Supreme Court Strikes Down Section 87 of the Arbitration Act: Hindustan Construction Company vs. Union of India (2019)

Date of the Judgment: 27 November 2019

Citation: (2019) INSC 1050

Judges: R.F. Nariman, J., Surya Kant, J., V. Ramasubramanian, J.

Can a law undo the effect of a Supreme Court judgment without directly addressing its core reasoning? The Supreme Court of India recently tackled this question while examining the validity of Section 87 of the Arbitration and Conciliation Act, 1996. This section, introduced by the 2019 Amendment Act, sought to reinstate the automatic stay on arbitral awards, a provision previously removed by the 2015 Amendment Act. The court also considered challenges to the Insolvency and Bankruptcy Code, 2016, regarding its application to government bodies.

The core issue was whether the 2019 amendments, which effectively reversed the 2015 amendments, were constitutional. The petitioners argued that these changes violated their fundamental rights and undermined the objectives of the Arbitration Act. The Supreme Court, in a unanimous decision, struck down Section 87, holding it to be manifestly arbitrary and in violation of Article 14 of the Constitution of India. The court further clarified that the automatic stay of arbitral awards was not the intention of the Arbitration Act, 1996.

Case Background

Hindustan Construction Company Limited (HCC), an infrastructure construction company, often undertakes projects for government bodies like the National Highways Authority of India (NHAI), NHPC Ltd., NTPC Ltd., IRCON International Ltd., and the Public Works Department (PWD). Disputes over project costs frequently arise, leading to delays in payments to HCC. These dues are typically recovered through civil proceedings or arbitration.

Arbitration awards in favor of HCC are often challenged under Sections 34 and 37 of the Arbitration Act, 1996. The major issue for HCC was the ‘automatic-stay’ of awards upon filing a challenge under Section 34, which could take more than six years to resolve. This situation was further complicated by the fact that government bodies, unlike government companies, are exempt from the Insolvency and Bankruptcy Code, 2016. Even if these bodies could be considered operational debtors, a challenge to an award would render the debt ‘disputed’, preventing HCC from initiating insolvency proceedings. Meanwhile, HCC faced pressure from its own operational creditors for payments.

Timeline:

Course of Proceedings

The judgment does not explicitly detail proceedings in lower courts. However, it mentions that arbitration awards in favor of HCC were invariably challenged under Sections 34 and 37 of the Arbitration Act, 1996. These challenges, coupled with the automatic stay of awards, led to significant delays in the recovery of dues. There was no mention of any referral to larger benches.

Legal Framework

The case revolves around the interpretation and constitutional validity of several key legal provisions:

• Section 36 of the Arbitration and Conciliation Act, 1996: This section deals with the enforcement of arbitral awards. Before the 2015 Amendment, it was interpreted by courts to mean that the filing of a challenge to an award automatically stayed its execution. The 2015 Amendment Act changed this, requiring a separate application for a stay. The original Section 36 stated:
  
  “36. Enforcement .—Where the time for making a n 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 a decree of the Court.”
• Section 87 of the Arbitration and Conciliation Act, 1996: Introduced by the 2019 Amendment Act, this section aimed to reinstate the automatic stay of arbitral awards by stating that the 2015 amendments would not apply to arbitral proceedings commenced before the 2015 Amendment Act, and to court proceedings arising out of such arbitral proceedings.
• Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015: This transitional provision stated that the 2015 amendments would not apply to arbitral proceedings commenced before the 2015 Amendment Act, unless the parties agreed otherwise. This was repealed by the 2019 Amendment Act. The provision stated:
  
  “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.”
• Section 3(7) of the Insolvency and Bankruptcy Code, 2016: Defines “corporate person” as a company, a limited liability partnership, or any other person incorporated with limited liability. Government bodies are excluded.
• Section 3(23)(g) of the Insolvency and Bankruptcy Code, 2016: Defines “person” to include any other entity established under a statute.
• Article 14 of the Constitution of India: Guarantees equality before the law and equal protection of the laws.
• Article 19(1)(g) of the Constitution of India: Guarantees the right to practice any profession, or to carry on any occupation, trade or business.
• Article 21 of the Constitution of India: Guarantees the protection of life and personal liberty.
• Article 300-A of the Constitution of India: States that no person shall be deprived of his property save by authority of law.

The Supreme Court examined how these provisions interacted and whether they upheld the constitutional principles of equality and fairness.

Arguments

Petitioner’s Arguments (Hindustan Construction Company):

• Automatic Stay is Unjust: The automatic stay of arbitral awards upon a Section 34 challenge, as interpreted by previous court judgments, defeats the purpose of arbitration, which is to provide a speedy and efficient resolution of disputes. The judgments of this Court which have so held would require a revisit by this larger bench.

