Hindustan Construction Company Limited & Anr.Dia & Ors. Vs. Union of India Case Summary You Can Listen To

infrastructure contracts, government liability, insolvency impact, contract law

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Hindustan Construction Company Limited & Anr.Dia & Ors. Vs. Union of India

Supreme Court Of India Writ Petition Civil /1074/2019

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The case revolves around Hindustan Construction Company Limited and others challenging certain provisions of the Arbitration and Conciliation Act, 1996, and the Insolvency and Bankruptcy Code, 2016. The petitioners argue ...

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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL ORIGINAL/APPELLATE JURISDICTION

WRIT PETITION (CIVIL) NO. 1074 OF 2019

Hindustan Construction Company Limited …Petitioners

& Anr.

Versus

Union of India & Ors. …Respondents

WITH

WRIT PETITION (CIVIL) No.1276 of 2019

WITH

WRIT PETITION (CIVIL) No.1310 of 2019

WITH

M.A. NOS.2140-2144 OF 2019

CIVIL APPEAL NOS. 2621-2625 OF 2019

J U D G M E N T

R.F. NARIMAN, J.

1. This set of Writ Petitions seek to challenge the constitutional

validity of Section 87 of the Arbitration and Conciliation Act, 1996

(hereinafter referred to as the “Arbitration Act, 1996”) as inserted by

Section 13 of the Arbitration and Conciliation (Amendment) Act,

2019 (hereinafter referred to as the “2019 Amendment Act”) and

brought into force with effect from 30.08.2019. They also seek to

challenge the repeal (with effect from 23.10.2015) of Section 26 of

the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter

referred to as the “2015 Amendment Act”) by Section 15 of the 2019

Amendment Act. Apart from the aforesaid challenge, a challenge is

also made to various provisions of the Insolvency and Bankruptcy

Code, 2016 (hereinafter referred to as the “Insolvency Code”) which,

as stated by the Petitioners, result in discriminatory treatment being

meted out to them.

2. The facts relevant for the determination of these matters may

be gleaned from Writ Petition (Civil) No.1074 of 2019. The Petitioner

No.1 therein, i.e. Hindustan Construction Company Limited, is an

infrastructure construction company involved in the business of

construction of public-utilities and projects like roads, bridges,

hydropower and nuclear plants, tunnels and rail facilities. The

Petitioner company, inter alia, undertakes these building projects as

a contractor for government bodies such as the National Highways

Authority of India (“NHAI”, i.e. Respondent No.5 in the Writ Petition),

NHPC Ltd. (“NHPC”, i.e. Respondent No.6), NTPC Ltd. (“NTPC”, i.e.

Respondent No.8), IRCON International Ltd. (“IRCON”, i.e.

Respondent No.7) and the Public Works Department (“PWD”). Such

projects are allotted to the Petitioner through the public tendering

system. As Government bodies are owners and beneficiaries of

such projects, cost overrun is almost invariably disputed by these

bodies, leading to huge delays in the recovery of the legitimate dues

of the petitioners. Also, these dues can only be recovered through

civil proceedings or through arbitrations.

3. Arbitration awards that are in favour of the Petitioner

company are invariably challenged under Sections 34 and 37 of the

Arbitration Act, 1996, and on average, more than 6 years are spent

in defending these challenges. The major problem in the way of the

Petitioners is that the moment a challenge is made under Section

34, there is an ‘automatic-stay’ of such awards under the Arbitration

Act, 1996.

4. The Petitioners are then subjected to a double-whammy.

Government bodies other than Government companies are exempt

from the Insolvency Code because they are statutory authorities or

government departments. Even if they can be said to be operational

debtors - which is not the case - the moment a challenge is filed to

an award under Section 34 and/or Section 37 of the Arbitration Act,

1996, such debt becomes a ‘disputed debt’ under the judgments of

this Court, and proceedings initiated under the Insolvency Code at

the behest of the Petitioner company, not being maintainable in any

case, would be dismissed at the threshold. Huge sums of money are

therefore due from all these companies/government/government

bodies to the Petitioners.

5. On the other hand, in order that the Petitioner company

continue to operate, the Petitioner owes large sums to operational

creditors for supplying men, machinery and material for the projects.

It is stated in the Writ Petition No.1074 of 2019 that Demand Notices

have been issued to the Petitioner by a large number of operational

creditors for sums amounting to over a hundred crores.

6. Dr. Abhishek Manu Singhvi, learned Senior Advocate

appearing on behalf of the Petitioner No.1 in Writ Petition No.1074

of 2019, has argued that the Arbitration Act, 1996 is based upon the

UNCITRAL Model Law on International Commercial Arbitration (as

adopted by the United Nations Commission on International Trade

Law on 21 June 1985) (hereinafter referred to as the “UNCITRAL

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

UNCITRAL Model Law, Section 36 of the Arbitration Act, 1996 has

been construed by judgments of this Court as granting an

‘automatic-stay’ the moment a Section 34 application is filed within

time. According to the learned Senior Advocate, from the plain

language of Section 36, automatic-stay does not follow, and the

judgments of this Court which have so held would require a revisit

by this larger bench. In any case, the 246

Report of the Law

Commission of India titled, ‘Amendments to the Arbitration and

Conciliation Act, 1996’ (August, 2014) (hereinafter referred to as the

“246

Law Commission Report”) recommended that Section 36 be

amended, which was in fact done by the 2015 Amendment Act, so

that automatic-stays are now things of the past. However, despite

the fact that the 2015 Amendment Act made large-scale changes to

the Arbitration Act, 1996, keeping in view the objects of the

Arbitration Act, 1996 of minimum judicial intervention, speedy

determination and recovery of amounts contained in arbitral awards,

yet, another ‘High-Level Committee to Review the Institutionalisation

of Arbitration Mechanism in India’ headed by Retd. Justice B.N.

Srikrishna by its report dated 30.07.2017 (hereinafter referred to as

the “Srikrishna Committee Report”) opined that the 2015

Amendment Act should not apply to pending court proceedings

which have commenced after 23.10.2015 (i.e. the date of the 2015

Amendment Act coming into force), but should only apply in case

arbitral proceedings have themselves been commenced post

23.10.2015, which would include court proceedings relating thereto.

He argued that the Government of India issued a Press Release on

07.03.2018 to enact a new Section 87 in accord with what the

Srikrishna Committee Report had opined, which was pointed out to

this Court before it decided the case of BCCI v. Kochi Cricket Pvt.

