This article is written by Johana George.
This article has been published by Sneha Mahawar.
On November 4, 2020, the Indian Government introduced the Arbitration and Conciliation (Amendment) Ordinance. On March 11, 2021, the ordinance was repealed and replaced by the Arbitration Conciliation Act (Amendment) of 2021 (hereinafter called “2021 Amendment”). This article primarily intends to analyse the new amendments added to the Arbitration and Conciliation Act., 1996 (hereinafter called “Act”). It seeks to amend the scheme of the Arbitration and Conciliation Act, 1996. The Act contains provisions to deal with domestic and international arbitration and defines the law for conducting conciliation proceedings. Through this article, the author seeks to discuss the changes brought about by the new amendment.
Changes brought by the 2021 amendment
Amendment to Section 36 for enforcement of awards
Section 36 (3) of the Act provides for stay of the operation of awards if the courts are satisfied with the facts and conditions. The 2021 Amendment added a second proviso which says that the courts can allow unconditional stay for the awards if satisfied that a prima facie case is made out that the arbitration agreement or the main contract on which the award is based is induced by fraud or corruption. The amendment can be applied to all arbitral proceedings and court proceedings arising out of them commenced prior to or after the date of the 2015 Amendment Act. (i.e., 23.10.2015).
It is pertinent to be noted here that the 2015 Amendment had already added that the arbitral award can be set aside if its making is induced/affected by fraud/corruption. (Section 34 (2) (b)(ii) Explanation 1(i)). But the 2021 Amendment has now allowed stay if either the making of the award, or the arbitration agreement, or the main contract is induced by fraud/corruption. Such an amendment was necessary owing to the doubts and questions that had arisen on the arbitrability of issues involving fraud/corruption which then took a longer time. The unconditional stay of awards will now allow the courts to give a better look into the cases as required.
The case laws mentioned hereunder provide a better understanding to this.
N. Radhakrishnan v. Maestro Engineers
In, N. Radhakrishnan v. Maestro Engineers, the two-judge bench of the Supreme Court held that the matters involving allegations of fraud and serious malpractices cannot be referred to arbitration.
In this case, the disputed parties were partners in a partnership firm. The appellant had alleged malpractice, fraud, collusion (between respondents) to syphon the firm’s money, and forging of the firm’s accounts for personal gain. He held the respondents responsible for the same and offered to retire from the firm once he gets his salary and share of profits with respect to his investment in the firm. In other words, his retirement was contingent upon the settlement of dues and he disagreed on treating that offer as final.
But the respondents did not agree on the quantum claimed by the appellant, went on and with reconstituted the partnership, and filed a suit to obtain a declaration that the appellant was no longer a partner in the firm. According to them, the appellant’s retirement offer was unequivocal and thus accepted.
The appellant questioned upon the validity of the reconstituted partnership and held that the partnership clauses of the original deed would continue to apply. The appellant thus filed a Section 8 application referring the dispute to arbitration since the partnership agreement had an arbitration clause. Respondents denied the same as the original partnership agreement was no longer applicable after reconstitution and thus the arbitration clause in it could not be used for referring the dispute to arbitration. It was also contended that since the appellant’s contentions involved the allegations of fraud and malpractice and were “serious” involving “substantial questions of law”, it required “detailed evidence” for which arbitration would not be a competent process.
- Whether the dispute was within the jurisdiction of the arbitrator?
- Whether an arbitrator was competent to decide disputes involving “serious allegations” requiring “substantial evidence”?
The Supreme Court expressed clearly that even though the subject matter was within the jurisdiction of an arbitrator, the matter had to be tried in a court of law since it was a “complicated matter.” The reason behind it was that fraud, financial malpractice and collusion are allegations with criminal repercussions. The arbitrator, being a creature of the contract, had his jurisdiction limited to the corners of the contract. Whereas, the courts were guided by the exhaustive Evidence Act, Codes of Civil and Criminal Procedures making them more equipped to adjudicate the matter and offering wider reliefs.offer
The decision in N. Radhakrishnan was recapitulated in several judgements including A. Ayyasamy v. A. Paramasivam and Ors. In this case, the disputed parties were partners in running the hotel. The respondents, after certain disagreements, filed an injunction suit before a court to prevent the appellant from managing the enterprise’s affairs. The respondent resisted arbitration relying on the contention that acts of fraud were involved. The Supreme Court, on the other handheld that while matters involving allegations of serious fraud were not arbitrable, matters involving “mere” allegations of fraud were arbitrable. A mere allegation of fraud being enough to not refer parties to arbitration would be misleading and the burden of proof (to show that the matter of dispute was inarbitrable) would lay upon the party not interested in arbitration (i.e., the party who prefers court proceedings).
