Arbitration Cases
Arbitration Cases
Arbitration Cases
Potluri Madhavilata
(2009)
Core issue: Does the arbitration agreement survive for the purpose of resolution of disputes
arising under or in connection with the contract even if its performance has come to an end
on account of termination due to breach?
Facts: PM hire purchase with MAGMA for purchase of a motor vehicle – pay in 46
installments – default in payment of few installments – MAGMA seized the vehicle – sent a
notice to PM intimating --- hire purchase agreement has been terminated.
PM filed suit against MAGMA seeking recovery of possession & injunction on further
transfer of vehicle. MAGMA application u/s 8—refer the dispute to arbitration. PM said hire
purchase agreement terminated, does not survive – the matter need not be referred to
arbitration. Civil court dismissed MAGMA’s application. HC also.
Supreme Court:
Heyman and Anr. v. Darwins Ltd.—Scope of arbitration clause in the context of a dispute
arising on the question of repudiation of a contract.
Lord Macmillan: “Arbitration clause in a contract is quite distinct from the other clauses. The
other clauses set out the obligations which the parties undertake towards each other, but the
arbitration clause does not impose on one of the parties an obligation in favour of the other. It
embodies the agreement of both parties that, if any dispute arises with regard to the
obligations which the one party has undertaken to the other, such dispute shall be settled by a
tribunal of their own constitution. And there is this very material difference, that whereas in
an ordinary contract the obligations of the parties to each other cannot in general be
specifically enforced and breach of them results only in damages, the arbitration clause can
be specifically enforced by the machinery of the Arbitration Act. The appropriate remedy for
breach of the agreement to arbitrate is not damages, but its enforcement.”
An accord and satisfaction only releases the parties from the obligations under a contract but
does not affect the arbitration clause in it. A dispute whether the obligations under a contract
have been discharged by an accord and satisfaction is no less a dispute regarding the
obligations under the contract. Such a dispute has to be settled by arbitration if it is within the
scope of arbitration clause and either party wants that to be done.
An arbitration clause is a collateral term in the contract, which relates to resolution disputes,
and not performance. Even if the performance of the contract comes to an end on account of
repudiation, frustration or breach of contract, the arbitration agreement would survive for the
purpose of resolution of disputes arising under or in connection with the contract.
Section 16(1) of the Act makes it clear that while considering any objection with respect to
the existence or validity of the arbitration agreement, an arbitration clause which forms part
of the contract, has to be treated as an agreement independent of the other terms of the
contract; and a decision that the contract is null and void shall not entail ipso jure the
invalidity of the arbitration clause.
An arbitration clause, as is well known, is a part of the contract. It being a collateral term
need not, in all situations, perish with coming to an end of the contract. It may survive. This
concept of separability of the arbitration clause is now widely accepted. In line with this
thinking, the UNCITRAL Model Law on International Commercial Arbitration incorporates
the doctrine of separability in Article 16(1). The Indian law -- the Arbitration and
Conciliation Act, 1996, which is based on the UNCITRAL Model Law, also explicitly adopts
this approach in Section 16(1)(b).
As per Kishorilal Gupta, merely because the contract has come to an end by its termination
due to breach, the arbitration clause does not get perished nor rendered inoperative; rather it
survives for resolution of disputes arising "in respect of" or "with regard to" or "under" the
contract.
For s. 8’s applicability, the following conditions must be satisfied:
(a) that there exists an arbitration agreement;
(b) that action has been brought to the court by one party to the arbitration agreement against
the other party;
(c) that the subject matter of the suit is same as the subject matter of the arbitration
agreement;
Section 8 is in the form of legislative command to the court and once the prerequisite
conditions as aforestated are satisfied, the court must refer the parties to arbitration.
The trial court, in the circumstances, ought to have referred the parties to arbitration as per
arbitration Clause 22--- matter referred to arbitration.
