Supreme Court Upholds Interim Order for Deposit of Awarded Amount in Arbitration Case: Sepco vs. Power Mech (19 September 2022)

Introduction

Date of the Judgment: 19 September 2022
Citation: 2022 INSC 429
Judges: Indira Banerjee, J. and Krishna Murari, J.

Can a court, while considering a stay on an arbitral award, direct the losing party to deposit the entire awarded amount? The Supreme Court of India recently addressed this question, clarifying the powers of the court under Section 9 and Section 36 of the Arbitration and Conciliation Act, 1996. This case revolves around a dispute between Sepco Electric Power Construction Corporation and Power Mech Projects Ltd., where the High Court ordered the deposit of the full arbitral award amount as a condition for staying the award. The Supreme Court upheld this order, emphasizing the court’s wide powers to secure the amount in dispute during arbitration proceedings. The judgment was delivered by a bench comprising Justice Indira Banerjee and Justice Krishna Murari.

Case Background

Sepco Electric Power Construction Corporation, a Chinese entity, was awarded contracts for coal-based power projects in India. They engaged Power Mech Projects Ltd., an Indian company, as a subcontractor. Disputes arose, leading to arbitration. The arbitral tribunal issued an award of approximately Rs. 142 crores in favor of Power Mech Projects Ltd.

Following the award, Sepco filed an application under Section 34 of the Arbitration and Conciliation Act, 1996, challenging the award in the Delhi High Court. Simultaneously, they filed an application under Section 36(2) of the same Act, seeking a stay on the arbitral award. Power Mech Projects Ltd. then filed an application under Section 9 of the Arbitration Act, seeking security for the awarded amount.

Timeline

Course of Proceedings

The Delhi High Court initially directed Sepco to disclose its assets and deposit 10% of the amount in its bank accounts. Subsequently, the High Court directed Sepco to deposit the entire awarded amount of Rs. 142 crores as security. The High Court also stated that upon deposit of this amount, the enforcement of the arbitral award would be stayed. Sepco appealed this order to the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation of Section 9 and Section 36 of the Arbitration and Conciliation Act, 1996.

Section 9 of the Arbitration and Conciliation Act, 1996 deals with interim measures that a court can order. It states:

“9. Interim measures, etc. by Court.—(1) A party may, before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with Section 36, apply to a Court:—(ii) for an interim measure of protection in respect of any of the following matters, namely:—(b) securing the amount in dispute in the arbitration:”

This section empowers the court to secure the amount in dispute during arbitration.

Section 36 of the Arbitration and Conciliation Act, 1996 deals with the enforcement of arbitral awards. It states:

“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). Provided further that where the Court is satisfied that a prima facie case is made out that,—(a) the arbitration agreement or contract which is the basis of the award; or (b) the making of the award, was induced or effected by fraud or corruption, it shall stay the award unconditionally pending disposal of the challenge under Section 34 to the award.”

This section outlines the conditions under which an arbitral award can be stayed, including the provision that the court may impose conditions for granting a stay.

Arguments

Arguments by the Appellant (Sepco Electric Power Construction Corporation):

• The Appellant argued that its application for stay under Section 36(2) of the Arbitration Act was filed before the Respondent’s application for interim relief under Section 9. Therefore, the High Court should have considered the Appellant’s application first.
• The Appellant contended that by clubbing the order on its application under Section 36(2) with the order on the Respondent’s application under Section 9, the High Court deprived the Appellant of its right to appeal against the order passed under Section 9, as an order under Section 36 is not appealable.
• The Appellant argued that while the grant of stay may be discretionary, the exercise of such power is mandatory. The exercise of discretion requires consideration of the merits of the challenge to the award, which was not done.
• The Appellant attempted to demonstrate that the award was against the fundamental policy of India, arguing that no documents were produced during the arbitration proceedings.
• The Appellant submitted that the court cannot stay an award without recording reasons in writing and must consider the provisions for stay of a money decree under the Code of Civil Procedure (CPC).
• The Appellant argued that the power to grant unconditional stay is subject to the condition that a prima facie case is made out that the arbitration agreement or contract which is the basis of the award or the making of the award was induced or effected by fraud or corruption.

