Saturday, December 19, 2020

Striking down of Article 87 of Arbitration & Conciliation Act:A perspective





THE STRIKING DOWN OF SECTION 87 OF ARBITRATION & CONCILIATION ACT: A PERSPECTIVE

The ratio in BCCI Vs v. Kochi Cricket Private Limited (2018) 6 SCC 287 is reaffirmed

 

                                                                            Anil K Khaware

                                                                              Advocate

 

The Arbitration laws have undergone periodic changes over the decades. The Arbitration Act of 1940 was finally changed and the Act was re-written in the name & style of Arbitration & Conciliation act 1996.This was done close on the heels of economic liberalization policy and the desirability of show casing to the world that the Indian Judicial system is not tardy and proper and expeditious outlet was in place for the foreign investor, in the event of inter se disputes in a time bound manner. Since then, there was a lull and thereafter series of amendments followed in 2015 and recently in 2019. These amendments in itself is comprehensive and are aimed at re-strengthening the process of arbitration and to accentuate its efficacy.   

The recent amendment in Arbitration & Conciliation Act 1996 has received the Presidential assent on August 9, 2019 and the same stood notified on 4 November 2020 by virtue of that certain provisions of the Arbitration and Conciliation Act 1996 stands amended. The object of the amendment has been to insulate the arbitral proceedings from frequent judicial interference in the arbitration process. The Amendment Act envisages that all the stakeholders get an opportunity to seek unconditional stay of enforcement of arbitral awards in case it is prima facie evident that either the arbitration agreement or the arbitral award is actuated by fraud or manipulation.

 

Before analyzing the issues further, the glimpse of some of the notable changes need perusal, that has found its place in the following parts of the Arbitration and Conciliation Act, 1996 (Act):

Section 36

    • The Section contains a Proviso which mandates a court to grant an unconditional stay where a prima-facie case of fraud or corruption has been made out.
    • Unconditional stay may be granted on an award, if the agreement or award is challenged and it is proved to be induced by fraud or manipulation/corruption. This will offer a window to exercise such unconditional stay and will be available to all the stakeholders.
    • Pertinently, the amendment shall apply to all arbitration proceedings, irrespective of time of commencement of arbitral or court proceedings i.e whether it commenced prior to or after the commencement of the Arbitration and Conciliation[i]

 (Amendment) Act, 2015

    • Section 43 J
    • The Ordinance also substitutes Section 43 J of the Act to state that 'the qualifications, experience and norms for accreditation of arbitrators shall be such as may be specified by the regulations.'
    • Consequently, Eighth Schedule of the Act, which deals with qualifications and experience of an arbitrator, has been omitted.
    • The Ordinance is, however, conspicuously silent on the name of the regulations which would regulate the qualifications, norms for accreditation of arbitrators.

The aforesaid stipulations as narrated above is likely to aid the cases where inherent illegality by fraud or corruption has been 'prima-facie' shown in court. The window is thus made available to court and court shall be equipped to form opinion in case of fraud or corruption.

The Act will also be tested on instances where parties earlier used it to stall the operation of an Award by filing a Section 36 application and waste precious court time. The Court of course, will have to be circumspect while formulating a test for granting an unconditional stay on the operation of the award.

AIM & OBJECT OF THE ACT

In the light of above, the aim and object of the 2019 Amendment Act inter alia is to reduce the judicial intervention in as much as appointment of arbitrators shall now be the domain of Arbitral Institutions. This initiative if fructified may bring the arbitration law in consonance with many international jurisdictions. As regards the appointment of Arbitrator, in absence of any mechanism earlier, whether due to absence of a stipulated procedure and/or failure in adhering to the procedure as prescribed under an arbitration agreement, the Courts used to nominate arbitrators for adjudication of disputes between parties thereby making the process of appointment of arbitrator as tardy.

