Supreme Court Partially Allows Appeal on Interim Rent Deposit: Evergreen Land Mark Pvt. Ltd. vs. John Tinson & Company Pvt. Ltd. (2022)

Date of the Judgment: April 19, 2022

Citation: 2022 INSC 394

Judges: M.R. Shah, J. and B.V. Nagarathna, J.

Can an arbitral tribunal order a party to deposit the full disputed amount as an interim measure, especially when a ‘force majeure’ clause is invoked due to unforeseen circumstances like a pandemic lockdown? The Supreme Court of India addressed this critical question in a recent case concerning a lease agreement dispute. The core issue revolved around whether a lessee should be compelled to deposit the entire rental amount during a period when business operations were severely restricted due to government-imposed lockdowns. The bench comprised Justices M.R. Shah and B.V. Nagarathna, with the judgment authored by Justice M.R. Shah.

Case Background

The case involves a dispute between Evergreen Land Mark Pvt. Ltd. (the appellant), a lessee operating a restaurant and bar, and John Tinson & Company Pvt. Ltd. and another (the respondents), the owners of the leased premises. The lease agreement was terminated by the owners, leading to arbitration proceedings. During the arbitration, the owners filed applications under Section 17 of the Arbitration and Conciliation Act, 1996, seeking a deposit of rental dues for the period between March 2020 and December 2021. The lessee argued that due to the COVID-19 pandemic and subsequent lockdowns, they were entitled to invoke the ‘force majeure’ clause (Clause 29) in the lease agreement, which would excuse them from paying rent for the lockdown periods.

The Arbitral Tribunal ordered the lessee to deposit 100% of the rental amount for the disputed period, which was upheld by the High Court of Delhi. The lessee then appealed to the Supreme Court, challenging the order to deposit the full amount, arguing that their liability was disputed due to the ‘force majeure’ clause.

Timeline:

Course of Proceedings

The Arbitral Tribunal, acting on applications by the respondents under Section 17 of the Arbitration and Conciliation Act, 1996, directed the appellant to deposit the full rental amount for the period from March 2020 to December 2021. The Tribunal ordered that the deposited amount be kept in fixed deposit accounts. The appellant challenged this order before the High Court of Delhi under Section 37(2)(b) of the Arbitration Act, which was dismissed. The High Court upheld the Arbitral Tribunal’s interim order. The appellant then approached the Supreme Court.

Legal Framework

The case primarily revolves around Section 17 of the Arbitration and Conciliation Act, 1996, which empowers the arbitral tribunal to order interim measures. The Supreme Court also considered the principles of Order XXXVIII Rule 5 of the Code of Civil Procedure (CPC), which deals with attachment before judgment, and Order XXXIX of the CPC, which deals with interim injunctions, as argued by the appellant.

Section 17 of the Arbitration and Conciliation Act, 1996 states:

“17. Interim measures ordered by arbitral tribunal.—(1) A party may, during the arbitral proceedings, apply to the arbitral tribunal—
(a) for the appointment of a guardian for a minor or person of unsound mind for the purposes of arbitral proceedings; or
(b) for an interim measure of protection in respect of any of the following matters, namely:—
(i) the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement;
(ii) securing the amount in dispute in the arbitration;
(iii) the detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any party, or authorising any samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence;
(iv) interim injunction or the appointment of a receiver;
(v) such other interim measure of protection as may appear to the arbitral tribunal to be just and convenient,
and the arbitral tribunal may grant such measure of protection as it may consider necessary.”

Arguments

Appellant’s Arguments:

• The appellant argued that the Arbitral Tribunal and the High Court failed to consider the ‘force majeure’ clause (Clause 29) of the lease agreement.
• It was contended that the Arbitral Tribunal itself noted it was not deciding on the impact of the force majeure clause at this stage.
• The appellant submitted that the order to deposit 100% of the rental amount was akin to an order under Order XXXVIII Rule 5 of the CPC, which requires evidence of the respondent disposing of property or removing assets to frustrate a monetary award.
• The appellant argued that the principles for granting an interim injunction under Order XXXIX of the CPC should also apply to orders under Section 17 of the Arbitration Act.
• The appellant highlighted that they could not fully utilize the premises due to the lockdown, and even when allowed to operate, it was only at 50% capacity and with restricted hours.
• The appellant also pointed out that they had already paid a substantial amount towards rent during the arbitration period.
• The appellant argued that the dispute was genuine and not intended to defraud the landlords.

