LAW OF ARBITRATION
HINDUSTAN CONSTRUCTION COMPANY LIMITED & ORS. V. UNION OF INDIA & ORS.
2019 S.C.C. OnLine S.C. 1520
Ms Neha Koppu, Mr Rohan Gulati
CLEARING THE MURKY SKY OF AUTOMATIC STAY:
HINDUSTAN CONSTRUCTION COMPANY LIMITED & ORS. V.
UNION OF INDIA & ORS.
CITATION: 2019 S.C.C. OnLine S.C. 1520
COURT: HON’BLE SUPREME COURT OF INDIA
BENCH: ROHINTON FALI NARIMAN, SURYA KANT AND V. RAMASUBRAMANIAN, JJ.
DATE OF DECISION: 27TH NOVEMBER, 2019
The practice and procedure of the arbitration law has moved across all directions due to the absence of streamlined interpretation of several provisions under the Arbitration and Conciliation Act, 1996 (hereinafter “1996 Act”). One of the most pressing issues had been the stay granted by the courts under Section 34 of the 1996 Act. Under practical considerations, it had become ideal to obtain a stay on the arbitral award merely by filing an application under Section 34 that would render the award unenforceable until the completion of proceedings. Pertinently, the anomaly was not apropos the proceedings under Section 34, but in the manner in which Section 34 operated. Commonly, referred to as the ‘automatic stay’ on the arbitral award, and it was perhaps an issue largely plaguing the arbitration regime and creating hesitation in the commercial sector.
It was only by way of the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter “2015 Amendment Act”) that the erroneous practice of obtaining an unreasonable stay by merely initiating proceedings under Section 34 was done away with. After 19 years of trouble, the 2015 Amendment Act may have given the award holders a sigh of relief, however, not for very long. The anomalies continued to stir. Earlier, the Hon’ble Supreme Court of India in the case of BCCI v. Kochi Cricket Pvt. Ltd. (hereinafter “BCCI”) decided to clear the clouds of ambiguity. However, the decision did not appeal to the lawmakers that sought to pull back the arbitration regime, yet again by introducing Section 87 to the 1996 Act.
Section 87 met its fate soon; as in the case of Hindustan Construction Company & Ors. v. Union of India & Ors., (hereinafter “HCC”), the Supreme Court of India authoritatively struck it down for being retrogressive to the arbitration regime.
Through this case comment, and not to put the cart before the horse, firstly, the authors succinctly trace the background concerning the automatic stay of arbitral awards since 1996. Secondly, the authors set the tone by discussing the detailed facts and issues of the HCC Case, and thirdly, critically analyze the intricacies of the decision. The authors intend to argue that the HCC decision represents the pro-arbitration stance taken by the judiciary. Lastly, the authors conclude by highlighting the way forward.
II. TRACING THE BACKGROUND
At the outset, it is germane to trace the timeline from 1996 to 2019 in order to provide a bird’s-eye view of the paradigm shift in the arbitration regime. Therefore, each part highlights the key development distinctly, however, it is intricately connected to one and another.
The 1996 Act, also commonly known as the Principal Act, was the first forward thrust towards redefining the arbitration regime in India. However, due to misconstructions, the courts observed that a mere filing of an application under Section 34 of the 1996 Act would stay the enforcement of the arbitral award. This essentially struck at the heart of the dispute resolution mechanism that was intended to ensure speedy disposal of disputes.
After 19 years of inconsistencies and dilemma suffered by the award holders, the 2015 Amendment Act sought to steer the regime in the right direction by inserting Section 36(3) and expressly stating that a separate application would have to be filed that would be duly considered by the court before granting a stay on the arbitral award. However, the lawmakers failed to consider the applicability of the 2015 Amendment Act and also its retrospective applicability to the pending proceedings. Accordingly, Section 26 came under the radar in order to cover this loophole.
