Ever since India was ranked at 178 out of 1891 nations in the world in contract enforcement, the government has attempted to take different steps to facilitate quick enforcement of contracts and hasten the process of dispute resolution through arbitration, so as to encourage investment and economic activity. As part of these measures to change the country's image with regard to contract enforcement, the government has made amendments to the Arbitration and Conciliation Act, 1996 ("Act")with the most recent amendment coming into effect on August 30, 2019 ("2019 Amendment Act"). Through the 2019 Amendment Act, the legislature introduced Section 87 to the Act, which ensured that the amendments made by the Arbitration and Conciliation (Amendment) Act, 2015 ("2015 Amendment Act") shall not apply to any (i) arbitral proceedings commenced before the commencement of 2015 Arbitration Act, (ii) court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the 2015 Amendment Act. Section 87 made it clear that the 2015 Amendment Act would only apply to arbitral proceedings commenced on or after the commencement of the 2015 Amendment Act and to court proceedings arising out of or in relation to such arbitral proceedings. The only scenario where Section 87 would not be applicable would be if parties have mutually agreed to have the 2015 Amendment applicable to the arbitration proceedings.
On November 27, 2019, the Supreme Court of India through its decision in Hindustan Construction Company Limited and Anr v Union of India and Ors2 ("Hindustan Construction Decision") struck down Section 87 of the Act on account of it being manifestly arbitrary under Article 14 of the Indian Constitution.The Hindustan Construction Decision dealt with the issues pertaining to the constitutional validity of Section 87 of the Act and the challenge to the repeal to Section 26 of the Act amongst other issues.
Possibility of'Mischief' through Section 87
Given that Section 87 allowed for the 2015 Amendment Act not to be applicable to (i) arbitral proceedings commenced before the commencement of 2015 Arbitration Act, (ii) court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the 2015 Amendment Act, it would lead to all sorts of confusion especially with Section 36 of the Act as it stood prior to the 2015 Amendment Act becoming applicable once again.
Section 36 of the Act prior to 2015
The entire debate regarding Section 87 stems from the wordings of Section 36 of the Act that existed prior to the 2015 Amendment Act. The law as it stood then provided for an automatic stay of an arbitration award as soon as a petition under Section 34 of the Act was filed. Section 36 of the Act prior to the 2015 Amendment Act stated that:
"36. Enforcement.-Where the time for making an application to set aside the arbitration award under section 34 has expired, or such application having been made, it has been refused, the award shall be enforced under the code of Civil Procedure, 1908 in the same manner as if it were a decree of the Court."
Thus, until the petition under Section 34 of the Act had been dismissed, an arbitration award could not be enforced by the award holder. In fact,the Supreme Court summarized the position of law with regard to Section 36 in Fiza Developers and Inter-trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd. and Anr.3 ("Fiza Decision")as:
"20. Section 36 provides that an award shall be enforced in the same manner as if it were a decree of the court, but only on the expiry of the time for making an application to set aside the arbitral award under Section 34, or such application having been made, only after it has been refused. Thus, until the disposal of the application under Section 34 of the Act, there is an implied prohibition of enforcement of the arbitral award. The very filing and pendency of an application under Section 34, in effect, operates as a stay of the enforcement of the award."
The wordings of Section 36 of the Act had effectively led to a scenario where an admission of a Section 34 petition would virtually paralyze the process for the winning party/award creditor and the Supreme Court in National Aluminium Co. Ltd. v. Pressteel & Fabrications Pvt. Ltd.4 even observed that Section 36 of the Act "defeats the very objective of the alternate dispute resolution system to which arbitration belongs."
While the Supreme Court through the Hindustan Construction Decision has now held the view in the Fiza Decision to be bad in law, prior to that, Section 36 of the Act did undergo amendments through the 2015 Amendment Act to rectify the mischief that had been created.
2015 Amendment: Fixing the 'Mischief'
After the 246th Law Commission called for amendments to be made to Section 36, in 2016, through the 2015 Amendment Act, Section 36 was finally amended and the provision for automatic stay being granted to parties upon filing of a petition under Section 34 was removed. The 2015 Amendment Act ensured that a stay would only be granted upon a separate application being filed and deemed by the Court to merit a stay to be granted. Section 36 as amended by the 2015 Amendment Act reads as follows:
"36. Enforcement.—(1) Where the time for making an application to set aside the arbitral award under section 34 has expired, then, subject to the provisions of sub-section (2), such award shall be enforced in accordance with the provisions of the Code of Civil Procedure, 1908 (5 of 1908), in the same manner as if it were a decree of the Court.
