India: SC Declares 2015 Amendment Act To Be Prospective; Carves Out An Exception For Section 36

BACKGROUND

The Arbitration & Conciliation Act, 1996 (Arbitration Act) was amended by way of the Arbitration and Conciliation (Amendment) Act, 2015 (Amendment Act) with effect from 23 October 2015. One of the significant changes was the removal of the automatic stay that operated in favour of the award debtor under the un-amended Section 36 of the Arbitration Act on filing of a challenge petition under section 34.

Soon thereafter, courts across the country were confronted with the question of whether section 36, as substituted by the Amendment Act, applied to a section 34 petition arising out of arbitrations invoked prior to commencement of the Amendment Act, leading to several conflicting views on this issue.

In this background, the Hon'ble Supreme Court was called upon to interpret section 26 of the Amendment Act. The court considered the question in 8 different special leave petitions which were clubbed together, the lead matter being Board of Cricket in India v. Kochi Cricket Pvt. Ltd. And Ors. (SLP (C) Nos. 19545-19546 of 2016.

The judgment of the Supreme Court was delivered on 15 March 2018.

ANALYSIS OF THE SUPREME COURT JUDGMENT

Construction of section 26 of the amendment act:

The central question in this case was the construction of section 26 of the Amendment Act, which reads as follows:

"26. Act not to apply to pending arbitral proceedings-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"

  • Bifurcation of Section 26 into two distinct parts

    The Supreme Court observed that section 26 can be divided in two parts, the first couched in negative terms referring to the Amendment Act not applying to certain proceedings, and the second couched in positive terms affirmatively applying to certain proceedings. The question for determination was precise meaning of each part.

    Significant elements of the first part of the section are: (i) the term "the arbitral proceedings" and their commencement is used in the context of section 21 of the Principal Act, (ii) the expression used is "to" and not "in relation to" and (iii) parties have been given the option of agreeing to opt in to the Amended Act. This is to be contrasted with the second part of the section wherein (i) the expression "in relation to" is used, and not "to" and (ii) the expression "the" arbitral proceedings and "in accordance with the provisions of section 21 of the principal Act" are absent.

    The court held that the expression "the arbitral proceedings" in the first part of Section 26 refer only to proceedings before an arbitral tribunal and not court proceedings. Reliance has been placed on the statutory scheme apparent from heading of Chapter V of the Principal Act titled "Conduct of Arbitral Proceedings" which only deals with the proceedings before the arbitral tribunal and not before court. The reference to Section 21 has also been heavily relied upon, to show that, only arbitral proceedings are covered by the first part. Further, the court held that since conduct of arbitral proceedings is largely procedural, that is the reason that in the first part of the section an option has been given to parties to 'opt in'. In contrast, the second part of section 26 makes the Amendment Act applicable "in relation to" arbitral proceedings which commenced after date of commencement of the Amendment Act. The court held that absence of reference to Section 21 showed that the second part is not controlled by Section 21, and applies only to court proceedings that are "in relation to" arbitral proceedings.

    Therefore, the court clearly bifurcates Section 26 of the Amendment Act into two parts: First Part applicable to proceedings before an Arbitral Tribunal and second part applicable to proceedings before court in relation thereto.
  • Bifurcation in section 26 leads to conclusion that the amendment act is prospective in nature

    Having clearly bifurcated Section in two, the court relied upon the plain meaning of the section and scheme of the Act to hold that the Amendment Act prospectively applied to (i) arbitral proceedings that have commenced on or after commencement of Amendment Act & (ii) court proceedings which have begun after commencement of the Amendment Act.

    The court held that its "intermediate approach" has the merit of introducing clarity to the law and would avoid anomalies in application of the Amendment Act, as it would apply only prospectively to Arbitral proceedings and court proceedings begun after its coming into force.

Applicability of the amended arbitration act to section 36 proceeding:

Having held that the Amendment Act as a whole would be prospectively applicable, the court went on to consider the question of applicability of amended Section 36 to Section 34 petitions filed before commencement of the Amendment Act.

