Hindustan Construction Company Ltd. v/s Union of India: Writ Petition (Civil) No. 1074 of 2019

Estimated Reading Time: 10 minutes

Introduction:

The apex court of India, on the 27th of November 2019, passed a judgment in the case of Hindustan Construction Company Limited & Anr. v/s Union of India & Ors. which essentially challenged the constitutional validity of Section 87 of the Arbitration and Conciliation Act, 1996. 

It is historically evident that award holders in India have generally faced difficulties in benefitting from the proceeds that come with an award, unless if they are challenged by award debtors and when the enforcement proceedings are automatically stayed. As a result of the judgment passed by the Supreme Court in this case, however, it has paved the way for award holders, under the Act, to secure a part of or the entire amount of the award pending the outcome of the petition to set aside the award. There is now a compulsion for the award debtor, pending the outcome of the challenge to the award, to file for a stay of application against the enforcement of the award with the addition of a requirement to deposit the amount of the award in court. There is now an extension on this position, which was possible through the Arbitration and Conciliation (Amendment) Act, 2015, on matters that commenced prior to the 23rd of October, 2015.

Facts:

To provide a better understanding of the case, it would be appropriate to divide the facts of this case into 4 time periods. 

Back in 1996, an important issue under the Arbitration and Conciliation (Amendment) Act, 2015 was the automatic stay against the enforcement of the award filed under Section 34 by an award when filing a petition for setting aside the award. This position was deemed to be in contradiction to the nature of an arbitral proceeding which provided for a quick and efficient alternate dispute resolution mechanism. Due to this, as long as the setting aside petition was not fully disposed of, the award holder was not entitled to realize the amounts provided for under an award. 

Coming to 2015, wherein the above complexity was intended to be rectified by the 2015 Amendment Act. To provide more context to this, the award debtor was now under the requirement, pursuant to Section 36(3) of the Act, to make a specific application for seeking a stay against the enforcement of the award. The mentioned stay could then be allowed by the court as long as certain requirements (including but not limited to, deposit of the award amount) are fulfilled. As a result of the 2015 Amendment Act coming into force, there was a rise in questions about the areas of application for this act i.e. whether they have retrospective application or prospective application. Over the next few months, there were elements of doubt among companies that the favourable arbitral awards they acquired would be unenforceable and they would be slapped with an automatic stay instead. This led to Section 26 of the 2015 Amendment Act, which provided for the application to be placed under rigorous judicial scrutiny in several courts across India.

Moving on to 2017, the aforementioned uncertainty was taken note of by the Srikrishna Committee Report in the same year, which recommended that there was a need to clear doubts and firmly establish that the 2015 Amendment Act was indeed applicable prospectively. The Supreme Court in BCCI v/s Kochi Cricket Private Limited (BCCI), before making a legal clarification on the applications of the 2015 Amendment Act, established a certainty that the 2015 Amendment Act, although can be mainly applied prospectively, does have retrospective applications (for eg, in the previous automatic stay against enforcement). Therefore, the holder of the award could not be denied by an ongoing setting-aside petition against the award, even for arbitral proceedings that took place before the 23rd of October, 2015. During the BCCI’s consideration by the Supreme Court, there was a recommendation by the legislature to implement the actions proposed by the Srikrishna Committee Report which was to make the prospective applicability of the 2015 Amendment Act available. However, the Supreme Court passed the recommendation that the legislature should refrain from undoing the object and purpose of the 2015 Amendment Act to fit the changes proposed.

Ultimately, in 2019, the Arbitration and Conciliation (Amendment) Act, 2019 was enacted by the legislature, which went against the recommendation passed by the Supreme Court in BCCI case. This amendment led to Section 26 of the 2015 Amendment Act to be repealed and putting forth a clarification in Section 87 that explained that the 2015 Amendment Act only had prospective applications. This position resulted in companies that aimed to benefit from the BCCI decision to profit from Section 36(3) of the Act and the additional provisions for enforcement, to reassess their stance on the entire issue.

