Which HC Ruling Will Get The SC’s Affirmation Over The Applicability Of 2015 Amendments To Post-Arbitration Court Proceedings?

The Arbitration & Conciliation (Amendment) Act, 2015 (“amendments” / “2015 Act”) was introduced with a purpose to give more autonomy to the arbitral tribunals and deter unnecessary and vexatious litigations arising out of arbitral proceedings. However, some felt that the provisions of 2015 Act were not precisely drafted to convey the legislative intent. Since the enactment, section 26 of the 2015 Act has been subject of interpretation in various Courts. Top lawyers of India have carefully analysed the 2015 Act and argued for or against the applicability the amendments to the court proceedings arising out of arbitration commenced before 23 October 2015 i.e. date when amendments were introduced. As of now four major High Courts i.e. Delhi, Bombay, Calcutta and Madras have interpreted the 2015 Act and given divergent views. The matter has now reached the Supreme Court for the final interpretation. This article seeks to very briefly analyse the major High Court decisions and bring a probable outcome.

I also felt the need to bring a practical perspective to the present issue. All the decisions interpreting Section 26 of the 2015 Act have given sound legal reasoning on why the 2015 amendments should be or should not be applicable to the court proceedings. However, the decisions do not adequately discuss the benefits and drawbacks of the amendments when applied practically. There is a reason to believe that the 2015 Act, if made applicable to court proceedings will have a bigger impact on arbitration culture than law of arbitration itself. The mandate to deposit the arbitral award amount will weed out vexatious Section 34 Petitions. Further, for the Section 34 Petitions filed, the decree holder will have confidence and assurance that it will finally get the money as the whole process would ease the execution proceedings.

THE ISSUE 

The central issue is the interpretation of the section 26 of the 2015 Act which sets out the applicability of the amendments to the arbitral proceedings commenced prior to the enactment of 2015 amendments. For a better understanding, Section 26 can be broken into following parts:

A: “26. Nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of section 21 of the principal Act, before the commencement of this Act

B:    unless the parties otherwise agree

C:   but this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act.

Initially Part A was the subject of debate and consequently Part B was also discussed in various judgments to apply the amendments in a retrospective manner. The topic of legal debate is whether amended or un-amended provision of the Act will be applicable to court proceedings under Section 34 arising out of arbitrations invoked prior to 23 October 2015. There is reason behind this issue becoming an epicentre of interpretation. The 2015 amendments pose great difficulty to those willing to challenge the arbitral award. Under the un-amended provisions, by mere filing of Section 34 Petition, there was an automatic stay on the execution of award.

Illustration

Position before the amendments:

To put it in a practical way, for example if X and Y have arbitration proceedings going on in New Delhi, and arbitral tribunal gives an award in favour of Y directing X to pay Rs. 100 Crore, then within 90 days of passing of the arbitral award, X could approach the Delhi High Court and pay Rs. 100 only as Court fees and stall the execution of arbitral award till X exhausts all its legal remedies.

Position after the amendments:

Now the 2015 Act introduced certain restrictions to this practice of stalling the arbitral awards. The amendments have removed the automatic stay and Section 36(2) of the Amended Act requires the judgement-debtor to move a separate application, specifically seeking stay of operation of the award in case it wishes to seek a stay of the execution proceedings. Further, under Section 36(3), if the Court is inclined to grant stay of operation of the award, it has to record reasons in writing and also have due regard to the provisions for grant of stay of a money decree under the Civil Procedure Code, 1908 (“CPC”). This provision mandates deposition of entire arbitral award amount or any amount that Court deems fit as a security in Court. Applying this in the aforesaid example would mean that X along with filing Petition under Section 34 must also file a separate application under Section 36(2) for stay of award and also deposit the entire Rs. 100 crore or any amount Court deems fit as security till the pendency of Section 34 Petition.

How the amendments are applicable to court proceedings arising out of arbitrations commenced prior to 23 October 2015:

Section 26 is a saving clause and the express terms only protected arbitral proceedings from applicability of 2015 Act. This is because the words used were “shall apply to the arbitral proceedings” and not “in relation to”. Therefore, Court proceedings arising out of arbitrations commenced prior to 23 October 2015 were within in the applicability of 2015 Act.