Respondents’ Arguments:

• The respondents argued that the Arbitral Tribunal was correct in ordering the deposit of the full amount as the appellant continued to occupy the premises without paying rent.
• They contended that the principles under Order XXXVIII Rule 5 and Order XXXIX Rule 1 of the CPC do not apply to interim measures under Section 17 of the Arbitration Act.
• The respondents submitted that the ‘force majeure’ clause is not applicable as the appellant remained in possession of the leased premises.
• The respondents argued that the impact of the pandemic on the appellant’s business does not absolve them of their contractual obligation to pay rent.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section, but the core issue was:

1. Whether the Arbitral Tribunal was justified in directing the appellant to deposit the entire rental amount as an interim measure under Section 17 of the Arbitration and Conciliation Act, 1996, when the applicability of the force majeure clause was yet to be decided.

Treatment of the Issue by the Court:

Authorities

The following authorities were considered by the Supreme Court:

Judgment

How each authority was viewed by the Court?

• The Supreme Court considered the case of Raman Tech. & Process Engg. Co. & Anr. Vs. Solanki Traders; (2008) 2 SCC 302* and observed that while the order to deposit the full amount may not be exactly akin to attachment before judgment, the Tribunal should have considered the dispute regarding the liability to pay rent before ordering a full deposit.
• The Supreme Court also considered the case of Adhunik Steels Ltd. Vs. Orissa Manganese and Minerals (P) Ltd.; (2007) 7 SCC 125* and noted that while exercising powers under Section 17 of the Arbitration Act, the Tribunal must consider the principles of natural justice and fairness.
• The Court analyzed Section 17 of the Arbitration and Conciliation Act, 1996* to determine the scope of the arbitral tribunal’s power to order interim measures.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the Arbitral Tribunal had not yet considered the applicability of the ‘force majeure’ clause in the lease agreement. The Court emphasized that when a serious dispute exists regarding the liability to pay, it is not appropriate to order a full deposit as an interim measure, especially for periods when the lessee was completely restricted from using the premises due to government-imposed lockdowns. The Court aimed to strike a balance by ensuring that the lessee does not evade their obligations while also protecting them from undue hardship during periods of complete closure.

Logical Reasoning:

The Court considered the arguments that the Arbitral Tribunal had not yet ruled on the applicability of the force majeure clause and that a full deposit order could be unduly harsh on the lessee during periods of complete lockdown. The Court also considered the fact that the lessee had already paid a substantial amount towards rent and that the dispute was genuine. The Court rejected the argument that the lessee should be required to deposit the full rent for the lockdown period, as the liability for that period was still under dispute. The Court also rejected the argument that the lessee should not be required to pay any rent at all, as they had continued to occupy the premises during the non-lockdown period.

The Supreme Court held that the Arbitral Tribunal should not have directed the deposit of the full rental amount for the period during which there was a complete lockdown, as the applicability of the force majeure clause was yet to be determined. However, the court directed the appellant to deposit the rental amount for the remaining period. The Court also clarified that the non-deposit of the rental amount for the lockdown period would be subject to the ultimate outcome of the arbitration proceedings. The Court also directed the Arbitral Tribunal to conclude the arbitration proceedings within nine months.

The Supreme Court stated:

• “Therefore, no order could have been passed by the Tribunal by way of interim measure on the applications filed under Section 17 of the Arbitration Act in a case where there is a serious dispute with respect to the liability of the rental amounts to be paid, which is yet to be adjudicated upon and/or considered by the Arbitral Tribunal.”
• “However, at the same time, the aforesaid can be considered only for the period of complete closure due to lockdown.”
• “However, non-deposit of the rental amount for the aforesaid period during which there was a complete closure/lockdown shall be subject to the ultimate outcome of the Arbitration Proceedings and the Arbitral Tribunal shall have to adjudicate and consider the principle of force majeure contained in clause 29 as contended on behalf of the appellant in accordance with law and on its own merits.”

