Section 87 of the Arbitration and Conciliation Act, 1996 struck down. Here’s why

Supreme Court: The 3-judge bench of RF Nariman, Surya Kant and V. Ramasubramanian, JJ has held that Section 87 of the Arbitration and Conciliation Act, 1996 must be struck down as manifestly arbitrary under Article 14.

Section 87 as introduced by the Arbitration and Conciliation (Amendment) Act, 2019 states that amendments made to the 1996 Act by the Arbitration and Conciliation (Amendment) Act, 2015 will not apply 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 the commencement of the Arbitration and Conciliation (Amendment) Act, 2015. It also states that the aforesaid amendments will apply only to arbitral proceedings commenced on or after the commencement of the 2015 Amendment Act and to court proceedings arising out of or in relation to such arbitral proceedings.

The Court noticed 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.

Section 87 was introduced after deleting Section 26 of the 2015 Amendment Act which stated that the 2015 Amendment Act will not 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.

When contrasted with Section 26, Section 87 is in two parts i.e. Section 87(a)

  • negatively stating that the 2015 Amendment Act shall not apply to Court proceedings arising out of arbitral proceedings irrespective of whether such court proceedings are commenced before or after the commencement of the 2015 Amendment Act; and
  • positively applying only to court proceedings in case they arise out of arbitral proceedings that are commenced on or after the commencement of the 2015 Amendment Act.

It can thus be seen that the scheme of Section 87 is different from that of Section 26 and is explicit in stating that court proceedings are merely parasitical on arbitral proceedings.

It was further observed that the law on Section 26 of the 2015 Amendment Act was laid down with great clarity. To thereafter 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. The Court, hence, held that

“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, is struck down as being manifestly arbitrary under Article 14 of the Constitution of India.”

Another reason considered by the Court to strike down Section 87 was the anomaly 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, (where an appeal is in the nature of a rehearing of the original proceeding, where the chance of succeeding is far greater than in a restricted review of arbitral awards under Section 34). The Court said that this itself was 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. It said,

“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.”

[Hindustan Construction Company Ltd. v. Union of India, 2019 SCC OnLine SC 1520, decided on 27.11.2019]

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