LEGAL ISSUE: Whether a government can obtain an unconditional stay on an arbitral award for payment of money, by using Order XXVII Rule 8A of the Code of Civil Procedure (CPC), or whether the court should impose conditions while granting stay under Section 36 of the Arbitration and Conciliation Act, 1996.
CASE TYPE: Arbitration Law
Case Name: PAM Developments Private Ltd. vs. State of West Bengal
[Judgment Date]: July 12, 2019
Introduction
Date of the Judgment: July 12, 2019
Citation: [Not Available in Source]
Judges: R.F. Nariman, J., Vineet Saran, J.
Can a government automatically avoid paying an arbitration award by simply filing an objection? The Supreme Court of India recently addressed this crucial question, clarifying the conditions under which a stay can be granted against a money award in arbitration cases involving the government. This judgment clarifies the interplay between the Arbitration and Conciliation Act, 1996 and the Code of Civil Procedure, 1908, specifically concerning the government’s obligation to comply with arbitral awards. The bench comprised Justices R.F. Nariman and Vineet Saran, with the majority opinion authored by Justice Vineet Saran.
Case Background
In 2001, PAM Developments Private Ltd. (the appellant) was awarded a contract by the State of West Bengal (the respondent) for road repair work. The work was completed in February 2002, but disputes arose regarding payments. The appellant raised its claims in May 2003, but the dues were not cleared by the respondent. Subsequently, the appellant initiated arbitration proceedings under Section 11(6) of the Arbitration and Conciliation Act, 1996. The Calcutta High Court appointed a retired judge as the arbitrator.
The arbitrator ruled in favor of the appellant in January 2010, awarding a sum of Rs. 2,87,11,553 with interest. The State of West Bengal challenged this award under Section 34 of the Arbitration Act before the Calcutta High Court. While this challenge was pending, the Arbitration Act was amended in 2016, introducing changes to Section 36, which deals with the enforcement of arbitral awards.
Following the Supreme Court’s ruling in Board of Control for Cricket in India vs Kochi Cricket Private Limited (2018) 6 SCC 287, which held that the amended Section 36 applies to pending proceedings, the appellant filed an execution application. The respondent then sought a stay on the award. The executing court initially attached Rs. 2.75 Crores from the respondent’s account with the Reserve Bank of India, but later dismissed the execution petition based on a coordinate bench order granting an unconditional stay to the State Government. The State of West Bengal then filed a fresh stay application, which was granted unconditionally by the Calcutta High Court, leading to the present appeal.
Timeline
| Date | Event |
|---|---|
| 2000-2001 | Respondent issued tender for road repair work. |
| 26th March 2001 | Appellant’s bid was accepted. |
| 2nd April 2001 | Agreement registered between the parties. |
| 28th February 2002 | Appellant completed the work. |
| 26th May 2003 | Appellant raised claims before the Executive Engineer. |
| 14th August 2003 | Calcutta High Court appointed an arbitrator. |
| 21st January 2010 | Arbitrator passed an award in favor of the appellant. |
| 2016 | Section 36 of the Arbitration Act was amended with retrospective effect from 23.10.2015. |
| 2018 | Appellant filed an execution application. |
| 18th September 2018 | Executing Court adjourned the matter. |
| 27th September 2018 | Stay application of the respondent was dismissed in default. |
| 3rd October 2018 | Executing Court attached Rs. 2.75 Crores from the respondent’s account. |
| 13th December 2018 | Calcutta High Court granted unconditional stay of the award. |
Course of Proceedings
The appellant initially filed an application under Section 11(6) of the Arbitration Act, which led to the appointment of an arbitrator by the Calcutta High Court. The arbitrator’s award in favor of the appellant was challenged by the respondent under Section 34 of the Arbitration Act. While this challenge was pending, the appellant filed an execution application after the amendment to Section 36 of the Arbitration Act, which was held to be applicable to pending proceedings by the Supreme Court.
The executing court initially attached funds but later dismissed the execution petition based on a coordinate bench order. The respondent then filed a fresh stay application, which was granted unconditionally by the High Court, leading to the present appeal before the Supreme Court. The High Court relied on Order XXVII Rule 8A of the CPC to grant the unconditional stay.
Legal Framework
The core legal issue revolves around the interpretation of Section 36 of the Arbitration and Conciliation Act, 1996, as amended in 2016, and its interplay with Order XXVII Rule 8A and Order XLI Rule 5 of the Code of Civil Procedure, 1908.
Section 36 of the Arbitration Act, as amended, states:
“Section 36. Enforcement. –
(1) Where the time for making an application to set aside the arbitral award under section 34 has expired, then, subject to the provisions of sub-section (2), such award shall be enforced in accordance with the provisions of the Code of Civil Procedure, 1908 (5 of 1908), in the same manner as if it were a decree of the court.