A claim for arbitration cannot be rejected merely or solely on the ground that a settlement
agreement or discharge voucher had been executed by the claimant, if its validity is disputed
by the claimant.
When a contract has been fully performed, there is a discharge of the contract by
performance, and the contract comes to an end. In regard to such a discharged contract,
nothing remains - neither any right to seek performance nor any obligation to perform – there
cannot be any dispute.
If the party who has executed the discharge agreement or discharge voucher, alleges that the
execution of such discharge agreement or voucher was on account of fraud/coercion/undue
influence practiced by the other party and is able to establish the same, then obviously the
discharge of the contract by such agreement/voucher is rendered void and cannot be acted
upon. Consequently, any dispute raised by such party would be arbitrable.
Bharat Heavy Electricals Ltd., - the question whether there was discharge of the contract by
accord and satisfaction or not, is a dispute arising out of the contract, which requires to be
referred to arbitration.
Held: prima facie, there is no accord and satisfaction in this case and the dispute is arbitrable.
But it is still open to the appellant to lead evidence before the arbitrator, to establish that there
is a valid and binding discharge of the contract by way of accord and satisfaction.
Finality given to the order of the court: the 'competence' of the arbitral tribunal to rule
upon its own jurisdiction and about the existence of the arbitration clause, when the Chief
Justice or his designate had appointed the Arbitral Tribunal under Section 11 of the Act, after
deciding upon such jurisdictional issue.
SBP Patel: Section 16 is said to be the recognition of the principle of Kompetenz -
Kompetenz. The fact that the arbitral tribunal has the competence to rule on its own
jurisdiction and to define the contours of its jurisdiction, only means that when such issues
arise before it, the Tribunal can and possibly, ought to decide them. This can happen when
the parties have gone to the arbitral tribunal without recourse to Section 8 or 11 of the Act.
But where the jurisdictional issues are decided under these Sections, before a reference is
made, Section 16 cannot be held to empower the arbitral tribunal to ignore the decision given
by the judicial authority or the Chief Justice before the reference to it was made.
Boghara Polyfab: prima facie of the view that there is no accord and satisfaction in this case
and the dispute is arbitrable. But it is still open to the appellant to lead evidence before the
arbitrator, to establish that there is a valid and binding discharge of the contract by way of
accord and satisfaction.
In holding that the arbitration clause had perished with the SPA in toto, the Learned Single
Judge has, with respect, overlooked that under Section 45 what the Court was called upon to
decide is not whether the main contract had been discharged, terminated or extinguished but
whether the arbitration agreement has been rendered null and void, inoperative or incapable
of performance. For that, the ground of challenge must be based on facts which are specific to
the arbitration agreement.
When by their mutual agreement they purported to resolve the modalities for working out the
performance of the clause on pre-emption, that did not render the arbitration agreement null
and void, inoperative or incapable of performance.
Once the exclusion contained in Section 45 is not attracted, parties must be referred to
arbitration.
A simple allegation of fraud may not be a ground to nullify the effect of an arbitration
agreement. However, when serious allegations of fraud are involved, the Supreme Court held
that courts can dismiss an application to refer a dispute to arbitration under Section 8 of the
Act. Serious allegations of fraud would involve:
Venture Global Engineering v. Satyam Computer Services Ltd. and Ors. (2008)
VGE, a company incorporated in the United States of America and SCS entered into a Joint
Venture Agreement to constitute a company named Satyam Venture Engineering Services
Ltd in which both the appellant and respondent have 50 per cent equity shareholding.
Another agreement was also executed between the parties on the same day being the
Shareholders Agreement which provides that disputes have to be resolved amicably between
the parties and failing such resolution, the disputes are to be referred to arbitration.