Issue before Court:

The controversy in Courts is that X refused to deposit Rs. 100 crore. Assuming that arbitration between X and Y commenced in 2013 and award was passed before 23 October 2015 or even thereafter, the 2015 Act mandates X to comply with amended provisions. X contends that since the arbitration proceedings had been initiated under un-amended Act, therefore has a vested right to challenge the same under the un-amended Act. On the other hand Y submits that X’s right to challenge the arbitral award still remains and only the procedure has been amended which cannot be termed as a vested/substantive right. Further Y contends that X had agreed to any statutory modification in the contract at the time of execution, therefore by virtue of Part B of Section 26, the amendments are applicable to the arbitral proceedings commenced prior to the 23 October 2015, i.e. the cut-off date.

TIMELINE OF CASES AND DEVELOPMENT OF JURISPRUDENCE

The first court to interpret Section 26 of the 2015 Act was Madras High Court in case of New Tirupur Area Development Corporation Limited v. Hindustan Construction Co. Ltd.^[1] The judgment was delivered on 27 January 2016. The Madras High Court observed that intention of Legislature was clear from the wordings of Section 26 and held that Section 26 of the 2015 Act cannot be extended to include post arbitration proceedings, when the award is passed, before the commencement of the amendments. Thereafter, in March 2016, a Division Bench of Calcutta High Court in Tufan Chatterjee v. Rangan Dhir^[2] affirmed the same. The jurisprudence was then discussed in detail by the Bombay High Court in case of Rendezvous Sports World v. Board of Control for Cricket in India^[3]. The Bombay High even further went ahead and observed that “it makes no difference if the application under Section 34 filed by the award-debtor was prior to 23 rd October, 2015”. The Court analysed the intention behind the amendments and observed that the amendments to Section 36 sought to balance between the rights and liabilities of the award-holder and the award-debtor, thus prospective in nature. It observed that earlier, a challenge under Section 34 would cast a shadow on the award-holder’s right to enforce the award since an automatic stay would operate. Subsequently, this shadow over the rights of the award-holder was removed, by way of the amendments. Meanwhile, the rights of the award-debtor were kept intact to the extent that interim reliefs can be sought from the court during the pendency of an application of challenge under Section.

The year 2017 commenced with the different opinion on the subject. The Division Bench of Delhi High Court in its judgment dated 6 January 2017 took a contrary view from that of other High Courts. The Division Bench in Ardee Infrastructure Pvt. Ltd. v. Anuradha Bhati^[4] held that right to file Petition under Section 34 and execution of the same is a vested right and the same cannot be taken away by 2015 Amendments and thus un-amended provisions of Act would apply to post-arbitration court proceedings arising out of arbitrations commenced prior to cut-off date. The Court held that not including court proceedings in Part A of Section 26 would give rise to several complications in terms of applicability. Thereafter, part B of Section 26 was analyzed and discussed by a Delhi High Court in Ratna Infrastructure Projects Pvt. Ltd. v. Meja Urja Nigam Private Limited^[5] , wherein the Court held that 2015 amendments shall be applicable to arbitrations commenced prior to 23 October 2015, if parties have agreed the same under statutory modifications clause.

Later, the Calcutta High Court took a divergent view from the earlier decision of Tufan Chaterjee and stood in support of Ardee Infra vide its decision of Saraf Agencies Pvt. Ltd and Ors. v. Federal Agencies for State Property Management and Ors^.[6] The Calcutta High Court again recently in the case of West Bengal Power Development Corporation Ltd. v. Dongfang Electric Corporation^[7] discussed both Part A and B of Section 26. The Respondents had argued that amendments to Section 36 are only procedural in nature and no not take away any substantive rights. Reliance was placed on the Delhi High Court’s decision of Ratna Infra and was contended that amended Act shall be applicable as parties had agreed the same in the statutory modification clause. However, Court dismissed the contentions after affirming its earlier decision in Saraf Industries.

THE PRESENT PROCEEDINGS IN SUPREME COURT

The full bench of Supreme Court comprising of Justice Dipak Misra, Justice A.M Khanwilkar and Justice Mohan M. Shantanagoudar are hearing the connected SLP’s arising out of Rendezvous and Ardee case. The matter was adjourned on earlier occasions and it tentatively listed for hearing on 4^th September 2017.

Why Rendezvous decision of Bombay High Court should be upheld by the Supreme Court

There are three major reasons to support the applicability of amendments to court proceedings arising out of arbitration commenced prior to 23 October 2016. Firstly the contention is supported by law, Secondly part B of the Section 26 itself supports the applicability of amendments if the same is agreed in the express terms of the agreement and Finally, the applying the amendments to court proceedings will foster a better arbitration practice in India.

