The Commercial Courts Act, 2015 (“the CC Act”) has been enacted with the primary goal to expedite the resolution of commercial disputes in a time bound manner and with minimal interference of the higher courts. The Act also grants jurisdiction to the Commercial Court over arbitration matters of a commercial nature. While is intent is noble, the lawmakers have inadvertently left behind jurisdictional inconsistencies in the Act, which leads to conflict with the provisions of the Arbitration and Conciliation Act, 1996. In the previous part, we analysed the provisions in light of the judgment of the Madhya Pradesh High Court in Yashwardhan Raghuwanshi vs. District & Sessions Judge. Now, the High Court of Orissa (“OHC”) has ruled the opposite in its judgment dated 08.04.2022 in M.G. Mohanty & Anr. Vs. State of Odisha & Ors.
The Conflict
In the last part, we learnt that the conflict of jurisdiction arises owing to the fact that the Commercial Courts set up under the Act, are at the level of Civil Judge Sr. Div. whereas, as per the Arbitration and Conciliation Act 1996 (“theA & C Act”), only a Principal Civil Court of a district may exercise jurisdiction over disputes arising out of arbitration matters. This has led to uncertainty as to whether the newly established Commercial Courts can entertain applications under the Arbitration Act. Although there is no answer to resolve this conflict of jurisdiction under the legislation, by the Apex Court, the Madhya Pradesh High Court held that irrespective of the value of the claim, arbitration matters are required to be adjudicated Principal Civil Court of a district, it was held that in respect of commercial disputes involving an arbitration dispute only the Commercial Court of the status of District Judge or Additional District Judge would be the competent court to entertain the matters under Sections 9, 14, 34 & 36 of the Arbitration Act and such disputes cannot be entertained by any Court of Civil Judge Class-I or Senior Civil Judge, or any Court of Small Causes.
The OHC Judgment in M.G. Mohanty & Anr. Vs. State of Odisha & Ors
The petitions posed the specific question of law as to whether for the purposes of the dealing with applications under Sections 9, 14, 34 and so on of the A&C Act jurisdiction can be conferred on a judicial officer subordinate to the rank of a District Judge, i.e., the Principal Civil Judge in the district notwithstanding Section 2 (1) (e) of the A&C Act?
The OHC in its analysis, looks at the extensive use of the word “Court” in the A & C Act. In that context, the expression ‘Court’ can be only the ‘Principal Civil Court of original jurisdiction in a district’ and, as the provision clarifies, it ‘does not include any Civil Court of a grade inferior to such Principal Civil Court, or any Court of small causes’. In certain States other than Odisha including the State of Madhya Pradesh, the ‘Principal Civil Court of original jurisdiction in a district’ need not be only the District & Sessions Judge (D&SJ) but can be even an ADJ. However, the admitted position is that as far as Odisha is concerned, further purposes of 2(1)(e)(i) of the A&C Act, it is only the D&SJ who is the Principal Civil Court in a district. Therefore, strictly going by Section 42 of the A&C Act, it is D&SJ alone which would have the jurisdiction to entertain the suit notwithstanding any other provision in any other law for the time being force.
The OHC however observes that a significant change has been brought about by the enactment of the CC Act in 2015. The Statement of Objects and Reasons (SOR) of the CC Act state that there was a ‘need to provide for an independent mechanism’ for the early resolution of ‘high value commercial disputes’. Such early resolution, it was expected, ‘shall create a positive image to the investor world about the independent and responsive Indian legal system’. In 2018, even commercial disputes of lesser value were brought under the ambit of the CC Act.
The OHC further observes that, Section 2 (1) (c) read with Section 10 of the CC Act, clearly stipulates that where arbitration matters are commercial disputes of specified value, it shall be heard and disposed of by the Commercial Courts. Similarly, Section 15 (2) of the CC Act, provides for transfer of all arbitration applications relating to a commercial dispute of a specified value pending in any civil court shall be transferred to the relevant Commercial Court. On top of that, Section 21 of the CC Act, provides the CC Act shall have an overriding effect over other statutes and laws.
The OHC categorically declined to concur with the judgment of the MPHC in Yashwardhan Raghuwanshi vs. District & Sessions Judge. Referring to the Parliamentary intent in enacting the CC Act in 2015 much after the A&C Act, the OHC observed that the legislature appears to have left it open to the High Court and the State government either to appoint a Civil Judge (Senior Division) or an Additional District Judge as the Commercial Court of first instance to expedite the adjudication of commercial disputes as is evident from the fact that the “specified value” of a commercial dispute was lowered from 1 crores to only 3 lakh rupees.