In this backdrop, with a view to show case India for foreign investors and also to afford a preferred seat for arbitration, what is being addressed to by the Arbitration (Amendment Act) 2019[ii]


is that: (i) Parties are now required to complete their pleadings within six months from the date of service of written notice to the arbitrator (section 23). It may be noted that the 2015 Amendment Act has already prescribed a time-limit of 12 months (may be extended to 18 months if parties to the lis accords consent) for the completion of arbitration proceedings from the date the arbitral tribunal enters upon reference. 2019 Amendment Act (Section 29A) now seeks to change the start date of this time limit of passing an award from the date on which statement of claim and defence are completed by parties. It may be noted that so far as International arbitration is concerned, the Amendment Act 2019 has provision for relaxation to the mandatory time period of one year of passing the award. It is not clear from the above amendments, though, whether the courts or the arbitral tribunal are permitted to extend the time limit of six months for completion of pleadings. The situation may be piquant if a party, who wishes to delay the arbitration proceedings, may not submit the statement of claim or defence in time, and this can lead to disagreements regarding the expiry of the time limit under Section 29A, giving rise to litigation on the issue.

The amendment has a provision that seeks to establish an independent body called the Arbitration Council of India (ACI) for the promotion of arbitrationmediation, conciliation and other alternative dispute redressal mechanisms. The ACI, inter alia, will be empowered to grade arbitral institutions, promote institutional arbitrations, frame, and review and update norms to ensure satisfactory level of arbitration. The efficacy of ACI will be tested in the space of time, as no regulations are in place In this regard as of now.

Its key functions include: 

(i)  Framing policies for grading arbitral institutions and accrediting arbitrators;

(ii)  Making policies for the establishment;

(iii) Operation, and maintenance of uniform professional standards for all      alternate dispute redressal matters; and

(iv) Maintaining a depository of arbitral awards made in India and abroad.

The other key amendment is the amendment to Section 11. Section 11 of Arbitration Act inter alia provides for appointment of the Arbitral Tribunal through Courts when parties fail to constitute the Arbitral Tribunal under the Arbitration Agreement. The Applications to the Court for appointment of Arbitrators was causing delays due to huge backlog of cases before the Courts. This amendment is likely to aid in expediting the appointment of Arbitrators, while this may also reduce the burden of the Courts to a certain extent. Also. The time period of 12 months required to make an award for all arbitration proceedings is now removed for International Arbitrations. However, the tribunals must endeavor to dispose-of international arbitration matters within 12 months.

Another significance aspect prior to 2019 Amendment Act was that an overlap between the arbitral tribunal and court existed, as both forums could have been approached for interim measures once the final award had been made and was awaiting enforcement. The 2019 Amendment Act now clarifies this inconsistency and provides for a system wherein interim reliefs post the arbitral award, the parties can only approach the courts. The 2019 Amendment Act clarifies that parties challenging the award must rely only on the record of the arbitral tribunal. This move may be a step forward in expediting the arbitration process, as lesser time may be spent by courts in scrutinizing the challenge to the award. Another key aspect of The 2019 Amendment Act is providing for confidentiality of arbitration proceedings. Disclosure of the arbitral award ought to be made only where it is necessary for implementing or enforcing the award.

The dilemma of section 87 of Arbitration & Conciliation Act

Section 87 of the 2019 Amendment Act reads as follows:

“87. Unless the parties otherwise agree, the amendments made to this Act by the Arbitration and Conciliation (Amendment) Act, 2015 shall–

(a) Not apply to-

(i) Arbitral proceedings commenced before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015;

(ii) court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015;

(b) Apply only to arbitral proceedings commenced on or after the  commencement of the Arbitration and Conciliation (Amendment) Act, 2015 and to court proceedings arising out of or in relation to such arbitral proceedings.” 
 
By Section 15 of the same Amendment Act, Section 26 of the 2015 Amendment Act was omitted as follows:

“15. Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 shall be omitted and shall be deemed to have been omitted with effect from the 23rd October, 2015.” Section 26 of the 2015 Amendment Act reads as follows:

“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.”