(2) 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, unless the Court grants an order of stay of the operation of the said arbitral award in accordance with the provisions of sub-section (3), on a separate application made for that purpose.
(3) Upon filing of an application under sub-section (2) for stay of the operation of the arbitral award, the Court may, subject to such conditions as it may deem fit, grant stay of the operation of such award for reasons to be recorded in writing:
Provided that the Court shall, while considering the application for grant of stay in the case of an arbitral award for payment of money, have due regard to the provisions for grant of stay of a money decree under the provisions of the Code of Civil Procedure, 1908 (5 of 1908)."
Section 26 and BCCI v Kochi
For the entire debate about Section 26, it is important to note the decision of the Supreme Court in Board of Control for Cricket in India vs. Kochi Cricket Pvt. Ltd5 ("BCCI Decision") was pronounced only in March 2018. The reason why it is so important to the note the date is because the Srikrishna Committee Report was submitted to the government on July 30, 2017 and the government relied upon the Srikrishna Committee's Report to justify the introduction of Section 87 and repealing Section 26 of the Act.
While the 2015 Amendment Act brought about some positive changes for the arbitration regime in India, the introduction of Section 26 in the Act did bring about some confusion with regard to the applicability of the 2015 Amendment Act specifically with regard to the applicability of the 2015 Amendment Act to court proceedings, both pending and newly initiated in case of arbitrations commenced prior to October 23, 2015.The Srikrishna Committee was of the opinion that by permitting the 2015 Amendment Act to apply to pending court proceedings related to arbitrations commenced prior to October 23, 2015 would result in uncertainty and prejudice to parties, as they may have to be heard again. The Committee was also of the opinion that if the 2015 Amendment Act was applicable to fresh court proceedings in relation to such arbitrations, it could result in an inconsistent position. As a result, the Committee suggested amending Section 26 to limit the applicability of the 2015 Amendment Act to arbitrations commenced on or after October 23, 2015 and related court proceedings.
While the Committee's proposed changes were well intentioned, the Supreme Court through the BCCI Decision in March 2018 finally clarified the applicability of the 2015 Amendment Act. The Supreme Court in the BCCI Decision held that Section 36 was a procedural provision and a party could not enjoy the right of an automatic stay by filing a petition under Section 34 of the Act by relying upon the phrase "has been" that had been inserted in Section 36 by the 2015 Amendment Act. The Supreme Court held that the phrase "has been"referred to petitions filed under Section 34 of the Act before October 23, 2015. Therefore, it was clarified that the 2015 Amendment Act would be applicable in cases where a petition under Section 34 had been filed before October 23, 2015 by reasoning that the execution of a decree is a procedural right, and there can be no vested right accrued upon a party to agitate the execution of an award in a certain manner or resist the execution of an award if it is not made in a certain manner. The Supreme Court also clarified that the remaining 2015 Amendment Act was prospective in nature, and would apply to those arbitral proceedings that are commenced on or after the 2015 Amendment Act came into effect, and to court proceedings which have commenced on or after the 2015 Amendment Act came into effect.
By omitting Section 26 in the 2019 Amendment Act and deeming Section 26 to have been omitted with effect from the October 23, 2015, removed the fundamental basis of the BCCI Decision, which clarified the confusion that High Courts across the country had. The Supreme Court in Hindustan Construction Decision held that by deleting Section 26 and introducing Section 87 in its place, would be wholly without justification and contrary to the object sought to be achieved by the 2015 Amendment Act, which was enacted pursuant to a detailed 246th Law Commission Report. The Court was of the view that that by referring to "the Srikrishna Committee Report (without at all referring to this Court’s judgment) even after the judgment has pointed out the pitfalls of following such provision, would render Section 87 and the deletion of Section 26 of the 2015 Amendment Act manifestly arbitrary, having been enacted unreasonably, without adequate determining principle, and contrary to the public interest sought to be sub served by the Arbitration Act, 1996 and the 2015 Amendment Act."
1 India presently ranks 163 out of 189 when it comes to enforcing contracts (information available at https://www.doingbusiness.org/en/rankings)
2 Writ Petition (Civil) No. 1074 of 2019 with Writ Petition (Civil) No. 1276 of 2019 with Writ Petition (Civil) No. 1310 of 2019 with M. A. Nos. 2140-2144 of 2019 in civil Appeal Nos. 2621-2625 of 2019
3 (2009) 17 SCC 796 2009
4 (2004) 1 SCC 540
5 (2018) 6 SCC 287
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