The purpose of this article is to examine the most recent change to the Arbitration and Conciliation Act of 1996, as well as to provide a brief history of Indian arbitration law writes Nivedita Singh.
Arbitration is a private method of resolving disputes rather than going to court. It is a process in which the parties to a contract appear before a tribunal to seek remedies after agreeing to resolve the disagreement without the use of litigation. Arbitration is a process in which a disagreement is settled by an impartial adjudicator whose decision is final and binding, as agreed by the parties to the dispute or as mandated by law. Arbitration awards have limited rights of review and appeal. Arbitration has several advantages, including time efficiency, flexibility, neutrality, confidentiality, party control, and autonomy.
The ever-evolving jurisprudence, particularly the growth of the law since the turn of the millennium, is a major factor in the success of arbitration. The Indian legal system has progressed significantly, moving from being "another issue resolution instrument" to being the "preferred dispute settlement process." This article will look at whether the amendment will have a favourable impact on India's pro-arbitration policy and perspective.
"Differences we shall always have but we must settle them all, whether religious or other, by arbitration." - Mahatma Gandhi
Since the end of the nineteenth century, arbitration has flourished in India. In 1834, the first Legislative Council for India was established, and on July 1, 1899, the First Indian Arbitration Act was passed. It was enacted, and the Indian Arbitration Act was based on the British Arbitration Act of 1889. However, the application of the Indian Arbitration Act was limited to the presidential towns of Calcutta, Bombay, and Madras. 1
It was subsequently codified in Section 89 and Schedule II of the Code of Civil Procedure, 1908, which expanded arbitration provisions to several parts of British India not covered by the Act of 1899.2
The Act of 1899 and the corresponding provisions of the Code of Civil Procedure, 1908 were determined to be inefficient and technical, and the Arbitration Act, 19403 was enacted, repealing the Act of 1899 and the applicable provisions of the Code of Civil Procedure, 1908.4
The Government of India considered international models like the United Nations Commission on International Trade Law (UNCITRAL)5 Model on Commercial International Arbitration and discussed the future of arbitration in India at a conference presided over by Prime Minister P.V. Narasimha Rao on December 4, 1993. The Arbitration and Conciliation Act of 1996 was born as a result of this conference.
Section 89 with Order X (Rules 1A to 1C) was reintroduced in CPC in 2002 to make the act more effective and efficient. By judicial rulings and parliamentary lawmaking, this law has been amended and enhanced (amendments).
The Indian court, led by the Supreme Court, has recently emerged as the most vocal proponent of alternative dispute resolution, seizing every chance to enhance the arbitral process, resulting in an increase in arbitration referrals. The courts have been particularly effective in:
From the “Arbitration and Conciliation Act, 1996” to the amendments in 2015, 2019, and 2021, there has been remarkable progress in the field of arbitration. Domestic development in arbitration has been made possible by international developments such as the UNCITRAL Model Law, which allows countries to keep up with global advances in the field of arbitration. Several sections have been introduced and altered in order to bring the national law up to international standards.7
This Amendment Act significantly altered the previous regime and ushered in a new era of arbitration, drastically improving the public's perception of arbitration. The major modifications brought about by the 2015 amendment legislation can be grouped into the following categories:
The ACI (Arbitration Council of India) was founded in 2019 as a result of a legislative reform to establish arbitral tribunals and to decide on things such as the minimum qualifications required for appointment of an arbitrator and to define many other rules relating to arbitrators. In addition, the high courts and the Supreme Court of India have been given the authority to name arbitral tribunals, which would be rated by the ACI. These modifications to institutional arbitration and the formation of APCI, however, have yet to be announced.10
The introduction of the 8th schedule, which provides that a person shall not be eligible to be an arbitrator unless he is an advocate within the meaning of the Advocates Act, 1961, with ten years of practice experience as an advocate, was the most contentious modification of 2019. The same was roundly chastised because there was a misunderstanding as to whether this applied to foreign arbitrators or not.11
The Arbitration and Conciliation (Amendment) Act, 202112 was enacted on March 11, 2021, following the introduction of the Arbitration and Conciliation (Amendment) Bill, 2021 in the Lok Sabha on February 4, 2021. It aims to amend the 1996 Arbitration and Conciliation Act. The Act includes rules for domestic and international arbitration, as well as a definition of the law governing conciliation proceedings. The Bill repeals an Ordinance enacted on November 4, 202013 that had the same requirements. The judgments, as well as the subsequent revision to the Principal Act of 1996, have clearly stated the legislators' determination to advance India as an arbitration-friendly and pro-arbitration environment.
