Akul Mishra[1]
I. Introduction
Arbitration is fundamentally designed to provide an alternative to court proceedings, focusing on resolving disputes outside the judicial system. However, in India, there remains a significant reliance across various areas of law, to preserve the essence of arbitration, such interventions must be minimised wherever possible. Yet, the amendment that brought Section 36(3)6 of the Arbitration and Conciliation Act, 1996 (“A&C Act, 1996”) brings a new open-ended question, which affects the overall enforcement and finality of arbitral awards. Furthermore, the concern persists over how much this may undermine the benefits of arbitration as a non-judicial dispute resolution mechanism.
The potential harm appears magnified in light , of the recent Supreme Court case of Delhi Metro Rail Corporation Ltd. v. Delhi Airport Metro Express Ltd., where an arbitral award was set aside on grounds of blatant illegality. This case was finally settled by a curative petition. While the extended timeline in this instance may be an exception, Section 36 interventions raise fears that prolonged timelines for , setting aside arbitral awards could become more common in India, eroding the core purpose of Arbitration.
In this blog post, the author would like to propose a solution that avoids any apparent delay in Indian domestic arbitration through Section 36(3). First, the contradiction that Section 36(3) with Section 34 is analysed, alongside the precariously confusing situation it stipulates. Second, the author aims to introduce a positivist solution to the contradiction, with an intention to maintain the true nature of why Arbitration remains a quick dispute resolution mechanism.
II. Issues regarding contradictory legal interplays with Sections 34 and 36(3)
Section 36(3)
Upon filing of an application under sub-section (2) for stay of the operation of the arbitral award, the Court may, subject to such conditions as it may deem fit, grant stay of the operation of such award for reasons to be recorded in writing:
[Provided further that where the Court is satisfied that a Prima facie case is made out that,--
(a) the arbitration agreement or contract which is the basis of the award; or
(b) the making of the award, was induced or effected by fraud or corruption, it shall stay the award unconditionally pending disposal of the challenge under section 34 to the award.
As seen above, Section 36(3) provides for an unconditional stay on the arbitral award. These conditions include aprima facie fraud assesment or corruption regarding the arbitral award framing and/or the arbitration agreement/ parent contract. To assess whether this amendment is a step in the right direction, we must first examine the language of the interconnected Section 34.
While Section 34 allows Indian courts to set aside awards, it raises the question of whether Section 34 is equivalent to an appellate jurisdiction of the High Court and the Supreme Court. Section 34 already accounts for fraud allegations and corruption in petitions to set aside arbitral awards. But, Section 36(3) has now introduced a wider, more overarching jurisdiction of Indian courts, which directly goes against the strict approach of the Supreme Court, emphasising Section 5.
The Supreme Court’s minority opinion has stated that Section 34 is not an appellate jurisdiction. The narrow sine-qua-non considerations were emphasised over subjective interpretation. The considerations it should note are narrow in light of the unequivocal importance in Section 5 of the Arbitration Act. The Supreme Court’s analysis is strict, it has stated that an arbitral award cannot be set aside on merits. Thus, from all the aforementioned cases, we see a clear, consistent approach to Indian courts’ jurisdiction in setting aside arbitral awards. This narrow approach is a clear paradox against the amendment of Section 36(3), which is wider, allows courts to intervene regardless of party autonomy, and finally, breaks the res integra approach that courts had envisaged concerning the reading of Section 34 and Section 5.
The proviso of Section 36 does not survive without Section 34, and an unconditional stay will continue until a Section 34 application has been heard and decided upon. But, suppose an unconditional stay has been granted, the court deciding on the Section 34 application will reference the stay granted under Section 36. Thus, this increases the court’s jurisdiction by a very wide margin and places a contradiction to the narrow interpretation often taken behind Section 34. This proves to be the biggest issue regarding the proviso from the amendment.
The only material qualifier is that the courts must find prima facie evidence of what constitutes fraud/corruption to grant an unconditional stay. However, this qualifier itself is an over-dependence on courts over arbitral tribunals. If there is a high evidentiary value of fraud/corruption, which one may assume is the intention behind the use of 'prima facie,' then the courts will acknowledge and use the same to set aside the award through its narrow powers under Section 34. Thus, it does not seem necessary to have additional power of the court when the power of the court is, ideally, enough under Section 34.
Additionally, a Delhi High Court judgement of Italian Thai Development vs Ntpc Ltd did take a very narrow approach in adjudicating through Section 36(3), where it ascertained that only a prima facie case of fraud would allow an unconditional stay of the award. Yet, this does not answer the question of why this process was necessary when any application under Section 34 would have also successfully answered this question by an application of judicial mind, in consistency with jurisprudence, which guarantees minimum interference with Arbitral awards and the process as a whole.
