Unconditional Stay: Legislative Caution Meets Judicial Redundancy
[Lavanya and Pallavi are advocates practicing in the Delhi High Court.]
In a bid to make India an attractive hub for arbitration and promoting the benefits of alternative dispute resolution mechanisms, the legislature and judiciary have always struggled to strike a balance between the speedy disposal of cases and the necessity for judicial review, where warranted. Another attempt at reconciling these seemingly contrasting policy considerations was made by the Arbitration and Conciliation Amendment Act 2021 (Amendment Act).
Vide gazette dated 11 May 2021, the legislature retrospectively made amendments to the Arbitration and Conciliation Act 1996 (Act) inter alia revising the scope of Section 36 which lays down the provision for ‘enforcement’ of arbitral awards. The present article pertains specifically to the introduction of second proviso to Section 36(3) which mandates the court to grant an ‘unconditional stay’ if it is satisfied that a prima facie case exists to demonstrate that the award was induced or effected by fraud or corruption. In analyzing the scope and application of the provision, the article delves into examining: (i) whether judicial practice has in fact defeated the legislative intent by imposing a high standard in granting a stay than contemplated by the words of the provision, and (ii) whether differing standards of proof of fraud exist under Section 36(3) vis-à-vis Section 34 of the Act.
Provision relating to Unconditional Stay on Arbitral Award
Vide Section 2 of the Amendment Act, an additional proviso was inserted to Section 36(3), with retrospective effect from 23 October 2015, allowing the court to grant an unconditional stay on the enforcement of an award, pending disposal of a challenge under Section 34 of the Act. However, this stay is limited to cases where it is prima facie apparent that the arbitration agreement or contract which forms the basis of the award was induced or effected by ‘fraud’ or ‘corruption’. The explanation to the provision further elaborates its application by clarifying that the same shall apply to all cases arising out of or in relation to arbitral proceedings regardless of whether they were commenced prior to or after the Arbitration and Conciliation (Amendment) Act 2015 (2015 Amendment Act).
While the legislature seems to have cogent reasons for this enactment, the amendment has met with considerable resistance and criticisms by academicians and legal commentators alike.
The original legal position i.e., that the mere filing of an application under Section 34 shall render the award unenforceable until the appeal petition is disposed of, made the arbitration system significantly weak for protecting legitimate business interests of the award holder. This is because the awards were routinely challenged in many cases, merely for getting a stay on any payment under the award. This was exacerbated by the judgment of the Supreme Court in the case of National Aluminium Company Limited v. Presstel and Fabrictions Private Limited, which held that the award shall only be enforceable as a decree on the expiry of the time for making an application under Section 34. In effect, this meant that the mere admission of a petition under Section 34 would have a chilling effect on award creditor’s right to derive the benefit accrued by the award.
However, this problem was appropriately remedied by the 2015 Amendment Act whereby instead of an “automatic stay”, the parties were eligible for a stay on a separate application, subject to the discretion of the court on such conditions, as may be prescribed. In context of this, many argue that the 2021 amendment to the provision was actually unwarranted.
Two issues arise with the present amendment which has introduced a second proviso to Section 36(3). Firstly, the nature of the stay prescribed is both unconditional and non-discretionary as the court 'shall stay' upon prima facie satisfaction of the existence of fraud. This means that while the grant for stay may depend upon a finding of fraud, but if found, the exercise of power to stay the enforcement of award becomes mandatory. The exercise of discretion requires a consideration of the merits of the challenge and therefore a review of the award. Secondly, a literal interpretation of the proviso shows that it extends both, to a fraudulent or corrupt arbitration agreement and contract. This seems to be a threshold far excess, considering that it is a settled position of law that an arbitration agreement is independent and severable from the contract. The legislative rationale however remains that such a provision is necessary to ensure that the country does not become a “center of procuring award through corrupt and fraud means”.
Given the legislative and judicial developments underlying the object of the arbitral process, it is now a settled point that the grounds for interference with an award is restricted under Section 34 of the Act. However, it is the authors’ view that such narrow scope vis-à-vis second proviso to Section 36(3) should not paralyze the parties from seeking a stay by virtue of imposition of judicial standards so high, that it virtually becomes impossible a burden of proof to discharge.
Considering that this is a recent amendment, there are still insufficient number of precedents to gauge the underlying principles guiding the courts to exercise discretion under the second proviso to Section 36(3). However, the courts as of now seem to be taking a cautious approach by allowing very limited cases to take the benefit of this provision by setting a high standard of such prima facie examination of fraud or corruption.
