Unconditional Stay of an Arbitral Award: A Confounding Saga

Unconditional Stay of an Arbitral Award: A Confounding Saga

Introduction

In a bid to smoothen Kompetanz-Kompetenz principle, India has time and again amended Arbitration and Conciliation Act, 1996. The most recent one being Arbitration and Conciliation (Amendment) Ordinance 2020, which seeks to address the concerns raised by the stakeholders”. However, government sprang a surprise by promulgating this ordinance as it was neither preceded by a consultation from the stakeholders, nor it has spurred from any judicial precedent which was in conflict with the legislative intent. In light of the confusion, the purpose remains almost unvocal because the power which the ordinance grants already rests with the courts[1].

Additional Grounds for an Unconditional Stay on Enforcement

The 2020 amendment added a new proviso to Section 36(3), which states that; court must grant an unconditional stay if the prima facie case appears to be that of fraud or corruption with respect to: firstly, making of the award and secondly the agreement or contract which forms the basis of the award.

That stated, there are certain issues which lies unaddressed. Firstly, the court can adjudicate upon the matter under Section 36(3) or the new proviso when an application is filed under Section 36(2) of the Act. This application further emanates from Section 34 for setting aside an arbitral award. Interestingly, Section 34(2)(b)(ii) takes into purview only ‘making of an award’ tainted with fraud and corruption and does not expressly mentions about the case where the ‘underlying agreement or contract’ is induced with fraud and corruption. Therefore, it acts as a seamlessly absurd paradox, as on one hand the ground is not available for setting aside the award but on the other hand it is available to an applicant for an unconditional stay.[2]

Secondly, Section 34(2)(a)(ii) iterates that “arbitration agreement will not be valid if the parties to the contract have subjected it” and thus if the contract is based upon fraud and corruption it will be a void contract as per the Indian laws. But, on the barefooting of Section 34(2A) which thwarts the courts for setting aside an award of international commercial arbitration; even if the case is that of patent illegality. That said, raises another question that is how can the enforcement of the award be stayed if illegality is based upon fraud and corruption. Moreover, there is no straight jacket formula which could be applied for adjudging the corruption or fraud. While in the case of ‘making of an award’, court’s conduct may be questioned and hence the matter is that of prudence, but when it comes to ‘underlining contract or agreement’ the matter is that of merits and would require more than mere scrutinization and evaluation of evidences. Hence, it is difficult to juxtapose the new proviso with the old principal sections of the Act.

Thirdly, the Explanation of the new proviso without wading back and forth makes it crystal clear that the proviso will have a retrospective effect and thus it is applicable from 23rd October 2015. However, it fails to vouch for the case where the applications are pending for adjudication under Section 36(2) as applicants may have to file the case all over again considering the new proviso in line. This will only prolong timelines. Adding to the cause, the Indian backlogged courts may fail to fill the void because of lack of finality to arbitral awards. There will be another set of applicants whose applications stands dismissed as per Section 36(2), but they might give a second shot as per the new proviso. All in all, the new proviso will flood the overburdened courts, hampering the very basic objective of the act.

Fourthly, whether an agreement is based on fraud and corruption has to be decided between the party’s privy to the contract. Subsequently, it can be investigated by the tribunals. But, to raise questions upon court’s competence while adjudicating would defeat the very purpose of the proviso to Section 34(2A) which states that ‘an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence’.

Hence, in nut shell the unconditional stay of an arbitral award lacks logic as it is contrary to the old principal legislation. Additionally, the question still subsists when the court can grant the stay whenever it deems fit so why there is a need for another new provision.

Grounds of Stay vs. Grounds for Setting Aside

The limited grounds for setting aside an arbitral award in India are listed under the Section 34 of the Act. The provision explicitly provides that an arbitral award can be set side if it is induced by fraud or corruption. But, as stated above it is silent when the question subsists that of underlying contract tainted with fraud or corruption. This departure in legal parlance is as per the established principal that an arbitral agreement is separate from the underlying contract, and mere invalidity of underlying contract does not ipso facto affect the arbitration agreement or the power of arbitral tribunal[3]. Section 16 of the Act entails the similar principle.

