SUPREME COURT PUTS TO REST THE CONTROVERSY RELATED TO THE AUTOMATIC STAY ON THE ENFORCEMENT OF THE ARBITRAL AWARD
Waseem Ismail Pangarkar
Senior Partner @ MZM Legal | 40 under 40 Industry Leader | A List Lawyer | Entrepreneur | Investor | Sports Enthusiast | Good Cook
The position of law laid down in National Aluminium Company Ltd. v. Pressteel & Fabrications (P) Ltd. and Anr. 2004 1 SCC 540 [“NALCO”], was that the moment an application challenging the Arbitral Award was made under Section 34 of the Arbitration and Conciliation Act, 1996 [“Arbitration Act”], an implied automatic stay was imposed on the enforcement of an award under Section 36 of the Arbitration Act. In its judgement, the Supreme Court stated,
“10… we noticed from the mandatory language of Section 34 of the 1996 Act, that an award, when challenged under Section 34 within the time stipulated therein, becomes unexecutable. There is no discretion left with the court to pass any interlocutory order in regard to the said award except to adjudicate on the correctness of the claim made by the applicant therein. Therefore, that being the legislative intent, any direction from us contrary to that, also becomes impermissible. On facts of this case, there being no exceptional situation which would compel us to ignore such statutory provision, and to use our jurisdiction under Article 142, we restrain ourselves from passing any such order, as prayed for by the applicant.
11. However, we do notice that this automatic suspension of the execution of the award, the moment an application challenging the said award is filed under Section 34 of the Act leaving no discretion in the court to put the parties on terms, in our opinion, defeats the very objective of the alternate dispute resolution system to which arbitration belongs. We do find that there is a recommendation made by the Ministry concerned to Parliament to amend Section 34 with a proposal to empower the civil court to pass suitable interim orders in such cases. In view of the urgency of such amendment, we sincerely hope that necessary steps would be taken by the authorities concerned at the earliest to bring about the required change in law.”
This was acknowledged by the Law Commission in its 246th Report titled "Amendments to the Arbitration and Conciliation Act, 1996". At para 67 of its report, the Law Commission noted,
“67. In 2004, this Court's judgment in National Aluminium Co. [National Aluminium Co. Ltd. v. Pressteel & Fabrications (P) Ltd., (2004) 1 SCC 540] had recommended that Section 36 be substituted, as it defeats the very objective of the alternative dispute resolution system, and that the section should be amended at the earliest to bring about the required change in law. It would be clear that looking at the practical aspect and the nature of rights presently involved, and the sheer unfairness of the unamended 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) without having to look at the facts of each case, it is clear that Section 36 as amended should apply to Section 34 applications filed before the commencement of the Amendment Act also for the aforesaid reasons.”
(emphasis supplied)
This translated into the 2015 Amendment Act which categorically put an end to the practice of automatic stays. It was done in pursuance of the objects and purposes of the original Arbitration Act, as well as the 2015 Amendment Act which wanted to achieve minimum court intervention in arbitration, and speedy disposal of disputes and in order encourage India to become an Arbitration hub in the world. Section 26 of the Amendment Act dealt with the application of the Amendment and stated,
“26. 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.”
Therefore, saving party autonomy, the 2015 Amendment Act was applicable only on arbitral proceedings which were initiated after the coming force of the amendment. After this, the Srikrishna Committee was constituted which in its report dated 30/07/2017 opined that the 2015 Amendment Act should not apply to pending court proceedings which have commenced after 23.10.2015 (i.e. the date of the 2015 Amendment Act coming into force), but should only apply in case arbitral proceedings have themselves been commenced post 23.10.2015, which would include court proceedings relating thereto. The reason cited by the Committee was the conflicting decisions rendered by different High Courts, creating confusion with regard to the interpretation and application of Section 26 of the 2015 Amendment Act. Soon thereafter, the confusion with regard to the interpretation of Section 26 was laid to rest when the Supreme Court heard the case of Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. [“BCCI”] on appeal from the Bombay High Court (which was decided on 15.03.2018). The Court, therein, laid down the following interpretation of Section 26,
i. Subject to party autonomy, the amendments would not apply to “arbitral proceedings” that had commenced before the commencement of the Amendment Act.