Disputes arose between the parties. SCS alleged that VGE had committed an event of default
under the Shareholders Agreement. SCS filed a request for arbitration with the London Court
of International Arbitration which appointed a sole arbitrator. Arbitrator passed an award
directing VGE to transfer its share to SCS. SCS filed a petition to recognize and enforce the
award before the US Court. VGE objected to the enforcement of the Award saying it was in
violation of Indian Laws and Regulations specifically FEMA. VGE filed a suit City Civil
Court, Secunderabad seeking declaration to set aside the award and permanent injunction on
the transfer of shares under the Award. District court passed ex parte ad interim order of
injunction. SCS appealed before the AP HC. HC dismissed the appeal holding that the award
cannot be challenged even if it is against the public policy and in contravention of statutory
provisions.
Issue: jurisdiction of Indian court for setting aside a foreign award u/s 34.
VGE’s Contentions: The claim that Part I of the Arbitration and Conciliation Act, 1996
applies to foreign awards is covered by the judgment of this Court in Bhatia. SCS could not
have pursued the enforcement proceedings in the District Court in Michigan, USA in the
teeth of the injunction granted by the Courts in India which also, on the basis of the Comity
of Courts should have been respected by the District Court in Michigan.
SCS’ contentions: In view of Section 44 of the Act and the terms of the agreement, no suit
would lie in India to set aside the Award, which is a foreign Award. No application under
Section 34 of the Act would lie to set aside the Award. In view of the provisions of the Act
and the terms of the agreement, the SCS rightly sought enforcement of the Award in
Michigan, USA, hence the civil suit filed at Secunderabad is not maintainable.
Ruling:
In any event, to apply Section 34 to foreign international awards would not be inconsistent
with Section 48 of the Act, or any other provision of Part II as a situation may arise, where,
even in respect of properties situate in India and where an award would be invalid if opposed
to the public policy of India, merely because the judgment-debtor resides abroad, the award
can be enforced against properties in India through personal compliance of the judgment
debtor and by holding out the threat of contempt as is being sought to be done in the present
case. In such an event, the judgment-debtor cannot be deprived of his right under Section 34
to invoke the public policy of India, to set aside the award.
The extended definition of public policy, as provided in the case of ONGC v. Saw Pipes, can
be by-passed by taking the award to a foreign country for enforcement.
The court agrees with the conclusions of Bhatia that:
provisions of Part I of the Act would apply to all arbitrations including international
commercial arbitrations and to all proceedings relating thereto.
where such arbitration is held in India, the provisions of Part-I would compulsorily
apply and parties are free to deviate to the extent permitted by the provisions of Part-I.
even in the case of international commercial arbitrations held out of India provisions
of Part-I would apply unless the parties by agreement, express or implied, exclude all
or any of its provisions.
SCS, in enforcing the Award in the US District Court instead of Indian Courts was motivated
by the intention of evading the legal and regulatory scrutiny to which this transaction would
have been subject to had it been enforced in India. In the light of the statutory provisions as
provided in the Companies Act and FEMA.
The effort of SCS was to avoid enforcement of the Award under Section 48 of the 1996 Act
which would have given VGE, the benefit of the Indian Public Policy rule based on the
judgment in the Saw Pipes case and for avoiding the jurisdiction of the Courts in India though
the award had an intimate and close nexus to India in view of the fact that, (a) the company
was situated in India; (b) the transfer of the "ownership interests" shall be made in India
under the laws of India as set out above; (c) all the steps necessary have to be taken in India
before the ownership interests stood transferred. If therefore, SCS was not prepared to
enforce the Award in spite of this intimate and close nexus to India and its laws, the VGE
herein would certainly not be deprived of the right to challenge the award in Indian Courts.
In this proceeding, we are not deciding the merits of the claim of both parties, particularly,
the stand taken in the suit filed by the appellant- herein for setting aside the award. It is for
the concerned court to decide the issue on merits and we are not expressing anything on the
same. The present conclusion is only with regard to the main issue whether the aggrieved
party is entitled to challenge the foreign award which was passed outside India in terms of
Section 9/34 of the Act.
