Supreme Court clarifies conditions for stay on arbitral awards: International Seaport Dredging vs. Kamarajar Port (2024)

Date of the Judgment: 24 October 2024

Citation: 2024 INSC 827

Judges: Dr Dhananjaya Y Chandrachud, J, J B Pardiwala, J, Manoj Misra, J

Can a court order a stay on the enforcement of an arbitral award for payment of money by simply asking for a bank guarantee, or is a deposit of the awarded amount necessary? The Supreme Court of India recently addressed this crucial question in a case between International Seaport Dredging Pvt Ltd and Kamarajar Port Limited. The Court clarified that while considering a stay on a money award, the provisions of the Code of Civil Procedure, 1908 (CPC) must be considered, but the unique nature of arbitration proceedings must also be kept in mind. This judgment was delivered by a three-judge bench comprising of Dr. Dhananjaya Y Chandrachud, J., J.B. Pardiwala, J., and Manoj Misra, J., with the opinion authored by Dr. Dhananjaya Y Chandrachud, J.

Case Background

The case revolves around a contract between International Seaport Dredging Pvt Ltd (the appellant) and Kamarajar Port Limited (the respondent). On 12 August 2015, the parties entered into a contract where the appellant was to perform capital dredging and related tasks at Kamarajar Port for approximately Rs 274 crores. The work included dredging of container berths, coal berths, removal of boulders and debris, and environmental monitoring, with a completion date of 11 April 2017. Disputes arose, leading the appellant to invoke arbitration.

The arbitral tribunal issued an award on 7 March 2024, directing the respondent to pay the appellant Rs 21,07,66,621, along with interest and costs. Both parties filed applications for corrections, and the tribunal only increased the costs awarded to the appellant. The respondent then challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) and sought a stay on its execution.

Timeline

Course of Proceedings

The High Court of Judicature at Madras, on 9 September 2024, granted a stay on the execution of the arbitral award, conditional on the respondent furnishing a bank guarantee of Rs 21,07,66,621 within eight weeks. The appellant challenged this order, arguing that the High Court should have directed the respondent to deposit the awarded amount instead of providing a bank guarantee, given that an arbitral award is akin to a money decree under Section 36 of the Arbitration Act.

Legal Framework

The Supreme Court considered the following provisions of the Arbitration Act:

• Section 36(2): States that filing an application to set aside an arbitral award does not automatically make the award unenforceable unless a stay is granted by the court.
• Section 36(3): Allows the court to grant a stay on the operation of the award, subject to conditions. The first proviso to Section 36(3) states:

  “Provided that the Court shall, while considering the application for grant of stay in the case of an arbitral award for payment of money, have due regard to the provisions for grant of stay of a money decree under the provisions of the Code of Civil Procedure, 1908 (5 of 1908).”

  This means that when considering a stay on an award for payment of money, the court must consider the provisions of the CPC related to stay of money decrees.

• The second proviso to Section 36(3) allows for unconditional stay if the arbitration agreement or the making of the award was induced by fraud or corruption.

Arguments

Appellant’s Arguments:

• Mr. Shyam Divan, senior counsel for the appellant, argued that previous Supreme Court precedents require the deposit of the awarded amount to maintain the sanctity of arbitration.
• The amended provisions of the Arbitration Act mandate that the court should consider the provisions of the CPC when staying a money award.
• The High Court only provided two reasons for staying the award: one related to a cess issue and the other that the respondent was not a “fly-by-night operator.”

Respondent’s Arguments:

• Mr. C A Sundaram, senior counsel for the respondent, argued that the amended Arbitration Act incorporates provisions of the CPC regarding stay of money awards.
• Order XLI Rule 5 of the CPC requires furnishing security, not necessarily depositing the money.
• The respondent is a statutory body, and the High Court correctly ordered a bank guarantee.
• The precedents relied on by the appellant pertain to appeals under Section 37 of the Arbitration Act, not Section 34.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue before the court was:

1. Whether the High Court was justified in directing the respondent to furnish a bank guarantee instead of directing a deposit of the awarded amount, while granting a stay on the execution of the arbitral award under Section 34 of the Arbitration Act.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

• Pam Developments Private Limited v. State of West Bengal [(2019) 8 SCC 112] The Supreme Court of India: This case clarified that while the provisions of the CPC should be considered as a guide, the Arbitration Act is a self-contained code and its provisions must be primarily applied. It also emphasized that there should be no special treatment for the government in arbitration proceedings.
• Toyo Engineering Corpn. v. Indian Oil Corpn. Ltd. [2021 SCC OnLine SC 3455] The Supreme Court of India: This case reiterated that Order XLI Rule 5 of the CPC should be followed in cases involving stay of arbitral awards and that discretion should not be exercised differently simply because public corporations are involved.