The Hon’ble Supreme Court in BCCI[iii] case (supra) had occasion to


deal with the important question as to the true interpretation of Section 26 of the 2015 Amendment Act. In paragraph 28, referred to the transitory provision contained in Section 85-A as proposed in the 246th Law Commission Report, and thereafter in paragraphs 29 to 31, referred to the debates on the floor of the House. In paragraph 32, the Supreme Court referred to the differences between Section 26 and Section 85-A as proposed, and then held:

“33. What can be seen from the above is that Section 26 has, while retaining the bifurcation of proceedings into arbitration and court proceedings, departed somewhat from Section 85-A as proposed by the Law Commission.”

36. Section 26 was then stated to have bifurcated proceedings with a great degree of clarity into two sets of proceedings – arbitral proceedings themselves, and court proceedings in relation thereto.

Paragraph 39 of the judgment refers to this and states as follows:

“39. Section 26, therefore, bifurcates proceedings, as has been stated above, with a great degree of clarity, into two sets of proceedings — arbitral proceedings themselves, and court proceedings in relation thereto. The reason why the first part of Section 26 is couched in negative form is only to state that the Amendment Act will apply even to arbitral proceedings commenced before the amendment if parties otherwise agree. If the first part of Section 26 were couched in positive language (like the second part), it would have been necessary to add a proviso stating that the Amendment Act would apply even to arbitral proceedings commenced before the amendment if the parties agree. In either case, the intention of the legislature remains the same, the negative form conveying exactly what could have been stated positively, with the necessary proviso.

Obviously, “arbitral proceedings” having been subsumed in the first part cannot re-appear in the second part, and the expression “in relation to arbitral proceedings” would, therefore, apply only to court proceedings which relate to the arbitral proceedings. The scheme of Section 26 is thus clear: that the Amendment Act is prospective in nature, and will apply to those arbitral proceedings that are commenced, as understood by Section 21 of the principal Act, on or after the Amendment Act, and to court proceedings which have commenced on or after the Amendment Act came into force.”

One of the provisions introduced by the 2019 Amendment Act was that the 2015 Amendment Act will only have prospective effect i.e. it will only apply to arbitral proceedings initiated after the effective date (i.e. October 23,2015) of the Amendment Act and court proceedings initiated arising out of such arbitral proceedings (section 87).

In this context it is worthwhile to state that the Apex Court in


BCCI[iv] Case (Supra) has held that to summarize the arbitration cases i.e both in pending petitions for setting aside of an award which were filed prior to October 23, 2015 and for fresh petitions for setting aside of an award, there would be no automatic stay of an award, unless a separate application was made for such a stay, which the court would have the discretion to grant or refuse coupled with deposit of money and/or security, if any.

The 2019 Amendment (section 87) as mentioned above changed this position laid down in BCCI case (Supra) , and provided that (unless the parties agreed otherwise) the 2015 Amendment Act would apply prospectively to all arbitral and court proceedings commenced after October 23, 2015.

However, recently, the Apex Court on November 27, 2019 the Hon’ble Supreme Court in Hindustan Construction Company v. Union of India[v] Case the Hon’bel Supreme Court is pleased to strike down Section 87 as unconstitutional for being arbitrary and restored its position as laid down in the BCCI case.

The Apex Court’s decision in Hindustan Construction Company(supra) was a right approach so as to provide the successful award holders the fruits of their award by way of security and not letting any automatic stay and consequent impasse in the way of the execution for several years.

To sum it up, Apex Courts purpose in Hindustan Construction case was to give the benefit of the 2015 Amendment Act to all arbitrations qua court proceedings, regardless of whether they commenced before, or after October 23, 2015. This decision of Hindustan Construction Company by Apex Court is a welcome development in the Indian arbitration regime. It may be construed, thus, that whereas the 2015 Amendment Act, was a step towards making India an arbitration-friendly jurisdiction, the 2019 Amendment Act is a step further towards that goal. Setting up of ACI under 2019 Amendment Act, is an interesting proposition and, if implemented in its true spirit, it may usher India into becoming one of the globally competent jurisdictions for Arbitration.

