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Section-87 of the Arbitration and Conciliation (Amendment) Act 2019 quashed by the Supreme Court
Team SoOLEGAL 10 Jan 2020

Section-87 of the Arbitration and Conciliation (Amendment) Act 2019 quashed by the Supreme Court

Section-87 of the Arbitration and Conciliation (Amendment) Act 2019 quashed by the Supreme Court

In a case between Hindustan Construction Company v Union of India, WP (CIVIL) NO. 1074 OF 2019, the Hon’ble Supreme Court of India quashed Section-87 of the Arbitration and Conciliation Act (hereinafter referred to as “the Act”) through an amendment in 2019.

The quashing of Section 87 by the apex court marks another turning point in the arbitration law in India. The bench lead by Justice R.F Nariman criticized the respective provision by saying that “it turns the clock back and pushes the firms into insolvency due to the delay in enforcement of awards”.

 

Background/facts of the case: The case was filed by the Hindustan Construction Company (HCC) through a writ petition under Article 32 of the Constitution of India. The contention by the petitioner was,  due to this provision they were forced into insolvency even though the NHAI (National Highway Authority of India) owed them an amount which was over 6000 crore.

 

 Chronology of the issues: The core issue of this case involves two amendments to “the Act”, one was in 2015 and the other one was in 2019 and also with a provision that was present in the parent Act i.e. 1996.

 

Section 36 of the Arbitration and Conciliation Act, 1996 provided that an arbitral award would be enforceable as a decision only after either (a) a complaint pursuant to Section-34 of the Arbitration Act contesting an arbitral award has been dismissed or (b) the time limit for contesting an arbitral award pursuant to Section 34 of the Arbitration Act has expired. In other words, if a petition under Section-34 (Challenge to an award) is in its pending stage, an arbitral award, even though awarded cannot be enforced unless the conditions above are not fulfilled. This clogged the rights of a bona fide award holder and was subsequently termed as “Automatic stay”.

 

In 2015, an amendment was made in the Act with the aim of reducing delay in the arbitration proceedings and enforcement of awards. The main significance of the amendment was the substitution of Section 36 which implied that although previously challenging an award under Section-34 would constitute an “Automatic stay” but after the amendment mere challenging an award would not constitute an “automatic stay”, unless a specific stay has been granted by filing a separate petition.

Further, Section-26 of the 2015 amendment specifically specified that the 2015 amendment will extend to arbitral proceedings commencing on or after 23 October 2015 (hereinafter referred to as “Cut-off Date”).

 

Hence, despite the substitution of Section 36, the concept of “Automatic stay” was still holding its value in cases where petitions of Section 34 were pending as on the “cut-off date”.

 

Furthermore, in 2018, in the case of BCCI v Kochi Cricket , (2018) 6 SCC 287 the question of interpreting     Section-26 of the 2015 amendment and its applicability to the proceedings pending before such amendment was put before the Indian Supreme Court. The Supreme Court observed that Section 36 is a procedural provision and a judgment debtor is unable to enjoy the substantive right of an automatic stay on the execution of an arbitral award when filing a petition under Section 34 of the Arbitration Act.

In view of the observations made, the Supreme Court held that substituted Section-36 of the Arbitration Act also applies to arbitral awards in situations where a complaint has already been filed pursuant to Section-34 of the Arbitration Act as of the Cut-off Date.

 

Introduction of Section-87 to the Act by 2019 Amendment:  

 

The introduction of Section 87 in the Arbitration Act was one of the major amendments introduced by way of amendment made in 2019, which provided that 2015 amendment would apply only to the arbitral proceedings initiated on or after the “Cut Off Date” and to such arbitral proceedings. In furtherance to this, Section-15 of the Amendment also omitted Section-26 introduced by way of the 2015 Amendment.

 

The main impact of this legislation was that it nullified the ruling given in BCCI v Kochi Cricket case and it restored the position before the 2015 Amendment i.e. “Automatic stays”.

 

In the present case of Hindustan Construction Company (HCC) v. Union of India, the 2019 amendment was questioned before the Indian Supreme Court on the grounds of the application of Section 87 of the Act and the abolition of Section 26 of the 2015 amendment.

 

In BCCI v. Kochi Cricket, the Supreme Court of India explained that the new Section 36 adopted by way of the 2015 amendment would also extend to awards in cases where a petition pursuant to Section 34 of the Act had already been lodged as on / before the Cut-off Date, thus abolishing the grant of an automatic stay pursuant to Section 34 of the Act on merely pending of the petition. The Supreme Court's view was seen to be in line with the purpose of the 2015 amendment, i.e. reducing the delay in arbitration proceedings and enforcing the resulting arbitral awards. The apex court further observed that due to the delay in enforcing arbitral awards because of an automatic stay granted to the judgment debtor as a "claimed right" or "privilege" defeats the purpose of granting the relief by way of passing an award.

Justice Nariman, in his judgment stated that “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.”

 

For the aforesaid reasons, the Supreme Court has struck down Section-87 ruling that it defeats the purpose of the 2015 Amendment as it not only hinders the enforcement of arbitral awards and delays the arbitral proceedings but also results in interruption in seeking relief and justice leaving the scope of judicial intervention.  

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