How Law supports it

The Bombay High Court in the Rendezvous case has covered all the aspects of law before concluding that Party A Section 26 does not save the court proceedings. For the sake of brevity, the relevant observations of Bombay High Court are not repeated here and only the major points to counter the observations in Ardee Infra are discussed hereunder:

• 2015 amendments have not taken away the substantive right to challenge the award but merely amended the procedure

It is suggested that the 2015 amendments have not changed or taken away the substantive rights of a party. As held in Ardee Infra, a right to challenge an arbitral award being a substantive right remains untouched by the 2015 Amendments. What has been amended by the 2015 Act is the procedure to challenge the award. Section 36 of the Act has now incorporated the provision of Code of Civil Procedure, 1908 (“CPC’) which is procedural law thus can be retrospectively operated. It is a settled principle of law that no person has vested right in any course of the procedure.

It is pertinent to note that 2015 amendments have incorporated the provisions of CPC related to staying of money decrees as stated under Order XLI Rule 1(3) of CPC. The provision is directory in nature as held by the Supreme Court in M/s. Malwa Strips Pvt. Ltd. v. M/s. Jyoti Ltd.^[8]. Since all procedural provisions are directory in nature, it is clearly established that Order XLI Rule 1 is procedural provision. The Supreme Court in Malwa Strips clearly held that failure to deposit does not affect appellant’s right to appeal. As Section 36 after the amendments incorporates the principles of Order XLI Rule 1, therefore, the amendments to Section 36 should be termed as directory in nature and can be retrospectively implemented. This argument was also raised by Mr. S.N Mookerjee, Sr. Advocate in the Dongfang Electric case but the Justice I.P Mukerjee of Calcutta High Court rejected the arguments and affirmed its own decision of Saraf.

• Recent decision dated 24.05.2017 of NCLT also supports the view

Although, the observation of the NCLT in the recent decision of Kirusa Software Pvt. Ltd. v. Mobix Innovation Pvt.^[9] Ltd. is merely an obiter but the observation with regards to the status of an award once Section 34 is filed is important and pertinent to note.  The observations can be found in paragraph no. 32 of the judgment, wherein the NCLAT endeavours to provide examples of what exactly would constitute a ‘debt’ in the context of The Insolvency and Bankruptcy Code, 2016 (“Insolvency Code”). Though the facts of the case before NCLT were different, the NCLAT proceeded to explain the status of the maintainability of an insolvency petition under Section 9 of the Insolvency Code founded on the basis of a decree of a court or the award of an arbitral tribunal in the following words:

“32. There may be other cases such as a suit relating to existence of amount of debt stands decided and decree is pending for execution. Similarly, existence of amount of debt or quality of goods or service for which a suit have been filed and decreed; an award has been passed by Arbitral Panel, though petition under Section 34 of Arbitration and Reconciliation ((Sic; Conciliation) Act, 1996 may be pending. In such case the question will arise whether a petition under Section 9 will be maintainable particularly when it was a suit or arbitration proceeding is not pending, but stand decided? Though one may argue that Insolvency resolution process cannot be misused for execution of a judgment and decree passed in a suit or award passed by an arbitration Tribunal, but such submission cannot be accepted in view of Form 5 of Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules 2016 wherein a decree in suit and award has been shown to be a debt for the purpose of default on non-payment.”

(emphasis supplied)

In the aforesaid para, it is important to note that the NCLAT specifically poses to itself the question as to whether a pending petition under Section 34 of the Arbitration and Conciliation Act, 1996 against an arbitral award would render non-maintainable an insolvency petition under Section 9 of the Insolvency Code. The NCLAT’s reasoning is that an arbitral award, though under challenge under Section 34 of the Arbitration and Conciliation Act, 1996, would constitute a debt for the purpose of the Insolvency Code. The NCLAT presumed the finality of an arbitral award and that it is ‘not pending, but stand decided’ during the pendency of a petition under Section 34 and compares it with a suit that stands decreed and is pending for execution. Hence until an application for stay of the execution is not filed, merely filing a Section 34 Petitioner would not render the award null.

• Principle of small repair is applicable which also supports the applicability of 2015 amendments

The filing of section 34 which resulted into an automatic stay was the defect which has been cured by the 2015 amendments. The 2015 amendments are valid in law which is supported by jurists of constitutional theory as well. Jurists have coined the “Principle of small repair”. The expression appears to have been used in an article published in Harvard Law Review^[10], The essential idea behind this doctrine is that if the legislature inadvertently makes a mistake in the enactment of a law, it is entitled to correct the error with retrospective effect. The same principle can be applied to the 2015 amendments. Bombay High Court also acknowledged the principle in Rendezvous case and discussed a similar doctrine i.e. Doctrine of Eclipse to justify the wordings of Section 26 of 2015 Act.