• Violation of UNCITRAL Model Law: Section 36 of the Arbitration Act, 1996, as originally interpreted, contradicts Article 36(2) of the UNCITRAL Model Law, which allows for the provision of security instead of an automatic stay.

• Section 87 is Arbitrary: Section 87 of the Arbitration Act, 1996, violates Articles 14, 19(1)(g), 21, and 300-A of the Constitution. It reverses the beneficial effects of the 2015 Amendment Act, which remedied the original mischief of automatic stays.

• Retrospective Effect: The retrospective application of Section 87 allows award debtors to claim back sums already paid to award holders, leading to arbitrary consequences.

• Insolvency Code Discrepancy: The Insolvency Code allows operational creditors to initiate proceedings against HCC for relatively small amounts while HCC cannot recover large sums due to the automatic stay of arbitral awards. The Insolvency Code does not provide a level playing field, as statutory authorities can initiate the resolution process against persons like HCC, but not vice-versa.

• NITI Aayog Scheme: The additional 10% per annum bank guarantee required under the NITI Aayog scheme is an arbitrary exercise of power.

• Section 87 attacks the judgment in BCCI v. Kochi Cricket Pvt. Ltd.: Section 87 is nothing but a re-hash of Section 26 and this being so, is therefore a direct attack on the judgment of this Court in BCCI (supra), without removing its basis.

Union of India’s Arguments:

• Clarificatory Amendment: The 2019 Amendment Act, including Section 87, clarifies the original intent of Parliament regarding the applicability of the 2015 amendments. The interpretation of Section 26 of the 2015 Amendment Act in BCCI’s case (supra) is only declaratory in nature.

• Parliamentary Domain: Fixing cut-off dates is within the exclusive domain of Parliament, and courts should not interfere unless blatantly arbitrary.

• Insolvency Code is Not for Recovery: The Insolvency Code is not a debt recovery statute but a mechanism for the reorganization of corporate persons and resolution of stressed assets. The Insolvency Code is not a statute for recovery of debts, but is a statute for reorganisation of corporate persons and resolution of stressed assets of corporate persons.

• NHAI is a Statutory Body: NHAI is a statutory body performing sovereign functions and cannot be subjected to the Insolvency Code.

• Misleading Claims: The petitioner has misrepresented facts regarding the amounts due from government entities. The petitioner has misleaded this Court by stating that a sum of INR 6070 crores is liable to be paid by the Government entities mentioned therein, as such sums amount to awards that have not been stayed by any Court.

• No Inroads into 2015 Amendment Act: No inroads have been made into the objects sought to be achieved by the 2015 Amendment Act by merely following a particular cut-off date.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. Whether Section 87 of the Arbitration and Conciliation Act, 1996, as introduced by the 2019 Amendment Act, is constitutionally valid?
2. Whether the repeal of Section 26 of the 2015 Amendment Act by Section 15 of the 2019 Amendment Act is constitutionally valid?
3. Whether the provisions of the Insolvency and Bankruptcy Code, 2016, result in discriminatory treatment and are therefore unconstitutional?

The Court also dealt with the issue of whether the additional 10% bank guarantee under the NITI Aayog scheme is arbitrary, although not specifically framed as an issue.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Court’s reasoning for resolving the issue was based on the following:

