Fraud/Corruption vis-à-vis Arbitration and Conciliation (Amendment) Bill 2021: Part I

- Rituparna Padhy

This is Part I of a three-part series on the new proviso regarding unconditional stay of an award upon discovery of fraud/corruption vis-à-vis Arbitration and Co­­­nciliation (Amendment) Bill 2021.

The Rajya Sabha, the Upper House (Council of States) of the bicameral Parliament of India, recently passed through voice vote the Arbitration and Conciliation (Amendment) Bill 2021 [“Amendment Bill”]. The Bill would replace the ordinance that was issued on 4 November 2020. The Bill addresses two issues:

a. An unconditional stay shall be granted if the arbitration agreement, underlying contract, or the impugned award is prima facie induced/affected by corruption, and

b. Omission of the Eighth Schedule of the Arbitration and Conciliation Act 1996 (“Act”) that had enumerated qualifications for an arbitrator.

The Amendment Bill essentially provides that when the court is satisfied that a prima facie case has been made out for the arbitration agreement, the underlying contract, or the making of the award has been induced/affected by fraud/corruption, the court is bound to stay the award’s enforcement unconditionally until the Section 34 application has been disposed of.[1] This new proviso to Section 36(3) of the Act would apply to all court cases related to arbitration proceedings that are pending or were initiated after the 2015 Amendment Act[2] came into force (23 October 2015). Consequentially, it is immaterial whether the arbitration/court case(s) began before or after the 2015 Amendment Act.[3]

In this Part, the author will be addressing the impact of the new proviso on the scope of judicial interference, the doctrine of severability, and the computation of the relevant limitation period.

Scope of Judicial Interference

The Act's objective to minimise judicial intervention in arbitral proceedings is evident in Section 5 of the Act, whose non-obstante clause clarifies that the only judicial intervention permitted is what is expressly provided in the Act.[4] The scope of judicial intervention has been particularly contentious in relation to issues dealing with Section 36 of the Act, with the stance in early 2020 being that a separate stay application has to be made regardless of when the court case/arbitration proceeding was initiated. The Supreme Court in the seminal case of Hindustan Construction Company Ltd. v Union of India[5] (“HCC”) ruling that an automatic stay on the operation of an award was no longer permitted.[6] Now, the new proviso may reintroduce the same “mischief”[7] of an automatic and unconditional stay, albeit in more limited circumstances. This is because once the court is satisfied that a prima facie case of fraud/corruption exists, it is mandated to grant an unconditional stay on the operation of the award, making it partially automatic.

Worryingly, there persist more concerns regarding the new proviso to be added to Section 36(3) of the Act. Pursuant to the Amendment Bill, while the award cannot be set aside on the ground of the underlying contract being affected by fraud/corruption, the operation of the award can be stayed for the same ground. It is evident that the grounds on which an unconditional stay on enforcement can be sought would be wider than the grounds permitted for challenging the award itself, which further broadens the scope of judicial intervention without balancing the rights of the parties as well.

Moreover, what if a prima facie determination of the arbitration agreement/underlying contract being induced by fraud/corruption is made out under Section 36(3), but the Section 34 challenge is dismissed because the award was not induced/affected by fraud/corruption? Would the award-holder now be able to get the award enforced despite the determination under the stay application? Considering the fact that Section 37 of the Act (exhaustively enumerating the appealable orders) does not apply to court orders relating to Section 36 (as held by the Bombay High Court in Essar Oil and Gas Exploration v Toshiba Water Solutions Pvt. Ltd.[8]),[9] the situation remains uncertain.

Presently, even when a Section 34 challenge has been filed, the award in question would not become unenforceable ipso facto. For the operation of the award to be stayed, a separate application has to be filed for the court to determine whether to grant such an order or not.[10] The court has the discretion to grant a stay "subject to such conditions as it may deem fit",[11] which suggests that practically, the court could ‘deem it fit’ to not impose any conditions. If the new proviso expressly mandates an unconditional stay upon a prima facie discovery of fraud/corruption, does it mean that an unconditional stay can be granted for no other grounds/claims? It is uncertain what the impact of the new proviso will be on the limits of judicial intervention be in this context.

At the same time, the discretionary authority to impose conditions on a stay order that is granted to courts by Section 36 is more considerate of the parties’ situation. Being compelled to grant an unconditional stay in the face of allegations as that of fraud/corruption could result in the misuse of the provision, since the interests of the award-holder and the conduct of the award-debtor may get more difficult to accommodate equitably. In this context, one could say that the scope of judicial intervention is being curtailed without a sufficient cause, though the Bill’s Statement of Objects and Reasons considers the unconditional nature of the stay a benefit – that an unconditional stay would protect the interests of the aggrieved party better. However, it provides no further explanation as to why the courts need to be divested of their discretionary power.

