3/18/23, 3:50 PM Case analysis : Hindustan Construction Company Limited & Anr. v.

Union of India & Ors - iPleaders

Case analysis : Hindustan Construction

Company Limited & Anr. v. Union of India & Ors
By  Shoronya Banerjee  - June 4, 2021

Image source: https://rb.gy/fqrijj

This article is written by Mridul Tewari, pursuing a  Certificate Course in Arbitration:

Strategy, Procedure and Drafting from LawSikho.com.

Table of Contents
Introduction 
Having a look at the facts of the case
Issues raised in this matter
The contentions of the parties
Arguments advanced by the petitioners : matters becoming worse for them
The case contended by the respondents
The take of the Supreme Court : the final judgment
Precedents referred to, commonly 
Conclusion 

Introduction 
Even though the purpose of arbitration is to keep the issue out of judicial intervention
and fast track the dispute resolution process, with the insertion of  Section 87  and
revocation of  Section 26 in the Arbitration & Conciliation Act 1996  (hereinafter referred
to as the “Act”), it may not be possible to do so. The provision for an automatic stay of
the arbitral award was not there in the original Act and it was introduced in Section 36 of
the Act by Apex Court’s judgment in NALCO and Fiza Developers cases.
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The insertion of Section 87 and the revocation of Section 26 by  the Arbitration &
Conciliation (Amendment) Act, 2019  brought back the same arbitrariness in the Act
which existed prior to the 2015 amendment of the Act. Prior to the 2015 amendment,
the minute an application was filed under  Section 34 of the Act, the award stayed
automatically and the award holder had to face a difficult time realising their dues from
the award debtors. This arbitrariness in the statute was corrected by the 2015
amendment to the Act but was brought back when Section 87 was inserted and Section
26 was repealed by the 2019 amendment. The object of this article is to analyse the
author’s understanding of the Supreme Court’s judgment in  Hindustan Construction
Company Limited & Anr. v. Union of India & Ors. (2019).

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Having a look at the facts of the case

The petitioners who were construction companies and had undertaken large scale
infrastructure building projects such as roads, bridges, hydropower, and nuclear
plants, tunnels and rail facilities, etc. as contractors for government bodies, were
aggrieved by the fact that whenever there was a cost overrun it was disputed by the
government bodies which led to a delay in the recovery of their legitimate dues which
could only be recovered through arbitration or through civil proceedings. 

Further, if an arbitral award(s) was in the petitioners’ favour, the government bodies
challenged it under Section 34 and Section 37 of the Act leading to the automatic stay
of such award(s). 

Moreover, the government bodies being statutory bodies were out of the scope of
the Insolvency & Bankruptcy Code, 2016 (IBC) but the petitioners were not exempted
from the IBC. 

This made matters worse for the petitioners as on one hand, they could not recover
their dues from the government bodies through insolvency proceedings but on the
other hand, the petitioners’ creditors could recover their dues from the petitioners
through insolvency proceedings. 

Issues raised in this matter

Whether Section 87 of the Arbitration and Conciliation Act, 1996 is constitutionally
valid or not?

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?

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The contentions of the parties

Arguments advanced by the petitioners : matters

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becoming worse for them

The petitioners contended that Section 36 of the Act, despite being based on Section
36 of the Model UNCITRAL Law, was contrary to it, because unlike Section 36 of model
UNCITRAL Law, Section 36 of the Act, when constructed with various judgments of the
Supreme Court, provided for an automatic stay of arbitral awards the minute an
application is filed under Section 34. Thus, such judgments need to be revisited by a
larger bench. 

Even though the arbitrariness in the Act was removed by the 2015 amendment, the
Government of India issued a press release on 07.03.2018 to enact the new Section
87 based on the recommendations of Justice B.N. Srikrishna Committee (Srikrishna
Committee) which in its report submitted on 30.07.2017 recommended that the 2015
amendment Act should not apply to pending court proceedings which have
commenced after 23.10.2015 and should only apply in case arbitral proceedings which
have themselves commenced post 23.10.2015(including the court proceedings). 

