Arbitration Amendment Quandary 3.0: Supreme Court in HCC v Union of India

This guest post is authored by Chintan Nirala. Chintan is an India-qualified lawyer and has recently obtained a master’s degree in international dispute resolution from King’s College, London. He graduated from University of Allahabad (BA, LLB) in 2017, where he secured the top position in the ADR course.

Notably, Chintan has interned with the International Council for Commercial Arbitration (Permanent Court of Arbitration, Hague) and a Justice of the Supreme Court of India. He is also a regular contributor to the ICCA Commercial Arbitration Yearbook.

Arbitration Amendment Quandary 3.0: Supreme Court in HCC v Union of India

In a recent landmark decision, the Supreme Court in Hindustan Construction Company v Union of India (2019) (HCC/Hindustan Construction) held that the newly inserted Section 87 of the Arbitration and Conciliation Act, 1996 (Arbitration Act/the Act) is unconstitutional for being manifestly arbitrary.

Section 87 was recently inserted in the Act by the Arbitration and Conciliation (Amendment) Act, 2019 [2019 Amendments]. It provides that, unless parties agree otherwise, the Arbitration and Conciliation (Amendment) Act, 2015 [2015 Amendments] will apply only to those arbitrations and court proceedings which commenced after 23 October 2015.

As discussed in detail below, Hindustan Construction has revived the applicability of Section 26 of the 2015 Amendments in accordance with the Supreme Court’s interpretation in BCCI v. Kochi Cricket Pvt (2018). Section 26 was effectively deleted by the 2019 Amendments with retrospective effect. Concurrently, the Supreme Court has also clarified that there can be no ‘automatic stay’ on the enforcement of an arbitral award when challenged under Section 34 of the Act. An award-debtor is required to take out a separate application seeking stay of an arbitral award.

Prologue

Before it was amended in 2015, Section 36 of the Act provided that where the time for making an application to set aside the arbitral award under section 34 has expired, or such application having been made, it has been refused, the award shall be enforced in the same manner as a decree of the Court.

In National Aluminum Company v. Pressteel & Fabrications., (NALCO) the Supreme Court interpreted the provisions of Section 36 to mean that the enforcement of an award will be automatically stayed when an application is filed for setting aside the award. The Supreme Court held as follows:

‘…we noticed from the mandatory language of section 34 of the 1996 Act, that an award, when challenged under section 34 within the time stipulated therein, becomes unexecutable …’[1]

This interpretation marked the beginning of the era of ‘automatic-stay’. What is noteworthy is that the court in NALCO was aware of the adverse effect of this interpretation. Whilst holding states that an automatic stay defeats the very objective of the alternate dispute resolution system, the Supreme Court held that the mandatory language of the provision leaves no choice but to interpret it in this manner.[2]

2015 Amendments

The Supreme Court’s interpretation of Section 36 in NALCO was sought to be corrected by an amendment to the Act in 2015. The 2015 Amendments amended the erstwhile Section 36 to provide, among other things, that the mere filing of a Section 34 application will not by itself render that award unenforceable. The Court is empowered to grant a stay of the award, with certain conditions, if it was satisfied with the grounds made out in a separate application for stay. The 2015 Amendments came into force with effect from 23 October 2015.

                Application ambiguity

While the 2015 Amendments were introduced with the best of intentions, it was unclear if the amended provisions were applicable to arbitrations and court proceedings which commenced after 23 October 2015. Several High Courts delivered contradictory interpretations of Section 26[3] of the 2015 Amendments.

The ambiguity around interpretations of Section 26 was finally settled by the Supreme Court in Board of Control for Cricket in India v Kochi Cricket Private Limited (2018) [BCCI]. The Apex Court distinguished (i) arbitral proceedings from (ii) proceedings in relation to arbitral proceedings, that is, arbitration related court proceedings.

It was held that amendments are applicable to all arbitral proceedings initiated after the Amendment Act 2015 came into force. Likewise, it was equally applicable to court proceedings initiated after the commencement of the Act, regardless of the fact that they might stem-out of arbitrations initiated before the commencement date.[4]

                Words of caution

The Supreme Court, in BCCI, was aware of the Government’s intention to insert Section 87 by way of an amendment to the Act. Given that Section 87 would be in conflict with the Supreme Court’s findings in BCCI, it was observed that the effect of the proposed Section 87 would be to put all the important amendments made by the Amendment Act 2015 on a backburner. The Court also directed that a copy of BCCI should be sent to the Law Ministry and the Attorney General highlighting this observation. Lastly, it was also reiterated that Section 87 in its form would be contrary to the aim of the 2015 Amendments.[5]

2019 Amendments

Soon thereafter, the Parliament passed the Arbitration and Conciliation (Amendment) Act, 2019 [2019 Amendments]. In order to settle the issue of applicability of the 2015 Amendments, the 2019 Amendments introduced a new Section 87[6] to the Arbitration Act.

Contrary to the Supreme Court’s observations in BCCI, Section 87 provided that the 2015 Amendments will be applicable only to the court proceedings which relate to arbitrations commenced after the commencement of Amendment Act 2015. Section 26 of 2015 Amendments was retrospectively deleted by virtue of Section 15 of the 2019 Amendments.

In Hindustan Construction, the Petitioner challenged inter alia the constitutional validity of Section 87 of the Arbitration Act and deletion of Section 26 of the 2015 Amendments.

Supreme Court in HCC

                Was the stay ever automatic?

