In an attempt to vitiate the negative effects of some archaic provisions governing arbitrations in India, the Parliament of India had introduced the Arbitration and Conciliation (Amendment) Act, 2015 (2015 Amendment). Among other things, the 2015 Amendment sought to minimise interference of courts in the arbitral process, and for speedy resolution of disputes which go to arbitration. In Section 26 of this 2015 Amendment, it is clarified that amended provisions shall not apply to arbitral proceedings commenced prior to 23 October 2015 (cut-off date) i.e., the date of commencement of the 2015 Amendment. However, the applicability of amended provisions to court proceedings, in relation to arbitral proceedings which commenced before the cut-off date, was unclear.
As a result of the ambiguous language of Section 26 of the 2015 Amendment, various High Courts adopted different interpretations of the same, thereby causing a lot of confusion among litigants. Finally, the Supreme Court of India (Supreme Court) in its decision in BCCI v. Kochi Cricket Pvt. Ltd. (BCCI),1 put to rest all debate regarding applicability of the 2015 Amendment to court proceedings commenced under the Arbitration and Conciliation Act, 1996 (Act/Arbitration Act). The Supreme Court held that the amended provisions would apply to court proceedings under the Arbitration Act, which have commenced on or after the commencement of the 2015 Amendment, irrespective of when the arbitration had commenced.
One amended provision in particular, has triggered a lot of discussion over the years. Prior to the 2015 Amendment, Section 36 of the Arbitration Act provided for an automatic stay on enforcement of an award, where such award has been challenged by way of an application under Section 34 of the Arbitration Act. However, the 2015 Amendment sought to change this and remove the operation of such automatic stay. The effect of the decision rendered by the Supreme Court in the BCCI matter is that an application filed under Section 34 of the Arbitration Act on or after the cut-off date would not attract automatic stay under Section 36 of the unamended Arbitration Act, on the enforcement of an arbitral award.
This move was instrumental in minimising the time taken in finally enforcing an arbitral award, and discouraging litigants from filing frivolous applications under Section 34 of the Arbitration Act, with the sole intention of stalling enforcement of an unfavourable award. However, this was a short-lived achievement. The latest amendment to the Arbitration Act was ushered in by way of the Arbitration and Conciliation (Amendment) Act, 2019 (2019 Amendment), and it undid the positive effect brought by the BCCI judgment.
Section 15 of the 2019 Amendment deleted Section 26 of the 2015 Amendment; and Section 13 of the 2019 Amendment introduces Section 87 in the Act, with effect from 23 October 2015. These amendments strike the root of the BCCI decision, without any justification being offered in the statement of objects and reasons. These two amendments were therefore recently challenged by way of a writ petition before the Supreme Court in Hindustan Construction Company Ltd. & Anr. v. Union of India & Ors. (Hindustan Construction).2
Section 87 in its present form was first envisaged in the report submitted by a high-level committee headed by Retd. Justice BN Sri Krishna (Committee Report).3 However, this Committee Report dates back to 2017, much before the BCCI decision was rendered. In fact, Section 87 as proposed in the Committee Report was specifically discussed by the Supreme Court in BCCI, wherein it was opined that the intent and purport of Section 87 is contrary to the overall scheme of the Arbitration Act and the object of the 2015 Amendment. The Supreme Court even ensured that the judgment rendered in the BCCI matter was shared with both the Ministry of Law and Justice, as well as the Attorney General of India. Subsequent to the BCCI decision, the law on Section 26 of the 2015 Amendment has been laid down with adequate clarity. The Supreme Court was therefore of the opinion that to delete this provision thereafter, and introduce Section 87 in its place, was wholly without justification or rational basis.
The bench in Hindustan Construction therefore deemed this to be a fit case to apply the doctrine of "manifest arbitrariness" in terms of Article 14 of the Constitution of India, 1949 (Constitution). This doctrine has been applied by the Supreme Court previously in various landmark judgments,4 while striking down statutory provisions which were violative of Article 14 of the Constitution. The test of "manifest arbitrariness" involves a determination as to whether something is done capriciously, irrationally and/or without adequate determining principle by the legislature.5 Particularly, while applying this doctrine to a piece of legislation, the court must examine whether that legislation is unfair, unreasonable, discriminatory, non-transparent, capricious, biased with favouritism or nepotism, and not in pursuit of promotion of healthy competition and equitable treatment.6
After due consideration of the above-mentioned factors, the Supreme Court in Hindustan Construction struck down the deletion of Section 26 of the 2015 Amendment and introduction of Section 87 in the Arbitration Act as "manifestly arbitrary", for the following broad reasons:
- The legislature placed reliance on the Committee Report to introduce Section 87 in the Act, ignoring one of the key findings in the BCCI decision, wherein the downsides of following such a provision have been set out;
- The legislature deleted Section 26 of the 2015 Amendment and replaced it with Section 87, unreasonably paving way for an increase in interference of courts in arbitral proceedings, and delay in disposal of arbitration proceedings, thereby defeating the object of the Arbitration Act and the 2015 Amendment;
- The legislature resurrected the mischief of misconstruction of Section 36 which was corrected after a period of more than 19 years by legislative intervention in 2015; and
- The legislature retrospectively revived an automatic stay in some cases, causing payments already made under the amended Section 36 to award-holders in a situation of no-stay or conditional-stay to now be reversed/refunded.
The Supreme Court in Hindustan Construction also emphasized on the contrast between an application under Section 34, which is essentially in the nature of a summary proceeding, and Order 41 Rule 5 of the Code of Civil Procedure, 1908 which operates in cases of full-fledged appeals. While there is no automatic stay called for in the latter case, the Supreme Court was of the opinion that it is absolutely unreasonable to infer that there would or should be operation of an automatic stay in the former case.
Lastly, the Supreme Court disapproved of the oversight of provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) in the Committee Report. The consequences of applying a provision such as Section 87 are all the more dangerous in view of the IBC. Upon operation of the automatic stay doctrine, an award-holder in an arbitration may become insolvent by defaulting on its payment to its suppliers, while awaiting the disposal of a Section 34 application to get its award enforced. Further, the well-earned fruits of tedious and long drawn arbitrations will be pushed farther away, and the award-holders in such cases will be brutally exposed to the rigors of the IBC.
Section 26 of the 2015 Amendment therefore stands revived, and the decision rendered in the matter of BCCI will continue to apply as a guiding principle for determining applicability of the 2015 Amendment.
1 Board of Control for Cricket in India v. Kochi Cricket, AIR 2018 SC 1549.
2 Report of the High-Level Committee to Review the Institutionalisation of Arbitration Mechanism in India, 30 July 2017.
3 Hindustan Construction Company Ltd. & Anr. v. Union of India & Ors., Decided on: 27.11.2019.
4 See Justice K.S.Puttaswamy (Retd.) v. Union of India, 2018 (3) SCC 797; Shayara Bano and Ors. v. Union of India, AIR 2017 SC 4609; and Navtej Singh v. Union of India and Ors., (2019) 1 SCC(LS) 443.
5 Shayara Bano and Ors. v. Union of India, AIR 2017 SC 4609.
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