Hindustan Construction Company v. Union of India | Case Law

INTRODUCTION 

Although arbitration aims to accelerate dispute resolution and avoid judicial intervention, the Act may not achieve this. This is due to the insertion of Section 87 and the revocation of Section 26. The automatic suspension of the arbitral award was not there in the original Act; it was added to Section 36 of the Act due to the verdict of the Apex Court in the cases of NALCO and Fiza Developers. The present article assesses the author’s understanding of the Supreme Court’s decision on Hindustan Construction Company v. Union of India (2019).

The Arbitration & Conciliation (Amendment) Act 2019 reintroduced arbitrariness that existed before the 2015 amendment. This happened by replacing Section 87 and rescinding Section 26.

The 2015 amendment differed significantly from earlier versions. Under it, filing an application under Section 34 automatically suspended the award. This made it difficult for award holders to recover dues from award debtors.

The arbitrariness corrected by the 2015 amendment was reinstated with Section 87’s insertion and Section 26’s repeal in the 2019 amendment.

FACTS

1. The petitioners are construction companies. They have undertaken large-scale infrastructure building projects like roads and bridges, hydropower, nuclear plants, tunnels, and rail facilities as contractors to government bodies. The grievance before this Court is that the government bodies dispute any cost overrun so that the same would delay the recovery of their legitimate dues. Their dues could be recovered only through arbitration or civil proceedings.
2. If, indeed, the arbitral award(s) was against the government bodies, then they have the right to challenge the said award(s) even under Section 34 and Section 37 of the Act, thereby causing automatic suspension of the award(s).
3. Other than that, the IBC 2016 did not apply to government entities as these were statutory bodies; however, the petitioners were not exempted from the IBC.
4. This worsened the petitioners’ situation because they could not recover their dues from the government authorities through insolvency proceedings. In contrast, the petitioners’ creditors recovered their dues from the petitioners on the same basis.

ISSUE RAISED

1. Whether Section 87 of the Arbitration and Conciliation Act, 1996 is constitutionally valid or not? 
2. Whether the 2019 amendment to the Arbitration and Conciliation Act, 1996 encroached upon the judgment of the court in BCCI v. Kochi Cricket Pvt. Ltd.(2018) or not? 

PLAINTIFF’S ARGUMENTS

1. Automatic Stay Under Section 36
   

   In contrast to Section 36 of the Model UNCITRAL Law, the petitioners argued that Section 36 of the Act functioned differently. When interpreted with Supreme Court judgments, it provided an automatic stay on arbitral awards upon filing an application under Section 34. This happened despite being based on the UNCITRAL model. Consequently, it is necessary for a more extensive bench to review these judgments.

2. Enactment of Section 87 and Its Impact
   

   The Government of India issued a press release on 07.03.2018 to enact Section 87, despite the 2015 amendment removing arbitrariness. The Srikrishna Committee, in its report on 30.07.2017, recommended that the 2015 amendment should not apply to pending court proceedings started after 23.10.2015. It should only apply to arbitral proceedings commenced post 23.10.2015, including related court proceedings.

    

3. Conflict with the Supreme Court Judgment in BCCI v. Kochi
   

   They stated that the Government incorporated Section 87 into the Act through the 2019 amendment, despite the Supreme Court’s review in BCCI v. Kochi Cricket Pvt. Ltd. (2018). The Supreme Court opined that the provision would be inconsistent with the purpose of the 2015 Amendment Act. The judgment was also sent to the Ministry of Law and Justice and the Attorney General for India.

4. Retrospective Impact on Award Holders

   They argued that the retrospective resurrection of the automatic stay would allow award debtors to reclaim payments. This would apply to those who challenged arbitral awards and had already paid the award holders.

    

5. The petitioners argued that Section 87 is a direct assault on the judgment of the Supreme Court in BCCI v. Kochi Cricket Pvt. Ltd. (2018).

6. They also argued that Section 87 violates Articles 14, 19(1)(g), 21, and 300-A of the Constitution of India and is contrary to the Act’s object.
   
7. It was also argued that arbitration proceedings automatically delay an award when an application is filed under Section 34, even though there is no automatic stay of a money decree in a civil appeal.
   
8. The petitioners also contested the IBC because the definition of a corporate person under Section 3(7) of the IBC did not encompass government bodies.
   
9. They also argued that Section 87 results in an absurd consequence, which is the insolvency of the award holder, when read in conjunction with various provisions of the IBC.

RESPONDENT’S ARGUMENTS

1. The respondents defended Section 87’s insertion and Section 26’s revocation in the 2019 amendment, calling the BCCI case interpretation merely declaratory. They argued that Parliament can clarify its original intent through amendments if it believes the Supreme Court’s view is inaccurate. Thus, they stated that the 2019 amendment clarified intent, making Section 87 a clarification, not an attack on the BCCI judgment.

2. The challenge to the 23.10.2015 cut-off date for prospective applicability lacked substance, as stated by them. They argued that courts should not intervene unless the cut-off date was patently discriminatory.

3. According to their argument, the challenge to the 23.10.2015 cut-off date lacked substance. They maintained that courts should intervene only if the cut-off date was patently discriminatory.

JUDGEMENT

In its judgment, the Supreme Court agreed that Section 87 reinstated issues corrected by the 2015 amendment. It noted that Section 87 was introduced based on the Srikrishna Committee Report. It aimed to resolve ambiguity. However, the ambiguity was already resolved in the BCCI case. The 2015 amendment was merely clarifying in nature.

The court stated that arbitral awards in the original Act did not include an automatic stay. It also agreed that Section 87 led to absurd outcomes under IBC provisions. Award holders became insolvent. Thus, the court ruled that Section 87’s insertion and Section 26’s revocation violated Article 14. It clarified that BCCI remains valid. Filing a setting-aside petition does not automatically stay an arbitral award.

CONCLUSION

The award debtors cannot evade their liability by submitting an application under Section 34 following this judgment. The award holders will be able to recover their dues previously ensnared in litigation or arbitration for an extended period, as there will be no automatic stay of the award.

It will also boost the stressed sectors, which are currently immobilized by a substantial amount of money due to litigation. Consequently, this judgment has enabled an award holder to secure a portion or the entirety of the award amount while awaiting the outcome of the petition to set aside the award under the Act.