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WAS THE SUPREME COURT CORRECT IN DISREGARDING PARTY AUTONOMY WHILE STRIKING DOWN ARBITRATION CLAUSES PRESCRIBING FOR MANDATORY DEPOSIT OF A PERCENTAGE OF CLAIM AMOUNT BY THE CLAIMANT PRIOR TO COMMENCEMENT OF ARBITRAL PROCEEDINGS?

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A case comment on the Apex Court decision of Lombardi Engineering Limited v Uttarakhand Jal Vidyut Nigam Limited delivered on 6 November 2023.

Party autonomy is a fundamental principle of arbitration, which allows parties to a contract to freely agree on the terms of their arbitration agreement, including the scope of the arbitration clause, the choice of arbitrator(s), and the seat of arbitration.

The Supreme Court of India has held that party autonomy is the “brooding and guiding spirit of arbitration” and that it is essential to the success of arbitration as a dispute resolution mechanism. However, the Supreme Court has also held that party autonomy is not absolute and that it may be limited in certain circumstances, such as where the arbitration clause is contrary to public policy or where it would lead to an unjust or unfair outcome.

In many commercial contracts, the parties agree that if and when in a situation the claimant seeks to file its claims against the respondent then in all such cases the claimant would first have to deposit a percentage of the prayed claim with the Court appointing the arbitrator or with the arbitral tribunal itself where the arbitrator is appointed directly without court intervention under Section 11 of the Arbitration & Conciliation Act, 1996. The intention behind such clauses is usually to prevent excessive, arbitrary and frivolous claims which does not have any basis in the evidence / documents which the claimant is bound to provide during the course of the arbitration proceedings.

I. BRIEF FACTS OF THE CASE

The Petitioner, a Swiss design consultancy firm, entered into a contract with the UPDCC, a wholly owned corporation of the Government of Uttarakhand, for the consultancy services and preparation of a modified comprehensive and bankable Detailed Project Report of the Arakot Tiuni Hydro Electric Project. The contract value was Rs. 1,39,45,000/- and the petitioner was to complete the work within 24 months, ie, by 25.09.2021. The respondent, a newly formed corporation, took over the said Project from the UPDCC in May 2020 and the Contract was novated to the extent that the respondent stepped into the shoes of UPDCC and took over all the obligations under the Contract.

The contract was between a foreign entity (the petitioner) and a government entity (the UPDCC). The contract was for a major infrastructure project. The contract was novated to a new government entity (the respondent).

Some disputes arose between the parties in pursuance of which the Petitioner vide notice invoking arbitration dated 6 May 2022 invoked the arbitration clause. The invoked arbitration clause is reproduced as here under:

“(a) All question and disputes relating to the meaning of the specification design, drawing and instructions herein and as to the quality of workmanship or materials used on the work or as to any other question claim, right, matter or thing, whatsoever in any way arising out of or relating to the contract, designs, drawings, specification, estimates instructions, orders or these condition or otherwise concerning the works or the execution or failure to execute the same, whether arising during the progress of the work or after the cancellation, termination, completion or abandonment thereof, shall be conducted in accordance with the provisions of the Arbitration and Conciliation Act, 1996 or any statutory modification or re-enactment thereof and the rules made the under and for the time being in force, shall apply to the arbitration proceedings. However, the Party initiating the arbitration claim shall have to deposit 7% of the arbitration claim in the shape of Fixed Deposit Receipt as security deposit.”

Since, the Petitioner was a foreign company, hence, the Petitioner filed a petition for appointment of arbitrator under Section 11 before the Hon`ble Supreme Court of India. It is in this context that the Hon`ble Supreme Court interpreted the Arbitration Clause and ruled in favor of the Petitioner thereby declaring a substantive portion of the Arbitration Clause as being not enforceable.

II. FINDINGS OF THE SUPREME COURT

The recent decision of Supreme Court in Lombardi Engineering Limited v Uttarakhand Jal Vidyut Nigam Limited (Arbitration Petition No. 43 of 2022) has discussed the jurisprudence on this subject at length. It has concluded after much discussion that such clauses requiring mandatory deposit by the claimant of a percentage of the claim amount at the outset of an arbitration proceedings will be required to be seen on a case to case basis. In essence this judgment laid down that no overarching principle of law can be enunciated which strikes all such clauses as void being in teeth of public policy. If the arbitration clause provides for refund of the security deposit amount back to the Claimant in cases where its claim has been partly allowed (refund being in proportion to the percentage of claim allowed vis a vis the claim pleaded) then such clauses would be enforceable.

For eg. In a given contract between ABC (Claimant) and XYZ (Respondent) the arbitration clause mandates that If ABC (claimant) files a Statement of Claim praying for an award of 10 crores (by way of multiple sub claims) then such claimant would have to deposit a sum of Rs. 1 crore by way of a security deposit with the Arbitral Tribunal at the outset before the start of arbitration proceedings. This arbitration clause further mandates that in case only Rs. 4 crores is awarded by the Arbitral Tribunal in favor of ABC (Claimant) then the entire amount of  security deposit i.e. Rs. 1 crore would be refunded back to ABC. Hence, as per such a clause, only when the entire Statement of Claim of the Claimant has been dismissed, could the Arbitral Tribunal forfeit this security deposit amount and give the same i.e. Rs. 1 crore (or any amount less than this as per discretion of the Arbitral Tribunal) to the Respondent.

Such a clause as per this recent Supreme Court judgment would be a valid clause.