Arguments by the Respondent (Power Mech Projects Ltd.):

• The Respondent argued that the High Court was correct in ordering the deposit of the full awarded amount to secure its interests.
• The Respondent contended that the High Court has wide powers under Section 9 of the Arbitration Act to pass orders securing the amount in dispute.
• The Respondent argued that the High Court rightly considered the prima facie case and found that there was an award of Rs. 142 crores against the Appellant.

Submissions Table

Issues Framed by the Supreme Court

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

1. Whether the High Court was justified in directing the Appellant to deposit the entire awarded amount as a condition for stay of the arbitral award under Section 9 and Section 36 of the Arbitration and Conciliation Act, 1996.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• Ajay Singh & Ors. v. Kal Airways Private Limited and Ors. [2017 SCC Online Del 8934] – Delhi High Court: The Court referred to this case to emphasize that while Section 9 grants wide powers to the courts, the exercise of such power should be principled and based on known guidelines.
• Jagdish Ahuja & Anr. v. Cupino Limited [2020 SCC Online Bom 849] – Bombay High Court: The Court cited this case to highlight that the scope of Section 9 is broad, and the court has a discretion to grant a wide range of interim measures, though such discretion has to be exercised judiciously.
• Valentine Maritime Ltd. v. Kreuz Subsea Pte Ltd. & Anr. [2021 SCC Online Bom 75] – Bombay High Court: The Court relied on this case to reiterate that while the court is guided by the principles of the Code of Civil Procedure, it is not unduly bound by its texts.

Legal Provisions:

• Section 9, Arbitration and Conciliation Act, 1996: This section empowers the court to grant interim measures of protection, including securing the amount in dispute.
• Section 36, Arbitration and Conciliation Act, 1996: This section deals with the enforcement of arbitral awards and the conditions for stay of such awards.
• Order 41 Rule 5, Code of Civil Procedure, 1908: This provision deals with the stay of a decree upon furnishing of cash security.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Ajay Singh & Ors. v. Kal Airways Private Limited and Ors. [2017 SCC Online Del 8934]*: The Court followed this authority to emphasize that the exercise of power under Section 9 should be principled.
• Jagdish Ahuja & Anr. v. Cupino Limited [2020 SCC Online Bom 849]*: The Court followed this authority to highlight the broad scope of Section 9 and the court’s discretion to grant interim measures.
• Valentine Maritime Ltd. v. Kreuz Subsea Pte Ltd. & Anr. [2021 SCC Online Bom 75]*: The Court followed this authority to reiterate that while the court is guided by the principles of the CPC, it is not unduly bound by its texts.
• Section 9, Arbitration and Conciliation Act, 1996: The Court relied on this provision to affirm the High Court’s power to secure the amount in dispute.
• Section 36, Arbitration and Conciliation Act, 1996: The Court used this provision to explain the conditions for stay of an arbitral award.
• Order 41 Rule 5, Code of Civil Procedure, 1908: The Court referred to this provision to support the High Court’s direction for furnishing cash security.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to ensure the efficacy of the arbitral process and to protect the interests of the party in whose favor the award was made. The Court emphasized the wide powers granted to the courts under Section 9 of the Arbitration Act to secure the amount in dispute. The Court also considered the fact that no cogent grounds were presented to challenge the arbitral award.

The court’s reasoning was driven by the following points:

• ✓ The High Court has wide powers under Section 9 of the Arbitration Act to pass orders securing the amount in dispute.
• ✓ The High Court was justified in directing the deposit of the entire awarded amount as a condition for stay.
• ✓ There was a valid arbitral award of Rs. 142 crores in favor of the Respondent.
• ✓ No cogent grounds were presented to challenge the award.
• ✓ The court must ensure the efficacy of the arbitral process.
• ✓ The court must protect the interests of the party in whose favor the award was made.