Though in Bhatia International (supra) the issue relates to filing a petition under Section 9 of
the Act for interim orders the ultimate conclusion that Part I would apply even for foreign
awards is an answer to the main issue raised in this case. We agree with this conclusion, and
we have not expressed anything on the merits of claim of both the parties.
Criticism of Venture:
The new procedure is that a person seeking to enforce a foreign award has not only to file an
application for enforcement under Section 48 of the Act, it has to meet an application under
Section 34 of the Act seeking to set aside the award. The new ground is that not only must the
award pass the New York Convention grounds incorporated in Section 48, it must pass the
expanded; public policy’ ground created under Section 34 of the Act. In practice, the
statutorily enacted procedure for enforcement of a foreign award would be rendered
superfluous till the application for setting aside the same (under Section 34) is decided. The
statutorily envisaged grounds for challenge to the award would also be rendered superfluous
as notwithstanding the success of the applicant on the New York Convention grounds, the
award would still have to meet the expanded ‘public policy’ ground (and virtually have to
meet a challenge to the award on merits).
Indtel Technical Services Private Ltd. v. W.S. Atkins Rail Ltd. the parties had not chosen the
law governing the arbitration procedure including the seat/venue of arbitration and it was,
therefore, that the Court went on to exercise the jurisdiction under Section 11(6) of the Act. It
was specifically found therein that there was no exclusion of the provisions of the Act by the
parties either expressly or impliedly, which is clear from the observations made in the
paragraph 37 of that judgment.
Videocon Industries Limited v. Union of India (UOI) and Ors. (2011) did not assume
jurisdiction as in other cases.
The dispute arose out of provisions of a Production Sharing Contract (PSC) signed between
the Government of India (UoI) on the one hand and a consortium consisting of four
companies on the other. This PSC could be amended by a written instrument signed by all the
parties. Contract - governed by laws of India. AA by laws of England.
The arbitration clause in the PSC provided for Kuala Lumpur, Malaysia as the seat of
arbitration. Due to the outbreak of SARS disease, the arbitration proceedings were held in
Amsterdam and London. In October 2003, the Tribunal passed a consent order which read:
“By consent of parties, seat of the arbitration is shifted to London.” The issue was whether
this meant a transfer of the seat of arbitration itself or merely a consensus between the parties
to the arbitration to hold the proceedings in London but to retain Kuala Lumpur as the seat.
Videocon argued that there was a transfer of seat and Union of India argued that there was no
transfer of seat.
UOI challenged partial award dated by filing a petition in the High Court of Malaysia at
Kuala Lumpur, also requested to order the arbitral proceedings to continue in Kuala Lumpur.
Videocon questioned the maintainability of the case before the High Court of Malaysia by
contending that in view of Clause 34.12 of the PSC only the English Courts have the
jurisdiction to entertain any challenge to the award. HC held remaining arbitral proceedings
will be held in London only.
UOI filed application u/s 9 in Delhi High Court for stay of the arbitral proceedings and also
challenges the partial award. Videocon pleaded that the Courts in India do not have the
jurisdiction to entertain challenge to the arbitral award. Delhi High Court overruled the
objection of Videocon and held that it has the jurisdiction to entertain the petition filed u/s 9.
Videocon’s contention:
even if the petition filed by UOI under Section 9 could be treated as maintainable, the High
Court did not have jurisdiction over the arbitration proceedings because the same are
governed by the laws of England. Also, after having expressly consented to the shifting of the
seat of arbitration from Kuala Lumpur to Amsterdam in the first instance and effectively
taken part in the proceedings held at London, Videocon is estopped from claiming that the
seat of arbitration continues to be at Kuala Lumpur.
UOI’s contention:
mere fact that the arbitration was held outside Kuala Lumpur due to the outbreak of epidemic
SARS, the venue of arbitration cannot be said to have been changed from Kuala Lumpur to
London. Once Kuala Lumpur was decided as the venue of arbitration by written agreement,
the same could not have been changed except by amending the written agreement. London
cannot be treated as juridical seat of arbitration merely because the parties had decided that
the arbitration agreement contained in Article 34 will be governed by the laws of England.
