THE CONSTITUTIONAL VALIDITY OF SECTION 87 OF THE ARBITRATION AND CONCILIATION ACT, 1996

THE CONSTITUTIONAL VALIDITY OF SECTION 87 OF THE ARBITRATION AND CONCILIATION ACT, 1996

 HINDUSTAN CONSTRUCTION COMPANY LTD V. UNION OF INDIA

 2019 (6) ARBLR 171 (SC)

 

The present petition has been filed in order to challenge Section 87 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as ‘the 1996 Act’) brought in by Section 13 of Arbitration and Conciliation (Amendment) Act, 2019 (hereinafter referred to as ‘the 2019 Act’) and repeal of Section 26 of the Act via Section 15 of the 2019 Act. This petition also challenges the provisions under the Insolvency and Bankruptcy Code, 2016 on the grounds of it being discriminatory towards the petitioners.

It was contended by the Petitioners that the unamended Act deviated from the UNCITRAL Model Law by not allowing two bites at the cherry to an award debtor, i.e., one during setting aside proceedings under section 34 and one during enforcement proceedings under section 36. Hence, the erstwhile the interpretation that the setting aside proceedings would create an automatic stay was itself fallacious when section 35 provided for the finality of the award.

It was argued that it was inconceivable that while in civil appeals there is no automatic stay of a money decree, there should be an automatic stay against the arbitral award when a setting aside application is filed. It was further contended that section 87, by applying the 2015 Amendment Act prospectively, was violative of Article 14, 19(1)(g), 21 and 300-A of the Constitution of India, namely because:

▪ It was contrary to the object of the Act

▪ It took away the vested right of enforcement and diluted the binding nature of an arbitral award

▪ It encroached upon the BCCI decision (BCCI v. Kochi Cricket Private Limited, (2018) 6 SCC 287) without formally neutralizing it, and was introduced without justification by simply relying upon the Srikrishna Committee Report which predated the BCCI decision

▪ It recreated the mischief that was sought to be done away with by the 2015 Amendment Act

▪ It was unreasonable, excessive, disproportionate and arbitrary

The court held that there was no requirement to expressly refer to the BCCI decision in order to nullify it by way of legislation. The very foundation of the BCCI decision having been uprooted, there was no direct assault on the decision. However, the reading of the unamended Act leads to the conclusion that there was a conscious deviation from the UNCITRAL Model Law by not allowing two bites at the cherry to an award debtor, i.e., one during setting aside proceedings under section 34 and one during enforcement proceedings under section 36. The court read section 35 (which deals with finality of an award) along with section 34 and 36 to state that it was never intended that a setting aside petition would automatically stay enforcement. This obviously was a complete departure from the earlier position that had been stated by the court itself. In -

a. National Aluminum Company Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd. and Anr., (2004) 1 SCC 250,

b. Fiza Developers and Inter-trade Pvt. Ltd. V. AMCI (India) Pvt. Ltd., (2009) 17 SCC 796

c. National Buildings Construction Corporation Ltd. V. Lloyds Insulation India Ltd., (2005) 2 SCC 367

the court had held that a setting aside petition would inherently stay the enforcement of an award. Thus, the court expressly overruled these decisions. The court also relied upon section, which enables a party to apply for interim reliefs after making of the award but before it is enforced, in support of the conclusion that the award is enforceable and there is no automatic stay against enforcement upon the filing of a setting aside petition. The court thus clarified that even under the Act, there was never any automatic stay intended and that the 2015 Amendment Act was merely clarificatory in this regard. By extension, the court implied that the 2015 Amendment Act was therefore retrospectively applicable.

The court observed that section 87 was introduced merely on the basis of the recommendation in the Srikrishna Committee Report to remove uncertainty around the prospective applicability of the 2015 Amendment Act, when in fact such uncertainty was removed by the BCCI decision. The court clarified that having held that there was no automatic stay under the unamended Act, the 2015 Amendment Act was only introduced to clarify such a position. Therefore, section 87 was contrary to the object sought to be achieved by the 2015 Amendment Act as it sought to make the 2015 Amendment Act only applicable from 23 October 2015. Further, the legislature without referring to the BCCI decision which had pointed out the pitfalls of introducing such a provision, had brought into play a provision that was manifestly arbitrary, without adequately determining the principle, and contrary to the public interest.

The court hence found the introduction of section 87 and the repeal of section 26 of the 2015 Amendment Act to be violative of Article 14 of the Constitution of India. Notably, the court made short work of the Respondents' contention that the cut-off date was not arbitrary by holding that the question before it was not whether the date was arbitrary but whether the non-bifurcation of court proceedings and arbitration proceedings with reference to the said date were arbitrary. The court having struck down the said provision on the basis of Article 14, did not venture further into its constitutionality vis-à-vis Article 19(1)(g), 21 and 300-A.

The court then clarified that the position in BCCI continues to hold good as on date, i.e., by filing a setting aside petition there would be no automatic stay against the enforcement of any arbitral award, irrespective of when the arbitration was commenced.

 

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