The OHC finally held that the A&C Act must yield to the CC Act and not vice versa given that the objective of both enactments is the speedy disposal of the cases, and the CC Act was a later enactment. There is no apparent conflict between the A&C Act and the CC Act for being resolved. The objective of both is the speedy resolution of the disputes.
Conclusion
It is true that with the implementation of the Commercial Courts Act, there has emerged a conflict in the jurisdiction of courts, on account of the Arbitration and Conciliation Act. The Madhya Pradesh High Court in an attempt to provide an answer delivered a simplistic yet rational judgment. The High Court of Orissa on the other hand has taken the opposite view and has sought to recognize the power of the State Government and the High Courts to confer jurisdiction on the courts of the lesser grade than the Principal Civil Court to hear and dispose of arbitration matter. There is no doubt to the fact that the provisions in both legislations are in conflict to the extent of jurisdiction of the courts where the Arbitration Act demands for Principal Civil Court of a jurisdiction, however, there being no parity in grade level of the judicial officers being appointed to the Commercial Courts, almost every state has appointed a Civil Judge of the Senior Division to the Commercial Courts.
It is interesting to note that there are several States that have constituted Commercial Courts both at the District Judge level as well as below the District Judge level. In Gujarat, the Courts of the Additional District Judges in Bhuj, Anjar, Gandhidham and Bhachau have been constituted for hearing arbitration matters whereas the Courts of the Principal Senior Civil Judge in these places are for hearing other commercial disputes. In Karnataka, in some districts, it is the Principal D&SJ and in others the AD&SJ. In Bihar, depending on the pecuniary value, it could be the District Judge or the Sub-Judge. In Uttarakhand, it is the Additional District Judge Commercial Court, Dehradun. The intent clearly was to expand the power and to bring in more Courts under the rubric of ‘Commercial Courts’. Considering that the specified value was being lowered, it was but natural to allow Courts below the rank of the District Judge to be designated as such.
As such, the Madhya Pradesh High Court has in an attempt to harmonize both the statutes, it has interpreted the provisions to mean that irrespective of the value of the claim, arbitration matters are required to be adjudicated Principal Civil Court of a district and in respect of commercial disputes involving an arbitration dispute, only the Commercial Court of the status of District Judge or Additional District Judge would be the competent court to entertain the matters under Sections 9, 14, 34 & 36 of the Arbitration Act and such disputes cannot be entertained by any Court of Civil Judge Class-I or Senior Civil Judge, or any Court of Small Causes. Further, judicial precedence clearly states that a special statute shall override provisions of general statute.[1] The OHC differs at this juncture and considers commercial disputes as a special category for the purposes of the CC Act. The OHC considers both the A & C Act and the CC Act as special laws, one being earlier and other later, therefore, the principle of ‘generalia specialibus non-derogant‘, has no application whatsoever, in the present context. The CC Act, being the later law, shall override the A & C Act.
At this stage, it is important to highlight the decision of the Bombay High Court, in Gaurang Mangesh Suctancar v. Sonia Gaurang Suctancar. The Bombay High Court, on analyzing these very provisions, came to the conclusion that it is the CC Act provisions that would prevail. In fact, the Arbitration Act and the Commercial Courts Act, both central enactments, have employed this ‘non-obstante clause’ at more than one place. The Bombay High Court has thus held that the Arbitration Act prevails when it concerns the parties’ substantive rights, and the Commercial Courts Act does when it concerns the parties’ procedural rights. The view taken by the Bombay High Court creates the most harmonious interpretation of both the Statutes. However, the conflict continues to exist and thus calls for a thorough interpretation by the highest court of the country, in order to prevent any further uncertainty as regards the jurisdiction of the Courts under both statutes. This is would further improve investor confidence and will be in furtherance of the objective of speedy disposal of commercial disputes.
The June 2021 judgment of the Supreme Court – Silpi Industries etc. vs. Kerala State Road Transport Corporation and Anr. (2021 SCC OnLine SC 439) (“Silpi Industries/ the judgment”) adjudicated, inter alia, the issue of maintainability of a counter claim filed by a non-MSME/buyer in proceedings initiated by a MSME registered seller under S.18(3) of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act/ the Act”).
Silpi Industries seemingly touches upon the apparent conflict between the MSMED Act and Arbitration and Conciliation Act, 1996, (“Arbitration Act”), determination whereof is directly in question in an appeal pending before the Apex Court1 against a Bombay High Court judgment in M/s Steel Authority of India and Anr. v. MSEFC2 (“Steel Authority”). Thus, Silpi ought to be read as having settled only the question of the right of the non-MSME buyer to file a counter claim in MSMED proceedings.