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Issue faced by the Supreme Court:

The petitioners in the present case moved the Supreme Court, challenging the constitutional validity of Section 87 brought into existence by the 2019 Amendment Act, the repealing of Section 26 of the 2015 Amendment Act and other provisions of the Insolvency and Bankruptcy Code, 2016, through a writ petition.

Contentions from the Petitioners:

The petitioners in the present case raised the contention that the Arbitration and Conciliation Act (before its amendment) was in contradiction to the UNCITRAL Model law due to it-not having a provision to allow for two benefits that the award debtor could receive namely:

  1. The first during the setting aside of the proceedings under Section 34 and;
  2. The second during the enforcement of such proceedings under Section 36.

Therefore, the previous position that the setting aside proceedings would result in an automatic stay proved to be untrue when Section 35 provided for the finality of the award.

The petitioners further contended that it was implausible that there should be an automatic stay against the arbitral award when a setting aside application is filed when, at the same time, there is no automatic stay of a money decree in civil appeals. It was also observed by the petitioners that if one applied the 2015 Amendment Act prospectively, Section 87 was in violation of Article 14, 19 (1) (g), 21 and 300-A of the Indian Constitution. The petitioners explained this observation by stating that 

  1. Section 87 was, essentially, in contradiction to the object of the Act,
  2. Section 87 was barring the vested right of enforcement and weakened the binding nature of an arbitral award,
  3. Section 87 violated the judgment passed in BCCI without nullifying it officially,
  4. Section 87 was unjustifiably introduced, pursuant to the Srikrishna Committee Report which came much earlier than the BCCI decision,
  5. Section 87, instead of upholding the object and purpose of the 2015 Amendment Act, recreated the complexities that it originally dealt with,
  6. Section 87 was, to certain extents, irrational, unwarranted, unbalanced and illogical.

Contentions from the Respondents:

The Respondent’s raised their counter contentions observing that there were no factual anecdotes that supported the petitioner’s contentions that the introduction of Section 87 and the revocation of Section 26 of the 2015 Amendment Act lacked constitutional validity. The respondent’s further raised the contention there were no merits behind the petitioner’s contention that the cut-off date of 23rd October, 2015 for prospective applicability was illogical. The respondent’s also observed that unless it was distinctly apparent, prima facie, that the cut-off date was discriminatory, the court should not interfere.

Another notable contention that the respondents raised was that they were of the position that the decision made in BCCI was declaratory in nature and did not set aside any executive action. Finally, the respondent’s submitted that Section 87 was actually a clarification of the legislature’s original intention and was not in interference to the decision passed in BCCI.

Summary of the judgment and its analysis

On the question of whether there was a requirement to specifically mention the decision made in BCCI with regards to the nullification of it by way of legislation, the Supreme Court agreed with the respondent’s stance that there were none. Furthermore, since the basic foundation of the BCCI decision was more or less uprooted, the Supreme Court concluded that there were no blatant feelings of dissent towards the decision. 

Having mentioned this, the Supreme Court however, took the side of the petitioners that there was, in fact, a blatant contradiction to the UNCITRAL Model Law, pursuant to the conclusion that is reached when reading through the initially unamended Act. The justification for this submission is the barring of the award debtor towards the two benefits that he is entitled to namely:

  1. The first, during the setting aside of the proceedings under Section 34 and;
  2. The second, during the enforcement of such proceedings under Section 36.

The Supreme Court took it upon themselves to read Section 35 (which provides for the finality of an award) along with Section 34 and 36 and concluded that a setting aside petition leading to an automatic stay enforcement was never the intention.

This position was in direct contradiction to the Supreme Court’s earlier observation. An important point to be noted is that the Supreme Court was of the opinion that a setting aside petition would inherently stay the enforcement of an award in NALCO, Fiza and National Buildings. As a result of the discussion of the aforementioned decision, the Supreme Court was clear in their approach to overrule these previous decisions. 