ii. The amendments would apply to court proceedings which have commenced, “in relation to arbitration proceedings”, on or after the commencement of the Amendment Act.
iii. The amendments, however, would apply to the enforcement of an award under Section 36, even if the court proceedings relating thereto have been filed before the commencement of the Amendment Act. The Court carved out this exception on the ground that enforcement proceedings are entirely procedural in nature, and could be applied retrospectively since no rights are vested in the parties seeking such enforcement.
During the hearing of the matter, it was pointed out to the Court that the government was planning to act on the recommendations of the Srikrishna Committee. The Government was planning to introduce a new Section 87 in the Act, and the same had been notified by it in a Press Release dated 07/03/2018. In response to this, the Apex Court cautioned the Government against such a move, categorically stating in its judgement,
“57. The Government will be well-advised in keeping the aforesaid Statement of Objects and Reasons in the forefront, if it proposes to enact Section 87 on the lines indicated in the Government’s press release dated 7th March, 2018. The immediate effect of the proposed Section 87 would be to put all the important amendments made by the Amendment Act on a back-burner, such as the important amendments made to Sections 28 and 34 in particular, which, as has been stated by the Statement of Objects and Reasons, “…have resulted in delay of disposal of arbitration proceedings and increase in interference of courts in arbitration matters, which tend to defeat the object of the Act”, and will now not be applicable to Section 34 petitions filed after 23rd October, 2015, but will be applicable to Section 34 petitions filed in cases where arbitration proceedings have themselves commenced only after 23rd October, 2015. This would mean that in all matters which are in the pipeline, despite the fact that Section 34 proceedings have been initiated only after 23rd October, 2015, yet, the old law would continue to apply resulting in delay of disposal of arbitration proceedings by increased interference of Courts, which ultimately defeats the object of the 1996 Act. …”
Subsequently, the Arbitration and Conciliation (Amendment) Act, 2019 dated 9 August 2019, introduced Section 87 to the Arbitration and Conciliation Act, 1996 with effect from 23 October 2015. Section 87 reads as under:
13. After section 86 of the principal Act, the following section shall be inserted and shall be deemed to have been inserted with effect from the 23rd October, 2015, namely:—
“87. Unless the parties otherwise agree, the amendments made to this Act by the Arbitration and Conciliation (Amendment) Act, 2015 shall—
(a) not apply to––
(i) arbitral proceedings commenced before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015;
(ii) 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 Arbitration and Conciliation (Amendment) Act, 2015;
(b) apply only to arbitral proceedings commenced on or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 and to court proceedings arising out of or in relation to such arbitral proceedings.”
The language employed in the final Section 87 is entirely identical to the language used to describe Section 87 in the above-mentioned Press Release dated 7 March 2018. Therefore, the Hon’ble Supreme Court’s above-mentioned opinion which should have been treated as a binding precedent on the meaning and effect of the aforesaid Section 87 was ignored and flouted when the legislature included Section 87 in the Amendment Act of 2019. Essentially, Section 87 as contemplated by the Amendment Act of 2019, sought to nullify the effect of the Hon’ble Supreme Court’s above-mentioned precedent.
Naturally, Section 87 of the Amending Act of 2019 was required to be examined by the Hon’ble Supreme Court in view of the constitutional impediments created by its earlier decision and guidance and the reasons leading to the same. This was done in the matter of Hindustan Construction Company Ltd v Union of India, which was heard by a bench comprising Hon’ble Justice R F Nariman, Hon’ble Justice Surya Kant and Hon’ble Justice V Ramasubramanian.
