Striking down of Section 87 of Arbitration & Conciliation Act,1996
In the case of Hindustan Construction Company Limited & Anr V Union of India, the Supreme Court had struck down the section 87 of the Arbitration & Conciliation Act,1996 as unconstitutional.
Section 87 of the Arbitration & Conciliation Act,1996 which provided for an automatic stay on an arbitral award the moment it was challenged in a court. It applies to those proceedings that commenced before October 23, 2015, merely by the filing of an application under sec 34 challenging the arbitral award.
Section 84 of the Arbitration & Conciliation Act,1996 was found violative of Article 14 of the constitution as it deemed an opportunity for companies to pay their creditors from the money received from the arbitral awards in cases and is " manifestly arbitrary".
The journey of striking down of section 87 of Arbitration & Conciliation, 1996.
The journey started through a case of Hindustan construction company ltd and Anr V Union of India.
The writ petition was filed by the petitioner ( Hindustan construction company Ltd) is an infrastructure construction company, which deals in the business of construction of public utilities and projects like roads, bridges, hydropower, and nuclear plants, tunnels and rail facilities.
Here, the petitioner got the project through public tendering systems in which the government bodies ( NHAI, NHPC, NTPC Ltd, IRCON, PWD ) were owners and beneficiaries of this project. So this cost overrun is almost invariably disputed by these bodies, leading to the huge delays in the recovery of the legitimate dues of the petitioner. And the pending dues could only be recovered by civil proceedings or by arbitration between the parties.
The arbitral award was given in favor of the petitioner. But that was challenged by the respondent(s) under sec 34 & 37 of the Arbitration Act, 1996. And which led to the stay of such awards under section 34 of the Arbitration Act, 1996.
Contention of Petitioner
The petitioner contended that the Arbitration Act, 1996 is based upon the UNCITRAL Model Law on international commercial arbitration. And Article 36(2) states that the other party may provide appropriate security for setting aside or suspension of an award. But, section 36 of the Arbitration Act, 1996 is contrary to it.
Besides that, the section 87, which was inserted through 2015 amendment act prospectively, was violative of some fundamental rights that are Article 14, Article 19(1)(g), Article 21 and Article 300 A of the constitution of India it is contrary to the section 34 & section 35 of the Arbitration Act, 1996.
Contention of Respondent
The respondent defended the repeal of section 26 of the 2015 Arbitration Amendment and section 87 insertion into the Arbitration Act 2019 is not in any way unconstitutional.
Also, there is no point to challenge section 87 on the substance that the cut-off date of 23 October 2015 for its prospective nature.
Supreme Court Decision
The Supreme Court observed that on the recommendation in the Srikrishna Committee Report, section 87 was welcomed, to sort the uncertainty regarding its prospective applicability of the 2015 amendment. And after the coming of the Insolvency Code, the results of section 87 was that due to the automatic stay on the arbitral award, the award holder if may become insolvent then he will be unable to pay large sums to its suppliers or operational creditors and this section is "manifestly arbitrary" and violative of Article 14, Article 19, Article 21A, Article 300A of the Constitution. So the deletion of section 26 of the Amendment Act, 2015 in addition to the insertion of section 87 into Arbitration Act, 1996 by the Amendment Act 2019 was struck down.