Ltd. (2018) 6 SCC 287 (which was decided on 15.03.2018). Despite

the fact that this Court specifically opined in the said judgment that

the aforesaid provision would be contrary to the object of the 2015

Amendment Act, and despite the fact that the judgment was

specifically sent to the Ministry of Law and Justice and to the

learned Attorney General for India, Section 87 was enacted,

reference being made only to the Srikrishna Committee Report,

without even a mention of the aforesaid judgment of this Court in

BCCI (supra). Consequently, the learned Senior Advocate argued

that since the basis of a judgment of the Supreme Court can only be

removed if there is a pointed reference to the said judgment,

obviously the judgment of this Court has been sought to be directly

overturned without removing its basis. Further, Section 87 flies in the

face of not only the object of the Arbitration Act, 1996 as a whole

and the objects for enacting the 2015 Amendment Act, but is also

contrary to Section 35 of the Arbitration Act, 1996. He has stated

that it is amazing that in a Civil Court where a full-blooded appeal is

filed, Order XLI Rule 5 of the Code of Civil Procedure, 1908

(hereinafter referred to as the “CPC”) is to apply, there being no

automatic-stay of a money decree; whereas in a summary

proceeding under Section 34 of the Arbitration Act, 1996, where the

court does not sit in appeal over the award – and if the view of the

arbitrator is a possible view, it passes muster – there is an

automatic-stay of an arbitral award on the mere filing of Section 34

application, which in turn takes years for final disposal.

7. Dr. Singhvi then trained his guns against Section 87, stating

that it is violative of Articles 14, 19(1)(g), 21 and 300-A of the

Constitution of India, as it is contrary to the object of the principal

Arbitration Act, 1996 itself; takes away the vested right of

enforcement and binding nature of an arbitral award; and without

removing the basis of the BCCI judgment (supra), acts in the teeth

of the said judgment, making the said section unreasonable,

excessive, disproportionate as well as arbitrary. He then argued that

in effect, the 2019 Amendment Act reverses the beneficial effects of

the 2015 Amendment Act which remedied the original mischief

contained in the Arbitration Act, 1996, that too after a period of more

than 19 years. To bring back this mischief of automatic-stays would

result in manifest arbitrariness, rendering the provision

constitutionally infirm. He argued that the Srikrishna Committee

Report also did not take into account the enforcement of the

Insolvency Code. On the one hand, arbitral awards for crores of

rupees will get automatically stayed through the application of

Section 87, and on the other hand, non-payment of any amount

beyond INR one lakh by the Petitioner to its operational creditors

would render it open to being declared insolvent. The absurd

consequence of this is that the fruits of an award are denied to the

Petitioner, resulting in financial hardship, which in turn results in

applications being filed against the Petitioner under the Insolvency

Code for lesser amounts than what is due to it as an award-holder.

Further, 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 sums back from such award-

holders. For all these reasons, it is contended that Section 87 is

constitutionally infirm. Also, according to Dr. Singhvi, since almost all

the arbitration clauses with Government/Government Bodies state

that the Arbitration Act, 1996 together with its amendments shall

apply, this would make the 2019 Amendment Act applicable to its

pending arbitral awards, resulting in wholly arbitrary consequences.

8. So far as the challenge to the Insolvency Code is concerned,

Dr. Singhvi exhorted us to read ‘corporate person’, as defined by

Section 3(7) of the Insolvency Code, to include Government Bodies

other than Government Companies (which are already included).

This was based on the argument that qua the object sought to be

achieved by the Insolvency Code, it makes no difference as to

whether the person sued as a corporate person is a government

company or a body corporate set up under a statute. He exhorted us

to either delete the words ‘limited liability’ contained in Section 3(7)

of the Code, or read Section 3(23)(g) of the Code into Section 3(7),

and relied upon judgments which stressed the ‘positive’ aspect of

Article 14 of the Constitution of India, which permit such

interpretation. He then pointed out that whereas ‘financial position’

(as defined under Section 5(9) of the Insolvency Code) mandates

taking into consideration the financial information and balance

sheets, such financial position is irrelevant at the stage of triggering

the Insolvency Code, and only becomes relevant at the stage of

declaring such position to prospective resolution applicants, which

itself makes the provision manifestly arbitrary. He then argued as to

the omission of initiation of the resolution process by a creditor in

Section 6 of the Insolvency Code, together with the absence of a

mechanism for forcing debtors of a corporate debtor to make

payments to avoid insolvency of such corporate debtors. He then

referred to the principle of ‘casus omissus’ and how the modern view

is that such casus omissus can be supplied by the Courts, so as to

save the provisions of the Insolvency Code from the vice of manifest

arbitrariness. He also argued that there is no level playing field so

far as his client is concerned, as a statutory authority can initiate the

resolution process against persons like his client, but not vice-versa.

He then made an impassioned plea that, in any event, this Court

ought to follow its earlier judgments and restate the principle that

payment of a money-decree under an award, even when under

challenge, is the rule - stay being the exception. Also in cases like

the present, even if deposits are made as a condition of stay of

money-decrees, withdrawal ought to be permitted - not on onerous

conditions such as bank guarantees - but on other conditions such

as corporate guarantees and the like, so that such monies are

available for payment to other creditors, including operational

creditors, who are free to invoke the Insolvency Code against the

Petitioner.

9. Dr. Singhvi then argued that his client was forced to avail of

the NITI Aayog’s Office Memorandum No.14070/14/2016-PPPAU

dated 05.09.2016 (hereinafter referred to as the “NITI Aayog

Scheme”) given the fact that the moment arbitral awards were

passed in his client’s favour, they were challenged under Section 34

of the Arbitration Act, 1996 as a result of which, there was an

automatic-stay. Thus, under the said NITI Aayog Scheme, his client

in order to retrieve amounts payable under such awards, was able to

get 75% of a “pay-out amount”, which is the amount for which the

award has been announced, plus payment of interest. This can only

be done against a bank guarantee of the equivalent amount.

However, apart from such bank guarantee, an additional bank

guarantee of 10% per year on the pay-out amount would also have

to be given, which is then compounded annually. According to him,

given the fact that 75% of such pay-out amount can only be

released on the bank guarantee of the equivalent amount, asking for

anything over and above this would amount to an arbitrary exercise

of power, which is liable to be struck down. Dr. Singhvi contended

that this extra amount of 10% per annum, being severable, can be

struck down without otherwise impacting the NITI Aayog Scheme.

10. Shri Neeraj Kishan Kaul, also appearing for Hindustan

Construction Company, reiterated some of the submissions of Dr.

Singhvi and argued, based on a reading of Section 87 as introduced

by the 2019 Amendmen t Act and Section 26 of the 2015

Amendment Act, that Section 87 is nothing but a re-hash of Section

26 and this being so, is therefore a direct attack on the judgment of

this Court in BCCI (supra), without removing its basis. He also

added that since there is no set-off mechanism provided by the

Insolvency Code, the provisions of the Insolvency Code will have to

be held to be manifestly arbitrary so far as his client is concerned, to

this extent.