Issues:
1. whether Kuala Lumpur was the designated seat or juridical seat of arbitration and the
same had been shifted to London?
2. whether the Delhi High Court could entertain the petition filed by the Respondents
under Section 9 of the Act.
Holding:
On first issue:
Neither there was any agreement between the parties to the PSC to shift the juridical seat of
arbitration from Kuala Lumpur to London nor any written instrument was signed by them for
amending Clause 34.12. Therefore, the mere fact that the parties to the particular arbitration
had agreed for shifting of the seat of arbitration to London cannot be interpreted as anything
except physical change of the venue of arbitration from Kuala Lumpur to London.
Referred Dozco India P. Ltd. v. Doosan Infracore Co. Ltd. which has quotes Redfern &
Hunter: “there is only one "place" of arbitration. This will be the place chosen by or on behalf
of the parties; and it will be designated in the arbitration agreement or the terms of reference
or the minutes of proceedings or in some other way as the place or "seat" of the arbitration.
This does not mean, however, that the arbitral tribunal must hold all its meetings or hearings
at the place of arbitration. each move of the arbitral tribunal does not of itself mean that the
seat of the arbitration changes. The seat of the arbitration remains the place initially agreed by
or on behalf of the parties.”
On 2nd issue:
Referred Bhatia and Venture.
Hardy Oil and Gas Limited v. Hindustan Oil Exploration Company Limited and Ors. (2006)
Guj HC:
During the pendency of the arbitration proceedings, an application was filed by the Appellant
in the District Court, Vadodara under Section 9 of the Act.
Contract—Indian law. Proceedings -- London Court of International Arbitration (SLCIA).
Place of arbitration – London. Law governing arbitration—English law.
“once the parties had agreed to be governed by any law other than Indian law in cases of
international commercial arbitration, then that law would prevail and the provisions of the
Act cannot be invoked questioning the arbitration proceedings or the award. Parties' intention
was to be governed by English law in respect of arbitration. It can be interpreted only to mean
that in case of any dispute regarding arbitration, English law would apply. District Court,
Vadodara did not have the jurisdiction to entertain the petition filed under Section 9 of the
Act because the parties had agreed that the law governing the arbitration will be English
law.”
The parties in Videocon had agreed that notwithstanding Article 33.1, the arbitration
agreement contained in Article 34 shall be governed by laws of England. This necessarily
implies that the parties had agreed to exclude the provisions of Part I of the Act. As a
corollary to the above conclusion, we hold that the Delhi High Court did not have the
jurisdiction to entertain the petition filed by the Respondents under Section 9 of the Act and
the mere fact that the Appellant had earlier filed similar petitions was not sufficient to clothe
that High Court with the jurisdiction to entertain the petition filed by the Respondents.
Note: The reasoning here by referring to the Guj HC case is flawed because the GJ HC has
denied jurisdiction because the law governing the arbitration was English law (law governing
contract was Indian law, law governing AA was not specified and the seat was London), but
here in Videocon case, the law governing contract is Indian law, law governing AA is
English law and seat is kuala lumpur, law governing arbitration is not specified (arbitration
should be conducted under the law of seat of arbitration).
Issue: whether this Court would be justified and would have the jurisdiction to appoint an
Arbitrator under Section 11(6) of the Act.
Court’s observation:
It would be clear from this that the bracketed portion in the Article was not for deciding upon
the seat of the arbitration, but for the convenience of the parties in case they find to hold the
arbitration proceedings somewhere else than Seoul, Korea.
the law laid down in Bhatia International v. Bulk Trading S.A. and Anr. (cited supra) and
Indtel Technical Services Private Ltd. v. W.S. Atkins Rail Ltd. (cited supra), as also in
Citation Infowares Ltd. v. Equinox Corporation (cited supra) is not applicable to the present
case. Since the interpretation ohf Article 23.1 suggests that the law governing the arbitration
will be Korean law and the seat of arbitration will be Seoul in Korea, there will be no
question of applicability of Section 11(6) of the Act and the appointment of Arbitrator in
terms of that provision.
