Hindustan Construction Company v. Union of India: how Section 87 fell and the no-automatic-stay regime was restored

The Supreme Court's judgment of 27 November 2019 in Hindustan Construction Company Ltd v. Union of India, reported at 2019 SCC OnLine SC 1520, is the modern leading authority on the enforcement architecture of the Arbitration and Conciliation Act 1996. A three-judge bench of Rohinton Fali Nariman, J. (authoring), Surya Kant, J. and V. Ramasubramanian, J. struck down Section 87 of the 1996 Act — inserted by the Arbitration and Conciliation (Amendment) Act 2019 with the express purpose of reviving the pre-2015 automatic-stay regime — as manifestly arbitrary and violative of Article 14 of the Constitution. The decision restored the no-automatic-stay regime that the 2015 amendments had constructed and that the Supreme Court had confirmed in Board of Control for Cricket in India v. Kochi Cricket Pvt Ltd (2018) 6 SCC 287.

The judgment is consequential at three connected levels. At the level of the Section 34/Section 36 enforcement architecture, it makes definitive the proposition that the mere filing of a Section 34 challenge does not, of itself, operate to stay the enforcement of the award; the award-debtor must apply separately for a stay under Section 36(3), and the court will impose conditions. At the level of the constitutional review of arbitration legislation, it confirms that legislative reversal of a regime that the Court has expressly approved — and that has stabilised commercial expectations — is itself susceptible to Article 14 challenge under the manifest-arbitrariness standard. At the level of practitioner discipline, it crystallises the obligation to plead and prove the grounds for stay independently of the Section 34 challenge, and to assume that the stay will, in the ordinary case, be conditional on security or deposit.

The statutory architecture

The architecture that Hindustan Construction engaged was the product of a quarter-century of legislative course-correction.

Under the Arbitration Act 1940, an award filed in court for confirmation was, until pronouncement of judgment in terms of the award, not executable. The pre-1996 regime was an architecture of judicial supervision rather than party-autonomy: the award was a step in the litigation that culminated in a court decree.

The Arbitration and Conciliation Act 1996, as originally enacted, sought to break with the 1940 model and to align Indian arbitration with the UNCITRAL Model Law. Section 36 — as it stood between 1996 and 23 October 2015 — provided that where the time for making an application to set aside the arbitral award under Section 34 had expired, or where such application had been made and refused, the award shall be enforced under the Code of Civil Procedure 1908 in the same manner as if it were a decree of the court. The interpretive question was whether the mere filing of a Section 34 application — before any judicial determination — operated to stay enforcement.

The pre-2015 case law had read Section 36 as importing an automatic stay. National Aluminium Co. Ltd v. Pressteel & Fabrications (P) Ltd (2004) 1 SCC 540 and Fiza Developers and Inter-Trade Pvt Ltd v. AMCI (India) Pvt Ltd (2009) 17 SCC 796 held that the filing of a Section 34 application operated to stay enforcement automatically. The consequence was structural: an award-debtor could file a Section 34 application — frequently a perfunctory pleading filed to forestall execution — and the award became, in effect, unenforceable until the Section 34 proceedings were concluded, a process that frequently took five to ten years.

The Arbitration and Conciliation (Amendment) Act 2015 — the product of the 246th Law Commission Report's structural critique of the 1996 Act — addressed the automatic-stay regime directly. Section 36 was substantially recast. As amended, Section 36(2) provides that the filing of an application to set aside the arbitral award under Section 34 shall not, by itself, render the award unenforceable, unless the court grants an order of stay of the operation of the award in accordance with the provisions of sub-section (3). Section 36(3) provides that on the filing of an application under sub-section (2), the court may, subject to such conditions as it may deem fit, grant a stay of the operation of the award for reasons to be recorded in writing. The proviso requires the court, in considering the application, to have due regard to the provisions of the Code of Civil Procedure 1908 relating to grant of stay of a money decree — including, prominently, the requirement of deposit or security where the award is for payment of money.

