Case Commentaries

LAW OF ARBITRATION

HINDUSTAN CONSTRUCTION COMPANY LIMITED & ORS. V. UNION OF INDIA & ORS.

2019 S.C.C. OnLine S.C. 1520

Ms Drasti Jain, Mr Aryan Deshmukh

BACKGROUND


Position under the original legislation:

The Arbitration and Conciliation Act, 1996, (“The Act” or “The 1996 Act”)which is largely based on the UNCITRAL Model Law, was brought in as an attempt to revolutionize the arbitration regime in India. Although it was a great attempt, the act was plagued with vague and ambiguous provisions. One of the most controversial sections in the aforesaid legislation was Section 36 which granted an ‘Automatic Stay’ on the enforcement of arbitral awards once a Section 34 appeal had been filed in the Court.


Effect of the 2015 Amendment:

The Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment Act”) corrected this mischief created by the original 1996 Act by removing the doctrine of ‘automatic stay’ on arbitral awards and amending Section 36 of the original legislation. The application of these amendments to arbitrations and court proceedings related thereto was defined in Section 26 of the 2015 Amendment Act. Section 26 stated that the 2015 Amendment Act would only apply to the arbitrations initiated after 23rd October, 2015.


Exception laid down by the Supreme Court in BCCI v. Kochi Cricket Private Ltd:

The Supreme Court laid down a very important exception to Section 26 of the 2015 Amendment Act in the case of BCCI v. Kochi Cricket Private Ltd.[1] (“BCCI Judgment”) where it held that the amendments of 2015 would apply to the enforcement of awards under Section 36, even if those court proceedings relating thereto have been filed before the commencement of the Amendment Act. The Court introduced this exception on the ground that enforcement of an award is purely procedural in nature and could be applied retrospectively as no rights were vested in the parties seeking enforcement of such an award.


2019 Amendment and the havoc caused by Section 87:

A new provision was introduced into the legislation through the Arbitration and Conciliation (Amendment) Act, 2019 (“2019 Amendment Act”). Section 13 of the 2019 Amendment Act stated that the 2015 amendments would not apply to arbitral proceedings commenced before the commencement of the 2015 amendments as well as the court proceedings arising in relation to any such arbitral proceedings, whether or not such court proceedings commenced prior to or after the commencement of the 2015 amendments.


This provision was not only completely contrary to the BCCI judgment passed by the Supreme Court[2]but also insinuated that the court proceedings arising out of arbitrations were merely ‘parasitical on arbitration proceedings’ by stating that the 2015 Amendment would not be applicable to court proceedings initiated after 23rd October, 2015, if the corresponding arbitration out of which these proceedings have been initiated was itself initiated before the amendment came in force.


This meant that the doctrine of ‘automatic stay’ of arbitral awards would continue to apply to the court proceedings initiated after 23rd October, 2015, if their corresponding arbitration had commenced before the aforesaid date.


The 2019 Amendment Act deleted Section 26 of the 2015 Amendment Act to avoid any overlap with Section 87. These circumstances paved the way for the current case of Hindustan Construction Company Limited & Anr v. Union of India & Ors.[3]


FACTS


Hindustan Construction Company Limited (The Petitioner) is an infrastructure company involved in the construction of public-utilities and various other construction projects. The petitioner, inter alia, undertook various construction projects for governmentagencies like the NHAI, the NTPC, the IRCON, PWD, etc. which were allotted to the petitioner through public tendering.


The existence of certain dues between the parties was challenged by the government agencies (Respondents) and the only way to recover these dues was through civil proceedings or arbitration. Accordingly, arbitrations were contested between the parties, and as a result of which awards were given in favour of the petitioners. These awards were invariably challenged under Section 34 and Section 37 of the 1996 Act by the respondents. This challenge was being contested for more than 6 years, and it started to cause a lot of inconvenience to the petitioner. The biggest problem was that a challenge under section 34 of the Act meant an automatic stay on the arbitral award under Section 36 of the act.


