Bell Bottoms & Automatic Stays – Things of the Past

 Ila Kapoor & Shruti Sabharwal 

The Problem in a Nutshell

India has, in the past decade, certainly moved forward in leaps and bounds to establish itself as an arbitration-friendly jurisdiction. Two major sets of amendments to the Arbitration and Conciliation Act, 1996 (Act) have been carried out. The first, the Arbitration (Amendment) Act 2015 (2015 Amendment Act), saw a major overhaul of critical provisions in the Act aimed at reducing judicial intervention and easing of procedural issues in the conduct of arbitration proceedings. The second, the Arbitration (Amendment) Act, 2019 (2019 Amendment Act) was brought in as recently in August 2019, to fix remaining loopholes. However, one amendment created greater confusion than that was sought to be fixed.

Prior to the amendments, the position as it stood was that the mere filing of a challenge to an arbitration award before court prevented an award creditor from enforcing such an award as a decree. This was dubbed an ‘automatic stay’. As a result of the automatic stay, an award creditor was forced to wait several years before being able to proceed for enforcement of the award. One of the most lauded amendments in the 2015 Amended Act was the doing away of the automatic stay. Section 36 of the Act was amended to provide that filing of a challenge to an award shall not by itself make the award unenforceable as a decree. A separate application seeking the stay of an award is required to be filed and decided. As regards the applicability of these amendments, Section 26 provided they were prospective in nature.

Pursuant to the 2015 amendments, award creditors approached the courts to commence execution of their awards, despite pending challenges, since automatic stays had been done away with. The courts were faced with the question as to whether the amended Section 36 was in the nature of a procedural amendment and would apply to challenge proceedings filed prior to the amendment coming into force, i.e. 23 October 2015 (“cut-off date”). Various High Courts took diverging views resulting in judicial uncertainty and confusion.

This controversy was finally put to rest by the Supreme Court in its decision of Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd (“BCCI”). The Supreme Court conclusively determined that the amended Section 36 of the Act will be applicable to applications for a challenge to an award made under Section 34, filed both before and after the cut-off date. The Court held that the 2015 Amendment Act, was generally prospective in nature with the exception of Section 36 of the Act which would apply retrospectively given that it did not affect any substantive rights. Accordingly, the amended Section 36 would also apply to court proceedings initiated prior to the cut–off date.

The second amendment, the Arbitration (Amendment) Act, 2019 (2019 Amendment Act) was brought about as recently as August 2019. These amendments were intended to fix loopholes created by the 2015 Amendment Act. In the 2019 Amendment Act, a new Section 87 was introduced clarifying the applicability of the 2015 amendments to only those court proceedings arising out of or in relation to arbitration proceedings which commenced after the cut-off date. In addition, the 2019 Amendment Act simultaneously repealed Section 26 of the 2015 Amendment Act. Consequently, the practice of ‘automatic stay’ on arbitration awards was reinstated for all those challenge proceedings which arose from arbitrations which commenced prior to the cut-off date. Not only was the law as laid down by the Supreme Court in BCCI nullified, but also the award debtors who had deposited amounts as a condition to stay an award now moved applications seeking refunds.

Interestingly, at the time the BCCI judgment was rendered, the 2019 Amendment Act had not been passed by the Parliament. However, the proposed amendments, including Section 87, were in the pipeline and were available for consideration before the Court in the form of the then pending Arbitration and Conciliation (Amendment) Bill, 2018. In this context, the Supreme Court had even sounded a word of caution by suggesting that the proposed Section 87 would be contrary to the objective that the 2015 Amendment Act sought to achieve. The Court also ordered that a copy of the BCCI judgment be sent to the Ministry of Law and Justice and the Ld. Attorney General for their consideration. Despite this, the 2019 Amendment Act was passed which included Section 87.

Hindustan Construction Company Ltd v Union of India: Supreme Court to the Rescue

As a welcome end to the year, the Supreme Court has struck down Section 87 of the Act and the repeal of Section 26 of the 2015 Amendment Act in the case of Hindustan Construction Company Ltd v Union of India (HCC) as being manifestly arbitrary and ultra vires the Constitution of India.

Pursuant to the 2019 amendments, various writ petitions were filed challenging the constitutional validity of the new Section 87 and the repeal of Section 26. The grievance was that despite having arbitral awards in their favour, these parties are unable to reap the benefits due to the resurrection of the ‘automatic stay’. This had the effect of rendering awards nugatory, leaving the award creditors embroiled in long-drawn litigations and more obstacles to overcome before they could actually realise the proceeds from the awards.

The Court traced the history and objectives for the enactment of Section 36 and interestingly concluded that Section 36, as originally enacted, had never intended to result in a stay of the award on the filing of an application for challenge under Section 34 of the Act. It was clarified that Section 36 was enacted with the intent to clarify when an award is not susceptible to challenge. That is, either because the time for making an application to set it aside has expired, or such application having been made is refused. The Court reiterated that the award, being final and binding, is enforceable under the Code of Civil Procedure, 1908 (“CPC”) as if it were a decree of the court. The Court also referred to the execution of a decree under the CPC and noted that there was no concept of an automatic stay.

The Court also noted that this position, though specifically clarified by the judgment in BCCI, was not even referred to in the simultaneous insertion and repeal of Section 87 and Section 26. The Court rightly observed that the retrospective resurrection of automatic stays, by the introduction of Section 87 and repeal of Section 26 had turned the clock back and defeated the very objective of the 2015 Amendment Act. Accordingly, the Court concluded that the judgment in BCCI will, therefore, continue to hold the field.

Bidding Adieu to Automatic Stays

The decision of the Supreme Court has conclusively laid to rest a controversy which, left unaddressed, would have resulted in major setbacks for the arbitration regime in India. In the wake of a pro-arbitration movement in India, the legislature had grossly erred in depriving the parties of the benefits of the 2015 Amendment Act.

It is also hoped that the decision will assist with infusing liquidity in sectors that have been plagued with long-drawn delays. Several entities in the infrastructure, construction and other sectors, who were unable to readily recover disputed amounts (especially from government entities) despite having arbitral awards in their favour would now be able to enjoy the fruits of their awards, in the absence of an automatic stay on awards when challenged under Section 34 of the Act. The biggest beneficiaries would be those award holders who, despite having large amounts awarded in their favour, were being pushed into insolvency on account of being unable to make payments to their creditors on account of a pending challenge to the awards before Courts. The Hindustan Construction Company Ltd issued a statement post the pronouncement that it would now be able to enforce awards worth INR 1,584 crores.

In the judgment, the Court also took cognizance of the practice of filing applications for a refund by award debtors after the passing of the 2019 Amendment Act. The judgment in HCC will, therefore, render such pending applications infructuous.

While restoring status quo ante, the Court has effectively reinstated the law laid down in its judgment in BCCI. This will also serve as a guide to ascertain the future of all pending applications that may have been filed to challenge arbitral awards under Section 34 which will now have to be dealt by the courts keeping in mind the judgments in BCCI and HCC. As rightly appreciated by the Supreme Court, Section 87 of the Act had the effect of causing a significant amount of delay in the disposal of arbitration proceedings and an increase in the interference of courts in arbitration matters, ultimately defeating the very object of the Act, which was further strengthened by the 2015 Amendment Act.

In conclusion, automatic stays, much like bell bottoms, are a thing of the past and should remain there.

Ila Kapoor is a  Partner & Shruti Sabharwal is a Principal Associate at Shardul Amarchand Mangaldas. The authors would like to thank Akriti Kataria, Associate at Shardul Amarchand Mangaldas & Co. for her able assistance with research and drafting of this article

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