The court has effectively given retrospective effect to section 36 in relation to such proceedings for the following reasons:

  1. The court first held that "Enforcement" and "Execution" are different concepts, "Enforcement" being substantive and "Execution" being procedural in nature. Section 36 refers to execution of an award as if it were a decree attracting the provisions of Order XXI and Order LXI, Rule 5 of CPC and would, therefore, be a provision dealing with execution of arbitral awards.
  2. As execution of a decree pertains to the realm of procedure, there is no substantive vested right that accrues in an Award debtor to resist execution in a particular fashion.
  3. Further, execution proceedings being purely in the realm of procedure, any change in law during the pendency of the cause will be deemed to be retroactive in its operation.
  4. The Court also observed that Court proceedings in relation to arbitral proceedings, being independent from arbitral proceedings, would not be viewed as a continuation of arbitral proceedings.
  5. The use of the expression "has been" in Section 36 was noticed, and was found to cover section 34 petitions which have been filed before the commencement of the Amendment Act.
  6. The Court was of the opinion that grant of automatic stay under the earlier regime was unfair and defeated the purpose of alternate dispute resolution mechanism. Related to this, the retrospective applicability of section 36, as substituted, was found to be in line with the statement of objects and reasons for the Amendment Act.
  7. An alternative reasoning given by the Court was that the right under Section 36 of the unamended Arbitration Act operated only as a clog on the right of the decree holder to execute the award in his favour, unless the conditions of this section are met. This does not mean that there was a corresponding right created in the judgement debtor to stay the execution of such an award, and as such no vested right accrued in favour of the award debtor.

Section 87 of the Arbitration and Conciliation (amendment) Bill of 2018

The court also noted that in the Arbitration Amendment Bill of 2018, a new section 87 is proposed to be inserted to clarify that unless parties agree otherwise, the Amendment Act shall not apply to (a) Arbitral proceedings which have commenced before the commencement of the Amendment Act (b) 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 Amendment Act of 2015, and shall apply only to Arbitral proceedings commenced on or after the commencement of the Amendment Act and to court proceedings arising out of or in relation to such Arbitral proceedings.

It is significant to note that the Court has opined that it appears that the proposed amended Section 87 would put the important amendments introduced by the Amendment Act on the back burner and the purpose of the principal Act.

Comment

The BCCI judgment has provided much needed clarity by declaring that the amended Arbitration Act will be applicable to arbitral proceedings and court proceedings only if they commence after the Amendment Act came into force. At the same time the Court has also found that certain individual provisions in the Amendment Act may effectively have retrospective operation, depending on the nature and effect of the provision in question such as the case of Section 36, at hand.

It is important to note that when faced with an argument regarding retrospective applicability of the amendment to Section 34 itself, the Court declined to express any opinion since that issue had not squarely been raised in these petitions. The court has thus left open the question of whether provisions other than amended section 36 will be deemed to have retrospective operation. However, the Court has given clear guidance on how such an inquiry should be conducted, as and when the issue of a specific provision in the Amendment Act arises. Similar to the examination of Section 36 in the present case, any other provision would also have to be tested on the touchstone of whether the provision is clarificatory, declaratory or procedural, and in such cases, the said provisions may be held to be retrospective, depending upon the facts of the case.

An ancillary point of interest arising out of this case is that the Supreme Court has also directed copies of the judgment to be given to Ministry of Law and Justice and the Attorney General for India to consider desirability of certain proposed Amendments to the Act touching upon the issue of retrospective/prospective operation of the Act. In our view, whether the suggestions in the judgment are accepted by the Government or not, an early clarification by way of amendment to the Arbitration Act to iron out the ambiguity regarding the retrospective/prospective operation of the Arbitration Act would be welcome to avoid another round of litigation with respect to the remaining provisions of the Arbitration Act as in the present case.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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