The Act includes two significant amendments: -
First was the significant change by adding a proviso under section 36(3)14 to ensure that if courts are prima facie satisfied by the case based on either (i)the arbitration agreement or contract that is the basis of the award; or (ii) the award was induced or influenced by fraud or corruption, the award will be upheld. It will stay the award indefinitely pending the outcome of the challenge.
The adjustment to Section 34 governing the automatic stay of awards granted under the Principal Act of 1996 is also one of the most prominent change in the Act of 2021. A party can move to the Court under Section 34 of the 1996 Act to have an arbitral judgement set aside under the current system. However, following the 2015 modification to the Act, an automatic stay on the award's implementation would not be granted simply by filing an application to set it aside.
It is interesting to note that such situations have already been anticipated and effectively addressed by the Act's current provisions.
Fraud or corruption in the arbitration agreement or contract: If the parties plan to plead and prove claims of fraud or corruption in the arbitration agreement or contract, the arbitral tribunal per se or at the stage of reference is the appropriate forum to do so. An arbitral tribunal is competent to determine the questions of fraud charged by the parties, according to recognised jurisprudence. The arbitral tribunal has the authority to assess extensive and voluminous information and undertake a thorough examination to decide if the arbitration agreement or contract has been tainted by fraud or corruption. If the parties are dissatisfied with the arbitral tribunal's findings or if the arbitral tribunal does not consider the allegations of fraud even after the parties have raised them, the litigants have the choice of filing an application for the setting aside of the award under Section 34 of the Act. Still, if the parties to the dispute are not satisfied they can appeal the order of Section 34 under section 37(1)(c) of the Act.
During the awarding process, if there was fraud or corruption.: Section 34(2)(b)[Explanation 1](i) The parties have the right to ask for the award to be set aside if the arbitral tribunal's decision was influenced by fraud or corruption, or if the award is against India's public policy. Again, if the parties to the dispute are not satisfied they can appeal the order of Section 34 under section 37(1)(c) of the Act of the Act. The 2021 Amendment does not appear to give any justifiable new ground or relief to an aggrieved party who is faced with a situation of fraud as defined by the amendment. As a result, it's not unreasonable to conclude that enacting the 2021 Amendment is just similar to imposing an additional level of judicial scrutiny in the form of an extra layer of appellate review, and that too as a stopgap measure with no effective safeguards. The ramifications of this expanded area of meddling are disastrous.15
The basic Act's eighth schedule also deleted the requirements, qualifications, experience, and standards for arbitrator certification.16
In this area, there were two amendments; however, because they are interconnected, they were debated together. Section 43J of the Principal Act was included in the 2019 Amendment, which established the criteria, eligibility, and standards for arbitrator accreditation. The Act's Eighth Schedule, which gave an exhaustive list of qualities that an arbitrator must possess, was also directed by this clause.
Persons having a bachelor's degree and ten years of experience in scientific or technical fields were also required to meet the schedule's minimal requirements. Aside from professional credentials, the Eighth Schedule outlined basic standards that an arbitrator must meet in order to be accredited, such as fairness, integrity, impartiality, and neutrality.
These qualifications, as well as the basic standards, were extremely broad. This section restricted the capacity of qualified foreign lawyers to participate as arbitrators in India, among other reasons. When compared to arbitration-friendly countries like France, this was considered as a considerable barrier.
Section 43J of the Act was substituted in the 2021 Amendment Act, and Schedule Eighth of the original Act was deleted. This effectively means that parties can appoint arbitrators with or without qualifications. Most members of the Lok Sabha applauded the government for proposing to remove the Eighth Schedule, stating that it will bring famous foreign arbitrators to India, furthering the goal of making India a global arbitration center.
The Law Minister went on to say that this reform would allow the Indian Arbitration Council more freedom and promote institutional arbitration. The change to Section 43J specifies that arbitrator qualifications shall be based on "norms," which are defined in Section 2(1)(j) to include the Arbitration Council of India's regulations. However, certain concerns remain unresolved, such as what these "regulations" may be, who would create them, and when they would be issued.