During the pendency of the above-mentioned matter, Hon’ble Justice Nariman observed that the Amending Act of 2019 had "put the clock back" and that "World over this 2019 act is being criticized. We are all different branches of state. We all stand for national interest. India cannot become hub of arbitration if you go like this". Such misgivings were reflected in the Hon’ble Supreme Court’s final judgment passed on 27 November 2019, which inter alia struck down Section 87 as contemplated in Amending Act of 2019.
The Hon’ble Supreme Court’s key findings set out in the judgement of Hindustan Construction Company Ltd v Union of India are as follows:
1. Section 36 (r/w Section 35) of the Arbitration Act, 1996, once an award made in India becomes final and binding, it becomes immediately enforceable, hence Section 36 only clarifies that when an arbitral award becomes final and binding, it shall be enforced under the CPC as if it were a decree of the court.
2. Hence, an award does not become un-executable when challenged under Section 34, mainly because Section 36 contemplates enforcement of a final award and inferring an automatic-stay from the language of the aforesaid provision reads something non-existent into Section 36.
3. As such, and in view of the legislative intent behind Section 9 (as noted at paragraph 13 of Dirk India Pvt. Ltd. v. Maharashtra State Power Generation Company Ltd. 2013 SCC Online Bom 481), the observation in National Aluminum Company Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd. and Anr. 2004 1 SCC 540 that “there is no discretion left with the Court to pass any interlocutory order in regard to the said Award…” and Fiza Developers and Inter-trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd. and Anr. (2009) 17 SCC 796 are unsustainable.
4. Hence, the reasoning of the judgments in NALCO and Fiza Developers are per incuriam as they failed to notice Sections 9, 35 and the second part of Section 36 of the Arbitration Act, 1996.
5. Consequently, the judgment in National Buildings Construction Corporation Ltd. v. Lloyds Insulation India Ltd. (supra) (2005) 2 SCC 367 in following NALCO is also a per incuriam judgement.
6. Hence, there is no automatic stay of an award, and Section 36 - even as originally enacted – was meant to stipulate that in the context of awards made in India, a final award was to enforced under the CPC as if it were a decree of the court.
7. In view of the foregoing observations the amended Section 36, “being clarificatory in nature, merely restates the position that the unamended Section 36 does not stand in the way of the law as to grant of stay of a money decree under the provisions of the CPC.”
8. In the BCCI judgment, the Government was cautioned that the proposed Section 87 was contrary to the Statement of Objects and Reasons of the 2015 Amendment Act, and the delays arising out of the unamended law defeated a primary object of the Arbitration Act, 1996 itself. Hence, introducing this Section would be contrary to what the 246th Law Commission had in mind and to the provisions enacted to correct defects found in the working of the Arbitration Act, 1996.
9. Further, Section 15 of the 2019 Amendment Act retrospectively omits Section 26 of the 2015 Amendment altogether from the very day when it came into force, thereby effecting the substance of the BCCI judgment.
10. Also, the scheme of Section 87 is different from that of Section 26, in as much as it expressly states that only arbitral proceedings have to be looked at to see whether the 2015 Amendment Act kicks in. Hence there appears to be a direct assault on the BCCI judgment without first removing its basis.
11. To delete Section 26 of the 2015 Amendment Act, after the Srikrishna Committee Report and the BCCI judgment is “wholly without justification and contrary to the object sought to be achieved by the 2015 Amendment Act”, which was enacted to rectify “various infirmities in the working of the original 1996 statute”.
12. Further, the Hon’ble Supreme Court stated that:
“48. ……To refer to the Srikrishna Committee Report (without at all referring to this Court’s judgment) even after the judgment has pointed out the pitfalls of following such provision, would render Section 87 and the deletion of Section 26 of the 2015 Amendment Act manifestly arbitrary, having been enacted unreasonably, without adequate determining principle, and contrary to the public interest sought to be subserved by the Arbitration Act, 1996 and the 2015 Amendment Act. This is for the reason that a key finding of the BCCI judgment (supra) is that the introduction of Section 87 would result in a delay of disposal of arbitration proceedings, and an increase in the interference of courts in arbitration matters, which defeats the very object of the Arbitration Act, 1996, which was strengthened by the 2015 Amendment Act.
