, which will hurdle India's efforts towards a pro-arbitration regime. This is primarily because it becomes easy for losing party to allege corruption and automatic stay on the arbitral award's enforcement.
This may defeat the very purpose of alternate dispute mechanism by drawing parties to courts and making it prone to litigation. Another primary concern with this amendment is that the legislation does not describe either fraud or corruption, creating an ambiguous situation where defendant parties may suffer the litigation heat even if they are correct. This amendment's retrospective effect might also open up a floodgate of litigation cases and overburden the courts.
In cases where an application under Section 36(2) of the Act is pending adjudication before a court, the applicants will now have to make renewed applications based on the grounds listed in the new amendment. This is likely to involve delays and increased costs unless the courts can sua sponte take notice of this new amendment and dispose of it with the filing of new submissions.
Therefore, this amendment will affect enforcement of awards, and India might further slip in ease of doing business reports. This amendment takes a regressive step and does not help India's aim of a pro-arbitration regime.
In response to the amendment's backlash, The Law Minister stated that despite the use of words, fraud and corruption in Section 34 were necessary as latter does not provide an "automatic stay" of the award. He further added that the Government wanted to promptly prevent parties collusive attempts to seek the benefit of an award tainted with corruption.
These arguments are unconvincing as he does not provides the reasoning behind his claim. Furthermore, pro-amendment scholars have argued that enabling this change relieves persons affected due to fraudulent elements in the arbitration award. They cite examples like Venture Global Engineering, where there was alleged fraud by the respondent's Tech Mahindra and Satyam Computers.
This fraud was discovered only after three years after the enforcement of the award, as a result, the award had to be revisited and accordingly set aside. However, it is still unclear how widening the Act's scope would protect several innocent parties where the challenge is only made to delay the enforcement of awards.
WIDENING THE SCOPE OF QUALIFICATION OF ARBITRATORS
There were two amendments in this area; however, both are interlinked, so discussed together. The 2019 Amendment of the Principal Act added section 43J which stated qualifications, eligibility and norms for accreditation of arbitrators. This section further directed the Eighth Schedule of the Act, which provided an exhaustive list of qualifications that an arbitrator needed to possess.
The schedule also had a minimum requirement of persons with an educational qualification at degree level with ten years of experience in scientific or technical streams. Other than the professional qualifications, the Eighth Schedule also provided general norms that would apply to an arbitrator for accreditation like fairness, integrity, being impartial and neutral and so on.
These qualification and the general norms were very broad. This section, among other things, limited the ability of qualified foreign lawyers from acting as arbitrators in India. This was seen as a significant hurdle when compared to arbitration-friendly states like France.
The 2021 Amendment act has substituted Section 43J of the Act and deleted the Schedule Eighth of the primary Act. This effectively means that parties are free to appoint arbitrators regardless of their qualifications. In the Lok Sabha, most members appreciated the Government for proposing to omit the Eighth Schedule as it will attract eminent international arbitrators to the country and further the goal of making India a hub of international arbitration.
The Law Minister added that this amendment would give greater flexibility to the Arbitration Council of India and promote institutional arbitration. The amendment to Section 43J states that qualifications of arbitrators will be based on the “regulations”, which as defined under Section 2(1)(j) to include regulations made by the Arbitration Council of India. However, what these “regulations” might be, who would make them, by when they would be released, are some of the questions that have been left unanswered.
By amending Section 43J, the Amendment Act also provides the Commission, freedom to take into consideration the appointment of foreign arbitrators, backed by the UNCITRAL Model Law provisions. This change also reinstates the party autonomy principle, which enables to choose arbitrators regardless of their qualifications.
ANALYSIS AND CONCLUSION
As stated at the beginning, the legislators' intent in the 21st century to make India an Arbitration friendly regime is reflected by the flurry of amendments and promulgation of ordinances in the past few years. These rapid amendments are signs of positive intent and reflect how the legislators have been hearing to the field scholars with open-mindedness.
However, these Continuous piecemeal amendments to the Arbitration Act in recent years indicates that the Government lacks legislative wisdom to stand its own laws. An example would be inclusion of section 43J in the 2019 Amendment Act and materially changing it just two years later through the 2021 Amendment Act. Similarly, the Amendment to section 36 concerning automatic stay and changing it materially in the current 2021 Amendment Act.
The 2021 Amendment Act uses broad and ambiguous terms in both amendments. The Amendment of section 36 uses terms like fraud and corruption without an exhaustive list or clarification of what would constitute fraud and corrupt practises. Therefore, parties who want to delay the award enforcement can exploit this section, pushing cases back to an orthodox litigation system.
It is also unclear what threshold the courts will look for the prima facie evidence needed for fraud and corruption. Furthermore, there is no clarity on whether contracts agreements affected by fraud or corruption are a matter of fact and ought to be debated by the parties in the arbitral proceedings.
In an amendment of section 43J, the term "regulated" is undefined, as stated above. It can only be hoped that the stakeholders involved in deciding the regulation may not fall prey to the Eighth Schedule's limitations and have an inclusive approach for eligibility.
The amendment to section 43J has potential to draw international arbitrators, which is a small step towards the Pro Arbitration scheme of India. However, the amendment on automatic stay of awards is more like a double-edged sword with equal potential to stretch matters and create hurdles in enforcing arbitral awards.
To overcome this, the lawmakers should be precise in their language of drafting and promote consultation processes by industry experts. Instead of continuous amendments on the same issues, legislators should look at a broader picture of the main barriers restricting India towards being an arbitration hub.
This includes addressing certain ambiguities exploited by losing parties when challenging awards, which has led to a lack of finality of awards. Permitting an arbitral tribunal to use different ADR mechanisms during the arbitral proceedings to encourage settlement of disputes may prove to be more effective but is rarely exercised in the Indian context.
(The author is a student at Jindal Global Law School)