(2) Where an application to set aside the arbitral award has been filed in the Court under section 34, the filing of such an application shall not by itself render that award unenforceable, unless the Court grants an order of stay of the operation of the said arbitral award in accordance with the provisions of sub-section (3), on a separate application made for that purpose.
(3) Upon filing of an application under sub-section (2) for stay of the operation of the arbitral award, the Court may, subject to such conditions as it may deem fit, grant stay of the operation of such award for reasons to be recorded in writing:
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).”
Order XXVII Rule 8A of the CPC states:
“8A. No security to be required from Government or a public officer in certain cases.— No such security as is mentioned in rules 5 and 6 of Order XLI shall be required from the Government or, where the Government has undertaken the defence of the suit, from any public officer sued in respect of an act alleged to be done by him in his official capacity.”
Order XLI Rule 5 of the CPC deals with stay of execution of decrees and specifies conditions for granting such stays, including the requirement for security or deposit.
The interplay of these provisions is crucial: Section 36 of the Arbitration Act allows for conditional stays on arbitral awards, while Order XXVII Rule 8A of the CPC exempts the government from providing security. The question is whether this exemption translates to an automatic, unconditional stay on money awards against the government.
Arguments
Appellant’s Submissions:
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The appellant argued that Order XXVII Rule 8A of the CPC should not be applicable in this case. The appellant contended that the Arbitration Act is a self-contained code, and stay applications should be considered as per Section 36 of the Arbitration Act, with due regard to, but not strictly in accordance with, the CPC.
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The appellant further submitted that even if Order XXVII Rule 8A is considered, it only exempts the government from furnishing security, not from depositing the awarded amount. The appellant argued that the court still has the discretion to direct deposit of the awarded amount or part thereof.
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The appellant contended that the phrase “subject to such conditions as it may deem fit” in Section 36(3) of the Arbitration Act makes it obligatory for the Court to impose conditions if it decides to grant a stay, meaning the grant of stay has to be conditional.
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The appellant argued that the Arbitration Act mandates equal treatment of all parties, including the government, and thus the government should not receive special treatment under Order XXVII Rule 8A of the CPC.
Respondent’s Submissions:
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The respondent argued that Section 36 of the Arbitration Act, particularly sub-section (3), allows the court discretion to grant a stay, subject to conditions and with reasons recorded in writing.
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The respondent contended that the phrase “have due regard to” in the proviso to Section 36(3) makes it mandatory to apply all relevant provisions of the CPC, including Order XXVII Rule 8A and Order XLI Rule 5.
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The respondent submitted that Order XXVII Rule 8A directly applies to stay of money decrees against the government, exempting it from furnishing security.
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The respondent argued that since the government is always considered solvent, it should not be required to deposit the awarded amount, as it would honour the decree.
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The respondent contended that Order XLI Rule 5(3) requires substantial loss to be shown by the party applying for stay, and in the case of the government, the cumulative effect of multiple arbitration proceedings would result in substantial loss.
Submissions Table:
| Main Submission | Appellant’s Sub-Submissions | Respondent’s Sub-Submissions |
|---|---|---|
| Applicability of Order XXVII Rule 8A CPC |
✓ Not applicable as Arbitration Act is a self-contained code. ✓ Stay under Section 36 should consider CPC as a guideline, not mandatory. |
✓ Directly applicable to stay of money decrees against the government. ✓ “Have due regard to” makes CPC provisions mandatory. |
| Conditions for Stay |
✓ Section 36(3) mandates conditional stay. ✓ Exemption from security doesn’t mean exemption from deposit. |
✓ Court has discretion to grant stay, subject to conditions. ✓ Government is solvent and should not be required to deposit. |
| Equal Treatment | ✓ Arbitration Act mandates equal treatment; no special treatment for the government. | ✓ Government is different from private parties and requires special consideration. |
Issues Framed by the Supreme Court
The Supreme Court considered the following issues:
- Whether the provision of Order XXVII Rule 8A of the Code of Civil Procedure, 1908 would be applicable to the present case, and as such the Court ought not to have considered the same while deciding the application for stay of the award under Section 36 of the Arbitration Act.
- Whether even if the provision of Order XXVII Rule 8A are to be taken into account, then too the Courts should not pass an order of unconditional stay of award and could still direct deposit of the awarded amount.