50. Also, as has been held in the recent decision Ssangyong Engineering & Construction Co. Ltd. v. NHAI 2019 SCC Online 677, after the 2015 Amendment Act, this Court cannot interfere with an arbitral award on merits (see paragraph 28 and 76 therein). The anomaly, therefore, of Order XLI Rule 5 of the CPC applying in the case of full-blown appeals, and not being applicable by reason of Section 36 of the Arbitration Act, 1996 when it comes to review of arbitral awards, (where an appeal is in the nature of a rehearing of the original proceeding, where the chance of succeeding is far greater than in a restricted review of arbitral awards under Section 34), is itself a circumstance which militates against the enactment of Section 87, placing the amendments made in the 2015 Amendment Act, in particular Section 36, on a backburner. For this reason also, Section 87 must be struck down as manifestly arbitrary under Article 14. The petitioners are also correct in stating that when the mischief of the misconstruction of Section 36 was corrected after a period of more than 19 years by legislative intervention in 2015, to now work in the reverse direction and bring back the aforesaid mischief itself results in manifest arbitrariness. The retrospective resurrection of an automatic-stay not only turns the clock backwards contrary to the object of the Arbitration Act, 1996 and the 2015 Amendment Act, but also results in payments already made under the amended Section 36 to award-holders in a situation of no-stay or conditional-stay now being reversed. In fact, refund applications have been filed in some of the cases before us, praying that monies that have been released for payment as a result of conditional stay orders be returned to the judgment-debtor.
51. Also, it is important to notice that the Srikrishna Committee Report did not refer to the provisions of the Insolvency Code. After the advent of the Insolvency Code on 01.12.2016, the consequence of applying Section 87 is that due to the automatic-stay doctrine laid down by judgments of this Court - which have only been reversed today by the present judgment - the award-holder may become insolvent by defaulting on its payment to its suppliers, when such payments would be forthcoming from arbitral awards in cases where there is no stay, or even in cases where conditional stays are granted. Also, an arbitral award-holder is deprived of the fruits of its award - which is usually obtained after several years of litigating - as a result of the automatic-stay, whereas it would be faced with immediate payment to its operational creditors, which payments may not be forthcoming due to monies not being released on account of automatic-stays of arbitral awards, exposing such award-holders to the rigors of the Insolvency Code. For all these reasons, the deletion of Section 26 of the 2015 Amendment Act, together with the insertion of Section 87 into the Arbitration Act, 1996 by the 2019 Amendment Act, is struck down as being manifestly arbitrary under Article 14 of the Constitution of India.”
Resultantly, the Hon’ble Supreme Court held that the BCCI judgment would continue to apply vis-à-vis amendments made by the 2015 Amendment Act to all court proceedings initiated after 23.10.2015. AND finally the controversy concerning the Automatic stay on the execution of the Arbitral Award has been put to rest.
By Waseem Pangarkar, Abhishek Gupta and Swapnil Srivastava
Resources
1. The Arbitration and Conciliation Act, 1996.
2. 2019 Arbitration Amendment Act, available at https://egazette.nic.in/WriteReadData/2019/210414.pdf.
3. 2015 Arbitration Amendment Act, available at https://www.adrassociation.org/pdf/acact2015.pdf.
4. Hindustan Construction Company Ltd. & Anr. v. Union of India & Ors., 2019, available https://www.livelaw.in/pdf_upload/pdf_upload-367215.pdf.
5. National Aluminium Company Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd. and Anr., 2004 1 SCC 540.
6. Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd., (2018) 6 SCC 287.
7. https://arbitrationblog.kluwerarbitration.com/2018/10/16/bcci-v-kochi-untangled-issues/.
11. https://www.bloombergquint.com/law-and-policy/section-87-supreme-court-strikes-down-provision-granting-automatic-stay-on-arbitral-award.