Arbitration Act: Progressive Response to Regressive Amendment

Bar & Bench December 2 2019

Lalltaksh Joshi 

A mention of 23.10.2015 each time rings a bell in every lawyer practicing arbitration laws in India. Since the date of coming into force, the applicability of the Arbitration (Amendment) Act, 2015 (2015 Amendment) has not only been a burning issue in the legal fraternity, bar and bench alike but also raised brows in the Parliament, Indian Conglomerates and the Public Sector Undertakings. 

The 2015 Amendment had removed the stench of the Arbitration and Conciliation Act, 1996 (Act) of an automatic stay on the enforcement of an arbitral award upon its challenge. The 2015 Amendment stipulated that there has to be an express order of the Court granting stay on the operation of the arbitral award, subject to such conditions as it may deem fit, for reasons to be recorded in writing. The 2015 Amendment Act was brought in, inter alia, to improve India’s rank on the index of contractual enforcement and to attract foreign investment by projecting India as an investor-friendly country having a sound legal framework. As a matter of fact, no one has ever found a fault with this aspect of the 2015 Amendment. 

It took a New York minute for creating a public discourse on the applicability of the changes brought in by the 2015 Amendment leading to conflicting judgments by the High Courts of various states. The underlined issue was whether the 2015 Amendment would apply retrospectively or prospectively, and, whether it would apply differently to arbitrations and the court proceedings arising therefrom. 

Soon, the Government realized the mischief and brought in section 26 to the 2015 Amendment Act as clarification. However, the issue of applicability wasn’t put to bed. On 15.03.2018, in the judgment of ‘BCCI Vs Kochi Cricket Pvt. Ltd.’, the Supreme Court settled that the 2015 Amendment applies to those arbitral proceedings as well as court proceedings that have commenced on or after 23.10.2015. It would apply to earlier arbitrations only if the parties agree. Imperatively, the Supreme Court cautioned the Government that section 87, which was in the pipeline then, would be contrary not only to the Objects and Reasons of the 2015 Amendment Act and the suggestions of the 246th Law Commission Report but also the Objects and Reasons of the Act itself. The principle of automatic stay being a filius nullius of the Act is evident from the 2003 Supreme Court judgment in ‘NALCO Vs Pressteel & Fabrications Pvt. Ltd.’ wherein, while upholding the principle of the automatic stay, the Court had observed that it “defeats the very objective of the alternate dispute resolution system to which arbitration belongs.” 

Yet, section 87 was introduced in the Act by way of the Arbitration (Amendment) Act, 2019 (2019 Amendment). The section’s heading reads as “Effect of arbitral and related court proceedings commenced prior to 23rd October 2015”. It led to the resurrection of the old regime of the automatic stay to all those arbitral proceedings which were commenced before 23.10.2015. The date of the commencement of court proceedings was rendered irrelevant.

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For instance, if arbitral proceedings had commenced in 2012 then the pre-2015 Amendment regime would apply even to those court proceedings, arising out of it, which were commenced after 23.10.2015. Thus, the stench, that the 2015 Amendment had removed, was back. 

On 27.11.2019, in the judgment of ‘Hindustan Construction Company Limited Vs Union of India and others’, a three judges bench of the Supreme Court struck down section 87 of the Act holding it to be “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.”

Supreme Court strikes down insertion of Section 87 to Arbitration Act by 2019 Amendment as Manifestly Arbitrary

Interestingly, the Supreme Court has gone a step further and held that even the pre-2015 Amendment regime did not provide for an automatic stay. Therefore, to that extent, the judgments passed by the Supreme Court in Pressteel case (supra) and ‘Fiza Developers and Inter-Trade Pvt. Ltd. Vs AMCI (India) Pvt. Ltd.’ stands overruled. 

Resultantly, not only section 87 of the Act has been struck down, but the pre-2015 Amendment understanding of automatic stay on the enforcement of arbitral awards has also been overruled. 

It is astonishing to note from the Hindustan Construction Company judgment (supra) that a whopping Rs.3,158 crore has been deposited in court at the interim stage by the Public Sector Undertakings, namely NHPC, NHAI, IRCON, and NTPC, in court proceedings arising out of arbitrations qua only one company, i.e. Hindustan Construction Company. Earlier this month, reportedly, the Prime Minister asked the secretaries of various ministries to address the alarming issue of rising arbitration claims against Public Sector Undertakings handling infrastructure projects in a time-bound manner. It was also reported in the same news that NHAI has maximum arbitration claims of nearly Rs.71,000 crore. 

In arbitration cases, a commercial and progressive judicial outlook is evident from the recent authoritative precedents, such as the Hindustan Construction Company case (supra), ‘Ssangyong Engineering & Construction Co. Ltd. Vs NHAI’,Mayavti Trading Pvt. Ltd. Vs Pradyuat Deb Burman’, to cite only a few. The scope of a court’s interference with the arbitral award is least and an approach to extend the fruits of an arbitral award to the award holder is the foremost. The stance of the Government is no different. NITI Aayog circular provides payment of 75% of the principal amount granted in arbitral awards in infrastructural projects, as an interim measure. Thus, no party, public and private alike, can afford to take the relevance of strategizing the course of arbitral proceedings easy, which are nothing short of a full-blown trial.

The author is practicing law before the courts in Delhi.