Arbitration Act: SC strikes down section 87 of the Act inserted by amendment of 2019 as manifestly arbitrary
[ by Kavita Krishnan ]A bench of Supreme Court Justices Rohinton F Nariman, Surya Kant and V. Ramasubramanian struck down section 87 of the Arbitration and Conciliation Act, 1996 (Act) holding that the provision is “manifestly arbitrary”.Writ Petitions were filed in the Supreme Court by Hindustan Construction Company Limited (HCC) seeking to challenge the constitutional validity of Section...
A bench of Supreme Court Justices Rohinton F Nariman, Surya Kant and V. Ramasubramanian struck down section 87 of the Arbitration and Conciliation Act, 1996 (Act) holding that the provision is “manifestly arbitrary”.
Writ Petitions were filed in the Supreme Court by Hindustan Construction Company Limited (HCC) seeking to challenge the constitutional validity of Section 87 of the Arbitration and Conciliation Act, 1996 as inserted by Section 13 of the Arbitration and Conciliation (Amendment) Act, 2019 (“2019 Amendment Act”) and brought into force with effect from 30th August 2019. They also sought to challenge the repeal (with effect from 23rd October 2015) of Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment Act”) by Section 15 of the 2019 Amendment Act. Apart from the aforesaid challenge, a challenge is also made to various provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) which, as stated by the Petitioners, resulted in discriminatory treatment being meted out to them.
Arbitration awards that in favour of the Petitioner company – were invariably challenged under Sections 34 and 37 of the Arbitration Act, 1996 (Act). According to the Petitioners, the major problem in the way is the moment a challenge is made under Section 34, there is an ‘automatic-stay’ of such awards under the Act.
Dr. Abhishek Manu Singhvi, learned Senior Advocate appearing on behalf of HCC argued that Section 87 of the Act is violative of Articles 14, 19(1)(g), 21 and 300A of the Constitution of India, as it is contrary to the object of the principal Arbitration Act, 1996 itself; takes away the vested right of enforcement and binding nature of an arbitral award; and without removing the basis of the BCCI v. Kochi Cricket Pvt. Ltd. judgment acts in the teeth of the said judgment, making the said section unreasonable, excessive, disproportionate as well as arbitrary.
He further contended that Section 87 is constitutionally infirm and since almost all the arbitration clauses with Government/Government Bodies state that the Arbitration Act, 1996 together with its amendments shall apply, this would make the 2019 Amendment Act applicable to its pending arbitral awards, resulting in wholly arbitrary consequences.
The learned Attorney General for India, Shri K.K. Venugopal, defended the repeal of Section 26 of the 2015 Arbitration Amendment and the insertion of Section 87 into the Act by the 2019 Amendment Act.
He argued that in BCCI’s case (supra), the interpretation of Section 26 of the 2015 Amendment Act is only declaratory in nature. Since the said judgment neither sets aside any executive action, nor any provision of a statute, it does not require a validating act to neutralize its effect.
He also argued that there is no substance to the challenge to Section 87 on the ground of the date being fixed as 23rd October 2015, as cut-off dates have been upheld in a plethora of cases as being within the exclusive domain of Parliament, and the courts should not normally interfere with the fixation of such cut-off date, unless blatantly arbitrary or discriminatory.
The provision sought to nullify the effect of 2018 judgment of the Supreme Court in BCCI v Kochi Cricket Private Ltd case which decided the prospective application of automatic stay provision in the Act. In this case, the Supreme Court had decided as to whether the 2015 amendments made to Section 36 of the Act were retrospective or prospective.
The Supreme Court held that to state that an award when challenged under Section 34 becomes unexecutable merely by virtue of such challenge being made because of the language of Section 36 is plainly incorrect. Further, reading Section 36 as inferring something negative, namely, that where the time for making an application under Section 34 has not expired and therefore, on such application being made within time, an automatic-stay ensues, is to read something into Section 36 which is not there at all.
