Fraud in the Underlying Contract: A New Hurdle for Enforcement of India-Seated Arbitral Awards

The President of India recently promulgated an Ordinance amending certain provisions relating to the enforcement of awards and qualification of arbitrators under the Arbitration and Conciliation Act, 1996 (the Act). While the immediate need for such a statutory amendment through a Presidential Ordinance is unclear, the avowed object of the enactment is to give to all parties an opportunity to seek an ‘unconditional stay’ on the enforcement of awards rendered in India-seated arbitrations. The following may be noted in relation to the recently amended provisions:

Section 36: Grounds for Unconditional Stay

The Ordinance has inserted a proviso to Section 36 of the Act (which deals with enforcement) empowering courts to grant an unconditional stay on the enforcement of an award on a prima facie finding that either:

(a) the arbitration agreement; or 

(b) the underlying contract; or 

(c) the making of the award; 

is induced or effected by fraud or corruption. Such a stay would be operational during the pendency of the application for setting aside the award filed under Section 34 of the Act. (Note how all three elements—the arbitration agreement, the main contract and the award—are disjunctive and separated with “or”.)

Grounds for Stay vs. Grounds for Setting Aside

Under the scheme of the law in India, arbitral awards can be set aside by courts only on the limited grounds expressly set out under Section 34 of the Act. It is not a provision for appeal. The provision explicitly provides that an award induced by fraud or corruption (point (c) above), or one based on an invalid arbitration agreement (point (a) above) may be set aside by courts. However, a corresponding ground for setting aside an award in case the underlying contract is found to be invalid (by reason of fraud, corruption, or even otherwise) is not included within its purview. This departure is in accordance with the well accepted principle that an arbitration agreement is separate and independent of the underlying contract between parties, and the invalidity of the underlying contract does not necessarily affect the arbitration agreement or the authority of the tribunal. In fact, this principle of separability has not only been judicially recognised in India, but has also been codified in the Act itself. Section 16, which deals with jurisdictional challenges to an arbitral tribunal, expressly states that invalidity of the underlying contract ‘shall not entail ipso jure the invalidity of the arbitration clause.’ Consequently, a challenge to the underlying contract independent of the arbitration agreement is not viewed as being of any consequence in setting aside proceedings per se. 

Moreover, as per the recent decision of the Indian Supreme Court in Avitel Post Studioz Limited v. HSBC PI Holdings, the question of whether the underlying contract is vitiated by fraud is one that must be decided by the arbitral tribunal. A party subsequently seeking to resist enforcement of an award on such ground would, therefore, be required to assail the findings of the tribunal, on merits. However, as per the scheme of the Act and settled law, the scope for court interference to set aside arbitral awards is extremely limited.  Any such judicial inquiry would be confined only to the highly restrictive test of ‘patent illegality’, as interpreted (rather restrictively) by the Supreme Court most recently in Patel Engineering Ltd v. North Eastern Electric Power Corporation Ltd. In any case, courts are not permitted to review such awards on merits, or re-appreciate evidence to arrive at a decision.

Resultantly, as per settled precedent, it is highly unlikely that an award can be set aside for the mere reason that the underlying contract is induced or effected by fraud or corruption. It thus appears that, in this regard, the newly inserted grounds for grant of unconditional stay on enforcement are wider than the grounds provided for setting aside the award itself. It will be interesting to see if courts will now be inclined to impliedly read in the same as additional grounds for setting aside awards.

Conclusion: The Way Ahead

In any case, it is indeed incongruous that a court may now stay the enforcement of an arbitral award on a ground (ie, that the underlying contract is affected or induced by fraud or corruption) which is otherwise not available to set aside the same award. Moreover, such an approach is also contrary to the hitherto clear legislative intent and judicial attitude that sought to encourage and bolster the expediency and efficiency of the arbitral process in India. The fact that enforcement can now be stayed unconditionally and only on a prima facie standard may prompt errant parties to approach the courts with such requests and cause to delay the enforcement of arbitral awards. Once granted, such a stay could potentially continue to operate indefinitely, without any prescribed timeline under law for the disposal of such cases. The use of the term ‘unconditional’ may also be seen as invalidating the Supreme Court’s ruling on the automatic vacation of stay orders after six months. Resultantly, subjecting the enforcement process to the rigours and procedures of India’s already backlogged courts may serve to defeat the very idea of the finality of arbitral awards, and therefore, the very core of arbitration itself. It remains to be seen how Indian courts will now interpret the new statutory provisions, and whether or not Parliament will bring about any changes to the Ordinance. 

Anhad S Miglani is an advocate licensed to practice in India and appears in commercial matters before the Supreme Court of India and various High Courts. 

Gaganjyot Singh is a corporate lawyer turned dispute resolution counsel, and is currently a practising advocate at the Calcutta High Court.