India: Between The Lines... April, 2018

Last Updated: 1 May 2018
Article by Vaish Associates Advocates

I. SUPREME COURT EXPANDS THE SCOPE OF ARBITRATION AMENDMENT ACT, 2015 TO PENDING COURT PROCEEDINGS FILED FOR SETTING ASIDE OF THE ARBITRAL AWARD

The Supreme Court in case of Board of Control for Cricket in India v. Kochi Cricket Private Limited (decided on March 15, 2018) held that the Arbitration and Conciliation (Amendment) Act, 2015 ("Amendment Act") shall apply to arbitration proceedings and court proceedings related to such arbitration proceedings initiated after the Amendment Act came to force i.e. October 23, 2015. It also made the Amendment Act applicable retrospectively to pre- amendment court proceedings under Section 34 (setting aside of arbitral award) of the Arbitration and Conciliation Act, 1996 ("Arbitration Act").

Facts

Under the pre-amended Arbitration Act, when an application for setting aside of an arbitral award was filed under Section 34, an automatic stay on the enforcement of the arbitral award would come into force under Section 36 of the Arbitration Act. The Amendment Act did away with such an automatic stay.

The brief facts of case are that certain applications were filed by the Board of Control for Cricket in India ("Appellant") in the Bombay High Court against the arbitral award passed in favour of the Kochi Cricket Private Limited ("Respondent") under Section 34 of the Arbitration Act before the commencement of the Amendment Act and certain applications were filed after commencement of the Amendment Act. There was no clarity with respect to the instances in which the Amendment Act shall apply. In the interim, Respondents filed execution applications in the Bombay High Court for payment of the amounts awarded under the arbitral awards, pending enforcement of such awards. These were resisted by the Appellants before the Supreme Court praying that there would be an automatic stay of the awards until the Section 34 proceedings had been decided. The question of law that came up before the Supreme Court in the present case was:

Issue

Whether Section 36 of the Arbitration Act, which was substituted by the Amendment Act, would apply in its amended form or in its original form to Section 34 applications filed (a) prior to the coming into force of the Amendment Act; and (b) after coming into force of the Amendment Act?

Relevant Provisions

The Court relied heavily on the interpretation of Section 26 of the Amendment Act to answer the aforesaid question of law. The provision has been reproduced hereunder for reference:

"Section 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."

Arguments

Appellants argued that Section 26 of the Amendment Act consists of two parts. The second part, which makes the Amendment Act applicable in relation to arbitral proceedings commenced on or after the date of commencement of the Amendment Act, is the principal part, whereas the first part of Section 26 of the Amendment Act, which makes the Amendment Act inapplicable if the parties do not agree for the same, is in the nature of a proviso or exception. If arbitral proceedings have commenced prior to coming into force of the Amendment Act, the said proceedings, together with all proceedings in court in relation thereto, would attract only the provisions of the un-amended Arbitration Act. Similarly, when arbitral proceedings have commenced after the coming into force of the Amendment Act, those proceedings, including all courts proceedings in relation thereto, would be governed by the Amendment Act. Hence, the Amendment Act will only apply to arbitral proceedings commenced on or after the commencement of the Amendment Act and to court proceedings that arise out of or in relation to such arbitral proceedings. It was emphasized that autonomy of the parties with respect to applicability of the Amendment Act to pre-amendment arbitral proceedings must be respected. Parties who have entered into agreements in the expectation that the old regime will apply cannot suddenly be foisted with a completely different regime under the Amendment Act.

The Respondent argued that in the first part of Section 26 of the Amendment Act, there is an absence of the mention of court proceedings. This shows that the Amendment Act would retrospectively apply to court proceedings, as distinguished from the arbitral proceedings. On a correct construction of Section 26 of the Amendment Act, proceedings under Section 34 of the Arbitration Act that have commenced before the Amendment Act came into force, would be governed by the Amendment Act, and arbitral proceedings which commenced after the Amendment Act, together with Section 34 applications made in relation thereto, would then be governed under the second part of Section 26 of the Amendment Act. It was stated that the original intent of the un-amended Arbitration Act was to minimise court intervention and to restrict the grounds of challenge of arbitral awards. Given the fact that court proceedings in this country take an inordinately long time, the whole object of the amendment to Section 36 of the Arbitration Act would be stultified, if Section 36 of the Arbitration Act is only applied to court proceedings that result from arbitral proceedings, which have commenced on and after the commencement of the Amendment Act. Further, since the execution proceedings are procedural in nature, the amendment to Section 36 would be retrospective and, therefore, the substituted Section 36 would apply even in cases where the Section 34 application is made before the commencement of the Amendment Act.

