SC Strikes Down Section 87 Of Arbitration & Conciliation Act Inserted By 2019 Amendment [Updated With Judgment]

In a significant judgment, the Supreme Court on Wednesday struck down Section 87 of the Arbitration and Conciliation Act 1996, which was inserted through the 2019 amendment Act passed by the Parliament last monsoon session.

The judgment was delivered in the case Hindustan Construction Company Ltd v Union of India, which was heard by a bench comprising Justices R F Nariman, Surya Kant and V Ramasubramanian.

The bench held the provision to be "manifestly arbitrary" and violative of Article 14 of the Constitution of India.

"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", observed the judgment authored by Justice Nariman.

The Court also observed that after the advent of the Insolvency and Bankruptcy Code, the restoration of the automatic stay provision might lead to the insolvency of arbitral-award holders, as the payments due to them might get blocked.

"an arbitral award-holder is deprived of the fruits of its award - which is usually obtained after several years of litigating - as a result of the automatic-stay, whereas it would be faced with immediate payment to its operational creditors, which payments may not be forthcoming due to monies not being released on account of automatic-stays of arbitral awards, exposing such award-holders to the rigors of the Insolvency Code", observed the Court.

The Court added that Section 87 militated against the concept of appeals under Arbitration Act, which are in the nature of summary proceedings than "full-blown" appeals. Introduction of Section 87 would result in a delay of disposal of arbitration proceedings, and an increase in the interference of courts in arbitration matters, which defeats the very object of the Arbitration Act, 1996.

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 that case, the SC had decided whether the 2015 amendments made to Section 36 of the Act were retrospective or prospective. It may be noted that the 2015 amendment made to Section 36 clarified that mere filing of appeal would not amount to stay of enforcement proceedings, and further introduced a provision that stay will be only conditional on furnishing security if the award relates to payment of money. Before the amendment, one could get a stay of enforcement of award by mere filing of appeal even without any security.

The bench comprising Justices Nariman and Navin Sinha held in Kochi Cricket Pvt Ltd case that the 2015 amendment to Section 36 will apply only to:

(a) arbitral proceedings commenced on or after October 23, 2015 (date of commencement of the Amendment Act); and

(b) arbitration-related court proceedings filed on or after October 23, 2015, even where the arbitral proceedings had been commenced before the amendments came into force.

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 goes against the Kochi Cricket Pvt Ltd judgment.

In this backdrop, the bench concluded :

"The result is that the BCCI judgment (supra) will therefore continue to apply so as to make applicable the salutary amendments made by the 2015 Amendment Act to all court proceedings initiated after 23.10.2015"

In fact, the Kochi Cricket Club judgment had criticized the the move of the Government to introduce Section 87 through Amendment as follows :

"The Government will be well-advised in keeping the aforesaid Statement of Objects and Reasons in the forefront, if it proposes to enact Section 87 on the lines indicated in the Government's press release dated 7th March, 2018. The immediate effect of the proposed Section 87 would be to put all the important amendments made by the Amendment Act on a back-burner, such as the important amendments made to Sections 28 and 34 in particular, which, as has been stated by the Statement of Objects and Reasons, "...have resulted in delay of disposal of arbitration proceedings and increase in interference of courts in arbitration matters, which tend to defeat the object of the Act", and will now not be applicable to Section 34 petitions filed after 23rd October,2015, but will be applicable to Section 34 petitions filed in cases where arbitration proceedings have themselves commenced only after 23rd October, 2015. This would mean that in all matters which are in the pipeline, despite the fact that Section 34 proceedings have been initiated only after 23rd October, 2015, yet, the old law would continue to apply resulting in delay of disposal of arbitration proceedings by increased interference of Courts, which ultimately defeats the object of the 1996 Act. It would be important to remember that the 246th Law Commission Report has itself bifurcated proceedings into two parts, so that the Amendment Act can apply to Court proceedings commenced on or after 23rd October, 2015. It is this basic scheme which is adhered to by Section 26 of the Amendment Act, which ought not to be displaced as the very object of the enactment of the Amendment Act would otherwise be defeated".

During the hearing of the challenge against Section 87, Justice Nariman had told the Solicitor General that the provision had "put the clock back".

"World over this 2019 act is being criticized. We are all different branches of state. We all stand for national interest. India cannot become hub of arbitration if you go like this",  Justice Nariman had orally remarked.

While speaking at a public seminar, Justice Nariman had aired his views against the changes brought by 2019 amendment.

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