BRIEF BACKGROUND
Over the years, jurisprudence has developed on the aspect of interplay between the Arbitration Act and the MSMED Act, 2006 in cases where a dispute arises between a MSME/supplier and a non-MSME/buyer.3 Briefly stating, the MSMED Act, being a special statute has been enacted for the benefit of suppliers falling in the category of micro, small and medium enterprises, registered as such, in terms of the MSMED Act. Under the Act, the MSME/ supplier can approach the Facilitation Council, established under the Ministry of Micro, Small and Medium Enterprises, to conciliate and arbitrate disputes with respect to non-payment of dues by the buyer. As is common in special enactments, the MSMED Act too provides for a non-obstante provision which lays down overriding powers over any other statute.
Section 18(1) of the MSMED Act contains, and begins with, such a non-obstante clause that seems to exclude applicability of the Arbitration Act. However, a further reading of S.18(1) of the Act also indicates that the use of the term “may”, in the context of the “any party” referring a dispute to the Facilitation Council, indicates that a party may be able to avoid being subjected to the said MSMED Act. Further, reference to “..with regard to any amount due under section 17..” also suggests that only those disputes, which arise out of a pending payment, owed to the supplier, by the buyer, can be adjudicated under the MSMED Act.
The non-obstante clause of the MSMED Act has received varied, and sometimes contradictory views on the applicability of the MSMED Act in matters involving an arbitration agreement.
Steel Authority, was the first significant case on the issue of invocation of the arbitration clause by the buyer where the MSME supplier sought recourse to the MSMED Act. The Division Bench of the Bombay High Court opined that it cannot be said that the independent arbitration agreement between the parties will cease to operate when one of the parties is a MSME. It held that it was only in situations of inconsistencies that the MSMED Act will supersede the Arbitration Act.
In Principal Chief Engineer4 however, the Supreme Court clarified that the MSME can invoke the provisions of the Act and refer a dispute to the Facilitation Council, despite the existence of an arbitration clause. The court recognised that the MSMED Act was a special enactment and as such the parties to the dispute were bound by it. However, this judgment was in the context of the MSME approaching the Facilitation Council first, i.e., before the non-MSME invoked the arbitration clause.
Till Silpi Industries was delivered, Principal Chief Engineer5 was the only significant judgment of the Supreme Court that dealt with issues arising out of applicability of the MSMED Act to situations where an arbitration agreement was also in existence.
One of the grey areas, when it comes to ascertaining the applicability of the MSMED Act in cases where the MSME and non-MSME have signed up for an arbitration clause, is when the non- MSME/buyer has a dispute against the MSME. There are a lot of cases that deal with situations where the MSME raises a
dispute against the non-MSME under the Act however the non-MSME/buyer seeks to invoke the arbitration clause. In such cases the law is broadly settled in favour of the MSMEs which have been held to be within their rights to invoke the provisions of the MSMED Act. However, there is no law which bars the non-MSME entity from invoking the arbitration clause when it is the one to invoke the arbitration clause first, i.e., before the MSME entity approached the Facilitation Council.
SILPI INDUSTRIES
As mentioned above, one of the issues that Silpi Industries adjudicates is whether the non-MSME has a right to file a counter claim before the Facilitation Council when the claim of the MSME is already pending before it. This is different from determining as to where the non-MSM buyer should pursue its claim against the MSME supplier when its own claim against the supplier is independent of the dispute that the supplier has raised against it. Para 5 of the judgement records that the claimant/ MSME approached the Supreme Court “..Primarily aggrieved by the findings recorded by the High Court on the applicability of Limitation Act, 1963 and maintainability of counter claim…” (Emphasis supplied)
It is further pertinent to note that para 5 of the judgement points out that the impugned order, while holding in favour of the right of the non-MSME to file its counter claim before the Facilitation Council, relies upon B.H.P. Engineers Pvt. Ltd. v. Director, Industries, U.P. (Facilitation Centre), Kanpur and the Division Bench judgment of the High Court of Bombay at Nagpur in the case of Steel Authority of India Ltd. v. Micro, Small Enterprise Facilitation Council. Silpi Industries does not delve into the aspect of whether, or not, the non-MSME has a right to choose jurisdiction with respect to its own claims against the MSME. The judgment ultimately affirms the right of the non-MSME to file its counter claim before the Facilitation Council. Thus, Silpi Industries does not contradict Steel Authority, which determines the broader issue of the rights of the non-MSMEbuyers to invoke arbitration agreement with the MSME.
Silpi Industries, factually deals with two sets of appeals. In the first batch of appeals the primary question is of maintainability of the non-MSME’s right to file a counter claim in an on-going proceeding under the Act. The second batch of appeals are those where the High Court dealt with the aspect of maintainability of an application under S.11 of the Arbitration Act (seeking appointment of second arbitrator) since filing of counter claim by the buyer was disallowed.
