Impact of India’s Arbitration and Conciliation (Amendment) Act, 2021 on Commercial Contract and Agreements

Key Takeaways

• The 2021 Amendment showcases the Indian government’s commitment to reforming the Arbitration Act of 1996 and establishing India as a favourable jurisdiction for arbitration.
• It enhances Section 36(3) with an additional provision that stays the award until the challenge under Section 34 is resolved, and requires applicants with pending applications to submit fresh applications.
• Concerns regarding increased judicial interference in arbitration processes are brought up by the 2021 Amendment to the Principal Act, which could further tax the legal system and prolong the process of executing arbitral judgements.
• Although Indian legislators are working to make India an arbitration-friendly nation, their lack of long-term legislative experience is having a detrimental effect on the enforceability of contracts.

Introduction 

The Arbitration Act, 1889, which was passed in India, established the first arbitration regulating procedure. Later, it was improvised in 1940 as the Arbitration Act, 1940, with several laws that include procedural components of various alternative dispute resolution techniques.

The modern version of the act is the legislation governing arbitration proceedings in India. It was enacted in 1996, and plays a crucial role in promoting arbitration as an efficient and effective means of dispute resolution, both domestically and internationally, and provides parties with a reliable and enforceable mechanism for resolving their disputes outside of the traditional court system.

Relevant Changes

On November 4, 2020, the Indian government introduced the Arbitration and Conciliation (Amendment) Ordinance. Later, on March 11, 2021, the ordinance was replaced by the Arbitration Conciliation Act (Amendment) of 2021, also known as the "2021 Amendment."

This amendment, the third in the past six years, reflects the government's commitment to reform the Arbitration Act of 1996 and establish India as a favourable jurisdiction for arbitration.

Analyzing the impact of the amendments on India’s pro-arbitration stance, two key changes can be observed in the Act. The first alteration allows for an automatic stay on awards in specific instances where the court possesses preliminary evidence suggesting that the underlying contract, upon which the award is based, has been influenced by “fraud” and “corruption.” The second modification involves the omission of the Eighth Schedule from the principal Act. This schedule outlines the regulations, qualifications, experience, and norms required for arbitrator accreditation.

Section 36(3) of the Act has been augmented by the 2021 Amendment with the following additional text, placed after the proviso concerning the enforcement of the arbitral award: “Furthermore, if the Court is satisfied that there is a prima facie case indicating that either the arbitration agreement or contract forming the basis of the award, or the process of making the award itself, has been induced or affected by fraud or corruption, it shall unconditionally stay the award until the challenge under Section 34 to the award is disposed of.”

The recent amendment introduces a requirement for applicants with pending applications under Section 36(2) of the Act to submit renewed applications based on the grounds specified in the new amendment. This additional step is expected to result in delays and higher costs, unless the courts can independently consider and address the amendment while processing the new submissions. 

Encouraging judicial intervention and intimidation control

Arbitrators in India can be appointed through various methods, such as Agreement of the Parties, Appointing Authority, Institutional Rules, and Court Appointment. The specific procedure for appointing arbitrators may vary depending on the arbitration agreement, the chosen arbitration rules, or the applicable law. 

The 2019 Amendment to the Principal Act introduced section 43J, which outlined the qualifications, eligibility criteria, and norms for the accreditation of arbitrators. It also had a direct impact on the Eighth Schedule of the Act, which required a minimum educational qualification at the degree level and ten years of experience in scientific or technical fields.

The 2021 Amendment raises concerns about increased judicial interference in arbitration proceedings, contradicting the purpose of choosing arbitration as a method of dispute resolution. This could further burden an already overwhelmed court system and contribute to the backlog of cases in India, leading to delays in enforcing arbitral awards. Additionally, the amendment has the potential to become a powerful tool for losing parties to harass opponents by raising allegations of fraud or corruption in every arbitration proceeding. This could escalate costs, cause inconvenience, and prolong the dispute resolution process, creating apprehension among innocent parties.

Lack of Clarity Regarding the Concept of Fraud

When parties are unhappy with the result of the arbitration procedures, they may try to assert that their contract or the award is tainted by fraud or corruption more frequently as a result of the addition of new grounds for contesting the enforcement of awards.

The Supreme Court determined that claims of contract fraud would not affect the arbitration agreement's legality in the case of Swiss Timing Ltd. v. Commonwealth Games [ 2014] 6 SCC  677.

The court emphasised that Sections 15 and 16 of the 1996 Act should be read collectively, indicating that everything, including the query of whether the primary contract is defective or voidable, might be sent to arbitration.

Without offering any legislative guidance, the legislature has effectively handed the judiciary the duty to make the following clarifications:

1. The extent to which the court may take into account fresh evidence or re-evaluate existing evidence independent of the arbitral tribunal’s analysis.

2. The exact nature, definition, and application of “fraud” and “corruption.”

3. The degree of examination that can be used to examine the findings drawn in the award and the freedom to voice disagreements.

4. The repercussions of failing to bring claims of fraud or corruption up in front of the arbitral panel or in court.

It’s also crucial to note that under the old Section 36 in conjunction with Section 34, the award-debtor already had access to the grounds of fraud and corruption as justifications for requesting a stay on an arbitral award. Given this, it is still questionable whether introducing a separate ground for such issues has a legitimate basis, which may limit the court’s ability to evaluate the arbitral award thoroughly and provide justice that is in line with the facts of the case.

Conclusion

The flurry of legislation and ordinances passed in recent years makes clear that legislators in the 21st century want to make India a country that welcomes arbitration. The government’s lack of long-term legislative savvy is called into question by these fragmented revisions, though. For instance, the 2021 Amendment Act includes concepts like fraud and corruption without offering a comprehensive list or explanation of what comprises such practises, which causes instances to be left to the conventional legal system.

It is harmful to shift from the favourable enforcement approach of Indian courts to granting courts authority to suspend the execution of an arbitral decision in a jurisdiction where implementing a court judgement or decision is already problematic. This has a negative impact on the enforceability of contracts and is likely to cause unease for businesses operating in a system where parties are vulnerable to additional litigation when attempting to enforce the arbitral decision.