IS THE POSITION ON AUTOMATIC STAY OF AWARDS FINALLY SETTLED: HINDUSTAN CONSTRUCTION COMPANY LTD V UNION OF INDIA

-by Abhishar Vidyarthi

The Hon’ble Supreme Court of India (“Court”) in a landmark decision titled “Hindustan Construction Company Ltd v Union of India” (Hindustan Company) struck down Section 87 of the Arbitration and Conciliation Act 1996, (“1996 Act”) which was inserted through the Arbitration and Conciliation (Amendment) Act, 2019 (“Amendment Act 2019”). Section 87, as inserted by the Amendment Act 2019, restricted the retrospective application of the Arbitration and Conciliation (Amendment) Act, 2015 (“Amendment Act 2015”). The law on ‘Automatic Stay’ of arbitral awards in India has been subject to constant deliberation. This article analyses the resulting uncertainty and the impact of the Hindustan Company case.

Changing Legal Position in India on Automatic Stay of Arbitral Awards

  1. Enactment of 1996 Act

Drawing from UNCITRAL Model Law, the 1996 Act was enacted in India. Section 34 of the 1996 Act provided for the grounds for setting aside of the awards and Section 36 of the 1996 Act provided that the award can be enforced only after the disposal of the application filled under Section 34 thereby allowing for an ‘automatic stay’ of arbitration award once it was challenged.

  1. First amendment in 2015

Amendment Act 2015 was enacted by virtue of which there was an amendment to Section 36 of 1996 Act whereby mere filing of application for setting aside an arbitral award would not render that award unenforceable unless the court grants an order of stay on the operation of the said award on a separate application made for that purpose. The Amendment also added a provision which provided that the stay shall only be conditional on furnishing of security if the award is related to the payment of money. Moreover, Section 26 of the Amendment Act 2015 stipulated that the provisions of the amendment shall not apply on arbitral proceedings which commenced prior to the commencement of the Amendment Act 2015.

  1. Contrasting decisions on the application of Amendment Act 2015

There were contrasting views on the applicability of the amendment and whether it would have retrospective or prospective application. The problem, which was also highlighted in the Srikrishna Committee report, came to be viewed in the following manner. In the case of National Aluminum Company Ltd. v. Pressteel & Fabrications Ltd. and Anr., the Supreme Court interpreted Section 34 of the 1996 Act to allow for an automatic stay of an arbitration award on the filing and pendency of an application for setting aside of an award. Similarly, in 2017, a division bench of the Delhi High Court in Ardee Infrastructure Pvt. Ltd v. Anuradha Bhatia had held that if the petition under Section 34 relates to an award which has been passed prior to the Amendment Act 2015, then an automatic stay would operate on the impugned award, by mere filing of such a Petition, even when such a Petition has been filed post the amendment. However, in 2018, the Supreme Court of India clarified the position in the case of BCCI v Kochi Cricket Private Ltd, (Kochi Cricket), wherein the Court stated that the amended Section 36 would apply retrospectively to Section 34 applications that had been filed prior to the commencement of the Amendment Act. While allowing the retrospective application of the amendment to Section 36, the Court held that there is no substantive vested right in an award debtor to resist execution.

  1. Another Amendment in 2019

The Government of India passed another Arbitration Amendment Act that inserted Section 87 into the 1996 Act. Section 87 of the Amendment Act 2019 sought to divert from the interpretation adopted by the Supreme Court in Kochi Cricket case and resolve the uncertainty by reinforcing the prospective nature of the Amendment Act 2015. Also, the Amendment Act 2019 also removed Section 26 of the Arbitration Act 2015.

  1. Strike down of Section 87 of Amendment Act 2019

On 27th November 2019, the Supreme Court of India in struck down Section 87, as inserted by the Amendment Act, 2019 and reinforced the retrospective application of Section 36 of the 1996 Act. Therefore, as a result of the judgement in Hindustan Company case, the Court has gone back to the stand it adopted in the Kochi Cricket case.

Hindustan Company case : A step forward ?

While holding Section 87 of the 1996 Act as unconstitutional, the Court stated “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”. Moreover, the Court referred to autonomic stay of arbitral awards as a ‘double whammy’ for arbitral award holders as they obtain the award after several years of litigation and are not able to payment to operational creditors as the amount due is not realised as a result of the stay.

The Court in this case has tackled the legal and practical criticisms targeted towards the reasoning of the Court in Kochi Cricket case. Interpreting Section 36, the Court has rejected the very stance, that the pre-amendment Section 36 required an automatic stay of arbitral awards on the receipt of a challenge under Section 34. The Court reading Section 36 of 1996 Act with Section 9 of the 1996 Act and in line with Article 36(2) of the UNCITRAL Model Law stated “to state that an award when challenged under Section 34 becomes in-executable merely by virtue of such challenge being made because of the language of Section 36 is plainly incorrect.” Therefore, as per this interpretation, Section 36 of the 1996 Act, even as originally enacted shall not warrant automatic stay of arbitral awards.

Historically, the ambivalent attitude of Indian Courts alongwith anti-arbitration judgments have been a major impediment for India, in its quest to become a global arbitration hub. Automatic stay of arbitral awards was a mischief that existed in the arbitration jurisprudence in India for over 19 years and was corrected by the Amendment Act 2015. Therefore, the judgement speaks immensely on the Court’s intention to further compliance of parties of an arbitral award in India, even in respect of arbitration initiated prior to the Amendment Act 2015. As highlighted by the Court, Section 87 was regressive in nature and was against the object of the 1996 Act and Amendment Act 2015 i.e. to promote a strong arbitration culture in India. Therefore, in terms of the judicial attitude towards arbitration, as a mode of dispute settlement in India, this judgement is certainly a step forward.

However, as India works towards making itself more arbitration friendly, what is worrisome is the inconsistency between the judiciary and legislation. India is trying to find the right balance and in consequence, the frequent changes in the position of law is leading to confusion and uncertainty. The legislators disregarded the recommendation made by the Court in Kochi Cricket case and enacted Section 87 which was later struck down by the Court. Therefore, as India aims on becoming a global arbitration hub, it is imperative for it to avoid such tiffs, ensure harmony and consistency by taking a collective step forward.

ABOUT THE AUTHOR

Abhishar Vidyarthi, a fifth year law student at Maharashtra National Law University, Mumbai. He presently serves as a remote research assistant at Asian Arbitration and ADR Alliance, Singapore; and takes a keen interest in international commercial and investment arbitration. He can be reached at avividyarthi@gmail.com

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