Supreme Court Upholds Interim Relief in Arbitration: Essar House vs. Arcellor Mittal (2022)

Introduction

Date of the Judgment: 14 September 2022

Citation: (2022) INSC 433

Judges: Indira Banerjee, J. and A.S. Bopanna, J.

Can a court order a party to deposit money as interim relief in an arbitration case, even if the strict rules of civil procedure aren’t fully met? The Supreme Court of India recently addressed this question, clarifying the extent to which the Code of Civil Procedure, 1908 (CPC) applies to interim relief under Section 9 of the Arbitration and Conciliation Act, 1996. The Court held that while the basic principles of the CPC should be considered, the technicalities cannot prevent the court from securing the ends of justice in arbitration matters. The judgment was delivered by a two-judge bench comprising Justice Indira Banerjee and Justice A.S. Bopanna.

Case Background

Essar House Private Limited (Essar House Private) is a real estate company that owns the Essar House building in Mumbai. Essar Services India Private Limited (Essar Services) provides accounting and related services. Both are part of the Essar Group of Companies. Essar Steel India Limited (Essar Steel) was a client of both companies. Arcellor Mittal Nippon Steel India Limited (Arcellor) took over Essar Steel through a resolution plan under the Insolvency and Bankruptcy Code, 2016 (IBC). The dispute arose when Arcellor sought to recover security deposits made by Essar Steel to Essar House Private and Essar Services.

Timeline:

Course of Proceedings

Arcellor filed applications under Section 9 of the Arbitration Act in the Commercial Division of the High Court of Judicature at Bombay, seeking orders to direct Essar House Private and Essar Services to deposit the security amounts. The Single Bench of the High Court allowed these applications, directing Essar House Private to deposit Rs. 35.5 crores and Essar Services to deposit Rs. 47.41 crores. Essar House Private and Essar Services appealed these orders to the Commercial Appellate Division of the High Court (Division Bench). The Division Bench dismissed the appeals, upholding the Single Bench’s orders.

Legal Framework

The core legal issue revolves around Section 9 of the Arbitration and Conciliation Act, 1996, which allows a party to apply to a court for interim measures of protection. This includes securing the amount in dispute or any other interim measure that the court deems just and convenient. The court’s power under Section 9 is similar to its power in regular proceedings. The interplay between Section 9 of the Arbitration Act and the Code of Civil Procedure, 1908 (CPC), particularly Order XXXVIII Rule 5, is central to this case. Order XXXVIII Rule 5 of the CPC deals with attachment before judgment, requiring proof that the defendant is attempting to dispose of assets to obstruct a potential decree.

Section 9 of the Arbitration and Conciliation Act, 1996 states:

“A party may, before, during or after arbitral proceedings, apply to a court for an interim measure of protection, including (i) for 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; (iv) an interim injunction or the appointment of a receiver; (v) such other interim measure of protection as may appear to the Court to be just and convenient, and the Court shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it.”

Arguments

Essar House Private and Essar Services:

• Essar House Private and Essar Services argued that the security deposits of Essar Steel were discharged to settle debts owed by Essar Steel to its creditors, based on Essar Steel’s instructions.
• They contended that the court should strictly follow the principles of the CPC, particularly Order XXXVIII Rule 5, which requires proof that the defendant is attempting to dispose of assets to obstruct a potential decree. They cited Raman Tech. & Process Engg. Co. & Anr. v. Solanki Traders [2008] 2 SCC 302, where the Supreme Court held that the power under Order 38 Rule 5 should be used sparingly and not to convert an unsecured debt into a secured debt.
• They claimed that the security deposits were adjusted against loans taken by Essar Steel, and thus, no amount was due to Arcellor.

Arcellor:

• Arcellor argued that the defense of set-off by Essar House Private and Essar Services was a sham, as no documents were provided to support their claims.
• They contended that the novation of the agreement or assignment of obligations could not be done unilaterally without the consent of Arcellor. They cited Citibank N.A. v. Standard Chartered Bank & Ors. [2004] 1 SCC 12, which held that novation of a contract requires the agreement of both parties.
• They also cited Khardah Company Ltd. v. Raymon & Co. (India) Pvt. Ltd. [1963] 3 SCR 183, which held that obligations under a contract cannot be assigned without the consent of the counterparty.
• Arcellor argued that during the Corporate Insolvency Resolution Process (CIRP), set-offs are not allowed without the consent of the Resolution Professional, and Section 14 of the IBC bars actions to enforce security interests.
• They argued that the High Court was correct in invoking the principles of Order 38 Rule 5 of the CPC, even if not strictly applicable, to secure their claim.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue was whether the High Court was correct in ordering Essar House Private and Essar Services to deposit the security amounts as interim relief under Section 9 of the Arbitration Act. This involved examining:

• The extent to which the principles of the CPC, particularly Order XXXVIII Rule 5, apply to Section 9 of the Arbitration Act.
• Whether the High Court had the power to order the deposit of security amounts without strict adherence to the requirements of Order XXXVIII Rule 5 of the CPC.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

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

How each authority was viewed by the Court?

✓ Raman Tech. & Process Engg. Co. & Anr. v. Solanki Traders [2008] 2 SCC 302* was distinguished by the Court as it was not in respect of Section 9 of the Arbitration Act.

✓ Citibank N.A. v. Standard Chartered Bank & Ors. [2004] 1 SCC 12* and Khardah Company Ltd. v. Raymon & Co. (India) Pvt. Ltd. [1963] 3 SCR 183* were used to support the argument that novation of contract and assignment of obligations cannot be done unilaterally.