The relevant excerpts from the judgment (while quoting from other past precedents forming the operative part of the judgment) are as follows:

“14. It will be noticed that in this judgment there was no plea that the aforesaid condition contained in an arbitration clause was violative of Article 14 of the Constitution of India as such clause is arbitrary. The only pleas taken were that the ratio of Central Inland Water Transport Corpn. [Central Inland Water Transport Corpn. Ltd. v. Brojo Nath Ganguly, (1986) 3 SCC 156 : 1986 SCC (L&S) 429] would apply and that there should be a cap in the quantum payable by way of security deposit, both of which pleas were turned down by this Court. Also, the security deposit made would, on the termination of the arbitration proceedings, first be adjusted against costs if any awarded by the arbitrator against the claimant party, and the balance remaining after such adjustment then be refunded to the party making the deposit. This clause is materially different from Clause 25(viii), which, as we have seen, makes it clear that in all cases the deposit is to be 10 per cent of the amount claimed and that refund can only be in proportion to the amount awarded with respect to the amount claimed, the balance being forfeited and paid to the other party, even though that other party may have lost the case. This being so, this judgment is wholly distinguishable and does not apply at all to the facts of the present case.
23. The important principle established by this case is that unless it is first found that the litigation that has been embarked upon is frivolous, exemplary costs or punitive damages do not follow. Clearly, therefore, a “deposit-at-call” of 10 per cent of the amount claimed, which can amount to large sums of money, is obviously without any direct nexus to the filing of frivolous claims, as it applies to all claims (frivolous or otherwise) made at the very threshold. A 10 per cent deposit has to be made before any determination that a claim made by the party invoking arbitration is frivolous. This is also one important aspect of the matter to be kept in mind in deciding that such a clause would be arbitrary in the sense of being something which would be unfair and unjust and which no reasonable man would agree to. Indeed, a claim may be dismissed but need not be frivolous, as is obvious from the fact that where three arbitrators are appointed, there have been known to be majority and minority awards, making it clear that there may be two possible or even plausible views which would indicate that the claim is dismissed or allowed on merits and not because it is frivolous. Further, even where a claim is found to be justified and correct, the amount that is deposited need not be refunded to the successful claimant. Take for example a claim based on a termination of a contract being illegal and consequent damages thereto. If the claim succeeds and the termination is set aside as being illegal and a damages claim of Rupees One crore is finally granted by the learned arbitrator at only ten lakhs, only one-tenth of the deposit made will be liable to be returned to the successful party. The party who has lost in the arbitration proceedings will be entitled to forfeit nine-tenths of the deposit made despite the fact that the aforesaid party has an award against it. This would render the entire clause wholly arbitrary, being not only excessive or disproportionate but leading to the wholly unjust result of a party who has lost an arbitration being entitled to forfeit such part of the deposit as falls proportionately short of the amount awarded as compared to what is claimed.”

However, in the same example as given above, if the arbitration clause would have mandated that the refund of security deposit would only be of the proportionate amount in proportion to the claim which has been awarded in favor of ABC (Claimant) and remaining balance amount to be forfeited and given to XYZ (Respondent). So in the above example, the Arbitral Tribunal would forfeit Rs. 60 lacs and pay the same to XYZ (Respondent) thereby only refunding Rs. 40 lacs to ABC (Claimant).

Such a clause as per this recent Supreme Court judgment would be a void and unenforceable clause as the same would discourage the remedy which lies with the Claimant as provided under the 1996 Act read with the Arbitration clause itself.

The relevant excerpts from the judgment (while quoting from other past precedents forming the operative part of the judgment) are as follows:

“25. In M/s ICOMM Tele Ltd. (supra) the objectionable clause 25(viii) was struck down which was for 10% deposit. In the event of an award in favour of the claimant, the deposit was to be refunded to him in proportion to the amount awarded with regard to the amount claimed and the balance if any was to be forfeited and paid to the other party. Resultantly, the Apex Court came to the conclusion that nine times of the deposit could be forfeited by the parties who lost in the arbitration proceedings and despite the fact that the party has an award against it. Thus, the clause was held to be wholly arbitrary …

However, in case in the same example as given above, if the arbitration clause would have mandated that the refund of security deposit would only be of the proportionate amount in  proportion to the claim which has been awarded in favor of ABC (Claimant) and remaining balance amount to be forfeited and given to XYZ (Respondent) then such clause would be  not enforceable as the same would discourage the remedy which lies with the Claimant as provided under the 1996 Act read with the Arbitration clause itself. So in the above example,  the Arbitral Tribunal would not be able to forfeit Rs. 60 lacs and pay the same to XYZ (Respondent) thereby only refunding Rs. 40 lacs to ABC (Claimant)…

Also, the security deposit made would, on the termination of the arbitration proceedings, first be adjusted against costs if any awarded by the arbitrator against the claimant party, and the balance remaining after such adjustment then be refunded to the party making the deposit. This clause is materially different from Clause 25(viii), which, as we have seen, makes it clear that in all cases the deposit is to be 10 per cent of the amount claimed and that refund can only be in proportion to the amount awarded with respect to the amount claimed, the balance being forfeited and paid to the other party, even though that other party may have lost the case…
20. The first important thing to notice is that the 10 per cent “deposit-at-call” of the amount claimed is in order to avoid frivolous claims by the party invoking arbitration. It is well settled that a frivolous claim can be dismissed with exemplary costs. …
21. It is therefore always open to the party who has succeeded before the arbitrator to invoke this principle and it is open to the arbitrator to dismiss a claim as frivolous on imposition of exemplary costs…

Take for example a claim based on a termination of a contract being illegal and consequent damages thereto. If the claim succeeds and the termination is set aside as being illegal and a damages claim of Rupees One crore is finally granted by the learned arbitrator at only ten lakhs, only one-tenth of the deposit made will be liable to be returned to the successful party. The party who has lost in the arbitration proceedings will be entitled to forfeit nine-tenths of the deposit made despite the fact that the aforesaid party has an award against it… 

Furthermore, applying the above said ratio to the facts of the case at hand, the Supreme Court held that since the Arbitration Agreement in the instant case was silent on the aspect as to in what manner and how much would be the security amount which would be refunded back to the Claimant at the end of the Arbitration Proceedings by the Arbitral Tribunal, hence, the Arbitration Clause was void and unenforceable.