Additionally, the wording in the Amendment Bill - "Where the Court is satisfied that a prima facie case is made out"[12] implies that a claim of fraud/corruption has to be expressly made by a party for the court to adjudicate on it. This interpretation would be more in line with the objective of minimum judicial interference of the Act. However, one could also argue that even when the separate stay application does not expressly argue on the ground of fraud/corruption for a stay on the award, the Court can take up the issue sua sponte. This interpretation would help dispense with the filing of more documents and ward off even more prolonged proceedings. On the other hand, should that be the intended interpretation, more deliberation would ensue - would the increased judicial discretion be antithetical to the objective of reducing judicial interference in arbitration or be in consonance with the Act by expediting proceedings?

Furthermore, the Act clearly lays down that an award cannot be set aside merely upon reappreciation of evidence.[13] However, if the tribunal has already undertaken the fact-finding process regarding the alleged fraud/corruption, the court would have to review and second-guess the arbitrator’s decision for granting a stay on that ground. Detecting fraud/corruption in the making of the award may be more procedural in nature and can be undertaken without reappreciating the evidence. In contrast, when the underlying contract has been tainted by fraud/corruption, it would necessitate ‘reappreciating’ the evidence and revisiting the facts and circumstances of the case.

Another peculiar situation may arise. As we know, one can file a Section 34 application on the ground of the award being in conflict with the public policy of India due to it being induced/affected by fraud/corruption.[14] While a stay application has to be separately filed, the new proviso permits the applicant to request a stay on the award’s operation on the same ground of fraud/corruption. The dilemma becomes this: would the court have to determine whether a prima facie case of fraud/corruption exists before the court determines the same thing (albeit more conclusively) in the Section 34 challenge? If the prima facie determination is in the affirmative, then the award has to be stayed unconditionally – the award-debtor gets to pause the enforcement of the award well before its Section 34 challenge on the same ground is resolved.

Whether the net outcome is beneficial to the objectives of the Act or not would vary from case to case, but this can also tantamount to a pre-emptive decision that places the award-holder in a prejudiced position before the actual proceedings are completed. Essentially, the award-debtor would have an additional loophole through which it can invite greater judicial intervention in the dispute.

Doctrine of Severability

We see that for a Section 34 application, the decision-making process behind the award should have been induced/affected by fraud/corruption.[15] However, according to the proposed proviso, a stay can be sought under Section 36(2) even when the contract in question appears to be induced/affected by fraud/corruption. Apart from increasing the scope of judicial interference, this has one major implication: it conflicts with the doctrine of severability that is fundamental to arbitration.

The principle of severability in arbitration postulates that an arbitration agreement is distinct and separate from the contract between parties, even if the arbitration agreement is one term of the contract.[16] This means that even if the underlying contract is nullified, the arbitration agreement/clause is not invalidated ipso jure.[17] Contextually, a stay on the operation of the award should not be affected by the validity of the underlying contract. This would be in line with the jurisprudence of Section 34 challenges,[18] which is relevant since a stay application is derived from a Section 34 challenge. However, the Amendment Bill blurs the line of severability because if the contract appears to have been tainted by fraud/corruption, then the award [that is based on the arbitration agreement] would be stayed unconditionally.

Impact on the Limitation Period

When the Amendment Bill enters into force, there can be two general situations regarding a Section 36(2) application: either the stay application was filed first and the fraud/corruption was detected later, or the stay application is filed after the fraud/corruption was detected. In either case, the courts would be able to accommodate the aggrieved parties' concern regarding potential fraud/corruption impacting the arbitration due to two reasons - courts could have the suo motu authority to look into such concerns, and there are no time limits prescribed for filing or adjudging a Section 36(2) application. However, accommodating such concerns carries its own set of complications.

It is probable that at the time of filing the Section 34 or Section 36(2) application(s), the aggrieved party was unaware of such acts. The impact of the Amendment Bill would differ between the two applications with regard to the limitation period:

Section 34 application

Section 34(3) expressly sets a time period of 3 months (from the date of receiving the award) with an additional thirty days (if sufficient cause present) for filing an application to set the award aside.[19] Additionally, Section 34(6) emphasises the need to dispose of such applications expeditiously.[20] Accordingly, it is understandable that courts have consistently refused to grant extensions even when sufficient cause for an extension is found.[21] It is also why courts have excluded the application of Section 17 of Limitation Act 1961, which provides that in cases where fraud is detected, the period of limitation would begin only after the party has discovered the fraud.[22]

In light of such a well-established practice, it is unlikely that courts will permit an extension of time when fraud/corruption is discovered after the prescribed period. This is the likely outcome despite the Supreme Court recently opining in the case of Government of Maharashtra v Borse Brothers Engineers and Contractors Ltd.[23] that a short delay may be condoned in limited situations.[24] However, by omitting to add an exception clause in Section 34(3) for the fraud/corruption proviso, the legislature has seemingly not accounted for the legitimate delays that may occur before the discovery of fraud/corruption.

