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Automatic Stay on Arbitral Award: Applicability of Doctrine of Manifest Arbitrariness

Written by Nishant Tiwari [i] and Alankrita Singh [ii]

[i] [ii]Third Year students, B.A. LLB. National University of Study and Research in Law, Ranchi



Disclaimer: Please note that the views expressed below represent the opinions of the article's author. The following does not necessarily represent the views of Law & Order.


Understanding the Doctrine of Manifest Arbitrariness

A provision of the law would be manifestly arbitrary if it lacks a clear determining principle or encapsulates a capricious or irrational measure. The manifest arbitrariness in legislation is a prominent reason for a constitutional court to annul it for violating Article 14 of the Constitution[1].

The test to determine "manifest arbitrariness" is to decide whether the promulgation is drastically unreasonable and/or capricious, irrational, or without an adequate determining principle. The latest example of a legislative provision that has been revoked for this reason is Section 87 of the Arbitration and Conciliation Act.

Promulgation can be revoked, if it is challenged for violating Article 14, only if it is determined that it violates the equality clause, the equal protection clause, or the violation of fundamental rights. It cannot be limited just because the Court believes it is not justified.

The evidence of manifest arbitrariness, therefore, as established in the case of State of A.P. v. McDowell & Co.[2], would be applied to invalidate the legislation, as well as the subordinate legislation according to Article 14. The manifest arbitrariness, therefore, must be something done by the legislature capriciously, irrationally, and/or without a principle of adequate determination. In addition, when something excessive and disproportionate is done, such legislation would be manifestly arbitrary. Therefore, arbitrariness in the sense of manifest arbitrariness would also apply to legislation denied under Article 14 of the Constitution of India, 1950. Therefore, it cannot be argued that a law can be revoked if the Court considers it arbitrary and does not comply with Article 14 and other fundamental rights.

Furthermore, just because the application of a principle entails some difficulties in a unique situation, it does not make the entire section manifestly arbitrary. The difficulty could have been explained by the Legislature and, in some cases, it could have been the only possible option available. Moreover, the doctrine of manifest arbitrariness only opens a door to replace legislative options with judicial wisdom when the difficulties are to be cured that arise from statutory structures.

Application of Doctrine to Strike Down Section 87 of the Arbitration Act

The Supreme Court of India in a movement in favor of arbitration has struck down Section 87 of the Arbitration and Conciliation Act of 1996 in the case of Hindustan Construction Company Limited v. Union of India[3], which was inserted earlier this year through Arbitration and the Conciliation (Amendment) Act of 2019, which clarified that all the provisions of the Arbitration and Conciliation (Amendment) Act of 2015 were applied prospectively.

At first, it was discovered that the Arbitration Act suffered from the disease of automatic suspension of the award if a challenge was filed under Section 34 of this Act. This effectively led to all awards being challenged before the court, since it automatically suspended any payment under it and consequently, deprived the holder of the prize of the amount owed. The problem was cured by the Arbitration and Conciliation (Amendment) Act of 2015. The 2015 Amendment Act stipulated that there will be no automatic suspension of the award simply by filing a challenge in accordance with Section 34 of this act.

However, the Arbitration and Conciliation (Amendment) Act of 2015 created another problem as it was not clear under what circumstances the Arbitration Act amended by the 2015 Amendment Act would be applicable. Finally, the Court resolved this controversy by ruling in the case of BCCI v. Kochi Cricket Private Ltd[4], where it was argued that Section 26 of the Arbitration and Conciliation (Amendment) Act of 2015 states that, unless the parties agree otherwise, the amendments would be prospective. The court also held that there would be no automatic suspension operating in the award, even when the request for a challenge in court was filed before the commencement date. However, later in 2019, the government enacted Section 87 through the Arbitration and Conciliation (Amendment) Act of 2019. The 2019 Amendment Act further repealed Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015.

The position is now back to the BCCI judgment, with the striking down of Section 87. The Supreme Court has observed that the enactment of Section 87 without any reference to the BCCI judgment, even after the BCCI judgment had pointed out the pitfalls of introducing Section 87, was manifestly arbitrary, devoid of reason and contrary to public interest sought to be fulfilled by the Act.

The position as it has evolved in this regard is as follows:

  1. In the Arbitration and Conciliation Act 1996, there was an automatic stay of the award on the filing of a challenge under Section 34 of the Arbitration and Conciliation Act before the court.

  2. Later, in the Arbitration and Conciliation (Amendment) Act of 2015, an amendment to Section 36 was introduced which provided for:

There should not be any automatic stay.

Specific applications are required for the stay.

The stay should be with respect to the CPC principles.

In the case of BCCI v. Kochi Cricket Pvt Ltd.[5], the 2015 amendment to Section 36 was applicable to court proceedings, filed on or after, or pending as of 23.10.2015.

In the Arbitration and Conciliation (Amendment) Act of 2019, the 2015 amendment (including section 36) was not applicable to court proceedings arising out of arbitration commenced prior to 23.10.2015.

Finally, in the case of Hindustan Construction v. U.O.I.[6], the decision of the BCCI case was reversed.

