Decoding Sec 87 of Arbitration and Conciliation Act, 1996

The Hon’ble Supreme in the judgment pronounced in the case of BCCI v. Kochi Cricket (P) Ltd., had caught sight of the fact that the Government was propounding to insert Section 87 in the Arbitration and Conciliation Act, 1996.

The press release, dated 7-3-2018, stated that the Union Cabinet under the chairmanship of the Hon’ble Prime Minister, has approved the Arbitration and Conciliation (Amendment) Bill, 2018 in which a new Section 87 is proposed to be inserted as follows: “A new Section 87 is proposed to be inserted to clarify that unless parties agree otherwise the Amendment Act, 2015 shall not apply to (a) arbitral proceedings which have commenced before the commencement of the Amendment Act of 2015, (b) 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 Amendment Act of 2015 and shall apply only to arbitral proceedings commenced on or after the commencement of the Amendment Act of 2015 and to court proceedings arising out of or in relation to such arbitral proceedings.”

The press release was in harmony with the report of the High-Level Committee to Review the Institutionalisation of Arbitration Mechanism in India headed by Retd. Justice B.N. Srikrishna. A bench of Justices Rohinton Fali Nariman and Navin Sinha, in BCCI (supra), held that the Arbitration and Conciliation (Amendment) Act, 2015, will apply to those proceedings of arbitration and court proceedings related to arbitration which began on or after 23rd October, 2015, that meant that the 2015 Amendment Act applied prospectively to the Principal Act of 1996. However, an exception was carved out and it was held that Section 36 would apply even to pending applications (filed before 23rd October, 2015) under Section 34 of the Act which meant that the 2015 Amendment Act applied retrospectively to Section 36 which will be able to do away with the automatic stay regime against enforcement of an award.

Also, In BCCI (supra), the Bench cautioned and advised the Government to take into consideration the Statement of Objects and Reasons of the Arbitration and Conciliation (Amendment) Act, 2015, before enacting Section 87 in the Arbitration and Conciliation Act, 1996, as the propounding of Section 87 would postpone the consideration of the 2015 Amendment Act and the incongruities in the Principal Act would be brought back into existence. A copy of the BCCI (supra) judgment was sent to the Ministry of Law and Justice and the learned Attorney General for India for their perusal and necessary measures.

The BCCI (supra) judgment sent to the Ministry of Law and Justice and the learned Attorney General for India was not taken into consideration by them and Section 87 of the Arbitration and Conciliation Act, 1996, was inserted by Section 13 of the Arbitration and Conciliation (Amendment) Act, 2019 and brought into force with effect from 30.08.2019.

 The facts of the case titled, Hindustan Construction Company Limited v. Union of India in which Section 87 was struck down, are discussed briefly. Hindustan Construction Company Limited is an infrastructure company which is involved in the business of infrastructure projects on a large scale. It undertakes projects as a contractor for government bodies and government companies such as the NHAI, NHPC, NTPC, IRCON, etc. As humongous cost overruns are involved in such projects and also due to the complexion of the projects, Hindustan Construction Company Limited wrangled with the government companies and bodies. The arbitral awards were pronounced in favour of Hindustan Construction Company Limited. The awards, so pronounced, were challenged under Section 34 of the Arbitration and Conciliation Act, 1996. The Respondents challenged the arbitral awards and succeeded in getting an automatic stay on the execution of the arbitral awards due to the newly inserted Section 87 of the Arbitration and Conciliation Act, 1996, as inserted by Section 13 of the Arbitration and Conciliation (Amendment) Act, 2019 and brought into force with effect from 30.08.2019.

Hindustan Construction Company Limited argued that Section 87 is an impediment for the enforcement of any arbitral award. The moment a challenge to any arbitral award is filed under Section 34 or Section 37 of the Arbitration and Conciliation Act, 1996, that would be parsed into a disputed debt under the Insolvency and Bankruptcy Code, 2016 which would eventually result to be held as nonmaintainable. Demand notices were also issued to the Petitioner who owed hefty sums of money to the operational creditors responsible for supplying men, machinery and material for the projects undertaken.