11. Shri C.A. Sundaram, learned Senior Advocate appearing for

M/s Patel Engineering Ltd. in I.A. No. 157742 of 2019 in W.P (C) No.

1074 of 2019, reiterated the submissions that Section 87, being

directly contrary to this Court’s judgment in BCCI (supra), needs to

be set aside. He also argued that it retrospectively removes a vested

right in the petitioner, as is reflected in paragraph 62 and 63 of the

BCCI judgment (supra).

12. Shri Ritin Rai, learned Senior Advocate appearing for M/s

Gammon Engineers and Contractors Private Limited, i.e. the

Petitioner No.1 in W.P.(C) 1276 of 2019, pointed out various

paragraphs of the Counter-Affidavit of the Union of India to show

that there is no real answer to the submission that Section 87

directly interferes with the judgment of this Court in BCCI (supra),

and that the introduction of Section 87 is manifestly arbitrary. In any

case, he relied upon Section 6 of the General Clauses Act, 1897 to

save the application of Section 36 as amended by the 2015

Amendment Act. When it came to the provisions of the Insolvency

Code, he referred to this Court’s judgment in Mobilox Innovations

Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353 and

stated that Section 5(6) of the Insolvency Code, which defines

‘disputes’, read with Section 8(2) of the Insolvency Code, would

make it clear that there is no bar to applying an Order VIII-A of the

CPC type procedure to proceedings under the Insolvency Code, so

that when his client’s sub-contractor triggers the Insolvency Code

against his client, his client in-turn should be able to make its

principal employer a party to such proceedings, so that the sub-

contractor may then recover these amounts from the principal

employer directly, thereby absolving his client from the clutches of

the Insolvency Code.

13. Shri Nakul Dewan, learned Senior Advocate appearing on

behalf of M/s Gangotri Enterprises Limited, i.e. the Petitioner No.1 in

W.P. (C) No. 1310 of 2019, referred copiously to the UNCITRAL

Model Law and stated that under the UNCITRAL 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 Arbitration Act, 1996 has not

followed this model and has a far more robust enforcement regime,

as Section 36 of the Arbitration Act, 1996 mandates that once an

award can be said to be final, it can be executed in the manner

provided by the CPC.

14. Mr. Dewan then went on to state that 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. He then argued that even though Section 15 of the 2019

Amendment Act has deleted Section 26 of the 2015 Amendment

Act, this has not changed the basis on which the judgment in BCCI

(supra) was delivered, as there is no vested right to resist the

enforcement of an arbitral award, and that arbitration proceedings

and court proceedings are distinct sets of proceedings as

recognized by Section 87 itself. Further, classification of parties on

the basis of this cut-off date has no rational nexus to the object

sought to be achieved by the Arbitration Act, 1996. Finally, he urged

that the Counter-Affidavit filed by the Union of India, after referring to

this Court’s judgment, then mouthed the same reasons for

introducing Section 87 as were in the Srikrishna Committee Report,

which was prior to, and could not have taken into account, this

Court’s judgment in BCCI (supra). Therefore, to state that even after

this Court settled the law in BCCI (supra) there would still be

‘uncertainty’ would itself show that the provision contained in Section

87 would be manifestly arbitrary. He then argued, based on a

treatise by Ian F. Fletcher on the law of insolvency, that a distinction

is made in insolvency law between refusal to pay, and inability to

pay. Since the automatic-stay provision would render persons like

his client unable to pay debts, his client, though otherwise financially

healthy, would suddenly become vulnerable to being declared

insolvent under the Insolvency Code.

15. The learned Attorney General for India, Shri K.K. Venugopal,

defended the repeal of Section 26 of the 2015 Arbitration

Amendment and the insertion of Section 87 into the Arbitration Act,

1996 by the 2019 Amendment Act. He argued that in BCCI’s case

(supra), the interpretation of Section 26 of the 2015 Amendment Act

is only declaratory in nature. Since the said judgment neither sets

aside any executive action, nor any provision of a statute, it does not

require a validating act to neutralise its effect. It is open to

Parliament, if it finds that a view expressed by the Apex Court does

not reflect its original intent, to clarify its original intent through

amendment. This is in fact what was done by deleting Section 26 of

the 2015 Amendment Act, and inserting Section 87 into the

Arbitration Act, 1996. He relied on the clarificatory aspect of the

amendment by referring to paragraph 6(vi) of the Statement of

Objects and Reasons to the Arbitration and Conciliation

(Amendment) Bill, 2019. In any event, even if the principles

governing validating acts are applied, the deletion of Section 26

retrospectively removes the basis of the judgment in the BCCI case

(supra). Further, there is no substance to the challenge to Section

87 on the ground of the date being fixed as 23.10.2015, as cut-off

dates have been upheld in a plethora of cases as being within the

exclusive domain of Parliament, and the courts should not normally

interfere with the fixation of such cut-off date, unless blatantly

arbitrary or discriminatory. He referred to some of our judgments in

support of this proposition.