The Court then moved on to the matter of removal of the basis of the BCCI judgment by the 2019 Amendment Act. The newly inserted section 87 in the Act provided that “Unless the parties otherwise agree, the amendments made to this Act by the Arbitration and Conciliation (Amendment) Act, 2015 shall— (a) not apply to–– (i) arbitral proceedings commenced before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015; (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 Arbitration and Conciliation (Amendment) Act, 2015; (b) apply only to arbitral proceedings commenced on or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 and to court proceedings arising out of or in relation to such arbitral proceedings.”
The Court held that it had cautioned the Government by stating that the immediate effect of enacting the proposed Section 87 would be directly contrary to the Statement of Objects and Reasons of the 2015 Amendment Act, which made it clear that the law prior to the 2015 Amendment Act resulted in delay of disposal of arbitral proceedings, and an increase in interference by courts in arbitration matters, which tends to defeat a primary object of the Arbitration Act, 1996 itself.
The Court further stated that all the amendments made by the 2015 Amendment Act, particularly the amendments made to Sections 28 and 34, would now be put on a backburner, which would be directly contrary to the salutary provisions that were made to correct defects that were found in the working of the Arbitration Act, 1996.
The Apex Court observed that when contrasted with Section 26, Section 87 is in two parts:
Section 87(a) negatively stating that the 2015 Amendment Act shall not apply to Court proceedings arising out of arbitral proceedings irrespective of whether such court proceedings are commenced before or after the commencement of the 2015 Amendment Act;
It positively applies only to court proceedings in case they arise out of arbitral proceedings that are commenced on or after the commencement of the 2015 Amendment Act.
It can thus be seen that the scheme of Section 87 is different from that of Section 26, and is explicit in stating that court proceedings are merely parasitical on arbitral proceedings.
Section 87 of the Act, inserted by 2019 Amendment Act, states that the 2015 Amendment will not apply to Court proceedings arising out of or in relation to arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015. To this extent, Section 87 is opposed to the Kochi Cricket Pvt. Ltd. judgment.
The Srikrishna Committee Report recommended the introduction of Section 87 owing to the fact that there were conflicting High Court judgments on the reach of the 2015 Amendment Act at the time when the Committee deliberated on the constitutional validity of the introduction of Section 87 into the Arbitration Act, 1996, and deletion of Section 26 of the 2015 Amendment Act by the 2019 Amendment Act against Articles 14, 19(1)(g), 21 and Article 300-A of the Constitution of India.
The Court observed, “Whatever uncertainty there may have been because of the interpretation by different High Courts has disappeared as a result of the BCCI judgment (supra), the law on Section 26 of the 2015 Amendment Act being laid down with great clarity. To thereafter delete this salutary provision and introduce 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 Law Commission report which found various infirmities in the working of the original 1996 statute. Also, it is not understood as to how “uncertainty and prejudice would be caused, as they may have to be heard again”, resulting in an ‘inconsistent position’. The amended law would be applied to pending court proceedings, which would then have to be disposed of in accordance therewith, resulting in the benefits of the 2015 Amendment Act now being applied. To refer 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 subserved by the Arbitration Act, 1996 and the 2015 Amendment Act.”
The Court also noted that “when the mischief of the misconstruction of Section 36 was corrected after a period of more than 19 years by legislative intervention in 2015, to now work in the reverse direction and bring back the aforesaid mischief itself results in manifest arbitrariness. The retrospective resurrection of an automatic-stay not only turns the clock backwards contrary to the object of the Arbitration Act, 1996 and the 2015 Amendment Act, but also results in payments already made under the amended Section 36 to award-holders in a situation of no-stay or conditional-stay now being reversed.”
Justice Nariman held that the non-bifurcation of court proceedings and arbitration proceedings with reference to the date of commencement of the Amendment Act (23rd October 2019) as a cut-off date, resulting in improvements in the working of the Arbitration Act, 1996 being put on a backburner. He further ruled that it is unnecessary to examine the constitutional challenge to the 2019 Amendment Act based on Articles 19(1)(g), 21 and 300-A of the Constitution of India.