III. PROBLEMS WITH THE VIEW TAKEN BY THE HON`BLE SUPREME COURT

The underlying premise of the view taken by the Hon`ble Supreme Court and also the view taken by this Court in the past is that since a Claimant has succeeded in the Arbitration Proceedings and hence, it should not be burdened with any mandatory costs as per a pre agreed arbitration clause. However, the Supreme Court fails to define and dissect what exactly “succeeds” means in the context of an Arbitration Proceedings. The Hon`ble Supreme Court fails to distinguish between a minimal success, partial success, substantial success and complete success of the Claim as filed by the Claimant. The Court simply gives its verdict on the basis of a broader view taken by the Arbitral Tribunal as to whether the Claim of the Claimant should be allowed or dismissed. The process of adjudication of claims by an Arbitral Tribunal is not simply about “succeeding” or “failing”. There are 50 shades of grey lying somewhere between these two ends of a continuum.

It is no revelation that the Claimants in many cases file Statement of Claims which include exaggerated and frivolous claims. In a number of cases, the first 2 – 3 claims are duly backed by evidence and scientific reasoning whereas the last 3 – 5 claims are arbitrary and exaggerated claims. Such arbitrary and exaggerated claims are filed in order to possibly put the respondent under some kind of pressure by showing a potential exposure of huge liability which the respondent may suffer in case he is unsuccessful in defending its case. This essentially results in abuse of the contractual remedy of arbitration which the Claimant has under the Arbitration Clause. Therefore, while the Supreme Court has pronounced this above judgment with the laudable objective of ensuring that the arbitration remedy of the Claimant is not stifled or hampered in any manner. However, the Court has failed to address the problem relating to the potential abuse of such remedy. All of these reasons coupled with the fact that both parties pre agreed for a scenario in which a minimum percentage of the claim amount was to be paid by the Claimant to the Arbitral Tribunal by way of a security deposit amply highlights how the Hon`ble Court may have taken an incorrect view in this matter thereby ignoring the principle of party autonomy.

This view taken by the Hon`ble Supreme Court will give a free hand to the Claimants who seek to file exaggerated Statement of Claims. The question that needs to be asked is that isn’t it the duty of a responsible litigant to file only those claims which are prima facie valid and backed by appropriate evidence and scientific reasoning? Isnt it true that in many cases, the Claimant files a Statement of Claim in which only the first two or three claims are well backed by evidence and the remaining claims are inflated, not backed by any evidence and in some cases not at all maintainable under law?

In order to address some of the issues above, the Hon`ble Supreme Court relied upon Section 31A of the Arbitration & Conciliation Act, 1996 and opines that the Arbitral Tribunal always has the discretion to impose “costs” on the Claimant if it finds that the Claimant has filed arbitrary, frivolous or exaggerated claims. However, the Court, in my humble opinion, fails to appreciate that Section 31A of the Act has a limited mandate and there is only a limited discretion given to the Arbitral Tribunal to award “costs”. Reliance is placed on the Explanation appended to Section 31A(1) which stipulates that the maximum costs which can be awarded by the arbitral tribunal is a cumulation of fees of arbitrators, courts, witnesses and lawyers. Although, the word “maximum” is not provided in the text of this Explanation, however, the same is implicit on a reading of Section 31A(1).

Therefore, when the Arbitrator has a limited discretion to provide for “costs” under Section 31A(1) and in contradiction to this the parties have mutually agreed at the outset (vide an Arbitration Clause) that in cases of partly allowed claims or no allowed claims, the Arbitral Tribunal shall forfeit the security deposit and pay the proportionate share of the same to the Respondent then there is no reason to declaring such clauses as unenforceable thereby emasculating the powers of an Arbitral Tribunal to appropriately penalize the deviant Claimant who did not file his Statement of Claims with utmost propriety and bona fide intention.

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CAN A SECTION 9 PETITION BE FILED BEFORE THE COMMENCEMENT OF ARBITRAL PROCEEDINGS? CAN A SECTION 17 PETITION BE FILED BEFORE FILING OF STATEMENT OF CLAIM? – A COMPARISON WITH THE PRINCIPLES APPLIED UNDER ORDER 39, RULE 1 AND 2 OF THE CODE OF CIVIL PROCEDURE

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At what stage can a Section 9 petition be filed and maintained by the Petitioner has been a question that has often been raised in several litigations and arbitration claims decided by the courts. Historically, under the conventional Code of Civil Procedure, 1908 context, an application for interim relief can only be raised when the underlying substantive proceedings have been filed and is pending before the adjudicating forum. Therefore, in classic civil suits, the application under Order 39, Rule 1 and 2 cannot be maintained or decided unless the court has on its record the Civil Suit in which the final substantive reliefs have been prayed for. This is also important for the reasons that any adjudication forum will be better equipped to deal and adjudicate the prayers for interim relief when it is privy to the context of the substantive claim along with final reliefs which have been raised by the Plaintiff/Claimant.

For instance, a suit is filed by the plaintiff seeking declaration that a particular sale deed is null and void owing to the seller not having any title over the suit property at the time of the sale. In such a case, the plaintiff also seeks interim relief that the defendant cannot create any third-party interest in the suit property during the pendency of the suit. The fact that a substantive suit containing elaborate pleadings and final reliefs is before the Hon`ble Court will only mean that the Hon`ble Court is in a better position to be able to assess the overall context of the case and decide on the interim application seeking interim relief of non-creation of any third party interest by the defendant. The substantive suit shall provide a complete chronology of facts and also other ancillary details relating to the claim.

However, the above-mentioned is not the norm or the law when it comes to Section 9 remedy under the Arbitration Act, 1996. As per Section 21 of the Arbitration Act, 1996, an arbitral proceeding commences on the issuance of Section 21 notice by the claimant to the respondent. It will be appropriate to reproduce the text of Section 21 of the Act here:

“21. Commencement of arbitral proceedings.—Unless otherwise agreed by the parties, the arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent.”

Therefore, it can be said that unless and until the Section 21 notice has been issued detailing in brief about the substantive claims of the claimant, the arbitral proceeding is deemed not to commence. The question which begs an answer in such a situation is:

  1. Whether a Section 9 petition can be filed before the Hon`ble District Court/ High Court seeking interim relief in relation to the subject matter of the claim even before the issuance of notice under Section 21 by the Claimant to the Respondent?
  2. Whether a Section 17 petition can be filed and maintained before the Arbitral Tribunal seeking interim relief even before the filing of the Statement of Claim by the Claimant?

