• Shubham Sharma

Arbitration and Conciliation (Amendment) Act 2021: What it holds for Foreign Investors


Introduction


After a series of heated debates, the Arbitration and Conciliation Amendment Act 2021 (the ‘Amendment’) finally received the parliamentary nod on 10th March 2021. The Amendment sought to replace the Arbitration and Conciliation (Amendment) Ordinance, 2020, which came into force on 20th November 2020, when the parliament was not in session.


Following a hiatus of almost two decades after enactment of the Act in 1996, the government has been introducing a flurry of amendments to elevate the position of India as the hub of international arbitration. This Amendment has effectively brought two new changes to the principle legislation - Arbitration and Conciliation Act, 1996 (the ‘Act’). First is the addition of unconditional stay on the enforcement of domestic awards and second, removal of the Eighth Schedule under the Act. As elucidated in the statement of object and reasons, the Amendment sought “to ensure that all the stakeholder parties get an opportunity to seek an unconditional stay of enforcement of arbitral awards, where the underlying arbitration agreement or contract or making of the arbitral award is induced by fraud or corruption” and ‘to omit the Eighth Schedule of the Act.’


Both the changes under the Amendment have been receiving a bag of mixed reactions from the stakeholders. This article attempts to discuss and analyze the true import of the Amendment and its significance for the future of India’s foreign investment landscape.


Unconditional Stay on Awards


Under Section 34(2)(b) of the Act, an arbitral award can be challenged and set aside if it conflicts with the public policy of India. The Explanation under the same clarifies that conflict with the public policy of India would mean, inter alia, where the making of the award was induced or affected by fraud or corruption. However, Section 36 states that an application to set aside an award under Section 34 does not automatically stay the enforcement of such award, but the court has the power to grant the stay, subject to such conditions as may be deemed fit.


The Amendment has brought about a material change in Section 36(3) by inserting an additional proviso. This proviso states that where the Court is satisfied that a prima facie case is

made out that –– (i) the arbitration agreement or contract which is the basis of the award; or (ii) the making of the award was induced or affected by fraud or corruption, it shall stay the award unconditionally pending disposal of the challenge to the award under Section 34.


It may be noted that Section 36 falls within Part 1 of the Act, which deals with the enforcement of domestic awards. Section 2(2) of the Act provides that Part 1 only applies to arbitration where the place (seat) of arbitration is in India. Enforcement of foreign awards is dealt with under Section 48 of the Act, which is left untouched by the Amendment. The proviso, therefore, has no applicability over international arbitration with offshore seat, and applying the principle laid down under Bharat Aluminium Co Ltd v Kaiser Aluminium Technical Service Inc[1], would only impact international arbitration where India is the seat.


The proviso would undoubtedly lead to major hiccups in the enforcement of all awards arising out of arbitration with India as seat. General concern over the Amendment is because of the broad terms used therein and its possible interpretations that are likely to give rise to new obstacles in the enforcement of awards. Under the proviso, the condition for obtaining an unconditional stay is to satisfy the court with a prima facie case of fraud or corruption in the making of the arbitration agreement, the contract, or the award. The Amendment is silent upon what constitutes a “prima facie case of fraud or corruption”. Left without any yardstick, two equally dangerous interpretations may arise:


1. Where a mere averment of fraud or corruption would be enough to grant a stay. With such an abysmally low threshold for the grant of stay, the enforcement proceedings would languish invariably.

2. Where the party is required to prove the existence of fraud or corruption. Fraud is understood to be a mixed question of facts and law. To determine the existence of fraud, the court would invariably have to delve into the merits of the case and re-appreciate evidence, which delegitimizes the powers of the arbitral tribunal and goes against the nature of summary proceedings under Section 36.