Legal Provisions Considered by the Court:

• Section 36 of the Arbitration and Conciliation Act, 1996: Deals with the enforcement of arbitral awards and the conditions for stay on their operation.
• Order XLI Rule 5 of the Code of Civil Procedure, 1908: Provides for the power of the court to direct deposit or security in respect of a decretal amount.

Judgment

How each authority was viewed by the Court:

• Pam Developments Private Limited v. State of West Bengal [(2019) 8 SCC 112]* was followed to reinforce that the Arbitration Act is a self-contained code, and CPC provisions are a guide, not mandatory.
• Toyo Engineering Corpn. v. Indian Oil Corpn. Ltd. [2021 SCC OnLine SC 3455]* was followed to highlight that Order XLI Rule 5 of CPC should be applied uniformly, and public corporations should not get special treatment.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• The need to uphold the integrity of the arbitration process.
• The principle of equal treatment of parties in arbitration, regardless of whether they are governmental or private entities.
• The fact that the High Court did not consider all the claims awarded by the arbitral tribunal, focusing only on one claim related to cess.
• The need to ensure that the stay on the enforcement of an arbitral award does not unduly deprive the decree-holder of the fruits of the award.

The court’s reasoning was based on the following steps:

The court considered the argument that the respondent, being a statutory body, should be treated differently but rejected it. The court emphasized that the Arbitration Act does not differentiate between governmental and private entities. The court also rejected the High Court’s reasoning that the respondent was not a “fly-by-night operator” as a valid basis for granting a stay. The court noted that such an assessment is subjective and has no basis in law.

The court quoted from the judgment in Pam Developments Private Limited v. State of West Bengal:

“Arbitration proceedings are essentially alternate dispute redressal system meant for early/quick resolution of disputes and in case a money decree — award as passed by the arbitrator against the Government is allowed to be automatically stayed, the very purpose of quick resolution of dispute through arbitration would be defeated as the decree- holder would be fully deprived of the fruits of the award on mere filing of objection under Section 34 of the Arbitration Act.”

The court also quoted from the judgment in Toyo Engineering Corpn. v. Indian Oil Corpn. Ltd.:

“This Court repeatedly having held that Order XLI Rule 5 principles are to be followed in these cases, we find that largely because public corporations are involved, discretion continues to be exercised not on principles under Order XLI Rule 5 but only because large amounts exist and that Government Corporations have to pay these amounts under Arbitral Awards. Both these considerations are irrelevant, as has been pointed out by us earlier.”

The court held that the High Court should not have based its decision on the status of the respondent as a statutory authority. The court stated that the Arbitration Act is a self-contained code that does not distinguish between government and private entities.

The court also observed that the High Court did not consider all the claims of the appellant that were allowed by the arbitral tribunal. The High Court only discussed the claim related to the refund of cess, which was only a small part of the total amount awarded.

Key Takeaways

• When considering a stay on an arbitral award for payment of money, courts must have due regard to the provisions of the CPC, but the unique nature of arbitration proceedings must also be considered.
• The Arbitration Act is a self-contained code, and there should be no differential treatment between governmental and private entities.
• Courts should not base their decisions on subjective assessments of whether a party is a “fly-by-night operator.”
• The form of security required for a stay should not depend on whether a party is a statutory or governmental body or a private entity.
• The court has the discretion to direct full or partial deposit of the decretal amount or the furnishing of security.

Directions

The Supreme Court modified the High Court’s order and directed that:

1. The respondent shall deposit 75% of the total decretal amount, including interest, by 30 November 2024.
2. Conditional on the deposit of the amount, there shall be a stay on the enforcement of the arbitral award.

Development of Law

The judgment clarifies that while the provisions of the CPC are a guide, they are not mandatory in the context of arbitration proceedings. The unique nature of arbitration, as an alternative dispute resolution mechanism, must be kept in mind. The court reiterated that there should be no differential treatment between governmental and private entities in arbitration proceedings. The ratio decidendi of the case is that when a stay is sought on a money award under Section 34 of the Arbitration Act, the court has the discretion to order a full or partial deposit of the amount, and cannot base its decision on the status of the party.

Conclusion

The Supreme Court’s judgment in International Seaport Dredging Pvt Ltd vs. Kamarajar Port Limited clarifies the conditions for granting a stay on the enforcement of arbitral awards for payment of money. The court emphasized that the Arbitration Act is a self-contained code that does not distinguish between government and private entities. The court also held that the High Court was in error in not considering all the claims awarded by the arbitral tribunal and in basing its decision on the status of the respondent as a statutory authority. The Supreme Court modified the High Court’s order and directed the respondent to deposit 75% of the decretal amount as a condition for the stay.