They said that the Government inserted Section 87 in the Act by the 2019 amendment
despite the fact that the SC while deciding upon the case of BCCI v. Kochi Cricket Pvt.
Ltd.(2018) also reviewed the recommendations of the Srikrishna Committee and
opined in the said judgment that the aforesaid provision would be contrary to the
object of the 2015 amendment Act and also sent the judgment to the Ministry of Law
and Justice and the Attorney General for India.

They contended that due to this retrospective resurrection of this automatic stay, all
the award debtors who have challenged the arbitral awards and have made payments
to the award holders will now claim the award back.

The petitioners contended that Section 87 is nothing but a direct attack on the
judgment of the SC in BCCI v. Kochi Cricket Pvt. Ltd.(2018).

They also contended that in addition to being contrary to the object of the Act, Section
87 also violates Articles 14,19(1)(g), 21, and 300-A of the Constitution of India.

It was also contended that though in a civil appeal there is no automatic stay of a
money decree, in arbitration proceedings an award is automatically stayed the minute
an application is filed under Section 34. 

The petitioners also challenged the IBC on the grounds that the definition of a
corporate person under Section 3(7) of the IBC did not include government bodies. 

They also contended that when read with various provisions of the IBC, Section 87
leads to an absurd outcome i.e. insolvency of the award holder.

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The case contended by the respondents

The respondents defended the insertion of Section 87 and the revocation of Section
26 by the 2019 amendment and said that in the BCCI case the interpretation of
Section 26 was only declaratory. They further added that if the parliament feels that
its original intent is not being reflected in a view expressed by the Supreme Court, it
is free to clarify its original intent by an amendment. Thus, the parliament clarified its
original intent by the 2019 amendment and that Section 87 is only clarificatory in
nature and was not an attack on the BCCI judgment. 

They also said that there was no substance to the challenge that the cut-off date of
23.10.2015 for prospective applicability was arbitrary and that courts should not
intervene unless the cut-off date is blatantly discriminatory.

Defending the challenge made to the IBC, the defendants said that a writ petition filed
under  Article 32 of the Constitution of India  cannot be converted into recovery
proceedings by the petitioner. 

The take of the Supreme Court : the final judgment

The Supreme Court in its judgment agreed with the petitioners that by introducing
Section 87, the mischief corrected by the 2015 amendment was resurrected. It observed
that the section was introduced only on the recommendation of the  Srikrishna
Committee Report to remove the ambiguity around the prospective applicability of the
2015 amendment,  when in fact the ambiguity was removed by the court’s decisions in
the BBCI case. It also stated that the 2015 amendment was only clarificatory in nature
and that there was no automatic stay in the arbitral awards in the original Act. The court
also agreed that when read along with the provisions of IBC, Section 87 led to absurd
results, i.e. award holders not being able to recover the amounts from award debtors
and becoming insolvent. Thus, the court found the insertion of Section 87 and revocation
of Section 26 as violative of Article 14. It also clarified that the position in BCCI
continuing to hold good as on date, i.e., by filing a setting aside petition there would be
no automatic stay against the enforcement of any arbitral award, irrespective of when
the arbitration was commenced.

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Precedents referred to, commonly 

Canara Nidhi Ltd. v. M. Shashikala (2019): In this case, the Supreme Court held that
an application under Section 34 of the Act is a summary proceeding not in the nature
of a regular suit.

Ssangyong Engineering & Construction Co. Ltd. v. NHAI (2019):  In this case, the
Supreme Court held that after the 2015 amendment, the court cannot interfere with
an arbitral award on merits.

BCCI v. Kochi Cricket Private Limited (2018): In this case, the Supreme Court clarified
that while the 2015 Amendment Act was prospective in nature, the change brought
about in the position vis-à-vis the erstwhile automatic stay against enforcement, was
retrospectively applicable.

Conclusion 
After this judgment, the award debtors will not be able to escape their liability by simply
filing an application under Section 34. As there will be no automatic stay of the award,
the award holders will be able to recover their dues which were earlier stuck in litigation
or arbitration for a long time.

It will also provide a boost to the stressed sectors where a large amount of money is
stuck up in litigation. Thus, this judgment has provided means to an award holder to
secure a part or whole of the award amount pending the outcome of the petition to set
aside the award under the Act.

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