For discussion on the Sumito Heavy Industries case, refer notes.
Discuss the impact of the two major amendments to the Arbitration and Conciliation
Act 1996 in order to make commercial arbitration a cost effective and speedy mode of
dispute resolution.
2015 amendment
1. NO AUTOMATIC STAY OF ARBITRAL AWARD UPON FILING OF A
CHALLENGE TO THE ARBITRAL AWARD
Prior to the Amendment Act, mere filing of a challenge petition to the arbitral award would
result in an automatic stay of the arbitral award. The court would take several years to decide
the petition, making the process of arbitration time consuming and ineffective. In a welcome
move, the Amendment Act provides that there would be no automatic stay of the arbitral
award and a separate application will have to be filed seeking stay of the arbitral award. The
court is now required to record reasons for grant of stay and the provisions of the CPC for
grant of stay of a money decree have been made applicable, meaning thereby that the losing
party will necessarily be required to either deposit some part or the entire sum awarded in the
arbitral award, or furnish security, as the court deems fit.
2. TIME BOUND PROCEEDINGS
The Amended Act provides for faster timelines to make the arbitration process more
effective. Proviso to Section 24 has been added providing for the arbitral tribunal to hold oral
hearings for evidence and oral argument on day-to-day basis and not grant any adjournments
unless sufficient cause is made out. The arbitral tribunal has been vested with the power to
impose heavy costs for adjournments without sufficient cause. Every arbitral award must be
made within 12 (twelve) months from the date the arbitrator(s) receives a written notice of
appointment. The parties may mutually decide to extend the time limit by not more than 6
(six) months. If the award is not made within 18 (eighteen) months, the mandate of the
arbitrator(s) will terminate unless the court extends the period upon an application filed by
any of the parties. However, there is no time period fixed for approaching the court seeking
extension of time which may again contribute to delays.
Further, while extending the time for making the award, if the court finds that the delay was
attributable to the arbitral tribunal, it may order reduction in the arbitrator's fee by not
exceeding 5% (five percent) for each month of such delay. The court while extending the
time limit would also have the right to change the arbitrator(s) as it may deem fit. An
application to the court, as stated above would be endeavoured to be disposed by the court
within 60 (sixty) days from the date the opposite party receives the notice. A challenge to an
arbitral award should be disposed expeditiously and in any event within a period of one year
from the date on which notice is served upon the other party. Section 11 will now have to be
decided within a period of 60 (sixty) days from the date of service of notice to the opposite
party.
In an arbitration regime that was plagued with delays and costs, this is a good development.
However, the parties would be forced to go court to seek extensions of time to complete the
arbitrations, which is an undesirable situation in a court system burdened with huge pendency
of cases.
Interestingly, it would appear that even the arbitration institutions would be required to make
an application for extension of time if the award is not rendered within the specified period. It
is indeed an undesirable situation to have parties including the institutional arbitrations with
their own set of rules, to be forced to come to court seeking extension of time to complete the
arbitration proceedings.6
Further, the proposed time line of 12 (twelve) months to pass the arbitral award is very
ambitious, even by international standards. There are some complex disputes, the resolution
of which may not be possible within this time frame. Even the Law Commission Report had
recommended a time period of 24 (twenty four) months to complete the arbitration
proceedings. Such ambitious time lines may act as a deterrent for foreign parties to choose
India as the seat of arbitration, particularly in complex disputes. Providing ambitious
timelines may actually backfire and go contrary to the very purpose of introducing these
amendments.
