Striking Down The Provision Of Automatic Stay: Did SC Really End An Era?

Author: Advocate Chirag Bhatia
Associate at Advani & Co.

The provision of the automatic stay on arbitration awards has been a rather very vexed issue in the past. Due to the certain pros and cons it carried, it had been a target of a lot of debates in the country. It has been remarked as a disease by many experts and the courts of this country. A disease which would grant an automatic stay on the enforcement of an award, once an application challenging the same has been filed in a court of competent jurisdiction under Section 34 of the Arbitration & Conciliation Act, 1996 (hereinafter referred to as “the 1996 Act”). However the same resulted in the delay of justice as it amounted to the award debtor obtaining a stay on the award free of cost and also without any separate application and a chance for the award creditor of being heard for opposing arguments. This piece discusses the effects of Arbitration & Conciliation (Amendment) Act, 2015 (hereinafter referred to as “the 2015 Amendment/Act”) and Arbitration & Conciliation (Amendment) Act, 2019 Arbitration (hereinafter referred to as “the 2019 Amendment/Act”) and also the most relevant judicial pronouncements on the issue.

THE PRACTICE OF AUTOMATIC STAY

As per the wordings of Section 36 of the Arbitration and Conciliation Act, 1996 an arbitral award becomes enforceable as a decree of the court only after the time limit for filing a petition under Section 34 of the Act (i.e. a period of 3 months from the date of receiving the award) has expired or after the Section 34 petition has been dismissed after due consideration by the court. Consequentially, during the pendency of Section 34 petition, an arbitral award becomes unenforceable, leaving no discretion in the court to pass any interim awards. Disposal of Section 34 applications, may easily take a period of 2 years in the Principal Civil Court or a High Court of Original Jurisdiction alone excluding the time required in appeal to High Court under Section 37 of the 1996 Act and ultimately by way of an SLP in the apex court. Pending this disposal and subsequent appeals, if any, the stay of enforcement of the award, by all means, defies the main object and core principle of arbitration i.e. speedy trial and minimum interference of courts in arbitration. This practice of getting a Section 34 application admitted and enjoying the consequent stay of the award, free of cost had its foot holes in arbitration law for years together and was rather illogical and against the idea of India as an arbitration-friendly jurisdiction.

AMENDMENT OF SECTION 36 BY THE 2015 ACT

The Arbitration & Conciliation (Amendment) Act, 2015, brought about an amendment in Section 36 of the 1996 Act whereby it intended to cure this disease/defect of the automatic stay on arbitral awards. The amended section 36 made it absolutely clear that:

  • No automatic stay would be in operation merely on challenging an arbitral award under Section 34 of the 1996 Act;
  • A separate application seeking a stay on the operation/enforcement of the award, with cogent reasons would have to file;

The most important consequence of this was that the application seeking a stay of the enforcement of the award would be granted by the court only on ordering the party opposing execution, to deposit/furnish appropriate security for the performance of such a decree as per the provisions of Order XLI Rule 5 of the Civil Procedure Code, 1908 (hereinafter referred to as “CPC”) in case the said party fails in successfully opposing the execution. In fact, Order XLI Rule 5 (5) also states that in case the award debtor fails to furnish the ordered security, the court would not make an order for stay of the execution. This step was welcomed with open arms as it was a much-desired step for curbing the enjoyment of award debtors of having a free of cost stay on the enforcement of the award.

POWER TO ORDER STAY OF AN AWARD IS DISCRETIONARY

The Supreme Court of India on a consideration of Order XLI Rules 1(3) and 5(5) of CPC, in Sihor Nagar Palika Bureau v. Bhabhlubhai Virabhai & Co.[1] inter alia held that the discretion lays with the appellate court to direct either deposit of the amount disputed in the appeal or to permit such security in respect thereof being furnished as the appellate court might think fit. It was further clarified that the discretion was to be exercised judicially and not arbitrarily, depending on the facts and circumstances of a given case. The said judgment also laid down that ordinarily, execution of a money decree was not stayed inasmuch as the satisfaction of money decree does not amount to irreparable injury and in the event of the appeal being allowed, and the remedy of restitution was always available to the successful party. However, the Court categorically noted that still the power is there, of course, a discretionary power, and is meant to be exercised in appropriate cases.

However, the 2015 Amendment Act created another problem. It was unclear in what circumstances the Arbitration Act as amended by the 2015 Amendment Act would apply. Particularly it was unclear if the amended provisions applied to court proceedings that arose from arbitrations which had commenced prior to the commencement date of the 2015 Amendment Act i.e. October 23, 2015 (“Commencement Date”). Further, it was also uncertain if the automatic stay on enforcement of awards would continue where proceedings under Section 34 were pending at the Commencement Date

SUPREME COURT – BCCI VS. KOCHI CRICKET PVT. LTD.