A. Whether a Section 9 petition can be filed before the Hon`ble District Court/ High Court seeking interim relief in relation to the subject matter of the claim even before the issuance of notice under Section 21 by the Claimant to the Respondent?

It will be appropriate to reproduce Section 9 at this stage to highlight the key phrases in the same to answer the above question.

“9. Interim measures, etc., by Court.—1[(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—

(i) for the appointment of a guardian for a minor or person of unsound mind for the purposes of arbitral proceedings; or

(ii) for an interim measure of protection in respect of any of the following matters, namely: —

(a) the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement;

(b) securing the amount in dispute in the arbitration;

(c) 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;

(d) interim injunction or the appointment of a receiver;

(e) 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.

2[(2) Where, before the commencement of the arbitral proceedings, a Court passes an order for any interim measure of protection under sub-section (1), the arbitral proceedings shall be commenced within a period of ninety days from the date of such order or within such further time as the Court may determine.

(3) Once the arbitral tribunal has been constituted, the Court shall not entertain an application under sub-section (1), unless the Court finds that circumstances exist which may not render the remedy provided under section 17 efficacious.]”

The text of Section 9(1) is clear and unequivocal. It says that “A party may, before or during arbitral proceedings or at any time after the making of the arbitral award” may apply to the court for interim reliefs seeking preservation, interim custody or sale of any goods/interim injunction or other interim measures. From a bare perusal of the text of this Section, it is amply clear that Section 9 petition can be moved before the notice is sent under Section 21 of the Arbitration Act, 1996 thereby invoking arbitration. This is in stark contrast to the principles governing substantive and interim reliefs claimed under the suits filed in accordance with the provisions of the Code of Civil Procedure, 1908.

It is important to analyze the reasons why the arbitration law in India has departed from the conventional principles enshrined under the Code of Civil Procedure, 1908.

One of the reasons as cited by the Hon`ble Supreme Court in the matter of Sundaram Finance v NEPC India, Manu/SC/0012/1999 in support of the above mentioned proposition was that it is a known fact that it is difficult to sometimes serve the respondent with the Section 21 notice and hence, in all such cases, the prayer for interim relief under Section 9 cannot be made to wait till the time the Section 21 notice has been served on the Respondent. The relevant portion of this judgment is reproduced as under:

“It is not unknown when it becomes difficult to serve the respondents. It was, therefore, necessary that provision was made in the Act which could enable a party to get interim relief urgently in order to protect it’s interest. Reading the section as a whole it appears to us that the Court has jurisdiction to entertain an application under Section 9 either before arbitral proceedings or during arbitral proceedings or after the making of the arbitral award but before it is enforced in accordance with Section 36 of the Act.”

Furthermore, in the same judgment, the Hon`ble Supreme Court also held that the invocation of Section 9 itself is prima facie proof of the fact that there does exist an arbitration agreement and the arbitration proceedings will be starting sometime in the future. Therefore, prima facie, the Section 9 relief is premised on some sort of underlying substantive claim which will be coming in the future. The relevant portion of the judgment is reproduced below:

“20. When a party applies under Section 9 of the 1996 Act it is implicit that it accepts that there is a final and binding arbitration agreement in existence. It is also implicit that a dispute must have arisen which is referable to the arbitral tribunal. Section 9 further contemplates arbitration proceedings taking place between the parties.”

The most important and fundamental reason behind advancing the proposition that Section 9 claims should be allowed to be filed before the Court of Original Jurisdiction even when the arbitral proceedings have not commenced is that the entire regime of Arbitration jurisprudence as per international model laws and framework is to give primacy to the urgent interim relief so that under no circumstances whatsoever the underlying claims of the Arbitral proceedings gets frustrated. Reliance is drawn on the following observations made by the Hon`ble Delhi High Court in Sanjay Arora & Ors v Rajan Chadha & Ors, MANU/DE/2643/2021:

“55. Empirically, in ordinary civil law, an application for interlocutory relief would lie only in substantive proceedings, claiming the main relief. The arbitral protocol, under the 1996 Act is, however, somewhat peculiar in its dispensation. Section 9 itself envisages grant of interim protection, by a Court, before institution of arbitral proceedings and can be invoked, in an appropriate case, even before the notice of arbitration, under Section 21, is issued. The reason is that, while considering the prayer for interim protection under the 1996 Act, whether under Section 9 or under Section 17, apart from the troika of a prima facie case, balance of convenience and irreparable loss, the Court, or Arbitral Tribunal, is also required to preserve the sanctity of the arbitral process, which is the very raison d’etre of the 1996 Act. All efforts to foster and promote the arbitral process, and prevent its interception or interdiction have, therefore to be made. The Court under Section 9, or the Arbitral Tribunal under Section 17 is also, therefore, empowered to grant interim protection where any possibility of the arbitral proceedings being frustrated is found to exist, whether such frustration be before the arbitral process is initiated, during the arbitral process or even after the passing of the Award. If, therefore, before a Statement of Claim is filed, the situation that presents itself is such that interim protection has to be granted, to ensure the preservation of the arbitral process, the Court under Section 9, and the Arbitral Tribunal under Section 17, is empowered to grant such protection. In view of this peculiar dispensation, unique to arbitration, I am of the opinion that the filing of Statement of Claim under Section 23 cannot be treated as a sine qua non for the maintainability of an application for interim protection under Section 17.”

Having laid out the reasons behind the position of law that Section 9 petitions can be maintained even before the commencement of the Arbitral proceedings, it would be apposite to mention that the Claimant seeking relief under Section 9 would have to prove that the petition is bona fide by prima facie suggesting the following:

  1. That it has a manifest intention to take recourse to the arbitral proceedings if, at the time when the application under Section 9 is filed, the proceedings have not commenced under Section 21 of the 1996 Act.
  2. That there does exist a valid arbitration agreement and the applicant intends to take the dispute to arbitration.
  3. That the Court adjudicating the Section 9 application may pass conditional orders to put the Claimant to such terms as it may deem fit with a view to see that the effective steps are taken by the Claimant for commencing the arbitral proceedings.