3. FAST TRACK PROCEDURE
Section 29B has been introduced which gives an option to the parties to agree on a fast track
mechanism under which the award will have to be made within a period of 6 (six) months
from the date the arbitrator(s) receiving written notice of appointment. The dispute would be
decided based on written pleadings, documents and submissions filed by the parties without
any oral hearing. Oral hearing can be held only if all the parties request or the arbitral tribunal
considers it necessary for clarifying certain issues. There may not be too many occasions
where the parties to an on-going dispute agree on anything, let alone agree on a fast track
procedure.
4. CAP ON FEES TO ARBITRATOR
The Fourth Schedule has been introduced which provides the model fees in case of
arbitrations other than international commercial arbitrations and in cases where parties have
agreed to the rules of an arbitral institution, with a view to ensure that the arbitration process
does not become very expensive. Section 11A (2) has been introduced which details the
procedure for Central Government to amend the Fourth Schedule. However, since the High
Court of each State is required to frame rules after taking into consideration the rates
mentioned in the Fourth Schedule, this may lead to a disharmonised fee regime 7 across the
country.
2019 amendment
Timely conduct of proceedings
As per the newly introduced Section 23(4), the statement of claim and defence shall be
completed within a period of six months from the date of appointment of the arbitrator(s) and
as per Proviso to the amended Section 29(1), the award in the matter of international
commercial arbitration may be made as expeditiously as possible with an endeavour to
deliver it within 12 months from the date of completion of pleadings under Section 23(4).
Whilst it is a welcome step – certainly with the right intent – it may lead to conflicts with the
rules of an arbitral institution as it overlooks the procedural aspects inherent to a complex
international arbitration. In international arbitration, the arbitrators routinely hold a case
management hearing, and after consultation with the parties, issue an order on the procedural
timetable for completion of pleadings, conduct of hearings etc. (e.g., see Rule 24 of the 2017
ICC Arbitration Rules). However, if Section 23(4) restricts a tribunal from being in control
of its proceedings, then it may be impossible to effectively conduct complex multi-party
arbitrations involving massive documents, where it may be practically impossible to complete
pleadings in six months. Similarly, the autonomy of parties to decide on a more flexible
procedural schedule will be severely limited. Most importantly, the parties will always be
wary of the fate of an award where the time requirements of Section 23(4) are not strictly
abided.
2021 amendment
AUTOMATIC STAY ON AWARDS
The amendment in Section 34 on automatic stay of the Principal Act's awards is the most
significant change in the Amendment Act of 2021. In the present system, a party can file an
application before the Court under Section 34 of the 1996 Act for setting aside an arbitral
award. However, after the 2015 amendment to the Act, an automatic stay would not be
granted on the award's operation by merely filing an application for setting it aside.
The 2021 Amendment has introduced a material change by adding a proviso under section
36(3) to ensure that if courts are prima facie satisfied by the case made out of either (i) the
arbitration agreement or contract, which is the basis of the award; or (ii) the making of the
award, was induced or affected by fraud or corruption. It shall stay the award unconditionally
pending disposal of the challenge. This has a retrospective effect, deemed to be effective
from October 23, 2015.
Many parliamentarians criticised the unconditional stay during introduction of the Bill In Lok
Sabha. Experts also point out that an unconditional stay amounts to a blanket stay, which will
hurdle India's efforts towards a pro-arbitration regime. This is primarily because it becomes
easy for losing party to allege corruption and automatic stay on the arbitral award's
enforcement.
This may defeat the very purpose of alternate dispute mechanism by drawing parties to courts
and making it prone to litigation. Another primary concern with this amendment is that the
legislation does not describe either fraud or corruption, creating an ambiguous situation
where defendant parties may suffer the litigation heat even if they are correct. This
amendment's retrospective effect might also open up a floodgate of litigation cases and
overburden the courts.
In cases where an application under Section 36(2) of the Act is pending adjudication before a
court, the applicants will now have to make renewed applications based on the grounds listed
in the new amendment. This is likely to involve delays and increased costs unless the courts
can sua sponte take notice of this new amendment and dispose of it with the filing of new
submissions.
