This article is written by Niharika Agrawal, pursuing B.B.A.L.L.B from IFIM Law School. This article reviews the Arbitration and Conciliation (Amendment) Act, 2021.
Arbitration is one of the alternatives for dispute resolution rather than going to court. This process is settled by the neutral adjudicator and his decision or award is final and binding upon the parties. Arbitration awards have limited rights of review and appeal. These alternative dispute resolutions are friendly in nature. It is time and cost-efficient, flexible, neutral, confidential, and autonomous.
In India, the first arbitration regulation procedure was enacted under the Arbitration Act, 1889. Later it was improvised in the year 1940 as Arbitration Act, 1940, with various laws that comprise procedural aspects of different alternative dispute resolution methods. Further, with an intention of lawmakers to make the process of arbitration a friendly regime, the principal Act of 1996 was enacted under the title the Arbitration and Conciliation Act, 1996. With the change in the legal system and progress of arbitration, the Arbitration and Conciliation (Amendment) Bill, 2021 was passed by the Parliament in March 2021. The Amendment Act includes the provision for domestic and international arbitration and the laws for conciliation proceedings. It replaces the Arbitration and Conciliation (Amendment) Ordinance, 2020. This article analyses the positive and negative impacts of the amendment made by the Act.
Amendment Act of 2021
The amending acts of 1996, in the subsequent years 2015 and 2019, showed the legislators’ intentions to enhance India as an arbitration-friendly and pro-arbitration environment. There are two major amendments made by the Arbitration and Conciliation (Amendment) Act, 2021.
Automatic stay on award
The first major change was the provision under Section 36(3) of the principal act of 1996. This Section was added to put a stay on the arbitral award if it satisfies two essential conditions:
- When there is prima facie evidence that the case is based on the arbitration agreement or contract which is the basis of the award, and
- The award was connected with fraud and corruption.
- In these two conditions, the award can be unconditionally and automatically upheld until and unless it is challenged under Section 34 of the principal act.
Before the commencement of the Amendment Act, the principal Act of 1996 stated under Section 34 (2) (b)(ii) that an arbitral award could be set aside if the courts are satisfied that such award is induced with fraud or corruption, which also meant conflict with the public policy of the country. This Act stipulated that the parties to the arbitration could approach the court by filing an application challenging such award under Section 34, which includes, inter alia, proof of the invalidity of the arbitration agreement. However, Section 36(2) of the act does not allow to set aside an award unless the court deems fit to do so. Also, in the 2015 Amendment Act, it was clarified that an arbitral award would not automatically be stayed just because an application is sent to the court to set aside the arbitral award.
After the enactment of the Amendment Act, it was clarified that the arbitral award can be set aside even during the pendency of the application if the court is satisfied that an award passed in an arbitration agreement or a contract was affected by fraud and corruption. There is a fear that the party may misuse the delay of enforcement of an arbitral award as per their benefit.
The provision of Section 36(3) is effective from 23rd October 2015, the same date on which the Arbitration and Conciliation (Amendment) Act, 2015 was enforced. It has the retrospective effect and applies to all the cases arising out of arbitral proceedings, regardless of court proceedings before or after the commencement of the Amendment Act of 2015.
Expanding the scope for qualification of arbitrators
Under this area, two amendments were made. As they are interlinked, they can be dealt with together. In the Arbitration and Conciliation (Amendment) Act, 2019, Section 43J was added to the principal Act which provided certain eligibility criteria, qualifications, norms, and standards for the accreditation of arbitrators. This Act also includes the Eighth Schedule that comprises an exhaustive list of qualifications necessary to be possessed for an arbitrator. This list includes an advocate, a Chartered Accountant, Company Secretary, an officer with an engineering degree, a person with educational qualification at degree level with 10 years of experience in scientific or technical streams, etc. everything except professional qualifications of an arbitrator. It also provided some general norms for the arbitrator to accreditation. These norms are as follows:
- An arbitrator should have a fair general reputation and integrity and should apply objectives to settle the dispute.
- There should not be any conflict of interest, that is the arbitrator must be impartial and neutral to both the parties in the arbitration and should avoid entering into any financial business or other relationship that leads to impartiality or might create a situation of partiality or bias amongst the parties.
- There should be any potential conflict by an arbitrator.
- The arbitrator shall have the capacity to suggest, recommend or state the reason and enforce an arbitral award in any dispute which comes before him for adjudication.
The recent Amendment Act of 2021 has replaced Section 43J and removed the Eighth Schedule with the following statement that “the qualification, experience, and norms for arbitrator’s accreditation shall be specified by the regulations” made by the Arbitration Council of India. However, the details of these regulations are still not specified.