Paras 20 and 21 of the judgment deal with the first batch of appeals, i.e., on the issue of the right of the non- MSME to file counter claim before the Facilitation Council. The relevant portion of the paras as under:
20. “……When there is a provision for filing counter-claim and setoff which is expressly inserted in Section 23 of the 1996 Act, there is no reason for curtailing the right of the respondent for making counter-claim or set-off in proceedings before the Facilitation Council.
21. It is also further to be noted that if we do not allow the counterclaim made by the buyer in the proceedings arising out of claims made by the seller, it may lead to parallel proceedings before the various fora….”
The aforesaid paras indicate that the judgment specifically deals only with the situation where the buyer seeks to file a counter claim before the Facilitation Council where the claim of the supplier is already pending. Thus, once the non- MSME/buyer submits to the jurisdiction of the Facilitation Council and consequently to the procedure as laid down under Section 18(3) of the MSMED Act, then it is entitled to all benefits/ opportunities that may be available to it in terms of the prescribed procedure.
Thus, in terms of S.18(3) of the MSMED Act, even before the Facilitation Council, the procedure to be adopted is that as provided under the Arbitration Act. Once the matter proceeds for arbitration, the provisions of the Arbitration Act come into play and in terms of Section 23 (2A) of the Arbitration Act, the participating buyer also gets a right to file its counter claim before the same forum, i.e., the before the Facilitation Council. This is the context in which the court concludes that the non-MSME has a right to file its counter claim.
Paras 22 -24 of the Judgment deal with the second batch of appeals, where the High Court allowed the non-MSME’s application for appointment of second arbitrator under S.11 of the Arbitration Act on the ground that a counter claim is not maintainable before the Facilitation Council. While rejecting the finding on the aspect of counter claim of the buyer not being maintainable before the Facilitation Council, Silpi Industries holds that:
“Thus, it is clear that out of the two legislations, the provisions of MSMED Act will prevail, especially when it has overriding provision under Section 24 thereof. Thus, we hold that MSMED Act, being a special Statute, will have an overriding effect vis-à-vis Arbitration and Conciliation Act, 1996, which is a general Act. Even if there is an agreement between the parties for resolution of disputes by arbitration, if a seller is covered by Micro, Small and Medium Enterprises Development Act, 2006, the seller can certainly approach the competent authority to make its claim. If any agreement between the parties is there, same is to be ignored in view of the statutory obligations and mechanism provided under the 2006 Act. Further, apart from the provision under Section 23(2A) of the 1996 Act, it is to be noticed that if counter-claim is not permitted, buyer can get over the legal obligation of compound interest at 3 times of the bank rate and the “75% pre-deposit” contemplated under Sections 16 and 19 of the MSMED Act…”
This para, if read in isolation may be construed to imply that the court has decided the overall aspect of applicability of the MSMED Act in supersession of the Arbitration Act. However, para 23 clarifies that these findings are in the context of the rights of the buyer to file a counter claim and the ill effects of not allowing the same. Para 24 of the judgment sums this up further:
“..24. For the aforesaid reasons and on a harmonious construction of Section 18(3) of the 2006 Act and Section 7(1) and Section 23(2A) of the 1996 Act, we are of the view that counter-claim is maintainable before the statutory authorities under MSMED Act…” (emphasis supplied)
ISSUES PENDING ADJUDICATION BEFORE SUPREME COURT
Steel Authority which is the first in the line of judgments that hold in favour of recognition of the arbitration agreement despite one of the parties being a MSME and covered by the MSMED Act, was challenged in Supreme Court SLP (C)4414/2011. The broader challenge of the conflicts arising out of the MSMED Act and the Arbitration is pending adjudication in the said matter.
In 2016, a writ petition being M/s Refex Energy Ltd. vs. Union of India (W.P. No.17785/2016) was filed in the High Court of Madras wherein the vires of S.18 of the MSMED Act was challenged on the ground that a party to an arbitration cannot be forced to participate in unilateral arbitration proceedings at the instance of the other party, under the MSMED Act. It was contended that at the time of entering into a specific agreement with an arbitration clause, the MSME waives its rights under S.18 of the MSMED Act. The petition was however dismissed, and impugned order of the Madras High Court was challenged before the Supreme Court in Civil Appeal No.2788-2789/2018 titled M/s Refex Energy Ltd. vs. Union of India & Anr. (“Refex Energy”)
CONCLUSION
Even as the Apex Court is seized of the aforesaid crucial questions of law, a list of permutations of facts along with the currently applicable caselaw may be useful to understand the applicability of the MSMED Act in cases where there is also an arbitration agreement signed between the parties:
i. When the MSME is the first to raise a dispute before the Facilitation Council and the non-MSME has counter claims against the MSME: This situation is squarely covered by Silpi Industries as discussed in detail in the present article. The non-MSME/buyer has a right to file a counter claim before the Facilitation Council with respect to its own claims against the supplier.
