It’s the end of an era..An era that began from the Supreme Court’s interpretation of Section 36 of the Arbitration and Conciliation Act, 1996 in NALCO v. Pressteel back in the year 2003 to mean that an arbitral award shall automatically stay once it is challenged in a court. An era that was gratefully exploited by award debtors and rued by award holders. An era which continued until rectifying amendments were brought to the arbitration regime in 2015 (as would be later interpreted by the Supreme Court in BCCI v. Kochi Cricket). And an era which was sought to be prolonged by retrospective amendments made in the year 2019 by inserting the controversial Section 87 to the Arbitration and Conciliation Act. Section 87 has now been struck down by the Supreme Court in HCC v. Union of India for being manifestly arbitrary and ultra vires the Constitution..‘Automatic stay’ and BCCI.Prior to 23 October 2015, the law around ‘automatic stay’ of an arbitral award stood as follows: execution of an arbitral award would be stayed the moment it was challenged under Section 34 of the Arbitration and Conciliation Act irrespective of the merits of such a challenge. This resulted in an automatic stay on the operation of an arbitral award. Naturally, this deprived the award holder of the fruits of the award obtained after several years of dispute resolution..This concept of ‘automatic stay’ under the arbitration regime was indeed one of its kind. No such preferential treatment has been provided under the CPC to an appellant in a civil appeal. A decree for payment of money is only stayed by the appellate court after securing the decretal amount by directing the appellant to deposit the decretal amount (either in part or whole) or to furnish adequate security (O. XLI, R. 5). An exception from furnishing security has been provided where the Government is the appellant under O. XXVII, R. 8A. But even this provision has been labeled by the Supreme Court as “archaic” and one having “no application or reference in the present times” (Pam Developments Private Ltd. v. The State of West Bengal)..Therefore, while a full-blown civil appeal does not entail an automatic stay on the execution of a money decree, it is only surprising that such benefit would be available to an award debtor once he challenges the arbitral award in summary proceedings under Section 34. The sheer unfairness of this concept of ‘automatic stay’ was lamented upon by the Supreme Court in several cases with a hope that the Parliament would bring remedial changes..This much-required change in law was brought in through the Arbitration and Conciliation (Amendment) Act, 2015 (effective from 23 October 2015) by way of an amendment to Section 36 of the Arbitration and Conciliation Act. While doing away with the concept of ‘automatic stay’, the amended Section 36 now provided that a separate application would have to be filed seeking for a stay on the operation/enforcement of the arbitral award. If the court is satisfied that a stay should be granted (for reasons to be recorded), it could do so by requiring the award debtor to provide suitable security or make a deposit in court..There was, however, some confusion on the interpretation of the applicability provision of this 2015 amendment viz. Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015. The question to be determined was: whether these amendments are to be applied prospectively or retrospectively, especially to court proceedings arising out of arbitration which commenced before 23 October 2015?.This confusion was finally put to rest by the Supreme Court in a remarkable judgment passed in BCCI v. Kochi Cricket in the year 2018. It held that generally the 2015 amendments applied prospectively i.e. only to all arbitrations and court proceedings filed after 23 October 2015. However, in so far as the amendment to Section 36 was concerned, these would apply retrospectively to even such court proceedings that were filed before 23 October 2015. The reasoning was simple, yet shrewd. Simply put, upon a detailed discussion on the provisions of the CPC, it was held that enforcement proceedings are entirely procedural in nature qua the award debtors and retrospective application of the 2015 amendments to Section 36 would have no bearing on their substantive rights, as none existed. Thus, the amended Section 36 became applicable to all court proceedings irrespective of the date of their commencement effectively doing away with the ‘automatic stay’ regime..The Supreme Court’s decision in BCCI was highly lauded both in the domestic and international arena. The award holders could finally get the benefit of money deposits or security furnished by award debtors once the award was challenged under Section 34, albeit after furnishing bank guarantees to the court. There was a surge of execution petition filings. The motivation to mechanically challenge arbitral awards was also lost. A real-time indication of the positive impact of the 2015 amendments and the BCCI judgment could be seen from the positive impact on India’s ranking released by the World Bank with regards to ‘ease of enforcing contracts’, which rose over 15 ranks from 178 out of 189 in nations in 2015 to 163 out of 190 nations in 2019..2019 amendments and striking down of Section 87.In a major departure from the Supreme Court’s decision in BCCI, Section 87 was introduced by the Arbitration and Conciliation (Amendment) Act, 2019. Section 87 made the 2015 amendments applicable only to arbitrations commenced after 23 October 2015 and court proceedings