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14 April, 2010
Background
Ever since the enactment of the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”), arbitral awards have been statutorily granted the same status as a decree of a civil court by way of a deeming fiction under Section 36 of the Arbitration Act. Up until the amendment of the Arbitration Act in 2015, the filing of an application challenging an arbitral award had the effect of an automatic stay on the enforcement of the award. The Arbitration and Conciliation (Amendment) Act, 2015 (the “2015 Amendment Act”) changed this, by mandating a separate application to be filed seeking stay of the award, which may (or may not) be granted by the court, subject to such conditions as it may deem fit.
Much back and forth has ensued between Parliament and the Supreme Court as regards whether this requirement to separately seek stay of an award, pending challenge, is to be applied in respect of those awards, challenges to which were pending when the 2015 Amendment Act came into effect, and/or where the arbitral proceedings commenced before the 2015 Amendment Act came into effect.
Finality has been brought to that issue recently, wherein the Supreme Court incidentally also clarified that Section 36 of the Arbitration Act (as originally enacted) did not intend to provide for an automatic stay on execution of the award upon filing of an application challenging an award.[1] However, there is still a lack of clarity as to the conditions courts may impose on a party seeking stay of an award, and whether an award can be unconditionally stayed.
Section 36(3) of the Arbitration Act provides that the court may ‘subject to such conditions as it may deem fit’ grant stay of the operation of an award ‘for reasons to be recorded in writing’. The proviso to Section 36(3) of the Arbitration Act requires the court to have ‘due regard to the provisions of grant of stay of a money decree’ under the CPC, while considering the application for grant of stay in the case of an arbitral award for payment of money. The relevant provisions under the CPC in this regard are Order XLI Rules 1 and 5, which deal with appeals from money decrees and stay on execution of a money decree.
Conditions under the CPC for stay of a money decree
We first examine whether unconditional stay on the execution of a money decree is contemplated in the CPC.
The position under the CPC, since inception, has been that the mere filing of an appeal will not operate as a stay on the execution of a decree. Order XLI Rule 5(1) of the CPC grants the court discretion to stay the execution of a decree for ‘sufficient cause’. The power to exercise such discretion is subject to the court being satisfied that the following conditions, laid down in Order XLI Rule 5(3), exist:
- Substantial loss may result to the party applying for stay of execution unless the order is made;
- The application for stay has been made without unreasonable delay; and
- Security has been given by the applicant for the due performance of such decree or order as may ultimately be binding upon him.
From 1976 onwards (pursuant to an amendment to the CPC), parties appealing against decrees for payment of money were required to deposit the amount disputed in the appeal or furnish such security in respect thereof as the court may think fit, within such time as the court may allow.[2] Order XLI Rule 5(5) was also inserted in the CPC in 1976, to provide that where the appellant fails to make the deposit or furnish the security as aforesaid, the court shall not make an order staying the execution of the decree.
An exceptional case has to be made out for stay of a money decree, including by establishing that undue hardship would be caused to the judgement-debtor if stay is not granted.[3] Execution of a money decree is not stayed ordinarily, as satisfaction of a money decree is not considered to amount to irreparable injury. If the appellant succeeds in his challenge to a money decree, he is entitled, by way of the remedy of restitution, to recover any amount paid to the decree-holder. Courts have, therefore, held that deposit of the disputed amount or furnishing of security is a condition precedent for an order staying execution of a decree, and that whilst the court has discretion to either direct deposit of the disputed amount or permit furnishing of such security as it may think fit, such discretion is to be exercised judicially and not arbitrarily, depending on facts and circumstances of the given case.[4]
Therefore, it appears that the only discretion available to an appellate court while deciding an application for stay of a money decree is to either direct a deposit of the amount disputed in the appeal, or to permit such security to be furnished as it may deem fit. An unconditional stay on the execution of a money decree does not appear to be contemplated in the CPC and has been clearly ruled out by judicial precedent.
Interestingly, the position in Maharashtra appears to be different. Courts in Maharashtra have the power to grant unconditional stay on the execution of a money decree. Order XLI Rule 1 of the CPC was substituted in its entirety by an amendment vide Bombay High Court Notification No. P. 0102/77 dated September 5, 1983 (the “Bombay Amendment”). The notable difference pursuant to this amendment is that Order XLI of the CPC, as applicable to Maharashtra, contains a proviso to Order XLI Rule 1(3) which provides that the court ‘may dispense with the deposit or security where it deems fit to do so for sufficient cause’.