The above-mentioned pointers can be gathered from the observations made by the Hon`ble Supreme Court in Sundaram Finance v NEPC India, Manu/SC/0012/1999.

Therefore, it is clear that while the norm and the advisable route to take is to first commence the arbitral proceedings by serving a Section 21 notice on the Respondent by the Claimant. However, in cases of grave emergency and especially when the Claimant is hard-pressed for time to draft and send a substantive Section 21 notice detailing all the claims, the Claimant may file a Section 9 petition directly without sending a Section 21 notice. Needless to mention here is that if the Claimant takes the latter path, it will have to observe and be bound by directions of the Section 9 court as mentioned in the three pointers above.

B. Whether a Section 17 petition can be filed and maintained before the Arbitral Tribunal seeking interim relief even before the filing of the Statement of Claim by the Claimant?

The case of Section 17 is different from the case of Section 9 as under Section 17, the words used are “during the arbitral proceedings” and not “before or during the arbitral proceedings”. Therefore, on a plain reading of the text of Section 17, it becomes clear that a Section 17 petition can only be moved after Section 21 notice has been issued and the arbitral proceedings have been started. However, what is not very clear from the provision is as to whether Section 17 petition can be filed and maintained before the substantive Statement of Claim is filed before the Arbitral Tribunal/ Sole Arbitrator.

An answer to this question is much desirable under Arbitration Law as there are multiple cases in which the solicitors/advocates contesting an Arbitration proceeding do not have enough time and resources to file the substantive Statement of Claim before the Section 17 application is filed seeking interim relief from the constituted Arbitral Tribunal/Sole Arbitrator. In such cases, an option for filing the Statement of Claim post the filing of the Section 17 application for interim relief will go a long way for the Claimant and Claimant`s team of lawyers in filing a well-researched and strategized Statement of Claimant after having taken its own sweet time once the Section 17 petition has been filed and possibly argued.

This question has been dealt with recently in a judgment pronounced by the Hon`ble Delhi High Court in Sanjay Arora & Ors v Rajan Chadha & Ors, MANU/DE/2643/2021 wherein the Court held that a Section 17 petition can be filed and maintained even before the claimant has filed the substantive Statement of Claim before the Arbitral Tribunal/Sole Arbitrator. Noteworthy to mention here is that, the Hon`ble Delhi High Court has disagreed with a view taken by the Bombay High Court in Tasty Korner v. Merwan’s Confectioners Pvt.,  Arbitration Petition (L) 1300/2019, 6th January 2020 wherein the Hon`ble Bombay High Court held that no Section 17 petition can be filed and maintained unless and until the claimant has filed the substantive Statement of Claim before the Arbitral Tribunal/Sole Arbitrator. The relevant portions of this judgment as pronounced by the Hon`ble Delhi High Court are:

“53. The legal proposition, as advanced by Mr. Mehta appears, at first blush, to be almost axiomatic. It appears incongruous that, in the absence of a substantive challenge (in the form of a Section 23 Statement of Claim), an application for interlocutory relief would lie. Possibly for this reason, the Bombay High Court, speaking through G.S. Patel, J., has observed, in Tasty Korner v. Merwan’s Confectioners Pvt. Ltd6, that “it also goes without saying that Section 17 Application cannot be disposed of or even taken up unless a statement of claim has (sic been?) filed to begin with”.

54. Despite the high estimation in which I hold Patel, J., I regret my inability to agree with this proposition.

55. Empirically, in ordinary civil law, an application for interlocutory relief would lie only in substantive proceedings, claiming the main relief. The arbitral protocol, under the 1996 Act is, however, somewhat peculiar in its dispensation. Section 9 itself envisages grant of interim protection, by a Court, before institution of arbitral proceedings and can be invoked, in an appropriate case, even before the notice of arbitration, under Section 21, is issued. The reason is that, while considering the prayer for interim protection under the 1996 Act, whether under Section 9 or under Section 17, apart from the troika of a prima facie case, balance of convenience and irreparable loss, the Court, or Arbitral Tribunal, is also required to preserve the sanctity of the arbitral process, which is the very raison d’etre of the 1996 Act. All efforts to foster and promote the arbitral process, and prevent its interception or interdiction have, therefore to be made. The Court under Section 9, or the Arbitral Tribunal under Section 17 is also, therefore, empowered to grant interim protection where any possibility of the arbitral proceedings being frustrated is found to exist, whether such frustration be before the arbitral process is initiated, during the arbitral process or even after the passing of the Award. If, therefore, before a Statement of Claim is filed, the situation that presents itself is such that interim protection has to be granted, to ensure the preservation of the arbitral process, the Court under Section 9, and the Arbitral Tribunal under Section 17, is empowered to grant such protection. In view of this peculiar dispensation, unique to arbitration, I am of the opinion that the filing of Statement of Claim under Section 23 cannot be treated as a sine qua non for the maintainability of an application for interim protection under Section 17.”

The rationale of the above-mentioned is absolutely clear that primacy needs to be accorded to saving/preserving the subject matter/property of the substantive claim in an arbitration proceeding. Under no cost or situation can and should the substantive arbitration proceedings be rendered infructuous owing to the underlying subject matter/property being destroyed or alienated by the respondent or any other third party as the same would lead to the frustration of the entire mandate of the arbitral tribunal.

In light of the above-mentioned conflict in the ratio as observed by the Hon`ble Bombay High Court and the Hon`ble Delhi High Court, it is desirable that the Hon`ble Supreme Court settles the position of law on this issue. Meanwhile, till the same is done, the Hon`ble Delhi High Court being a later judgment can be considered to have a higher persuasive value thereby suggesting that the Section 17 application for interim relief can be filed before the filing of the Statement of Claim in an arbitral proceeding.