16. Shri Tushar Mehta, learned Solicitor General of India,

defending the constitutional challenge to the provisions of the

Insolvency Code, argued that a Writ Petition filed under Article 32 of

the Constitution of India cannot be converted into a recovery

proceeding by the Petitioners. According to Shri Mehta, the conduct

of the Petitioner No.1 in W.P. (C) 1074 of 2019 is such that the Writ

Petition ought to be dismissed at the threshold itself. First and

foremost, it was contended that the petitioner has mislead this Court

by stating that a sum of INR 6070 crores is liable to be paid by the

Government entities mentioned therein, as such sums amount to

awards that have not been stayed by any Court. He referred to and

relied upon a chart appended to the Counter-Affidavit of the Union of

India dated 21.10.2019, in which he was at pains to point out that in

each of the awards in favour of the Petitioner No.1 in Writ Petition

No.1074 of 2019, the contract value was much less than the actual

amount paid on completion of work, in addition to which, deposit

orders have been passed by courts in all these cases, which have

not been appealed against. He further argued that there was a gross

suppression of facts and figures by Petitioner No.1, as a result of

which the Writ Petition ought to be dismissed at the threshold. He

contended that what was deliberately hidden by the Petitioner No.1

was the fact that the Respondent Public Sector Undertakings

(hereinafter referred to as “PSUs”) have deposited/paid substantial

amounts that are due against them under arbitral awards, amounting

percentage wise to 83.3%. He also pointed out that insofar as

IRCON is concerned, in relation to one particular arbitral award,

IRCON has accused the Petitioner No.1 of trying to influence the

arbitrator by providing unsolicited facilities to the arbitrator, and

actually getting orders drafted on behalf of the arbitrator by the

lawyer of the Petitioners and otherwise providing undue favours to

the arbitrator; all of which is the subject matter of adjudication

pending in the Delhi High Court. When it came to the challenge to

the Insolvency Code, he argued that except for the sums owing

under some arbitral awards, none of the PSUs have any other dues

that are owing to the Petitioner No.1. He also pointed out that

whether a person is an operational creditor has to be decided based

upon the fact situation in each case. The very fundamental basis of

the Petitioner’s argument that the Insolvency Code is

unconstitutional because it does not give the Petitioners a right to

recover monies from their debtors - and that the same Insolvency

Code gives the debtor a right to recover from the Petitioner No.1 - is

flawed, because the Insolvency Code is not a statute for recovery of

debts, but is a statute for reorganisation of corporate persons and

resolution of stressed assets of corporate persons. According to

him, three of the five entities who have arbitral awards against them,

namely NTPC, NHPC and IRCON, are Government Companies,

which certainly fall within the definition of ‘corporate person’ and

‘corporate debtor’ under Section 3(7) and 3(8) of the Insolvency

Code. So far as the NHAI is concerned, he referred to the Statement

of Objects and Reasons of the National Highways Authority of India

Act, 1988 (hereinafter referred to as the “NHAI Act”) and some

sections of the said Act to show that NHAI is a statutory body which

functions as an extended limb of the Central Government, and which

is to carry out the sovereign function of laying down national

highways. Obviously, the Insolvency Code cannot be used against

such a statutory body, because 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 an Insolvency Code. He also referred to the

definitions contained in Section 3(7) and 3(23) of the Insolvency

Code, and stated that they are separate and independent of each

other, Section 3(7) lifting only two out of seven entities mentioned in

Section 3(23). Thus, being mutually exclusive, nothing from Section

3(23) which defines ‘person’ can possibly be imported into Section

3(7) which defines ‘corporate person’. He further argued that this

Court’s judgment in K. Kishan v. Vijay Nirman Company Pvt. Ltd.

(2018) 17 SCC 662 made it clear that arbitral awards that are

pending adjudication under Section 34 would show that a pre-

existing dispute exists in such cases, and therefore would in any

case be outside the strong arm of the law contained in the

Insolvency Code.

17. Ms. Pinky Anand, learned Additional Solicitor General,

supported the submissions of both the learned Attorney General and

the Solicitor General. She further argued, based on a copious

reading of the Counter-Affidavit filed on behalf of the Union of India,

that no inroads have been made into the objects sought to be

achieved by the 2015 Amendmen t Act by merely following a

particular cut-off date. In any case, the fixing of such cut-off date,

being the sole prerogative of the Parliament, cannot be interfered

with by the courts as this pertains to policy matters. She also cited

some judgments of this Court to buttress her submissions.

Interpretation of Section 36 of the Arbitration Act, 1996

18. At the outset, it is important to advert to Section 36 of the

Arbitration Act, 1996 and the judgments interpreting it. Section 36

(prior to the 2015 Amendment Act) stated as follows:

“36. 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.”

19. The UNCITRAL Model Law is important in understanding the

provisions of the Arbitration Act, 1996 as the said Act is explicitly

based upon it. The preamble of the Arbitration Act, 1996 specifically

states as follows:

“Preamble. -- WHEREAS the United Nations

Commission on International Trade Law

(UNCITRAL) has adopted the UNCITRAL

Model Law on International Commercial

Arbitration in 1985; AND

WHEREAS the General Assembly of the

United Nations has recommended that all

countries give due consideration to the said

Model Law, in view of the desirability of

uniformity of the law of arbitral procedures and

the specific needs of international commercial

arbitration practice;

AND WHEREAS the UNCITRAL has adopted

the UNCITRAL Conciliation Rules in 1980;

AND

WHEREAS the General Assembly of the

United Nations has recommended the use of

the said Rules in cases where a dispute arises

in the context of international commercial

relations and the parties seek an amicable

settlement of that dispute by recourse to

conciliation;

AND WHEREAS the said Model Law and

Rules make significant contribution to the

establishment of a unified legal framework for

the fair and efficient settlement of disputes

arising in international commercial relations;

AND WHEREAS it is expedient to make law

respecting arbitration and conciliation, taking

into account the aforesaid Model Law and

Rules.”

20. As a matter of fact, the judgment in Chloro Controls (I) Pvt.

Ltd. v. Seven Trent Water Purification Inc. (2013) 1 SCC 641

says as much in paragraph 93 thereof, which reads as under:

“93. As noticed above, the legislative intent

and essence of the 1996 Act was to bring

domestic as well as international commercial

arbitration in cons onance with

the UNCITRAL Model Rules, the New York

Convention and the Geneva Convention. The

New York Convention was physically before

the legislature and available for it s

consideration when it enacted the 1996 Act.

Article II of the Convention provides that each

contracting State shall recognise an

agreement and submit to arbitration all or any

differences which have arisen or which may

arise between them in respect of a defined

legal relationship, whether contractual or not

concerning a subject-matter capable of

settlement by arbitration. Once the agreement

is there and the court is seized of an action in

relation to such subject-matter, then on the

request of one of the parties, it would refer the

parties to arbitration unless the agreement is

null and void, inoperative or incapable of

performance.”

21. What is important so far as the UNCITRAL Model Law is

concerned is Article 36(2) thereof, which states as follows:

“Article 36. Grounds for refusing recognition or

enforcement-

xxx xxx xxx

(2) If an application for setting aside or

suspension of an award has been made to a

court referred to in paragraph (1)(a)(v) of this

article, the court where recognition or

enforcement is sought may, if it considers it

proper, adjourn its decision and may also, on

the application of the party claiming

recognition or enforcement of the award, order

the other party to provide appropriate

security.”

22. Shri Dewan has argued that under the UNCITRAL Model

Law, Articles 34 and 35 provide for two bites at the cherry: (i) in

cases in which an award is sought to be set aside, and (ii) thereafter

when not set aside, sought to be recognised and enforced in the

same country in which it has been made. He is right in stating that

Section 36 of the Arbitration Act, 1996 does not follow the two bites

at the cherry doctrine, for the reason that when an award made in

India becomes final and binding, it shall straightaway be enforced

under the CPC, 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. In point of fact, the raison

d'etre for Section 36 is only to make it clear that when an arbitral

award is not susceptible to challenge, either because the time for

making an application to set it aside has expired, or such application

having been made is refused, the award, being final and binding,

shall be enforced under the CPC as if it were a decree of the court.