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues
| Issue | Court’s Decision | Brief Reasons |
|---|---|---|
| Applicability of Order XXVII Rule 8A CPC | Not applicable | Section 36 of the Arbitration Act is a self-contained code; CPC provisions are guidelines, not mandatory. The phrase “have due regard to” means the provisions of CPC are to be taken into consideration, and not that they are mandatory. |
| Unconditional Stay | Not justified | Even if Order XXVII Rule 8A is considered, it only exempts the government from furnishing security, not from depositing the awarded amount. The Court has discretion to direct deposit of the awarded amount or part thereof. |
Authorities
The Court considered the following authorities:
| Authority | Court | How it was Considered | Legal Point |
|---|---|---|---|
| Board of Control for Cricket in India vs Kochi Cricket Private Limited (2018) 6 SCC 287 | Supreme Court of India | Followed | The amended provisions of Section 36 of the Arbitration Act would also apply to the pending proceedings under Section 34 of the Arbitration Act. |
| Shri Sitaram Sugar Company Limited. v. Union of India (1990) 3 SCC 223 | Supreme Court of India | Followed | The words ‘having regard to’ are legislative instructions for general guidance and are not strictly mandatory, but directory in nature. |
| Superintendent & Legal Remembrancer, State of West Bengal v. Corporation of Calcutta (1967) 2 SCC 170 | Supreme Court of India | Followed | The archaic rule based on the prerogative and perfection of the Crown has no relevance to a democratic republic; it is inconsistent with the rule of law based on the doctrine of equality. |
| Order XXVII Rule 8A, Code of Civil Procedure, 1908 | N/A | Interpreted | Exempts the government from furnishing security, but does not exempt from depositing the decretal amount. |
| Order XLI Rule 5, Code of Civil Procedure, 1908 | N/A | Interpreted | Provides for the power of the Court to direct full or part deposit of decretal amount or to furnish security. |
| Section 36, Arbitration and Conciliation Act, 1996 | N/A | Interpreted | Provides for conditional stay of arbitral award and the court has discretion to grant stay subject to such conditions as it may deem fit. |
| Section 18, Arbitration and Conciliation Act, 1996 | N/A | Interpreted | Mandates equal treatment of parties. |
Judgment
How each submission made by the Parties was treated by the Court?
| Submission | Court’s Treatment |
|---|---|
| Appellant’s submission that Order XXVII Rule 8A CPC is not applicable. | Accepted. The Court held that the Arbitration Act is a self-contained code and the provisions of CPC are to be taken as guidelines, not mandatory. |
| Appellant’s submission that even if Order XXVII Rule 8A is considered, the Court can still direct deposit of the awarded amount. | Accepted. The Court held that Rule 8A only exempts the government from furnishing security, not from depositing the decretal amount. |
| Respondent’s submission that “have due regard to” makes CPC provisions mandatory. | Rejected. The Court held that the phrase “have due regard to” means the provisions of CPC are to be taken into consideration, and not that they are mandatory. |
| Respondent’s submission that Order XXVII Rule 8A provides for unconditional stay. | Rejected. The Court held that Rule 8A only exempts the government from furnishing security, not from depositing the decretal amount. |
How each authority was viewed by the Court?
✓ The Supreme Court followed Board of Control for Cricket in India vs Kochi Cricket Private Limited (2018) 6 SCC 287* to apply the amended Section 36 of the Arbitration Act to pending proceedings.
✓ The Supreme Court followed Shri Sitaram Sugar Company Limited. v. Union of India (1990) 3 SCC 223* to interpret the phrase “having regard to” as a directory provision and not mandatory.
✓ The Supreme Court followed Superintendent & Legal Remembrancer, State of West Bengal v. Corporation of Calcutta (1967) 2 SCC 170* to hold that the archaic rule based on the prerogative of the Crown has no relevance in a democratic republic.
✓ The Supreme Court interpreted Order XXVII Rule 8A of the CPC as only providing exemption from furnishing security, not from depositing the decretal amount.
✓ The Supreme Court interpreted Order XLI Rule 5 of the CPC as providing the power to direct deposit of the decretal amount or to furnish security.
✓ The Supreme Court interpreted Section 36 of the Arbitration Act as providing for conditional stay and not an automatic stay.
✓ The Supreme Court interpreted Section 18 of the Arbitration Act as mandating equal treatment of parties, including the government.
What weighed in the mind of the Court?
The Supreme Court’s decision was influenced by several key factors, emphasizing the need for a balanced approach in arbitration cases involving the government. The Court aimed to ensure that the Arbitration Act’s objective of quick dispute resolution is not defeated, while also recognizing the need to protect the interests of both parties.
The Court emphasized that the Arbitration Act is a self-contained code designed for quick resolution of disputes. Granting an automatic stay to the government would defeat this purpose. The Court also highlighted that Section 18 of the Arbitration Act mandates equal treatment of all parties, including the government.
The Court noted that the provisions of the CPC are to be followed as a guidance, whereas the provisions of the Arbitration Act are essentially to be first applied. The Court also pointed out that Order XXVII Rule 8A of the CPC was enacted during British rule to protect the Crown and is not relevant in a democratic republic.