in relation to such arbitrations. Consequently, in cases where the arbitral proceedings were initiated before 23 October 2015, and the resultant arbitral award has been challenged under Section 34 (whether before or after 23 October 2015), there would now once again be an automatic stay on the operation of the arbitral award..The pro-arbitration amendments brought about by the 2015 amendments, and fortified by the Supreme Court in BCCI, were therefore neutralized. In fact, the proposal of the Parliament to enact Section 87 was brought to the Supreme Court’s knowledge while it was hearing the BCCI matter. Even then the Supreme Court observed that the Parliament would be well-advised that if Section 87 stood enacted, its immediate effect would be to put all the important amendments made in 2015 on a back-burner. To quote the relevant extracts of BCCI:.“78. The Government will be well-advised in keeping the aforesaid Statement of Objects and Reasons in the forefront, if it proposes to enact Section 87 on the lines indicated in the Government’s Press Release dated 7-3-2018. The immediate effect of the proposed Section 87 would be to put all the important amendments made by the Amendment Act on a back-burner… and will now not be applicable to Section 34 petitions filed after 23-10-2015 but will be applicable to Section 34 petitions filed in cases where arbitration proceedings have themselves commenced only after 23-10-2015… It would be important to remember that the 246th Law Commission Report has itself bifurcated proceedings into two parts, so that the Amendment Act can apply to court proceedings commenced on or after 23-10-2015. It is this basic scheme which is adhered to by Section 26 of the Amendment Act, which ought not to be displaced as the very object of the enactment of the Amendment Act would otherwise be defeated.”.Naturally, once the 2019 amendments were enacted, they were challenged by several financially stressed infrastructure companies (including, HCC, Patel Engineering, and Gammon) which had huge arbitral awards in their favour. The challenge was made in an already pending writ petition filed by HCC challenging the constitutionality of various provisions of the Insolvency and Bankruptcy Code, 2016..In HCC, the Supreme Court struck the root of the entire basis of ‘automatic stay’ under Section 36 of the Arbitration and Conciliation Act. Briefly set out below is what the Supreme Court held:.Section 36 was never intended to impose an ‘automatic stay’ on the enforcement of an arbitral award upon being challenged. The earlier decisions of the Supreme Court in NALCO v. Pressteel, NBCC v Lloyds and Fiza Developers v AMCI were per incuriam and “do not state the law correctly”. It then held that:.“Given the fact that we have declared that the judgments in NALCO (supra), National Buildings Construction Corporation Ltd. (supra) and Fiza Developers (supra) have laid down the law incorrectly, it is also clear that the amended Section 36, being clarificatory in nature, merely restates the position that the unamended Section 36 does not stand in the way of the law as to grant of stay of a money decree under the provisions of the CPC.”.There has been no “assault” on BCCI by virtue of Section 87, and that “Section 15 of the 2019 Amendment Act removes the basis of BCCI (supra) by omitting from the very start Section 26 of the 2015 Amendment Act.” In essence, the Parliamentary power to bring retrospective amendments by removing the basis of a judgment of the Supreme Court and by not merely legislatively overruling it, was upheld.Section 87 was, however, and unsurprisingly so, struck down as being manifestly arbitrary under Article 14 of the Constitution, in the following terms:.“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… The result is that the BCCI judgment (supra) will, therefore, continue to apply so as to make applicable the salutary amendments made by the 2015 Amendment Act to all court proceedings initiated after 23.10.2015.”.Once Section 87 was struck down as being ultra vires Article 14, the Supreme Court considered it is unnecessary to examine the constitutional challenge based on Articles 19(1)(g), 21 and 300-A of the Constitution..What’s next?.The proverbial ghost (for some, an actual ghost) of ‘automatic stay’ has been buried once and for all. The historical unfairness dating back to more than a decade starting from NALCO v. Pressteel has now been remedied. A provision as biased as one providing for an ‘automatic stay’ to an award debtor should never had any place in the laws of a country that is striving to make its mark in the global arbitration circle. Provisions such as these desist foreign investors from making investments in Indian companies and projects owing to the uncertainty of recovery of money despite having a favourable arbitral award..While we can now expect to see the benefits of this new pro-arbitration scheme, some industry-wide practical concerns remain. Key amongst them is whether an award holder would be required to continue furnishing bank guarantees for withdrawal of deposited amounts or security by the award debtor (which comes at a considerable cost)? Or would the courts soon consider this ‘practice’ to be onerous as well?.About the authors: Ashish Bhan (partner), Mohit Rohatgi (senior associate), Rajendra Dangwal (associate) and Aayush Mitruka (associate) are lawyers working at Trilegal. In this matter, Patel Engineering was represented by Trilegal through Ashish Bhan, Mohit Rohatgi, Ketan Gaur, Aayush Mitruka and Rajendra Dangwal.