• The 2015 amendments shall not create any anomaly in application

The Division Bench of the Delhi High Court in Ardee Infra discussed that if Section 26 is applied in light of the interpretation given in Thyssen case, the it would lead to serious anomalies. These include the interplay between Section 9 & 17 and applicability of Section 8 of the Act. In this regard, it is submitted that Section 9(3) of the amended Act gives Court the discretion to provide the remedy if it is of the opinion that an efficacious remedy is not available. Further, it has been suggested that reference to arbitration under Section 8 will be affected as an arbitral tribunal (constituted pre-Amendment) governed by the old regime would lack jurisdiction over any person claiming through or under a party under Section 8. The proposition is of no relevance now.

Applying Part B of the Section 26 to implement the 2015 amendments

As discussed above Section 26 is divided into three parts. Part B is a proviso to the Part A. In arbitration, the parties are bound by the express terms of the Agreement. Therefore, if parties under the arbitration agreement have themselves agreed to the applicability of the 2015 amendments, then part A of Section 26 does not save such proceedings. The issue was first discussed in Ranta Infra. Delhi High Court held that the words “any statutory modification or re-enactment thereof and the rules made thereunder and for the time being in force shall apply to the arbitration...” satisfies the requirement of Section 26. It is pertinent to note that subject matter of the Ranta Infra was different, however the principle laid down was contended by the Respondent in Dongfang Electric case. However, the said argument rejected on the ground that it interferes with Section 6 of the General Clauses Act, 1897. Court observed that:

“In this case I do not think the parties agreed to give up their rights under the General Clauses Act, 1897 and the Repeal and Savings provisions and accept application of the new Act. For all those reasons this contention of Mr. Mookherjee fails.”

However, Calcutta High Court failed to appreciate that courts cannot go beyond the terms of arbitration agreement and Section 36 is procedural and does not confer any substantive rights which are protected in Section 6 of the General Clauses Act, 1897. Further, the Court also failed to appreciate the observation of Bombay High Court in Rendezvous case on non-applicability of Section 6 of General Clauses Act, 1897 while interpreting Section 26 of the 2015 Act.

Practical Benefits of upholding the Rendevous decision:

• Reduction in unnecessary Section 34 Petition:

The mandatory deposit under Section 36(3) will deter parties from filing vexatious Section 34 Petition. Let us accept the fact that most of the arbitral awards, if analyzed carefully violate Section 31(3) or 28(2) of the Act. It is also fair to say that sometimes arbitrators give the right verdict but with a wrong reasoning. Challenging such awards is a waste of time. Arbitrations involve complex issues and numerous claims and counter-claims and even the slightest errors committed by the arbitrators are picked by lawyers while drafting Section 34. Errors like inter alia no reasons for dismissal of counter-claim, failure to quantify losses, non-appreciation of documentary evidence, ignoring cross-examination answers, travelling beyond the express terms by giving award on equity etc are common grounds in any Section 34 Petition. A slightest of the aforesaid grounds is sufficient for issuance of getting a notice in Section 34 Petition.

The above-mentioned grounds coupled with small court fees have made Section 34 an obvious remedy. If Rendezvous case is upheld then, only genuine Section 34 Petitions shall be filed as not everyone would be interested to deposit the entire arbitral award amount and also continue to litigate. Further, even some of the pending Section 34 may get withdrawn as parties may foresee that ultimately they have to pay in the end. It has been rightly pointed out in the National Aluminum Co. Ltd. v. Pressteel and Fabrication Pvt. Ltd^[11], 246^th Report of the Law Commission of India and Rendezvous, that Section 34 should not be used as a tactic to prevent the award-holder from enjoying the fruits of his success.

• Ease the process of execution of arbitral award

Getting a favourable award is just the first step in winning a commercial dispute. Execution of an arbitral award is a challenge in itself. The mandatory deposition of award amount would give the assurance to the decree-holder that during the execution, he shall get the money. It is not uncommon that hurdles are created at the time of execution. For instance in the case of The State Trading Corporation of India v. Global Steel Holdings Limited^[12], a consent award was passed in New Delhi and Respondent agreed to pay approximately Rs. 700 crore to STC. However, when the STC filed an execution petition in Delhi High Court for enforcement of consent award, the Respondent submitted that the same cannot be enforced as none of the assets of the Global Steel Holdings Limited are situated in India. The execution petition was dismissed by the Delhi High Court on this ground. (The matter is now pending in Supreme Court)

Therefore in order to avoid any hurdles at the time of execution, the legislature now mandates deposition of arbitral award amount or any amount that Court deems fit to ensure that party filing Section 34 Petition has capacity to pay at the time of execution and filing of Section 34. Therefore, the amendments are in the interest of positive development of arbitration practice in India. Implementing them to arbitrations commended prior to 23 October 2015 shall be a bona fide step to rectify the wrongs committed in past.

