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[This is a Guest Post by Dhruva Gandhi and Sahil Raveen.]


Last year in Hindustan Construction Company Limited v Union of India (“Hindustan Construction”), the Supreme Court of India delivered a widely welcomed decision in so far as arbitral proceedings in India were concerned. Once an award is passed by an arbitral tribunal under the Arbitration and Conciliation Act, 1996 (“Act”), it can be challenged by any aggrieved party under Section 34 of the Act before a principal civil court having jurisdiction vis-à-vis the seat of arbitral proceedings. The award is executed as per Section 36 of the Act as if it were a decree of a court. For nearly two decades, there has been confusion prevailing with respect to whether the mere filing of an application under Section 34 amounts to an automatic stay of the execution proceedings.

In Hindustan Construction, the Supreme Court clarified this proposition. It said that there mere filing of a Section 34 application does not lead to a stay on execution. However, in the process, it struck down two statutory provisions using the doctrine of ‘manifest arbitrariness’. In this post, we critique the application of this doctrine. Last year, commenting on the IBC decision in Committee of Creditors in Essar v Satish Kumar Gupta, we had remarked how ‘manifest arbitrariness’ is a powerful tool and could lead the Judiciary into unchartered territory. In this post, we show how in Hindustan Construction, the Court has effectively substituted the Legislature’s preferences with its own under the garb of this doctrine.

Section 36 and the conundrum of automatic stay on enforcement of arbitral awards

Section 36 of the Act, prior to the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”) said,

36. Enforcement-Where the time for making an application to set aside the arbitral 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 (5 of 1908) in the same manner as if it were decree of the Court.

The Supreme Court in National Aluminum Company Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd. and Anr (“NALCO”) interpreted Section 36 to mean that the moment an application challenging an arbitral award is filed under Section 34 of the Act, there will be an automatic stay on the execution of the award. In Fiza Developers and Inter-trade Private Limited v. AMCI (India) Private Limited and Anr, (“Fiza Developers”), the Supreme Court reiterated this position. This position was undesirable for an award holder because an award debtor simply had to lodge an application to evade payment/compliance under the award. With the pendency in Indian legal system, it meant that an award debtor could hold up execution for at least a few years.

Subsequently, by the 2015 Amendment, the Legislature amended Section 36 of the Act to read,

36. (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, 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.

Therefore, the 2015 Amendment clarified in no uncertain terms that the mere filing of a Section 34 application would not lead to an automatic stay on execution.

What is crucial for our purposes though, is Section 26 of the 2015 Amendment. Section 26 said,

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 unless the parties otherwise agree but this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act.

While Section 36 was amended to usher in much needed clarity, Section 26 of the 2015 Amendment led to a confusion of its own. It was unclear whether or not Section 26 implied that the amended Section 36 would also apply to pending court proceedings that had arisen out of arbitrations initiated before 23.10.2015 (the date of enactment of the 2015 Amendment).

Different High Courts offered conflicting opinions. Finally, the Supreme Court in Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. (“BCCI”) said that the amendments to Section 36 would apply to pending court proceedings, even if they arose out of arbitrations initiated before 23.10.2015. It said that Section 36 was procedural in nature and therefore, amendments made to it could be applied retrospectively. However, the rest of the 2015 Amendment would apply prospectively.

Notably, in our opinion, (even so far as Section 36 of the Act was concerned) Section 26 could equally fairly have been interpreted to apply only to arbitrations commenced after 23.10.2015 and court proceedings arising thereof. The text of the statute allowed for a literal interpretation of that nature.

Thereafter, the Legislature enacted the Arbitration and Conciliation (Amendment) Act, 2019 (“2019 Arbitration”) and further introduced Section 87 in the Act. Section 87 replaced Section 26 of the 2015 Amendment, which was also deleted. Section 87 said,

87. 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.

Evidently then, the Legislature differed with the view espoused in BCCI and sought to take away the basis for that decision.

Constitutional Challenge to Section 87 of the 2019 Amendment

In Hindustan Construction, the constitutionality of Section 87 was challenged. The Supreme Court in an opinion delivered by Nariman J. upheld the constitutionality of the section in so far as it took away the basis for a previous Apex Court decision. However, it struck down the provision for being manifestly arbitrary and thus, in breach of Article 14 of the Constitution of India.

What piques our interest in this post are the reasons offered by Nariman J. to hold Section 87 to be manifestly arbitrary. They were,

  • The 2019 Amendment was based on a Report by the Srikrishna Committee. This Committee had said that there were conflicting High Court decisions on Section 26 of the 2015 Amendment and there was a need to clarify the position. However, this Report was delivered in 2017 whereas the BCCI judgement was delivered in 2018. Therefore, according to Nariman J., the Legislature ought not to have relied on this Report once the Supreme Court had decided the issue.
  • The Report opined that to make provisions of the 2015 Amendment applicable retrospectively may create confusion and uncertainty in that parties may have to be heard afresh. According to Nariman J. there was little substance to this observation as fresh applications for lifting of stay could be decided forthwith.
  • The benefits of Order XLI, Rule 5 of the Civil Procedure Code were available in case of an appeal from a decree but not in case of a challenge to an arbitral award under Section 34 of the Act. Order XLI, Rule 5 says that there shall be no automatic stay on proceedings under a decree merely on filing of an appeal. Section 34 of the Act though, is not an appeal.
  • Section 87 does not consider implications under the Insolvency and Bankruptcy Code, 2016. Award holders unable to recover operational debts under an award may themselves have to bear the brunt of an insolvency application from creditors downstream. Therefore, an automatic stay on the execution of an arbitral award would create unwarranted economic hardship.

