Supreme Court of India: No Automatic Stay on Enforcement of Domestic Awards Pending Adjudication of the Application to Set Aside Such Award

Supreme-Court-of-India-1_85138_730x419

The Arbitration & Conciliation Act, 1996 of India (‘1996 Act’) is based upon the UNCITRAL Model Law (‘Model Law’), Article 36(2) of which specifically refers to applications for setting aside or suspension of an award, in which the other party may provide appropriate security. Contrary to Article 36 of the Model Law, Section 36 of the 1996 Act has been construed by judgments of the Indian Courts as granting an ‘automatic-stay’, the moment an application to set aside an award under Section 34 of the 1996 Act is filed.

It is noteworthy that under the Model Law, in case an award were to be passed, whether domestic or international, in the same country, two bites at the cherry would be available: one at the time of setting aside the award, and one at the time of recognition and enforcement. The 1996 Act, however, has not followed this model and has a far more robust enforcement regime, as Section 36 of the 1996 Act mandates that once an award can be said to be final, it can be executed in the manner provided by the Civil Procedure Code , 1908 of India (‘CPC’).

For long, the ‘automatic stay’ on enforcement of domestic awards in India as envisaged by the Supreme Court in number of cases, have came in the way of expeditious realisation of awarded monies to the award creditors. To cure this lacuna, the Law Commission of India, in its 246th Report, recommended that Section 36 of the 1996 Act be amended. Resultantly, the 1996 Act was amended by the Arbitration & Conciliation (Amendment) Act, 2015 (‘2015 Act’) with effect from 23.10.2016 which had done away the ‘automatic stay’ of enforcement of awards pending adjudication of application to set aside the award. Further, Section 26 of the 2015 Act provided a cut off date in respect of the applicability of the 2015 Act as follows

2015 Act not applicable To the arbitral proceedings commenced before 23.10.2016 (unless the parties otherwise agree)
2015 Act applicable To the arbitral proceedings commenced on or after 23.10.2016

However, in 2017, a committee report by Retd. Justice B.N. Srikrishna (‘Srikrishna Committee Report’) opined that 2015 Act should not apply to pending court proceedings which have commenced after 23.10.2015 but should only apply in case arbitral proceedings have themselves been commenced post 23.10.2015, which would include court proceedings relating thereto. Accordingly, the Government of India issued a press release on 07.03.2018 to enact a new Section 87 in the 1996 Act to accord with what the Srikrishna Committee Report had opined.

In the meantime, the Supreme Court while deciding, BCCI v. Kochi Cricket Pvt. Ltd. (‘BCCI’) (2018) 6 SCC 287 (decided on 15.03.2018), opined 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 1996 Act which was strengthened by the 2015 Act. Thus, the applicability of Section 36 as amended by the 2015 Act provided in BCCI can be illustrated as follows:

2015 Act applicable (w.r.t removal of automatic stay) Arbitration commenced prior to 23.10.2015
2015 Act applicable (w.r.t removal of automatic stay) Arbitration commenced after to 23.10.2015

The Indian Parliament, however, being oblivious to the findings of the Supreme Court in BCCI inserted Section 87 in the 1996 Act by the Arbitration & Conciliation (2019) Act (‘2019 Act’) as proposed in Srikrishna Committee Report and removed Section 26 of the 2015 Act. Thus, the applicability of 2015 Act as provided under Section 87 can be illustrated as under:

2015 Act not applicable ·       to arbitral proceedings commenced before 23.10.2015

·       to court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after 23.10.2015

2015 Act applicable ·       to arbitral proceedings commenced on or after 23.10.2015

·       to court proceedings arising out of or in relation to such arbitral proceedings commenced on or after 23.10.2015

In nutshell, Section 87 as inserted 2019 Act resurrected the ‘automatic stay’ of the operation of arbitral awards pending adjudication of the application to set aside the award and therefore, it was challenged in the Supreme Court in the case of Hindustan Construction Company Limited & Anr v. Union of India & Ors 2019 SCC OnLine SC 1520. This post encapsulates a short reflection of this judgement.

