India: Supreme Court Clarifies The Application Of Section 26 Of The Arbitration Amendment Act, Holds That The Provisions Of The Amended Section 36 Will Apply To Section 34 Applications Filed Before And After The Commencement Of The Amendment Act

Brief Facts

The Supreme Court, in Board of Control for Cricket in India v. Kochi Cricket Private Limited, has put to rest the controversy surrounding the construction and interpretation of Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 ("Amendment Act") with respect to the applicability of the amended Section 36. Section 26 of the Amendment Act reads as follows:

Section 26. Act not to apply to pending arbitral proceedings: 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.

In view of the controversy at hand, the relevant facts are the dates of filing of applications under Section 34 of the Arbitration and Conciliation Act, 1996 ("Act"). Out of the eight appeals, in four instances Section 34 applications were filed prior to the coming into force of the Amendment Act (i.e., 23 October 2015, or "Commencement Date"), while the others were filed after the Commencement Date.

Issues

While dealing with the interpretation of Section 26 of the Amendment Act, the primary issue before the Court was whether the substituted Section 36 (Enforcement)¹, as introduced by the Amendment Act, would apply in its original form or its amended form. The unamended Section 36 provided for an automatic stay on the enforcement of an arbitral award, on the filing of an application for setting aside such award under Section 34. In contrast, the newly-introduced Section 36(2) does away with such automatic stay and instead requires a separate application to be made before the Court for an order granting stay of the operation of the award.

This can be separated into two discrete issues:

1. Whether the amended Section 36 will be applicable to a Section 34 application filed after the Commencement Date even though the arbitral proceedings commenced before such date; and
2. Whether the amended Section 36 will be applicable to a Section 34 application filed prior to the Commencement Date.

Judgment

The Supreme Court has conclusively determined that the substituted Section 36 will be applicable to Section 34 applications filed both before and after the Commencement Date. The factors considered by the Court in reaching these conclusions are detailed below.

Issue (i)

In dealing with the first issue, the Court referred to the 246th Report of the Law Commission of India, which observed that the automatic stay against the enforcement of an arbitral award under the unamended Section 36, on the filing of an application under Section 34, was leading to delays and rendering the arbitration scenario in India ineffective. The Law Commission had suggested the insertion of a new Section 85A², which bifurcated proceedings into arbitral proceedings (pending before the arbitral tribunal) and Court proceedings, and made the amendments prospective in application, with certain exceptions.

Noting that Section 26 departed from the language suggested by the Law Commission, the Court looked into the manner in which a provision akin to Section 26 of the Amendment Act ought to be interpreted, stating that such a provision should first be construed literally, then purposively and pragmatically.

Dealing with the scope and ambit of Section 26, the Court held that Section 26 of the Amendment Act consists of two parts separated by the word "but", which signifies that the parts are separate and distinct. While the first part, which is couched in negative terms, applies only to arbitral proceedings, the second part affirmatively applies the Amendment Act to Court proceedings in relation to arbitral proceedings. That the first part refers exclusively to arbitral proceedings is evident from the use of the words "to the arbitral proceedings" in contrast with the expression "in relation to" (which is used in second part), the reference to Section 21 of the Act (Commencement of arbitral proceedings) and the option provided to parties to "otherwise agree" to apply the Amendment Act to arbitral proceedings that have commenced before the Commencement Date, since the conduct of arbitral proceedings is merely procedural in nature. Therefore, Section 26 bifurcates proceedings into two sets – arbitral proceedings themselves, i.e., proceedings before an arbitral tribunal, as covered under Chapter V of the Act [First Part]; and Court proceedings in relation thereto [Second Part]. Since arbitral proceedings are subsumed within the First Part of Section 26, the same cannot fall within the scope of the Second Part thereof, and hence the Second Part refers exclusively to Court proceedings.

With regard to the scheme of Section 26, the Court held that the Amendment Act is prospective in application and applies only to arbitral proceedings and Court proceedings which commenced on or after the Commencement Date.

The Court thought it necessary to discuss the judgment in Thyssen Stahlunion GmBH v. Steel Authority of India Limited³, as it was strongly relied upon by counsels on both sides. The issue in Thyssen was the interpretation of Section 85(2)(a) of the Act.⁴ The Court distinguished the present case from Thyssen, stating that the judgment in Thyssen dealt with a differently worded provision and emphasised the difference in language between the expressions "to" and "in relation to". Section 85(2)(a) of the Act has two major differences in language from Section 26 of the Amendment Act. First, the expression "in relation to" appears in both parts of Section 85(2)(a), in contrast to Section 26, where it appears only in the Second Part while the expression "to" arbitral proceedings is used in the First Part. Second, commencement in the First Part of Section 26 must be understood in the context of Section 21 of the Act, which reference is absent in Section 85(2)(a).

In view of the above, the Court held that the substituted Section 36 will be applicable to Section 34 applications which have been filed after the Commencement Date even if the arbitral proceedings were initiated prior to such date.

