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Section 87 Of The Arbitration And Conciliation Act

The three judge bench of R F Nariman, Aniruddha Bose, and Ramasubramanian held on 27th November 2019 that Section 87 of the Arbitration and Conciliation Act, 1996 must be struck down, it being manifestly arbitrary under Article 14 of the Indian Constitution. This article intends to have a journey through the background of origin, origin and end of Section 87 through different case laws of timeline 2015 to 2019.


Position prior to 2015 Amendment

Before the amendment of Arbitration and Conciliation Act, 1996 (hereinafter called "Act") in 2015, Section 36 had stated that the arbitral award could be enforced as if it were a decree of the Court (as per the Civil Procedure Code, 1908) only if:
  • Limitation period for making an application to set aside the arbitral award under Section 34 (i.e., 3 months from receiving the arbitral award or 3 months from disposing of the Section 33 application for correction/interpretation of arbitral award) is elapsed; or
  • Application under Section 34 has been made and refused/dismissed

In other words, if a Section 34 application has been filed before the court for setting aside the arbitral award, the award couldn't be enforced as under Section 36 which led to an "automatic stay" to the enforcement of award. This had led to many frivolous applications being filed to set aside the award and the award creditor couldn't recover his award even after it being issued on his favour. The whole process thus went against the very object of the ADR system, i.e., speedy disposal of cases.

This theory was also reinstated in Fiza Developers and Inter-trade P. Ltd. v. AMCI(I) Pvt. Ltd. & Anr., and National Aluminium Co. Ltd (NALCO) v M/s. Pressteel & Fabrications Pvt. Ltd. & Anr.

Fiza Developers & Inter-Trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd.

In this case, the Supreme Court dealt with the question whether issues as contemplated under the Civil Procedure Code (Order 14 Rule 1) should be framed while filing Section 34 applications to challenge arbitral awards. The Supreme Court held that Section 34 applications are summary proceedings with the object to prove the existence of any challenge grounds under Section 34(2).

The applicant (i.e., the award-debtor) can file affidavits of his witnesses as proof and also place his evidence by affidavit. The court can also permit cross-examination of the persons swearing to the affidavit, if the case so warrants. Thereafter, the court would hear arguments and/or receive written submissions to decide on the matter. This is a routine procedure and can be varied depending upon the facts and circumstances of the case or as per other local rules.

But, since under the then applicable laws, filing and pendency of these applications stayed the enforcement of the award, and bearing the considerations that arbitration was meant for minimal court interference and speedy trials, the Supreme Court clarified that framing of issues as under Rule 1 of Order 14 of the CPC was not an integral part of the Section 34 proceedings and is necessary only when a party affirms and the other denies many types of material propositions of fact or law.

The Supreme Court reasoned that because the grounds for setting aside the award are specific, a petitioner who applies to set aside an award will have to plead the facts necessary to make out the ingredients of any of the grounds mentioned in Section 34 and prove the same.41

The Supreme Court, however, stated that "when it is said issues are not necessary, it does not mean that evidence is not necessary" and this statement led to several inconsistent practices in High Courts, by insisting conduction of Section 34 proceedings in the same manner as regular civil suits with leading evidence.

National Aluminium Co. Ltd (NALCO) v M/s. Pressteel & Fabrications Pvt. Ltd. & Anr

In this case, it was held that a mere filing of Section 34 application operated as an automatic stay over the operation of an arbitral award. Nevertheless, it observed that the relevant ministry had recommended to the Parliament to amend the language of Section 34 as an automatic stay would be against the principles of an effective ADR system.

Position under 2015 Amendment
To overcome these loopholes, the Act was amended in 2015 which reversed the pre-2015 theory to such a way as to end the automatic stay methodology. It said that:
  • The time limit to file the application for setting aside the arbitral award under Section 34 has to be expired
  • A mere filing of Section 34 application before the courts would not render the arbitral award unenforceable, unless the court grants a stay order to the operation of the arbitral award
  • The stay for the operation would be granted only for conditions that are deemed fit for the courts, for which the reasons has to be recorded in writing.
  • In order to stay the operation of an arbitral award for payment of money, the conditions to be fulfilled must be in consonance with the conditions for stay of a money decree as per the Civil Procedure Code, 1908.

