WHAT IS SECTION 87 OF THE ARBITRATION AND CONCILIATION ACT WHY WAS ITS CONSTITUTIONALITY CHALLENGED?
Updated: Mar 30
Author: Priyangi Mohi, 4th Year B.A.,LL.B(Hons.) From Institute of Law, Nirma University.
Co-author: Shreepurna Dasgupta, 4th Year B.Com.,LL.B(Hons.) From Institute of Law, Nirma University.
Arbitration and Conciliation Act has been suffering from the disease of ‘automatic stay’ of award if and when any challenge is being filed against the award under Section 34 of the Act. This has deprived the holders of the award from enforcing it for a very long time now .The core of the issue lies from the incorporation of Section 36 in the Arbitration and Conciliation Act, 1996 which stated that an award can only be enforced after either the complain has been filed under Section 34 of the act contesting the awards passed by arbitral tribunal which has been dismissed by the court of law or the limitation period that is available for contesting an arbitral award under Section 34 of the Act has expired.
The ‘automatic stay’ provided under Section 36 has in many ways clogged the right of bona fide award holder.
In the cases of NALCO v. Pressteel & Fabrications Ltd., NBCC Ltd. v. Lloyds Insulation India Ltd. and Fiza Developers and Inter-Trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd., it was provided that under Section 36, arbitral award would be enforced in the manner similar as if it were a decree of any Court of Law, it was also stated that such award can only be enforced after the time has lapsed for making an application for challenging the said award or the court of law has dismissed the application.
It was held that there was an implied prohibition on the enforcement of the award passed by the arbitral tribunal if the arbitral award was challenged in the court of law.
POSITION UNDER THE AMENDMENT ACT ,2015
An amendment was brought by the 2015 Act which provided that by merely challenging the award passed by arbitral tribunal under Section 34 of the Act, automatic stay would come into effect unless and until a specific stay is granted that too by filing separate petition. Section 26 of the Arbitration and Conciliation Act had specified that the Amendment Act of 2015 will be applied to arbitral proceedings that has commenced on or after 23rd October, 2015 which can be referred to as ‘cut-off date’. After the Amendment specified under 2015 Act also, ‘the Automatic Stay’ was still applicable on the cases which were pending on the ‘cut-off date’.
It has also been stated that under Section 34, the court shall be guided by the provisions of Civil Procedure Code for granting stay on the enforcement of the arbitral award. The court is also required to record sufficient cause and its satisfaction while granting stay on the operation of arbitral award and certain grounds were mentioned on which stays can be granted.
After the Amendment Act of 2015, there was divergent opinion among the High Courts on the applicability of the amendment. Some of them held that Section 36 of the Act cannot be applied retrospectively and some ruled that Section 36 would be applicable to proceedings pending before the date of the commencement of the Amendment Act. Ultimately it was clarified by the judgement of BCCI that Section 36 would be applicable to all the proceedings that are pending under Section 34 of the Act.
SECTION 87 AND AMENDMENT ACT OF 2019.
Section 87 was introduced by the Arbitration (Amendment) Act, 2019 (under Section 13) into the Arbitration and Conciliation Act, 1996 which provides that any amendment brought by the Arbitration and Conciliation Act 2015 to the 1996 Act, such will not be applicable on court proceedings that has arisen or in relation with the arbitral proceedings irrespective of the timing when such proceedings have started as on both the proceedings which have stared prior or after the commencement of the Arbitration and Conciliation Act 2015, the amendment will not be applicable. The Section further clarifies that the amendment done in 2015 will only be applicable to arbitral proceedings that have commenced on or after the 2015 Amendment Act.
Later on, the court noticed that by introducing Section 87 in the Act, the delay in setting off the arbitral proceedings would hike, and it will also increase the court’s interference in the matters of arbitration that weakens the main objective behind bringing the Act of 1996 which was also strengthened by the Amendment Act 2015.
Moreover, the Amendment Act 2019 through Section 87 has restricted the applicability of the Amendment Act 2015 to the court proceedings which has arisen before 23rd October, 2015 and if any arbitral award that has been passed before the said cut-off date of the Act then there can be automatic stay applicable on such proceedings if such awards has been challenged in the court of competent jurisdiction.
The parties in whose favour the arbitral award is passed will not be able to secure or enforce the award until and unless the court dismisses the challenge and refuse to set aside the award that has been passed by the arbitral tribunal. The Amendment of 2019 is in direct contravention of the Supreme Court decision that has been given in the case of BCCI v. Kochi Cricket Private Limited.