However, Bharat Heavy Electricals Limited vs. State of UP by Allahabad High Court, The Chief Administrator Officer, COFMOW v MSEFC of Haryana by Punjab and Haryana High Court and Principal Chief Engineer v. M/s Manibhai and Brothers (Sleepers) by the Gujarat High Court diverged from the Bombay High Court in Steel Authority of India by holding that the provisions of the MSMED Act shall prevail over the Arbitration clause.
Since the Steel Authority judgment is now before the Supreme Court, the law is likely to be settled on all related aspects whenever the judgment is delivered.
iii. When both the MSME and the non-MSME invoke the arbitration clause, but the MSME then approaches the Facilitation Council and insists for adjudication under the MSMED Act: Steel Authority (on facts)
iv. When the non-MSME raises claims against the MSME entity and invokes the arbitration clause before the MSME raises a dispute under the MSMED Act: Porwal Sales vs. Flame Control Industries8 which held that since the jurisdiction of the Council had not yet been invoked, there was nothing barring the court from appointing an arbitrator in terms of the arbitration agreement between the parties. However, as mentioned above at point ii., High Courts other than the Bombay High Court have taken a divergent view on the aspect of MSMED Act having an overriding effect over the Arbitration Act. Therefore, Powal Sales is most likely to have persuasive value within the jurisdiction of Bombay High Court alone.
Silpi Industries settles one more important permutation arising out of the many arising out of the MSMED & Arbitration Act interplay. However, the broader issue of applicability of the Act during the subsistence of an arbitration agreement, remains to be settled. This aspect is likely to get finally settled once the Supreme Court decides the pending appeals in the matters arising out of challenge to Steel Authority and Refex Energy as mentioned above.
Naomi Chandra, Partner
Naomi Chandra is a Partner at TMT Law Practice. She has been practicing law for over 14 years and has extensive experience in the field of criminal as well as in civil and commercial litigation.
Arbitration has emerged as the forerunner as a means of dispute resolution in recent times. The primary attractions for contracting parties to opt for arbitrations include time and cost efficiency, flexibility of procedures and most importantly, the minimal judicial intervention. In all legal systems, any challenge to arbitral awards is limited to maintain the essence of the arbitral process.
The Arbitration and Conciliation Act, 1996 (Act) regulates the arbitrations conducted in India and it has been subjected to endless piecemeal tinkering by the Legislature to project India as a pro-arbitration venue and an attractive business destination with a robust dispute resolution mechanism. The most recent step in this regard is the enactment of the Arbitration and Conciliation (Amendment) Act, 2021 (2021 Act) which has brought back the “Automatic Stay” of arbitral awards (albeit in circumstances of fraud and corruption), undoing the change brought about by the Arbitration and Conciliation (Amendment) Act, 2015 (2015 Act).
Therefore, in effect, the 2021 Act has opened the floodgates for challenge to an arbitral award on grounds of fraud and corruption, and further, revived the power of the Court to grant an unconditional and automatic stay of the arbitral award, where a prima facie case of fraud and corruption has been established. Inevitably, the 2021 Act has been subject of much criticism and has been considered a regressive step for the Indian Arbitration regime.
2. Evolution of the automatic stay provisions in the Act
Original Legal Position:
Since its inception, the Act suffered a major drawback. Any award passed in an arbitration governed under the Act, could automatically stayed merely by filing of an appeal under Section 34 of the Act. Originally, Section 36 of the Act[1] dealt with enforcement of awards and although, Section 35 of the Act categorically provides that arbitral awards shall be final and binding on the parties, Section 36 mentioned the limited scenario whereby the award shall be enforced. Interpreting Section 36 of the Act, the Supreme Court in National Aluminium Company Ltd. v. Presstel & Fabrications (P) Ltd. & Anr[2] held that an award can be enforced as if it was decree of a court under Civil Procedure Code, 1908 (“CPC”), but only on the expiry of the time for making an application under Section 34 or when such application has been made and refused. The Supreme Court further held the language of Section 36 allowed no discretion in the court to put the parties on terms which defeated the very objective of the alternate dispute resolution system.
Thus, prior to the enactment of the 2015 Act, mere filing of a petition under Section 34 of the Act, would lead to an automatic stay of the award, and thus led to all awards being challenged as it automatically stayed any payment under the award.
Legal position after the 2015 Act:
The problem of the “Automatic Stay” was resolved by the 2015 Act, which amended Section 36[1] and the amended Section 36 provided that:
Filing of Section 34 application shall not by itself render the award unenforceable unless the Court grants a stay on a separate application seeking stay of the award.