This becomes clear when Section 36 and 35 of the Arbitration Act,

1996 are read together. Section 35 of the Arbitration Act, 1996 reads

as follows:

“35. Finality of arbitral awards.- Subject to

this Part an arbitral award shall be final and

binding on the parties and persons claiming

under them respectively.”

23. However, in National Aluminum Company Ltd. (NALCO) v.

Pressteel & Fabrications (P) Ltd. and Anr. 2004 1 SCC 540, this

Court held:

“10…At one point of time, considering the

award as a money decree, we were inclined to

direct the party to deposit the awarded amount

in the court below so that the applicant can

withdraw it, on such terms and conditions as

the said court might permit it to do as an

interim measure. But then we noticed from the

mandatory language of Section 34 of the 1996

Act, that an award, when challenged under

Section 34 within the time stipulated therein,

becomes unexecutable. There is no discretion

left with the court to pass any interlocutory

order in regard to the said award except to

adjudicate on the correctness of the claim

made by the applicant therein. Therefore, that

being the legislative intent, any direction from

us contrary to that, also becomes

impermissible. On facts of this case, there

being no exceptional situation which would

compel us to ignore such statutory provision,

and to use our jurisdiction under Article 142,

we restrain ourselves from passing any such

order, as prayed for by the applicant.

11. However, we do notice that this automatic

suspension of the execution of the award, the

moment an application challenging the said

award is filed under Section 34 of the Act

leaving no discretion in the court to put the

parties on terms, in our opinion, defeats the

very objective of the alternate dispute

resolution system to which arbitration belongs.

We do find that there is a recommendation

made by the Ministry concerned to Parliament

to amend Section 34 with a proposal to

empower the civil court to pass suitable

interim orders in such cases. In view of the

urgency of such amendment, we sincerely

hope that necessary steps would be taken by

the authorities concerned at the earliest to

bring about the required change in law.”

24. When this court speaks of “the mandatory language of

Section 34” of the Arbitration Act, 1996 obviously what is meant is

the language of Section 36 of the Arbitration Act, 1996, as noted by

National Buildings Construction Corporation Ltd. v. Lloyds

Insulation India Ltd. (2005) 2 SCC 367 (in paragraph 6). In Fiza

Developers and Inter-trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd.

and Anr. (2009) 17 SCC 796, this Court held:

“20. Section 36 provides that an award shall

be enforced in the same manner as if it were a

decree of the court, but only on the expiry of

the time for making an application to set aside

the arbitral award under Section 34, or such

application having been made, only after it has

been refused. Thus, until the disposal of the

application under Section 34 of the Act, there

is an implied prohibition of enforcement of the

arbitral award. The very filing and pendency of

an application under Section 34, in effect,

operates as a stay of the enforcement of the

award.”

25. To state that an award when challenged under Section 34

becomes unexecutable merely by virtue of such challenge being

made because of the language of Section 36 is plainly incorrect. As

has been pointed out hereinabove, Section 36 was enacted for a

different purpose. When read with Section 35, all that Section 36

states is that enforcement of a final award will be under the CPC,

and in the same manner as if it were a decree of the Court. In fact,

this is how Section 36 has been read by a three-judge bench in

Leela Hotels Ltd. V. Housing and Urban Development

Corporation Ltd. (2012) 1 SCC 302 as follows:

“45. Regarding the question as to whether the

award of the learned arbitrator tantamounts to

a decree or not, the language used in Section

36 of the Arbitration and Conciliation Act,

1996, makes it very clear that such an award

has to be enforced under the Code of Civil

Procedure in the same manner as it were a

decree of the court. The said language leaves

no room for doubt as to the manner in which

the award of the learned arbitrator was to be

accepted.”

26. To read Section 36 as inferring something negative, namely,

that where the time for making an application under Section 34 has

not expired and therefore, on such application being made within

time, an automatic-stay ensues, is to read something into Section 36

which is not there at all. Also, this construction omits to consider the

rest of Section 36, which deals with applications under Section 34

that have been dismissed, which leads to an award being final and

binding (when read with Section 35 of the Arbitration Act, 1996)

which then becomes enforceable under the CPC, the award being

treated as a decree for this purpose.

27. This also finds support from the language of Section 9 of the

Arbitration Act, 1996, which specifically enables a party to apply to a

Court for reliefs “…after the making of the arbitration award but

before it is enforced in accordance with Section 36.” The decisions

in NALCO (supra) and Fiza Developers and Intra-trade Pvt. Ltd.

(supra) overlook this statutory position. These words in Section 9

have not undergone any change by reason of the 2015 or 2019

Amendment Acts.

28. Interpreting Section 9 of the Arbitration Act, 1996, a Division

Bench of the Bombay High Court in Dirk India Pvt. Ltd. v.

Maharashtra State Power Generation Company Ltd. 2013 SCC

Online Bom 481 held that:

“13….The second facet of Section 9 is the

proximate nexus between the orders that are

sought and the arbitral proceedings. When an

interim measure of protection is sought before

or during arbitral proceedings, such a measure

is a step in aid to the fruition of the arbitral

proceedings. When sought after an arbitral

award is made but before it is enforced, the

measure of protection is intended to safeguard

the fruit of the proceedings until the eventual

enforcement of the award. Here again the

measure of protection is a step in aid of

enforcement. It is intended to ensure that

enforcement of the award results in a

realisable claim and that the award is not

rendered illusory by dealings that would put

the subject of the award beyond the pale of

enforcement.”

29. This being the legislative intent, the observation in NALCO

(supra) that once a Section 34 application is filed, “there is no

discretion left with the Court to pass any interlocutory order in regard

to the said Award…” flies in the face of the opening words of Section

9 of the Arbitration Act, 1996, extracted above.

30. Thus, the reasoning of the judgments in NALCO (supra), and

Fiza Developers and Intra-trade Pvt. Ltd. (supra) being per

incuriam in not noticing Sections 9, 35 and the second part of

Section 36 of the Arbitration Act, 1996, do not commend themselves

to us and do not state the law correctly.

