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Striking Down Section 87 Of The Arbitration And Conciliation (Amendment) Act, 2019; Fixing What Was Not Broken

Striking Down Section 87 Of The Arbitration And Conciliation (Amendment) Act, 2019; Fixing What Was Not Broken

Introduction

On 27.11.2019, the Hon’ble Supreme Court of India in Hindustan Construction Company Limited & Anr v. Union of India & Anr. 2019 SCC OnLine SC 1520 struck down Section 87 of the Arbitration and Conciliation (Amendment) Act, 2019 (‘2019 Amendment Act’) as being manifestly arbitrary under Article 14. Section 87 of the 2019 Amendment Act laid down that the Arbitration and Conciliation (Amendment) Act, 2015 (‘2015 amendment’) shall “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.”

Section 87 of the 2019 Amendment Act in essence nullified the judgment of the Supreme Court in BCCI v. Kochi Cricket Pvt. Ltd.(2018) 6 SCC 287in which the Supreme Court while adjudicating whether Section 36 as amended by the 2015 amendment applied retrospectively, held that the amended Section 36 which does away with any automatic stay on enforcement of an award as soon as a petition under Section 34 is filed, would apply in the following scenarios also:

  1. Petitions under Section 34 which were pending when the 2015 amendment came into force; and
  2. Section 34 petitions which even though were filed after the 2015 emanated out of arbitral proceedings commenced before the 2015 amendment came into force.
The Supreme Court struck down Section 87 as it was regressive in nature and sought to bring back the mischief which the Legislature took 19 years to remove. This article will look at the brief history of the mischief that was removed through the 2015 amendment and re-introduced through the 2019 amendment.

The Object behind the Act

The Arbitration and Conciliation Act, 1996 (‘the Act’) was enacted as it was felt that the Arbitration Act, 1940, the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961 had become obsolete and did not provide for an effective and efficient framework to provide for an effective Arbitration mechanism to deal with the domestic as well as International commercial disputes. The United Nations Commission on International Trade Law (UNCITRAL) adopted in 1985 the Model Law on International Commercial Arbitration. The General Assembly of the United Nations had recommended that all countries give due consideration to the said Model Law to ensure uniformity of the law of arbitral procedures and the specific needs of international commercial arbitration practice.

The Supreme Court in Guru Nanak Foundation v Rattan Singh (1981) 4 SCC 634  elaborated the issues with the Arbitration Act, 1940 and observed that:

“Interminable, time consuming, complex and expensive Court procedures impelled jurists to search for an alternative Forum, less formal, more effective and speedy for resolution of disputes, avoiding procedural claptrap and this led them to Arbitration Act, 1940 (“Act” for short). However, the way in which the proceedings under the Act are conducted and without exception challenged in Courts, has made Lawyers laugh and legal philosophers weep. Experience shows and law reports bear ample testimony that the proceedings under that Act have become highly technical accompanied by unending prolixity, at every stage providing a legal trap to the unwary. Informal Forum chosen by the parties for expeditious disposal of their disputes has by the decisions of the Court been clothed with 'legalese' of unforeseeable complexity.”

The Act introduced a simplified procedure which was not hyper technical, mouldable according to the dispute but still in accordance with the principles of natural justice and basic canons of law and justice. The mischief that the legislature could not recognise in the Act was incorporated within Section 36 which dealt with enforcement of Arbitral Awards. This section led to an automatic stay on the enforcement of an Arbitral Award as soon as a petition under Section 34 challenging it was filed. Section 36 of the Act prior to the 2015 amendment which read as under:

“36. Enforcement.—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 under the Code of Civil Procedure, 1908 (V of 1908) in the same manner as if it were a decree of the Court.”

Even though the Act provided for a mechanism in consonance with the Model Law on International Commercial Arbitration, it failed to resolve two important issued which led to the 2015 amendment:

  1. Inordinate delay in disposing of petitions under Section 34 of the Act; and
  2. Automatic stay of enforcement of arbitral awards on filing a petition under Section 34 of the Act.
Removing the mischief

Even though the Act provided a mechanism for the conduct of arbitral proceedings and enforcement of arbitral awards, the prime purpose of an expeditious disposal of the arbitral proceedings and a timely enforcement of the award was still far from reality.

The mischief as is apparent on the face of the section was that there was an automatic stay on the enforcement of the arbitral award as soon as a petition under Section 34 challenging the arbitral award was filed till the disposal of the petition. This led to the object of the Act being defeated altogether as by the time a petition under Section 34 was disposed of and the award enforced, many years lapsed. This mischief was recognised by the Supreme Court as early as in 2004 when in National Aluminum Company Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd. and Anr.(2004) 1 SCC 540 it was observed that:

“However, we do notice that this automatic suspension of the execution of the award, the moment an application challenging the said award is filed under Section 34 of the Act leaving no discretion in the court to put the parties on terms, in our opinion, defeats the very objective of the alternate dispute resolution system to which arbitration belongs. We do find that there is a recommendation made by the Ministry concerned to Parliament to amend Section 34 with a proposal to empower the civil court to pass suitable interim orders in such cases. In view of the urgency of such amendment, we sincerely hope that necessary steps would be taken by the authorities concerned at the earliest to bring about the required change in law.”