JUDICIAL PRONOUNCEMENT AGAINST THE CONSTITUTIONALITY OF SECTION 87 OF THE ACT.
It is interesting to note that when arguments of BCCI were going on, the government had passed Arbitration and Conciliation (Amendment) Bill, 2018 which included clause 87 that provided for an automatic stay on the enforcement of the Arbitral award upon challenge under Section 34 of the Act if such arbitral proceeding had begun prior to the date of commencement of the Act of 2015. After the bill was brought to the notice of the judges in the BCCI case, they had advised Government against the enactment of clause 87. But the government failed to take notice of any advice and brought clause 87 into effect through Arbitration and Conciliation Act, 2019.
Hence, in the case of BCCI v. Kochi Cricket Private Limited, the petitioner had challenged Section 87 of the Act and for removal of Section 26 from the Act of 2015 on the grounds that it is violative of Article 14, 19(1)(g), 21 and 300-A of the Constitution. The apex court held that the concept of automatic stay cannot be inferred from Section 36 of the Act. The court, also, held that the judgment given by NALCO v. Pressteel & Fabrications Ltd. and Fiza Developers and Inter-Trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd., had incorrectly interpreted Section 36 of the act as they have failed to take into account Section 9 and Section 35 of the Act as under Section 9 courts have been given the power to pass interlocutory order even after the award has been passed by the arbitral tribunal but before the enforcement.
The court further mentioned that section 36 should be read with section 35 of the Act which provides that award passed by arbitral tribunal shall be final and it shall be binding on parties and when automatic stay is inferred from section 36 it would be incorrect interpretation of Section 36.
The case had clarified that section 36 after the amendment would also be applicable on the awards that are pending in the court under Section 34 of the act but Amendment Act of 2019 had introduced Section 87 of the Act and reversed the judgment given by BCCI case and provided that Amendment Act of 2015 would only apply to such arbitral and court proceedings that have commenced on or after the commencement of 2015 amendments.
However, when the Hindustan Construction Company Ltd. (HCCL) & Anr. v. Union of India, the apex court finally settled the issue of automatic stay in cases of grant of arbitral award. The main facts were that many arbitration proceedings against the petitioner company was in favor of them and hence, costs arose for the opposite parties.
The Union of India challenged these awards under Section 34. Hence, the automatic stay under Section 36 was applicable.
Now, with respect to the above discussion, the 2019 amendment had made it mandatory for the application of Section 87 for cases instituted after 2015 Act. This was challenged by the petitioner company. It argued that the right to equality law under Article 14 of the Constitution was being violated by taking away their “vested right of enforcement” of the award.
This was done without considering the basis of BCCI judgement as mentioned above. It argued that this made Section 87 unreasonable and arbitrary. The court cited the reason that if Section 87 is applied then those parties winning the award may become insolvent because of non- payment of arbitral awards from the losing parties which they would be otherwise receive when no such stay or conditional stay has been announced.
This also gives powers to the supplicants to put an hold to any arbitral award under Section 34 whenever the award is against their favor.
Hence, the Supreme Court struck down Section 87 stating that with the enforcement of BCCI case as explained above, that the enforcement of an arbitral award would not be automatically stayed upon when an application of Section 34 has been filed. Also, the apex court termed the 2019 Amendment Act to put the 2015 Act on the ‘backburner’ with respect to the Sections 28 and 34 which also was in contrary to the 246th Law Commission report and to all such provisions of Arbitration Act, 1996.
Another viewpoint taken by the court with respect to the Section 26 of the 2015 Amendment Act was that if it is repealed by Section 15 of the 2019 Amendment Act, it is also manifestly arbitrary to Article 14 of the Indian Constitution.
Therefore, this judgement was a welcome relief to all the parties who were to receive the arbitral award and this ensured that those cases filed after 2015 amendment shall not suffer from the ‘automatic stay’ concept under Section 36 of the Arbitration Act, 1996. The concept of automatic stay has been now dissolved under Section 36. The view taken by the court is thar if the Section is considered as a whole, then the whole purpose of the Arbitration Act, 1996 would be defeated as whenever Section 34 application is filed. This judgement is the key to providing a robust mechanism for the constitution of arbitration hub in India and it will also ensure that there is minimal interference from the courts which is one of the main aims of the UNCITRAL model and the Arbitration Act, 1996.