The fact that NALCO

(supra) has been followed in National Buildings Construction

Corporation Ltd. v. Lloyds Insulation India Ltd. (supra) does not

take us any further, as National Buildings Construction

Corporation Ltd. (supra) in following NALCO (supra), a per

incuriam judgement, also does not state the law correctly. Thus, it is

clear that the automatic-stay of an award, as laid down by these

In NALCO (supra), this Court was concerned with two questions – the

second question being whether the appropriate Court, for the purpose of

challenging or seeking modification of an award, was the Supreme

Court, or the principal Civil Court of original jurisdiction under Section

2(e) of the Arbitration Act, 1996. This Court held, distinguishing State of

M.P. v. Saith and Skeleton (P) Ltd. (1972) 1 SCC 702 and Guru

Nanak Foundation v. Rattan Singh and Sons. (1981) 4 SCC 634, that

the Court which had jurisdiction to modify and/or set aside the award

was not the Supreme Court. On this point, NALCO (supra) has

subsequently been followed by a number of judgments and continues to

be good law. Also, the ratio of the judgment in Fiza Developers and

Intra-trade Pvt. Ltd. (supra) on the construction of Section 34 of the

Arbitration Act, 1996 relating to the framing of issues and pleadings and

proof required in Section 34 proceedings remains untouched by the

present judgment.

decisions, is incorrect. The resultant position is that Section 36 -

even as originally enacted - is not meant to do away with Article

36(2) of the UNCITRAL Model Law, but is really meant to do away

with the two bites at the cherry doctrine in the context of awards

made in India, and the fact that enforcement of a final award, when

read with Section 35, is to be under the CPC, treating the award as

if it were a decree of the court.

31. In any event, on this aspect of the case, the BCCI judgment

(supra) referred, in paragraph 25 thereof, to the 246

Law

Commission Report on Section 36 as follows:

“25. At this point, it is instructive to refer to the

246th Law Commission Report which led to

the Amendment Act. This Report, which was

handed over to the Government in August

2014, had this to state on why it was

proposing to replace Section 36 of the 1996

Act:

“AUTOMATIC STAY OF ENFORCE MENT OF THE

AWARD UPON ADMISSION OF CHALLENGE

“43. Section 36 of the Act makes it clear that

an arbitral award becomes enforceable as a

decree only after the time for filing a petition

under Section 34 has expired or after the

Section 34 petition has been dismissed. In

other words, the pendency of a Section 34

petition renders an arbitral award

unenforceable. The Supr eme Court,

in National Aluminium Co. Ltd. v. Pressteel &

Fabrications (P) Ltd. [National Aluminium Co.

Ltd. v. Pressteel & Fabrications (P) Ltd.,

(2004) 1 SCC 540] held that by virtue of

Section 36, it was impermissible to pass an

order directing the losing party to deposit any

part of the award into Court. While this

decision was in relation to the powers of the

Supreme Court to pass such an order under

Section 42, the Bombay High Court in Afcons

Infrastructure Ltd. v. Port of Mumbai [Afcons

Infrastructure Ltd. v. Port of Mumbai, (2014) 1

Arb LR 512 (Bom)] applied the same principle

to the powers of a court under Section 9 of the

Act as well. Admission of a Section 34 petition,

therefore, virtually paralyses the process for

the winning party/award creditor.

44. The Supreme C ourt, in National

Aluminium [National Aluminium Co.

Ltd. v. Pressteel & Fabrications (P) Ltd.,

(2004) 1 SCC 540] , has criticised the present

situation in the following words: (SCC p. 546,

para 11)

‘11. However, we do notice that this automatic

suspension of the execution of the award, the

moment an application challenging the said

award is filed under Section 34 of the Act

leaving no discretion in the court to put the

parties on terms, in our opinion, defeats the

very objective of the alternate dispute

resolution system to which arbitration belongs.

We do find that there is a recommendation

made by the Ministry concerned to Parliament

to amend Section 34 with a proposal to

empower the civil court to pass suitable

interim orders in such cases. In view of the

urgency of such amendment, we sincerely

hope that necessary steps would be taken by

the authorities concerned at the earliest to

bring about the required change in law.’

45. In order to rectify this mischief, certain

amendments have been suggested by the

Commission to Section 36 of the Act, which

provide that the award will not become

unenforceable merely upon the making of an

application under Section 34.”

It then further went on to state:

“62…Since it is clear that execution of a

decree pertains to the realm of procedure, and

that there is no substantive vested right in a

judgment-debtor to resist execution, Section

36, as substituted, would apply even to

pending Section 34 applications on the date of

commencement of the Amendment Act.”

The Court then commented on this Court’s judgment in NALCO

(supra) as follows:

“67. In 2004, this Court's judgment in National

Aluminium Co. [National Aluminium Co.

Ltd. v. Pressteel & Fabrications (P) Ltd.,

(2004) 1 SCC 540] had recommended that

Section 36 be substituted, as it defeats the

very objective of the alternative dispute

resolution system, and that the section should

be amended at the earliest to bring about the

required change in law. It would be clear that

looking at the practical aspect and the nature

of rights presently involved, and the sheer

unfairness of the unamended provision, which

granted an automatic stay to execution of an

award before the enforcement process of

Section 34 was over (and which stay could

last for a number of years) without having to

look at the facts of each case, it is clear that

Section 36 as amended should apply to

Section 34 applications filed before the

commencement of the Amendment Act also

for the aforesaid reasons.”

(emphasis supplied)

32. Section 36, as amended by the 2015 Amendment Act, now

reads as follows:

“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 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).”

Given the fact that we have declared that the judgments in NALCO

(supra), National Buildings Construction Corporation Ltd.

(supra) and Fiza Developers (supra) have laid down the law

incorrectly, it is also clear that the amended Section 36, being

clarificatory in nature, merely restates the position that the

unamended Section 36 does not stand in the way of the law as to

grant of stay of a money decree under the provisions of the CPC.

Removal of the basis of the BCCI judgment by the 2019

Amendment Act

33. It now falls to be determined as to whether the 2019

Amendment Act removes the basis of the BCCI judgment (supra) of

this Court.

34. For this purpose, it is necessary to set out the relevant

provisions of the 2019 Amendment Act. Section 87 as introduced by

Section 13 of the 2019 Amendment Act reads as follows:

“87. Unless the parties otherwise agree, the

amendments made to this Act by the

Arbitration and Conciliation (Amendment) Act,

2015 shall–

(a) not apply to-

(i) arbitral proceedings commenced before

the commencement of the Arbitration

and Conciliation (Amendment) Act,

2015;

(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;

(b) apply only to arbitral proceedings

commenced on or af ter the

commencement of the Arbitration and

Conciliation (Amendment) Act, 2015 and to

court proceedings arising out of or in

relation to such arbitral proceedings.”

By Section 15 of the same Amendment Act, Section 26 of the

2015 Amendment Act was omitted as follows:

“15. Section 26 of the Arbitration and

Conciliation (Amendment) Act, 2015 shall be

omitted and shall be deemed to have been

omitted with effect from the 23

October,

2015.”

Section 26 of the 2015 Amendment Act reads as follows:

“26. 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.”