Observations of the Supreme Court

The Supreme Court held that while the first part of Section 26 of the Amendment Act refers only to arbitral proceedings before an arbitral tribunal, the second part refers to court proceedings "in relation to arbitral proceedings", and it is the commencement of these court proceedings that is referred to in the second part of Section 26 of the Amendment Act. Section 26 of the Amendment Act, therefore, bifurcates proceedings, into two sets of proceedings (a) arbitral proceedings, and (b) court proceedings in relation thereto. The reason the first part of Section 26 of the Amendment Act is couched in negative form is only to state that the Amendment Act will apply even to arbitral proceedings commenced before the amendment if parties agree to such an arrangement. As "arbitral proceedings" having been subsumed in the first part, they cannot re-appear in the second part, and the expression "in relation to arbitral proceedings" would, therefore, apply only to court proceedings which relate to the arbitral proceedings. The Supreme Court observed that the scheme of Section 26 of the Amendment Act is that the Amendment Act is prospective in nature, and will apply to those arbitral proceedings that are commenced on or after the Amendment Act, and to court proceedings which have commenced on or after the Amendment Act came into force.

The Supreme Court further observed that enforcement and execution of the award were one and the same and that proceedings under Section 36 of the Arbitration Act were procedural in nature. The judgement debtor did not have a substantive vested right to resist execution. Therefore, the new Section 36 of the Arbitration Act, would retrospectively apply even to pending Section 34 applications on the date of commencement of the Amendment Act. Supplementing this argument, the Supreme Court remarked on its judgement in National Aluminium Company Limited v. Pressteel & Fabrications Private Limited (decided on December 18, 2003) where it had recommended that Section 36 of the un-amended Arbitration Act should be changed, as it defeated the very objective of the alternative dispute resolution system. The Supreme Court observed that it is clear by looking at the practical aspect, the nature of rights involved and the sheer unfairness of the un-amended provision, which granted an automatic stay to execution of an award before the enforcement process of Section 34 was over (and which stay could last for a number of years), that Section 36 of the Arbitration Act as amended would apply to Section 34 applications filed before the commencement of the Amendment Act.

Decision of the Supreme Court

The Supreme Court dismissed the appeals filed by the Appellant and held that:

  1. The Amendment Act shall apply to arbitration proceedings initiated on or after commencement of the Amendment Act as well as to court proceedings in relation to such arbitration proceedings.
  2. The Amendment Act shall apply to court proceedings initiated by way of application for setting aside the arbitral award under Section 34 of the Arbitration Act if such court proceedings are pending when the Amendment Act came to force.

Situational analysis of the decision

Situation 1: X and Y enter into an agreement before commencement of the Amendment Act. Y sends a notice to X to initiate arbitration on or after the coming into force of the Amendment Act. The Amendment Act applies.

Situation 2: X and Y enter into an agreement before commencement of the Amendment Act. Y sends a notice to X to initiate arbitration before the coming into force of the Amendment Act. X and Y mutually agree that the Amendment Act shall apply to their arbitration proceedings. The Amendment Act applies.

Situation 3: X and Y enter into an agreement before commencement of the Amendment Act. Y sends a notice to X to initiate arbitration before the coming into force of the Amendment Act. Court proceedings with respect to this matter are initiated on or after the coming into force of the Amendment Act. The Amendment Act applies.

Situation 4: X and Y enter into an agreement before commencement of the Amendment Act. Y sends a notice to X to initiate arbitration before the coming into force of the Amendment Act. Arbitral award is passed in favour of Y and X files an application for setting aside the award under Section 34 of the Arbitration Act. While such application is pending, Amendment Act comes to force. The Amendment Act applies.

VA View

Section 26 of the Amendment Act has been at the centre of ample debate leading to contradictory views and multiple interpretations. The question at the crux of this disharmony is to which proceedings shall the Amendment Act apply? Before the Amendment Act came to force, after the arbitrator passed the arbitral award, the counter party could file an application to the court to set aside such award, which would result into an automatic stay on the enforcement of that award under the pre-amended Section 36of the Arbitration Act. This was misused by the judgement debtor as a dilatory tactic to delay the enforcement of awards which resulted in awards not being enforced for years on end.

The Amendment Act by amending Section 36 of the Arbitration Act has done away with such an automatic stay and now it requires a separate court order to be made to cease the enforcement. This was an extremely welcome change. However, there was great uncertainty with respect to applicability of the new Section 36of the Arbitration Act to pending arbitration and court proceedings. The cloud of confusion surrounding this matter has been lifted to a certain extent by this judgement. The Amendment Act shall apply in all four instances stated above in "Situational analysis of Decision". This judgement, despite its merits, fails to address the larger issue as to whether the Amendment Act applies to pending court proceedings other than those under Section 34 of the Arbitration Act. The judgement nevertheless shall have far reaching impact in so far as pending court proceedings under Section 34 of the Arbitration Act are concerned.

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© 2018, Vaish Associates Advocates,
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Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

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