Finality and Enforcement: Section 36 and the Automatic Stay That Was Abolished
Chapter Forty
Syllabus topic 2.1, "The Arbitration and Conciliation Act, 1996"
Pages 202 to 206 of 377
In one line
An award is final and is enforced like a decree of a court, and since 2015 merely filing a challenge no longer freezes it.
In exam wording: section 35 makes an arbitral award final and binding on the parties and persons claiming under them, and section 36 provides for its enforcement in accordance with the Code of Civil Procedure 1908 as if it were a decree of the court, subject to a stay granted on a separate application.
Section 35: finality
Subject to this Part, an arbitral award shall be final and binding on the parties and persons claiming under them respectively.
Three words to notice.
"Subject to this Part." The finality is not absolute; it yields to section 34.
"Final and binding." There is no appeal on the merits, as chapter 400 explains.
"And persons claiming under them." The award binds not only the parties but those who claim through them, such as an assignee or a legal representative. Compare section 2(1)(g)'s definition of legal representative.
Section 36 before 2015: the automatic stay
To understand section 36 you have to know what it replaced, because the whole story is a reaction to it.
Under the original section 36, an award became enforceable only when the time for a section 34 application had expired, or such application had been made and refused. So filing a section 34 application automatically suspended enforcement.
The consequence was predictable and it hollowed out arbitration in India. Every losing party filed under section 34, whatever its merits, because filing alone stopped the award. The successful party then waited years for the challenge to be heard, with nothing in hand. An award was, in practice, a piece of paper until the courts had finished with it.
Section 36 as it now stands
Section 36(1): where the time for making a section 34 application has expired, then, subject to sub-section (2), the award shall be enforced in accordance with the Code of Civil Procedure 1908, in the same manner as if it were a decree of the court.
Note what the award is not. It is not a decree; it is enforced as if it were one. There is no need to file a suit on the award, and no separate decree is drawn up.
Section 36(2): where a section 34 application has been filed, 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 award in accordance with sub-section (3), on a separate application made for that purpose.
This is the reform, in one sentence. Filing a challenge no longer stops the award. The challenger must make a separate application for a stay and persuade the court to grant it.
Finality and Enforcement: Section 36 and the Automatic Stay That Was Abolished
Section 36(3): on such an application the Court may, subject to such conditions as it may deem fit, grant stay of the operation of the award, for reasons to be recorded in writing.
First proviso: while considering a stay of an award for payment of money, the Court shall have due regard to the provisions for grant of stay of a money decree under the Code of Civil Procedure 1908.
That proviso is what makes a stay conditional in practice. In a money decree the ordinary course is to require security or a deposit, so a party seeking a stay of a money award will usually be required to secure the amount.
The 2021 proviso: an unconditional stay for fraud
Second proviso to section 36(3), inserted by the 2021 amendment: where the Court is satisfied that a prima facie case is made out that:
- (a) the arbitration agreement or contract which is the basis of the award; or
- (b) the making of the award,
was induced or effected by fraud or corruption, it shall stay the award unconditionally pending disposal of the challenge under section 34.
Explanation: the proviso applies to all court cases arising out of or in relation to arbitral proceedings, irrespective of whether the arbitral or court proceedings were commenced prior to or after the commencement of the 2015 Amendment Act.
Three things to note. The standard is prima facie, not proof. The stay is mandatory where that standard is met, the word being "shall". And it is unconditional, so no security is required, which is the opposite of the ordinary position under the first proviso.
The fight over section 87, and why it belongs here
This sequence is the single best illustration in the subject of the three-cornered relationship between Parliament, the Supreme Court and Parliament again. Learn it as a chronology.
One. The 2015 amendment ended the automatic stay by substituting section 36 in the form set out above. Section 26 of the 2015 Amendment Act dealt with which arbitrations the amendments applied to.
Two. The 2019 amendment deleted section 26 of the 2015 Act and inserted section 87 into the principal Act, the effect of which was that the 2015 amendments would not apply to arbitrations commenced before 23 October 2015, or to court proceedings arising out of them. Because the automatic stay was one of the things the 2015 Act had removed, section 87 revived the automatic stay for that large body of older cases.
Three. In Hindustan Construction Company Ltd v. Union of India, decided 27 November 2019 by R.F. Nariman J with Surya Kant and V. Ramasubramanian JJ, the Supreme Court struck it down. Its conclusion, in its own words:
Finality and Enforcement: Section 36 and the Automatic Stay That Was Abolished
the deletion of Section 26 of the 2015 Amendment Act, together with the insertion of Section 87 into the Arbitration Act, 1996 by the 2019 Amendment Act, is struck down as being manifestly arbitrary under Article 14 of the Constitution of India.
