HINDUSTAN CONSTRUCTION COMPANY LTD. V. UNION OF INDIA AIR 2020 SC 122​:

DATE: 27/11/2019​

COURT: Supreme Court of India

BENCH: Justice R.F. Nariman, Justice V. Ramasubramanian, and Justice Surya Kant

FACTS:

Hindustan Construction Company Limited (HCC), a prominent infrastructure construction firm, undertook large-scale projects such as roads, bridges, hydropower and nuclear plants, tunnels, and rail facilities, primarily as a contractor for various government bodies, including the National Highways Authority of India (NHAI), NHPC Ltd., NTPC Ltd., IRCON International Ltd., and the Public Works Department (PWD). During the execution of these projects, disputes frequently arose concerning cost overruns, which were often contested by these government entities. Consequently, HCC faced significant delays in recovering its legitimate dues, necessitating arbitration or civil proceedings to resolve these disputes. ​

Upon obtaining arbitral awards in its favor, HCC encountered further challenges as these government bodies routinely filed applications under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996, leading to an automatic stay on the enforcement of such awards. This situation was exacerbated by the fact that while these government entities were statutory bodies and thus not subject to proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC), HCC itself was not exempt from the IBC's provisions. As a result, HCC found itself in a precarious position: unable to recover dues from government bodies through insolvency proceedings, yet vulnerable to insolvency actions initiated by its own creditors seeking to recover debts from HCC. ​

ISSUES:

The main issue was whether Section 87 of the Arbitration and Conciliation Act, inserted by the 2019 amendment, was constitutionally valid. It mandated an automatic stay on arbitral award enforcement during a pending challenge, which the petitioner argued was arbitrary and violated Article 14 by unfairly delaying dues to private contractors.

JUDGEMENT WITH REASONING:

The Supreme Court struck down Section 87 of the Arbitration and Conciliation Act, 1996 as unconstitutional. The Court held that the provision was manifestly arbitrary and violated Article 14 of the Constitution, as it unfairly delayed the enforcement of arbitral awards by granting an automatic stay during the pendency of a challenge. The Court also declared the deletion of Section 26 of the 2015 Amendment Act unconstitutional, thereby restoring the prospective application of the amended arbitration law.

The Supreme Court addressed the constitutional validity of Section 87 of the Arbitration and Conciliation Act, 1996, which was introduced by the Arbitration and Conciliation (Amendment) Act, 2019. The Court examined whether the automatic stay on arbitral awards, resulting from the insertion of Section 87 and the repeal of Section 26 of the 2015 Amendment Act, was constitutionally valid. The Court found that these amendments led to delays in the enforcement of arbitral awards, undermining the objectives of the Arbitration Act to ensure speedy resolution of disputes and minimal judicial intervention. Consequently, the Court struck down Section 87 and the repeal of Section 26, deeming them unconstitutional.​

The Court reasoned that the introduction of Section 87 reintroduced an automatic stay on the enforcement of arbitral awards upon the filing of a challenge under Section 34, which was contrary to the intent of the 2015 amendments aimed at removing such automatic stays to promote efficient enforcement of arbitral awards. The Court observed that this automatic stay was arbitrary and discriminatory, violating Article 14 of the Constitution, as it unfairly favored award-debtors over award-holders. Additionally, the Court noted that the automatic stay could lead to financial distress for award-holders, potentially pushing them into insolvency, which was inconsistent with the objectives of the Insolvency and Bankruptcy Code, 2016. Therefore, the Court concluded that the amendments introduced by the 2019 Act were manifestly arbitrary and unconstitutional.​

ANALYSIS:

The Supreme Court’s decision in Hindustan Construction Company Ltd. v. Union of India is a landmark ruling that reinforces the principle of fairness and the integrity of arbitration as a method of dispute resolution. By striking down Section 87 of the Arbitration and Conciliation Act, 1996, the Court acknowledged the hardships faced by contractors, particularly in the infrastructure sector, where large sums are often locked in prolonged litigation due to automatic stays. The Court rightly emphasized that such provisions, which enable government entities to delay payment obligations without risk of insolvency, place private contractors at an unfair disadvantage, exposing them to financial strain and possible insolvency despite having succeeded in arbitration. This decision upholds the intent of the 2015 amendments, which aimed to make arbitration faster and more effective.

Moreover, the judgment demonstrates the Court’s broader commitment to ensuring that legislative changes do not undermine constitutional guarantees, particularly the right to equality under Article 14. The Court’s recognition that Section 87 arbitrarily favored award-debtors and frustrated the enforcement of legitimate claims reflects a progressive approach to judicial review, especially in the commercial and infrastructural context. It also aligns with the objectives of the Insolvency and Bankruptcy Code, which seeks to maintain financial discipline. By removing the barrier of automatic stays, the ruling enhances the enforceability of arbitral awards and sends a clear message that statutory protections must not be manipulated to delay justice.