Unconditional Stay On Arbitral Awards

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Indian arbitration law, contained in the Arbitration and Conciliation Act, 1996 (the "Act"), provided for an automatic stay on enforcement of the arbitral award once a challenge against the award...
India Litigation, Mediation & Arbitration
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Unconditional stay on enforcement of arbitral awards has yet again become a reality in India.

  1. Background

Indian arbitration law, contained in the Arbitration and Conciliation Act, 1996 (the "Act"), provided for an automatic stay on enforcement of the arbitral award once a challenge against the award was entertained by the Court under Section 34 of the Act.

The automatic stay on enforcement was heavily criticized, as it defeated the whole objective of expeditious adjudication of disputes by arbitration. The Indian Courts often took years to arrive at a final decision in the proceedings under Section 34 of the Act, challenging the award, which final decision was again subject to an appeal under Section 37 of the Act.

The legal position qua automatic stay of the award was changed by the Arbitration and Conciliation Amendment Act, 2015 (the "Amended Act, 2015"), which stipulated that a stay on enforcement could only be availed by a party upon deposit of an amount upto the amount of the award, as directed by the Court granting such stay. This amendment somewhat expedited the proceedings (and practically encouraged settlements, post the award) 

  1. Present Development

The new Arbitration and Conciliation (Amendment) Bill, 2021 (the "Bill") passed by the Lok Sabha on February 12, 2021, and the Ordinance earlier promogulated on November 4, 2020 with the same objective, introduce the below stated second proviso to Section 36 (3) of the Act, which effectively grants power to the Indian Courts to now grant unconditional stay on the enforcement of an arbitral award in cases where the Court is satisfied that a prima facie case is made out that:

(a) the arbitration agreement or contract which is the basis of the award; or

(b) the making of the award,

was induced or effected by fraud or corruption. The stay so granted can continue pending disposal of the challenge under section 34 to the award.

The statement of object and reasons supporting the Bill states that the issue of corrupt practice in securing the contracts or arbitral awards need to be addressed and in cases where the underlying arbitration agreement or the making of an arbitral award is induced by fraud or corruption, the stakeholder parties must get an opportunity to seek unconditional stay on enforcement of an arbitral award.

  1. Analysis:

What constitutes "corruption" or "fraud" is however not defined or specified by the Bill/the Ordinance. In absence of a specific definition, it is possible that the Courts would look at the global understanding which includes conduct, not only criminal and/or that constituting bribery but also "the abuse of entrusted power for private gain" [Transparency International], an impairment of integrity, virtual or moral principle [Black's Law Dictionary]. Indian Contract law also gives a wide definition of "fraud", to include "deceitful conduct".

It would be interesting to see how the Indian judiciary reacts to the Ordinance/the Bill. Notably, one earlier attempt by the legislature, by introducing Section 87 to the Act vide an amendment in 2019 was struck down by the Hon'ble Supreme Court of India, with heavy criticism and a categorical observation that:

"The retrospective resurrection of an automatic-stay not only turns the clock backwards contrary to the object of the Arbitration Act, 1996 and the 2015 Amendment Act, but also results in payments already made under the amended Section 36 to award-holders in a situation of no-stay or conditional-stay now being reversed."

Now, by the Bill/the Ordinance, the law may again regress to the position prevailing from 1996 till 2015. Though the Bill/Ordinance offer unconditional stay only in cases where the award was induced by "fraud" or "corruption", one can expect that at least for argument's sake, such challenges would be raised in almost every objection against an arbitral award.

Given the possibilities discussed above, it would be advisable to:

  1. Specify a time limit within which an objection qua existence of any fraud or corruption in an arbitration agreement or proceedings should be raised, and
  2. Stipulate a penalty, so as to deter frivolous objection on grounds of fraud or corruption being raised against an award by the party challenging it.

While setting aside of an arbitral award on grounds of fraud or corruption has jurisprudential significance, it needs to be ensured that the same does not end up defeating the whole objective of the alternative dispute resolution mechanism, which also is that "a winning party must enjoy the fruits of its victory". It is because of this reason that the grounds for challenge of an arbitral award must be kept extremely narrow.

In absence of a definition of "corruption" or "fraud" specific in relation to arbitration agreement, proceedings and/or the awards, the Indian Courts would now be expected to determine what constitutes "fraud" or "corruption" while considering requests for unconditional stays on arbitral awards.

Disclaimer: LexCounsel provides this e-update on a complimentary basis solely for informational purposes. It is not intended to constitute, and should not be taken as, legal advice, or a communication intended to solicit or establish any attorney-client relationship between LexCounsel and the reader(s). LexCounsel shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained in this e-newsletter. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.

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