The Hon’ble Supreme Court of India in its judgment of Board of Control for Cricket in India vs. Kochi Cricket Pvt. Ltd. and Ors.[2] put to rest, the above-mentioned controversy of retrospective or prospective applicability of the 2015 amendment. It held that the award holders could finally get the benefit of money deposits or security furnished by award debtors once the award was challenged under Section 34, albeit after furnishing bank guarantees to the court. The court held that Section 26 of the 2015 Amendment Act provides that unless the parties agreed otherwise, the amendments would be prospective i.e. it would apply to court proceedings which commenced on or after the Commencement Date irrespective of whether the connected arbitration had commenced prior to Commencement Date. Crucially, the court also held that there would be no automatic stay operating on the award even when the challenge application in court had been filed prior to the Commencement Date.

INTRODUCTION OF SECTION 89 BY 2019 AMENDMENT

Interestingly, when the arguments in the said case were ongoing, the parliament passed Arbitration & Conciliation (Amendment) Bill, 2018 (“Bill”). Clause 87 of the Bill provided that the 2015 Amendment Act shall apply only where the arbitration had commenced prior to the Commencement Date. With Clause 87 the automatic stay on enforcement of award upon a challenge being filed would apply for all awards arising out of arbitration that commenced prior to October 23, 2015. Upon the Bill being brought to the notice of the Supreme Court, the Supreme Court in the BCCI Judgment advised the government to not enact Clause 87.

However, in 2019, the government enacted the above-said bill and by Section 13 of the Arbitration and Conciliation (Amendment) Act, 2019, Parliament inserted Section 87 of the Act which read as:

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 2019 Act also repealed Section 26 of the 2015 amendment Act. In a nutshell, Section 87 as introduced by the Arbitration and Conciliation (Amendment) Act, 2019 states that amendments made to the 1996 Act by the Arbitration and Conciliation (Amendment) Act, 2015 will not apply to 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. It also states that the aforesaid amendments will apply only 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.

When contrasted with Section 26, Section 87 is in two parts i.e. 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; and
  • positively applying 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.

SUPREME COURT STRIKES DOWN SECTION 87 AS UNCONSTITUTIONAL

The Hon’ble Supreme Court of India in the recent case of Hindustan Construction Company Limited & Anr. v. Union of India[3] struck down Section 87 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) as unconstitutional. This judgment marks yet another turning point in the arbitration law in India as the court held that, Section 87 of the Act (2019 Amendment) reverses the beneficial effects of the 2015 Amendment Act which remedied the original mischief contained in the Arbitration Act, 1996, thus stroked it down on following grounds:

  • Section 87 of the act is in contravention of Article 36 (2) of UNCITRAL Model Law- Article 36 (2) of UNCITRAL Modal Law is a provision under which applications for setting aside or suspension of an award, in which the other party may provide appropriate security, can be filed, any award passed by the arbitral tribunal does not automatically become unenforceable on the filing of a petition against it.
  • Principle of “automatic stay” is in contravention of the very objects of the Arbitration Act, 1996 such as -minimum judicial intervention, speedy determination and recovery of amounts contained in arbitral awards
  • Section 87 of the Act make Section 35 of the Act, superfluous, which makes an arbitral award final and binding on the parties and persons claiming under them respectively.
  • Violation of Article 14: the present judgment the award-holder may become insolvent by defaulting on its payment to its suppliers when such payments would be forthcoming from arbitral awards in cases where there is no stay, or even in cases where conditional stays are granted. Also, 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.
  • 2019 Amendment act has inserted Section 87 without removing the basis of the judgment of the Supreme Court in BCCI (Supra) as the Supreme Court, specifically opined that the provision would be contrary to the object of the 2015 Amendment Act, Section 87 was enacted.

 

FACTS:

The petitioners, in this case, challenged the constitutional validity of the newly inserted Section 87 of the Arbitration Act. The petitioners in the case were construction engineering companies. These companies were undertaking projects for government bodies and would typically have large claims on account of cost overruns, delays etc. They were facing a situation where large amounts of money were locked because of the automatic stay on awards which were passed in their favour. On the other hand, such companies were facing a threat of insolvency proceedings for not having paid off the operational creditors. With the BCCI Judgment, it was clear that there would not be an automatic stay on awards. However, due to the reversal of position by the 2019 Amendment Act, the petitioners challenged the constitutionality of Section 87.

