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Apr 16, 20217 min read

Arbitration and Conciliation (Amendment) Act, 2021: Hits and Misses

Updated: Oct 15

Ayushi Dubey & Yash Jain*


Excerpt

The recent Amendment in the Arbitration and Conciliation Act, 1996 (“the Act”) aims to reinforce the automatic and unconditional stay on the enforcement of the arbitral award. Additionally, it removes the Eighth Schedule which specified certain qualifications, experience, and accreditation norms for arbitrators. The Amendment is seen both as a progressive and regressive step in the current arbitration regime of India. The omission of the Eighth Schedule promotes party autonomy and will empower Indian parties to choose foreign arbitrators. On the other hand, the automatic and unconditional stay on enforcement of arbitral award invites additional judicial interference and will result in unnecessary delay in their enforcement.

In the article, the authors have tried to critically analyse the recent Arbitration and Conciliation (Amendment) Act, 2021 and its impact on the current arbitration regime of India in light of statutory history and judicial pronouncements.


Introduction

Over the last decade, the arbitration policy of India has seen a flurry of amendments taking the regime towards the pro-arbitration approach. The most recent one was introduced on March 11, 2021, when the Arbitration and Conciliation (Amendment) Act, 2021 (“2021 Amendment”) acquired presidential assent. It has been deemed to come into force from November 04, 2020, when the President of India promulgated the Arbitration and Conciliation (Amendment) Ordinance, 2020.

The 2021 Amendment has introduced primarily two significant changes, firstly, to grant an automatic and unconditional stay on enforcement of arbitral awards, where the underlying arbitration agreement, contract or arbitral award is induced by fraud or corruption. Secondly, to omit the Eighth Schedule of the Act by specifying through regulations, the qualifications, experience, and norms for accreditation of arbitrators.

Automatic Stay on Appeal

The 2021 Amendment seeks to amend the Act by addition of another proviso to Section 36(3), making it imperative for the courts to grant an unconditional stay on the execution of a domestic arbitral award if the court is prima facie of the opinion that the arbitration agreement or contract or the award itself was affected by fraud or corruption. The Amendment will have a retrospective effect and shall be deemed effective from October 23, 2015.


Background

A party to an arbitral award can seek to set it aside for the grounds given under Section 34 of the Act. Further, prior to the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”), an automatic and unconditional stay under Section 36 of the Act was granted when an application under Section 34 of the Act was made. This meant that the enforcement of an arbitral award that is challenged would stay until the application under Section 34 of the Act is decided. This resulted in the delay of enforcement of the arbitral award.

The delay in enforcement of the arbitral award was not only used as a weapon by the losing party but was also against the sheer objective of the Act i.e. speedier dispute resolution. Thus, the 2015 Amendment made it crystal that an application under Section 34 would not automatically make the award unenforceable. The Amendment clarified that a separate application seeking a stay on the enforcement of the award would have to be filed and if the court is satisfied it may for the reasons to be recorded grant the stay.

Unclear Stand of Prospective or Retrospective Applicability

The 2015 Amendment, to a certain extent, managed to clear the fog surrounding the position of the automatic and unconditional stay on an arbitral award under Section 36 of the Act. However, the B.N. Srikrishna Committee Report noted that there is an ambiguity concerning the applicability of the Amendment, and opined that the Amendment has prospective applicability. Contrary to the report, the Supreme Court in Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. (“BCCI”) observed that though the 2015 Amendment is prospective, the applicability of Section 36 of the Act as amended by the 2015 Amendment will be retrospective. Withal, the Arbitration and Conciliation (Amendment) Act, 2019 (“2019 Amendment”) introduced Section 87 which provided that the 2015 Amendment would only apply to arbitral proceedings that commenced on or after October 23rd, 2015, and not retrospectively.

The constitutional validity of Section 87 as introduced by the 2019 Amendment was challenged before the Supreme Court in the matter of Hindustan Construction Company v. Union of India, (“HCC”). The Apex court observed that the insertion of Section 87 in the Act will re-establish the view of the automatic stay on arbitral awards under Section 36 upon the filing of an application under Section 34 of the Act and thus rescind the Supreme Court’s view in BCCI and the very object of the 2015 Amendment. Therefore, the court struck down the insertion of Section 87 of the Act by the 2019 Amendment for being arbitrarily discriminatory.

Current Position

The Supreme Court’s decision in BCCI and HCC had cleared the position regarding the automatic and unconditional stay on arbitral awards and were applicable until the 2021 Amendment again reversed the position by bringing back the automatic and unconditional stay on enforcement of arbitral awards. The Amendment is seen as a step backwards as it will take the pro-arbitration regime of India in the reverse direction. It will bring back the perversity in Section 36 of the Act which was corrected by the 2015 Amendment and judicial decisions after much deliberation.