Issue (ii)

In determining the applicability of the substituted Section 36 to Section 34 applications filed before the Commencement Date, the Court looked into the meaning and import of the word "enforcement" used in Section 36.

After setting out the scheme of the Act, the Court stated that under Section 36, an arbitral award is deemed to be a decree of Court and shall be enforced under the Code of Civil Procedure, 1908 ("CPC"). The manner of enforcement of a decree under the CPC is through the execution process, i.e., under Order XXI of the CPC.

Next, the Court considered whether execution proceedings gave rise to vested rights and whether they are substantive in nature. Relying upon the decisions of the Supreme Court in Lalji Raja and Sons v. Hansraj Nathuram⁵ and Narhari Shivram Shet Narvekar v. Pannalal Umediram⁶, the Court concluded that the execution of a decree pertains to the realm of procedure and there is no substantive vested right in a judgment debtor to resist execution. Further, the Court held that the unamended Section 36 was only a clog on the right of the decree holder, who could not execute the award in his favour till the conditions of this section were met. This does not give rise to a corresponding right in the judgment debtor to stay the execution of the award.

In addition, the Court looked into the use of the words "has been" in the newly introduced Section 36(2), and stated that Section 36 being a procedural provision, the words "has been" would refer to Section 34 applications which were filed before the Commencement Date.

Thus, the Court concluded that the amended Section 36 will apply even to Section 34 applications pending as on the Commencement Date.

Analysis

The judgment has conclusively laid to rest a controversy which had generated widely divergent views from various High Courts.⁷ With its focus on minimising judicial intervention and reducing delays, this decision represents a step forward in improving the arbitration landscape in India.

Interestingly, the Court noted the proposed Section 87 of the Arbitration and Conciliation (Amendment) Bill, 2018 ("Bill")⁸, approved by the Cabinet of Ministers on 7 March 2018, which stipulates that the Amendment Act shall not apply to Court proceedings arising out of or in relation to arbitral proceedings which commenced prior to the Commencement Date, irrespective of whether such Court proceedings commenced prior to or after the Commencement Date.

However, the Court refused to look into Section 87 of the proposed Bill for the interpretation of Section 26 of the Amendment Act for two reasons: first, that the ultimate form in which Section 87 is enacted may not be the same as is presently proposed; and second, a proposed Bill introducing a new provision of law cannot be the basis for interpretation of a provision of law as it now stands.

The Court has cautioned the Government of India that the immediate effect of the proposed Section 87 would be to "put all the important changes made by the Amendment Act on a back-burner". Quoting from the Statement of Objects and Reasons of the Amendment Act, the Court stated that the Amendment Act was enacted for the specific purpose of providing speedy disposal of cases and minimising court intervention in arbitration in order to make India an investor-friendly jurisdiction; and such purpose must be given effect. The Court has warned that the basic scheme of bifurcation of proceedings into two parts ought not to be displaced as the very object of the enactment of the amendments would otherwise be defeated. The effect of the judgment in light of the proposed Bill is yet to be seen.

Footnotes

* Authored by Tejas Karia, Partner & Head – Arbitration, Ila Kapoor, Partner, Ananya Aggarwal, Senior Associate and Aishwarya Narayanan, Associate; Board of Control for Cricket in India v. Kochi Cricket Private Limited and etc., Civil Appeal Nos. 2879-2880 of 2018, Supreme Court, judgment dated 15 March 2018.

Quorum: R.F. Nariman and Navin Sinha, JJ.

[1] Notably, newly introduced Section 36(2) provides that "Where an application to set aside the arbitral award has been filed in the Court 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".

[2] The proposed Section 85A read as follows:

[3] (1999) 9 SCC 334.

[4] Section 85(2)(a) of the Act provides that "Notwithstanding such repeal, the provisions of the said the provisions of the said enactments shall apply in relation to arbitral proceedings which commenced before this Act came into force unless otherwise agreed by the parties but this Act shall apply in relation to arbitral proceedings which commenced on or after this Act comes into force".

[5] (1971) 1 SCC 721.

[6] (1976) 3 SCC 203.

[7] Footnote 3 of the judgment lists out 35 decisions of the various High Courts dealing with the applicability of the Amendment Act.

[8] A brief analysis of the Bill is available at http://www.mondaq.com/india/x/682332/Arbitration+Dispute+Resolution/Analysis+Of+The+Arbitration+And+Conciliation+Amendment+Bill+2018 (accessed 18 March 2018). The proposed Section 87 is intended to clarify that unless parties agree otherwise, the Amendment Act shall not apply to: (a) arbitral proceedings which have commenced before the commencement of the Amendment Act; (b) 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 Amendment Act and shall apply only to arbitral proceedings commenced on or after the commencement of the Amendment Act and to Court proceedings arising out of or in relation to such arbitral proceedings.

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