✓ The Court relied on the judgments of various High Courts, including Ajay Singh & Ors. v. Kal Airways Private Limited and Ors. [2017] SCC Online Del 8934*, Jagdish Ahuja & Anr. v. Cupino Limited [2020] SCC Online Bom 849*, Valentine Maritime Ltd. v. Kreuz Subsea Pte. Ltd. & Anr. [2021] SCC Online Bom 75* and Srei Infrastructure Finance Limited v. M/s. Ravi Udyog Pvt. Ltd & Anr. A.P. No. 522 of 2008* to support the view that Section 9 of the Arbitration Act confers wide powers on the Court to pass orders securing the amount in dispute.

The Supreme Court held that the High Court had correctly applied the principles of the CPC while exercising its powers under Section 9 of the Arbitration Act. The Court emphasized that while the basic principles of procedural law should be considered, the technicalities of the CPC should not prevent the court from securing the ends of justice. The Court observed that Section 9 of the Arbitration Act confers wide powers on the Court to pass orders securing the amount in dispute in arbitration. The Court noted that a strong prima facie case was made out, and the balance of convenience was in favor of granting interim relief.

The Court stated:

“In deciding a petition under Section 9 of the Arbitration Act, the Court cannot ignore the basic principles of the CPC. At the same time, the power Court to grant relief is not curtailed by the rigours of every procedural provision in the CPC.”

“All that the Court is required to see is, whether the applicant for interim measure has a good prima facie case, whether the balance of convenience is in favour of interim relief as prayed for being granted and whether the applicant has approached the court with reasonable expedition.”

“If a strong prima facie case is made out and the balance of convenience is in favour of interim relief being granted, the Court exercising power under Section 9 of the Arbitration Act should not withhold relief on the mere technicality of absence of averments, incorporating the grounds for attachment before judgment under Order 38 Rule 5 of the CPC.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to ensure that arbitration claims are secured effectively and that procedural technicalities do not hinder the dispensation of justice. The Court emphasized that the primary objective of Section 9 of the Arbitration Act is to promote the efficacy of arbitration as a form of dispute resolution. The Court was also concerned that the security deposits were not being released to Arcellor due to convoluted internal arrangements within the Essar Group.

Key Takeaways

✓ Courts have wide powers under Section 9 of the Arbitration Act to grant interim relief, including securing the amount in dispute.

✓ While the principles of the CPC should be considered, the technicalities of the CPC should not prevent the court from securing the ends of justice.

✓ A strong prima facie case and balance of convenience are sufficient for granting interim relief under Section 9.

✓ The power under Section 9 is not strictly bound by the provisions of Order XXXVIII Rule 5 of the CPC.

✓ The primary objective of Section 9 is to promote the efficacy of arbitration as a form of dispute resolution.

Directions

No specific directions were given by the Supreme Court in this judgment. The appeals were dismissed, upholding the High Court’s order.

Specific Amendments Analysis

There is no specific amendment that was discussed in the judgment.

Development of Law

The ratio decidendi of this case is that while the principles of the Code of Civil Procedure, 1908 (CPC) should be considered when granting interim relief under Section 9 of the Arbitration and Conciliation Act, 1996, the technicalities of the CPC should not prevent the court from securing the ends of justice. This judgment clarifies that the power of the court under Section 9 is broad and is aimed at promoting the efficacy of arbitration. There is no change in the previous position of law, but the judgment has clarified the scope of Section 9 and the extent to which the CPC is applicable.

Conclusion

The Supreme Court dismissed the appeals filed by Essar House Private and Essar Services, upholding the High Court’s order to deposit the security amounts. The Court clarified that while the principles of the CPC are relevant, the technicalities should not hinder the court’s ability to secure justice and promote the efficacy of arbitration. The judgment reinforces the wide powers conferred on courts under Section 9 of the Arbitration Act to grant interim measures of protection.

Category:

Parent Category: Arbitration Law

Child Category: Section 9, Arbitration and Conciliation Act, 1996

Child Category: Interim Relief

Child Category: Code of Civil Procedure, 1908

Parent Category: Code of Civil Procedure, 1908

Child Category: Order XXXVIII Rule 5, Code of Civil Procedure, 1908

FAQ

Q: What is Section 9 of the Arbitration and Conciliation Act?

A: Section 9 allows a party to an arbitration agreement to seek interim relief from a court, such as securing the amount in dispute, before, during, or after the arbitration proceedings.

Q: Does a court have to strictly follow the Code of Civil Procedure when granting interim relief under Section 9?

A: No, while the court should consider theprinciples of the CPC, it is not bound by every technicality. The court’s primary goal is to secure justice and promote effective arbitration.

Q: What is Order XXXVIII Rule 5 of the CPC?

A: Order XXXVIII Rule 5 of the CPC deals with attachment before judgment, requiring proof that the defendant is attempting to dispose of assets to obstruct a potential decree.

Q: What did the Supreme Court decide in the Essar House vs. Arcellor Mittal case?

A: The Supreme Court held that the High Court correctly ordered Essar House and Essar Services to deposit security amounts as interim relief under Section 9 of the Arbitration Act. It clarified that while CPC principles should be considered, technicalities should not prevent the securing of justice in arbitration matters.

Q: What is the practical implication of this judgment?

A: This judgment clarifies that courts have wide powers to grant interim relief in arbitration cases, even if the strict requirements of the CPC are not fully met. It emphasizes the importance of securing the amount in dispute to ensure the effectiveness of arbitration proceedings.

Q: What is the ratio decidendi of the case?

A: The ratio decidendi is that while the principles of the Code of Civil Procedure, 1908 (CPC) should be considered when granting interim relief under Section 9 of the Arbitration and Conciliation Act, 1996, the technicalities of the CPC should not prevent the court from securing the ends of justice.