The 2015 amendments also inserted Section 26 — a transitional provision that, on its face, applied the amended provisions only to arbitral proceedings commenced on or after the commencement date (23 October 2015), and not to arbitral proceedings commenced before that date. The transitional question — whether the amended Section 36 applied to Section 34 proceedings filed after 23 October 2015 in respect of arbitrations commenced before that date — was the subject of BCCI v. Kochi Cricket.

BCCI v. Kochi Cricket Pvt Ltd (2018) 6 SCC 287 — a two-judge bench of Rohinton Fali Nariman, J. and Indu Malhotra, J. — held that the amended Section 36, being procedural in nature and dealing with enforcement, applied to Section 34 applications filed after 23 October 2015 regardless of when the arbitral proceedings had commenced. The Court recorded that the legislative scheme of Section 26 and the amended Section 36, read together, produced this result; the no-automatic-stay regime was made of immediate, universal application to all post-23-October-2015 Section 34 filings.

The Arbitration and Conciliation (Amendment) Act 2019 was the legislative reversal. Section 87 — newly inserted — provided that, unless the parties otherwise agreed, the 2015 amendments would apply only to arbitral proceedings commenced on or after 23 October 2015 and to court proceedings arising out of or in relation to such arbitral proceedings. Section 87, as a logical correlate, contained a notwithstanding clause that displaced anything to the contrary in any judgment or order of any court. Section 26 of the 2015 Amendment Act was simultaneously deleted with retrospective effect.

The net legislative effect was the express undoing of BCCI v. Kochi Cricket. For arbitrations commenced before 23 October 2015 — a substantial inventory of pending matters, particularly in the infrastructure and government-contract sectors — the pre-2015 automatic-stay regime was restored.

The factual matrix

The petitioner in Hindustan Construction Company was a major infrastructure-sector contractor that had accumulated, over years of large public-sector projects, a substantial portfolio of arbitral awards in its favour against the Union of India and various public-sector undertakings — primarily the National Highways Authority of India and equivalent State and Central authorities. The awards, in aggregate, were substantial — covering disputed claims arising out of cost overruns, scope changes and delay liabilities on infrastructure projects executed under standard-form government contracts.

The structural problem the petitioner faced was the Section 34 sequence. The award-debtor — typically the Union or a public-sector undertaking — would file Section 34 applications as a matter of routine on receipt of an adverse award. Under the pre-2015 automatic-stay regime that Section 87 had restored, the filing of the Section 34 application itself stayed enforcement. The pendency of these applications — frequently for five to seven years — meant that the petitioner held a substantial portfolio of unrealisable awards.

The constitutional injury was compounded by the Insolvency and Bankruptcy Code 2016. While the petitioner could not enforce its awards against the Union and its undertakings, the petitioner's own creditors — banks and operational creditors holding undisputed debts — could and did initiate insolvency proceedings against the petitioner under the IBC 2016. The petitioner found itself in the position of holding executable rights against the State that could not be realised, while simultaneously facing insolvency proceedings on the part of its own creditors whose claims it could not satisfy. The asymmetry — that the State could pay nothing while the petitioner faced corporate insolvency — was the architectural injustice that the petition challenged.

The petitioner accordingly mounted an Article 14 challenge to Section 87 on the manifest-arbitrariness standard articulated in Shayara Bano v. Union of India (2017) 9 SCC 1 — contending that the legislative revival of a regime that the Court had expressly disapproved, in the teeth of the architectural consequences for the infrastructure sector, was itself manifestly arbitrary.

The Court's reasoning

The bench struck down Section 87 on three connected grounds.

The manifest-arbitrariness ground. The bench drew on the Shayara Bano articulation of manifest arbitrariness — that legislation is manifestly arbitrary when it is enacted "capriciously, irrationally and/or without adequate determining principle" or where it is "excessive and disproportionate." The bench held that Section 87 was manifestly arbitrary on each limb. It was capricious because it revived a regime that the legislature itself, only four years earlier, had identified as the central pathology of Indian arbitration and had deliberately dismantled. It was irrational because it produced the structural consequence — already documented in the 246th Law Commission Report and in BCCI v. Kochi Cricket — that award-debtors could file perfunctory Section 34 applications and freeze enforcement for years. It was disproportionate because the harm caused to award-holders (and, derivatively, to their own creditors in the infrastructure-finance ecosystem) was not justified by any countervailing legislative interest that the State had identified.