The previous qualifications and norms were quite broader. It has restricted the capacity of qualified foreign lawyers to practice arbitration in India. After the enforcement of the Amendment Act, parties are allowed to appoint arbitrators without any parameters of qualification. This has also provided the Law Commission with the freedom to take into consideration the appointment of the foreign expertise in arbitration as per the UNCITRAL Model law provisions. Several members from Lok Sabha have appreciated this amendment as it may bring famous foreign arbitrators to India, and make India a global arbitration center. These amendments have made the arbitration process friendly and flexible like other countries such as France.
Drawbacks in the Amendment Bill, 2021
Restriction in the enforcement of awards
As per the changes made under the Act, the court needs to prove prima facie that there was no fraud or corruption in the arbitration agreement or the contract in providing the arbitral award, for disposing of Section 36 of the Act. Such findings would anyway be subject to the application under Section 34. Hence this amendment does not mitigate the challenge of proceedings for the final disposal which may take up to six years. This Act of unconditional stay was also criticized by many experts. They also opined that unconditional stay may hinder India’s goal to establish a pro-arbitration policy.
If the case is under adjudication before the court as per Section 36(2) of the Act, the party needs to file a fresh agreement with regards to new ground. This may take time in further submissions and additional expenses. Thus, such an amendment may have an impact on the enforcement of arbitral awards and may also affect India’s ease of doing business.
The whole aim of arbitration is to avoid court proceedings and ensure smooth dispute resolution. With the introduction of new grounds for enforcing the award, if the parties are not satisfied with the awards, they may make all the attempts to contend that their contract or award is connected with fraud and corruption. Hence, the amendment may increase judicial intervention as the court would be overburdened by the applications for the arbitral awards induced by fraud and corruption.
As observed above, the term “regulations” is not yet defined clearly. What are these regulations? Who is responsible for framing them? When will it be enforced? These are some of the unanswered questions. Another issue that was observed is that the amending act does not deal with the complexities and has failed to explain the scope of “fraud and corruption” that would lead to an unconditional stay on arbitral awards. In this scenario, the legislators have sought certain clarity from the judiciary on specific points:
- Courts’ ability to examine new evidence.
- The scope of fraud and corruption.
- The degree to which conclusions in the awards can be examined.
- The effects of failure to raise such allegations before the arbitral tribunal or in court proceedings.
Invalidates the Amendment Act of 2015
The basic motive behind enacting the Amendment Act of 2015 was based on the judgment of the Supreme Court in the case of National Aluminum Company (2003). It was held that the jurisprudence of automatic stay keeps the parties in the same position as in court, which fails in an alternative dispute resolution system. In the Amendment Act of 2021, the court requires to prove, prima facie, the evidence of fraud and corruption, to entitle unconditional stay. This will eliminate all the distinct competing interests that would differ from case to case in putting the stay on enforcement of arbitral awards. Thus, the Amendment Act of 2021 reintroduced the intervention of the judicial authority resulting in paper awards.
Tools for aggravation
The Amendment Act of 2021 encourages the parties to claim fraud and corruption in every hearing of the arbitral award. This may increase the cost, trouble, and time in resolving the disagreement. It may also increase the dread of innocent parties. They may lose the confidence of choosing arbitration as a form of dispute resolution, as in the end, they have to face the court’s proceedings to get relief. Many commercial parties hesitate to commence or continue their business in India due to a lack of alternative dispute resolution mechanisms, as, in the future, they will, fortunately, or unfortunately, have to face the court for redressal.
The Arbitration and Conciliation Act, 2021 was made with the good intentions of the legislators to make the Indian arbitration center a friendly regime. This aim has been successful to a large extent. The amended provisions have reduced the cases of the arbitral award which are interlinked to fraud and corruption. This has helped the parties to escape from being affected by the negative impact of the arbitral awards. Another step to remove the Eighth Schedule may help the country to establish a global arbitration center in India by appointing competent foreign arbitrators.
However, there are some flaws in this legislation also. The addition of Section 36(3) has increased the working of the courts to analyze the prima facie element of fraud and corruption in the arbitral awards.
Eliminating the eighth schedule of the principal Act of 2019 has widened the scope for appointing foreign arbitrators and arbitrators of various other fields without any qualifications. This may lead to the appointment of incompetent arbitrators and may also affect the Indian arbitrators due to the easy appointment of foreign arbitrators. It will also increase the work of the parties, councils, and Indian courts to repeatedly verify the arbitrator’s competency.
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