Another problem which the petitioners faced was that government agencies except government companies could not be tagged as ‘operational creditors’ to initiate insolvency proceedings against them under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC 2016”). Even if they could be considered to be operational creditors under the act, challenging an arbitral award under Section 34 and Section 37 of the 1996 Act makes this a ‘disputed debt’ under Section 8 of the IBC and, hence, insolvency proceedings could not be initiated against these government agencies.


The petition filed before The Hon’ Supreme Court challenged the constitutional validity of Section 87 of the 1996 Act as well as that of the IBC 2016.


LEGAL ISSUES


The present case of Hindustan Construction Company Limited & Anr v Union of India & Ors. presented four important questions before the Hon’ble Supreme Court of India.


Can Section 36 of the 1996 Act be interpreted to grant an ‘automatic stay’ on arbitral awards?


Disposition:

The Apex Court held that Section 36, per se, never contained a provision for granting an automatic stay on arbitral awards and that the amended Section 36 merely restates the position that the un-amended Section 36 does not stand in the way to grant a stay of a money decree under the provisions of the Civil Procedure Code (“CPC”).[4]


Reasoning:

The Supreme Court, while passing this judgment, interpreted Section 36 of the 1996 Act differently from its previous judgments in National Aluminium Company Limited v. Pressteel and Fabrications Private Limited and Another[5](“NALCO”), National Buildings Construction Corporation Limited v. Lloyds Insulation India Limited,[6](“NBCCL”) and Fiza Developers and Inter-trade Private Ltd. V. AMCI (India) Private Ltd[7](“Fiza”). In the present case, the Apex Court opined that the Section did not provide any vested rights of granting an ‘automatic stay’ in itself. It further observed that Section 36 does not follow the ‘two bites at the cherry’ doctrine of the UNCITRAL Model Law. Hence, when an award becomes final and binding, it shall straight away be enforced under the CPC as if it were a money decree. It went ahead to point out that:


‘The raison d'etre for Section 36 is only to make it clear that when an arbitral award is not susceptible to challenge, either because the time for making an application to set it aside has expired, or such application having been made is refused, the award, being final and binding, shall be enforced under the Code of Civil Procedure as if it were a decree of the court’[8]


Therefore, the Supreme Court’s decisions in the cases of NALCO, NBCCL, and Fiza were held to be per incuriam in not noticing Section 9, 35, and the second part of Section 36 of the 1996 Act and could not be relied upon for the interpretation of Section 36.[9]


Does Section 87 of the 1996 Act remove the basis of the BCCI judgment?


Disposition:

The Apex Court held that Section 87 of the 1996 Act removes the basis of the BCCI judgment.[10]


Reasoning:

The objective of Section 87 introduced by the 2019 Amendment is completely contrary to the principle of retrospective application of Section 36 as laid down by the BCCI judgment. The Court observed that the scheme of the old Section 26 of the 2015 Amendment Act was different from that of the newly introduced Section 87, which insinuates, ‘court proceedings are merely parasitical on arbitration proceedings’[11]. It was also stated that while passing the BCCI judgment, the Court was well aware of the fact that the Srikrishna Committee Report had advised the introduction of Section 87 to the 1996 Act, and the Court had specifically noted that the introduction of Section 87 would turn the clock backward and obliterate the objective of the 2015 amendments brought to minimize the interference of courts in arbitral matters[12]. In conclusion, the Court held that by omitting Section 26 of the 2015 Amendment Act from the very beginning, Section 87 removes the basis of the BCCI judgment.


Is Section 87 of the amended 1996 Act constitutionally valid?


Disposition:

The Apex Court held that the insertion of Section 87 through the 2019 Amendment Act and the deletion of section 26 of the 2015 Amendment Act was ‘manifestly arbitrary’[13]. It also pointed out, ‘it is unnecessary to examine the constitutional challenge to the 2019 Amendment Act based on Articles 19(1)(g), 21, and 300-A of the Constitution of India’ since the BCCI judgment continues to apply to make the 2015 amendments applicable.[14]


Reasoning:

While passing this particular judgment, the Court observed that despite the BCCI judgment having clarified the stance of the judiciary on ‘automatic stay on arbitral awards’ under Section 36 of the 1996 Act and the applicability of Section 26 of the 2015 Amendment, the legislature went ahead and amended Section 26. The Supreme Court, while passing the BCCI judgment, was well aware of the Srikrishna Committee Report. Amending Section 26 on the advice of the committee not only made the BCCI judgment (which completely solved the issue regarding ‘automatic stay’ on arbitral awards) obsolete but also obliterated the objectives of the 2015 Amendment Act.[15]


The Apex Court believed that the 2015 Amendment Act had finally corrected the mayhem caused by the original Section 36 of the 1996 Act. The 2019 Amendment Act and the introduction of Section 87, in particular, had turned the clock backwards and had set the arbitration regime back by many years. It further went on to clarify that since the BCCI judgment continues to apply to make the 2015 amendments applicable to all court proceedings commenced on or after 23rd October 2015, the examination of a constitutional challenge was unnecessary.[16]


CRITICAL ANAYSIS


This three-judge bench judgment of the Supreme Court has come in at a crucial juncture. If Section 87 was not struck down, the impact would have been immense and negative in nature. Through this critical analysis, we trace the impact and the repercussions of this decision:


1. Promotion of India as a pro-arbitration centre

India ranks 163 out of 189 nations in the world in contract enforcement.[17]To encourage investment and economic activity, different steps such as facilitating quick enforcement of contracts and speeding up the process of dispute resolution through arbitration are of utmost importance.


The primary intention of the 2015 Amendment Act was to make India a pro-arbitration centre.[18]In the case of Mangalam Chaudhary Company vs. Hindustan Construction Company Limited[19], the arbitration proceedings were initiated prior to the commencement of the 2015 Amendment Act i.e., in 2007. The argument of the petitioners was with regards to the unilateral appointment of the arbitrator that went against the ‘principle of neutrality’ for arbitrators as enshrined in Schedules V and VII of the 2015 Amendment. The literal interpretation of Section 87 was applied contrary to the position established by the Apex Court in the BCCI judgment. The Bombay High Court in this September 2019 judgment held that the provisions of the 2015 Amendment Act could not apply to this case, as there was absence of an agreement to the contrary between the parties. Hence, the arguments of the petitioner held no water. All of this could have been prevented if Section 26 of the 2015 Amendment was relied upon.


The judgment amply proves that if the discretionary powers granted in the 2019 Amendment Act was given its true and full effect, the ability of courts to interfere in matters of arbitration would go on to increase manifold. This would have been in direct contradiction to the purpose and objective of the 2015 Amendment Act. The backwards implication of such a precedent due to the insertion of Section 87 were indeed dangerous and were rightly prevented by striking down the Section.


Section 5 of the Act states, “no judicial authority shall intervene except where so provided in this Part”. This clearly indicates the legislative intent to minimize the intervention of a judicial authority in the arbitration process.[20]


2. Interpretation of automatic stay against the objectives and purposes of the Act

Facilitation of speedy arbitration comes in when judicial intervention is minimal and the laws of the land support means of dispute resolution. The principle of ‘automatic stay’ goes against the very objectives and purposes of the Act. The finality of Arbitral Awards is enshrined in Section 35 of the 1996 Act. It has to be read with Section 34 and 36, which clearly indicate that the legislation never intended for a setting-aside petition to automatically stay enforcement. This interpretation of the Supreme Court overruled the decisions (with regards to this aspect) in the NALCO[21], Fiza[22], and NBCCL[23] cases, wherein, the Apex Court held that a setting-aside petition would inherently stay the enforcement of an award. Thus, the previous interpretation of the judiciary was incorrect.[24]An automatic stay on enforcement of an award on just an application for setting aside the award would result in unnecessary delays to the disposal of the arbitration matter. The judgment of a court is not automatically stayed upon filing of the appeal in case of a civil suit.[25]This is in stark comparison to a stay on the award on a challenge, even though it is narrower than an appeal. Moreover, under the procedure established in Section 34, as long as the award is legally valid and practical to enforce, the courts are bound to uphold the award of the arbitral tribunal.