In Damodar Valley Corporation v. Reliance Infrastructure, the Calcutta High Court dismissed an application for unconditional stay stating that the petition was unable to make an “exceptional case for unconditional stay of the award” since there was nothing that shocked the court’s “conscience” or indicated that the award was without jurisdiction or obtained by fraud or corruption.
Similarly, the Bombay High Court in State of Maharashtra v. Jaykumar Fulchand Ajmera set a high standard of prima facie proof by interpreting the word “induced” to necessarily be based on some fraud practice or corruption and stating that a mere allegation of inducement is not sufficient. The court has further considered whether the ground of fraud or corruption was taken by the applicant while challenging the award under Section 34.
While dismissing applications for unconditional stay in case of Percept Talent Management v. Sourav Chandidas Ganguly, the Calcutta High Court has further elaborated on this proviso holding that by reading the second proviso in light of the first, the judgment-debtor cannot seek a stay as a matter of right without conditions imposed by the court like that of furnishing of security for the stay of award. Furthermore, in Fair Deal Supplies Limited. v. R Piyarelal Iron and Steel, the court again rejected the grant of unconditional stay, and reiterated that the 2015 Amendment Act purported to cure the mischief of automatic stay due to which “award holders would have to wait for umpteen years to get there just dues”.
In Mahanagar Telephone Nigam Limited v. Canara Bank and Another, while adjudicating upon a question concerning allegations of inducement in the contract, the Supreme Court negated the argument of the petitioner stating that it “has not been able to demonstrate prima facie that the contract which is the basis of the award, was induced by fraud or corruption.” However, following the trend in the above judicial precedents, no guidelines as to the examination of a prima facie case of fraud were laid down.
Parallel to the allegation and establishment of fraud or corruption under the second proviso to Section 36(3) of the Act, fraud constitutes a ground for setting aside of an award under Section 34. In a catena of decisions with Venture Global Engineering v. Tech Mahindra Limited and Another being a prominent one, the Supreme Court has accepted that “it is not easy to give a definition of what constitutes fraud” as understood by civil courts of justice and in essence includes all acts, omissions and concealment involving a breach of legal or equitable duty, trust or confidence. Hence, the ambit of the word ‘fraud’ is itself wide and leads to the inference that the proviso to Section 36(3) rather invites the court to liberally interpret the provision as was intended by the legislature by virtue of the words ‘prima facie.’ It is hence a matter of discussion whether an excessive judicial standard defeats the legislative intent with which the second proviso was added to Section 36(3) of the Act.
While it remains to be seen how the Supreme Court interprets this new provision and how it affects the extensiveness of its applicability, the High Courts seem to be making very cautious approach to ensure that the proviso is not used to turn back to the original position before the 2015 amendment and to keep the judicial intervention to a minimum. Such an approach is undeniably sensible as the consideration to keep alternative dispute resolution unaffected by the delay and laches in court, must be paramount. However, a balance needs to be drawn to intersect the legislative intent and judicial approach. The discretion under second proviso to Section 36(3) should not be posed as an unattainable standard for a party. A rigorously cautious view while granting a stay on grounds of fraud and corruption cannot operate to defeat the relief contemplated by the provision leading to denial of interests of justice. It is also pertinent to note that the conclusive determination of whether an award is to be set aside on grounds of fraud or corruption is to be decided on merits by the court while adjudicating upon a petition under Section 34. In parallel, it is only natural for a party to seek a stay on the enforcement of an award when alleging that the award is liable to be set aside on grounds of fraud within the scope of Section 34. In context of this, it is evident that akin to Section 34, under Section 36(3), the court is required to assess the award on merits before granting a stay while the petitioner pursues its challenge under Section 34. In authors’ view, such standard under second proviso to Section 36(3) should be balanced as the legislative mandate is only to make out a ‘prima facie’ case, and not to establish a conclusive case of fraud, as such interpretation would render the intent behind the clause otiose.
Considering the interplay which exists between these two sections, it is rather obvious that the ‘prima facie’ standard under Section 36(3) should be less stringently interpreted than what is contemplated under Section 34. Though no test can ever conclusively lay what constitutes a 'prima facie' test of fraud/corruption, it is important that the Supreme Court advances a principled interpretation of second proviso to Section 36(3) premised on some guidelines keeping in view the scope of Section 34.