Notably, the Amendment also states that the proviso to Section 36(3) shall be deemed to have been inserted with effect from the 23rd day of October 2015, which is the date when the Arbitration and Conciliation Amendment Act, 2015 (the ‘2015 Amendment’) came into force. Furthermore, the explanation to the proviso adds that it shall apply to all court cases arising out of or in relation to arbitral proceedings, irrespective of whether the arbitral or court proceedings were commenced prior to or after the commencement of the 2015 Amendment. The legislative intent, therefore, is clearly to enact the Amendment with retrospective effect to all enforcement proceedings before the Indian courts. The Explanation aligns with the decision of the Apex Court in BCCI v Kochi Cricket Pvt. Ltd[2]. where it was held that the amended Section 36 would also apply retrospectively to Section 34 applications that had been filed prior to the commencement of the 2015 Amendment Act. However, with the introduction of a possible roadblock in enforcement, any party that has been successful at securing an award or are yet to secure one, will be caught off-guard as the defendants would invariably try their hand at obtaining a stay leading to the enforcement proceeding dragging its feet.


The proviso would undoubtedly lead to undue obstacles in the enforcement of awards and that will not go unnoticed by the foreign investors. Though the interpretations of the amendment by the courts are yet to be seen, we are likely to witness reluctance from foreign investors when it comes to choosing India as their seat in any future agreements. Furthermore, we may face amendment requests from foreign investors to amend the seat of arbitration in agreements.


Even after the progressive steps taken by previous amendments, this move reflects that India has still not completely broken through the shackles of a stiff enforcement regime.


Qualifications of Arbitrators


Arbitration and Conciliation Amendment Act 2019, inserted Part 1A under the Act, which stipulated for the constitution of Arbitration Council of India (ACI). Section 43J thereunder introduced the Eighth Schedule into the Act. The Schedule became subject to wide criticism [3] on the grounds of departure from the principles of party autonomy. It enlisted the qualifications and experience for being appointed as an arbitrator. The prescribed qualifications were not only restrictive but also unjustly prohibitive of the appointment of foreign arbitrators. It was argued that this untoward approach towards foreign arbitrators goes against the very spirit of arbitration and earns a bad reputation for India as the seat of international arbitration. Notably, these amendments have not been notified as the Arbitration Council of India (ACI) is yet to be established.


The 2021 Amendment has addressed this concern by effectively doing away with the Eighth Schedule in one full sweep. The Eighth Schedule now stands omitted and Section 43J states that the qualifications, experience, and norms for accreditation of arbitrators shall be such as may be specified by the regulations. The position of the section indicates that the “Regulations” will be framed by the ACI. The Statement of Object and Reasons under the amendment states that this step is being taken “to promote India as a hub of international commercial arbitration by attracting eminent arbitrators to the country.” Therefore, the regulations framed by the ACI are expected to be drafted in the interests of party autonomy and in consonance with international standards.


This is a welcome step in the development of arbitration. and is likely to attract more attention to India as an international seat for arbitration because the foreign investors will no more be deprived of their right to choose an arbitrator (even foreign). Having foreign arbitrators would not only bring confidence to the foreign parties, but would help shed-off the perception of India as an inward-looking arbitration regime. Furthermore, the delegation of framing legislation to the ACI could also be the cue that we may soon see the establishment of the ACI, and with that, a new dawn for the arbitration practice in India.


Conclusion


Where on one hand the Amendment prevents the compromise of the arbitrator appointment procedure, it places another frontier for the award to prove its might. India needs to ease the process of enforcement of an award by reducing the possibilities for the parties to use dilatory tactics. It cannot be gainsaid that the enforcement mechanism of a country directly contributes to its Ease of Doing Business and consequently, the foreign inflow.


The Amendment will have a positive effect to the extent of rectifying the anomalies of the 2019 Amendment but may not be received too well by the foreign investors. With an apprehension that the award may become a part of the long line of pending litigation at the courts, the foreign investors will still prefer to have the seat elsewhere.

[1] (2002) 4 SCC 105

[2] (2018) 6 SCC 287

[3] Subhiksh Vasudev, The 2019 amendment to the Indian Arbitration Act: A classic case of one step forward two steps backward?, Kluwer Arbitration Blog, (Last Accessed on June 21st , 2021), http://arbitrationblog.kluwerarbitration.com/2019/08/25/the-2019-amendment-to-the-indian-arbitration-act-a-classic-case-of-one-step-forward-two-steps-backward/

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