The conditions may include:
  1. Substantial loss may occur to the applicant if the stay of award is not allowed
  2. Application for stay has been made without reasonable delay
  3. Adequate security has been deposited by the applicant for the due performance of the decree or court order
Even though the enforcement theory of arbitral awards was clarified, the doubts arose on the applicability of the 2015 Amendment. The date on which 2015 Amendment came into effect was 23rd October, 2015 (hereinafter called Amendment Date). But then some High Courts were against the retrospective application of Section 36 and held that the amended Section 36 could be applied on the arbitral proceedings that commenced after the Amendment Date.

Some other courts ruled that the amended Section 36 would be applicable to the Section 34 filed before Amendment Date too. Thus, there were clash of opinions amongst the courts which led legal debates.

Position under Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd.
Pursuant to a franchise agreement between the Board of Control for Cricket of India and Kochi Cricket Pvt. Ltd, there arose certain disputes between them which resulted initiation of arbitration. The tribunal passed 2 awards (on June 22, 2015) in favour of Kochi Cricket and the same was challenged by BCCI. Kochi Cricket filed applications for enforcement of awards on November 26, 2015.

The BCCI resisted the enforcement application on the ground that Section 36 (then unamended) would be applicable which imposed automatic stay on the operation of awards until the applications under Section 34 were disposed of.

So the issue to be discussed in this landmark judgement was whether the amended Section 36 would apply to appeals under Section 34 the Amendment Date.

But as an end to all the legal controversies and debates, the Apex Court in BCCI v. Kochi Cricket ruled that the 2015 Amendment would be applicable to all pending Section 34 petitions, may it be filed before or after the Amendment Date. Thus, even for arbitrations before the Amendment Date, no automatic stay would be applicable to the enforcement of arbitral awards.

First let's see Section 26 inserted by 2015 amendment:

Section 26. Act not to apply to pending arbitral proceedings: 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 Apex Court noted that Section 26 of the Act (amended) has dealt with the applicability of the amendment as two parts- the first part refers to non-applicability of the amendment on some proceedings and the second part refers to the applicability of the amendment to some other proceedings.

Section 26 could also bifurcated in another way, i.e., with respect to the use of the words "in relation to arbitral proceedings" the section can be divided for arbitral proceedings and court proceedings the first part deals with arbitral proceedings before an arbitral tribunal and the second part refers to court proceedings that arises in relation to these arbitration proceedings.

So, the amendment is prospective, and will apply only to those arbitral proceedings and related court proceedings commenced on or after the Amendment Date. It is to be noted here that the amendment would not be applicable irrespective of whether the court proceedings, by itself, had commenced before or after the Amendment Date.

So, having regard the above calculations, it can be clearly said that if an appeal is filed under Section 34, after the Amendment Date, then the amendment would not be applicable. The Court ruled so- held that:
"From a reading of Section 26 as interpreted by us, it thus becomes clear that in all cases where the Section 34 petition is filed after the commencement of the Amendment Act, and an application for stay having been made under Section 36 therein, will be governed by Section 34 as amended and Section 36 as substituted."

Origin of Section 87

Meanwhile when the cloud of confusions got cleared, on 9th August 2019, there came into existence the 2019 Amendment for the Act. As per the same, Section 26 was repealed and a new Section 87 was inserted which said so:

The amendments made to the Act 2015 Amendment will not be applicable to:
  • Arbitral proceedings commenced before the Amendment Date
  • Court proceedings arising out of/in relation to arbitral proceedings commenced before the Amendment Date (may the court proceedings be commenced before or after the Amendment Date)

The amendments made to the Act 2015 Amendment will be applicable only to:
  • Arbitral proceedings commenced on/after the Amendment Date
  • Court proceedings arising out of/in relation to the arbitral proceedings commenced on/after the Amendment Date

In other words, the automatic stay criterion would be applicable for the arbitral proceedings that were initiated before the Amendment Date and those cases would again be delayed unreasonable. The award creditor would neither be able to secure security amount deposition as offered by the amended Section 36 nor could they enforce the award without specific refusal of Section 34 application by the court.

