In its 3 February 2021 decision in Kolkata Metropolitan Development Authority v South City Projects (Kolkata) Ltd, the Calcutta High Court decided upon the interplay between section 36 of the Arbitration and Conciliation Act 1996 and order 41(5) of the Civil Procedure Code (CPC).
On 18 December 2006 South City invited bids for the development of a residential-cum-office complex in Kolkata through a joint venture with Kolkata Metropolitan. The parties entered into a memorandum of understanding of joint venture on 17 December 2007. However, on 7 December 2010 the government cancelled the lease granted in favour of Kolkata Metropolitan. Subsequently, on 19 April 2018, the state government executed a lease in favour of Kolkata Metropolitan with various restrictions. Disputes and differences arose between the parties. As such, Kolkata Metropolitan applied for relief under section 11 of the Arbitration and Conciliation Act; the Court appointed an arbitrator on 3 May 2017.
The arbitrator, via an arbitral award dated 22 June 2020, awarded Kolkata Metropolitan:
- a sum of approximately Rs114,140,000 as the principal amount together with interest at a rate of 15% per annum from 17 December 2007 until the date of the award;
- damages by way of expenses incurred amounting to approximately Rs6,233,172; and
- interest amounting to approximately Rs2,243,943; and
- nominal damages in the region of Rs100.
The question arose of whether the courts have discretion under section 36 of the Arbitration and Conciliation Act to direct the deposit of any amount as they deem appropriate to stay the execution of an award pending the consideration of an application under section 34 thereof.
Kolkata Metropolitan's submissions
Kolkata Metropolitan contended that the Calcutta High Court had sufficient power and discretion under section 36 of the Arbitration and Conciliation Act to require such an amount of security or deposit as it deemed appropriate to stay the execution of an award pending the consideration of an application under section 34 of the act.
Section 36 of the Arbitration and Conciliation Act states the following:
36. Enforcement . . . .
(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.
Kolkata Metropolitan relied on Pam Developments Private Limited v State of West Bengal [(2019) 8 SCC 112] wherein the Supreme Court considered the provisions of section 36(3) of the Arbitration and Conciliation Act in the context of an arbitral award for payment of money. It was submitted in Pam Developments that the proviso makes it clear that the court must have due regard to the provisions for the grant of stay of a money decree under the provisions of the CPC. It was further held in Pam Developments that the phrase "have due regard to" means only that the provisions of the CPC are to be considered and not that they are mandatory; the phrase used is not "in accordance with" the provisions of the CPC.
South City's submissions
South City contended that the Court should order Kolkata Metropolitan to furnish security on the full arbitral award. However, the court has discretion over the form of the security that it may direct to be furnished – namely, it may direct furnishing security by cash or by another means.
Order 41(5) of the CPC reads as follows:
5. Stay by Appellate Court . . . .
(3) No order for stay of execution shall be made under sub-rule (1) or sub-rule (2) unless the Court making it is satisfied –
(a) that substantial loss may result to the party applying for stay of execution unless the order is made;
(b) that the application has been made without unreasonable delay; and
(c) that security has been given by the applicant for the due performance of such decree or order as may ultimately be binding upon him.
South City also contended that it had the right to withdraw the secured amount which the Court had directed to be deposited. In support of this contention, South City relied upon case law.(1)
The Calcutta High Court held that the proviso to section 36(3) of the Arbitration and Conciliation Act stipulates that the court shall, while considering the application for grant of stay in the case of an arbitral award for the payment of money, have due regard to the provisions of the CPC. While exercising powers under section 36(3) of the act, the court is not bound by the provisions of order 41(5) of the CPC, which in principle applies to an appeal preferred under section 37 of the act. Under section 36(3) of the act, the court can require a party to furnish such security as it deems appropriate. However, the court must give reasons for such orders.
The first proviso of section 36(3) of the Arbitration and Conciliation Act mandates 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 of the CPC:
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).
The second proviso of section 36(3) of the Arbitration and Conciliation Act, as inserted by the Arbitration and Conciliation (Amendment) Ordinance 2020, stipulates that where the court is satisfied that a prima facie case has been made with the arbitration agreement or the contract which is the basis of the award or that the making of the award had been induced or effected by fraud or corruption, it shall stay the award unconditionally pending disposal of the challenge to the award under section 34.
The Arbitration and Conciliation (Amendment) Ordinance 2020 has added one more proviso to section 36(3) of the Arbitration and Conciliation Act 1996:
Provided further that where the Court is satisfied that a prima facie case is made out.-
(a) that 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.
In Pam Developments, it was held that the court retains the discretion to grant stay on such conditions as it deems fit with regard to an award directing payment of money. It was recognised that the court has the power to direct the full or partial deposit and furnish the security for the determined amount. In Pam Developments, the court did not direct security for the entire awarded amount.
On the contention of Kolkata Metropolitan on the withdrawal of the amount, the Calcutta High Court held that in M/s Mehta Teja Singh, the Supreme Court allowed the decree holder to withdraw the amount by furnishing a bank guarantee, to the satisfaction of the high court. The Court allowed the withdrawal of the money in a pending appeal under section 37 of the Arbitration and Conciliation Act 1996. In the present case, the parties were yet to reach the section 37 stage.
While exercising its discretion, the Calcutta High Court directed Kolkata Metropolitan to deposit the principal sum awarded under the arbitral award, approximately Rs114,140,000.
Order 41(5) of the CPC vests the court with limited discretion either to direct the deposit of the amount disputed in the appeal or to furnish such security as it may deem fit. Under section 36(3) of the Arbitration and Conciliation Act 1996, the court must have due regard only to these provisions. It is well established that the act is a self-contained code. While courts have frequently held that the efficacy of the arbitral process must always be protected and that courts should be hesitant to interfere with arbitral awards, section 36(3) of the act clearly affords discretion to courts to impose such conditions as they deem fit.
For further information on this topic please contact Nihal Shaikh or Shrikant Pillai at Clasis Law by telephone (+91 22 4910 0000) or email ([email protected] or [email protected]). The Clasis Law website can be accessed at www.clasislaw.com.
Endnotes
(1) Mehta Teja Singh and Company v Grindlays Bank Limited [(1982) 2 SCC 199 M/s] and Kanpur Jal Sansthan v Bapu Constructions [(2015) 5 SCC 267].