It’s the end of an era..An era that began from the Supreme Court’s interpretation of Section 36 of the Arbitration and Conciliation Act, 1996 in NALCO v. Pressteel back in the year 2003 to mean that an arbitral award shall automatically stay once it is challenged in a court. An era that was gratefully exploited by award debtors and rued by award holders. An era which continued until rectifying amendments were brought to the arbitration regime in 2015 (as would be later interpreted by the Supreme Court in BCCI v. Kochi Cricket). And an era which was sought to be prolonged by retrospective amendments made in the year 2019 by inserting the controversial Section 87 to the Arbitration and Conciliation Act. Section 87 has now been struck down by the Supreme Court in HCC v. Union of India for being manifestly arbitrary and ultra vires the Constitution..‘Automatic stay’ and BCCI.Prior to 23 October 2015, the law around ‘automatic stay’ of an arbitral award stood as follows: execution of an arbitral award would be stayed the moment it was challenged under Section 34 of the Arbitration and Conciliation Act irrespective of the merits of such a challenge. This resulted in an automatic stay on the operation of an arbitral award. Naturally, this deprived the award holder of the fruits of the award obtained after several years of dispute resolution..This concept of ‘automatic stay’ under the arbitration regime was indeed one of its kind. No such preferential treatment has been provided under the CPC to an appellant in a civil appeal. A decree for payment of money is only stayed by the appellate court after securing the decretal amount by directing the appellant to deposit the decretal amount (either in part or whole) or to furnish adequate security (O. XLI, R. 5). An exception from furnishing security has been provided where the Government is the appellant under O. XXVII, R. 8A. But even this provision has been labeled by the Supreme Court as “archaic” and one having “no application or reference in the present times” (Pam Developments Private Ltd. v. The State of West Bengal)..Therefore, while a full-blown civil appeal does not entail an automatic stay on the execution of a money decree, it is only surprising that such benefit would be available to an award debtor once he challenges the arbitral award in summary proceedings under Section 34. The sheer unfairness of this concept of ‘automatic stay’ was lamented upon by the Supreme Court in several cases with a hope that the Parliament would bring remedial changes..This much-required change in law was brought in through the Arbitration and Conciliation (Amendment) Act, 2015 (effective from 23 October 2015) by way of an amendment to Section 36 of the Arbitration and Conciliation Act. While doing away with the concept of ‘automatic stay’, the amended Section 36 now provided that a separate application would have to be filed seeking for a stay on the operation/enforcement of the arbitral award. If the court is satisfied that a stay should be granted (for reasons to be recorded), it could do so by requiring the award debtor to provide suitable security or make a deposit in court..There was, however, some confusion on the interpretation of the applicability provision of this 2015 amendment viz. Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015. The question to be determined was: whether these amendments are to be applied prospectively or retrospectively, especially to court proceedings arising out of arbitration which commenced before 23 October 2015?.This confusion was finally put to rest by the Supreme Court in a remarkable judgment passed in BCCI v. Kochi Cricket in the year 2018. It held that generally the 2015 amendments applied prospectively i.e. only to all arbitrations and court proceedings filed after 23 October 2015. However, in so far as the amendment to Section 36 was concerned, these would apply retrospectively to even such court proceedings that were filed before 23 October 2015. The reasoning was simple, yet shrewd. Simply put, upon a detailed discussion on the provisions of the CPC, it was held that enforcement proceedings are entirely procedural in nature qua the award debtors and retrospective application of the 2015 amendments to Section 36 would have no bearing on their substantive rights, as none existed. Thus, the amended Section 36 became applicable to all court proceedings irrespective of the date of their commencement effectively doing away with the ‘automatic stay’ regime..The Supreme Court’s decision in BCCI was highly lauded both in the domestic and international arena. The award holders could finally get the benefit of money deposits or security furnished by award debtors once the award was challenged under Section 34, albeit after furnishing bank guarantees to the court. There was a surge of execution petition filings. The motivation to mechanically challenge arbitral awards was also lost. A real-time indication of the positive impact of the 2015 amendments and the BCCI judgment could be seen from the positive impact on India’s ranking released by the World Bank with regards to ‘ease of enforcing contracts’, which rose over 15 ranks from 178 out of 189 in nations in 2015 to 163 out of 190 nations in 2019..2019 amendments and striking down of Section 87.In a major departure from the Supreme Court’s decision in BCCI, Section 87 was introduced by the Arbitration and Conciliation (Amendment) Act, 2019. Section 87 made the 2015 amendments applicable only to arbitrations commenced after 23 October 2015 and court proceedings