Furthermore, as per the settled legal precedents, the chances of setting aside an award merely on the basis of underlying contract being induced with fraud are very less. It thus can be concluded that as per the newly inserted proviso, the grounds for unconditional stay of an award are wider than the grounds provided for setting aside of an award. In my opinion, it will be difficult for the courts to read impliedly the same additional grounds for setting aside an award.

Arbitrability Of Fraud

The fate of arbitrability of fraud is riddled with ambiguity. Therefore, Judiciary had to step forward and deal with arbitrability of fraudsince legislature has always been silent on the same. However, while upholding the common law principles coupled with the different fact scenario, the tests so propounded were simply round pegs in square holes.

Given the uncertainty around the word fraud while forming the arbitration agreement or contract or making of the award, applicants may exploit the amendment in their favour to avoid the making of any depositof funds to obtain a stay[4].Had the case been that of prudence an Indian court wouldn’t require any deposit while adjudicating a contract which is tainted with fraud or corruption. For instance, loosing party by all their means may come up with all the false allegations of fraud just to avoid arbitral award against them.

This half a century old conundrum around arbitrability of fraud would have been settled long back if Legislatures would have incorporated the recommendations laid down by the 246th Law Commission Report which specifically states that disputes of fraud to be arbitrable. The Report clearly states that “The Commission believes that it is important to set this entire controversy to a rest and make issues of fraud expressly arbitrable and to this end has proposed amendments to section 16.” But, Section 16 of the Act portrays completely different scenario, as till date it remains unchanged even after repetitive amendments of the Act. Thus, its high time to restrict judicial intervention and facilitate arbitration in India.

Conclusion

The fact that enforcement of an arbitral award can be stayed unconditionally just on the prima facie basis of underlying contract or making of award being tainted with fraud may prompt parties to delay the enforcement of arbitral award. Once the stay is granted it may continue for indefinite period as there is no timeline or recourse prescribed under the Indian arbitration regime for disposal. The unconditional stay of an award may be contrary to the Supreme Court’s ruling of vacation of stay orders after six months[5]. Resultantly, the positive affirmation of vacating the stay order will be completely negated because of the new proviso. Moreover, such an approach is clearly contrary to legislative intent as well as the judicial attitude who seeks to make arbitration more powerful rather than keeping it a paper tiger.

The Indian Arbitration regime while dealing with the arbitrability of fraud had a challenging time. There is still skepticism with respect to the new proviso as it may pose threat for enforcing the award; since, the non – enforcing party can sought unconditional stay by exploiting and overusing new proviso in its favour. Despite ordinance being promulgated there isn’t any clear picture in sight with respect to arbitrability of fraud. Hence the new proviso, in my opinion doesn’t hold true to the old principal legislation and is sheerly thoughtless.


[1] Payaswini Upadhaya,A Change to The Arbitration Law Whose Purpose Is Unclear, Bloomberg Quint (Nov.20.2020, 12:48 P.M.),https://www.bloombergquint.com/law-and-policy/a-change-to-the-arbitration-law-whose-purpose-is-unclear.

[2]Subhiksh Vasudev, The 2020 Amendment to the Indian Arbitration Act: Learning from Past LessonsKulweArbitrationBlog(Dec.10.2020)http://arbitrationblog.kluwerarbitration.com.elibrary.nirmauni.ac.in/2020/12/10/the-2020-amendment-to-the-indian-arbitration-act-learning-from-the-past-lessons/

[3]Anhad S. Miglani & Gaganjyot Singh, Fraud in the Underlying Contract: New Hurdle for Enforcement of India – Seated Arbitral Awards, University of Oxford, (Dec.15.2020),https://www.law.ox.ac.uk/business-law-blog/blog/2020/12/fraud-underlying-contract-new-hurdle-enforcement-india-seated.

[4]Supra note 1.

[5] Pooja Tidke and Warisha Parkar, Mondaq,India: Henceforth, All Orders Staying Civil/Criminal Proceedings Will Automatically Expire Within 6 (Six) Months Unless Extended for Good Reason Says the Supreme Court of India (Nov. 04.20) https://www.mondaq.com/india/litigation-mediation-arbitration/1001252/henceforth-all-orders-staying-civilcriminal-proceedings-will-automatically-expire-within-6-six-months-unless-extended-for-good-reason-says-the-supreme-court-of-india-.

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