An arbitral award can be challenged by filing an application under Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”). Ordinarily, along with the application to set aside an arbitral award, another application is filed under Section 36(2) of the Act seeking a stay on the operation of the award. Prior to the amendment to the Act in the year 2015, mere filing of an application under Section 34 of the Act would lead to an automatic stay on the enforcement of the award. However, pursuant to the Arbitration and Conciliation (Amendment) Act, 2015, Section 36(2) was amended to state that filing of an application to set aside an arbitral award shall not by itself render the award unenforceable and a specific order of stay of operation of the award shall have to be granted on a separate application being made for that purpose. Upon the filing of a separate application, seeking a stay on the operation of the arbitral award, the court may grant the stay, while imposing certain conditions, as it may deem fit. These conditions could entail either furnishing a bank guarantee or depositing cash with the court, to secure the arbitral award. The form and quantum of the security depends on the facts and circumstances of each case and is typically driven by the financial wherewithal and the conduct of the judgment debtor.
With the evolving jurisprudence on this subject, courts have been ordering the parties challenging the award to deposit the entire awarded amount as a condition for grant of stay on enforcement[1]. The rationale being that an award holder’s right to enjoy the fruits of the award must be protected and the endeavor should be that an award is not rendered a mere paper decree. As a hypothetical scenario, imagine a situation where a party has filed an application to set aside an arbitral award, along with an application seeking stay on enforcement. The court before which such applications are filed has directed the party to furnish a bank guarantee to secure the entire awarded amount as a condition for stay on enforcement of the award. What are the likely consequences if the party is unable to furnish the bank guarantee and comply with the conditions for stay? Will it only affect enforcement of the award or could it even lead to the dismissal of the application to set aside the arbitral award? The answer to this question requires an appreciation of the overall scheme of the Act.
From a wholistic review of the Act, it is manifest that there exists no provision in the Act which mandates that the hearing of an application to set aside an arbitral award is contingent upon the deposit of the awarded amount (imposed as a condition for stay on enforcement). In other words, the Act does not provide that an application under Section 34 can be heard on merits only on a pre-deposit of the awarded amount. In case of a conditional stay on the arbitral award, the failure to comply with the conditions for stay would imply that there would be no impediments to proceed with the enforcement of the award. However, this does not mean that an application under Section 34 of the Act can be dismissed altogether on this account. Interpreting anything to the contrary would mean reading something into the Act, which does not exist. Some of the earlier decisions on this issue are in the context of appeals filed under the Code of Civil Procedure, 1908 (“CPC”). These decisions may even be relevant for an arbitration proceeding since courts are required to have due regard to the provisions of CPC for grant of stay on the enforcement of a money decree.
In Kayamuddin Shamsuddin Khan v. State Bank of India[2](“Kayamuddin”),the appellant had filed an appeal against a decree and had also filed an application for stay of execution of the decree. The Hon’ble High Court of Bombay (Nagpur Bench) passed a direction, asking the appellant to deposit INR 75,000/- within two weeks, failing which it was ordered that the appeal would stand dismissed. The appellant failed to deposit the above sum and consequently, the appeal stood dismissed. The appellant challenged this order and the Hon’ble Supreme Court of India while relying on sub rule 5 of Rule 5 of Order 41 of CPC held that the only consequence of non-compliance with the direction/condition for stay would be refusal of the court to stay the execution of the decree. In other words, the application for stay of execution of the decree could be dismissed for such non-compliance, but the court could not give a direction for the dismissal of the appeal itself. A similar view was also taken in Devi Theatre v. Vishwanath Raju[3](“Devi Theatre”)wherein it was held that imposing a condition of deposit of money subject to which an appeal may be admitted for hearing on merits was not legally justified.