Factual Matrix

The Petitioner was in the business of undertaking construction projects with government entities such as the Respondents. Certain arbitral awards were passed in favour of Petitioner which were challenged under Section 34 of the 1996 Act and fell in the ambit of ‘automatic-stay’ under the 1996 regime. The Petitioner was further barred from seeking relief under the Insolvency & Bankruptcy Code, 2016 (‘Code’) since the moment a challenge is filed to an arbitral award under Section 34 of the 1996 Act, such debt becomes a ‘disputed debt’, and therefore, proceedings cannot be initiated under the Code at the behest of the Petitioner. As a sequitur, allegedly huge sums of money were due from all these statutory bodies to the Petitioner. This led the Petitioner to challenge the resurrection of automatic stay by 2019 Act.

Applicable Legal Principles

Section 36 under 1996 Act

Enforcement.—Where the time for making an application to set aside the arbitral award under section 34 has expired, or such application having been made, it has been refused, the award shall be enforced under the Code of Civil Procedure, 1908 (5 of 1908) in the same manner as if it were a decree of the Court.

Section 36 of 1996 Act as amended by 2015 Act

Section 36 – Enforcement

(1) Where the time for making an application to set aside the arbitral award under section 34 has expired, then, subject to the provisions of sub-section (2), such award shall be enforced in accordance with the provisions of the Code of Civil Procedure, 1908 (5 of 1908), in the same manner as if it were a decree of the court.

(2) Where an application to set aside the arbitral award has been filed in the Court under section 34, the filing of such an application shall not by itself render that award unenforceable, unless the Court grants an order of stay of the operation of the said arbitral award in accordance with the provisions of sub-section (3), on a separate application made for that purpose.

(3) Upon filing of an application under sub-section (2) for stay of the operation of the arbitral award, the Court may, subject to such conditions as it may deem fit, grant stay of the operation of such award for reasons to be recorded in writing:

Provided that the Court shall, while considering the application for grant of stay in the case of an arbitral award for payment of money, have due regard to the provisions for grant of stay of a money decree under the provisions of the Code of Civil Procedure, 1908 (5 of 1908).

Section 26 of 2015 Act

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 (i.e. the 1996 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.

Section 87 of 2019 Act

Section 87 – Effect of arbitral and related court proceedings commenced prior to 23rd October, 2015

87 Effect of arbitral and related court proceedings commenced prior to 23rd October, 2015

Unless the parties otherwise agree, the amendments made to this Act by the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016) shall–

(a) not apply to–

(i) arbitral proceedings commenced before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016);

(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 (3 of 2016);

(b) apply only to arbitral proceedings commenced on or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016) and to court proceedings arising out of or in relation to such arbitral proceedings.

Parties Contentions

Petitioners

  1. A plain reading of Section 36 of the 1996 Act does not follow automatic stay of enforcement of domestic award pending adjudication of setting aside applications which is also against Article 36 of the Model Law.
  2. Such an automatic stay was rightly removed by the 2015 Act on the recommendation of 246th Law Commission Report.
  3. The Supreme Court in BCCI had specifically opined that Section 87 of 2019 Act would be contrary to the object of the 2015 Act and despite the fact that the judgement was specifically sent to the Government of India.

Section 87 is Constitutionally Infirm

  1. Section 87 is violative of Articles 14(Right to Equality), 19(1)(g) (Right to freedom to practice any profession or to carry out any occupation, trade or business), 21(Protection of life and personal liberty) and 300-A (Persons not to be deprived of property save by authority of law.) of the Constitution of India.
  2. Section 87 has brought back the mischief of automatic stay of domestic awards pending adjudication of the setting aside application which has resulted in manifest arbitrariness, rendering the provision constitutionally infirm.
  3. The retrospective resurrection of the automatic stay provision allows award debtors who have challenged arbitral awards before the Courts, and who have in fact made payments to award holders, to now claim the aforesaid sum back from such award holders which makes Section 87 constitutionally infirm

No level playing field for Creditor against statutory authorities under the Code

  1. There is no level playing field so far a normal creditor is concerned against a statutory authority of India, as under the provisions of the Code, a statutory authority can initiate corporate insolvency resolution process against normal creditors, but it is not vice-versa.

No two bites at the cherry under 1996 Act unlike the Model Law

  1. Under the Model Law, in case an award is to be passed, two bites at the cherry would be available. However, the 1996 does not follow this concept and mandates that once an award can be said to be final it can be executed in the manner provided under the Code.

Concept of cut off dates

  1. Section 87 destroyed a level playing field in relation to enforcement of arbitral awards, by re-imposing an arbitrary cut off date qua application of the amended Section 36 as amended by the 2015 Act.

