SUPREME COURT STRIKES DOWN CONSTITUTIONAL VALIDITY OF SECTION 87 OF ARBITRATION AND CONCILIATION ACT 1996

The Supreme Court of India has in a recent case of Hindustan Construction Company Limited and Anr. vs Union of India and others dated 27-11-2019 struck down the constitutional validity of Section 87 of Arbitration and Conciliation Act 1996 as amended in 2019 (Act).

The Petitioner, Hindustan Construction Company Limited, had challenged Section 87 of the Amendment Act 2019 on the grounds that although certain arbitral awards were in their favour and certain amounts were due under such awards from the Government bodies, but as soon as the judgment debtors made an application under Section 34 before a court of law, thereby challenging such arbitral award, the court imposed an automatic stay on the execution of such award and the Petitioner was left remediless until and unless such court proceedings were complete. As a result, the Petitioner had become incapable of paying money to various operational creditors who had supplied manpower, machinery, etc to the Petitioner, and thus, they had initiated the process of recovery of dues under the Insolvency and Bankruptcy Code 2016 as amended thereof (the Code). Thus, the Petitioner became vulnerable to being declared insolvent under the Code.

The Apex Court discussed in this case that the 2015 Amendment Act had corrected certain mischiefs prevalent in the Act including the provision of application for setting aside an arbitral award in a court of law, which had acted as an automatic stay on enforcement of arbitral award, leaving the decree holder remediless till the court proceedings were complete. This 2015 Amendment Act had application with respect to court proceedings arising out of arbitral proceedings that are pending on, or commenced on or after 23-10-2015. Thus, accordingly, the courts had allowed a number of Section 34 applications (i.e. court proceedings to set aside arbitral award) that were pending on/commenced on or after 23-10-2015, and also granted conditional stay on enforcement of awards after deposits were made by judgment debtors. This ensured that there was a speedy disposal of court matters in arbitration cases.

The Apex Court further discussed that with the introduction of Section 87 of the Act in 2019, the provision of automatic stay on enforcement of arbitral award has been reinstated, thereby causing delay in disposal of cases, and an increase in the interference of courts in arbitration matters, which defeated the very object of the Act. Further, this 2019 Amendment Act has application with respect to court proceedings arising out of arbitral proceedings that were commenced on or after 23-10-2015. As a result, a number of refund applications had been filed by judgment debtors for refund of deposits made by them against grant of conditional stay in court proceedings that had arisen out of arbitral proceedings commencing on or after 23-10-2019. Further, Section 87 of the Act has also treated court proceedings pending on 23-10-2015 differently than those commenced on or after 23-10-2015.

Thus, on the aforesaid grounds the Apex Court considered Section 87 to be arbitrary and thus, violative of Article 14 of Constitution of India, as it brought back the mischief that was corrected by the 2015 Amendment Act. Therefore, the Supreme Court struck down the constitutional validity of Section 87 of the Act and refused to proceed with the objections pertaining to stay on the execution of the arbitral award in the present case as there was a pre-existing dispute between the parties regarding deposit made against such conditional stay.

Harini Daliparthy

Senior Legal Associate

The Indian Lawyer