• UNCITRAL Model Law: The Court noted that Section 36 of the Arbitration Act, 1996, as originally interpreted, contradicted Article 36(2) of the UNCITRAL Model Law which allows for the provision of security instead of an automatic stay.
• 246th Law Commission Report: The Court referred to the report’s recommendations for removing the automatic stay of arbitral awards.
• Srikrishna Committee Report: The Court noted that the report’s recommendations were made prior to the BCCI judgment and that the report did not take into consideration the Insolvency Code.
• NALCO [CITATION]: The Court held that the reasoning of the judgment was per incuriam and did not state the law correctly.
• National Buildings Construction Corporation Ltd. [CITATION]: The Court held that this judgment, in following NALCO, also did not state the law correctly.
• Fiza Developers [CITATION]: The Court held that the reasoning of the judgment was per incuriam and did not state the law correctly.
• Leela Hotels [CITATION]: The Court relied on this judgment to clarify that an arbitral award has to be enforced under the Code of Civil Procedure in the same manner as it were a decree of the court.
• Dirk India Pvt. Ltd. [CITATION]: The Court relied on this judgmentto clarify the intent of Section 9 of the Arbitration Act.
• Chloro Controls [CITATION]: The Court referred to this judgment to highlight that the legislative intent of the 1996 Act was to bring domestic and international arbitration in consonance with the UNCITRAL Model Rules.
• BCCI [CITATION]: The Court held that the 2019 Amendment Act removed the basis of this judgment by omitting Section 26.
• Mobilox Innovations [CITATION]: The Court referred to this judgment to clarify the definition of “dispute” under the Insolvency Code.
• K. Kishan [CITATION]: The Court relied on this judgment to clarify that arbitral awards that are pending adjudication under Section 34 would show that a pre-existing dispute exists.
• Ssangyong Engineering [CITATION]: The Court referred to this judgment to clarify that after the 2015 Amendment Act, the Court cannot interfere with an arbitral award on merits.
• Canara Nidhi Ltd [CITATION]: The Court referred to this judgment to clarify that an application under Section 34 of the Arbitration Act, 1996, is a summary proceeding.
• Associated Construction [CITATION]: The Court referred to this judgment to clarify that a court reviewing an arbitral award under Section 34 does not sit in appeal over the award.
• Pioneer Urban Land [CITATION]: The Court referred to this judgment to clarify that the Insolvency Code is not meant to be a recovery mechanism.
• Swiss Ribbons [CITATION]: The Court referred to this judgment to clarify that the Insolvency Code, belonging to the realm of economic legislation, raises a higher threshold of challenge.
• Shri Prithvi Cotton Mills [CITATION]: The Court referred to this judgment to clarify that a court’s decision must always bind unless the conditions on which it is based are so fundamentally altered.
• State of Tamil Nadu v. Arooran Sugars Ltd. [CITATION]: The Court referred to this judgment to clarify that the legislature is competent to remove the defect pointed out by the court.
• Goa Foundation [CITATION]: The Court referred to this judgment to clarify that the courts will lean in support of the legislative power to remove the basis of a court judgment even retrospectively.
• UOI v. Parameswaran Match Works [CITATION]: The Court referred to this judgment to clarify that the court should not ordinarily interfere with the fixation of cut-off dates.
• Govt. of A.P. v. N. Subbarayudu [CITATION]: The Court referred to this judgment to clarify that the court should not ordinarily interfere with the fixation of cut-off dates.
• Gulabdas & Co. [CITATION]: The Court referred to this judgment to clarify that the Court cannot embark on a detailed investigation of disputed facts under Article 32.
• Surendra Prasad Khugsal [CITATION]: The Court referred to this judgment to clarify that the Court cannot resolve disputed facts under Article 32.
• Sumedha Nagpal [CITATION]: The Court referred to this judgment to clarify that the Court cannot take a decision on disputed facts in a summary proceeding under Article 32.

Final Decision

The Supreme Court, in a unanimous decision, held as follows:

• Section 87 of the Arbitration and Conciliation Act, 1996, is struck down as unconstitutional. The Court found it to be manifestly arbitrary and in violation of Article 14 of the Constitution.
• The repeal of Section 26 of the 2015 Amendment Act is also struck down as unconstitutional. This was considered to be a direct attack on the judgment in BCCI v. Kochi Cricket Pvt. Ltd. without removing its basis.
• The provisions of the Insolvency and Bankruptcy Code, 2016, were held to be valid. The Court clarified that the Insolvency Code is not a debt recovery mechanism, and the exclusion of government bodies from the definition of “corporate person” is valid.

The Court also clarified that the additional 10% bank guarantee under the NITI Aayog scheme is not arbitrary.

The Supreme Court directed that all cases pending under Section 34 of the Arbitration Act, 1996, shall be governed by the 2015 Amendment Act, including the requirement for a separate application for a stay of the arbitral award.

Flowchart

Implications

The Supreme Court’s judgment has significant implications for the arbitration process in India:

• Removal of Automatic Stay: The judgment reaffirms that the automatic stay of arbitral awards is not the intention of the Arbitration Act, 1996. This means that award holders can now seek enforcement of their awards without undue delays.
• Speedier Enforcement of Awards: The removal of the automatic stay will lead to speedier enforcement of arbitral awards, making the arbitration process more effective and efficient.
• Constitutional Validity: The judgment reinforces the constitutional principles of equality and fairness, ensuring that the arbitration process is not undermined by arbitrary legislative changes.
• Clarity on Retrospective Application: The judgment clarifies that retrospective application of laws that undermine the purpose of beneficial legislative amendments is unconstitutional.
• Protection of Award Holders: The judgment protects the interests of award holders, particularly those who have been facing long delays in the recovery of their dues due to the automatic stay of awards.
• Impact on Government Contracts: The judgment has a significant impact on government contracts, as it ensures that government bodies cannot use the automatic stay of awards to delay payments to contractors.
• Discouragement of Arbitrary Amendments: The judgment serves as a deterrent to arbitrary legislative amendments that seek to undo the effect of court judgments without addressing their core reasoning.

The judgment has also brought clarity on the interplay between the Arbitration Act and the Insolvency and Bankruptcy Code, ensuring that the two operate in their respective spheres without undue overlap.