In the interim, a High-level Committee headed by Justice B.N. Srikrishna (hereinafter “Committee Report”) was set up that, inter-alia, pertinently considered the loophole left out by the 2015 Amendment Act, too. To stir up even more confusion, the committee recommended that the 2015 Amendment Act shall only apply prospectively, thereby implying that proceedings commenced or pending before 23rdOctober, 2015, will continue to suffer the fate of automatic stay.
In an attempt to put the issue apropos of automatic stays to rest, the Supreme Court rendered the decision in the BCCI case and authoritatively observed that the 2015 Amendment Act shall be applicable prospectively. However, the practice of automatic stay corrected by the aforestated amendment shall be applicable retrospectively.
The parliamentary draftsmen perhaps did not seem to be at ease, despite the BCCI decision settling the void. Thus, to shock the conscience and perhaps disturb the regime, yet again decided to introduce Section 87 vide the Arbitration and Conciliation (Amendment) Act, 2019 (hereinafter “2019 Amendment Act”), that essentially reiterated the recommendation of the Committee Report and overlooked the decision in the BCCI case. Pertinently, Section 87 was prima facie retrogressive and redundant in light of the BCCI case and turned the law on its head.
III. DETAILED FACTS & ISSUES
In the instant case, Hindustan Construction Company Limited (hereinafter “Petitioner”) is an infrastructure construction company, which primarily deals with construction of various public utilities and undertakes development projects. The Petitioner was engaged in a building project with several government bodies, such as NHAI, NHPC Ltd., NTPC, etc. As a contractor, the allotment of this project was done by way of a public tendering system. However, there were huge delays in the recovery of dues of the Petitioners, since the owners and beneficiaries were government bodies- due to which the cost overrun was invariably disputed.
Pertinently, the dues arising out of such projects could only be effectively claimed through arbitration or civil proceedings. Incidentally, arbitral awards were rendered in favor of the Petitioner. Albeit, due to the insertion of Section 87, the award-debtors were successful in obtaining an automatic stay on the awards upon filing an application under Section 34 of the 1996 Act.
Unfortunately, due to the automatic stay on such awards, the Petitioner was unable to claim the huge amount due. Accordingly, the Petitioner was unable to repay large dues to other operational creditors for supplying equipment and manpower for the project. Thus, the Petitioner feared an insolvency proceeding due to outstanding debts owed to the financial/operational creditors.
The two-fold problem was termed as a double whammy for the Petitioners. The muddled history behind the applicability of the 2015 Amendment Act and the introduction of Section 87 by way of the 2019 Amendment Act placed the Petitioner at a loss.
Thus, aggrieved by the same, a batch of Writ Petitions were filed that – firstly, challenged the constitutional validity of Section 87 of the 1996 Act, secondly, sought to challenge the repeal of Section 26 of the 2015 Amendment Act, and thirdly, challenged the constitutional validity of certain provisions of Insolvency and Bankruptcy Code, 2016 (hereinafter “IBC”) on the grounds of discriminatory application to the Petitioners.
(i) Decoding Section 36 of the 1996 Act
Albeit, Section 36 has been subjected to the fate of misinterpretation on several occasions, it is perhaps a pivotal provision concerning enforcement of awards. Prior to the 2015 Amendment Act, Section 36 largely replicated the UNCITRAL Model Law, however, with a more robust and intricate approach, so as to avoid the doctrine of two bites at the same cherry. Additionally, Section 36 was often misconstrued in the sense of obtaining an automatic stay of the award in case an application for setting-aside of the award was filed under Section 34 of the 1996 Act. Fortunately, vide the 2015 Amendment Act, Section 36 was equipped with enough arsenal to ensure that upon the mere filing of an application under Section 34, it would not render the award unenforceable.
At this stage, it would be appropriate to consider that whether Section 36 impliedly or expressly permitted automatic stay of awards prior to the 2015 Amendment Act? A very simple answer ensues – No. Section 36, even prior to its amended position, never intended to grant automatic stay of arbitral awards and render them unenforceable. In fact, it reiterated the positive position for the award holder i.e., when the time limit would expire under Section 34 or the application were to be refused, the award shall be enforced.