Section 36(2) application

Section 36(2) appears to be more accommodative of the time it may take before the fraud/corruption is discovered. Since there is no time limit associated with the filing of a Section 36 application, one will theoretically be able to claim a prima facie discovery of fraud/corruption well after the filing as well. Even the court would not be bound to determine a prima facie case within a prescribed time limit, which would ultimately be beneficial for the aggrieved party. Moreover, courts will likely permit invoking Section 17 of the Limitation Act for a Section 36(2) application too, since the Act has no time limits that would override the provisions of the Limitation Act. Even though the abovementioned Section 17 covers fraud, one can be hopeful that courts would extend the principle to cases of corruption as well.

Effect of the explanation to the new proviso

The explanation of the new proviso clarifies that the proviso would apply retrospectively regardless of whether the court case or the arbitration proceedings commenced before or after the 2015 Amendment. As mentioned previously, this explanation expressly acknowledges the maintainability of the eligible applications in the context of the time period. However, two new procedural concerns arise:

a. If a Section 36(2) application is already pending, either a fresh application has to be filed for invoking the new proviso or the party should be permitted to amend the already filed application. This can tantamount to further delays unless the court can take suo motu notice of the new proviso and dispense with any further action on part of the applicant. However, this would again call into question the interpretation of the phrase “prima facie case is made out” – whether this requires the applicant to expressly argue for this proviso to apply, or whether the court can take the matter up without the parties having to invoke the same.

b. Due to the retrospective application, a flurry of new Section 36(2) applications could be apprehended due to the allure of an unconditional stay, especially when a previous stay application was already refused in the same matter. The courts must exercise caution when parties attempt to take ‘a second bite at the cherry’ and argue for a stay on the operation of the award.

Concluding Remarks

Even in 2020, the Supreme Court had to point out that Section 34 proceedings take an average of six years to be disposed of.[25] This in itself exemplifies the significance of a stay on the enforcement of an arbitral award, especially an unconditional one. In this first Part, we analysed how the boundaries of judicial intervention are being modified, the overall inference being that the chances of curial intervention are heightened without some of the necessary safeguards being present. With respect to the doctrine of severability, we studied the potential ripples in litigation the new proviso may cause by subjecting an award’s stay to the validity of the underlying contract. Finally, we observed how time limits in Section 34 appear to be more rigid towards and Section 36 appears to be more accommodative of the new proviso. While relaxing Section 34 time constraints would be detrimental to the speedy disposal of cases in general, an exception clause could have been added to it for complementing the new proviso.

Thus, while the Amendment Bill would be welcomed in some procedural aspects, it regrettably leaves much to speculation and interpretation. In the next two Parts, we would delve deeper into the substantive scope of fraud and corruption in the context of arbitration.

[1] §2, Arbitration and Conciliation (Amendment) Bill 2021. [2] Arbitration and Conciliation (Amendment) Act 2015. [3] Id. [4] §5, Arbitration and Conciliation Act 1996. [5] WP (Civil) No. 1074 of 2019 [HCC]. [6] Id. at ¶31. [7] HCC supra note 5 at ¶50. [8] Commercial Appeal (L) No. 4288 of 2021. [9] Id. at ¶4. [10] §36(2), Arbitration and Conciliation Act 1996. [11] §36(3), Arbitration and Conciliation Act 1996. [12] Proviso to §36(3), Arbitration and Conciliation Act 1996. [13] Proviso to §34(2A), Arbitration and Conciliation Act 1996. [14] Explanation 1(i) to §34(2)(b)(ii), Arbitration and Conciliation Act 1996. [15] Explanation 1(i) to §34(2)(b)(ii), Arbitration and Conciliation Act 1996. [16] §16(1), Arbitration and Conciliation Act 1996. [17] Id. [18] Vidya Drolia and Others v Durga Trading Corporation, 2020 SCC OnLine SC 1018, ¶67; A. Ayyasamy v A. Paramasivam and Others, (2016) 10 SCC 386, ¶53. [19] §34(3), Arbitration and Conciliation Act 1996. [20] §34(6), Arbitration and Conciliation Act 1996. [21] Simplex Infrastructure v Union of India, SLP (C) No. 17521 of 2017; Basawaraj v Land Acquisition Officer, (2013) 14 SCC 81, ¶12; Government of Maharashtra (Water Resources Department) v M/S Borse Brothers Engineers & Contractors Pvt. Ltd., CA 995 of 2021, ¶56, 60. [22] §17, Limitation Act 1961. [23] CA No. 995 of 2021. [24] Id. at ¶61. [25] HCC supra note 5 at ¶3.