SC Strikes Down Section 87 Of The Arbitration And Conciliation Act, 1996 [Read Judgment]

The Supreme Court on November 27, 2019, in the case of Hindustan Construction Company Limited & Anr. v. Union of India struck down Section 87 of the Arbitration and Conciliation Act, 1996(hereinafter referred to as the Arbitration Act, 1996) as inserted by Section 13 of the Arbitration and Conciliation (Amendment) Act, 2019 (hereinafter referred to as the 2019 Amendment Act) and brought into force with effect from August 30, 2019.

A bench comprising of Justices R.F Nariman, Surya Kant and V. Ramasubrmanian was hearing writ petitions seeking to challenge the constitutional validity of Section 87 of the Arbitration Act, 1996. They were also seeking to challenge the repeal of Section 26 (which came into effect on October 23, 2015 making the amendments of 2015 inapplicable on pending proceedings) of the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter referred to as the 2015 Amendment Act) by Section 15 of the 2019 Amendment Act.

Section 36 of the Arbitration Act, 1996 provides that an award shall be enforced in the same manner as if it were a decree of the court, but only on the expiry of the time for making an application to set aside the arbitral award under Section 34, or after the refusal of an application made under this section. 

The Supreme Court in the case of Fiza Developers and Inter-trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd. and Anr. (2009) 17 SCC 796 had held that, until the disposal of the application under Section 34 of the Act, there is an implied prohibition of enforcement of the arbitral award. The very filing and pendency of an application under Section 34, in effect, operates as a stay of the enforcement of the award.

However, the Supreme Court in the present case overturned its earlier ruling saying that, to state that an arbitral award becomes unenforceable merely because it was challenged under Section 34 is plainly incorrect. Section 36 when read with Section 35 of the Arbitration Act, 1996 states that a final award by an arbitrator will be enforced in the same manner as a decree is enforced under the Code of Civil Procedure, 1908.

The court further observed that, To read Section 36 as inferring something negative, namely, that where the time for making an application under Section 34 has not expired and therefore, on such application being made within time, an automatic-stay ensues, is to read something into Section 36 which is not there at all. This construction also fails to consider the fact that an arbitral award becomes final when an application under Section 34 has been dismissed by the court. 

Interpreting the operation of Section 34 in manner that grants automatic stay on the enforcement of an arbitral award under Section 36 read with Section 35 defeats the very purpose of alternative dispute resolution mechanism thereby leaving no discretion to the court to bring parties in line with each others terms. 

In order to rectify the mischief of incorrect interpretation regarding the finality of an arbitral award, the 2015 Amendment Act, inserted a sub-clause in Section 36 which unequivocally states that, Where an application to set aside the arbitral award has been 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. Upon filing of an application under subsection (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: 

The Supreme Court had previously cautioned the Government that introduction of Section 87 as per the 2019 Amendment Act would not only overturn its ruling in the case of BCCI v. Kochi Cricket Pvt. Ltd. (2018) 6 SCC 287 but also directly defy the object of the 2015 Amendment Act thereby causing a delay in the disposal of arbitration cases on the whole in the country. Apart from that, it would lead to an increase in the interference of courts in arbitration proceeding which would prove counterproductive to say the least.

The Supreme Court in the case of Ssangyong Engineering & Construction Co. Ltd. v. NHAI 2019 SCC Online 677, had previously held that, after the 2015 Amendment Act, this Court could not interfere with an arbitral award on merits (see paragraph 28 and 76 therein). The anomaly, therefore, of Order XLI Rule 5 of the CPC applying in the case of full-blown appeals, and not being applicable by reason of Section 36 of the Arbitration Act, 1996 when it comes to review of arbitral awards, (where an appeal is in the nature of a rehearing of the original proceeding, where the chance of succeeding is far greater than in a restricted review of arbitral awards under Section 34), is itself a circumstance which militates against the enactment of Section 87, placing the amendments made in the 2015 Amendment Act, in particular Section 36, on a backburner.

It is for the abovementioned reasons that it became absolutely necessary for the Supreme Court to strike down Section 87 which was violative of Article 14 of the Constitution since it took away the vested right of enforcement of an arbitral award and threatened its binding nature. The petitioners was right in arguing that allowing Section 36 to be misconstrued would take us back by 19 years and eliminate the progressive amendments introduced in 2015.   

In this regard the Court said that, The retrospective resurrection of an automatic-stay not only turns the clock backwards contrary to the object of the Arbitration Act, 1996 and the 2015 Amendment Act, but also results in payments already made under the amended Section 36 to award-holders in a situation of no-stay or conditional-stay now being reversed.

[Read Judgment]