[Harsh and Uddeshya are students at NALSAR University of Law, Hyderabad, and National Law University, Delhi, respectively.]
India has time and again projected its interest in becoming a lucrative seat for international arbitration. However, this interest has failed to take effect holistically. Yet another example of India’s failed attempt at a law conducive to international arbitration is the Arbitration and Conciliation (Amendment) Ordinance 2020 (Ordinance). Though the Ordinance apparently seeks to ameliorate the concerns of stakeholders, it actually ends up amplifying existing ambiguities.
The Ordinance amends two provisions of the Arbitration and Conciliation Act 1996 (Act). First, it introduces an additional proviso to Section 36(3) of the Act, granting an opportunity for unconditional stay on arbitral awards, in cases where a contract which is the basis of the award or the making of the award was induced either by fraud or corruption. Secondly, it amends Section 43J, which relates to the accreditation of arbitrators, and consequently deletes Schedule VIII of the Act, that entailed guidelines for accreditation. An analysis of the Ordinance shows how both these amendments are counterintuitive to India’s evolution into a flourishing avenue for international arbitration.
Amendment to Section 36: Court Interference and Inordinate Delays
Section 36(3) of the Act provides that the court may grant stay on an award, subject to the conditions as it may deem fit. The only guiding principle for such consideration, as per the proviso, comes from the provisions for grant of stay of a money decree under the Code of Civil Procedure 1908. Now, post the Ordinance, if the court is prima facie satisfied with the grounds (of fraud or corruption), it shall order unconditional stay the award.
There are two words of significance here, 'prima facie' and 'shall'. First, the interpretation of the term prima facie by the Indian courts draws heavily on the Cyanamid Case, where the House of Lords held it to be the mere presence of ‘serious question to be tried’. With ‘serious question’, the court meant any question that is not ‘frivolous or vexatious’. By adding ‘prima facie’ to the provision, the ordinance substantially lowers the requisite threshold that needs to be matched while granting an unconditional stay on an arbitral award. Second, the added proviso to Section 36(3) states that courts shall order unconditional stay on the award. The word ‘shall’ is of significance because although it should be interpreted in consonance with the context and intent of the statute, it casts a mandatory obligation on the courts to grant a stay. Section 36(3) of the Act, which provides for granting a stay on awards, uses the term may. The interpretational ambiguity that arises when a provision contains the term ‘may’ and the proviso to the same contains ‘shall’ was settled by the apex court in Ajendraprasadji case. It was held that in such instances, ‘may’ has to be interpreted as may, and ‘shall’ as shall. This substantially truncates the court’s discretion in deciding such cases (given the low threshold to be qualified as prima facie, and usage of shall) and brings to mind pre-2015 amendment state of affairs, when only an application made under Section 34 rendered the award stayed till the application was decided upon. While the Ordinance does not completely regress back to that era, it unarguably qualifies as a retrograde step. It makes it easier to seek a stay on awards and gives the losing parties an incentive to challenge arbitral awards. In the process, it undoes the lacunae filled by the 2015 amendment. This essentially leads to both an accretion in the court’s role in an arbitration process and an unjustified delay in resolving issues. Such delays blemish India’s face as a hub for international arbitration.
The White Industries case is a good example of such delays. Herein, the arbitral award in favour of White Industries in 2004 was subsequently challenged by Coal India before the Calcutta High Court. The proceedings extended till 2010. This delay resulted in a claim by White Industries against the Republic of India, which asserted that India, under the Australia-India Bilateral Investment Treaty, was required to provide White Industries with “effective means of asserting claims and enforcing rights”. The inordinate delay violated the same and India had to pay approximately 4.1 million dollars in damages.
The apex court has frequently opined how courts need to minimize their interference in the process of arbitration, as it destroys the very purpose of opting for arbitration - an expeditious dispute resolution mechanism. The essence of this intent is also evident in how the courts have interpreted the term 'fraud' as a ground for setting aside arbitral awards.