The Court also observed that while the CPC provides for differential treatment to the government in certain cases, the same may not be applicable while considering a case against the government under the Arbitration Act.
The Court emphasized that the phrase “have due regard to” in Section 36(3) of the Arbitration Act means that the provisions of the CPC are to be taken into consideration, and not that they are mandatory.
The Court also highlighted that even if Order XXVII Rule 8A is considered, it only exempts the government from furnishing security, not from depositing the awarded amount. The Court has the power to direct deposit of the awarded amount or part thereof.
Sentiment Analysis:
| Reason | Percentage |
|---|---|
| Emphasis on the Arbitration Act as a self-contained code for quick dispute resolution. | 30% |
| Rejection of special treatment for the government under the Arbitration Act. | 25% |
| Interpretation of “have due regard to” as directory, not mandatory. | 20% |
| Relevance of Order XXVII Rule 8A of CPC in the present democratic setup. | 15% |
| Power of the Court to direct deposit of the awarded amount. | 10% |
Fact:Law Ratio:
| Category | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
The analysis reveals that the Court’s reasoning was primarily driven by legal considerations (70%), focusing on the interpretation of the Arbitration Act and the CPC. The factual aspects of the case (30%) played a supporting role in understanding the context and implications of the legal issues.
Logical Reasoning:
Key Takeaways
- The government cannot claim an automatic, unconditional stay on arbitration awards for payment of money by using Order XXVII Rule 8A of the CPC.
- The courts have the discretion to impose conditions, such as requiring the government to deposit the awarded amount or part thereof, while granting a stay under Section 36 of the Arbitration Act.
- The Arbitration Act mandates equal treatment of all parties, including the government, and no special treatment is to be given to the government while considering an application for stay of a money decree.
- The provisions of the CPC are to be followed as a guidance, whereas the provisions of the Arbitration Act are essentially to be first applied.
- Order XXVII Rule 8A of the CPC, which was enacted during British rule, is not relevant in today’s democratic setup and only provides an exemption from furnishing security, and not from making a deposit.
Directions
The Supreme Court quashed the Calcutta High Court’s order granting an unconditional stay and restored the executing court’s order, which had attached Rs. 2.75 Crores from the respondent’s account. The Court directed that it shall be open for the petitioner-award holder to pray for release of the attached amount.
Development of Law
The ratio decidendi of this case is that the government cannot claim an automatic, unconditional stay on arbitration awards for payment of money by using Order XXVII Rule 8A of the CPC. The court has the discretion to impose conditions, such as requiring the government to deposit the awarded amount or part thereof, while granting a stay under Section 36 of the Arbitration Act. This judgment clarifies that the Arbitration Act mandates equal treatment of all parties, including the government.
This judgment changes the previous position of law where the government could claim an automatic stay by virtue of Order XXVII Rule 8A of the CPC.
Conclusion
The Supreme Court’s judgment in PAM Developments Private Ltd. vs. State of West Bengal clarifies that the government cannot obtain an automatic, unconditional stay on arbitral awards for payment of money. The Court emphasized that the Arbitration Act is a self-contained code that mandates equal treatment of all parties, including the government. The Court held that while considering an application for stay, the courts must impose conditions, such as requiring the government to deposit the awarded amount or part thereof. This ruling ensures that the purpose of quick dispute resolution through arbitration is not defeated and that the government cannot avoid its obligations by simply filing an objection.
Category
Parent Category: Arbitration and Conciliation Act, 1996
Child Categories:
- Section 36, Arbitration and Conciliation Act, 1996
- Stay of Arbitral Award
- Enforcement of Arbitral Award
- Code of Civil Procedure, 1908
- Order XXVII Rule 8A, Code of Civil Procedure, 1908
- Order XLI Rule 5, Code of Civil Procedure, 1908
- Government Litigation
FAQ
Q: Can the government automatically avoid paying an arbitration award?
A: No, the government cannot automatically avoid paying an arbitration award by simply filing an objection. The Supreme Court has clarified that the government cannot claim an automatic, unconditional stay on arbitration awards for payment of money.
Q: What conditions can a court impose when granting a stay to the government?
A: The court can impose conditions such as requiring the government to deposit the awarded amount or part thereof while granting a stay under Section 36 of the Arbitration Act.
Q: Does the government receive special treatment in arbitration proceedings?
A: No, the Arbitration Act mandates equal treatment of all parties, including the government. The government does not receive special treatment while considering an application for stay of a money decree.
Q: What is the relevance of Order XXVII Rule 8A of the CPC?
A: Order XXVII Rule 8A of the CPC only provides an exemption from furnishing security to the government, and not from making a deposit of the decretal amount.
Q: What does “have due regard to” mean in Section 36(3) of the Arbitration Act?
A: The phrase “have due regard to” means that the provisions of the CPC are to be taken into consideration, and not that they are mandatory.