Accordingly, the present case played a significant role in clarifying the position of Section 36 of the 1996 Act prior to and after the 2015 Amendment Act. It was rightly observed that Section 36 was previously read and applied in a manner that it was never meant to. Whereas, the position after the 2015 Amendment Act achieves the purpose that Section 36 ought to have had from the very beginning.
(ii) The Flawed Approach
Retreating to the discussion concerning the misinterpretation of Section 36, the decisions in the case of National Aluminium Company Ltd. v. Pressteel & Fabrications (P) Ltd. and Anr. (hereinafter “NALCO”) and Fiza Developers and Inter-trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd. and Anr. (hereinafter “Fiza Developers”) are significant.
In the NALCO case, the Supreme Court observed that the ‘mandatory language’ of Section 34 conveyed that an award becomes unenforceable when it is challenged within the stipulated time.Additionally, in the NALCO case, the court failed to take into account the operation of Section 9 of the 1996 Act. As per the decision in the NALCO case, the court shall be precluded from passing any interlocutory order after the arbitral award has been passed. Albeit, from a bare reading of Section 9, the court still possesses the power to pass an order that safeguards the arbitral award.Incidentally, in the Fiza Developers case, the court emphasised that the award shall come ‘into effect’ only after the stipulated time for setting aside has lapsed and in case an application is pending under Section 34, it is manifest that such an award is unenforceable. Such decisions invariably seemed to be against the ethos of the arbitration regime, thereby, pulling it backwards.
On the positive side, in the HCC case, the court observed that the decisions in the NALCO and in Fiza Developers cases were incorrect. The aforestated cases attempted to read Section 36 in a manner that was contrary to its objective and purpose. Thus, the clarification that ensued from the HCC case provides the much-needed ground to Section 36 of the 1996 Act.
(iii) Court's heavy reliance on the BCCI Case
The decision in the BCCI case had been considered as the focal point of streamlining the flip-flop regime. Accordingly, and as expected, there was considerable reliance upon the BCCI judgment whilst challenging the constitutionality of Section 87, that had been inserted by the 2019 Amendment Act. In substance, the decision in the BCCI case had sought to correct the errors of both, the Committee Report and the lawmakers. The underlying objective of the BCCI decision was to ensure that the changes incorporated by the 2015 Amendment Act are not put on the back burner per se.
Thus, the agitation of the Petitioner that the 2019 Amendment Act did not pay heed to the decision in the BCCI case was the reason for challenging the removal. However, the court was reluctant since merely declaring the non-binding effect of a judgment is not sufficient. Thus, according to the legislative competence, for removal of defects, it may be made by introducing an amendment.Whereas, in the HCC case, it was not prevalent enough. It would perhaps be correct to argue that the 2019 Amendment Act reiterated the recommendation made by the Committee Report. Hence, Section 87 did not carry any explanation under the 2019 Amendment Act. Thus, a derivation that could be arrived at is that the 2019 Amendment Act ‘overlooked’ the decision in the BCCI case.
However, irrespective of the observations insofar as removal of basis is concerned, it would be safe to note that the HCC case was heavily reliant on the BCCI judgment. The court had been eager to correct the errors made by Section 87, and the precedential value of the BCCI case was the correct way to do so. Therefore, the decision in the BCCI case was well within the purview of the HCC case so as to finally put to rest the issue haunting the arbitration regime in India.
(iv) The Final Word
The insertion of Section 87 through the 2019 Amendment Act may have been the return of the jedi, however, not for very long. The HCC case vehemently challenged the constitutionality of Section 87 that prima facie seemed to strike at the heart of the dispute resolution regime with manifest arbitrariness. However, before weighing in on the analysis, it is indispensable to locate the genesis of Section 87. Notably, Section 87 stems from the recommendations of the Committee Report that was, incidentally, before the judgment of the BCCI case.
