SECTION 36 OF THE ARBITRATION ACT DOESN’T PERMIT ‘AUTOMATIC STAY’: A COMMENT ON HINDUSTAN CONSTRUCTION CO. LTD. AND ORS. V. UOI & ORS.

Introduction

In this case, Arbitration Awards that are in favour of the Petitioner company are invariably challenged under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 (hereinafter Arbitration Act). The major problem in the way of the Petitioners is that the moment a challenge is made under Section 34, there is an ‘automatic-stay’ of such awards under the Arbitration Act. Therefore, the question of law was raised as to whether Section 36 (before 2015 Amendment) permits ‘automatic stay’ on the award if a setting aside application is filed under Section 34 of the Arbitration Act?

Analysis

A plain reading or literal interpretation of Section 36 (before the 2015 Amendment) suggests that the arbitral award automatically stays as soon as the party files an application to set aside the award in a court of law under Section 34 of the Arbitration Act. For a better interpretation, provision of Section 36 (before the 2015 Amendment) is reiterated below:

“Where the time for making an application to set aside the arbitral award Under Section 34 has expired, or such application having been made, it has been refused, the award shall be enforced under the Code of Civil Procedure, 1908 (5 of 1908) in the same manner as if it was a decree of the Court.”

The Supreme Court interpreted this Section in Fiza Developers and Inter-trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd. and Anr, and National Aluminum Co. Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd. and Anr., and held that an arbitral award can be enforced as a decree of the court only if the time for setting-aside application expires or such application has been refused by the court under Section 34 of the Act. That means, until the disposal of the application under Section 34 of the Act, there is an implied prohibition of enforcement of the arbitral award. Thus, the very filing and pendency of an application under Section 34, in effect, operate as an automatic stay of the enforcement of the award. These cases followed the literal rule of interpretation while reading Section 36 of the Act. The literal rule of interpretation states that ‘the first and primary rule of construction is that the intention of the legislature must be found in the words used by the legislature itself.

But the Supreme Court in the present case observed that Section 36 of the Act was enacted for a different purpose and that purpose cannot be fulfilled by doing the literal interpretation of the said Section as it permits a mischievous outcome. Attention must be given to Kehar Singh & Others v. The State (Delhi Administration) where Hon’ble Justice Shetty has observed that the court will consider the provisions to ensure coherence and consistency within the law as a whole to avoid undesirable consequences, and this adventure enlarges the court’s discretion as to interpretation.

Therefore, the court in the instant case resorts to the purposive rule of interpretation in the instant case to achieve the actual purpose or intention of the legislature while passing this legislation. In order to apply the purposive rule of interpretation, the court firstly refers to the United Nations Commission on International Trade Law (hereinafter UNCITRAL) Model Law, as the whole Arbitration Act of India is explicitly based on it. The legislative intent and essence of the Arbitration Act was to bring domestic as well as international commercial arbitration in consonance with the UNCITRAL Model Rules, the New York Convention and Geneva Convention. In fact, the New York Convention was physically present before the legislature and available for its consideration when it enacted the 1996 Act. Article II of the New York Convention provides that if the parties had agreed to settle any dispute by arbitration, courts are seized of action concerning such subject matter unless the agreement itself is null and void, inoperative or incapable of performance. Moreover, Article 36 (2) of the UNCITRAL Model Law states that:

“If an application for setting aside or suspension of an award has been made to a court referred to in paragraph (1) (a) (v) of this article, the court where recognition or enforcement is sought may, if it considers it proper, adjourn its decision and may also, on the application of the party claiming recognition or enforcement of the award, order the other party to provide appropriate security.”

A reference to Article 36 (2) of UNCITRAL Model Law impels the court to hold that an award, when challenged under Section 34, becomes inexecutable merely by virtue of such a challenge being made because of the language of Section 36 as laid down in Fiza Developers and NALCO is plainly incorrect.

Furthermore, reading Section 36 along with Section 35 of the Act makes the award enforceable and binding on the parties as a decree under the Code of Civil Procedure. This position is supported by Section 9 of the Act which specifically enables a party to apply to a court for relief “…after the making of the arbitration award but before it is enforced in accordance with Section 36.” The Court in the instant case observed that Section 9 has been overlooked in Fiza Developers and NALCO judgments and therefore they reached the conclusion that there was no discretion left with the court to pass any interlocutory order concerning the award in dispute under Section 34 of the Act. Such narrow interpretation of Sections 34 and 36 flies in the face of Section 9 of the Act. Thus, the court in the instant case held that the said precedents are per incuriam in not reading Section 36 along with Sections 9 and 35 of the Act and therefore do not commend themselves to the Court.

Therefore, a purposive interpretation of Section 36 along with Section 9 and 35 serves the purpose and intention of the Arbitration Act and rescues it from conflicting with other provisions of the same Act and UNCITRAL Model Law.

 Conclusion

Arbitration is a method of alternative dispute resolution which provides an alternative to the traditional method of dispute redressal (i.e. litigation). But a plain reading of Section 36 along with Section 34 of the Act allows a party to get the award automatically stayed by mere filing a setting aside application in the court. Consequently, the parties ultimately resolve their dispute through litigation in a court of law which was never the intention of the parties and the agreement. Thus, it defeats the very purpose of the parties resorting to arbitration. It further defeats the purpose of establishing an alternative dispute resolution system such as Arbitration. Therefore, the approach of the Supreme Court applying the purposive rule of interpretation (as discussed above) states a correct position of law and rules out the scope of any possible mischief.

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ABOUT THE AUTHOR

Rahul Kumar is a third-year student of B.B.A.LL.B.  at School of Law, Bennett University, Greater Noida.

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