DRAWBACKS AND THE OTHER SIDE STORY

The nature of amendments introduced clearly proves that the un-amended 1996 Act was unable to meet its objectives. Unaccounted delays in arbitral proceedings, exorbitant fees, biased and untrained arbitrators, less autonomy to the arbitral tribunal made parties lose faith in arbitration and therefore, Section 34 became the most sought after remedy and the Courts drifted from supervisory courts to become the court of regular appeals for the aggrieved party.

The parties became so helpless that the only remedy to undo the harm done to them was filing Section 34 Petition. Although courts have a limited scope to interfere with the arbitral award under Section 34 but, if valid grounds are raised, then the entire arbitral award can be set aside by a Court. As per the recent Supreme Court decision in Kinnari Mullick v. Ghanshyam Das Damani^[13], it has been held that Section 34(4) of the Act, does not empower the court to relegate the parties before the arbitral tribunal after having set aside the arbitral award in question. Therefore, Section 34 possesses great powers. However, the Legislature felt that the power was being misused and therefore was necessary to introduce certain checks.

The analysis of Ardee Infrastructure and Saraf Agencies judgements reveal that Courts have given emphasis to vested and inherent rights of the parties to challenge the arbitral award under Section 34. This inherent rights is put on the same pedestal as the right to appeal and therefore both Delhi and Calcutta High Court held that the 2015 Act cannot take away this inherit right and therefore amended Section 36(2) and 36(3) are not applicable.

The 2015 amendments do seek to cure the shortcomings of the 1996 Act but will these amendments also cure the wrongs already done to parties in arbitrations commenced prior to 23 October 2015? Is it justified to put additional burden over the parties which have already suffered unending arbitration proceedings, unjustified fees and may be perhaps biased arbitrators? The party has only right to challenge the same under Section 34. Therefore, courts adjudicating the Petitions arising out of un-amended Act have a bigger responsibility and have assumed the status of appellate courts in the eyes of litigants. The same is also clearly reflected in the decisions of Ardee Infra and Saraf. The Calcutta High Court in Dongfang case even rejected the argument that parties agreed to be governed by the amended provisions as per the express terms of the contract and the same was permitted under Part B of Section 26 of the 2015.

Let us hope that Supreme Court takes into consideration all the aspects of law and practical implications while deciding the present controversy. As lawyers, we must realize that amendments are not just made for Delhi, Calcutta, Mumbai and Chennai but have the nationwide impact. Both the interpretations of Section 26 are plausible. However, we have to make a choice, and decide which verdict will benefit the arbitration culture in India. Reduction in number of Section 34 Petition may not be beneficial for lawyers, but in long term this will ease the dispute resolution process and may be a step forward in making India hub of international arbitrations.

^[1] A. No. 7674 of 2015, O.P. No. 931 of 2015, DOJ: 27^th Jan 2016

^[2] FMAT No.47 of 2016, DOJ: 2^nd March 2016

^[3] Chamber Summons No. 1530, 1532 of 2015  & Chamber Summons N0. 66 of 2016, 2016 SCC Online Bom 255. DOJ : 14^th June 2016

^[4] FAO (OS) No.221/2016, DOJ: 6^th January 2017

^[5] Arb. P. 537/2016, DOJ: 11^th  April 2017.

^[6] AIR 2017 Cal 65

^[7] G.A. No. 3750 of 2015 in A.P. No. 1709 of 2015, DOJ: 17^th July 2017.

^[8] AIR 2009 SC 1581, ¶ 8

^[9] Company Appeal (AT) (Insolvency) 6 of 2017, DOJ; 24.05.2017, ¶ 32,

^[10] Charles B Hochman, “The Supreme Court and the Constitutionality of Retroactive legislation” (1960) 73 Harv L Rev 692.

^[11] (2004) 1 SCC 540, ¶ 11

^[12] EX.P. 337/2014 with EA Nos. 697-98 of 2014 and 199-200 of  2015.

^[13] Civil Appeal No. 5172 of 2017 (Arising out of SLP (Civil) No. 2370 of 2015) Decided On: 20.04.2017

Author is a lawyer practicing in Delhi High Court and specializes in commercial remedies and arbitration

[The opinions expressed in this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of LiveLaw and LiveLaw does not assume any responsibility or liability for the same]