Sentiment Analysis Ranking of Reasons:

Fact:Law Ratio:

Logical Reasoning:

Judgment

The Supreme Court dismissed the appeals, upholding the High Court’s order to deposit the entire awarded amount. The Court reasoned that the High Court had acted within its powers under Section 9 of the Arbitration Act, which allows it to pass orders securing the amount in dispute. The Court emphasized that there was a valid arbitral award and that no cogent ground had been made out for interference with the award.

The Court also referred to the proviso to Section 36(3) of the Arbitration Act, which states that while considering an application for stay in the case of an arbitral award for payment of money, due regard has to be given to the provisions for grant of stay of a money decree under the provisions of the CPC. The Court noted that Order 41 Rule 5 of the CPC provides for stay of decree upon furnishing of cash security.

The Supreme Court observed that the High Court had considered the prima facie case and found that there was an award of Rs. 142 crores against the Appellant. The Court held that the High Court was justified in directing the deposit of the entire awarded amount as a condition for stay.

The Supreme Court also made the following observations:

• ✓ There is no hard and fast rule that an application made earlier in point of time must be heard before an application made later in point of time.
• ✓ The jurisdiction of the Court under Section 9 is wide.
• ✓ The Court is empowered to impose such conditions as it might deem fit and may grant stay of operation of the award subject to furnishing of security covering entire amount of the award including interest.

“Section 9 expressly empowers the Court to pass orders securing the amount in dispute in the arbitration and/or any interim measure or protection as may appear to the Court to be just and convenient.”

“For grant of interim relief under Section 9, the Court would have to consider the prima facie case. In this case, prima facie there is an award for a huge amount of Rs. 142 Crores against the Appellant. The Respondent has a strong case for interim relief.”

“The High Court acted within the scope of its powers under Section 9 in passing the impugned judgment and order.”

The Court did not introduce any new doctrines or legal principles, but it clarified the scope of the court’s powers under Section 9 of the Arbitration Act. The Court also reinforced the principle that the courts should not interfere with arbitral awards unless there are cogent grounds to do so.

Key Takeaways

• ✓ Courts have wide powers under Section 9 of the Arbitration and Conciliation Act, 1996, to secure the amount in dispute in arbitration proceedings.
• ✓ Courts can order the deposit of the entire awarded amount as a condition for staying the enforcement of an arbitral award.
• ✓ The filing of an application to set aside an arbitral award does not automatically stay its enforcement.
• ✓ Parties seeking a stay of an arbitral award must demonstrate a strong prima facie case against the validity of the award.
• ✓ Courts are not bound to hear earlier applications before later applications, especially when both relate to the same award.

This judgment reinforces the pro-arbitration stance of the Indian judiciary. It clarifies that courts have the power to ensure that arbitral awards are not rendered ineffective by delaying tactics. The decision also highlights that the courts are not to act as appellate bodies over arbitral awards unless there is a clear and cogent reason to do so.

Directions

The Supreme Court requested the High Court to dispose of the pending applications of the Appellant under Section 34 of the Arbitration Act as expeditiously as possible, preferably within 3 months from the date of communication of this judgment.

Specific Amendments Analysis

There is no discussion of any specific amendment in the judgment.

Development of Law

The ratio decidendi of this case is that courts have the power under Section 9 of the Arbitration and Conciliation Act, 1996, to order the deposit of the entire awarded amount as a condition for staying the enforcement of an arbitral award. This judgment reinforces the pro-arbitration stance of the Indian judiciary and clarifies the extent of the court’s powers in securing the amount in dispute in arbitration proceedings. There is no change in the previous position of law, but the judgment clarifies the application of Section 9 and Section 36 of the Arbitration Act.

Conclusion

The Supreme Court upheld the Delhi High Court’s order directing Sepco Electric Power Construction Corporation to deposit the full arbitral award amount of Rs. 142 crores as a condition for staying the enforcement of the award. The Court emphasized that the High Court acted within its powers under Section 9 of the Arbitration and Conciliation Act, 1996, and that no cogent grounds were presented to challenge the award. This judgment reinforces the broad powers of the court to secure the amount in dispute during arbitration and underscores the importance of ensuring the efficacy of the arbitral process.