The delegation of powers to appoint Arbitrations to designated institutions within 30 days is also a step towards reducing the court interference and delay in Arbitration. The introduction of confidentiality, immunity to arbitrators, and continuation of arbitrator\'s mandate pending application for extension of the arbitration timeline  are all welcome steps towards making India a more arbitration friendly jurisdiction. In this context one has to bear in mind that whereas these initiatives are encouraging, the 2019 Amendment Act alone may not in itself cause a spur in international arbitration in India, as this will be contingent on various factors apart from having a congenial local laws. The implementation of laws, rules, and regulations; development of competent institutions; availability of conducive infrastructure for Arbitrations shall be the sine qua non for making India an arbitration hub. As governmental initiative is now in place, it could be reasonably expected that other factors may too fall in place sooner than later.  

In retrospect, what is significant to find out is that 1996 Act was amended for the first time by way of Amendment Act of 2015 only i.e after about Twenty (20) years , but subsequent amendment in 2019 was sooner in time. This probably may show the keenness and alacrity of the union government to develop the Arbitration regime in India; and intention to deal with prevalent issues. The impediments are sought to be set right in timely manner. The implementation of the 2019 Amendment Act, of course, would be the key to its success or failure, especially, in relation to formation of ACI and designation of Arbitration institutions by the Court. Once the entire 2019 Amendment Act comes into force, it would be interesting to watch how it would pan out.

Before going further, it may be worthwhile to point out the observation of Hon’ble Supreme Court in respect of provisions of 2015 Amendment Act, in BCCI case (Supra)

57. 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 7th March, 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, such as the important amendments made to Section 28 and 34  in particular, which, as has been stated by the Statement of Objects and Reasons, “…have resulted in delay of disposal of arbitration proceedings and increase in interference of courts in arbitration matters, which tend to defeat the object of the Act”, and will now not be applicable to Section 34 petitions filed after 23rd October,  2015, but will be applicable to Section 34 petitions filed in cases where arbitration proceedings have themselves commenced only after 23rd October, 2015. This would mean that in all matters which are in the pipeline, despite the fact that Section 34 proceedings have been initiated only after 23rd  October, 2015, yet, the old law would continue to apply resulting in delay of disposal of arbitration proceedings by increased interference of Courts, which ultimately defeats the object of the 1996 Act.

It is further observed that these amendments have the effect, as stated in  HRD Corporation (Marcus Oil and Chemical Division Vs  GAIL (India) Ltd ( Formerly Gas Authority of India  Ltd) V2017 SCC Online 1024 (at paragraph 18) of limiting the grounds of challenge to awards as follows:

“…In fact, the same Law Commission Report has amended Sections 28 and 34 so as to narrow grounds of challenge available under the Act. The judgment in ONGC v. Saw Pipes Ltd, (2003) 5 SCC 705,[vi] has been expressly done away with. So has the judgment in ONGC v. Western Geco International Ltd., (2014) 9 SCC 263[vii]. Both Section 34  and 48  have been brought back to the position of law contained in Renusagar Power Plant Co. Ltd. v. General Electric Co., (1994) Supp (1) SCC 644, where “public policy” will now include only two of the three things set out therein, viz., “fundamental policy of Indian law” and “justice or morality”. The ground relating to “the interest of India” no longer obtains. “Fundamental policy of Indian law” is now to be understood as laid down in Renusagar[viii] (supra). “Justice or morality” has been tightened  and is now to be understood as meaning only basic 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 rd October, 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.

While going through the judgment of Hon’ble Supreme Court in BCCI Case (Supra) the prelude to the amendments may also be analyzed. That is Sri Krishna Committee Report.

SRI KRISHNA COMMITTEE REPORT: A Retrospect

A High Level Committee set up to review the Institutionalization of Arbitration Mechanism in India and had submitted its report to the Union Law Ministry in July 2017.  It was headed by Justice (retired) BN Srikrishna. The Union Government is committed for speedy resolution of commercial disputes and to make India an international hub of Arbitration. The Government thus had decided to have a relook in the arbitration law based on the recommendation for removing stumbling block in the way of arbitration.

