UNCONDITIONAL STAY ON ARBITRAL AWARDS: TURNING THE CLOCK BACKWARDS?
Unconditional stay on arbitral awards was initially introduced through the Arbitration and Conciliation Act (Amendment) Ordinance, 2020 and now has been statutorily installed through the Arbitration and Conciliation (Amendment) Act, 2021. The amendment grants an unconditional stay on the account that the arbitration agreement, contract, or arbitral award has been tainted by fraud or corruption. Earlier, a similar provision of an “automatic stay” existed that gave the Courts discretion to set aside the award on similar grounds. Such practice faced several criticisms and led to a debate of it being arbitration-friendly or not. Finally, the Supreme Court, in the case of Hindustan Construction Company Limited & Anr v. Union of India struck down this provision under Section 87 of the Arbitration and Conciliation (Amendment) Act, 2019, calling the compulsory stay clause to be discriminatory and “double whammy” in nature.
Although section 87 was done away within the past, section 36(3) second proviso seems to reinstitute it. Considering this, it becomes pertinent to examine section 36(3) and understand its implication as to whether it takes us back to the old debate pursuant to the automatic stay or not.
Nature and Intention
The intention behind the legislature to adopt such change was to resolve the issue of corrupt and fraudulent practices in securing the award or the contract. As per the Amendment, an unconditional stay has been introduced as a safeguard to shield all the stakeholder parties protect their interest from fraud or corruption. A party must prove the facts that induced the award, were induced by means of fraud or corruption. Similarly, in past, the automatic stay application was filed by the parties arguing that the award was formulated by fraud or corruption such as the arbitrator receiving undue favours from either of the party. Therefore, the purpose and intention of both the provisions are almost the same. Since the (Amendment) Act 2021 has a retrospective effect, therefore, parties who have initiated proceedings and are still pending under section 34 even before 2015 can avail of the unconditional stay. However, the matter under review is about the efficiency of unconditional stay and the subsequent effect on the entire process of arbitration.
When it comes to the automatic stay, the application has to be processed by the party to set aside the award under section 34 and the award could be enforced only once it is rejected by the Court. It was at the disposal of the parties to file an application and the power to act further with the Court was discretionary in nature. As per National Aluminum Company Ltd. v. Pressteel & Fabrications (P) Ltd. And Anr. automatic stay was necessary since “there is no discretion left with the Court to pass any interlocutory order in regard to the said award”.
On the other hand, the bare reading of the text of the amendment suggests that the Court may subject to conditions under section 36 as it may ‘deem fit’ and grant a stay. The provision of unconditional stay takes this discretionary power on a higher pedestal by giving more power to the Court.
The unconditional stay has now become a guaranteed right of the party and a mandatory ground in case of fraud and corruption. Hence, granting an unconditional stay is granting an automatic stay with increased discretionary power in the hands of the Court and stands afoul to the objective of minimal intervention of the Court.
Consequently, the effect of granting such relief would be unnecessarily delaying the enforcement of the award. Moreover, it would increase the intervention of the Court which destroys the object of resorting to the alternate dispute regulation procedure in the first place. In India, the number of arbitral awards being challenged is increasing and this stay might serve as a weapon in the hands of parties to misuse it to achieve a decree of setting aside the order. Moreover, the ambiguity and clarity persist while identifying fraud or corruption on the award. Though a substantial test has been laid down in the case of Rashid Raza v. Sadaf Akhtar the question here arises about the evidence, on the bare reading of the amendment text does not suggest any threshold of proof. What would constitute fraud or corruption as per the test is again at the discretion of the judge. Moreover, in such cases, it has to be determined on a case- to-case basis which again requires the discretion of the judge.
As per the requirement under section 36 of the (Amendment) Act 2021 a prima facie case has to be made out to avail the unconditional stay. However, we must dwell on the Court’s interpretation of this case to have a clear picture. The Supreme Court of India in the case of Martin v. R.N Banerjee highlighted that a prima facie case is not a case proved, instead it is a case that can be established if the evidence submitted is led in support of the same were believed. Moreover, in the case of H.R Gokhale v. Bharucha, Noshir C., the Bombay High Court mentioned that the evidence must be judged on its face value and the Court is not bound to check the credibility of the evidence. The Court only has to see whether a case can be established through the evidence presented.
The catch here is that under section 34 of the Act, the Court is not supposed to examine or consider the merit of the award that has been awarded by the arbitrator. Even if the Court has different thoughts about the award but it cannot intervene with the reasoning and understanding based on which the arbitrator declared the award. This view was emphasized in the case of Southeast Asia Marine Engineering and Construction Limited v Oil India Limited.
The amendment gives rise to this dichotomy. The term “prima facie”, lowers the threshold for proving fraud or corruption. Relying on the judgments the question arises as to whether a mere allegation of fraud or corruption and a piece of unchecked evidence about its credibility is enough to grant an unconditional stay. Instead of removing the doubts and difficulties of the Ordinance, 2020 the Amendment has rather increased the ambiguity surrounding it.
It is quite unclear as to why an additional ground was inserted when the Act already provided for a remedy under Section 34(2) (b) for setting aside an order formulated by fraud as it would violate the Public Policy of India. Not only this but under section 34, a party has to submit an application as well as deposit money for availing such remedy. These rules create a structure that would filter out false accusations of fraud where parties generally raise this ground just to delay the matter. The latest amendment does not talk about such deposition of money or a separate application. The situation intensifies when an unconditional stay is granted by the Court and the award holder has no opportunity provided to approach the appellate Court.
Since the introduction of the Arbitration and Conciliation Act, 1996 and arbitral award is treated as a money decree under the Code of Civil Procedure. To obtain a stay, execution, and appeal of a money decree under CPC one has to look into Order XLI Rules 1 and 5. A per the case of As per the case of Malwa Strips Private Limited v Jyoti Limited a party has to prove that there is a “sufficient cause”. Further, a party is liable to deposit the amount mentioned in the matter or furnish security to obtain a stay on the execution of a decree. The only discretionary power the Court has to decide whether the amount in dispute has to be submitted or the security. Though CPC allows a stay but clearly does not allow to stay the award unconditionally pending disposal of the challenge under section 34.
Considering this difference on the point of availing a stay under CPC and the (Amendment) Act, 2021 we can certainly understand that the rights of the parties are affected to a greater extent. CPC provides minimum discretion of the judge, provides a right to appeal whereas the position under the (Amendment) Act 2021, puts the award holder in a situation where he has no right to appeal or any other remedy to reverse the order of unconditional stay.
The Arbitration and Conciliation Act, 1996, and the subsequent amendments have always intended to develop an arbitration-friendly environment in India through the minimal intervention of Courts, ensuring party autonomy and protecting the rights and interests of the stakeholder parties. The additional ground to obtain an unconditional stay and contemplation of discretionary power is in fact more than the power bestowed to the Courts by the automatic stay provision in past. Automatic stay was resurrected on the grounds of being manifestly arbitrary and discriminatory in nature and reinstitution of such provision again in the face of unconditional stay would take us back to the whole debate before 2015. This new additional ground is not only in contrast with the objectives of Alternate Dispute Resolution but also stands as a hurdle in ease of doing business. As a result, many companies might get insolvent due to an unconditional stay on the award they were entitled to receive. Taking into such severe repercussions, it would not be wrong to say that this step reverses the clock and brings back the automatic stay provision under the cloak of a new additional ground to fight fraud and corruption
Author: Shreya Belokar,
Maharashtra National Law University Mumbai, 4th year Student