The stay is not to be granted as a matter of right, but the Court may in its discretion grant such a stay, subject to such conditions, and by recording specific reasons for granting such stay.
While granting such stay, provisions of the CPC regarding stay of money decree needs to be observed by the Court.
Therefore, the 2015 Act scrapped the notion of an automatic stay pushing the arbitration towards a more business friendly environment.
3. Unconditional stay under the 2021 Act – the Current legal position:
The statement of object and reasons of the 2021 Act state that the amendment was brought in to tackle the issues of corruption and fraud in securing contracts or arbitral awards. In that light, Section 36 was further amended by the 2021 Act[1] introducing a new proviso to sub-section 3 of Section 36 of the Act, whereby, the Court has the power to unconditionally stay an arbitral award from being executed when there is prima facie evidence that the award itself, or the contract on which such award is based, was affected by fraud or corruption. It is important to note here that the amended Section 36, has completely ignored the basic structure of any arbitration agreement, that is, the arbitration agreement is severable from the contract itself. It is a settled principle of law that notwithstanding the invalidity of the contract, the arbitration agreement stands on an independent footing and is severable from the contract. The 2021 Act uses the language “arbitration agreement or contract which is the basis of the award” which is in direct conflict of the settled legal position, because invalidity of the contract does not necessarily affect the arbitration agreement which is severable in law.
A careful reading of the provisions further illuminates the use of the terms “it shall stay”. Therefore, the Courts are not allowed a discretion in the matter. In other words, in the event a prima facie case is established that an arbitral award or the contract was affected by fraud or corruption, the Court must mandatorily impose an unconditional stay of the award pending disposal of the challenge under Section 34 to the award.
4. Impact of the 2021 Act
A step in the wrong direction:
Historically, the Arbitration Act, 1940 had adopted a circumspect approach as regards the enforcement of arbitral awards, and accordingly, a confirmation of the award by the Court was a mandatory pre-requisite for enforcement. This led to excessive judicial intervention in the matters to the extent of revalidation of the merits of the case. This was cured by the Act, which brought in direct enforceability of the arbitral awards in conformation with the UNCITRAL Model Law. However, unlike the UNCITRAL Model Law, the Act did not permit a challenge to the award at the stage of enforcement, thereby ensuring quicker enforcements and minimal judicial intervention. The 2021 Act has undermined this aspect by opening fresh grounds of challenge at the stage of enforcement.
Because of the 2021 Act, any execution/enforcement proceedings under the Act would in most cases compel the Court to examine if there is prima facie evidence of fraud and corruption in securing the contract or in the making of the award. The 2021 Act thus reintroduces judicial confirmation for enforcement of awards, which adds an extra layer of judicial scrutiny. The 2021 Act is thus a regressive step for the Indian arbitration regime.
Redundancy of the Amended Section 36:
Fraud and corruption go against the very basic notions of public policy of our country. Hence, any arbitral award which is marred by fraud or corruption can be directly challenged on those grounds under Section 34 of the Act itself. Further, Explanation 1 to Section 34 (b) of the Act, explicitly grants a right to the parties to challenge the arbitral award if the making of the award was induced or affected by fraud or corruption, being against the public policy of India. The 2021 Act does not seem to complement or add to the existing provision of the Act. Furthermore, the 2021 Act does not provide any flexibility to the Court to impose any conditions based on the facts and circumstances of each case. Such blanket stay as an interim measure without any flexibility to the court will severely erode the efficiency of the arbitration process.
Reversal of the 2015 Amendment:
The 2015 Act brought about a much-needed relief to parties opting for arbitration in India by categorically clarifying that an automatic stay cannot be granted merely for filing a petition under Section 34 of the Act. The 2015 Act further clarified that powers of the Court to enforce an award was akin to those provided under Order 41 Rule 5 of the CPC. In other words, the enforcement of an award may be stayed by a Court where substantial loss may result to the party applying for stay of execution.
With the 2021 Act, merely establishing a prima facie case would entitle the party to procure an unconditional stay, thereby eliminating any discretion of the Court to balance the competing equities which would almost certainly vary depending on the facts and circumstances in each case. In this respect, the 2021 Act re-introduces the very reason which led to the 2015 Act in the first place.
Low burden of proof and vague standards:
The unconditional stay introduced by the 2021 Act demands a very low standard of proof. Establishing a mere prima facie case of fraud or corruption would compel the Court to mandatorily grant an unconditional stay of the award. The Supreme Court in the case of United Commercial Bank vs. Bank of India & Ors.[1] has held a prima facie case to mean that in the facts and circumstances of the case, there is a bona fide contention between the parties and a serious question is to be decided. Thus, with such low standard of proof to obtain an unconditional stay, the 2021 Act has the possibility of becoming a potent tool for harassment to the award holder.