What distinguishes this case from earlier decisions is that, in Hindustan Construction, the Supreme Court re-examined NALCO to analyse the root cause of the problem at hand. The Supreme Court observed that the reasoning in NALCO was plainly incorrect, since the enforcement provision was enacted for a different purpose than how it was interpreted.

Section 36 simply stated that enforcement of a final award will be in the same manner as if it were a decree of the court. To read it with a negative inference would amount to reading something into the section which is not there at all.

The Court also pointed out that NALCO had wrongly observed that ‘there is no discretion left with the court to pass any interlocutory order’. The NALCO Court had clearly overlooked the provisions of Section 9, which specifically enables a party to apply to court for reliefs even after the making of the arbitration award but before it is enforced. NALCO was declared to be in per incuriam for not considering Sections 9, 35, and 36 of the Arbitration Act. It was clarified that NALCO was decided incorrectly and, as such, its creation of the automatic stay was wrong.

Skirting around BCCI

It was observed that Section 87 has resulted in the pre-2015 amendment law being applied to all matters which are in the pipeline since the 2015 Amendments came into force. For instance, automatic stay will apply even to setting aside applications initiated in court after the Commencement Date if the concern arbitral proceedings are prior to the Commencement Date.

The Court in Hindustan Construction concluded that, although no direct reference was made to the BCCI judgment while introducing the amendments, deleting Section 26 retrospectively has removed the basis of the BCCI judgment.

Constitutional validity of Section 87

While assessing the constitutional validity of Section 87, the Supreme Court made the following broad observations.

  • Firstly, while introducing 2019 Amendments, the Government did not refer to BCCI even when the judgment had specifically pointed out the pitfalls of section 87 and importance of section 26. The key finding in BCCI was that the introduction of Section 87 would result in a delay of disposal of arbitration proceedings, and an increase in the interference of courts in arbitration matters. This renders insertion of Section 87 and the deletion of Section 26 manifestly arbitrary – having been enacted unreasonably and without an adequate determining principle. It was thus contrary to the public interest sought to be sub-served by the Arbitration Act and the 2015 Amendments.

 

  • Secondly, the Code of Civil Procedure, 1908 provides that an appeal will not act as a stay unless the appellate court so orders. The same rule is not applicable on review of arbitral awards because of the concept of automatic stay. This anomaly, therefore, makes Section 87 manifestly arbitrary sufficient enough to be struck down under Article 14 of the Constitution.

 

  • Thirdly, the misconstruction of the enforcement provision leading to automatic stay was corrected after a period of more than 19 years by the 2015 Amendments. Section 87 is a work in the reverse direction which brings back the aforesaid mischief. The retrospective resurrection of an automatic-stay not only turns the clock backwards contrary to the object of the Arbitration Act, but also results in payments already made under the amended section to award-holders in a situation of no-stay or conditional-stay now being reversed. Similarly, non-bifurcation of court proceedings and arbitration proceedings also results in improvements made by the working of the 2015 Amendments being put on a backburner.

In the circumstances, the Court held that deletion of Section 26 of the 2015 Amendments and insertion of Section 87 was manifestly arbitrary and without any basis whatsoever. Section 87 was struck down for being contrary to the principles of Article 14 of the Constitution, and BCCI was declared to remain valid and applicable.

Concluding remarks

Even before the Supreme Court decided Hindustan Construction, Justice Rohinton Nariman who authored the judgement remarked in a speech concerning 2019 Amendments that ‘..hopefully judgements will, therefore, say despite Section 87 [that] the automatic stay provision being retrospective in nature and being clarificatory of what the law always was, will continue to apply. That again awaits a judicial decision.’[7] Is it appropriate for a Supreme Court Justice to comment on the correctness of a legislation before it is considered for judicial determination? Perhaps that is a discussion for another day.

Nevertheless, it is safe to say that the Supreme Court’s decision in Hindustan Construction is sound in law and beneficial in practice. The automatic stay has been nipped in the bud for good. Hindustan Constructions has not only brought clarity on the applicability of 2015 Amendments, but also reinstated the faith that Indian courts will most likely adopt an arbitration friendly approach.

It is also an example of a tussle between the legislature and judiciary. This duality has its own benefits; whereby different organs of the State keep a check on each other and uphold the essential values and principles of a democratic nation. It would be interesting to see if the Legislature will counter the judicial check in Hindustan Construction or take it in the right stride and move towards creating further reforms in Indian arbitration law.

[1] National Aluminum Company v Pressteel & Fabrications (P) Ltd., (2004) 1 SCC 540 at para 10

[2] Ibid, at para 11

[3] Section 26 of the 2015 Amendments

Nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of Section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree but this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act

[4] See, paragraph 39.

[5] Ibid, at paragraphs 77-78.

[6] 87. Effect of arbitral and related court proceedings commenced.—

Unless the parties otherwise agree, the amendments made to this Act by the Arbitration and Conciliation (Amendment) Act, 2015 shall—

(a) not apply to—

(i) arbitral proceedings commenced before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 (23rd October, 2015); (ii) court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015;

(b) apply only to arbitral proceedings commenced on or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 and to court proceedings arising out of or in relation to such arbitral proceedings.

[7] Justice Nariman here seems to be referring to the BCCI decision, in which the amendments to Section 36 were declared to have retrospective application. He further indicates that despite newly inserted section 87, future judgements will follow BCCI judgement and continue to apply retrospective operation of the automatic stay provision. In the remaining speech, Justice Nariman highlights other pitfalls of the 2019 Amendments which needs correction.

 Justice Nariman’s speech at 3rd ICC India Arbitration Day, available at: https://www.youtube.com/watch?v=OLxFTi1Cb1A&t=788s

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