This was clearly against the decisions of Supreme Court in BCCI v. Kochi Cricket and the constitutional validity of the 2019 Amendment got into question then.

Section 87 ruled unconstitutional- Hindustan Construction Company v. UOI

The constitutional validity of Section 87 was questioned in the landmark judgement of Hindustan Construction Company Limited and Anr v Union of India and Ors. It was decided in the case that the introduction of Section 87 in the Act and the repeal of section 26 of the 2015 Amendment Act was unconstitutional.

The Hindustan Construction Company (hereinafter called "Petitioner"), an infrastructure construction company, was the contractor for government bodies including the NHAI (National Highways Authority of India), NHPC (National Hydroelectric Power Corporation), NTPC Ltd. (National Thermal Power Corporation Ltd.) IRCON International Ltd. (Indian Railway Construction Limited) and PWD (Public Works Department) (hereinafter called the Respondents).

These being government bodies, cost overrun for the projects were disputed invariably by them, which then lead to delays in the recovery of the legitimate dues of the Petitioner. They then needed to be recovered only through civil proceedings and arbitrations.

Contentions of the Petitioner and Respondent
When one looks into the details of the matter, it gets clear that the Petitioners were subjected to a "double-whammy". First being even if the arbitral awards were in favour of the Petitioner, they were challenged under Section 34 and then appealed under Section 37. The challenges would usually have to be defended for more than 6 years (in an average). The automatic stay process after Section 34 filing was the major hurdle before the Petitioner here.

As per the Insolvency and Bankruptcy Code, the government bodies (excluding government companies) are exempted from insolvency as they were statutory authorities. So, the moment Section 34 application was filed by the Respondents against the arbitral awards of such debts they would then become disputed debts and the insolvency proceedings initiated by the Petitioner as an operational creditor wouldn't be maintainable and be dismissed at the threshold.

Thus, huge amounts were due from the Respondents to the Petitioner. But in order to operate smoothly, the Petitioner had to pay the operational creditors so as to supply men, material, and material and they had already started sending demand notices for their payments. This was the second hidden snag.

The Respondents were of the opinion that the Petitioner's contentions hadn't had any merit in itself. It was argued that the decision in BCCI v. Kochi Cricket was only declaratory and it doesn't set aside any executive actions or provisions of a statute, because of which it doesn't need a validating act to neutralise its effect. The Parliament can clarify the legal intent through amendments if it believes that any views expressed by the Supreme Court does not reflect the same.

  • Section 87 was inserted through the amendment to implement the suggestions in the Srikrishna Committee Report of 2017 on removing the confusions on the applicability of the 2015 Amendment. It was meant only to explain the whole confusions on applicability. But the Apex Court had already ruled on the same in BCCI v. Kochi Cricket judgement. But it came over in such a way that it was "manifestly arbitrary" and it "directly interfered" with the BCCI judgement.
  • The insertion of Section 87 would delay disposal of arbitration proceedings, and increase the interference of courts in arbitration.
  • Section 26 inserted under the 2015 Amendment Act was better clear than Section 87. Thus the deletion of Section 26 was also struck down.
  • The Section 36 misconstruction was corrected after nearly 20 years in 2015 Amendment. Inserting Section 87 would only reverse the whole situations back to how it was before which by itself is manifest arbitrariness.

The Supreme Court thus struck down Section 87, upholding the BCCI judgement which said that Section 36 would have retrospective and even if the Section 34 petition is pending, it would not be able to grant an automatic stay on enforceability of such awards.

This was what the Supreme Court held:
"To refer to the Srikrishna Committee Report (without at all referring to this Court's judgment) even after the 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 Arbitration Act, 1996 and the 2015 Amendment Act."

Position under 2019 Amendment
Owing to the Supreme Court's decision declaring Section 87 as unconstitutional, the same was repealed to increase the effectiveness and efficiency of the process of arbitration.

Striking off Section 87 from the Act was a major milestone in the history of Indian arbitration. It was the endgame for many doubts that had been clouded for years. These indecisions and hesitation while ruling on arbitration clearly reveals that the arbitration system is just taking its baby steps in India. There is still a long way for us to go in Alternate Dispute Resolution.

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