35. This Court’s judgment in BCCI (supra) had occasion to deal

with the important question as to the true interpretation of Section 26

of the 2015 Amendment Act. This Court, in paragraph 28, referred to

the transitory provision contained in Section 85-A as proposed in the

246

Law Commission Report, and thereafter in paragraphs 29 to

31, referred to the debates on the floor of the House. In paragraph

32, this Court referred to the differences between Section 26 and

Section 85-A as proposed, and then held:

“33. What can be seen from the above is that

Section 26 has, while retaining the bifurcation

of proceedings into arbitration and court

proceedings, departed somewhat from Section

85-A as proposed by the Law Commission.”

36. Section 26 was then stated to have bifurcated proceedings

with a great degree of clarity into two sets of proceedings – arbitral

proceedings themselves, and court proceedings in relation thereto.

Paragraph 39 of the judgment refers to this and states as follows:

“39. Section 26, therefore, bifurcates

proceedings, as has been stated above, with a

great degree of clarity, into two sets of

proceedings — arbitral proceedings

themselves, and court proceedings in relation

thereto. The reason why the first part of

Section 26 is couched in negative form is only

to state that the Amendment Act will apply

even to arbitral proceedings commenced

before the amendment if parties otherwise

agree. If the first part of Section 26 were

couched in positive language (like the second

part), it would have been necessary to add a

proviso stating that the Amendment Act would

apply even to arbitral proceeding s

commenced before the amendment if the

parties agree. In either case, the intention of

the legislature remains the same, the negative

form conveying exactly what could have been

stated positively, with the necessary proviso.

Obviously, “arbitral proceedings” having been

subsumed in the first part cannot re-appear in

the second part, and the expression “in

relation to arbitral proceedings” would,

therefore, apply only to court proceedings

which relate to the arbitral proceedings. The

scheme of Section 26 is thus clear: that the

Amendment Act is prospective in nature, and

will apply to those arbitral proceedings that are

commenced, as understood by Section 21 of

the principal Act, on or after the Amendment

Act, and to court proceedings which have

commenced on or after the Amendment Act

came into force.”

(emphasis supplied)

37. The Court was alive to the Srikrishna Committee Report’s

recommendation of a proposed Section 87, as is clear from footnote

23 appended to paragraph 44 of the judgment. The Court then made

a reference to the Statement of Objects and Reasons for the 2015

Amendment Act and stated as follows:

“77. However, it is important to remember that

the Amendment Act was enacted for the

following reasons, as the Statement of Objects

and Reasons for the Amendment Act states:

“2. The Act was enacted to provide for

speedy disposal of cases relating to

arbitration with least court intervention. With

the passage of time, some difficulties in the

applicability of the Act have been

noticed. Interpretation of the provisions of the

Act by courts in some cases have resulted in

delay of disposal of arbitration proceedings

and increase in interference of courts in

arbitration matters, which tend to defeat the

object of the Act. With a view to overcome

the difficulties, the matter was referred to the

Law Commission of India, which examined

the issue in detail and submitted its 176th

Report. On the basis of the said Report, the

Arbitration and Conciliation (Amendment)

Bill, 2003 was introduced in the Rajya Sabha

on 22-12-2003. The said Bill was referred to

the Department-related Parliamentary

Standing Committee on Personnel, Public

Grievances, Law and Justice for examination

and report. The said Committee, submitted

its Report to Parliament on 4-8-2005,

wherein the Committee recommended that

since many provisions of the said Bill were

contentious, the Bill may be withdrawn and a

fresh legislation may be brought after

considering its recommendations.

Accordingly, the said Bill was withdrawn from

the Rajya Sabha.

3. On a reference made again in pursuance

of the above, the Law Commission examined

and submitted its 246th Report on

“Amendments to the Arbitration and

Conciliation Act, 1996” in August 2014 and

recommended various amendments in the

Act. The proposed amendments to the Act

would facilitate and encourage Alternative

Dispute Mechanism, especially arbitration,

for settlement of disputes in a more user-

friendly, cost-effective and expeditious

disposal of cases since India is committed to

improve its legal framework to obviate in

disposal of cases.

4. As India has been ranked at 178 out of

189 nations in the world in contract

enforcement, it is high time that urgent steps

are taken to facilitate quick enforcement of

contracts, easy recovery of monetary claims

and award of just compensation for damages

suffered and reduce the pendency of cases

in courts and hasten the process of dispute

resolution through arbitration, so as to

encourage investment and economic activity.

5. As Parliament was not in session and

immediate steps were required to be taken to

make necessary amendments to the

Arbitration and Conciliation Act, 1996 to

attract foreign investment by projecting India

as an investor friendly country having a

sound legal framework, the President was

pleased to promulgate the Arbitration and

Conciliation (Amendment) Ordinance, 2015.

6. It is proposed to introduce the Arbitration

and Conciliation (Amendment) Bill, 2015, to

replace the Arbitration and Conciliation

(Amendment) Ordinance, 2015, which inter

alia, provides for the following, namely—

(i) to amend the definition of “Court” to

provide that in the case of international

commercial arbitrations, the Court should

be the High Court;

(ii) to ensure that an Indian court can

exercise jurisdiction to grant interim

measures, etc., even where the seat of the

arbitration is outside India;

(iii) an application for appointment of an

arbitrator shall be disposed of by the High

Court or Supreme Court, as the case may

be, as expeditiously as possible and an

endeavour should be made to dispose of

the matter within a period of sixty days;

(iv) to provide that while considering any

application for appointment of arbitrator,

the High Court or the Supreme Court shall

examine the existence of a prima facie

arbitration agreement and not other

issues;

(v) to provide that the Arbitral Tribunal

shall make its award within a period of

twelve months from the date it enters upon

the reference and that the parties may,

however, extend such period up to six

months, beyond which period any

extension can only be granted by the

Court, on sufficient cause;

(vi) to provide for a model fee schedule on

the basis of which High Courts may frame

rules for the purpose of determination of

fees of Arbitral Tribunal, where a High

Court appoints arbitrator in terms of

Section 11 of the Act;

(vii) to provide that the parties to dispute

may at any stage agree in writing that their

dispute be resolved through fast-track

procedure and the award in such cases

shall be made within a period of six

months;

(viii) to provide for neutrality of arbitrators,

when a person is approached in

connection with possible appointment as

an arbitrator;

(ix) to provide that application to challenge

the award is to be disposed of by the Court

within one year.

7. The amendments proposed in the Bill will

ensure that arbitration process becomes

more user-friendly, cost-effective and lead to

expeditious disposal of cases.”