In Hindustan Construction Company case (supra), three issues were challenged before the Hon’ble Supreme Court, which were: –

The constitutional validity of Section 87 of the Arbitration and Conciliation Act, 1996;

 Repealing of Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 by Section 15 of the 2019 Amendment Act;

Some provisions of the Insolvency and Bankruptcy Code, 2016.

In Hindustan Construction Company case (supra), a bench of Justices R.F. Nariman, Surya Kant and V. Ramasubramanian pronounced the judgment with Justice R.F. Nariman authoring it. It was enunciated that in the case of BCCI (supra), the Hon’ble Supreme Court had already cautioned the Government that Section 87, if enacted, would be in conflict with the Statements of Objects and Reasons of the Arbitration and Conciliation (Amendment) Act, 2015, still the Arbitration and Conciliation (Amendment) Act, 2019 was brought into force. As Section 87 was enacted in accordance with the report of High-Level Committee to Review the Institutionalisation of Arbitration Mechanism in India headed by Retd. Justice B.N. Srikrishna, the Committee failed to take into consideration that the it took 19 years for the Parliament to remove the mischief of Section 36 by bringing into force the Arbitration and Conciliation (Amendment) Act, 2015, and by enacting Section 87, the 2015 amendment is reversed, which leads to manifest arbitrariness.

The bench observed that the Hon’ble Supreme Court’s judgments in the cases of National Aluminum Company Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd. and Fiza Developers and Inter-trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd. were per incuriam and incorrect as both the judgments held that that the moment an arbitral award is challenged, an automatic stay on the award comes into picture and the award becomes impossible to be enforced. The judgments failed to interpret Sections 9, 35, and 36 of the Arbitration and Conciliation Act, 1996, correctly. Also, automatic stay by way of Section 36 is not there in the Section at all and this interpretation fails to consider the second part of Section 36 dealing with the enforcement of an award (final and binding) as a decree of a court under the Code of Civil Procedure.

Coming to the issue of the repealing of Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 by Section 15 of the 2019 Amendment Act, the Bench laid emphasis on the BCCI judgment (supra) in which the scheme of Section 26 was made clear. The judgment in BCCI (supra) made it pretty lucid with regard to the scheme of Section 26 that the 2015 Amendment Act is prospective in nature, and will apply to those arbitral proceedings that are commenced, by way of Section 21 of the principal Act, on or after the Amendment Act, and to court proceedings which have commenced on or after the Amendment Act came into force. After interpreting Section 26 of the Arbitration and Conciliation Act, 1996, very lucidly, Section 87 was still enacted which defeats the primary goals and objectives of the Arbitration and Conciliation Act, 1996.

 The bench while rejecting the petitioners’ argument to either read in or read down, the definition of corporate person in Section 3(7) of the Insolvency and Bankruptcy Code, 2016, observed that the NHAI is a statutory body which performs significant governmental functions as an extended limb of the Central Government, and bodies such as the NHAI are ungovernable by certain provisions of the Insolvency and Bankruptcy Code, 2016. The Bench, while discussing the case of Swiss Ribbons (P) Ltd. v. UOI, noticed that the Insolvency and Bankruptcy Code, 2016, is an economic legislation which usually raises a bigger threshold of challenge and leaves the Parliament of India a free play in the joints.

 The bench, after discussing various aspects of the Arbitration and Conciliation (Amendment) Act, 2015, the Arbitration and Conciliation (Amendment) Act, 2019, and a catena of judgments, in detail, held as follows: –

The introduction of Section 87 in the Arbitration and Conciliation Act, 1996, by way of Section 13 of the Arbitration and Conciliation (Amendment) Act, 2019, is manifestly arbitrary under Article 14 of the Constitution of India. An arbitral award-holder will always be dispossessed of the productivity of the award if the grant of automatic-stays, the moment an application under Section 34 is filed, become the norm, defeating the very purpose of the Arbitration and Conciliation Act, 1996 and exposing the awardholders to the adversities of the Insolvency and Bankruptcy Code, 2016. Section 9 of the Principal Act also supports the fact that there is no concept of automatic stay as the said Section assists the parties to apply for interim reliefs before the enforcement of an award and 2015 Amendment Act clarified the misconception of automatic stays.