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SECURING MONEY CLAIM BY WAY OF AN INTERIM MEASURE – COMPARISONS BETWEEN PRINCIPLES GOVERNING ORDER XXXVIII RULE 5 OF THE CODE OF CIVIL PROCEDURE, 1908 VIS A VIS SECTION 9(1)(II)(B) OF THE ARBITRATION ACT, 1996

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Suit for recovery filed by the plaintiff before a Civil Court and claim for money filed by a claimant under the given arbitration clause are 2 remedies under law which are regularly invoked by lawyers on behalf of their clients. It is common knowledge that a suit for recovery will take as long as 3 to 4 years and an arbitration claim for recovery of the amount will take as long as 1 to 2 years before getting finally decided. One of the requests which is frequently made by the client from their respective lawyer is that pending this suit or arbitration claim the amount which is claimed under the litigation may be secured by way of a fixed deposit, bank guarantee or any other mode in a way that the said amount is protected from being alienated by the respondent or defendant pending the litigation/recovery process.

Above mentioned provisions of law become even more important and relevant in cases where the defendant or the respondent company is facing financial turmoil and maybe on the brink of insolvency. A litigation or an arbitration where there is very less chance of being able to receive the fruits of the decree or the award is a legal process which likely is going to end up in wastage of time, resources and money for all the stakeholders involved. Hence, in such circumstances the importance and purport of Order XXXVIII Rule 5 of the Code of Civil Procedure 1908 and section 9(1)(ii)(b) of the Arbitration Act 1996 becomes important.

It is settled position of law that principles governing the Code of Civil Procedure 1908 and the provisions under the same is not mandatorily applicable to proceedings under the Arbitration Act 1996. However, it is also common knowledge that a vast amount of jurisprudence and detailed procedure has evolved under the Code of Civil Procedure 1908 in the last more than 100 years. Arbitration Act 1996 is relatively new and hence has time and again been inspired by the principles and procedure laid down under the Code of Civil Procedure 1908.

The question therefore is that whether the legal process of securing the amount involved in an arbitration under Section 9(1)(ii)(b) will be bound by the principles as enshrined under Order XXXVIII Rule 5 of the Code of Civil Procedure 1908. This article intends to comment on the above-mentioned question in a structured manner wherein the first part of this article shall deal with the ingredients which a litigant has to satisfy before the appropriate court in order to secure an interim order thereby protecting the claim amount in dispute pending the arbitration. The second part of this article shall deal with the relationship between Order XXXVIII Rule 5 of the Code of Civil Procedure 1908 and section 9(1)(ii)(b) of the Arbitration Act 1996 from the perspective of the claimant whose endeavour is to secure the claim amount pending the arbitration.

INGREDIENTS WHICH THE CLAIMANT NEEDS TO SATISFY IN ORDER TO SUCCESSFULLY SECURE AN INTERIM ORDER UNDER SECTION 9(1)(ii)(b) OF THE ARBITRATION ACT 1996

There are 2 mandatory prerequisites which need to be established and satisfied by the claimant in order to successfully secure an interim order under Section 9(1)(ii)(b) of the Arbitration Act 1996. The first prerequisite is to show a prima facie case which is extremely strong and credible on the face of it. There are numerous judgments of the Honourable Supreme Court and the High Courts which state that when the nature of the claim is prima facie not tenable or the debt in the litigation is not crystallised and is in some sort of dispute, then in such cases the underlying amount of the arbitration shall not be ordered to be secured by way of any interim order. There can be no cavil to the proposition that any defence setup by the respondent against an alleged claim cannot be frivolous and totally baseless. Such a defence will not create any plausible doubt in the tenability of the claim as claimed by the Claimant and hence, the debt of the Claimant in such cases would continue to remain crystallized.

A strong prima facie case usually means that the claimant was able to adduce his or her claim along with documents which are of high evidentiary value. For eg. the claimant is able to produce an admission of liability which may have been made by the respondent at any time prior or post the commencement of the arbitral proceedings. Such admissions strengthen the case of the claimant and show that prima facie the respondent is indeed liable to make the payment of the alleged amount to the claimant. In such cases once a prima facie determination has been made that the amount is payable from the respondent to the claimant, the balance of convenience is in favour of the claimant and hence the respondent is required to secure the amount in question so that later whenever the award or decree is passed the same may not be defeated due to any circumstances which are beyond the control of the claimant.

It will be apposite to mention the following precedents with the relevant portions from the same to corroborate the above said:

1.) Sepco Electric Power Construction Corporation v. Power Mech Projects Ltd., (2021) 10 SCC 792:

“34.  Section 9 of the Arbitration Act confers wide power on the Court to pass orders securing the amount in dispute in arbitration, whether before the   commencement   of   the   Arbitral   proceedings, during   the   Arbitral proceedings or at any time after making of the arbitral award, but before its enforcement in accordance with Section 36 of the Arbitration Act. 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.”

The same was reiterated by the Hon’ble Supreme Court in Essar House Private Limited v. Arcellor Mittal Nippon Steel India Limited, 2022 SCC OnLine SC 1219.

2.) Adhunik Steels Limited v. Orissa Manganese and Minerals (P) Ltd., (2007) 7 SCC 125:

“10. It is true that Section 9 of the Act speaks of the court by way of an interim measure passing an order for protection, for the preservation, interim custody or sale of any goods, which are the subject matter of the arbitration agreement and such interim measure of protection as may appear to the court to be just and convenient. The grant of an interim prohibitory injunction or an interim mandatory injunction are governed by well-known rules and it is difficult to imagine that the legislature while enacting Section 9 of the Act intended to make a provision which was de hors the accepted principles that governed the grant of an interim injunction. Same is the position regarding the appointment of a receiver since the Section itself brings in, the concept of ‘just and convenient’ while speaking of passing any interim measure of protection. The concluding words of the Section, “and the court shall have the same power for making orders as it has for the purpose and in relation to any proceedings before it” also suggest that the normal rules that govern the court in the grant of interim orders is not sought to be jettisoned by the provision. Moreover, when a party is given a right to approach an ordinary court of the country without providing a special procedure or a special set of rules in that behalf, the ordinary rules followed by that court would govern the exercise of power conferred by the Act. On that basis also, it is not possible to keep out the concept of balance of convenience, prima facie case, irreparable injury and the concept of just and convenient while passing interim measures under Section 9 of the Act.”