Respondents

  1. In BCCI case the interpretation of Section 26 of 2015 Act is only declaratory in nature the said judgment neither sets aside any executive action nor any provision of a statute.
  2. The deletion of Section 26 of 2015 retrospectively removes the basis of the judgement in BCCI.
  3. There is no substance to challenge of Section 87 on the ground of cut off dates as similar cut-off dates have been upheld in a plethora of cases by Indian Courts as being within the exclusive domain of Parliament and the Courts should not normally interfere with the fixation of such cut off dates, unless blatantly arbitrary or discriminatory.
  4. A writ petition under Article 32 of the Constitution of India cannot be converted into a recovery proceeding by the Petitioner. Since the Code is not a statute for recovery of debt, but it is a statute for reorganization of corporate persons and resolution of stressed assets of corporate persons.
  5. The Code cannot be used against a statutory body since no resolution professional or private individual can take over the management of such body as it performs sovereign functions nor can such body be driven to insolvency under the Code.
  6. The arbitral awards that are pending adjudication of the application to set aside an award would show a pre-existing dispute exists in such cases, and therefore would in any case be outside the ambit of Code.
  7. Fixing of cut-off date being the sole prerogative of the Parliament, cannot be interfered with by the courts as this pertains to public policy matters.

Judgement

After analysing the rival contentions of both sides, the Court held as under:-

Automatic stay of an award as laid down by judgements is incorrect

  1. Under Model Law, Articles 34 and 35 provide two bites at the cherry i.e.
    1. In cases in which an award is sought to be set aside, and
    2. Thereafter when not set aside, sought to be recognized and enforced in the same country in which it has been made.
  2. However, Section 36 of 1996 Act does not follow this two bites at the cherry doctrine for the reason when award made in India becomes final and binding it shall straightaway be enforced under Code and in the same manner as if it were a decree of the Court, there being no recourse to the self-same grounds when it comes to recognition and enforcement.
  3. To state that an award when challenged under Section 34 of 1996 Act becomes unexecutable merely by virtue of such challenge being made because of the language of Section 36 is plainly incorrect.
  4. Such interpretation omits to consider the rest of Section 36 which deals with the applications under Section 34 that have been dismissed, which leads to an award being final and binding. Such an award when read with Section 35 becomes enforceable under Code and being treated as a decree for this purpose. This view is further supported from the language of Section 9 (Interim measures by Court) of the 1996 Act which specifically enables a party to apply to a Court for interim reliefs “after the making of the arbitration award but before it is enforced in accordance with Section 36
  5. That the automatic stay of awards as laid down in previous cases (National Aluminum Company Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd. and Anr. 2004 1 SCC 540 (NALCO) and Fiza Developers and Inter-trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd. and Anr. (2009) 17 SCC 796 (Fiza)) is incorrect.

BCCI continues to apply as to make applicable the amendments made by 2015 Act to all court proceedings initiated after 23.10.2015

Section 87 removes the basis of BCCI resulting in 1996 Act being put on a backburner

  1. Section 36 of 1996 Act as amended by 2015 Act being clarificatory in nature, merely restates the position that the unamended Section 36 of 1996 Act does not stand in the way of the law as to grant of stay of money decree under the provisions of the Code.
  2. A key finding of BCCI judgement was that the introduction of Section 87 would result in delay of disposal of arbitration proceedings and an increase in the interference of courts in arbitration matters which defeats the very object of the 1996 Act which was strengthened by the 2015 Act.
  3. In BCCI, the Court cautioned the Government of India that the immediate effect of enacting the proposed Section 87 would be directly contrary to the Statement of Objects and Reasons of the 2015 Act which made it clear that the law prior to the 2015 Act resulted in delay in disposal of arbitral proceedings and increased in interference by courts in arbitration matters which tends to defeat a primary object of the 1996 Act.
  4. The question of removing the basis of a judgement can arise in substance if the basis of a particular judgement is in fact removed by legislature whether or not such judgement is referred to in the Statement of Objects and Reasons of the amending Act by the legislature.

Section 87 is Arbitrary and therefore against Article 14 of the Indian Constitution

  1. After 2015 Act, the Supreme Court cannot interfere with an arbitral awards on merits which militates against the enactment of Section 87 and must be struck down as manifestly arbitrary under Article 14 of the Constitution of India.

