Arbitration ordinance: Reopening the floodgates to litigation

December 03, 2020 7:15 AM

The ramifications of this ordinance within the Indian arbitration regime are yet to be seen. One can only hope the amendments brought about by the ordinance are not misused in a way that would set the clock back on India’s progress in aligning itself with international arbitration jurisprudence

It is no secret that public sector undertakings (PSUs) and government ministries are the biggest litigators in our country and arbitration awards against government bodies are invariably challenged in the courts.It is no secret that public sector undertakings (PSUs) and government ministries are the biggest litigators in our country and arbitration awards against government bodies are invariably challenged in the courts.

By Ila Kapoor & Ananya Aggarwal

The urgency to pass a presidential ordinance on amendments to the Arbitration & Conciliation Act, 1996, on November 4, 2020, has taken the legal community by surprise. This is the third amendment to the arbitration law in the past five years and the second one in the last two years. However, unlike others, this amendment has been brought about without any discussion in Parliament, public comments or exhaustive Law Commission reports.

The preamble states that “the amendments were necessary to ensure that all the stakeholder parties get an opportunity to seek unconditional stay of enforcement of arbitral awards where the underlying arbitration agreement or contract or making of the arbitral award are induced by fraud or corruption”. But, in fact, this protection already existed under the previous legislation. Practitioners are concerned that the ordinance will open the floodgates to litigation with more losing parties seeking an unconditional stay of enforcement of awards against them. There is also a concern that it will expand the court’s intervention at the time of challenges to enforcement of awards. Invariably, there will be delays in the award creditor being able to fructify his award, striking at the very root of arbitration, which promises its user a speedy and conclusive resolution of disputes.

The ordinance also deletes the Eighth Schedule to the Arbitration Act, which was introduced by the 2019 amendments and which lays down criteria for a person to be appointed as an arbitrator. It required the arbitrator to be qualified as an advocate under the Indian Advocates Act, thereby excluding foreign practitioners from the role. A further requirement was that the arbitrator be conversant with the Constitution of India, commercial laws, labour laws, etc, even if the arbitrator was an engineer, chartered accountant, etc. The schedule was much criticised for impinging on party autonomy by restricting their choice of arbitrator. The Eighth Schedule had not yet been notified, and while its removal is a positive step, it could not have been the reason for the urgent passing of the ordinance without any discussion in Parliament.

Prior to the overhaul of the existing arbitration regime by the 2015 amendments to the Arbitration Act, parties would routinely challenge the award against them, sanguine in the knowledge that the courts would stay the enforcement of the award, often for years to come. The 2015 amendments specifically provided that mere filing of a challenge would not render the award unenforceable and that it was the court’s discretion whether or not to grant a stay on the enforcement of an award subject to such conditions as the court deemed fit. Significantly, even though the 2015 amendments did away with automatic stay on the award, the ability to challenge the award and seek a stay of its enforcement on the grounds of fraud or corruption in the arbitration agreement, contract or making of the award was available to the parties even prior to the ordinance.

So, what is the new amendment? Prior to this ordinance, granting of stay was a discretionary power of the courts. They could also stay the operation of the award unconditionally, if justified by the grounds raised by the parties. The ordinance seems to have made it mandatory for the courts to grant an unconditional stay if a prima facie case is made out for existence of fraud or corruption. It is reasonable to predict that majority of awards will now be challenged in the courts along with an application to stay their enforcement on the grounds of fraud or corruption.

There is no clear guidance as to the level of enquiry a judge must undertake before reaching a prima facie opinion. Challenge proceedings are generally in the nature of summary proceedings and are restricted to the documents already submitted to the arbitrator. However, it may be difficult to form a prima facie opinion on the existence of fraud or corruption without going into the merits. This has considerably enlarged the scope of the court’s interference at this stage of challenge proceedings and is likely to be misused by award debtors.

The ordinance makes this amendment applicable retrospectively to all court proceedings arising out of arbitral proceedings, whether they commence before or after the 2015 amendments. Therefore, parties will be able to make such an application even in enforcement proceedings that are pending and a stay on enforcement of award had not been sought earlier—thereby creating hurdles and delaying the proceedings.

It is no secret that public sector undertakings (PSUs) and government ministries are the biggest litigators in our country and arbitration awards against government bodies are invariably challenged in the courts. This problem was recognised by the Department of Justice, Ministry of Law & Justice, which came up with an ‘Action Plan to reduce Government Litigation’ in 2017, where it candidly accepted that “approximately 46% of the total pending cases in courts pertain to the Government. This includes cases relating to Public Sector Undertakings as well as other autonomous bodies.” To reduce pendency, the action plan suggested that the government adopt alternate dispute resolution mechanisms. This step coupled with the 2015 amendments was successful in reducing the pendency of cases from 76,708 in 2018 to 58,638 in 2019, as provided on the LIMBS website of the Department of Legal Affairs, Ministry of Law & Justice. The NITI Aayog had also tried to discourage challenge to arbitral awards by laying down guidelines requiring PSUs and government bodies to deposit 75% of the total award amount in court, if they decided to challenge arbitral award against them. Despite these efforts, government entities continue to challenge the enforcement of awards on the grounds of ‘public policy’, as is evident from the matters of Vedanta Ltd, Reliance Industries Ltd and Devas Multimedia.

The ordinance could defeat the objectives of these progressive actions if it takes us back to a time where, tempted by the promise of an unconditional stay, parties as a matter of course start another round of litigation to stall the enforcement of an arbitral award against them. In the case between Devas Multimedia and Antrix Corporation, which is a part of the ISRO, though the Supreme Court had stayed the operation of the award against Antrix Corporation, it allowed Devas to approach the High Court to seek a deposit of the arbitral amount. The ordinance may now open up the possibility for Antrix to seek an unconditional stay.

The ramifications of this ordinance within the Indian arbitration regime and its effect on India’s image as an arbitration hub are yet to be seen. Much will depend on the way the provision is interpreted by the courts and the ease with which this relief is granted. Enforcement regimes directly impact the ease of doing business in India and consequently the inflow of foreign investment. One can only hope that the amendments brought about by the ordinance are not misused in a way that would set the clock back on India’s progress in aligning itself with international arbitration jurisprudence.

Kapoor is partner and Aggarwal is principal associate, Shardul Amarchand Mangaldas

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