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Hindustan Construction Company Limited v. Union of India

Writ Petition (Civil) · 2019 INSC 1289Decided 27 Nov 2019
Writ Petition (Civil) No. 1074 of 2019
Justice Rohinton Fali Nariman · Justice Surya Kant · Justice V. Ramasubramanian

Background

Infrastructure companies like Hindustan Construction Company, which build public projects such as roads and dams for government bodies, often win arbitration awards against those bodies, only to have the awards automatically stayed the moment the government challenges them in court: a process that could take over six years. In 2015, Parliament had fixed this "automatic-stay" problem through Section 36 of the Arbitration Act, but a 2019 amendment (inserting Section 87 and repealing Section 26 of the 2015 Amendment Act) effectively revived automatic stays for a large set of ongoing cases. The companies challenged this 2019 change as unconstitutional, arguing it reintroduced the very problem Parliament had just fixed, while also leaving them exposed to being dragged into insolvency proceedings by their own unpaid suppliers because the award money remained frozen.

Decision Breakdown

The Supreme Court held that reviving the automatic-stay regime through Section 87 and the repeal of Section 26 was "manifestly arbitrary" and violated Article 14 of the Constitution, because it reversed a beneficial reform without any rational justification, created hardship for award-holders already suffering a combination of long-delayed litigation and now-renewed insolvency risk, and disturbed settled expectations by applying retrospectively. The Court therefore struck down both the insertion of Section 87 into the Arbitration Act, 1996 and the repeal of Section 26 of the 2015 Amendment Act. It separately rejected a challenge to a related government scheme that allowed contractors to withdraw 75% of disputed award amounts against a bank guarantee, finding the 10% annual guarantee requirement was not arbitrary. All the writ petitions were disposed of accordingly.

Lesson Learnt

A law or amendment that reverses a beneficial legal reform without any rational basis, especially retrospectively and to the serious detriment of those who relied on the earlier position, can be struck down by courts as "manifestly arbitrary" and unconstitutional, even though legislatures otherwise have wide power to amend laws.

Official source (sci.gov.in)View Judgment (PDF)

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