Conditions under the Arbitration Act for stay of an award
The provisions of grant of stay of a money decree under the CPC became relevant to the enforcement of arbitral awards only on account of the 2015 Amendment Act, which required courts to `have due regard’ to the same. The application of this standard by courts has not been entirely consistent, insofar as some found that Section 36(3) of the Arbitration Act does not mandate the court to apply the provisions of the CPC while considering an application for stay, and that there is a discretion to grant unconditional stay.[5] Other courts considered themselves to be bound by these provisions of the CPC, and took the view that a party challenging an award will now have to deposit the awarded amount or furnish security as a condition precedent to obtain stay on the award.[6]
In 2019, the position in this regard was fortified by the Supreme Court in Pam Developments Private Limited. v. State of West Bengal.[7] The Supreme Court was faced with a situation where the State of West Bengal was granted unconditional stay on an award by the Calcutta High Court, on account of Order XXVII Rule 8-A of the CPC, which exempts the Government from the requirement to furnish security under Order XLI Rule 5. In this context, the Supreme Court held that the phrase ‘have due regard to’ in the proviso to Section 36(3) of the Arbitration Act would only mean that the provisions of the CPC are to be taken into consideration and that the same are only directory and not mandatory. It further held that (a) the provisions of the CPC are to be only looked to for guidance, and the provisions of the Arbitration Act are to be first applied and (b) since the Arbitration Act is a self-contained Act, the provisions of the CPC will apply only insofar as the same are not inconsistent with the spirit and provisions of the Arbitration Act.
Pam Developments clarifies that when it comes to applications for stay of awards under Section 36 of the Arbitration Act, the courts are not strictly bound by the provisions of the CPC relating to stay of a money decree. However, some ambiguity remains as to what conditions may be imposed for staying an award, and whether an award can be stayed unconditionally.
In 2018, a Division Bench of the Bombay High Court held that whilst the court is required to take Order XLI Rule 5 of the CPC into consideration while deciding an application for stay of an award, such an order is discretionary and must be passed taking into consideration the facts and circumstances of the case.[8] The Bombay High Court also held that (a) there cannot be a straitjacket formula that in every case the court would impose conditions or that there necessarily has to be a deposit of the decretal amount, and (b) the party opposing grant of stay cannot assert a proposition that it would be mandatory for the court to impose a condition for stay of execution.
It is a well-settled position that the Arbitration Act is a self-contained code. Whilst courts have held time and again that the efficacy of the arbitral process must always be protected, and courts should be slow to interfere with arbitral awards, Section 36(3) of the Arbitration Act clearly affords discretion to courts to impose such conditions as they may deem fit. No doubt, if the court prima facie finds an award to be well-reasoned and lacking in any apparent infirmity, it may exercise its discretion to reject an application for stay or grant conditional stay. But when dealing with an award which is, on the face of it, perverse or prima facie hit by one of the grounds of challenge under Section 34(2) of the Arbitration Act, the court ought to be able to stay such an award without subjecting the award-debtor to any conditions. Whilst the court’s discretion to do so seems apparent from a plain reading of Section 36(3) of the Arbitration Act, the reference to the provisions of the CPC for stay of a money decree, and the aggressive pro-arbitration approach being adopted of late have created some ambiguity.
Order XLI Rules 1 and 5 vest the court with limited discretion to either direct deposit of the amount disputed in the appeal or to furnish such security as it may deem fit. Since under Section 36(3) of the Arbitration Act, the court must only have due regard to these provisions, can an award be stayed on other conditions, or to the extent of securing only part of the decretal amount? Can unconditional stay be granted where the circumstances warrant the same? Some clarity in this regard would be very welcome, in the absence of which the issue of grant of conditional or unconditional stay of awards will continue to be subject to various (and possibly inconsistent) interpretations and outcomes.
For further information, please contact:
Aditya Mehta, Partner, Cyril Amarchand Mangaldas
aditya.mehta@cyrilshroff.com
[1] Hindustan Construction Company Limited & Anr. v. the Union of India & Ors [2019 SCC Online SC 1520]
[2] Order XLI Rule 1(3) of the CPC
[3] See Malwa Strips Private Limited. v. Jyoti Limited [(2009) 2 SCC 426]
[4] See Sihor Nagar Palika Bureau v. Bhabhlubhai Virabhai & Co. [2005 (4) SCC 1]
[5] See Ecopack India Paper Cup Pvt. Ltd. v. Sphere International [2018 SCC OnLine Bom 540]
[6] West Bengal Power Development Corporation Ltd. v. Dongfang Electric Corporation [AIR 2017 Cal 297]
[7] (2019) 8 SCC 112
[8] Ecopack India Paper Cup Pvt. Ltd. v. Sphere International [2018 SCC OnLine Bom 540]