The Supreme Court has examined the constitutional validity of the introduction of Section 87 into the Arbitration Act, 1996, and deletion of Section 26 of the 2015 Amendment Act, by the 2019 Amendment Act against Articles 14, 19(1)(g), 21 and Article 300-A of the Constitution of India. The Sri Krishna Committee Report recommended the introduction of Section 87 owing to the fact that there were conflicting High Court judgments on the reach of the 2015 Amendment Act at the time when the Committee deliberated on this subject. This was stated as follows in the Sri Krishna Committee Report:

“However, Section 26 has remained silent on the applicability of the 2015 amendment Act to court proceedings, both pending and newly initiated in case of arbitrations commenced prior to 23 October 2015. Different High Courts in India have taken divergent views on the applicability of the 2015 Amendment Act to such court proceedings. Broadly, there are three sets of views as summarized below:

(a) The 2015 Amendment Act is not applicable to court proceedings (fresh and pending) where the arbitral proceedings to which they relate commenced before 23 October 2015.

(b) The first part of Section 26 is narrower than the second and only excludes arbitral proceedings commenced prior to 23 October 2015 from the application of the 2015 Amendment Act. The 2015 Amendment Act would, however, apply to fresh or pending court proceedings in relation to arbitral proceedings commenced prior to 23 October 2015.

(c) The wording “arbitral proceedings” in Section 26 cannot be construed to include related court proceedings. Accordingly, the 2015 Amendment Act applied to all arbitrations commenced on or after 23 October 2015. As far as court proceedings are concerned, the 2015 Amendment Act would apply to all court proceedings from 23rd October 2015, including fresh or pending court proceedings in relation to arbitration commenced before, on or after 23 October 2015.

Thus, it is evident that there is considerable ambiguity regarding the applicability of the 2015 Amendment Act  related to court proceedings in arbitration commenced before 23 October 2015.The Committee was of the view that a suitable legislative amendment is required to address this issue. The committee further felt that permitting the 2015 Amendment Act to apply to pending court proceedings related to arbitrations commenced prior to 23 October 2015 would result in uncertainty and prejudice to parties, as they may have to be heard again. It may also not be advisable to make the 2015 Amendment Act applicable to fresh court proceedings in relation to such arbitrations, as it may result in an inconsistent position. Therefore, it is felt that it may be desirable to limit the applicability of the 2015 Amendment Act to arbitrations commenced on or after 23 October 2015 and related court proceedings.”

The Srikrishna Committee [ix] Report is dated 30.07.2017, which is long before the Supreme Court’s judgment in the BCCI case (supra). Whatever ambiguity may have remained because of the interpretation by different High Courts has disappeared as a result of the BCCI judgment (supra), the law on Section 26 of the 2015 Amendment Act being laid down with great clarity. It was thus held that thus, thereafter, to delete this salutary provision and introduce Section 87 in its place would be wholly without justification and contrary to the object sought to be achieved by the 2015 Amendment Act, which was enacted pursuant to a detailed Law Commission report which found various infirmities in the working of the original 1996 statute. Also, it is not understood as to how “uncertainty and prejudice would be caused, as they may have to be heard again”, resulting in an ‘inconsistent position’. The amended law would be applied to pending court proceedings, which would then have to be disposed of in accordance therewith, resulting in the benefits of the 2015 Amendment Act now being applied. To refer to the Srikrishna Committee Report even after judgment of the hon’ble Supreme Court in BCCI Case and even after the said judgment has pointed out the pitfalls of following such provision, would render Section 87 and the deletion of Section 26 of the 2015 Amendment Act manifestly arbitrary, having been enacted unreasonably, without adequate determining principle, and contrary to the public interest sought to be subserved by the Section 87 of Arbitration Act, 1996 and the 2015 Amendment Act. This is for the reason that a key finding of the BCCI judgment (supra) is that the introduction of Section 87 would result in a delay of disposal of arbitration proceedings, and an increase in the interference of courts in arbitration matters, which defeats the very object of the Arbitration Act, 1996, which was strengthened by the 2015 Amendment Act.