Revisiting Fraud and Arbitration

The 2021 Amendment is a progressive development in the interplay between fraud and arbitration as it solidifies the Supreme Court’s stand on the arbitrability of fraud. The courts in India have expanded the concept of arbitrability of fraud in various instances. In the recent case of Vidya Drolia v. Durga Trading Corporation, wherein it was observed that the courts can check the prima facie validity of an agreement while deciding the application under Sections 8 and 11 of the Act. However, there is less discussion on the impact of fraud on the enforcement of arbitral awards.

Further, the Apex Court in the case of Venture Global Engineering v. Tech Mahindra (“Venture Global”), observed that the whole arbitration process can be declared void ab initio when the allegations of fraud are proved. Nonetheless, the 2021 Amendment will answer the issue that arose after Venture Global i.e. whether it would be right to quash the whole arbitral proceedings when the allegations of fraud are proved, by providing the parties with an opportunity to seek an unconditional stay on the enforcement of arbitral award when the court is prima facie of the view that the award was affected by fraud or corruption.

Qualification of Arbitrators

The 2021 Amendment is a pivotal step for future arbitrators in the country. The 2021 Amendment has substituted Section 43J of the Act which was added vide the 2019 Amendment. Under the 2019 Amendment, Section 43J provided for the capabilities, experience, and standards for accreditation of arbitrators, as determined in the Eighth Schedule of the 2019 Amendment. The Eighth Schedule laid down an exhaustive list of professional qualifications that an arbitrator must possess. Besides, it also administered general norms that would apply to an arbitrator for accreditation.

Even though the Eighth Schedule confers an exhaustive list of qualifications, the 2019 Amendment was nonetheless scrutinised unequivocally because of the presentation of such standards as were considered to be extremely prohibitive and contrary to the idea of the arbitration itself, which has consistently been characteristically connected with party autonomy. Additionally, it was noticed that the 2019 Amendment ruled out foreign qualified professionals to be designated in India-situated arbitrations, that would intensely bargain the opportunity of parties to choose arbitrators of their choice.

Mindful of this scenario, the 2021 Amendment has looked to correct the mischief of the 2019 Amendment, wherein it recognises the qualification guidelines as a matter of strategy and administrative technicalities that cannot be prescribed in the statute itself. Furthermore, time and again, the Supreme court and the High courts have reiterated and upheld the principle of party autonomy. The principle indicates that the parties to an agreement can mould and devise mechanisms for the settlement of disputes and can customize the procedure according to their needs. Notably, the 2021 Amendment promotes the cardinal principle of party autonomy in arbitration proceedings by omitting the Eighth Schedule from the Act. The parties will now have greater flexibility to appoint foreign arbitrators aided by UNCITRAL Model Law provisions, eventually widening the scope of qualification of arbitrators. Thus, it will promote India in becoming a hub of international arbitration and will attract eminent arbitrators in the country.

Conclusion

Automatic and unconditional stay on enforcement of arbitral award upon the filing of an application under Section 34 of the Act has time and again been seen through scepticism by the judicial authorities. Nonetheless, the 2019 Amendment had settled the situation to an extent. However, the re-establishment of the automatic and unconditional stay by the 2021 Amendment, though in good faith, will result in unnecessary delay in the enforcement of arbitral awards through additional judicial intervention. Thus, the Amendment in Section 36(3) though introduced to serve the interest of the parties would be misused by the losing party. The automatic and unconditional stay on the enforcement of arbitral award will drag the parties to the courts, resulting in cumbersome litigation which investors usually want to avoid. Thus, the far-reaching effects of automatic and unconditional stay will also engulf foreign investors and will manifest India as an arbitration-unfriendly regime among foreign investors.

Further, the omission of the Eighth Schedule from the Act is seen as a favourable move that will help in expanding the landscape of arbitration in India. As accreditation of arbitrators will upgrade confidence in the framework, it is fundamental that the standards for accreditation are outlined considering the accepted procedures of arbitral accreditation institutions throughout the world. Moreover, the regulations for qualification of the arbitrators must be framed with a comprehensive approach without being limited to connection with government posts or being restrictive in nature. The Central government must notify the regulations contemplated by the 2021 Amendment as quickly as possible, thereby, giving effect to the 2021 Amendment in its entirety.

The 2021 Amendment to an extent has both rectified and nullified the changes made through the 2019 Amendment. On one hand, it has moved a step forward by doing away with the Eighth Schedule and on the other hand, it has created a hurdle in the prompt conclusion of arbitral proceedings by re-introducing automatic and unconditional stay under Section 36 of the Act.

* The authors are Fourth year students of B.A.LLB (Hons.) at Institute of Law, Nirma University, Ahmedabad. They can be reached via LinkedIn at Ayushi Dubey and Yash Jain.

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