Whilst weighing in on Section 87, problems appear to be manifold in nature viz., (i) It turns the clock backward by putting the 2015 Amendment Act on the back burner, (ii) it overlooks the decision in the BCCI case, (iii) it activates automatic stay for proceedings before 23rd October, 2015, and (iv) puts the award-holders on an uneven playing field. Therefore, Section 87 causes more harm than good. Notably, it would be appropriate to argue that Section 87 predominantly deprived award-holders by activating automatic stay and letting the award-debtors retain the rigors of the litigation circuit. Thus, the court, whilst upholding the decision of the BCCI case, struck down Section 87 as being manifestly arbitrary under Article 14 of the Constitution of India.
(v) Navigating the challenge towards the Insolvency and Bankruptcy Code
In the present case, the court also deliberated upon the constitutional challenge raised against the provisions of the Insolvency and Bankruptcy Code, 2016. The primary intent of the petitioner was to bring the government bodies on an equal pedestal by reading down provisions of the IBC. Despite being subjected to a double whammy, the constitutional challenge against the provisions of the IBC looked a forced one.
Accordingly, the court, in the HCC case, explicated the definition of a ‘corporate person’ under the IBC and correlated it with the definition of a ‘company’ under the Companies Act, 2013. By doing so, they safely and correctly arrived at the conclusion that bodies such as the National Highways Authority of India (NHAI) are extended limbs of the government and perform sovereign functions. Hence, they would not fall under the umbrella of the IBC.
In order to cushion the case of the petitioner, it was observed that the operational creditors cannot initiate insolvency proceedings as the operational debt tangled due to the challenge to the arbitral award and would become ‘disputed debt’, thus, falling outside the scope of the IBC. Pertinently, the IBC is not a debt-recovery legislation. The term ‘dispute’ under the IBC needs to be read in accordance with Section 9 of the legislation. Thus, an application under Section 9 of the IBC is bound to be rejected where there exists a pending arbitration proceeding even before the receipt of the demand notice of an outstanding operational debt.
The HCC case is the flag-bearer of the pro-arbitration regime that has been adopted by the Supreme Court. The mist around the flawed concept of automatic stay had haunted the arbitration practice even after the noteworthy 2015 Amendment Act. Suffice to say, it is both fortunate and unfortunate. It was fortunate since Section 87 was struck down for being retrogressive, and the era of automatic stay was finally ended, however, it was unfortunate since it took a judicial pronouncement that came after more than two decades, to set straight the ghosts of the past. However, to conclude on a positive note, such pro-arbitration decisions aid India in heading towards becoming an arbitration-friendly seat in the near future.
 Arbitration and Conciliation (Amendment) Act, 2015, Act No. 3 of 2016, Act of Parliament, 1992 (India)
 Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd., (2018) 6 S.C.C. 287.
 Hindustan Construction Company v. Union of India, 2019 S.C.C. OnLine S.C. 1520.
 Report of the High Level Committee to Review the Institutionalization of Arbitration Mechanism in India (Oct., 14, 2020 at 2:13 P.M.),
 Arbitration and Conciliation (Amendment) Act, 2019, Act No. 33 of 2019, Act of Parliament, 2019 (India)
 National Aluminium Company Ltd. v. Pressteel & Fabrications (P) Ltd., (2004) 1 S.C.C. 540.
 Fiza Developers and Inter-trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd., (2009) 17 S.C.C. 796.
 supra note 6, at 10.
 Dirk India Pvt. Ltd. v. Maharashtra State Power Generation Co. Ltd., 2013 SCC OnLine Bom 481.
 supra note 7, at 20.
 Shri Prithvi Cotton Mills Ltd. v. Broad Borough Municipality, (1969) 2 S.C.C. 283.
 Goa Foundation v. State of Goa, (2016) 6 S.C.C. 602.
 Pioneer Urban Land and Infrastructure Limited v. Union of India, (2019) 8 S.C.C. 416.
 Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., (2018) 1 S.C.C. 353.