The interaction with the IBC. The bench engaged the structural interaction between the Arbitration and Conciliation Act 1996 and the Insolvency and Bankruptcy Code 2016. The petitioner held executable awards against the State that could not be realised under the Section 87 regime; the petitioner faced insolvency proceedings under the IBC 2016 that proceeded on the assumption that its own debts to its operational creditors could and should be enforced. The architecture produced what the bench described as a one-way valve — enforcement against private parties was robust, while enforcement against the State (in the form of Section 34-blocked arbitral awards) was effectively suspended. The structural asymmetry was, on the bench's reading, itself an indication of manifest arbitrariness: the legislative revival of the automatic-stay regime had not engaged the IBC interaction at all, and the consequences were not justified by any rational policy basis.

The displacement of a Court decision by legislative reversal. The bench engaged the further question whether legislative reversal of a Court decision is itself a doctrinal red flag under Article 14. BCCI v. Kochi Cricket had expressly addressed the transitional question and had held the amended Section 36 applicable to all Section 34 filings after 23 October 2015. Section 87 operated to reverse that holding by retrospective legislative override. The bench held that, while Parliament has the constitutional power to amend the law including with retrospective effect, the exercise of that power is subject to Article 14 — and where the legislative reversal is unaccompanied by any rational determining principle and produces the structural consequences that the Court had identified as pathological, the reversal is manifestly arbitrary. The proposition is a limited but important one: legislative reversal of a Court-approved regime is not, of itself, unconstitutional, but it must be supported by a rational basis that the State can articulate.

The bench accordingly struck down Section 87 and the simultaneous deletion of Section 26 of the 2015 Amendment Act. The no-automatic-stay regime built by the 2015 amendments and confirmed in BCCI v. Kochi Cricket was restored.

The doctrinal contribution

Hindustan Construction contributed three propositions to Indian arbitration and constitutional jurisprudence.

It made stable the no-automatic-stay regime under the post-2015 architecture of Section 36. The proposition, after Hindustan Construction, is uncontroversial: the filing of a Section 34 challenge does not, of itself, stay the enforcement of the arbitral award; the award-debtor must apply separately for a stay under Section 36(3); the court will impose conditions including, in the ordinary case for a money award, deposit or substantial security.

It articulated the application of the manifest-arbitrariness standard to arbitration legislation. Shayara Bano had articulated the manifest-arbitrariness test in the personal-law context; Hindustan Construction extended its application to commercial-law statutes and demonstrated that legislative reversal of a Court-approved regime, in the absence of a rational determining principle, can be struck down on this ground. The decision is part of the post-Shayara Bano arc that has stabilised manifest arbitrariness as a working Article 14 standard.

It crystallised the structural interaction between the Arbitration and Conciliation Act 1996 and the Insolvency and Bankruptcy Code 2016. The two regimes were enacted in separate legislative tracks but operate in adjacent commercial-recovery spaces; the Section 87 episode demonstrated that legislative changes in either regime that ignore the interaction produce constitutionally suspect consequences. The lesson has been internalised in subsequent legislative drafting and in judicial articulation of the IBC–arbitration interface.

What the judgment did not decide

Three limits should be flagged.

First, the judgment did not decide that every grant of stay under Section 36(3) must be accompanied by full deposit of the awarded sum. The proviso to Section 36(3) directs the court to have due regard to the provisions of the Code of Civil Procedure 1908 relating to stay of money decrees — which, under Order 41 Rule 5, contemplates the possibility of security or deposit but does not mandate it in every case. The court retains discretion to set conditions that are appropriate to the case, including the financial position of the award-debtor, the strength of the Section 34 challenge, and the urgency of enforcement. The post-Hindustan Construction case law has applied the discretion contextually.