The repealing of Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 by Section 15 of the 2019 Amendment Act is also manifestly arbitrary under Article 14 of the Constitution of India. The judgment in BCCI (supra) will continue to be incorporated in every sense so that 2015 Amendment Act can apply to all court proceedings which commenced after 23.10.2015.

The challenge to some of the provisions of Insolvency and Bankruptcy Code, 2016, has no merit at all and therefore, the challenge is rejected. As discussed, the NHAI is a statutory body which performs significant governmental functions as an extended limb of the Central Government, and bodies such as the NHAI are ungovernable by certain provisions of the Insolvency and Bankruptcy Code, 2016. The Insolvency and Bankruptcy Code, 2016, is an economic legislation which usually raises a bigger threshold of challenge and leaves the Parliament of India a free play in the joints.

The judgment in the case of Hindustan Construction Company Limited v. Union of India has finally settled the position regarding the applicability of the Arbitration and Conciliation (Amendment) Act, 2015, as pronounced by the Hon’ble Supreme Court in the case of BCCI (supra) and reiterated in this judgment. The concept of automatic stays has been put to rest with the judgment elucidating that the Arbitration and Conciliation Act, 1996, has nothing in it with regard to automatic stays, if the interpretation of Section 36 is considered as a whole. The moment an application is filed under Section 34, automatic stay is granted on the award which is against the basic foundation and object of the Arbitration and Conciliation Act,1996, so, the judgment in hand has removed such oddity. This judgment will prove to be a boon in strengthening the Indian Arbitration Regime and make our country a robust hub of arbitration. The Hon’ble Supreme Court has provided a significant breathing space to the award holders by holding in the judgment in hand that the arbitral awards are challenged under Sections 34 and 37 of the Arbitration Act, 1996 and more than 6 years are spent in defending these challenges, therefore, the major problem was that the moment a challenge is made under Section 34, there is an automatic-stay of such awards under the Arbitration and Conciliation Act, 1996. The judgment has now done away with this glaring problem.

This judgment also clears the air with regard to the true applicability of Section 26 of the Principal Act by holding that the 2015 Amendment Act is prospective in nature, and will apply to those arbitral proceedings that are commenced, by way of Section 21 of the principal Act, on or after the Amendment Act, and to court proceedings which have commenced on or after the Amendment Act came into force. The Supreme Court has risen to the occasion by holding that the Insolvency and Bankruptcy Code, 2016, is an economic legislation which usually raises a bigger threshold of challenge and leaves the Parliament of India a free play in the joints. The judgment will surely play a vital role in strengthening the alternate dispute resolution mechanism in our country and in promoting the concept of less interference of courts in arbitral awards and proceedings.

Justice R.F. Nariman before pronouncing the judgment in hand, had already said that the 2019 Arbitration Amendment Act has several glaring loopholes while delivering a keynote address at the 3rd ICC India Arbitration Day event organized by Indian Chamber of Commerce at Delhi on 14th September 2019 (Saturday). Justice Nariman said, “The insertion of Section 87 in the Act was a retrograde move, as it nullified the effect of 2018 judgment of the SC which clarified the position on retrospective application of automatic stay provision. The Supreme Court in BCCI v. Kochi Cricket Private Limited, had said that the 2015 amendment to Section 36 will apply only to: (a) arbitral proceedings commenced on or after October 23, 2015; and (b) arbitration-related court proceedings filed on or after October 23, 2015, even where the arbitral proceedings had been commenced before the amendments came into force. Section 87 has unsettled this provision, leading to confusion. Another judicial pronouncement in future will be needed to clear this confusion.”

 The important impact of this judgment is the positive approach of the Judiciary towards strengthening the Arbitration Regime in India. Our country will surely become a robust hub of arbitration provided all stakeholders rise to the occasion by taking concerted steps for the unfolding of arbitration jurisprudence in India. With the pronouncing of judgments like the one in hand, the future of arbitration in our country is well shielded. The arbitration jurisprudence will surely make headway in the coming years as parties have now started to settle their disputes by means of arbitration in a great way. This is one of the consequences of the increased globalisation of world trade and investment. Therefore, our country is also putting its best foot forward by bringing our Principal Arbitration Act in line with the arbitration legislations followed by other countries, to become a sturdy hub of arbitration in the world.

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