in relation to such arbitrations. Consequently, in cases where the arbitral proceedings were initiated before 23 October 2015, and the resultant arbitral award has been challenged under Section 34 (whether before or after 23 October 2015), there would now once again be an automatic stay on the operation of the arbitral award..The pro-arbitration amendments brought about by the 2015 amendments, and fortified by the Supreme Court in BCCI, were therefore neutralized. In fact, the proposal of the Parliament to enact Section 87 was brought to the Supreme Court’s knowledge while it was hearing the BCCI matter. Even then the Supreme Court observed that the Parliament would be well-advised that if Section 87 stood enacted, its immediate effect would be to put all the important amendments made in 2015 on a back-burner. To quote the relevant extracts of BCCI:.“78. The Government will be well-advised in keeping the aforesaid Statement of Objects and Reasons in the forefront, if it proposes to enact Section 87 on the lines indicated in the Government’s Press Release dated 7-3-2018. The immediate effect of the proposed Section 87 would be to put all the important amendments made by the Amendment Act on a back-burner… and will now not be applicable to Section 34 petitions filed after 23-10-2015 but will be applicable to Section 34 petitions filed in cases where arbitration proceedings have themselves commenced only after 23-10-2015… It would be important to remember that the 246th Law Commission Report has itself bifurcated proceedings into two parts, so that the Amendment Act can apply to court proceedings commenced on or after 23-10-2015. It is this basic scheme which is adhered to by Section 26 of the Amendment Act, which ought not to be displaced as the very object of the enactment of the Amendment Act would otherwise be defeated.”.Naturally, once the 2019 amendments were enacted, they were challenged by several financially stressed infrastructure companies (including, HCC, Patel Engineering, and Gammon) which had huge arbitral awards in their favour. The challenge was made in an already pending writ petition filed by HCC challenging the constitutionality of various provisions of the Insolvency and Bankruptcy Code, 2016..In HCC, the Supreme Court struck the root of the entire basis of ‘automatic stay’ under Section 36 of the Arbitration and Conciliation Act. Briefly set out below is what the Supreme Court held:.Section 36 was never intended to impose an ‘automatic stay’ on the enforcement of an arbitral award upon being challenged. The earlier decisions of the Supreme Court in NALCO v. Pressteel, NBCC v Lloyds and Fiza Developers v AMCI were per incuriam and “do not state the law correctly”. It then held that:.“Given the fact that we have declared that the judgments in NALCO (supra), National Buildings Construction Corporation Ltd. (supra) and Fiza Developers (supra) have laid down the law incorrectly, it is also clear that the amended Section 36, being clarificatory in nature, merely restates the position that the unamended Section 36 does not stand in the way of the law as to grant of stay of a money decree under the provisions of the CPC.”.There has been no “assault” on BCCI by virtue of Section 87, and that “Section 15 of the 2019 Amendment Act removes the basis of BCCI (supra) by omitting from the very start Section 26 of the 2015 Amendment Act.” In essence, the Parliamentary power to bring retrospective amendments by removing the basis of a judgment of the Supreme Court and by not merely legislatively overruling it, was upheld.Section 87 was, however, and unsurprisingly so, struck down as being manifestly arbitrary under Article 14 of the Constitution, in the following terms:.“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… The result is that the BCCI judgment (supra) will, therefore, continue to apply so as to make applicable the salutary amendments made by the 2015 Amendment Act to all court proceedings initiated after 23.10.2015.”.Once Section 87 was struck down as being ultra vires Article 14, the Supreme Court considered it is unnecessary to examine the constitutional challenge based on Articles 19(1)(g), 21 and 300-A of the Constitution..What’s next?.The proverbial ghost (for some, an actual ghost) of ‘automatic stay’ has been buried once and for all. The historical unfairness dating back to more than a decade starting from NALCO v. Pressteel has now been remedied. A provision as biased as one providing for an ‘automatic stay’ to an award debtor should never had any place in the laws of a country that is striving to make its mark in the global arbitration circle. Provisions such as these desist foreign investors from making investments in Indian companies and projects owing to the uncertainty of recovery of money despite having a favourable arbitral award..While we can now expect to see the benefits of this new pro-arbitration scheme, some industry-wide practical concerns remain. Key amongst them is whether an award holder would be required to continue furnishing bank guarantees for withdrawal of deposited amounts or security by the award debtor (which comes at a considerable cost)? Or would the courts soon consider this ‘practice’ to be onerous as well?.About the authors: Ashish Bhan (partner), Mohit Rohatgi (senior associate), Rajendra Dangwal (associate) and Aayush Mitruka (associate) are lawyers working at Trilegal. In this matter, Patel Engineering was represented by Trilegal through Ashish Bhan, Mohit Rohatgi, Ketan Gaur, Aayush Mitruka and Rajendra Dangwal.