Now, coming to the realm of arbitrations, in an appeal filed before the Hon’ble Bombay High Court under Section 37 of the Act[4], it was argued by the award holder that the entire amount awarded had not been deposited with the court. The Hon’ble Bombay High Court held that it would not hear the appeal under Section 37 unless the judgment debtor/appellant deposited the entire amount, along with interest before the executing court. This order was challenged before the Hon’ble Supreme Court of India[5]. The Hon’ble Supreme Court of India, relying on Kayamuddin and Devi Theatre held that the directions passed by the Hon’ble Bombay High Court could not be sustained and were required to be set aside. This decision of the Hon’ble Supreme Court of India has been relied upon in a recent judgment of the Hon’ble Delhi High Court[6], wherein the Hon’ble Division Bench of the Delhi High Court has held that it is not open for the court to decline to hear an application under Section 34 of the Act on the ground that the judgment debtor had not complied with the conditions under Section 36(2) of the Act for staying the enforcement of the arbitral award.
In this case, the appeal before the Hon’ble Division Bench was filed against the order of the Ld. Single Judge[7] dismissing the application filed under Section 34 of the Act on account of alleged non-compliance with the directions (of the Hon’ble Supreme Court of India and the Hon’ble Delhi High Court) to deposit the entire awarded amount in court in cash. While appreciating the scheme of the Act and the judicial precedents on the subject, the Hon’ble Division Bench[8] held that the consequences of failure to comply with the order of stay are that the award is liable to be enforced, however, it cannot follow that the application filed under Section 34 of the Act is required to be dismissed on this account. A Special Leave Petition was filed[9] against the above judgment of the Hon’ble Division Bench of the Delhi High Court. While it was argued that the order of dismissal by the Ld. Single Judge was based on inter-party orders passed by the Hon’ble Supreme Court of India and the Hon’ble Delhi High Court in the same lis, the Hon’ble Supreme Court of India upheld the observations of the Hon’ble Division Bench as laying down the correct law and dismissed the Special Leave Petition.
Therefore, the position of law, as has been enunciated through the above judicial precedents, is that an application filed for setting aside an arbitral award under Section 34 of the Act cannot be dismissed for want of compliance with the conditional order granting stay on enforcement. The remedy available to the award holder for any non-compliance with the conditions of stay, is the right to proceed with the enforcement of the arbitral award, notwithstanding the judgment debtor’s challenge to the arbitral award pending consideration.
For further information, please contact:
Kapil Arora, Partner, Cyril Amarchand Mangaldas
kapil.arora@cyrilshroff.com
[1] Manish v. Godawari Marathawada Irrigation Development Corporation, SLP (Civil) No. 11760-11761/2018; Toyo Engineering Corporation & Anr. v. Indian Oil Corporation Limited CA Nos 4549-4550 of 2021; Mahanagar Telephone Nigam Limited v. Canara Bank & Anr. O.M.P (COMM) 312/2022
[2] (1998) 8 SCC 676,
[3] (2004) 7 SCC
[4] Maharashtra Krishna Valley Development Corporation, Pune v. BT Patil and Sons (Construction) Private Limited, Arbitration Appeal (L)(No.) 98669 of 2020
[5] Maharashtra Krishna Valley Development Corporation, Pune v. BT Patil and Sons (Construction) Private Limited, 2021 SCC OnLine SC 3524
[6] SEPCO Electric Power Construction Corporation v. Power Mech Projects Limited FAO(OS)(COMM) 109 of 2023, judgment dated August 21, 2023.
[7] SEPCO Electric Power Construction Corporation v. Power Mech Projects Limited, OMP (COMM) 432 of 2017, order dated May 09, 2023
[8] The Hon’ble Division Bench in paragraph 30 of the judgment dated August 21, 2023 in FAO(OS)(COMM) 109 of 2023 recorded SEPCO’s compliance with the orders passed under Section 36(2) and Section 9 of the Act.
[9] Power Mech Projects Limited v. SEPCO Electric Power Construction Corporation, SLP (C) No. 20543 of 2023, order dated September 26, 2023