78. The Government will be well-advised in

keeping the aforesaid Statement of Objects

and Reasons in the forefront, if it proposes to

enact Section 87 on the lines indicated in the

Government's Press Release dated 7-3-2018.

The immediate effect of the proposed Section

87 would be to put all the important

amendments made by the Amendment Act on

a back-burner, such as the important

amendments made to Sections 28 and 34 in

particular, which, as has been stated by the

Statement of Objects and Reasons,

“… have resulted in delay of disposal of

arbitration proceedings and increase in

interference of courts in arbitration matters,

which tend to defeat the object of the Act”,

and will now not be applicable to Section 34

petitions filed after 23-10-2015, but will be

applicable to Section 34 petitions filed in cases

where arbitration proceedings have

themselves commenced only after 23-10-

2015. This would mean that in all matters

which are in the pipeline, despite the fact that

Section 34 proceedings have been initiated

only after 23-10-2015, yet, the old law would

continue to apply resulting in delay of disposal

of arbitration proceedings by increased

interference of courts, which ultimately defeats

the object of the 1996 Act. [These

amendments have the effect, as stated

in HRD Corpn. v. GAIL (India) Ltd., (2018) 12

SCC 471 of limiting the grounds of challenge

to awards as follows: (SCC p. 493, para

18)“18. In fact, the same Law Commission

Report has amended Sections 28 and 34 so

as to narrow grounds of challenge available

under the Act. The judgment in ONGC

Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 has

been expressly done away with. So has the

judgment in ONGC Ltd. v. Western Geco

International Ltd., (2014) 9 SCC 263. Both

Sections 34 and 48 have been brought back to

the position of law contained in Renusagar

Power Plant Co. Ltd. v. General Electric

Company, 1994 Supp (1) SCC 644, where

“public policy” will now include only two of the

three things set out therein viz. “fundamental

policy of Indian law” and “justice or morality”.

The ground relating to “the interest of India” no

longer obtains. “Fundamental policy of Indian

law” is now to be understood as laid down

in Renusagar, 1994 Supp (1) SCC 644.

“Justice or morality” has been tightened and is

now to be understood as meaning only basic

notions of justice and morality i.e. such notions

as would shock the conscience of the Court as

understood in Associate Builders v. DDA,

(2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204.

Section 28(3) has also been amended to bring

it in line with the judgment of this Court

in Associate Builders, (2015) 3 SCC 49 :

(2015) 2 SCC (Civ) 204, making it clear that

the construction of the terms of the contract is

primarily for the arbitrator to decide unless it is

found that such a construction is not a

possible one.”] It would be important to

remember that the 246th Law Commission

Report has itself bifurcated proceedings into

two parts, so that the Amendment Act can

apply to court proceedings commenced on or

after 23-10-2015. It is this basic scheme which

is adhered to by Section 26 of the Amendment

Act, which ought not to be displaced as the

very object of the enactment of the

Amendment Act would otherwise be

defeated.”

(emphasis supplied)

In paragraph 83, the Court then concluded:

“83. In view of the above, the present batch of

appeals is dismissed. A copy of the judgment

is to be sent to the Ministry of Law and Justice

and the learned Attorney General for India in

view of what is stated in paras 77 and 78

supra.”

38. After construing Section 26 in the manner stated in the

judgment, this Court 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. It was therefore stated that all the amendments made by

the 2015 Amendment Act, and important amendments in particular

that were made to Sections 28 and 34, would now be put on a

backburner, which would be contrary not only to what the 246

Law

Commission had in mind, but also directly contrary to the salutary

provisions that were made to correct defects that were found in the

working of the Arbitration Act, 1996.

39. At this point it is important to refer to the relevant paragraphs

of the Statement of Objects and Reasons of the 2019 Amendment

Act which introduced Section 87. In paragraphs 2 to 6 of the

Statement of Objects and Reasons, the Srikrishna Committee

Report alone is referred to, and paragraph 6(vi) in particular states

as follows:

“6. The salient features of the Arbitration and

Conciliation (Amendment) Bill, 2019, inter alia,

are as follows:-

xxx xxx xxx

(vi) to clarify that Section 26 of the Arbitration

and Conciliation (Amendment) Act, 2015 is

applicable only to the arbitral proceedings

which commenced on or after 23

October,

2015 and to such court proceedings which

emanate from such arbitral proceedings.”

40. Interestingly, no such clarification was made by the 2019

Amendment Act. Instead, Section 26 was omitted with effect from

23.10.2015 and Section 87 introduced.

41. Dr. Singhvi has argued, based on a number of judgments of

this Court, that the question of removing the basis of a judgment

cannot arise unless and until the judgment is present to the mind of

the legislature. He stated that in all the major cases in which a

judgment of a court is nullified by removing its basis, the judgment in

question has been expressly referred to in the concerned Statement

of Objects and Reasons. We are afraid that we cannot agree with

this line of argument. What is important is to see whether, in

substance, the basis of a particular judgment is in fact removed,

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.

42. In Shri Prithvi Cotton Mills Ltd. and Anr. v. Broad

Borough Municipality and Ors. (1969) 2 SCC 283, this Court held:

“4….Granted legislative competence, it is not

sufficient to declare merely that the decision of

the Court shall not bind for that is tantamount

to reversing the decision in exercise of judicial

power which the Legislature does not possess

or exercise. A court's decision must always

bind unless the conditions on which it is based

are so fundamentally altered that the decision

could not have been given in the altered

circumstances.”

43. In State of Tamil Nadu v. Arooran Sugars Ltd. (1997) 1

SCC 326, this Court after setting out what was held in Shri Prithvi

Cotton Mills (supra) stated:

“16…The same view was reiterated in the

cases of West Ramnad Electric Distribution

Co. Ltd. v. State of Madras [(1963) 2 SCR 747

: AIR 1962 SC 1753] ; Udai Ram

Sharma v. Union of India [(1968) 3 SCR 41 :

AIR 1968 SC 1138] ; Tirath Ram Rajindra

Nath v. State of U.P. [(1973) 3 SCC 585 :

1973 SCC (Tax) 300] ; Krishna Chandra

Gangopadhyaya v. Union of India [(1975) 2

SCC 302] ; Hindustan Gum & Chemicals

Ltd. v. State of Haryana [(1985) 4 SCC 124]

; Utkal Contractors and Joinery (P)

Ltd. v. State of Orissa [1987 Supp SCC 751]

; D. Cawasji & Co v. State of Mysore [1984

Supp SCC 490 : 198 5 SCC (Tax) 63]

and Bhubaneshwar Sing h v. Union of

India [(1994) 6 SCC 77] . It is open to the

legislature to remove the defect pointed out by

the court or to amend the definition or any

Reference cases

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