The Supreme Court of India ("Court") in 2018 decided that there would be no automatic stay on enforcement of arbitral awards when an award is challenged under Section 34 of the Indian Arbitration and Conciliation Act ("IAA"). On November 27, 2019, the Court struck down an amendment to the IAA which sought to revive the automatic stay regime and reiterated India's commitment to be seen as an arbitration friendly jurisdiction. The present article will analyse the decision of the Court dated November 27, 2019 titled "Hindustan Construction Company Ltd. and Anr. vs. Union of India and Ors.", arising out of Writ Petition No. 1074 of 2019 ("HCC").
The decision in Board of Control for Cricket in India vs. Kochi Cricket Pvt. Ltd. ("BCCI") was concerned with the applicability of the the Arbitration and Conciliation (Amendment) Act, 2015 ("2015 Amendment Act"), which did away with the regime for automatic stay on enforcement of an award. The 2015 Amendment Act was to come into effect from October 23, 2015. The Court, however, decided that enforcement proceedings under Section 36 of the IAA were procedural in nature and would apply retrospectively even to those Section 34 petitions which were filed before October 23, 2015.
While the matter was being decided, the Arbitration and Conciliation (Amendment) Bill, 2018 ("2018 Bill") had been introduced by the Government of India to clarify that the 2015 Amendment Act would only apply to arbitral or court proceedings initiated after October 23, 2015. The 2018 Bill had been brought to the Court's attention during the hearing for BCCI and the Court had said that the amendments sought to be introduced by the 2018 Bill would put the important amendments under the 2015 Amendment Act. Ignoring this observation of the Court, the Parliament went ahead and enacted the Arbitration and Conciliation (Amendment) Act, 2019 ("2019 Amendment Act").
The "back-burner" amendment
The 2019 Amendment Act inserted Section 87 to the IAA to clarify that the 2015 Amendment Act would:
The effect of the 2019 Amendment Act was a revival of the automatic stay regime contained under the IAA before the 2015 Amendment Act. This meant that if an award arising out of an arbitral proceeding commenced before October 23, 2015 is challenged after October 23, 2015, the enforcement of such an award would be automatically stayed. This went contrary to the main objective behind the 2015 Amendment Act, i.e. faster resolution of disputes through arbitration and avoiding delays.
The insertion of Section 87 to the IAA was challenged before the Court in HCC on the ground that it had reversed the beneficial effects of the 2015 Amendment Act. The Court struck down Section 87 as being manifestly arbitrary and contrary to objectives of the IAA and the 2015 Amendment Act.
Origins of the automatic stay regime and per incuriam decisions
While striking down Section 87, the Court considered the origins of the automatic stay regime under Section 36 of the IAA. The Court noted that the IAA, as originally enacted, did not contemplate an automatic stay on enforcement of an award once the award is challenged before a court. The Court noted that the Section 36 of the IAA was different from Article 36 of the UNCITRAL Model Law. According to Section 36, once an award had become final and binding it had to be enforced as a decree before the court.
The Court noted that an automatic stay on enforcement of awards under challenge was never intended by Section 36. The automatic stay regime was introduced into Section 36 by the Court's decision in NALCO vs. Pressteel Fabrications (P) Ltd. and Anr., judgment dated 18.12.2003 in IA No. 2 of 2003 in Civil Appeal No. 2522 of 1999 ("NALCO") and Fiza Developers and Inter-trade Pvt. Ltd. vs. AMCI (India) Pvt. Ltd. and Anr., judgment dated 17.07.2009 in Civil Appeal No. 5139 of 2009 ("Fiza"). The Court declared the decisions in both NALCO and Fiza to be per incuriam because they overlooked the statutory provisions of the IAA. Consequently, Section 36 – even as originally enacted – never contemplated an automatic stay. As regards the 2015 Amendment Act, it was held that the amendments were only clarificatory and restated the position of no automatic stay on enforcement of awards.
The 2019 Amendment Act is arbitrary and unconstitutional
One of the reasons for invalidating a statutory enactment in India is manifest arbitrariness. Courts in India usually adopt a restrictive approach for judicial review of economic legislation Swiss Ribbons Pvt. Ltd. and Anr. v. UOI and Ors., WP(C) No. 99 of 2018. However, if the legislature does something capriciously, irrationally and without adequate determining principles; something that is excessive or disproportionate, the legislation can be struck down on the ground of manifest arbitrariness [Shayara Bano v. Union of India, WP(C) No. 118 of 2016].
The Court considered the Report of the High Level Committee to Review the Institutionalisation of Arbitration Mechanism in India dated 30.07.2017 ("Report") which had recommended the introduction of Section 87 to clarify the applicability of the 2015 Amendment Act. The Report was published before the Court's decision in BCCI and had recommended that the applicability of the 2015 Amendment Act should be limited to arbitrations commenced on or after 23 October 2015 and related court proceedings. While deciding BCCI, the Court had considered the Report and had pointed out the loopholes contained in the Report, i.e. the introduction of Section 87 would result in a delay of disposal of arbitration proceedings and increase in the interference of courts in arbitration matters. Even then, the Parliament had enacted the 2019 Amendment Act by referring to the Report and without referring to the judgment in BCCI. The Court held that doing so had rendered Section 87 and the deletion of Section 26 of the 2015 Amendment Act manifestly arbitrary, without adequate determining principle, and contrary to the public interest sought to be subserved by the IAA and the 2015 Amendment Act.
Effect of the decision in HCC
The declaration of law in HCC is two-fold:
The combined effect of the two declarations is that no matter when an award is challenged, before or after 2015, there cannot be an automatic stay on enforcement of awards under challenge. For example, even if an automatic stay on enforcement had been granted in a Section 34 petition filed before October 23, 2015, the stay would now become invalid. This is because the second declaration destroys the very basis on which automatic stays used to be granted.
The status of stay orders which have already been granted by various high courts in pending execution proceedings needs to be examined. The decision in HCC is a law declared by the Supreme Court under Article 141 of the Constitution of India and would apply to all pending proceedings. Stay orders on enforcement proceedings granted by the court in pending matters would now become invalid and parties may have to file appropriate applications for vacation of the stay. In some cases, the court may insist that the parties file an application to seek release of the amount awarded by the tribunal subject to depositing appropriate bank guarantees before the court. Parties may also seek to withdraw the bank guarantees already deposited before the court as a precondition to the grant of stay on the enforcement proceedings.
Views Are Personal Only
(Author is a Delhi based Lawyer)