In the Ayyasamy case, the Supreme Court underscored the distinction between “serious allegations of fraud” and “mere allegations of fraud”. It opined that while matters involving the former are not arbitrable, the latter are. Further, in the N. Radhakrishnan case, the apex court held that “serious allegations of fraud” require extensive evidence and are more complex in nature, when compared to “mere allegations of fraud”. Finally, the court settled the contentions in the case of Avitel v. HSBC, laying down two tests to determine what constitutes “serious allegation of fraud”, making the dispute non-arbitrable. First, the arbitration agreement per se should seem to not exist – being vitiated by fraud. In the alternative, the allegations of fraud lie against the state or its instruments, giving rise to a larger question of public law. It is apparent from the rationale adhered to by the courts in these rulings that there is a certain sense of inhibition in staying arbitral awards on such grounds unless serious allegations of fraud are found true. Now, the Ordinance gives parties a prospective opportunity to seek an unconditional stay that stands in a blatant conflict with the judicial intent of seeking minimum interference and maximum efficacy of arbitral proceedings.
Amendment to Section 43J: Aggravating Government Control
The Ordinance does away with Schedule VIII of the Act that laid down the qualifications for the accreditation of arbitrators. The amended Section 43J now says that such guidelines for accreditation will be ‘as specified by the regulations.’ Section 2(1)(j) of the Act states that ‘regulations’ means the regulations formed by the Arbitration Council of India (ACI) under the Act, which clarifies that the ACI will be forming guidelines for the accreditation of arbitrators. As mentioned in the preamble of the ordinance and later stated by a government spokesperson, the amendment is an ameliorative measure to the concerns of the stakeholders regarding the appointment of foreign arbitrators, raised after the 2019 amendment.
However, the present Ordinance only opens new doors for government interference, by vesting the power to form those guidelines in the ACI, without laying down the specifics of those regulations.
The ACI has been regarded with scepticism since its formulation by virtue of it being a governmental body, with appointments to the body being government-controlled. While the accreditation process prior to the Ordinance was still ACI controlled, there was at least specificity of requisite qualifications for the same. Now, the substituted section only insinuates arbitrariness. Consequently, it is nothing but a truism to assert that the Ordinance creates more grounds for apprehensions and concerns. Red-tapism and governmental autonomy in accrediting arbitrators conflict with the aim to promote international arbitration. It is pertinent to note the former CJI Justice TS Thakur’s views about the 2019 Amendment, that government interference prevails in the accreditation process laid down in the Act. This was when at the very least, specific guidelines still existed for qualifications for accreditation. Now, the Ordinance offers wide discretionary ambit to a government body in deciding who gets accredited as an arbitrator.
Countries like Singapore and the UK, which have robust arbitration mechanisms, have no parallels of a body akin to ACI for accrediting arbitrators. In these countries, accreditation is done by independent autonomous institutions, having their own frameworks for the same, sans any role played by government bodies. In fact, institutions like CIArb, SIArb have flexible accreditation rules and even allow students to get accredited as arbitrators. Moreover, the BN Srikrishna Committee formed for revamping the arbitration structure in India, made similar suggestions to the government for relying on these international bodies for the process of accreditation. However, the Ordinance seems to take a different course by increasing governmental role in the process, a direction detrimental to the sought-after aim of promoting international arbitration.
The Ordinance is a piecemeal measure, that increases more concerns than it promises to resolve. With a pre-existing mechanism in place for staying arbitral awards induced by fraud, introducing a provision guaranteeing unconditional stay on a prima facie review only inhibits arbitral processes. Further, in an attempt to address the concerns of circumventing foreign arbitrators, it creates more ambiguity in their appointment, by giving no clarity on what the regulations governing their accreditation will be. It merely creates another bureaucratic hoop to be crossed in the path of arbitral proceedings. Lastly, as the concerned ordinance is retrospective in application, it will lead to a plethora of fresh challenges made by parties in pending Section 36 litigations. The delays and complexities caused by the same will only dissuade parties from considering India conducive to international commercial arbitration. It is high time the Indian legislature brought conformity between its aim and the actions taken to achieve the aim. Drawing the line between supporting institutional arbitration and controlling the same is the need of the hour.