Resolving the Retrospective Application of the 2015 Amendment to the Arbitration Act

[Satyajit Bose is a 3rd Year student at the National Law School of India University, Bangalore]

On 27 November 2019, the Supreme Court of India delivered its judgement in Hindustan Construction Co. Ltd. v. Union of India. In this case, a division bench of the Supreme Court was called upon to adjudicate on the constitutionality of section 87 of the Arbitration and Conciliation Act, 1996 [‘1996 Act’]. This provision had been inserted by section 13 of the much-debated Arbitration and Conciliation (Amendment) Act, 2019 [‘2019 Amendment’]. While the decision to strike down section 87 was of little surprise, the reasoning adopted by the Court is intriguing. In its judgement, the Court relies on constitutional grounds to strike down the impugned provision, namely, ‘manifest arbitrariness’ under Article 14 of the Constitution of India. In the process, this judgement offers a unique insight into the interaction between Indian constitutional law and arbitration statutes, an approach that has recently gained ground within the Supreme Court.[1]

In this post, I seek to provide a brief overview of the legislative history behind section 87 of the 1996 Act, culminating in the judgement of the Supreme Court in BCCI v. Kochi Cricket Pvt. Ltd. I will then argue that the Supreme Court’s use of article 14 in striking down section 87 is flawed, despite the prima facie favourable outcome that it reached. I shall conclude by commenting on the significance of this judgement, particularly as to the insights that one can gain on the new judicial approach towards arbitration in India. 

Judicial History of Section 87: Facts in Issue

The 1996 Act was designed along the lines of the UNCITRAL Model Law on International Commercial Arbitration [‘Model Law’], and was enacted to bring Indian arbitration law at par with international standards. While the core principles of the Model Law were preserved, the Act diverged from the Model Law in certain cases, most significantly in the enforcement of arbitral awards. Under the Model Law, parties are entitled to ‘two bites of the cherry’, i.e., the award may be challenged at the time of setting aside and during enforcement. Sections 34 and 36 of the 1996 Act were worded differently, such that the enforcement of an award resembled that of a civil decree. Therefore, parties were only given one opportunity to challenge the award. However, subsequent judicial pronouncements interpreted section 36 differently.

In National Aluminum Company Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd. and Anr., section 36 was interpreted to mean that if an application to set aside the award was pending adjudication, an automatic stay would prevent enforcement. In NALCO, the Court rightly observed that this interpretation defeated the very objectives of arbitration, as it would directly contribute to further delays in obtaining the fruits of the arbitral process. However, the Court concluded by stating that it was bound by this interpretation as the intent of the legislature was amply clear. This lacunae was then recognized by the 246th Law Commission Report, which recommended an amendment to section 36. Accordingly, the Arbitration and Conciliation (Amendment) Act, 2015 [‘2015 Amendment’] amended the provision, which now explicitly states than an award shall not be enforceable merely because an application under section 34 is pending adjudication.

However, the controversy does not end there. Under section 26 of the 2015 Amendment, it was specified that the amendments would only apply to those arbitrations commenced after 23 October 2015, the date on which the Amendment came into force [‘cut-off date’]. This provision assumed extreme significance in enforcement proceedings as it excluded the possibility of an automatic stay if an application to set-aside the award was pending. However, this provision was also riddled with  ambiguity. For example, what if an application to set aside the award was filed before the cut-off date? In the months that followed, section 26 received divergent judicial interpretations from different High Courts across the country. The Bombay High Court held that the 2015 Amendment would apply retrospectively to court proceedings initiated before the cut-off date. Per contra, the Delhi High Court held that the 2015 Amendment would not apply to both arbitration and court proceedings which commenced before the cut-off date. In this context, the Supreme Court intervened in BCCI. The Court unanimously held that the 2015 Amendment would apply retrospectively, i.e., it would govern court proceedings instituted before the cut-off date. Therefore, an application to set aside the award would not lead to an automatic stay on the enforcement of the award.

In 2019, the Indian Parliament enacted yet another amendment to the 1996 Act. Under section 13 of the 2019 Amendment, a new provision was sought to be introduced in the 1996 Act as section 87. Under Section 87, the 2015 Amendment was explicitly made inapplicable to court proceedings arising out of arbitrations that had commenced before 23 October 2015, irrespective of whether the court proceedings commenced before said date or not. Prima facie, this directly contradicts the decision of the Supreme Court in BCCI, and sets the stage for yet another struggle between the judiciary and the legislature. The constitutionality of this provision was subsequently challenged, which gave rise to the judgement under consideration.

