Section 87 of Arbitration and Conciliation Act 1996 struck down by Supreme Court as constitutional invalid

Section 87 of Arbitration and Conciliation Act 1996 struck down by Supreme Court as constitutional invalid. The said section had provided for an automatic stay on arbitral award when challenged in court

ABCAUS Case Law Citation:
ABCAUS 3190 (2019) (11) SC

Important case law relied upon by the parties:
BCCI v. Kochi Cricket Pvt. Ltd. (2018) 6 SCC 287
National Aluminum Company Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd. and Anr. 2004 1 SCC 540
Kishan v. Vijay Nirman Company Pvt. Ltd. (2018) 17 SCC 662
Ssangyong Engineering & Construction Co. Ltd. v. NHAI 2019 SCC Online 677

In the instant case various Writ Petitions had challenged the constitutional validity of Section 87 of the Arbitration and Conciliation Act, 1996 (Arbitration Act, 1996) as inserted by Section 13 of the Arbitration and Conciliation (Amendment) Act, 2019 (2019 Amendment Act) and brought into force with effect from 30.08.2019.

The said section 87 provided for an automatic stay on an arbitral award as soon as it was challenged in a court.

The Petitions had also challenged the repeal (with effect from 23.10.2015) of Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 2015 Amendment Act) by Section 15 of the 2019 Amendment Act.

Section 87 of Arbitration and Conciliation Act 1996 struck down by SC

The Hon’ble Supreme Court observed that it was alive to the Srikrishna Committee Report’s recommendation of a proposed Section 87 as in the BCCI judgment, the Court had cautioned the Government by stating that the immediate effect of enacting the proposed Section 87 would be directly contrary to the Statement of Objects and Reasons of the 2015 Amendment Act, which made it clear that the law prior to the 2015 Amendment Act resulted in delay of disposal of arbitral proceedings, and an increase in interference by courts in arbitration matters, which tends to defeat a primary object of the Arbitration Act, 1996 itself.

The Hon’ble Supreme Court stated that it is important to see whether, in substance, the basis of a particular judgment is in fact removed, irrespective of whether or not that judgment is referred to in the Statement of Objects and Reasons of the amending act which seeks to remove its basis. 2019 Amendment Act had removed the basis of BCCI judgment by omitting from the very start Section 26 of the 2015 Amendment Act.

The Hon’ble Supreme Court examined 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 Hon’ble Supreme Court observed that the Srikrishna 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.

It was observed that the Srikrishna Committee Report was submitted long before the Apex Court’s judgment in the BCCI case. Thus uncertainty because of the interpretation by different High Courts had disappeared, the law on Section 26 of the 2015 Amendment Act being laid down with great clarity.

In view of the above, the Hon’ble Supreme Court opined that 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.

It was noted that a key finding of the BCCI judgment was 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.

The Hon’ble Supreme Court observed that the retrospective resurrection of an automatic-stay would not only turn the clock backwards contrary to the object of the Arbitration Act, 1996 and the 2015 Amendment Act, but also result 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 Hon’ble Supreme Court pointed out that the 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, 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.

In view of the above, the Hon’ble Supreme Court struck down the deletion of Section 26 of the 2015 Amendment Act, together with the insertion of Section 87 into the Arbitration Act, 1996 by the 2019 Amendment Act as being manifestly arbitrary under Article 14 of the Constitution of India.

The Hon’ble Supreme Court held that the BCCI judgment 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.

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