The Supreme Court further took note of the fact that Section 87 was introduced simply due to the fact that the Srikrishna Committee Report recommended that the ambiguity surrounding the prospective application of the 2015 Amendment Act should be clarified, when in reality, there were no such ambiguity as a result of the decision passed in BCCI. The Supreme Court further provided more context to this position by observing that there was no provision for an automatic stay in the unamended act and the only purpose with which the 2015 Amendment Act was introduced was to clarify this uncertainty. The Supreme Court, therefore, reached the conclusion that Section 87 was in contravention to the purpose of the 2015 Amendment Act as it barred the Act from being applicable on dates prior to the 23rd of October, 2015. Furthermore, the legislature was guilty of introducing a discriminatory provision which was in contravention to public interest despite not referencing the BCCI decision which had concluded that the introduction of such a provision would inevitably lead to complications.

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In their judgment, the Supreme Court agreed with the petitioner’s stance that Section 87 being introduced brought on the complexity of the same issue which the 2015 Amendment Act intended to fix, thereby making it constitutionally invalid. At a first glance, this decision seems to be in contradiction to what the Supreme Court decided as to why there were no complexities under the Act i.e., there were no such automatic stay provided for in the unamended Act. Nevertheless, it seems that the Supreme Court took reference of their previous observations in NALCO and Fiza, which had resulted in an inaccurate interpretation of the Act which was something the 2015 Amendment Act intended to fix.

Furthermore, the Supreme Court also took the petitioner’s side that Section 87 when read along with the Insolvency and Bankruptcy Code, 2016, results in a nonsensical conclusion. To clarify this observation, the Supreme Court noted that when the aforementioned takes place, it leads to the insolvency of the award holder due to them being unable to recover sums under arbitral awards. Therefore, the Supreme Court held that Section 87 being introduced and Section 26 of the 2015 Amendment Act being repealed are in violation of Article 14 of the Indian Constitution.

Another point that the Supreme Court highlighted in their judgment was their quick decision on the respondent’s contention that the cut-off date was not arbitrary by stating that the court was concerned with whether the non-bifurcation of the court and arbitration proceedings with respect to the mentioned date was arbitrary and not whether the date itself was arbitrary. As the Supreme Court had already declared the provision constitutionally invalid as a result of it being in contravention to Article 14 of the Indian Constitution, the court no longer felt the need to discuss the provision’s unconstitutionality with reference to Article 19 (1) (g), 21 and 300-A.

The Supreme Court, however, stressed that the decision made in BCCI that there would be no automatic stay against the enforcement of any arbitral award, regardless of when the commencement of the arbitration began, is still of value as on date.

Conclusion:

An estimated amount of about INR 38,000 crores is essentially stuck in litigation in the roads sector as the amount of money that is due under their respective arbitral awards have not yet been disposed of as a result of the option of an automatic stay being made available to the award debtor with the simple action of filing a setting aside petition under Section 34. When assessing this situation, one can come to the conclusion that this disorder is spread across several other sectors and is not exclusive only to cases where governmental agencies are award debtors.

The decision made by the Supreme Court in Hindustan Construction Company Limited and Anr. v/s Union of India and Ors is essentially, providing a long required relief to award holders who now no longer need to hold out for an average of 6-7 years before finally receiving the amount of money they were awarded. This decision would help in balancing the financial sheets between various companies by injecting a much needed relief in the form of liquidation in sectors that are in dire need of these award amounts.

An important thing to note in the Supreme Court’s decision in this case would be how this decision would, similarly, affect some of the other amendments introduced by the 2015 Amendment Act, as what was done to Section 36(3).

In conclusion, the main observation to make out of the Supreme Court’s decision in Hindustan Construction Company Limited and Anr. v/s Union of India and Ors. is the positive change in attitude and approach that the judicial system has adopted towards arbitration in India which is undoubtedly an encouraging sign for Indian arbitration in the future. 

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