But the Apex Court in Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee found out that the N. Radhakrishnan decision was per incuriam and was not reliable enough. In Swiss Timing Ltd. v. Organising Committee, Commonwealth Games, the petitioner (Swiss Timing Ltd.) had entered into an agreement with the respondent (Organising Committee, Commonwealth Games) to provide supporting services for the conduct of the 2010 Commonwealth Games held at New Delhi. Once the Commonwealth Games was completed, the petitioner raised the invoice but the respondent refused its payment on some unjustified grounds.
The Court rejected the Respondent’s objections to reference to arbitration which said that arbitration was not a competent process there because of the allegations of fraud against the petitioner which laid the contract void ab initio. But the Court undertook the view that such allegations could be decided by an arbitral tribunal, relying on the principles of separability and competence.
N. Radhakrishnan v. Maestro Engineers thus stood overruled.
Avitel Post Studioz Limited and Ors. v. HSBC PI Holdings (Mauritius) Limited and Ors.
In this case, the appellant (Avitel Post Studioz) and the respondent (HSBC Holdings) entered into a share subscription agreement. Pursuant to it, the respondent undertook an investment of 60 million USD so as to acquire a certain percentage of the appellant’s paid-up equity capital. The respondent invoked arbitration and filed a criminal complaint along with it, as he discovered that the appellant’s representation on contract with a British corporation was fraudulent. The same was set up only to induce the respondent into executing the share subscription agreement. Interim awards (by emergency arbitrators) passed permitted the respondent to freeze appellant’s accounts. The respondent then filed a Section 9 application seeking a deposit of the security amount (60 million USD) which was allowed by the courts.
The Ld. Division Bench held that-
- Allegations of fraud were in the context of Sections 17 and 18 of the Indian Contract Act, 1872, i.e., the disputes are of civil nature and are thus arbitrable.
- A security deposit of 30 million USD was to be maintained in the appellant’s account (difference between the respondent’s price paid for acquiring the shares and received (to-be) on reselling the shares).
The decision was appealed before the Supreme Court.
Whether the Section 9 application seeking a deposit of 60 million USD should be allowed against the appellant since allegations of fraud were raised by one of the parties to the arbitration agreement?
The Court held that serious allegations of fraud arose can be determined only if either of the followings tests of arbitrability of fraud were satisfied-
- Whether the plea permeates the entire main contract and the arbitration agreement, rendering it void?
- Whether the allegations of fraud touch upon the parties’ internal affairs inter se having no implication in the public domain?
Holding the dispute to be arbitrable, the Court stated that the allegations of fraud did not vitiate the arbitration agreement and the fraudulent actions were related to the internal affairs of the parties only with no implications in the public domain.
The measure of damages for the fraudulent misrepresentation was not different between the respondent’s price paid for acquiring the shares and received (to-be) on reselling the shares (as held by the Division Bench). But it should be measured by putting the respondent in the position as if the contract had never been entered into. It necessitated the deposit of 60 million USD as a security deposit.
This was the landmark judgment that cleared the cloud of doubts regarding arbitrability of fraud. The Supreme Court referred to its own judgments in Swiss Timing Ltd v. Organizing Committee, Commonwealth Games 2010, Delhi and A. Ayyasamy v. A. Paramasivam & Ors. (even though they couldn’t be considered as binding precedents) and reiterated that only matters involving very serious fraud allegations can be considered inarbitrable and be passed on to courts. In allegations of fraud simpliciter (i.e., simple allegations of fraud), the tribunal need not nullify the arbitration clause and can rule on the issue as under the Principle of Kompetenz-Kompetenz (i.e., the jurisdiction of the arbitral tribunal to rule on its own competence).