The second prerequisite for the claimant in order to successfully secure an interim order under Section 9(1)(ii)(b) is to show that there is a strong possibility that the assets of the respondent will be dissipated or are being dissipated during the course of the proceedings and hence, there won’t be anything left on the basis of which the Claimant would be able to enjoy the fruits under the arbitral award. This second pre-requisite, in most cases, is even more of an important ingredient than the first pre-requisite mentioned in the preceding paragraphs. The burden on the claimant is to show that the respondent, in all likelihood, is in the process of selling / alienating his or her assets so that the respondent does not have to bear the burden of the eventual liability. The claimant can also show that the respondent is undergoing major financial turmoil and may be at the brink of insolvency proceedings. The larger point which needs to be advanced by the Claimant along with some prima facie evidence is that if the amount in the claim is not secured by way of an interim order (fixed deposit, bank guarantee etc) then the fruits of the award will not be enjoyed by the Claimant.

It will be apposite to mention the following precedents with the relevant portions from the same to corroborate the above said:

1.) Essar House Private Limited v. Arcellor Mittal Nippon Steel India Limited, 2022 SCC OnLine SC 1219 observed:

“48. Section 9 of the Arbitration Act confers wide power on the Court to pass orders securing the amount in dispute in arbitration, whether before the commencement of the arbitral proceedings, during the arbitral proceedings or at any time after making of the arbitral award, but before its enforcement in accordance with Section 36 of the Arbitration Act. 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.

49.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.

50.Proof of actual attempts to deal with, remove or dispose of the property with a view to defeat or delay the realisation of an impending Arbitral Award is not imperative for grant of relief under Section 9 of the Arbitration Act. A strong possibility of diminution of assets would suffice. To assess the balance of convenience, the Court is required to examine and weigh the consequences of refusal of interim relief to the applicant for interim relief in case of success in the proceedings, against 17 the consequence of grant of the interim relief to the opponent in case the proceedings should ultimately fail.”

2.) Indiabulls Housing Finance Limited v. Ambience Projects & Infrastructure Private Limited & Ors, MANU/DE/0557/2021:

“44. To my mind, on the face of it, these assertions are woefully insufficient to maintain a prayer for interim protection, under Section 9 of the 1996 Act. No particulars, of the manner in which the making of payments, to Vistra, by APIPL, would “grossly undermine the ability” of APIPL to make payments to IHFL, are forthcoming. No basis for the “apprehension” that the assets of Respondents 12 to 26 are at the risk of being sold off/ transferred/alienated is, either, provided in the petition. (This aspect is, strictly speaking, not relevant for the present order, as Mr. Nayar restricted his prayer for ad interim relief to a restraint, against APIPL, from making payments to APL or to any other creditors or group companies.) How, even if payments were to be made by APIPL to APL, or to Vistra, towards satisfaction of the MoU dated 14th January, 2021, the arbitral proceedings relating to the present dispute would be rendered infructuous, is also not apparent either from the pleadings or from the material placed on record. There is no averment, in the petition, that, if APIPL were to make further payments to APL, or to Vistra, it would be rendered financially incapable of liquidating its debts towards IHFL-assuming, that is, that these dues are found to be payable in the arbitral proceedings, which are yet to commence…

…

45. This Court has, in its judgment in Avantha Holdings MANU/DE/1548/2020, observed thus, in this context:

26. That said, the mere satisfaction of these criteria does not, ipso facto, make out a case for ordering interim measures under Section 9. Additionally, the Court is also required to satisfy itself that the relief, being sought under Section 9, cannot await the constitution of the arbitral tribunal, or the appointment of the arbitrator, and the invocation, before such arbitrator or arbitral tribunal, of Section 17. Emergent necessity, of ordering interim measures is, therefore, an additional sine qua non, to be satisfied before the Court proceeds to grant relief under Section 9 of the 1996 Act. While passing orders under Section 9, therefore, the Court is required to satisfy itself that (i) the applicant, before it, manifestly intends to initiate arbitral proceedings, (ii) the criteria for grant of interim injunction, which apply to Order 39 of the CPC, stands satisfied, and (iii) circumstances also exist, which renders the requirement of ordering interim measures an emergent necessity, which cannot await a Section 17 proceeding, before the arbitrator, or arbitral tribunal. In assessing whether such an emergent necessity exists, or not, the Court would, essentially, have to satisfy itself that failure to order interim measures, under Section 9, would frustrate, or would render the recourse, to arbitration-which is yet to take place-futility.”

The chances of the Claimant receiving an interim order in his or her favor becomes really high if the Claimant is able to satisfy the appropriate court on the above mentioned 2 factors. Being able to receive an interim order under Section 9(1)(ii)(b) of the Arbitration Act 1996 comes with benefits for the Claimant. The primary benefit which such an order provides is that in cases where the Claimant ends up being successful and secures the arbitral award in his / her favor then in all such cases, the execution proceedings are not required to be filed or even if filed then the same remains mostly a formality. Since, the claim amount under the dispute has already been secured, the execution proceedings are mostly left for the purposes of securing the interest and costs on the claim amount. Usually, in cases where the courts have ordered interim relief under Section 9(1)(ii)(b) of the Arbitration Act, 1996, in all such cases the courts at the time of pronouncement of the final award also orders the release of the amount to the Claimant which was secured vide the interim order.

