In modern era of dispute resolution, arbitration has become the preferred mode for dispute resolution. Over the last two decades, arbitration has gained a lot of traction and one of the chief reasons for the same is the legislative intent to facilitate and encourage arbitration and make it a more user-friendly, cost-effective and expeditious method of dispute resolution. The Arbitration and Conciliation Act, 2015 (“2015 Amendment Act”) was a step towards fulfilling such legislative object as it brought far-reaching changes to the overall process of arbitration.
However, the applicability of the amended provisions on pending / freshly instituted proceedings under the Arbitration and Conciliation Act became a major issue. This article attempts to answer this issue through the various judgements passed by the Supreme Court. The article also deals with the interplay of Section 34 and 36 of the Arbitration Act.
II. Interplay of Section 34 and 36
One of the major impediments, prior to the 2015 Amendment Act, was that if an application was filed under Section 34 of Arbitration and Conciliation Act, 1996, (“the Arbitration Act, 1996”) to challenge an arbitral award, the award would become inexecutable under Section 36 of the Arbitration Act, 1996 immediately on filing of such application. There was an automatic stay on the execution of the award till such application under Section 34 was pending before a Court. Such applications would remain pending before the courts for many years which would adversely affect the rights of the decree holder in obtaining speedy justice. This flaw in Section 36 of the pre-amendment era was also observed by the Hon’ble Supreme Court in the matter of National Aluminum Co. Ltd. v. Pressteel & Farbications (P) Ltd. (“the NALCO Judgment”). In the said judgment, the Hon’ble Supreme Court observed that a stay on an award is automatic upon filing of an application under Section 34 and even the Courts have no discretion to pass any interlocutory order in relation to the award. Thus, the Hon’ble Supreme Court recommended the authorities to take necessary steps to bring about the required change in law.
Upon the recommendations of the 246th Report of Law Commission of India, the 2015 Amendment Act brought major changes, specifically focused on speedy resolution of arbitration proceedings and proceedings arising therefrom. Under Section 34(6), the challenge to the arbitral award was to be disposed of within a period of one year from the date when prior notice is served upon the other party. Furthermore, the language of the Section 36 was changed and clearly specified that filing of application under Section 34 shall not by itself render the award unenforceable unless the Court grants a stay on a separate application made. Section 36, under the amended Act, therefore, does not make the stay on the impugned award automatic upon filing of a Petition under section 34.
Hindustan Construction Company Limited – Declaring NALCO per incuriam
Recently, the Supreme Court in the matter of Hindustan Construction Co. Ltd. and Anr. v. Union of India and Ors. (“the HCCL Judgment”) declared that its observations made in the NALCO Judgment were incorrect. The Supreme Court held that inferring something negative into Section 36 of the nature that whenever an application is filed under Section 34, the provision becomes unenforceable is incorrect and against the statutory scheme as evident from other provisions like Sections 9, 34, 35 and 36 (second part). Thus, the statutory provision of automatic stay as laid in that Judgment is incorrect.
III. Applicability of the amended provisions on arbitration proceedings and the BCCI Judgement
After the 2015 Amendment Act came into force, there was no clarity with regard to the applicability of the amended Section 36 to the petitions pending under Section 34 filed in the pre-amendment era. This issue was dealt by the Supreme Court in the matter of Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. (“the BCCI Judgment”). The Court held that from a reading of Section 26 of the Amendment Act, 2015 it is clear that–
The Amendment Act, 2015, is prospective with regard to the arbitral proceedings, unless the parties otherwise agree; and,
The Amendment Act, 2015, would apply to all court proceedings commenced on or after the commencement of the 2015 Amendment Act.
While answering the question about retrospective applicability of the amended Section 36 to the pending petitions under Section 34, the Hon’ble Supreme Court relied upon the language of sub-section (2) of Section 36. The amended Section 36(2) reads as “Where an application to set aside the arbitral award has been filed in the Court under Section 34, the filing of such an application shall not by itself render that award unenforceable . . .” (Emphasis added). The Supreme Court observed that, Section 36 being a procedural provision, it is obvious that the expression “has been” would refer to Section 34 petitions filed before the commencement of the 2015 Amendment Act; and it would point to the fact that the said section would indeed apply, in its substantive form, even to such pending petitions.
During the pendency of the BCCI matter, the Government had proposed to enact Section 87 which provided that the 2015 Amendment Act shall not apply to the court proceedings which arose out of arbitral proceedings commenced before the 2015 Amendment Act. The Supreme Court observed that such provision would run contrary to the objects of the Amendment Act and put the positive effects of the amendment on a backburner. Thus, the Court advised against such enactment.
IV. Challenge before the Supreme Court - HCCL Judgement
Overlooking the observations made by the Supreme Court in the BCCI judgement, the Legislature enacted the proposed Section 87 vide the Arbitration and Conciliation (Amendment) Act, 2019 (“the 2019 Amendment Act”). The constitutionality of this provision came to be challenged and decided by the Supreme Court in HCCL judgement. A brief synopsis of the HCCL judgement on this aspect is summarized under:-
a) Brief facts
The Petitioners, which were construction engineering companies, were the contractors for government bodies and typically had large claims for cost overrun and delays etc. The Petitioners were in a tricky situation where even the awards passed in the Petitioner’s favour involving large sums of money, were subject to the automatic stay on the filing of an Appeal by the Government body on awards.
The issues framed were whether Section 87 was constitutionally valid and whether the removal of Section 26 from the Amendment Act, 2015, violated Article 14 of the Constitution of India.
c) Verdict by the Hon’ble Supreme Court
In a remarkable strike, the Hon’ble Supreme Court held that the 2019 Amendment Act removes the basis of the BCCI Judgment. The Srikrishna Committee Report dated 30-07-2017, which was long before the BCCI Judgment, had recommended the introduction of Section 87 owing to the fact that there were conflicting High Court Judgments in regard to the applicability of the 2015 Amendment Act. After the BCCI Judgment, the confusion caused by the conflicting High Court Judgments had disappeared. Therefore, the Hon’ble Supreme Court held that after the pronouncement of BCCI judgement, deleting Section 26 of the 2015 Amendment Act would be wholly without justification and contrary to the object sought to be achieved by the Amendment Act, 2015. The deletion of Section 26 by introducing Section 87 was held to be manifestly arbitrary and contrary to the public interest sought to be sub-served by the Arbitration Act, 1996 and the Amendment Act, 2015.
Based on the aforesaid discussion, it is clear that the Hon’ble Supreme Court was right in striking down the Section 87 as it would have resulted in delay in completion of arbitral proceedings. For example, when the 2015 Amendment Act is applied to the pending court proceedings, such proceedings would then be disposed of in accordance with the benefits from the 2015 Amendment Act resulting in faster resolution of pending proceedings. On the contrary, the introduction of Section 87 would have resulted in a delay of disposal of arbitration proceedings, and an increase in the interference of courts in arbitration matters, which would have defeated the object of the Arbitration Act, 1996 and the 2015 Amendment Act.