Supreme Court Strikes down Section 87 of the 2019 Arbitration Amendment

-Gunjan, Partner

Recently, the Supreme Court of India had the opportunity to deal with a batch of Writ Petitions challenging the validity of certain provisions of the Arbitration and Conciliation (Amendment) Act, 2019 (“2019 Act”) as well as certain aspects of the Insolvency and Bankruptcy code. A bench of Justices Nariman, Surya Kant and Ramasubramanian delivered its verdict on these issues on 27th November, 2019 by the judgment of Hindustan Construction Company Ltd. and anr vs. Union of India (“Hindustan Construction”). 

This article deals solely with the arbitration related aspects of the judgment. Incase you’re interested to read about the Insolvency related aspects of the said judgment, read here. 

Under Hindustan Construction, the constitutional validity of the following provisions of the 2019 Act were challenged:

1. Section 87 of the Arbitration and Conciliation Act, 1996 (“1996 Act”) as inserted by Section 13 of the 2019 Act and brought into force with effect from 30.08.2019. 
2. The repeal (with effect from 23.10.2015) of Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 ( “2015 Act”) by Section 15 of the 2019 Act. 

I have already previously mentioned the modifications made by the 2019 Act in a previous post, which can be accessed here. In effect, Section 87 was introduced to provide clarity on the applicability of the 2015 Act, which remained hazy owing to the language used in Section 26 of the 2015 Act. Furthermore several judgments had dealt with Section 26, to clarify the applicability of the 2015 Act, owing to this lacunae, before the enforcement of the 2019 Act. (read here about the various judgments).

The main impact on the Applicability of the 2015 Act appears to be on Section 36 and Section 34 of the 1996 Act. Previous to the 2015 Act, the language of Section 36 of the un-amended 1996 Act implied that mere filing of a Petition challenging an award under Section 34 would lead to an automatic stay on the award. This meant, that as soon as a party preferred an objection petition against an award under Section 34, no execution could be filed against the said award. Since there was no rationale to deprive a party to the fruits of an award, owing to a mere challenge, be it with or without merit, the 2015 Act did away by it by amending Section 36. After the 2015 Act, Section 36 was amended so that the mere filing of Section 34 would not lead to an automatic stay of the award, but a specific application seeking stay would need to be filed which would be treated at par on a stay application filed in an appeal against a money decree.

Section 26 of the 2015 Act, which came into effect on 23.10.2015, provided that,  “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.”. The language of this Section had created a controversy regarding the class of court proceedings that the 2015 Amendment Act would be applicable to.

After an array of judgments (read here), the law as to the applicability of the 2015 Act was settled in the case of BCCI v. Kochi Cricket Private Ltd., (2018), 6 SCC 287(“BCCI”), by holding as follows:-

1. If the arbitration commenced prior to 23.10.2015, but the Petition under Section 34 was filed after 23.10.2015, the stay application under Section 36(2) is required as no automatic stay would be applicable.
2. If the Section 34 Petition is pending before 23.10.2015, then also a stay application under Section 36(2) is required as automatic stay would not be applicable to such proceedings. This is owing to the use of the words “where an application to set aside the arbitral award has been filed in the Court….” Thus even applications which have already been filed before Court as on date of amendment would be covered by Section 36(2).

In the BCCI Judgment, the reasoning given by Court was that such a reasoning was in line with the 246^th Law Commission Report, to ensure speedy determination and recovery of amounts contained in arbitral report. In the said judgment of BCCI, it was pointed out by the parties that even at that time, the Shri Krishna Committee Report dated 30.07.2015 had opined that the 2015 Act should not apply to pending court proceedings commencing after 23.10.2015 if they arise out of arbitrations ongoing or concluded before 23.10.2015, and infact should only apply to proceedings which commence post 23.10.2015. Even the press-release to this effect dated 07.03.2018 was shown to the Court in the BCCI case (decided on 15.03.2018). The court had at the relevant time, reviewed these documents, and specifically opined that the aforesaid provision of Section 87, if enacted would be contrary to the very object of the 2015 Amendment, and thereafter the said judgment was specifically sent to the Ministry of Law and Justice and to the Attorney General of India. 

Despite these specific findings in BCCI and the above steps having been taken, it seems that the parliament had nevertheless enacted and enforced Section 87 on 30.08.2019.

Section 87 which was already dealt and opined upon by the Supreme Court in the BCCI judgment, and thereafter enacted, reads,

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

• not apply to–– 

• arbitral proceedings commenced before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015; 
• 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;

• 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.”

In the Hindustan Construction case, the Court was mindful of the entire background of the enactment of Section 87, being the BCCI judgment as well as the specific opinion given therein on the impending amendment, as also that the judgment was circulated to all relevant authorities. The Court held, that Section 87 deserved to be struck down on the following reasons:-

1. Section 34 is not in the nature of an appeal, and is a narrower review of an award than even an appeal. That being said, Order XLI Rule 5 of CPC, applies to full blown appeals, so as to suggest that there can be no automatic stay in the cases of even a full blown appeal. In view thereof, there was no gainsaying that there could be a right of an automatic stay on an award, especially in a limited challenge such as that of a Section 34 Petition. This itself makes Section 87 arbitrary as there is no reasonable differentia. 
2. The Sri Krishna Committee Report, being the reasoning behind enforcement of Section 87 was itself prior to the BCCI judgment, and thus could not have possibly dealt with the lacunae pointed out in the said judgment. 
3. Further, the Sri Krishna Committee Report had also not dealt with the advent of the Insolvency and Bankruptcy Code, 2016.Thus if an automatic stay of the award is allowed to continue, an award-holder, despite having obtained an award in his favour after several years would fail to bear fruits of the same, and on the other hand would be liable to pay his operational creditors immediately, owing to the said legislation.

For the above reasons the Court held that the striking down Section 26 of the 2015 Act, as well as the insertion of Section 87 into the Act by the 2019 Act, deserved to be struck down as being manifestly arbitrary under Article 14 of the Constitution of India. It was further held, that as of now, the law already held in the BCCI judgment would continue to apply so far as the Applicability of the 2015 Act (and automatic stays) is concerned.