India introduces mandatory stay on enforcement of domestic arbitral awards to protect against fraud and corruption

Overview

On 4 November 2020 the Government of India issued the Arbitration and Conciliation (Amendment) Ordinance 2020 (the “Ordinance Amendment”) - modifying by immediate effect India’s Arbitration and Conciliation Act 1996, which seeks to regulate domestic arbitration (the “1996 Act”).

The Ordinance Amendment introduces unconditional stays to the enforcement of domestic arbitral awards that are being challenged by parties on the grounds of having been “induced or effected” by fraud or corruption. This amendment is deemed to take effect from 23 October 2015 and applies to all cases arising from arbitral proceedings, irrespective of whether the proceedings were commenced before or after that date.

In passing the Ordinance Amendment, the Government of India has also withdrawn certain mandatory experiences and qualifications of arbitrators in order for them to be considered as qualified to be seated in India.

Further detail outlining the implication of these changes is set out below.

Stay of enforcement of arbitral awards: prima facie fraud cases

Section 34 of the 1996 Act allows those who are a party to an arbitral award made in India to apply to the courts to have it set aside, on the grounds that it conflicts with the public policy of India. This includes circumstances where it is alleged that the making of the arbitral award was induced or effected by fraud or corruption.

Prior to 2015, where a section 34 application had been made, section 36 of the 1996 Act also applied - which provided that any enforcement of the arbitral award being challenged would be stayed until the party’s section 34 application had been decided by the Indian courts. Unsurprisingly, this encouraged losing parties to arbitral awards to challenge their award in order to delay its enforcement.

In 2015, an amendment to the 1996 Act clarified that the filing of an application to set aside an award would not, by default, render the award unenforceable unless the court granted a stay of the enforcement by a separate application.

Now, the introduction of the Ordinance Amendment establishes that a court must stay the arbitral award if it is satisfied that a prima facie case of fraud or corruption has been made out in respect of either (i) the arbitration agreement or contract which is the basis of the award; or (ii) the making of the award itself. If a stay is granted by the court on those grounds, it shall continue until the application challenging the basis of the award has been decided.

In the Ordinance Amendment it is stated that the Ordinance Amendment was necessary "to address the concerns raised by stakeholders after the enactment of the Arbitration and Conciliation (Amendment) Act, 2019 and to ensure that all the stakeholder parties get an opportunity to seek an 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".

Qualifications of arbitrators and the withdrawal of the Eighth Schedule

The Ordinance Amendment has also removed the Eighth Schedule to the 1996 Act, which was introduced by the Arbitration and Conciliation (Amendment) Act 2019 and dealt with qualification and experience requirements of arbitrators.

The Eighth Schedule effectively precluded foreign lawyers from obtaining accreditation as arbitrators in India.

Section 43J of the 1996 Act now states that “the qualifications, experience and norms for accreditation of arbitrators shall be such as may be specified by the regulations”.

Comment

The Indian courts have previously been able to stay (at their discretion) the enforcement of an arbitral award in circumstances where it was being challenged by a party. The Ordinance Amendment’s introduction of a mandatory stay on enforcement can be seen as a positive step to mitigate against fraud and corruption in arbitration in India. However, it may also incentivise losing parties to challenge arbitral awards under Section 34 of the 1996 Act on those grounds. It remains to be seen whether this measure will help to eliminate fraud and corruption from arbitration in India, or whether it predominantly will serve to increase the strain on the court system and delay enforcement of domestic arbitral awards. A collateral impact of this could be the increase in the use of foreign seated arbitrations by Indian parties. This could reduce the risk of challenge in Indian courts and enable the route for seeking enforcement of foreign arbitral awards.

Qualifications and experience for the accreditation of arbitrators will now be prescribed by regulations. It too remains to be seen what those regulations will contain and whether this is a pre-cursor to regulations anticipated from the Arbitration Council of India (as first introduced in the Arbitration and Conciliation (Amendment) Act 2019).