Moreover, the 2021 Act does not provide for any guidance in respect of prima facie determination of the existence of fraud or corruption. It is one of the cardinal principles of arbitration that the Courts cannot enter the merits of the dispute. The allegations of fraud or corruption are serious in nature and cannot be established without examining the merits and evidence adduced thereto. Thus, the 2021 Act runs in conflict to one of the foundational principles of the arbitration laws. Section 36 of the Act was enacted to balance the equities between the parties in consonance with Section 34 of the Act. However, with the enactment of the 2021 Act, the fundamental difference between Section 34 and Section 36 has been diluted, which may amount to unnecessary and multiplicity of proceedings.
Conclusion
The 2021 Act seeks to address the prevalent corruption in the system however, it appears that the lawmakers of the country have not fully considered the side-effects of this amendment. India ranks at a miserable 163 among 193 countries in terms of enforcement of contract and the 2021 Act does very little to inspire further confidence in the Indian arbitration regime. Enforcement of awards in India was already mired in complications and delays, and a sudden volte-face of the lawmakers to introduce an unconditional stay of arbitral awards erodes the very sanctity of an arbitral award. The Indian courts are yet to provide the guiding principles to address the issues contemplated herein, and we sincerely hope that the judiciary will persevere to address the many ambiguities introduced by the 2021 Act.
Soumitra Bose, Principal Associate
Soumitra is a Principal Associate at TMT Law Practice. He graduated from NALSAR University of Law in 2016 and was gold medallist in Arbitration and Ethics. After graduation, he was an Associate at Luthra & Luthra Law Offices, New Delhi in the Mergers & Acquisitions Team and worked with them for a year. During his engagement with Luthra & Luthra Law offices, he garnered knowledge and experience of general corporate advisory, mergers and acquisitions, and commercial contracts, and advised extensively on the acquisition of several Indian ITeS companies by US based entities.
After that he shifted to litigation practice in the High Court of Orissa in 2017, working with the Chambers of Advocate Subir Palit. As a practicing advocate, he specializes in all kinds of corporate and commercial litigation. he has worked extensively on petitions in relation to mining leases and mining tenders under the Mineral Concession Rules, in respect of education laws, including Joint Entrance Examinations, admissions, and vires of applicable regulations as well as in respect of various employment disputes, including retirement benefits, illegal terminations, and promotion matters with regular appearance before the High Court of Orissa, Civil Courts and Tribunals. He has also advised, drafted, and appeared in matters relating to illegal mining before the National Green Tribunal as well as the Supreme Court. He has further advised, drafted, and appeared in several arbitration matters and proceedings. Additionally, he has also advised, drafted, and appeared in criminal matters, relating to white collar crimes under the GST Act.
He is a member of the Odisha State Bar Council and the High Court Bar Association.
[1] “36. Enforcement – Where the time for making an application to set aside the arbitration award under section 34 has expired, or such application having been made, it has been refused, the award shall be enforced under the Code of Civil Procedure, 1908 in the same manner as if it were a decree of the Court.”
[1] (2004) 1 SCC 540
[1] “36. Enforcement – (1) Where the time for making an application to set aside the arbitral award under section 34 has expired, then, subject to the provisions of sub-section (2), such award shall be enforced in accordance with the provisions of the Code of Civil Procedure, 1908 (5 of 1908), in the same manner as if it were a decree of the court.
(2) Where an application to set aside the arbitral award has been filed in the Court under section 34, the filing of such an application shall not by itself render that award unenforceable, unless the Court grants an order of stay of the operation of the said arbitral award in accordance with the provisions of sub-section (3), on a separate application made for that purpose.
(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 that the Court shall, while considering the application for grant of stay in the case of an arbitral award for payment of money, have due regard to the provisions for grant of stay of a money decree under the provisions of the Code of Civil Procedure, 1908 (5 of 1908).]
Provided further that where the Court is satisfied that a prima facie case is made out –
(a) that 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.”
“The supreme art of war is to subdue the enemy without fighting.”
This quote from Sun Tsu’s Art of War could not be more apt in the context of commercial disputes, where half the battle is won before the fight. As in litigation, interim relief is a vital tool in arbitration proceedings. In India-seated arbitrations, parties seeking urgent interim relief prior to commencement of arbitration usually need to approach the local court having jurisdiction over the dispute under Section 9 of the Indian Arbitration and Conciliation Act, 1996 (Act).
