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Synopsis

The Supreme Court has said that the Arbitration Act is a self-contained code and the form of security required to be furnished should not depend on whether a party is a statutory or other governmental body or a private entity. 

"Governmental entities must be treated in a similar fashion to private parties insofar as proceedings under the Arbitration Act are concerned, except where otherwise indicated by law. This is because the parties have entered into commercial transactions with full awareness of the implications of compliance and non-compliance with the concerned contracts and the consequences which will visit them in law," a bench led by Chief Justice of India D Y Chandrachud said.

The court rejected an argument on behalf of Kamarajar Port Limited that the High Court was correct in directing it to furnish bank guarantees in relation to the amount awarded because it is a statutory body.

Appellant International Seaport Dredging Pvt Ltd challenged the Madras High Court's order of September 9, 2024, which granted a stay on the execution of the Arbitral award conditional on the respondent furnishing a bank guarantee in the sum of Rs 21,07,66,621 within a period of eight weeks.

A three-member arbitral tribunal ordered an award on March 7, 2024 directing the respondent to pay the appellant a sum of Rs 21,07,66,621 towards the claims that were allowed in its favour.

The appellant contended since the award operates as a money decree under Section 36 of the Arbitration Act, the High Court was not justified in directing merely the furnishing of a bank guarantee in relation to the principal amount. It said that the respondent ought to have instead been directed to deposit the amount awarded to it as a condition for the grant of a stay on the execution of the award.

The respondent, on the contrary, said the High Court had due regard to the fact that the respondent is a statutory body and correctly held that security should be furnished in the form of a bank guarantee.

The bench, also comprising Justices J B Pardiwala and Manoj Misra, pointed out that Section 36(2) of the Arbitration Act indicates that where an application to set aside an arbitral award has been filed under Section 34, the filing of such an application shall not, by itself, render that award unenforceable, unless the Court grants a stay on the enforcement of the arbitral award in terms of sub-section (3). 

It also noted that the provision indicates that a separate application must be made for this purpose. Sub-section (3) of Section 36 stipulates that where such an application has been filed, 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. 

Following the amendments brought about by the Arbitration and Conciliation (Amendment) Act 2015, the first proviso to sub-section (3) stipulates that the court shall, while considering an application for grant of stay in the case of an arbitral award for payment of money, have due regard to the provisions related to the grant of stay of a money decree under the CPC. The second proviso provides for a situation in which the Court may grant unconditional stay, it said.

In the present case, there is an arbitral award to the tune of approximately Rs 21 crores in favour of the appellant. However, the High Court, while issuing a direction for furnishing of a bank guarantee, dealt with only one of the claims which was awarded by the arbitral tribunal, namely, that which pertained to the refund of the cess under the Building and Other Construction Workers’ Welfare Cess Act 1996, the bench noted.

"The High Court granted a stay on the operation of the award subject to the respondent furnishing a bank guarantee for the principal amount awarded to the appellant, i.e. Rs 21,07,66,621. It held that it was not inclined to issue orders in relation to the interest and the costs awarded to the appellant because “the petitioner is not a fly-by operator and is a statutory undertaking.” The law qua arbitration proceedings, in our view, cannot be any different merely because of the status of the respondent as a statutory undertaking," the bench said.

The bench opined that the High Court was in error in not even prima facie considering the fact that apart from the issue of cess, there was an arbitral award in favour of the appellant in regard to other claims as well. Further, the High Court ought not to have based its decision on the condition for the grant of stay on the status of the respondent as a statutory authority, it said.

"The Arbitration Act is a self-contained code – it does not distinguish between governmental and private entities. Hence, the decision of the Court cannot be influenced by the position of the party before it and whether it is a fly-by-night operator. Moreover, an assessment as to whether a party is reliable or trustworthy is subjective," the bench said.

The bench felt many private entities, too, may rely on the size of their undertaking, its success, public image, or other factors to argue that they are not fly-by-night operators. 

"In the absence of any provision of law in this regard, it would be inappropriate for courts to apply this standard while adjudicating the conditions upon which a stay of an award may be granted," it said.

The bench pointed out that under Order XLI Rule 5 of the CPC, the court has the power to direct full or part deposit and/or the furnishing of security in respect of the decretal amount. 

"Bearing in mind the principles which must guide the court, we are of the view that the order of the High Court requires modification," the bench said, directing the respondent to deposit an amount quantified at 75% of the decretal amount, inclusive of interest, on or before November 30, 2024 before the High Court.

"Conditional on the deposit of the amount within the period stipulated, there shall be a stay on the enforcement of the arbitral award," the bench ordered.

Case Title: International Seaport Dredging Pvt Ltd Vs Kamarajar Port Limited