Legislative decision in violation of Constitution? Supreme Court on recent Arbitration Amendment.

(2019 SCC OnLine SC 1520)

While Asia has emerged as a popular destination for arbitration venues, India despite having adequate legal infrastructure trails a long way behind. And the premier explanation of the same is the uncertainties in the Arbitration Law of the land. However, the government has taken few steps in order to tackle these uncertainties and to hasten the process of dispute resolution through arbitration in the largest democracy of the world.

Initially, the Arbitration and Conciliation Act, 1996 (“Act”) was found to be suffering from a disease of automatic stay on arbitral awards. Before the Arbitration and Conciliation (Amendment) Act, 2015 (“Amendment Act”) was passed, according to Section 36 of the Act, a mere admission of an application under Section 34 (challenge to award) of the Act paralyzed the whole process for the award holder. However, the Amendment Act rectified the irregularity of the Act and provided that there shall be no automatic stay on the arbitral award merely upon filing of a challenge under Section 34. 

Although, the Amendment Act came into force to clear out all the irregularities and iron out wrinkles in the Act, it had in fact, presented its own set of controversies. The Amendment Act was unclear about the circumstances under which it would apply. Specifically, it was unclear if it shall apply on the arbitration proceedings that arose from arbitration prior to the commencement date of the Amendment Act i.e. October 23, 2015. Also, the Amendment Act was uncertain if the automatic stay shall continue where the arbitration proceedings under Section 34 were pending before the Amendment Act. In other words, various High Courts of the country were dealing with the issue whether the Amendment Act was retrospective or prospective in nature.

In the meanwhile, the ambiguity in the Amendment Act was notified by the Srikrishna Committee Report 2017. The said report recommended to the government that the Amendment Act should be prospective in nature and it should not be applied to the arbitral proceedings commenced before the Amendment Act. 

Furthermore, the Apex Court through its another landmark judgement cleared the uncertainty in the Amendment Act. The Supreme Court of India in BCCI V. Kochi Cricket Pvt. Ltd. clarified that while the Amendment Act was prospective in nature, the change brought about in the position vis-à-vis the erstwhile automatic stay against enforcement, was retrospectively applicable. Thus, the Supreme Court provided clarity on the aspect that the award debtor could not run away from its liabilities by merely challenging the award even if the arbitral proceedings commenced before the Amendment Act. Also, the Supreme Court being aware of the recommendation of the Srikrishna Committee, suggested to the government not to amend the Amendment Act and not undo the basic objective of the Amendment Act.

Regardless to the findings of the Supreme Court in BCCI V. Kochi Cricket Pvt. Ltd, the legislature enacted the Arbitration and Conciliation (Amendment) Act, 2019 (“2019 Amendment Act”). In the 2019 Amendment Act the legislature omitted Section 26 from the Amendment Act and clarified that the Amendment Act was completely prospective in nature by including Section 87 in the Act.

Subsequent to the enactment of the 2019 Amendment Act, companies (Petitioners) approached the Supreme Court of India through writ petitions challenging the constitutional validity of Section 87, omission of Section from the Amendment Act and certain provisions of Insolvency and Bankruptcy Code (“IBC”). It was contended that Section 87 was violative of Article 14, 19(1)(g), 21 and 300-A of the Constitution of India. By enacting the 2019 Amendment Act, the legislature not only recreated the mischief in the arbitration law but also made it inconceivable that while in CPC there is no automatic stay on money decree, there should be an automatic stay on arbitral award once the award is challenged. Due to enactment of the 2019 Amendment Act the companies which had relied upon the BCCI V. Kochi Cricket Pvt. Ltd, were forced to reevaluate. 

However, on November 27, 2019 the Supreme Court of India through its decision in Hindustan Construction Company Limited and Another V. Union of India and Others struck down Section 87 of the Act as unconstitutional. The Supreme Court held that:

“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.”

This judgment introduces one more defining moment in the arbitration law in India. The Supreme Court overruled its previous judgements i.e. National Aluminium Company Ltd. v. Presstel & Fabrications (P) Ltd. & Anr, (“NALCO Judgment”) and Fiza Developers and Inter-trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd. (“Fiza Developers Judgment”) wherein the Supreme Court itself held that a mere challenge of the award would automatically put a stay on the award. 

The Supreme Court said that the decision of the legislature was merely based on the recommendation of the Srikrishna Committee Report 2017 and was made to clear the ambiguity of the Amendment Act, however, there was no uncertainty in the Amendment Act and the Supreme Court clarified the same in BCCI V. Kochi Cricket Pvt. Ltd, judgement. Moreover, the Supreme Court had also advised the legislature not to amend the Amendment Act when it became aware about the Srikrishna Committee Report 2017 through BCCI V. Kochi Cricket Pvt. Ltd. The Supreme Court also pronounced 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.”

The Supreme Court also concurred that when read with the IBC, the consequence of section 87 leads to an absurd result, i.e., the award holder becoming insolvent as it was unable to recover sums under arbitral awards. The Supreme 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.

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