Substitution of new section for Section 43J and the omission of Eighth Schedule
Justice BN Srikrishna in the Committee Report of 2017 had noted that the accreditation of arbitrators was a necessary reform required to improve on the process of institutional arbitration in India since various stakeholders had started losing faith in Indian domestic arbitration. This was because we were lagging behind as compared to the ADR hubs like Singapore and London. Indian arbitral institutions have to be on par with the international arbitral institutions in all means. It was suggested that the arbitrators had to be encouraged to get accredited from bodies established in India like the Chartered Institute of Arbitrators (CIArb).
Some of its recommendations included the following:
- An APCI (Arbitration Promotion Council of India) may be set up to recognize professional institutes that provide for accreditation of arbitrators
- Such accreditation may be preferable for
- international commercial arbitrations seated in India;
- other arbitration proceedings with a seat in India where the value of the claim is more than or equal to 5 crores.
- Central and State governments may stipulate that only accredited arbitrators may be appointed during arbitration disputes involving government contracts.
In view of the same, the Arbitration and Conciliation (Amendment) Act, 2019 established the Arbitration Council of India (by inserting Part IA to the Act). It also inserted Section 43J which stated qualifications, eligibility criteria and other norms for accreditation of the arbitrators. 43J had then been directed to the Eighth Schedule. The Eighth Schedule was added into the Act to enlist the qualifications, experience, and general norms applicable on an arbitrator.
The criticisms against the schedule majorly included its restrictive approach which limited India to be an arbitration-friendly nation. It had debarred foreign nationals from being appointed as an arbitrator in Indian seated arbitration.
The qualifications to be an arbitrator as per Eighth Schedule were as below:
- An advocate with 10 years of experience
- A chartered accountant with 10 years of experience
- A cost accountant with 10 years of experience
- A company secretary with 10 years experience
- An officer of the Indian Legal Service
- An officer with a law degree having ten years of experience in legal matters in the government, autonomous bodies, PSUs or at a senior level managerial position in the private sector
- An officer with an engineering degree having ten years of experience as an engineer in the government, autonomous bodies, PSUs or at a senior level managerial position in the private sector or self-employed
- An officer having senior-level experience of administration in the Central Government or State Government or having experience of senior-level management of a PSU or a Government company or a private company of repute;
- A person having an educational qualification at degree level with ten years of experience in scientific or technical stream
There were also some 8 general norms the arbitrator had to adhere to which included being fair and impartial, being able to understand general contractual obligations in civil and commercial disputes, and so on and so forth.
The whole of these qualifications and norms were necessary so as to qualify as being an arbitrator before the 2021 Amendment. Even though they were broad, it did have some loopholes which had to be covered. This section, among other things, had also 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.
Section 3 and 4 of the 2021 Amendment Act states on the substitution of Section 43J of the Act and deletion of the Eighth Schedule. By deleting the Eighth Schedule, the scope of qualifications has been extended to a greater level by ensuring the inclusion of different individuals with expertise in different fields. Section 3 of the 2021 Amendment Act (i.e., Section 43J (amended) of the Act) states that the qualifications, norms and accreditation of the arbitrators will be as specified in the ‘regulations’. Regulations, as per Section 2 (1)(j) are the regulations specified by the Arbitration Council of India under the Act.
The aim behind such a transformation may be that granting such a power to the Arbitration Council of India rather than enlisting the qualifications and other norms in the Act would widen the scope of the appointment of arbitrators not limited to lawyers, but extended to experts across various fields. Foreign arbitrators can also be backed up with such an amendment.
The Indian ADR system’s development is pretty evident from the fact that back-to-back amendments are notified year after year. Many amendments and bills have been proposed in these past years to make our country more and more arbitration-friendly. These new changes and modifications are applauded as well as criticised by scholars in one angle or the other. Some view this as changes for better international support and involvement, but some see it as a mere interest to tackle the goals of Alternate Dispute Resolution.
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