Section 87 (inserted by the 2019 Amendment Act) makes Section 35 of the 1996 Act redundant.[26]The Supreme Court noted the same as arbitrary in its judgment. The insertion of Section 87 is against the spirit of the Act, as it would have made the 2015 Amendment Act applicable from 23 October, 2015, which was introduced to clarify and remedy the mischief contained in the original 1996 Act. Section 87 would have led to the return of the mischief caused by the 1996 Act.[27]Further, it would have led to the misinterpretation (caused by previous Supreme Court judgments) of Section 36 which was put right by the 2015 Amendment. Thus, it was imperative for the Court to have declared Section 87 as unconstitutional.


Impact on Award – Holder

An automatic stay on enforcement of an award results not only in delays but also places an unnecessarily heavy burden on the Award-Holder. To ensure speedy arbitration proceedings, it is important that there is timely recovery of amounts contained in arbitral awards, as well. Withholding of the award amount combined with the repercussions of Section 87 would result in the award-holder becoming insolvent due to their inability to pay their suppliers; such payments, however, would be forthcoming in cases of no stay on the award. To deprive an award-holder of their rightful award and have them wait for years due to litigation caused by automatic stay and then seek their award would be unjust.[28]Additionally, this comes in a situation, wherein, they have to continuously pay the operational creditors which would be difficult due to the money being withheld. The doom of insolvency would always be looming in such a situation. As a result of this judgment, award-holders wouldn’t have to wait for years before realizing the awarded amounts. This will also lead to an injection of liquidity and a short term relief to the award-holders without impacting their ability to run their businesses heavily. This resurrection would further allow award-debtors, who have made payments to award-holders, to claim the amount back.[29]


CONCLUSION


To reinstate the position as under the original Act of 1996 for, “arbitration proceedings commenced before the 2015 Act and 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 2015 Act”, would be in violation of the ‘rule against retrospective laws’. Subsequently, to rob the people of the benefits under the 2015 Amendment, which were primarily to resolve the mischief of the 1996 Act would also be contrary to the public interest.


We, thus, find both the judgment and the reasoning by the Court to be sound and the striking down of Section 87 as a welcome step that will help ease the arbitration process and provide a relief to award-holders. The judgment brought in the much needed clarity with regards to the 2015 Amendments and also demonstrated the pro-arbitration stance that the courts will hopefully take in future.



Refrences:


[1]BCCI v. Kochi Cricket Private Ltd, (2018) 6 S.C.C. 287

[2] Ibid

[3] Hindustan Construction Company Limited & Anr v. Union of India & Ors A.I.R. 2020 S.C. 122.

[4] Id at ¶ 32

[5] National Aluminium Company Limited v. Pressteel and Fabrications Private Limited and Another, (2004) 1 S.C.C. 540

[6] National Buildings Construction Corporation Limited v. Lloyds Insulation India Limited, (2005) 2 S.C.C. 367

[7] Fiza Developers and Inter-trade Private Ltd. v. AMCI (India) Private Ltd, (2009) 17 S.C.C. 796.

[8] Hindustan Construction, supra note 3 ¶ 22

[9] Id at ¶ 30

[10] Id at ¶ 45

[11] Id at ¶ 46

[12] Id at ¶ 37

[13] Id at ¶ 51

[14] Id at ¶ 55

[15] Id at ¶ 48

[16] Id at ¶ 54, 55

[17] Ease of Doing Business Rankings, WORLD BANK (15 Oct, 2020) https://www.doingbusiness.org/en/rankings

[18] Mangalam Chaudhary Company v. Hindustan Construction Company Limited MANU/MH/2618/2019

[19] Ibid

[20] K.V. SATYANARAYANA, LAW OF ARBITRATION AND CONCILIATION IN INDIA, 57 (1st Ed., Asia Law House, 2017)

[21] NALCO, Supra Note 5

[22] Fiza, Supra Note 7

[23] NBCCL, Supra Note 6

[24] Hindustan Construction, Supra Note 9

[25] Id at ¶ 6

[26] Ibid

[27] Id at ¶ 7

[28] Id

[29] Ibid

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