RELATIONSHIP BETWEEN ORDER 38 RULE 5 OF THE CODE OF CIVIL PROCEDURE, 1908 AND SECTION 9(1)(b)(ii) OF THE ARBITRATION ACT 1996

To what extent should the principles under Order 38 Rule 5 of the Code of Civil Procedure, 1908 should govern the exercise of jurisdiction under Section 9(1)(b)(ii) by appropriate courts in cases of recovery of money is a subject of some debate. Some courts have taken the view that Order 38, Rule 5 has a much higher threshold and burden for the Plaintiff to prove in order to be able to secure an interim order as compared to the threshold and burden of the Claimant under Section 9(1)(b)(ii). In Delta Constructions v. Narmada Cement, (2002) 2 BOMLR 225, the Bombay High Court pronounced:

“10. …All this makes it clear that Act of 1996 itself has provided for interim measures that can be granted by the court and by the Arbitral Tribunal. Insofar as the Court is concerned, there is further power conferred that the court meaning thereby the court having jurisdiction can exercise all the powers available to it as the court under the provisions of the Code of Civil Procedure. The substantive power conferred on the court by Section 9 is to be effected by the procedural provisions as contained in the Code of Civil Procedure. The Code of Civil Procedure for example under Order 38 has provided for the security by way of arrest before Judgment and attachment before judgment. The Court before issuing the warrant of arrest or attaching the property and/or in the event, defendant does not furnish security has to satisfy itself that the various predicates as set out in Order 38 of Code of Civil Procedure have been satisfied. The corresponding power in the court under Section 9 would be of securing the amount in dispute in the arbitration. The power of the court to secure the amount in dispute under arbitration is not hedged by the predicates as set out in Order 38. All that the court must be satisfied is that an interim measure is required. In other words, the party coming to the court must show that if it is not ‘secured, the Award which it may obtain would result in a paper decree or a decree which cannot be enforced on account of acts of a party pending arbitral process. Therefore, the court would not to be bound by the requirement of Order 38 Rule 5. Since the power is discretionary, the court must be satisfied that it is in the interest of justice, based on the material before it to pass order to secure the petitioner before it. The discretion to be exercised would be based as set out earlier on the material before it and the petitioner making out a case that there is need for an interim measure of protection. However, once the court passes the order, then the order to secure would be as per the procedure as laid down in the Code of Civil Procedure. Insofar as preservation, interim, custody etc. is concerned, the power as conferred under Order 39, Rule 7 is also provided by Section 9(ii)(c). Appointment of Receiver is covered by 9(ii)(d). Power to sell goods at interim stage is specifically provided for in Section 9(ii)(a). Apart from that there is general power reserved in the courts for such interim measure as it may thought proper under Section 9(ii)(a). The substantive provisions of granting interim relief as provided for in the Code of Civil Procedure therefore, cannot be read into Section 9. There are independent provisions in the Act itself. The exercise of the power must be construed, bearing in mind the object of the Act and the need to dispose of the matter as expeditiously and not hedged in, by the provisions of the Code of Civil Procedure. To my mind, therefore, it is not necessary for the court when called upon to secure the amount in dispute to find out whether the respondent before it is seeking to dispose of the property or taking the property outside the jurisdiction of the court. The court is not hedged by such restriction. If it were to be so, the legislature considering that the petition lies to the Civil Court could have provided that court can exercise all the powers it has under the Civil Procedure Code for granting interim relief. On the contrary only procedural provisions to give effect to the power under Section 9 have been conferred. Considering that, to my mind, the observation of the learned Judge of the Delhi High Court in M/s Global (supra) when it noted that the principles of the Code of Civil Procedure will have to be borne in mind would only restrict the exercise of powers under Section 9. The power under Section 9 cannot be fettered by reading into it the requirements for granting interim reliefs which are not provided. To that extent, I am unable to agree with the view expressed by the Delhi High Court.”

However, some other courts have indeed pronounced that the principles governing the grant of interim order under Order 38, Rule 5 will indeed be considered by the appropriate courts while granting an order under Section 9(1)(b)(ii) of the Arbitration Act, 1996. In Essar House Private Limited v. Arcellor Mittal Nippon Steel India Limited, 2022 SCC OnLine SC 1219, the Supreme Court relied upon the observations made by the Bombay High Court in Valentine Maritime Ltd. v. Kreuz Subsea Pte. Ltd. & Anr, 2021 SCC Online Bom 75 the following terms:

“46. In Valentine Maritime Ltd. v. Kreuz Subsea Pte. Ltd. & Anr., the High Court held :-

95. Insofar as judgment of this Court delivered by the Division Bench of this court in case of Nimbus Communications Limited v. Board of Control for Cricket in India (supra) relied upon by the learned senior counsel for the VML is concerned, this Court adverted to the judgment of Hon’ble Supreme Court in case of Adhunik Steels Ltd. v. Orissa Manganese and Minerals (P) Ltd., (2007) 7 SCC 125 and held that in view of the decision of the Supreme Court in case of Adhunik Steels Ltd., (supra) the view of the Division Bench in case of National Shipping Company of Saudi Arabia (supra) that the exercise of power under section 9(ii)(b) is not controlled by the provisions of the Code of Civil Procedure, 1908 cannot stand. This court in the said judgment of Nimbus Communications Limited (supra) held that the exercise of the power under section 9 of the Arbitration Act cannot be totally independent of the basic principles governing grant of interim injunction by the civil Court, at the same time, the Court when it decides the petition under section 9, must have due regard to the underlying purpose of the conferment of the power upon the Court which is to promote the efficacy of arbitration as a form of dispute resolution.

96. This court held that just as on the one hand the exercise of the power under Section 9 cannot be carried out in an uncharted territory ignoring the basic principles of procedural law contained in the Code of Civil Procedure, 1908, the rigors of every procedural provision in the Code of Civil Procedure, 1908 cannot be put into place to defeat the grant of relief which would sub-serve the paramount interests of justice. A balance 15 has to be drawn between the two considerations in the facts of each case. The principles laid down in the Code of Civil Procedure, 1908 for the grant of interlocutory remedies must furnish a guide to the Court when it determines an application under Section 9 of the Arbitration and Conciliation Act, 1996. The underlying basis of Order 38 Rule 5 therefore has to be borne in mind while deciding an application under Section 9(ii) (b) of the Arbitration Act.”

Therefore, it seems like both the Claimant and the Respondent have something on which they can possibly rely to bring their burden under law to a threshold which is much lower than that as required under Order 38, Rule 5 of the Code of Civil Procedure, 1908. Needless to mention that this is important at the time of arguing and contesting the interim application under Section 9(1)(b)(ii) as any interim order granted or declined in money claims can possibly have a game changing impact on the entire arbitration proceedings itself.

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