Manifest Arbitrariness: The Interplay Between Article 14 and Section 87 

In its judgement, the Court relies on article 14 of the Constitution of India to declare that section 87 is ‘manifestly arbitrary’. In broad terms, article 14 mandates equality before law. Therefore, the issue with respect to article 14 was whether the unequal treatment of parties in court proceedings before and after the cut-off date justified. The Court relies on two primary grounds to declare section 87 as manifestly arbitrary: first, it defeats the public interest sought to be achieved by the 1996 Act; second, it creates an inconsistency between appeals under the Civil Procedure Code and those under the 1996 Act. I seek to address each of these in turn.

Beginning with the first reason, the Court argues that prospective application of the 2015 Amendment would defeat the public interest in speedy dispute resolution. This argument is tenuous as the Court does not evaluate the rights that parties have accrued prior to the 2015 Amendment. The adjudication of this issue must begin with an evaluation of what rights are at stake, and whether they can be dispensed with in the interest of speedy dispute resolution. For example, the Court ought to have begun by considering whether the parties have a substantive right to resist enforcement when an application under section 34 had been filed before the 2015 Amendment had entered into force. The argument in favour of a substantive right to resist enforcement may be derived from section 34 itself, which lists several substantive grounds for setting aside an award, such as incapacity of the parties and invalidity of the arbitration agreement. If the Court decided against recognizing a substantive right against enforcement, it could have followed the approach laid down in BCCI, which explicitly declared that there was no substantive right to resist enforcement. However, that finds no mention while Article 14 is being applied. Even if the Court were to adopt the aforementioned BCCI holding, that raises a plethora of questions. For example, in paragraph 45 the Court held that the basis of the BCCI judgement had been removed by section 87 through the 2019 Amendment, which implies that the fallacies pointed out by the previous judgement had been addressed by the subsequent Amendment. Therefore, will it continue to bind the Court in this regard? While the Court may have reached an arbitration friendly outcome, its reasoning leaves a lot to be answered.

Furthermore, the reliance on Order XLI Rule 5 of the Code of Civil Procedure is also misplaced. Under Order XLI Rule 5 of the Code of Civil Procedure, an appeal shall not prevent the execution of a judgement. However, that cannot be sufficient grounds to declare section 87 as manifestly arbitrary. Admittedly, the Court is correct in pointing out the difference that was previously created between enforcement of an award and a civil decree. However, that was a position of law that existed prior to the 2015 Amendment, which has subsequently been modified. Therefore, the question before the Court is not whether the previous position was arbitrary, but rather whether the retrospective application of the Amendment is arbitrary. By conflating the two, the Court has inappropriately used article 14 to strike down section 87 of the 1996 Act.

Conclusion: Lessons Learnt and What Lies Ahead

As was noted at the beginning of this post, the approach adopted by the Court is of immense significance. In real terms, it implies that award holders may now enforce their award under section 36 without being subject to an automatic stay under section 34. However, the Court’s emphasis on substantive justice is of far greater importance. The Court recognizes that the goal of the arbitral process is speedy resolution of disputes, and uses article 14, which is a fundamental right no less, to strike down the impugned provision. For commercial parties, this may mark the beginning of a new era of Indian arbitration, where courts will not stand in the way of enforcing arbitral awards. However, such optimism should be restrained. As highlighted above, Hindustan Construction adopts a line of reasoning whose sustainability is in doubt. Whether this marks an institutional change in approach towards arbitration is something only time will tell.  

Satyajit Bose

[1] ICOMM Tele v. Punjab State Water Supply and Sewerage Board [2019] 4 SCC 401; State of Bihar v. Brahmaputra Infrastructure Ltd. [2018] 17 SCC 444.

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  • Should have also discussed about the Srikrishna Comm. The one which recommended the 2019 Amendment.

  • Towards the end of fourth para of this piece where the Nalco judgments has been cited, in the last line you were going for “unenforceable”. I think it is a typing mistake. A very insightful post by a third year learner. Good Job.

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