Second, the judgment did not address the position of public-sector award-debtors that face budgetary or sovereign-payment constraints. The structural objection — that requiring the Union or a public-sector undertaking to deposit substantial sums as a condition of stay places budgetary pressure on the State — was raised in the proceedings and noted by the bench, but was not given controlling weight. The post-judgment practice of public-sector litigation has accommodated the requirement through standard-form bank guarantees and through phased deposits negotiated with the courts; the architectural objection has not produced a doctrinal carve-out.

Third, the judgment did not displace the Section 34 jurisdiction on the merits. The decision is about the enforceability of the award pending Section 34 — not about the grounds on which a Section 34 challenge may succeed. The substantive law of Section 34 — public policy, patent illegality, due process and the like — remains as articulated in Associate Builders v. DDA (2015) 3 SCC 49, Ssangyong Engineering v. NHAI (2019) 15 SCC 131, Project Director, NHAI v. M. Hakeem (2021) 9 SCC 1 and Larsen Air Conditioning & Refrigeration Co v. Union of India (2023 SCC OnLine SC 982).

The doctrinal arc

Hindustan Construction sits at the centre of a six-step legislative-and-judicial arc on Section 36.

The first step was the 1996 enactment of Section 36, on terms that did not — on a faithful reading of the UNCITRAL Model Law parent — contemplate an automatic stay. The second was the pre-2015 case-law gloss in National Aluminium (2004) and Fiza Developers (2009), which constructed the automatic-stay regime out of the original text. The third was the 2015 amendment to Section 36, which expressly undid the automatic-stay reading and required separate application for stay. The fourth was the BCCI v. Kochi Cricket (2018) confirmation that the amended Section 36 applied to all post-23-October-2015 Section 34 filings irrespective of when the arbitral proceedings had commenced. The fifth was the 2019 insertion of Section 87, which legislatively reversed BCCI v. Kochi Cricket. The sixth is Hindustan Construction (2019) striking down Section 87 and restoring the 2015 architecture.

The post-Hindustan Construction arc has been doctrinally stable. The no-automatic-stay regime has operated without further legislative challenge through 2020–2026. The practitioner discipline on independent stay applications under Section 36(3) — pleading the grounds expressly, addressing the CPC analogy for money-decree stays, offering security or deposit on conditions — has become the working norm. Larsen Air Conditioning (2023) and the 2025 Gayatri Balasamy v. ISG Novasoft Constitution Bench have refined the Section 34 substantive law without disturbing the Hindustan Construction enforcement architecture.

What practitioners take from the judgment today

For award-holder counsel, the operative position is clear: the filing of a Section 34 application by the award-debtor does not, of itself, stay enforcement. The award-holder should — as a matter of standard practice — proceed to file enforcement proceedings under Section 36 read with the Code of Civil Procedure 1908 without waiting for the Section 34 proceedings to conclude. Where the award-debtor seeks a stay under Section 36(3), counsel should be prepared to press for conditions including deposit of the full awarded sum or substantial security, and to engage the Order 41 Rule 5 CPC framework on which the proviso to Section 36(3) rests.

For award-debtor counsel, the operative discipline has shifted. A Section 34 application alone does not buy time on enforcement. Counsel must file the Section 36(3) stay application contemporaneously with the Section 34 application, plead the grounds for stay expressly, and be prepared to offer security or deposit on terms the court will scrutinise. The pre-2015 practice of relying on the Section 34 filing as a de facto stay is no longer available; the architectural discipline of pleading and proving stay independently has become the working norm.

For Union and public-sector litigators, the Hindustan Construction discipline has driven a structural change in budgetary practice. The standard practice for stay of public-sector arbitral awards now involves the offering of bank guarantees in lieu of cash deposit, the negotiation of phased deposit schedules where the award sum is large, and the integration of arbitral liability into routine budget planning. The constitutional injury that Hindustan Construction identified — the asymmetry between the State's freedom to delay payment and the private litigant's exposure to insolvency proceedings — has, in substance, been remedied at the practice level.

For constitutional litigators outside the arbitration space, the judgment is the working illustration of manifest arbitrariness applied to commercial-law legislation. The proposition that legislative reversal of a Court-approved regime can be struck down where the reversal lacks a rational determining principle has been deployed in subsequent constitutional challenges and is part of the post-Shayara Bano doctrinal architecture.

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