Therefore, this amendment will affect enforcement of awards, and India might further slip in
ease of doing business reports. This amendment takes a regressive step and does not help
India's aim of a pro-arbitration regime.
In response to the amendment's backlash, The Law Minister stated that despite the use of
words, fraud and corruption in Section 34 were necessary as latter does not provide an
"automatic stay" of the award. He further added that the Government wanted to promptly
prevent parties collusive attempts to seek the benefit of an award tainted with corruption.
These arguments are unconvincing as he does not provides the reasoning behind his claim.
Furthermore, pro-amendment scholars have argued that enabling this change relieves persons
affected due to fraudulent elements in the arbitration award. They cite examples like Venture
Global Engineering, where there was alleged fraud by the respondent's Tech Mahindra and
Satyam Computers.
This fraud was discovered only after three years after the enforcement of the award, as a
result, the award had to be revisited and accordingly set aside. However, it is still unclear
how widening the Act's scope would protect several innocent parties where the challenge is
only made to delay the enforcement of awards.
Discuss the scope of the concept of the public policy in the annulment of an arbitral
award.
legal rights and duties can not exist in a vacuum but must have a place within a legal system
that is available for dealing with such questions as the validity, application, and interpretation
of contracts, and, generally, for supplementing their express provisions.
Like a contract, an arbitration does not exist in a legal vacuum. It is regulated, first, by the
rules of procedure that have been agreed or adopted by the parties and the arbitral tribunal;
secondly, it is regulated by the law of the place of arbitration.
It is possible to identify at least five different systems of law that, in practice, may have a
bearing on an international arbitration:
1. the law governing the arbitration agreement and the performance of that agreement;
2. the law governing the existence and proceedings of the arbitral tribunal or law
governing the arbitration (the lex arbitri);
3. the law, or the relevant legal rules, governing the substantive issues in dispute
(generally described as the ‘applicable law’, the ‘governing law’, ‘the proper law of
the contract,’ or ‘the substantive law’);
4. law governing the parties' capacity to enter into an arbitration agreement
5. other applicable rules and non-binding guidelines and recommendations; and
6. the law governing recognition and enforcement of the award (which may, in practice,
prove to be not one law, but two or more, if recognition and enforcement is sought in
more than one country in which the losing party has, or is thought to have, assets).
Law governing the arbitration agreement
It might be assumed that this is the same law as that which the parties chose to govern the
substantive issues in dispute—but this is not necessarily a safe assumption.
It would therefore be sensible, in drafting an arbitration agreement, also to make clear what
law is to apply to that agreement. If no such express designation has been made and it
becomes necessary to determine the law applicable to the agreement to arbitrate, the principal
choice—lies between the law of the seat of the arbitration and the law that governs the
contract as a whole.
1. Law of the contract:
Since the arbitration clause is only one of many clauses in a contract, it might seem
reasonable to assume that the law chosen by the parties to govern the contract will
also govern the arbitration clause. If the parties expressly choose a particular law to
govern their agreement, why should some other law—which the parties have not
chosen— be applied to only one of the clauses in the agreement, simply because it
happens to be the arbitration clause? The autonomy of the arbitration clause and of the
principal contract does not mean that they are totally independent one from the other,
as evidenced by the fact that acceptance of the contract entails acceptance of the
clause, without any other formality.
An arbitration clause is taken to be autonomous and to be separable from other
clauses in the agreement. If necessary, it may stand alone. In this respect, it is
comparable to a submission agreement. It is this separability of an arbitration clause
that opens the way for the possibility that it may be governed by a different law from
that which governs the main agreement.
The New York Convention points towards this conclusion. In the provisions relating
to enforcement, the Convention stipulates that the agreement under which the award
is made must be valid ‘under the law to which the parties have subjected it’, or failing
any indication thereon, ‘under the law of the country where the award was made’
(which will be the law of the seat of the arbitration).