The challenge is not to cut off date but to non-bifurcation of court and arbitration proceedings w.r.t. such cut off date

  1. The challenge is not to the fixing of 23.10.2015 as a cut off date as the aforesaid date is the date on which the 2015 Act came into force. Instead what has been found to be manifestly arbitrary is the non-bifurcation of court proceedings and arbitration proceedings with reference to aforesaid date resulting in improvements in the working of the 1996 Act being put on a backburner.

A statutory body can neither be taken over by insolvency resolution professional nor it can be wound-up

  1. Petitioner (NHAI) is a statutory body which functions as an extended limb of the Government of India and performs government functions which cannot be taken over by a resolution professional under the Code, or by any other corporate body. Nor can such authority ultimately be wound-up under the Code.
  2. The Code is not a debt recovery legislation and therefore, an argument that an equivalent mechanism for private creditors to initiate corporate insolvency resolution process against the statutory bodies is missing runs against this settled position of law.

Position in England & Wales

In Far Eastern Shipping v AKP Sovcomflot [1995] 1 Lloyds Rep 520 Potter J considered whether the court had jurisdiction to stay enforcement of a New York Convention award once it has been converted into an English judgment for the purposes of execution. The judge held that having elected to convert an award into an English judgment, the plaintiff ought in principle to be subject to the same procedural rules and conditions as generally apply to the enforcement of such judgements. The application in that case was made pursuant to the forerunner of CPR 83.7 which provided that the court may order a stay where there were special circumstances (not an automatic stay) which rendered it inexpedient to enforce the judgment or order.

However, the above authority was recently distinguished by the Commercial High Court of England & Wales in BSG Resources Limited v Vale SA & Ors [2019] EWHC 2456 (Comm). In that case, one of the issues before the Court was whether a stay on enforcement of an arbitral award should be granted pending determination of Award Debtor’s challenge to the award.

While refusing to grant such automatic stay (if I may say so), the English Commercial High Court observed that there is no general rule that a stay should be granted pending the determination of the Section 68 challenge (Challenging the award: serious irregularity). This would be contrary to the principle that an award has a presumptive validity and would be inconsistent with the approach of the courts on an appeal where there is no automatic stay merely because an appeal against an order is pending.

Position in Singapore

In Strandore Invest A/S and others v Soh Kim Wat [2010] SGHC 174, Strandore, a Danish Award holder filed an application seeking enforcement of the arbitral award against, Soh, a Singaporean entity in Singapore. Soh resisted the enforcement seeking inter alia stay of enforcement proceedings pending adjudication of appeal filed by Soh against the decision of Singapore High granting leave to Strandore to enforce the Danish award. The Singapore High Court refused to stay the enforcement of arbitral award pending adjudication of Soh’s appeal citing the principles enunciated by the Singapore Court of Appeal in Lian Soon Construction Pte Ltd v Guan Qian Realty Pte Ltd [1999] 1 SLR(R) 1053 which are as follows:-

  • While the court has the power to grant a stay, and this is entirely at the discretion of the court, the discretion must be exercised judicially, i.e., in accordance with well-established principles.
  • The first principle is that, as a general proposition, the court does not deprive a successful litigant of the fruits of his litigation and lock up funds to which he is prima facie entitled, pending an appeal. There is no difference whether the judgment appealed against was made on a summary basis or after a full trial.
  • This is balanced by the second principle. When a party is exercising his undoubted right of appeal, the court ought to see that the appeal, if successful, is not nugatory. Thus a stay will be granted if it can be shown by affidavit that, if the damages and costs are paid, there is no reasonable probability of getting them back if the appeal succeeds.
  • The third principle follows, and is an elaboration of the second principle, that an appellant must show special circumstances before the court will grant a stay.

My Comments

The position that emerges from the English and Singaporean authorities is that stay on enforcement of arbitral award is not a norm rather its an exception and it is awarded in ‘special circumstances’ [as provided in Far Eastern Shipping (supra)]. The Singaporean authorities in Lian Soon Construction (supra) read with Strandore Invest (supra) clearly sets out the parameters which needs to be considered while granting stay of enforcement of arbitral award. It is also noteworthy that these precedents were rendered much earlier in time as compared to Supreme Court decisions of NALCO and Fiza which had created this regime of automatic stay on enforcement of domestic awards pending adjudication of application to set aside the award. Thus, in view thereof, this decision sets the things back on track which were turned backward by Section 87 of the 2019 Act by retrospective resurrection of an automatic-stay.

Disclaimer: The views expressed on this post are mine and do not reflect the views of the organisation(s) I am engaged with

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