Securing a favourable relief before a court requires time. In India, where the local courts have an overwhelming pendency of cases, a time-lag in grant of interim relief is expected. Further, approaching a court may not always be the ideal option for a party unfamiliar with the local court having jurisdiction over the dispute, or a party desirous of keeping its dispute out of the public knowledge and the newspapers. In order to combat this impediment, international arbitral situations like the SIAC1, ICC2, LCIA3 and others have introduced the concept of emergency arbitration. It gives effect to parties’ intent of resolving their disputes through arbitration and eliminate the need to resort to court for such adjudication, even before the constitution of an arbitral tribunal. Many such jurisdictions have also adopted legislation for the enforceability of such awards and orders4.
In India, while the Act does not expressly provide for recognition and enforcement of emergency arbitration awards, Section 17, which provides for interim measures that can be granted by an arbitral tribunal, can be extended to apply to emergency arbitral tribunal as well. In the absence of any coordinate provision in Part II of the Act, there is a lack of clarity regarding enforcement of such emergency arbitration awards for foreign seated arbitrations.
The question of enforceability of emergency arbitration awards has most recently come up before the Delhi High Court while dealing with Amazon’s dispute with Future Retail concerning the sale of the latter’s assets to Reliance Retail. Amazon invoked the arbitration clause under its agreement with Future Coupons (Future Retail’s subsidiary) and obtained an emergency injunction award from SIAC restraining Future Group from proceeding with the sale to Reliance. Amazon has filed a suit under Section 17(2) of the Act before the Delhi High Court to enforce the emergency arbitral award. Future Group has contended that the emergency arbitral award does not amount to an order passed under Section 17 of the Act. Whether or not such a contention will hold water is difficult to ascertain, given that Indian jurisprudence on enforceability of emergency awards is inconsistent.
On the one hand, the Bombay High Court has, in HSBC Pl Holdings (Mauritius) Ltd. v. Avitel Post Studioz Ltd.5 held that the order of a SIAC emergency arbitrator granting an injunction fell under Section 17 of the Act, so as to form an order by an arbitral tribunal, and hence was enforceable. However, the Delhi High Court held to the contrary in the case of Raffles Design International India Pvt. Ltd. & Anr. v. Educomp Professional Education Ltd. & Ors.6 ruling that an emergency arbitration award is not enforceable under the Act, but the applicant was not precluded from applying for court ordered ‘interim measures’ under Section 9 of the Act. Interestingly, the aforesaid decision in Raffles Design has not been followed by a coordinate bench of the Delhi High Court in Ashwani Minda and Anr. v. U-Shin Ltd. & Anr. where the court dismissed the application for court-ordered ‘interim relief’ under Section 9 of the Act filed by a party to a Japan-seated arbitration, following the applicant’s failure to obtain similar relief from an emergency arbitrator.
It is noteworthy that the Law Commission of India has, in its 246th Report7, recommended that provisions validating the application of emergency arbitrator provisions of arbitral institutions ought to be brought within the purview of the Act8. While it is concerning that the provision is applicable only to emergency arbitrators appointed by arbitration institutions, considering that an institutional arbitration regime is currently absent in India, the outlook for emergency arbitration looks hopeful in light of the enactment of the New Delhi International Arbitration Centre Act, 2019 (NDIAC Act). The NDIAC Act aims to set up institutional arbitration in India. The aforesaid recommendations and the NDIAC Act, when implemented, would make India the first jurisdiction to give statutory recognition to emergency arbitrators, which would instantly boost India’s position as a hub of international arbitration.
8 The Law Commission has also recommended that Section 2(1)(d) of the Act be amended so as to include the clause: “…and, in the case of an arbitration conducted under the rules of an institution providing for appointment of anemergencyarbitrator, includes suchemergencyarbitrator“, such that the new Section 2(1)(d) would read:
“‘arbitral tribunal’ means a solearbitratoror a panel of arbitrators and, in the case of an arbitration conducted under the rules of an institution providing for appointment of anemergencyarbitrator, includes suchemergencyarbitrator.”
Author: Ms. Shilpa Gamnani, Senior Associate, TMT Law Practice
Shilpa is a Senior Associate at TMT Law Practice. She has extensive experience in advising clients on matters pertaining to corporate and commercial disputes, and has advised clients in restructuring and bankruptcy matters across a wide range of sectors, including media, telecom, broadcasting etc. In addition to regularly appearing before the Supreme Court of India, Delhi High Courts, lower courts, and tribunals including the National Company Law Tribunal (NCLT), National Company Law Appellate Tribunal (NCLAT), the Telecom Disputes and Settlement Appellate Tribunal (TDSAT), Appellate Tribunal, Prevention of Money Laundering Act, Shilpa has also worked on international and domestic arbitrations, including those before the London Court of International Arbitration (LCIA).