The issue of delay in enforcement of arbitral awards was highlighted by the Law Commission of India in its’ Report No. 246 titled “Amendments to the Arbitration and Conciliation Act 1996”. The Commission observed that:

“The Commission finds that in most Courts, arbitration matters are kept pending for years altogether, and one of the reasons is the lack of dedicated benches looking at arbitration cases. One may look to the experience in the Delhi High Court where there is a practice of having separate and dedicated benches for arbitration related cases. This has resulted not only in better and quicker decisions, but has also increased the confidence of the parties in choosing the jurisdiction of the Delhi High Court for dealing with arbitration related cases”

This mischief was removed through the 2015 amendment and Sub Section 2 was inserted in Section 36 to do away with any automatic stay as soon as a petition under Section 34 was filed. The relevant portion of the amended Section 36 reads as under:

“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 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.”

Striking down Section 87

The 2015 amendment gave rise to another contentious issue; whether the amendment was retrospective in nature, particularly the amendment to Section 36? The High-Level Committee to Review the Institutionalisation of Arbitration Mechanism in India headed by Retd. Justice B.N. Srikrishna in its report dated 30.07.2017 observed that “section 26 has remained silent on the applicability of the 2015 Amendment Act to court proceedings, both pending and newly initiated in case of arbitrations commenced prior to 23 October 2015. Different High Courts in India have taken divergent views on the applicability of the 2015 Amendment Act to such court proceedings”. The Committee concluded that “it is evident that there is considerable confusion regarding the applicability of the 2015 Amendment Act to related court proceedings in arbitrations commenced before 23 October 2015.” The committee then recommended that the 2015 amendment should only apply in case of arbitral proceedings that have themselves been commenced post 23.10.2015, which would include court proceedings emanating out of these arbitral proceedings and hence this recommendation found its way into the Act through Section 87 added through the 2019 amendment. 

The recommendation of the Committee was based on the confusion that prevailed due to different High Courts giving inconsistent interpretations with respect to the retrospectivity of the amended Section 36. It is important to note that the report is dated 30.07.2017. The confusion was cleared by the Supreme Court through BCCI’s case which was delivered on 15.03.2018 and hence the very basis for introducing Section 87 was negated before the 2019 amendment was passed by the Parliament and brought into force on 30.08.2019. For the sake of clarity, it would be prudent to repeat here what the Supreme Court laid down in BCCI’s case. The Supreme Court in BCCI’s case held that the amended Section 36 which does away with any automatic stay on enforcement of an award as soon as a petition under Section 34 is filed, would apply in the following scenarios also:

  1. Petitions under Section 34 which were pending when the 2015 amendment came into force; and
  2. Section 34 petitions which even though were filed after the 2015 emanated out of arbitral proceedings commenced before the 2015 amendment came into force.
Apart from the fact that the basis for introducing Section 87 was negated by the Supreme Court, Section 87 itself runs contrary to the Statement of Objects and Reasons of the 2015 amendment which states that “it is high time that urgent steps are taken to facilitate quick enforcement of contracts, easy recovery of monetary claims and award of just compensation for damages suffered and reduce the pendency of cases in courts and hasten the process of dispute resolution through arbitration, so as to encourage investment and economic activity.” It was to remedy the delay in enforcing arbitral awards and provide for a time bound end to the arbitral proceedings and Section 34 petitions that the 2015 amendment was enacted. The Supreme Court in Hindustan Construction’s case explained how Section 87 ran contrary to the spirit of the 2015 amendment:

“when the mischief of the misconstruction of Section 36 was corrected after a period of more than 19 years by legislative intervention in 2015, to now work in the reverse direction and bring back the aforesaid mischief itself results in manifest arbitrariness. 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. In fact, refund applications have been filed in some of the cases before us, praying that monies that have been released for payment as a result of conditional stay orders be returned to the judgment-debtor.”

In fact, The Supreme Court in BCCI’s case was conscious of the fact that the Legislature intends to add Section 87 to the Act and added a word of caution:

“The Government will be well-advised in keeping the aforesaid Statement of Objects and Reasons in the forefront, if it proposes to enact Section 87 on the lines indicated in the Government's Press Release dated 7-3-2018. The immediate effect of the proposed Section 87 would be to put all the important amendments made by the Amendment Act on a back-burner, such as the important amendments made to Sections 28 and 34 in particular, which, as has been stated by the Statement of Objects and Reasons, 

“… have resulted in delay of disposal of arbitration proceedings and increase in interference of courts in arbitration matters, which tend to defeat the object of the Act”, 

and will now not be applicable to Section 34 petitions filed after 23-10-2015, but will be applicable to Section 34 petitions filed in cases where arbitration proceedings have themselves commenced only after 23-10-2015.”

The Judiciary has stepped into the Legislature’s shoes in times of necessity when the Legislature has had a cavalier approach towards its duties; in this case the Supreme Court has shown that the Legislature need not be overzealous in enacting laws that seek to fix what is not broken.

About the author: Vivek Punia is an Associate in the Office of Justice (Retd.) G.P. Mittal.

Mr. Punia after completing his B.A LL.B. (Hons.) from Amity Law School, Delhi in 2016 has worked as a Judicial Clerk cum Research Assistant with Hon’ble Justice Vinod Goel at the Delhi High Court. Mr. Punia has a keen interest in Arbitration Law and Criminal Law and his practice is based primarily in Delhi. 

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