Business Laws

Arbitration and court interventions

Chitra Narayan | Updated on January 10, 2021

The amendment puts disputing parties in a difficult situation   -  Getty Images/iStockphoto

Recent Ordinance amending Arbitration Act seeks to recalibrate oversight by courts

The recent Ordinance (October 2020) amending the Arbitration and Conciliation Act, 1996 (the Act), is the third measure in four years that seeks to re-calibrate the balance between autonomy of the arbitration process and oversight by the courts.

This amendment permits a court hearing to challenge an arbitration award to stay the operation of the award unconditionally in situations where a claim is made that the arbitration agreement, or the very making of the award, was affected by fraud or corruption.

The amendment puts disputing parties in a difficult situation. After spending time and resources in completing the arbitration, parties are now forced to a standstill – to await completion of the challenge procedure, and possibly more rounds of appeal – undermining ease of resolution of disputes.

Reference points

The Act sets reference points for intervention by the courts during the life of the arbitration. If an arbitration agreement exists, courts will not intervene except under certain prescribed situations (Secion 5).

The first point of intervention arises if a case is filed even when there is an arbitration agreement in place — here, the court must refer the parties back to arbitration (Section 8).

The second intervention arises where parties to an arbitration need interim orders from the court (Section 9). Orders here can be passed before, during and after the arbitration. Similar powers to pass interim orders have been granted to the arbitral tribunal after its appointment (Section 17).

The third intervention is where the courts are petitioned for setting up the arbitral tribunal. This arises in cases where the parties do not agree on a procedure for appointment of the tribunal, or do not cooperate in the appointments to be made (Section 11). The last intervention by courts is to decide a challenge to the arbitration award.

By extensive amendments to the Act in 2016, Parliament stepped in to mark limits within which the courts would intervene in the situations set out above.

First impression basis

UnderSsection 8, the amendment stipulated that the court would examine the arbitration agreement on a first impression (or prima facie) basis. The court must refer parties back to arbitration, unless it is apparent that there is no valid arbitration agreement.

The Supreme Court has held that if a court finds that serious or complicated issues of fraud or forgery that affects the validity of the arbitration clause or the entire contract have been raised, and that these allegations are better heard by a court rather than arbitration, then it will refuse to refer the case to arbitration and take it up itself (A. Ayyasamy Vs A. Paramsivam and Avitel Post Studioz Vs HSBC Holding.)

Similarly, it was clarified that courts ought not to ordinarily intervene in the dispute to grant interim orders once the arbitral tribunal is constituted. Section 34 of the Act provides the grounds — such as going against a public policy of India or fraud — on which a challenge can be made to an award or decision made by the arbitral tribunal after arbitration.

The amendment now made through the Ordinance flips this balance. Earlier, the courts were set a high bar for intervention; now this threshold has been lowered, enabling more of court’s intervention.

Noteworthy aspects

Two more aspects of the amendment are noteworthy. This intervention is made after the entire arbitration process is over with resources and time expended, and a decision being made by the arbitral tribunal. The ground for intervention relates to fraud in the making of the award, and is serious. This ground was already recognised as warranting intervention by the court. What the amendment does is to mandate intervention on prima facie basis, and to remove discretion of the courts by requiring that the award not be permitted to be enforced.

The amendment unsettles the approach of the law in permitting the due course of the arbitration with limited intervention. It is also at odds with the approach in another provision of the Act that addresses fraud in the arbitration agreement. A similar complaint that there is no valid arbitration agreement (including the allegation that the arbitration agreement itself was fraudulently made) can be raised by parties before the arbitral tribunal, which decides this issue upfront (Section 16).

If the tribunal decides that the arbitration agreement exists and is valid, the Act does not permit an immediate challenge to this decision, apparently unmindful at this stage of the seriousness of the allegation. It permits the arbitration to proceed and be completed; the question of the validity of the arbitration agreement can be taken up only after the arbitration is over. This forces the parties to go through the entire process notwithstanding claims of fraud.

A consistent approach is needed through the Act on fraud and on interventions by court. An Ordinance as a mechanism for changes causes unpredictability as to the changes made. This Ordinance makes no reference to any urgent situation warranting this mechanism, and this could well have been done on due consideration and on a balance to be achieved throughout the Act.

(The author is an advocate and a mediator)

Published on January 10, 2021

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