Among the reasons the Court gave was that monies were not being released to award-holders on account of automatic stays of arbitral awards, exposing such award-holders to the rigours of the Insolvency Code. In other words, the revived automatic stay was pushing successful claimants into insolvency.
Four. The 2021 amendment then added the second proviso above, giving an unconditional stay in fraud and corruption cases. So Parliament's final position is: no automatic stay, a stay only on a separate application and usually on conditions, but an unconditional stay where fraud or corruption is shown prima facie.
Manifestly arbitrary is the standard the Court applied. A law is manifestly arbitrary, and so violates article 14, where it is capricious or lacks an adequate determining principle.
A worked example
An award for Rs. 5 crore against a construction company is received on 1 April. The company files a section 34 application on 20 June.
Does filing stop enforcement? No. Under section 36(2) the filing does not by itself render the award unenforceable. That is the change made in 2015.
What must the company do? Make a separate application for a stay under section 36(2) and (3). The Court may grant it subject to such conditions as it deems fit and must record reasons in writing.
What conditions are likely? This is an award for the payment of money, so under the first proviso the Court must have due regard to the provisions for stay of a money decree under the Code of Civil Procedure, which ordinarily means security or a deposit.
Suppose the company shows a prima facie case that the contract itself was procured by bribing an official. Then the second proviso applies: the Court shall stay the award unconditionally pending disposal of the section 34 challenge. No security.
Nobody applies under section 34 at all. Then once the three months, and any thirty day extension, have expired, section 36(1) applies and the award is enforced under the Code of Civil Procedure as if it were a decree.
The arbitration had begun in 2013 and the award was made in 2018. Before Hindustan Construction, section 87 would have applied the pre-2015 position and the filing of a section 34 application would have stayed the award automatically. Section 87 having been struck down, section 36 as amended applies and there is no automatic stay.
Finality and Enforcement: Section 36 and the Automatic Stay That Was Abolished
What beginners get wrong
An award is not a decree. It is enforced as if it were one, under section 36(1).
Filing a section 34 application does not stay the award. A separate stay application is required, and this is the most important single change made in 2015.
A stay is not automatic even on the separate application. It is discretionary, conditional, and requires written reasons, except under the 2021 fraud proviso where it is mandatory and unconditional.
Section 87 is not in force as law. It stands in the printed Act but was struck down in Hindustan Construction.
Section 35's finality is expressly "subject to this Part", so it does not exclude section 34.
Quick revision
- Section 35: an award is final and binding on the parties and persons claiming under them, subject to this Part.
- Section 36(1): once the time for a section 34 application has expired, the award is enforced under the Code of Civil Procedure as if it were a decree of the court.
- Section 36(2): filing a section 34 application does not by itself render the award unenforceable; a separate stay application is required.
- Section 36(3): stay is discretionary, on conditions, with written reasons. First proviso: for a money award, due regard to the rules for staying a money decree under the Code. Second proviso (2021): where a prima facie case of fraud or corruption in the agreement, the contract or the making of the award is made out, the Court shall stay the award unconditionally; the Explanation applies it to all such cases whenever commenced.
- The chronology: 2015 ended the automatic stay; 2019 deleted section 26 of the 2015 Act and inserted section 87, reviving it; Hindustan Construction (27 November 2019) struck that down as manifestly arbitrary under article 14; 2021 added the unconditional fraud stay.
Test yourself
1. Does filing an application under section 34 stop the award being enforced? No. Section 36(2) provides that the filing of such an application shall not by itself render the award unenforceable unless the Court grants a stay under sub-section (3) on a separate application made for that purpose.
2. What must a court have regard to when staying a money award? Under the first proviso to section 36(3), the provisions for grant of stay of a money decree under the Code of Civil Procedure 1908, which ordinarily means requiring security or a deposit. It must also record reasons in writing.
3. When is a stay unconditional? Under the second proviso to section 36(3), inserted in 2021, where the Court is satisfied that a prima facie case is made out that the arbitration agreement or contract which is the basis of the award, or the making of the award, was induced or effected by fraud or corruption. In that case the Court shall stay the award unconditionally pending disposal of the section 34 challenge.
Finality and Enforcement: Section 36 and the Automatic Stay That Was Abolished
4. What was section 87 and what happened to it? Section 87 was inserted by the 2019 amendment, together with the deletion of section 26 of the 2015 Amendment Act, so that the 2015 amendments would not apply to arbitrations commenced before 23 October 2015 or to related court proceedings, which revived the automatic stay for those cases. In Hindustan Construction Company Ltd v. Union of India the Supreme Court struck down that deletion and insertion as manifestly arbitrary under article 14.
5. Is an arbitral award a decree of the court? No. Section 36(1) provides that it shall be enforced in accordance with the Code of Civil Procedure 1908 in the same manner as if it were a decree of the court. No suit on the award is needed and no separate decree is drawn.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself for the same subject.