Application in Various Judgements

The evidence of "manifest arbitrariness" is well explained in the case of Khoday Distilleries Ltd. v. State of Karnataka[7]. It was presented to the court that the amended rules were arbitrary, unreasonable and caused undue hardships and, therefore, violates Article 14 of the Constitution of India, 1950. Although the protection of Article 19(1)(g)[8] may not be available to the appellants, the Rules must undoubtedly satisfy the test of Article 14, which is a guarantee against arbitrary action. However, it should be borne in mind that what is questioned here under article 14 is not an executive action but a delegated legislation. The arbitrary action tests that apply to executive actions do not necessarily apply to delegated legislation. In order for delegated legislation to be eliminated, such legislation must be manifestly arbitrary; a law that could not reasonably be expected to emanate from a delegated authority with the power to make laws.

The Supreme Court in Hindustan Construction emphasized that the consequence of applying a provision such as Section 87 is even more dangerous in view of the IBC, as upon operation of the automatic stay doctrine, the holder of an award in arbitration may become insolvent by failing to pay its suppliers, pending the provision of a Section 34 request to enforce its award. Also, there are several other cases where the court has applied the doctrine.

In Committee of Creditors of Essar Steel v. Satish Kumar Gupta,[9] while clarifying the law on several aspects of the Insolvency & Bankruptcy Code, 2016, the Supreme Court held that a mandatory time period of 330 days as fixed under the Code for completion of the Corporate Insolvency Resolution Process (“CIRP”) was manifestly arbitrary.

With regard to Section 4 of the Insolvency and Bankruptcy Code, 2016, it is clear that the original terms of Section 12 of the Code in which a CIRP must be completed have now been extended to 330 days, which is 60 more days than 180 plus 90 days. The provision of Section 12 states: “the corporate insolvency resolution process shall mandatorily be completed within a period of three hundred and thirty days from the insolvency commencement date, including any extension of the period of corporate insolvency resolution process granted under this section and the time taken in legal proceedings in relation to such resolution process of the corporate debtor.”[10]

Therefore, the Court, while leaving the provision intact, repealed the word "obligatorily" as manifestly arbitrary according to Article 14 of the Constitution of India, 1950 and as an excessive and unreasonable restriction of the litigant's right to conduct business under Article 19 (1) (g) of the Constitution of India, 1950. The effect of this statement is that, in general, the time required in relation to the corporate debtor's resolution process must be completed within the external limit of 330 days from the date of commencement of insolvency, including extensions and the time required in legal proceedings.

However, it was explained that, in relation to the facts of a given case, if it can be demonstrated to the Adjudicating Authority and/or Appellate Tribunal under the Code, there is only a short period left to complete the insolvency resolution process beyond 330 days, and that it would be in the interest of all stakeholders that the corporate debtor instead of being sent into liquidation, be put back on its feet and that the time taken in legal proceedings is largely due to factors owing to which the fault cannot be ascribed to the litigants before the Adjudicating Authority and/or Appellate Tribunal, the delay or a large part thereof being attributable to the tardy process of the Adjudicating Authority and/or the Appellate Tribunal itself, and in such cases it may be open for the Adjudicating Authority and/or Appellate Tribunal to extend the time beyond 330 days.

Conclusion

Therefore, the insertion of Section 87, without even considering the Supreme Court ruling, is one of the many problems affecting the 2019 Amendment Act.


The BCCI Judgment had resolved certain problems related to the applicability of the 2015 Amendment Act. In addition, the BCCI Judgment says that the 2015 Amendment Act applies prospectively, that is, to those arbitration proceedings and judicial proceedings that have begun on or after the Commencement Date. Also, the provision of Section 87 should not be applied to IBC, as the well-earned fruits of long and tedious arbitrations will be taken further, and the winners in such cases will be brutally exposed to the rigors of the IBC.

[1] Article 14, The Constitution of India, 1950. [2] State of A.P. v. McDowell & Co., [1996] 3 S.C.C. 790. [3] Hindustan Construction Company Ltd v. Union of India, WP(Civil) No 1074 of 2019. [4] B.C.C.I. v. Kochi Cricket Private Ltd., [2018] 6 S.C.C. 287. [5] [2018] 6 S.C.C. 287. [6] WP(Civil) No 1074 of 2019. [7] Khoday Distilleries Ltd v. State of Karnataka, [1996] 10 S.C.C. 304. [8] Article 19(1))g), The Constitution of India 1950. [9] Committee of Creditors of Essar Steel v. Satish Kumar Gupta, [2019] S.C.C. OnLine S.C. 1478. [10] Section 12, The Insolvency and Bankruptcy Code 2016. Bibliography

  1. Article 14, The Constitution of India, 1950.

  2. State of A.P. v. McDowell & Co., [1996] 3 S.C.C. 790.

  3. Hindustan Construction Company Ltd v. Union of India, WP(Civil) No 1074 of 2019.

  4. B.C.C.I. v. Kochi Cricket Private Ltd., [2018] 6 S.C.C. 287.

  5. Khoday Distilleries Ltd v. State of Karnataka, [1996] 10 S.C.C. 304.

  6. Article 19(1))g), The Constitution of India 1950.

  7. Committee of Creditors of Essar Steel v. Satish Kumar Gupta, [2019] S.C.C. OnLine S.C. 1478.

  8. Section 12, The Insolvency and Bankruptcy Code 2016.

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