In our opinion, none of these reasons hold much merit and we shall deal with them in seriatim.

While the Statement of Objects and Reasons of the Arbitration and Conciliation (Amendment) Bill, 2019 does refer to the Srikrishna Committee Report, it primarily does so in the context of institutional arbitration. On Section 87, it simply says that the Legislature intends to clarify the manner in which Section 26 of the 2015 Amendment would apply. Moreover, the tools of statutory interpretation lead us to imply that the Legislature would be presumed to be aware of the BCCI judgement and simply wished to remove a prop of that decision.

Moving on, the observation of the Srikrishna Committee too was not entirely baseless. In some cases where the Section 34 application was at an advanced stage, the court would now have to consider whether or not to issue a stay on the award under Section 36. However, the decision which a court would actually make is whether or not to lift the stay already in place. Considerations that play on a judge’s mind when lifting a stay are quite different from the ones for the issuance of a stay. Even the mere pendency of a Section 34 application would be a consideration. Therefore, there was both a rational and a plausible basis for the Committee to say that retrospective operation of Section 36 of the Act could potentially lead to inconsistent outcomes.

With respect to the point that no automatic stay operates in case of civil decrees, the Legislature was entitled to create different regimes for arbitral awards as opposed to a decree of a court and then to change the regime with the 2015 Amendment. If at all, one could consider whether this met the twin tests of ‘intelligible differentia’ and ‘rational nexus’ under Article 14. These tests though find no mention in the Supreme Court’s deliberation.

Lastly, the implications under insolvency law that Nariman J. mentions are not unique. It is commonplace to see companies and individuals be rendered insolvent owing to forward payments not having been cleared. Courts expect debtors to factor such recoveries into their transactions. While this is also a point to be dealt with by insolvency law, there is no reasoning offered to show how a one-off economic hardship may lead to a violation of the ‘Right to Equality’ under Article 14 of the Constitution.

Therefore, in our opinion, none of the reasons offered to say that Section 87 is manifestly arbitrary really pass the muster.

The real reason to employ ‘Manifest Arbitrariness’

More than the reasons, what is noteworthy is the language employed by the Court. In our opinion, it is the language which seems to be indicative of the unspoken premise of the decision.

To refer to the Srikrishna Committee Report (without at all referring to this Court’s judgement) even after the judgement 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 arbitration, 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 anomaly, therefore, of Order XLI Rule 5 of the CPC applying in the case of full-blown appeals, and not being applicable by reason of Section 36 of the Arbitration Act, 1996…., is itself a circumstance which militates against the enactment of Section 87, placing the amendments made in the 2015 Amendment Act, in particular Section 36, on a backburner. For this reason also, Section 87 must be struck down as manifestly arbitrary under Article 14….

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.” (emphasis supplied)

 

There is a distinct preference that comes to the fore in the language employed by the Court. The objects of the 2015 Amendment are worthy, those of the 2019 Amendment are not. The former must be prioritised and preferred over the latter. The 2019 Amendment to the extent that it militates against the 2015 Amendment must be reversed.

However, this cannot be the basis to strike down a provision of law as unconstitutional. A provision cannot be held unconstitutional only because it purportedly reversed the clock on an earlier amendment. During the evolution of the doctrine of ‘manifest arbitrariness’ one of the objections put forth before the Supreme Court was that it would simply result in a replacement of policy choices of the Legislature with those of the Judiciary. The decision in Hindustan Constructions is a prime example of these fears coming to life. With time, what may happen is that the outcome of a case may even boil down to the court in question. Some judges may agree with the policy preferences of the Legislatures, others may not. The doctrine of ‘manifest arbitrariness’ thus carries a lurking danger of being arbitrary. .

Conclusion

Like in Essar, in Hindustan Construction too, in our opinion, Nariman J. could have arrived at the same conclusion through alternate means.

In Hindustan Construction, Nariman J. held both NALCO and Fiza Developers to be per incuriam. It is now a settled position [(1988 2 SCC 602, Paras 40, 183] that once a decision has been held to be per incuriam, it loses precedent value. As a consequence, the interpretation proposed by NALCO and Fiza Developers was never the law. Therefore, Nariman J. could have stated that there has never been an automatic stay of execution proceedings on the filing of a Section 34 application in India. This has always been the law and there has been no change in the interpretation of Section 36. After that, the 2015 Amendment in so far as Section 36 was concerned would have become merely declaratory e- clarifying the position of law by means of abundant caution. Extending that logic, Section 87 would not have to be applied to Section 36 at all because there would be no question of its retrospective operation. Section 87 only clarified when and how the other amendments introduced by the 2015 Amendment ought to apply.

It is our opinion that laws must not be struck down as unconstitutional unhesitatingly, especially when there are alternatives available. Although slightly unconventional, Nariman J. could have explored this route of interpretation to arrive at the same conclusion and thereby, minimised the use of ‘manifest arbitrariness’, the increased usage of which is matter grave concern.