In the factual matrix of Italian Thai Development the petitioner had made an application under Section 34. Thus, the rationale defending two different outcomes, one under Section 36, which is pending disposal of one under Section 34, seems to show a massive waste of resources and case pendency, which affects why out-of-court proceedings like arbitration, must be considered in the first place. This hurts the overall image and use of arbitration.
III. A Proposed Objective Solution
The solution that the author proposes may be considered radical. There is some belief in the lack of defence behind the logic of why we need two separate court-related findings, one under Section 36(3) and one under Section 34. Thus, the entire intention behind the amendment was, from what the author believes, extremely unnecessary unless there has been a pattern of unfair arbitral awards being upheld by Indian courts. The cost-benefit analysis is that the intention behind arbitration must be upheld, and when there was a recourse available under Section 34, there may not be any requirement under Section 36(3). An unconditional stay depends upon the questions that will be acknowledged and adjudicated under an application under Section 34.
Thus, the first and most radical solution is to stop and repeal the amendment to prevent any new jurisprudence that could severely affect the scope of arbitration in the country and hurt the entire process of arbitration while simultaneously overwhelming courts with increasing yet unnecessary jurisdiction under the A&C Act, 1996. Repealing amendments itself is a big task. So if the solution is to repeal the amendment, it is too exceptional. Thus, the solution needs to be less extreme. A new less extreme solution could be to make the considerations under Section 36(3) as objective as possible.
This also comes out of the fact that the definition of what ‘prima facie’ means in Indian law is unclear, vague, inconsistent and highly contested. Prima facie has very high evidentiary value and must be, on a more accurate definition, on the face of it, present a case of fraud or corruption, to ensure that an unconditional stay is granted under Section 36(3).
Interestingly, the Delhi High Court, in the case of MTNL V Canara Bank, had to answer the question of what prima facieis and how much the court can investigate/assert that there is fraud or corruption in any or all conditions under Section 36(3). There was a distinction on what prima facie means, as envisaged by the court, the court did not go into the nuances of what part of the transaction in question came off as fraud. This was adjudicated upon by the arbitrator and formed the reason why the Delhi High Court asserted that there is no prima facie case of fraud. Fraud does not mean that the court will delve into Reserve Bank of India/ Securities and Exchange Board of India’s guidelines, then assert that the transaction was fraudulent, then assert the award was fraudulent and finally grant an unconditional stay.
The narrow approach was also defended by stating that the parties can resubmit such allegations under a Section 34 petition. This reasserts my argument that if the same allegations considered under Section 34, the necessity of a Section 36(3) process will fail. However, it brings in the reason why the author believes that there should be guidelines under Section 36(3), which can include some proposals that may be delved into by the legislative or as guidelines by the apex court themselves. These can be included in a very non-exhaustive manner,
A) The court shall only acknowledge, use and adjudicate the evidence presented at hand to determine if there is, prima facie, a case of fraud/corruption to grant an unconditional stay.
B) The court shall abstain from going into the depth of the transaction or the arbitral award itself but only stick to the allegations submitted by both parties to assert a prima facie case.
C) The court shall not question the judicial mind, conduct, credentials, decision, application/implementation of law by the esteemed arbitrator, and shall not question the decision taken by the arbitrator even if there is a prima facie case of fraud and corruption.
IV. Conclusion
A reader may notice that the solution is quite objective, meant to be followed step by step. In Part III for example, there is a clear-cut distinction between finding a prima facie corruption or fraud case and questioning the arbitrator’s decision and application of mind. Thus, this distinction is objective, and the proposed solution suggests that the courts should delve into what prima facie is, but follow objective criteria and decide on the unconditional stay. Even if new evidence is suddenly revealed, it can be used in a Section 34 application, but Section 36(3) should be extremely narrow and restrictive to ensure that it meets jurisprudence. It is in line with the courts’ logic, notwithstanding the strict jurisprudence in Section 34.
Current jurisprudence has seen that The Calcutta High Court has dismissed Section 36(3) petitions if no strict prima facie case is made out for an unconditional stay in the cases of WBSIDC Vs. Kaushalya Infrastructure Development Corporation and RMB Srijan Limited v. Great Eastern Energy Corporation Limited. The threshold is considered to be very high and Questions of fact do not meet this threshold. Thus, the objective criteria will not clash with jurisprudence but rather support the strict perspective and logic taken up by Indian courts. It makes their job easier and removes the burden of defining the term prima facie. The Courts have taken a high standard of proof for defining prima facie, with evidence at hand and a clear distinction of cases. Thus, it will be imperative if the evidence considerations are included in the objective criteria, meeting the high standard of proof asked out of Section 36(3) petitions.
[1] Akul Mishra is a fourth year law student at Jindal Global Law School, interested in corporate and commercial laws.
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