The Amendment Act, by altering Section 43J, also gives the Commission the authority to examine the appointment of foreign arbitrators, which is supported by UNCITRAL Model Law requirements. This reform also restores the idea of party autonomy, which allows parties to select arbitrators regardless of their qualifications.17
The 2021 Amendment requires the Court to make a prima facie opinion that there was no fraud or corruption in the securing of the contract or in the making of the award in order to dismiss a Section 36 application. The fact that such a finding will still be subject to the outcome of the Section 34 application does not lessen the challenge, given that the final disposition of such processes (including appeals to the Supreme Court) can take up to six years on average. In this way, the 2021 Amendment reintroduces the barrier to enforcement (in circumstances of alleged fraud or corruption), reverting the arbitral regime backwards.18
During the introduction of the Bill in the Lok Sabha, many parliamentarians criticised the unconditional stay. Experts also point out that an unconditional stay is the same as a blanket stay, which will stymie India's efforts to adopt a pro-arbitration policy. This is due to the ease with which the losing party can allege corruption and get an automatic stay on the arbitral award's enforcement.19
In circumstances where an application under Section 36(2) of the Act is under adjudication before a court, the applicants will be required to file fresh applications based on the new grounds. Unless the courts can take notice of this new change on their own and dispose of it with the filing of new submissions, this is likely to result in delays and additional expenses.
As a result, this modification will have an impact on award enforcement, and India may fall farther behind in ease of doing business rankings. This change is regressive and does not support India's goal of establishing a pro-arbitration regime.
The implementation of the 2021 Amendment could lead to an increase in excessive judicial intervention in arbitration proceedings, which is counter to the very reason for choosing arbitration as a method of dispute resolution, namely, to avoid the ordeals of a traditional litigation process, as enshrined in Section 5 of the Act. Furthermore, it will place an enormous strain on India's already overburdened courts and the backlog of cases. This will almost certainly prolong the time it takes for arbitral awards to be enforced in India.
As previously noted, the term "regulated" is ambiguous in an amendment to section 43J. It is only to be hoped that those concerned in deciding the regulation do not succumb to the limits of the Eighth Schedule and adopt a more inclusive approach to eligibility. Another major issue with this amendment is that it does not define either fraud or corruption, producing an uncertain situation in which defendant parties could face legal action even if they are correct. Furthermore, the 2021 Amendment contains grounds for delaying a decree that are not explicitly mentioned in the CPC, such as "fraud" and "corruption." These new grounds are now confined to arbitral procedures, implying a fundamental skepticism of the arbitral process and, as a result, an illogical distinction between civil and arbitral processes.
Even within the domain of Section 36 procedures, the 2021 Amendment has the potential to cause significant harm.
The Supreme Court's judgement in National Aluminum Company 20 that the automatic stay jurisprudence left "no discretion in the court to put the parties on terms" failed "the basic goal of the alternate dispute resolution system" was one of the key grounds for enacting the 2015 Amendment. This grievance was also addressed in the 246th Law Commission Report, which acknowledged the law's paralysing impact and urged that it be changed.
With the 2021 Amendment Act, proving a prima facie case would entitle a party to a "unconditional" stay, effectively eliminating any discretion to weigh competing interests that would inevitably differ from case to case in stopping the enforcement of an arbitral ruling. In this regard, the 2021 Amendment reintroduces the stifling of judicial authority that led to the 2015 Amendment in the first place, resulting in "paper awards."
The 2021 Amendment might become a powerful tool for losing parties to harass opponents by claiming fraud or corruption in every arbitration hearing to prolong the implementation of the arbitral award, similar to how most Section 34 applications allege a violation of public policy. This may not only increase the costs, trouble, and time it takes to resolve a disagreement, but it may also increase the dread of innocent parties. This may deter parties from using arbitration as a dispute resolution process because they will eventually have to go through the court's ordeals to seek relief. As a result, the 2021 Amendment is likely to encourage parties to approach the courts without any checks and balances, making commercial parties hesitant to do or continue business in India due to a lack of a robust dispute resolution mechanism, as they will almost certainly have to submit their disputes to Indian courts for resolution.
The BCCI Case21 ruled that the modifications to Section 34, which changed the grounds for challenging an arbitral ruling, were substantive rights-related and could not be applied retroactively to Section 34 applications lodged before the Cut-Off Date. The Court, on the other hand, found that “execution of a judgement refers to the area of procedure,” and that no vested right “to resist enforcement” under the not amended Section 36 can be claimed by a party. As a result, the Court determined that the modified Section 36 would apply to Section 34 petitions submitted before the Cut-Off Date.