HELD:

Automatic Stay was never inherent in Section 36:

The Court, at the outset, held that even prior to the 2015 Amendment Act the concept of automatic stay could not be inferred from Section 36 of the Arbitration Act. The Court referred to its judgment of National Aluminium Company Ltd. v. Presstel & Fabrications (P) Ltd. (hereinafter referred to as “NALCO Judgement”) & Anr[4] & Fiza Developers and Inter-trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd[5] (hereinafter referred to as “FIZA Developers Judgement”) and held that both of them have incorrectly interpreted Section 36. In both NALCO Judgment and FIZA Developers Judgment, the Court had held that an award shall be enforced as if it was a decree of the court, but only on the expiry of the time for making an application to set aside the award under Section 34, or when such application having been made, has been refused. The Court, in NALCO Judgment, also held that the language 36, leaves no discretion with courts to pass any interlocutory order in regard to the awards, once an application for setting aside has been made.

However, the Court in the present case held that both the NALCO Judgment and Fiza Developers Judgment are incorrect as they fail to consider Section 9 and Section 35 of the Arbitration Act. It observed that Section 9 also gives the courts the liberty to pass any interlocutory even after passing of the award prior to its enforcement. It also held that Section 36 has to be read with Section 35, which provides that arbitral award shall be final and binding on parties and persons claiming under them. Reading Section 36 in a manner that leads to an automatic stay on award upon an application under Section 34 being filed, would amount to reading something into Section 36, which is incorrect. Thus, there is no implied concept of automatic stay merely because an application under Section 34 (challenge to award) is filed. It further observed that 2015 Amendment Act is clarificatory in nature and merely states that the unamended Section 36 does not stand in the way of law to grant a stay of a money decree under the provisions of the Civil Procedure Code.

Constitutional Challenge to the 2019 Amendment Act:

The petitioners challenged the constitutional validity Section 87 in the Arbitration Act and removal of Section 26 from the 2015 Amendment Act as being violative of Article 14, 19(1) (g), 21 and 300-A of the Constitution of India.

The apex court observed that the B N Srikrishna Committee in its Report dated July 30, 2017 (hereinafter referred to as the “Srikrishna Report”) recommended the introduction of Section 87 because there were various conflicting views from different High Courts as to the applicability of 2015 Amendment Act. However, the Court in its BCCI Judgment had warned about the fatal consequences of the introduction of Section 87 into the Arbitration Act and held as follows:

“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. This is for the reason that a key finding of the BCCI judgment (supra) is that the introduction of Section 87 would result in a delay of disposal of arbitration proceedings, and an increase in the interference of courts in 59 arbitration matters, which defeats the very object of the Arbitration Act, 1996, which was strengthened by the 2015 Amendment Act”.

Accordingly, the court struck down Section 87 of the Arbitration Act as violative of Article 14 of the Constitution of India.

However, one confusion still prevails due to paragraph 54 of the HCC judgment which is reproduced herein below:

“54. 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.”

There is a lot of debate around this paragraph and a few other observations in the judgment that whether this judgment:

  • Has the effect of making the entire 2015 Amendment including the amended Section 34 & 36 applicable prospectively i.e. to all court proceedings initiated after 23.10.2015 irrespective of whether the arbitration proceedings that they culminate out of, had been initiated before or after 23.10.2015;

Or

  • Has the effect of making the 2015 Amendment (excluding the amended Section 34 & 36) applicable prospectively i.e. to all court proceedings initiated after 23.10.2015 irrespective of whether the arbitration proceedings that they culminate out of, had been initiated before or after 23.10.2015; but with the exception that the amended Section 34 & 36 will be applicable retrospectively i.e. applicable even to the court proceedings filed before 23.10.2015 and whether or not they are pending on the said amendment date or the date of the judgment (as held in BCCI judgment);

CONCLUSION

Thus, it can be clearly seen that the 2019 Amendment has been debated on a lot of points and insertion of 87 without considering the judgment of the apex court in BCCI case being one of the main issues that plague the 2019 Amendment Act. However, there still lies some confusion as depicted above in the latest judgment of the Supreme Court on this issue i.e. HCC Ltd. vs. UOI (Supra) which strikes down section 87. The confusion on whether the 2015 Amendment will or will not be applicable to court proceedings that have commenced after 23.10.2015 but the arbitration proceedings out which they culminate, were initiated before 23.10.2015 still haunts the arbitration regime till date resulting in a step back for depicting India as an arbitration-friendly jurisdiction.

[1] (2005) 4 SCC 1

[2] (2018) 6 SCC 287 – Decided on 15.03.2018

[3]  AIR 2020 SC 122

[4] (2004) 1 SCC 540

[5] (2009) 17 SCC 796