There were no dissenting opinions in this case. The bench consisted of two judges, both of whom agreed on the final order.

Key Takeaways

• An arbitral tribunal should not order the deposit of the full disputed amount as an interim measure under Section 17 of the Arbitration Act when the liability is seriously disputed and the ‘force majeure’ clause is invoked.
• Interim measures should be balanced and not unduly harsh, especially during periods of complete closure due to government-imposed lockdowns.
• The applicability of a ‘force majeure’ clause must be considered before ordering a full deposit of rental amounts.
• Arbitral tribunals must consider principles of natural justice and fairness while exercising powers under Section 17 of the Arbitration Act.

Directions

The Supreme Court modified the orders of the Arbitral Tribunal and the High Court, directing the appellant to deposit the rental amount for the period other than the complete lockdown periods (22.03.2020 to 09.09.2020 and 19.04.2021 to 28.06.2021). The non-deposit of rental amount for the lockdown period was made subject to the final outcome of the arbitration. The Arbitral Tribunal was directed to conclude the arbitration proceedings within nine months.

Development of Law

The ratio decidendi of this case is that an arbitral tribunal cannot order a full deposit of disputed rental amounts as an interim measure under Section 17 of the Arbitration Act when the lessee has invoked a force majeure clause and the applicability of such a clause is yet to be adjudicated upon by the tribunal. This clarifies the extent of powers under Section 17 and provides guidance on how to balance the rights of both parties during interim measures. This case does not overrule any previous position of the law but clarifies the application of Section 17.

Conclusion

The Supreme Court’s judgment in Evergreen Land Mark Pvt. Ltd. vs. John Tinson & Company Pvt. Ltd. provides important clarifications on the powers of arbitral tribunals to order interim measures under Section 17 of the Arbitration and Conciliation Act, 1996. The Court emphasized that while tribunals have the power to order interim measures, they must exercise this power judiciously, especially when there is a serious dispute about liability and the applicability of a ‘force majeure’ clause is yet to be determined. The judgment strikes a balance between protecting the rights of the lessor and ensuring that the lessee is not unduly burdened during periods of complete lockdown. It also underscores the importance of considering the specific circumstances of each case and not applying blanket orders for full deposits without considering the merits of the dispute.

Category

Parent Category: Arbitration Law

Child Categories: Interim Measures, Section 17, Force Majeure, Arbitration and Conciliation Act, 1996

Parent Category: Arbitration and Conciliation Act, 1996

Child Categories: Section 17, Arbitration and Conciliation Act, 1996

FAQ

Q: Can an arbitral tribunal order a party to deposit the full disputed amount as an interim measure?

A: An arbitral tribunal can order interim measures, but it should not order a full deposit of the disputed amount if there is a serious dispute about the liability and a ‘force majeure’ clause has been invoked, especially when the tribunal has not yet considered the applicability of such a clause.

Q: What is a ‘force majeure’ clause?

A: A ‘force majeure’ clause is a contractual provision that excuses a party from performing its obligations when certain extraordinary events or circumstances beyond their control occur, such as natural disasters or government-imposed lockdowns.

Q: What should a lessee do if they are unable to pay rent due to a lockdown?

A: A lessee should invoke the ‘force majeure’ clause in their lease agreement, if any, and present their case before the arbitral tribunal. They may not be required to deposit the full rental amount during periods of complete lockdown if the tribunal has not yet adjudicated on the applicability of the ‘force majeure’ clause.

Q: What is Section 17 of the Arbitration and Conciliation Act, 1996?

A: Section 17 of the Arbitration and Conciliation Act, 1996, empowers arbitral tribunals to order interim measures of protection during arbitration proceedings, such as ordering the preservation of goods, securing the amount in dispute, or granting interim injunctions.

Q: What does this judgment mean for future cases involving ‘force majeure’ and lease agreements?

A: This judgment clarifies that arbitral tribunals must consider the applicability of ‘force majeure’ clauses before ordering a full deposit of rental amounts as an interim measure. It also emphasizes that interim measures should be balanced and not unduly harsh on the parties.