The second portion of the 2021 Amendment, which refers to the explanation of the extra proviso, is concerned with the 2021 Amendment's retrospective applicability. In essence, it allows the parties to file an application under Section 36(2) of the Act and invoke the grounds of fraud or corruption set out in the additional proviso to Section 36(3) of the Act in “all court cases arising out of or in relation to arbitral proceedings, whether the arbitral or court proceedings were commenced prior to or after the commencement of the arbitral or court proceedings, irrespective of whether the arbitral or court proceedings were commenced prior to or after the commencement of the arbitral or court proceedings.”
Unlike the standards laid down under Section 34 of the Act, which requires a party to “establish on the basis of the arbitral tribunal's record” if the parties seek to invoke the grounds under Section 34 for the setting aside of the arbitral award, the 2021 Amendment prescribes no standard or criterion on which fraud or corruption is to be assessed. Invoking and justifying the grounds under Section 36 of the Act induced by the 2021 Amendment is ambiguous, imprecise, and vague in the lack of a clear specified criteria. It may severely discourage a business entity from submitting to an uncertain dispute resolution procedure.
The 2021 Amendment allows parties to plead fraud or corruption during enforcement procedures, even if they did not plead fraud or corruption before the arbitral panel. This could mean that a party can receive an unconditional stay on an award's enforcement based on a ground that the party did not even raise before filing the application to set aside the award.
There's also the risk of tarnishing the arbitrator's reputation if the courts hurry to grant an unconditional stay based on a prima facie case of fraud or corruption in the award-making process. In practice, if arbitrators are always under pressure that their award would be unconditionally delayed on the grounds of fraud or corruption without thorough review by the courts, it could have a substantial impact on their functioning and concerns of arbitrator immunity.22
The Amendment Act, like all other pieces of legislation, is not without flaws. One of them is that the modification to Section 36 gives the already overworked Indian courts more leeway in determining whether an arbitral judgement prima facie contains elements of fraud.
The simple reiteration of the provisions of the 2021 Amendment in the Statement of Objects and Reasons23 does not inspire confidence, given the significant revamp of the scheme of the Arbitration Act. It appears that the Parliament is not completely aware of the problems.
The deletion of the main Act's Eighth Schedule broadened the scope for the appointment of foreign arbitrators and arbitrators in a variety of professions. However, it may result in the appointment of inept arbitrators. The parties, Council, and Indian Courts will all have to verify the arbitrator's competence again, which is unfavourable. In that scenario, the Council and the parties must proceed with prudence when choosing arbitrators under the modified Act.
Despite these flaws, the truth is that proper implementation of the modified provisions will help to limit the number of cases when parties to arbitration proceedings are harmed by fraud in arbitral rulings. Only time will tell whether the Council's regulations will help designate appropriate arbitrators under the second portion of the Amendment Act.
Qualification and experience requirements for being chosen as an arbitrator should be formulated in a more holistic manner, rather than relying solely on affiliation with government posts/entities to determine eligibility.
While the ailments that the 2021 Amendment is seeking to heal are still unknown, the 2021 Amendment's negative effects could be disastrous.
The addition of an additional appellate layer of judicial intervention, the multiplicity of proceedings, ambiguity in the application, enabling a barrage of challenges and opening doors of further complications in the capacity of the arbitrator's liability, combined with the dispersion of the 2015 Amendment and failure in performing the cardinal principle of the arbitration process, i.e., lowest possible judicial intervention through the 2021 Amendment, may not work positively in the India’s effort of becoming a pro-arbitration hub.
A sudden shift from Indian courts' pro-enforcement approach to empowering courts to grant an unconditional stay on the enforcement of an arbitral award is detrimental to the sacrosanct vested right of enforcement, finality, and binding nature of an arbitral award in a jurisdiction where enforcement of a judgement or award is already problematic. This has an influence on contract enforceability and is likely to cause businesses to be uneasy about operating in an environment where the parties are more likely to face another round of litigation when the arbitral award is enforced, depriving them of the arbitral award's benefits.
The 2021 Amendment reflects a basic skepticism of the arbitral procedure, which does not bode well for India's arbitration regime, especially given the country's dismal position24 of 163 out of 193 in contract enforcement. The judiciary now has the responsibility of ensuring that the delicate balance between contract integrity and award enforcement is maintained.
To address the flaws in the latest revisions, lawmakers should be clearer in their drafting language and encourage industry experts to participate in consultation sessions. Rather than making incremental changes to the same concerns, policymakers should consider the larger picture of the major roadblocks to India's becoming an arbitration hub.