Further, the hon’bel Supreme Court has repeatedly held that an application under Section 34 of the Arbitration Act, 1996 is a summary proceeding not in the nature of a regular suit


Canara Nidhi Ltd[x] case  As a result, a court reviewing an arbitral award under Section 34 does not sit in appeal over the award, and if the view taken by the arbitrator is possible, no interference is called for – Ref Associated Construction[xi] case.  The Hon’ble Supreme Court has held in Sangyoung Engineering & Constructions[xii] Co. case, that after the 2015 Amendment Act, the Courts cannot interfere with an arbitral award on merits.  The anomaly, therefore, of Order XLI Rule 5 of the CPC applying in the case of full-blown appeals, and not being applicable by reason of Section 36 of the Arbitration Act, 1996 when it comes to review of arbitral awards, is itself a circumstance which militates against the enactment of Section 87, placing the amendments made in the 2015 Amendment Act, in particular Section 36, on a backburner. For this reason also, Section 87 must be struck down as manifestly arbitrary under Article 14. It is also held that when the mischief of the misconstruction of Section 36 was corrected after a period of more than 19 years by legislative intervention in 2015, to now work in the reverse direction and bring back the aforesaid mischief itself results in manifest arbitrariness. 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. In fact, refund applications have been filed in some of the cases before the Hon’ble Supreme Court thereby praying that monies that have been released for payment as a result of conditional stay orders be returned to the judgment-debtor.

The Hon’ble Supreme Court had the occasion to notice that Srikrishna Committee Report did not refer to the provisions of the Insolvency Code. After the advent of the Insolvency Code on 01.12.2016, the consequence of applying Section 87 is that due to the automatic-stay doctrine laid down by judgments of the Supreme Court - which have only been reversed by the Hindustan Construction judgment - the award-holder may become insolvent by defaulting on its payment to its suppliers, when such payments would be forthcoming from arbitral awards in cases where there is no stay, or even in cases where conditional stays are granted. Also, an arbitral award-holder is deprived of the fruits of its award - which is usually obtained after several years of litigating - as a result of the automatic-stay, whereas it would be faced with immediate payment to its operational creditors, which payments may not be forthcoming due to monies not being released on account of automatic-stays of arbitral awards, exposing such award-holders to the rigors of the Insolvency Code. For all these reasons, the deletion of Section 26 of the 2015 Amendment Act, together with the insertion of Section 87 into the Arbitration & Conciliation Act, 1996 by the 2019 Amendment Act, is struck down as being manifestly arbitrary under Article 14 of the Constitution of India.

Thus as per the judgment of Hon’ble Supreme Court in Hindustan Construction Company v. Union of India it is categorically held that the judgment rendered in BCCI Case (supra) will 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.

References:-



[i] The Arbitration & Conciliation (Amendment) act 2015

[ii] the Arbitration & Conciliation (Amendment) act 2019

[iii] BCCI Versus  Kochi Cricket Private Limited (2018) 6 SCC 287

[iv] HRD Corporation (Marcus Oil And Chemical Division Versus  Gail (India) Ltd ( Formerly Gas Authority Of       India  Ltd)   2017 SCC Online 1024

[v] Hindustan Construction Company Versus Union Of India 2019(6) ARB.L.R 171 Sc

[vi] ONGC  Versus Saw Pipes Ltd, (2003) 5 SCC 705

[vii] ONGC versus western GECO international ltd., (2014) 9 SCC 263

[viii] Renusagar Power Plant co. Ltd. Versus General Electric Co., (1994) Supp (1) scc 644,

[ix] Srikrishna Committee Report- July 2017

[x] Canara Nidhi Ltd versus  Shashikala 2019 SCC online SC 1244

[xi] Associated Construction versus Pawan Hans Helicopters Ltd (2008) 16 SCC 128.

[xii] Sangyoung Engineering & Constructions co. Ltd Versus NHAI 2019 SCC online 677

  

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