A close look at Issue of Security Deposit under Arbitration and Conciliation Act vis-à-vis Order XLI Rule 5 of Civil Procedure Code

The Arbitration and Conciliation Act, 1996 (for short “the said Act”) provides procedures for challenging an arbitral Award as well as enforcement of the said Award. Prior to the 2015 amendment of the said Act by the Arbitration and Conciliation (Amendment) Act, an automatic stay was applicable on the operation of the Award on the very filing of an application for it setting aside.

Post the 2015 amendment, Section 36(2) of the said Act provides that an Award would not be rendered unenforceable automatically on the filing of an application under Section 34 for setting aside of the arbitral Award unless the Court grants an order of stay of operation of the Award on the party making a separate application for such purpose. Under Section 36(3) of the said Act, the Court may impose such conditions as it may deem fit for granting the stay of operation of the Award. The proviso to section 36(3) clarifies that where the Award is for payment of money, the Court shall have due regard to the provisions for stay of a money decree under the Code of Civil Procedure, 1908 (for short “CPC)”. As such, under the new regime post 2015, an arbitral Award may be enforced under Section 36 even when an application under Section 34 is pending or where the time period for making an application under section 34 has expired unless an order of stay on the Award has been granted by the Court.

Section 36 (3) of the said Act provides discretion to the Court to subject the grant of stay to such conditions as it may deem fit. It further provides that for such purpose, the Court shall refer to the provisions for stay of a money decree under CPC where the Award is for payment of money. Under Order XLI Rule 5(3) of CPC, stay of execution of a decree is granted only when the Court is satisfied that (a) the stay is necessary, (b) the application for stay has been made without undue delay and (c) security has been given for due performance of the decree as may be finally binding upon the applicant.

Thus, in terms of Order XLI Rule 5(3)(c), the amount of the decree or a part thereof, must be furnished as security before the execution of the decree is stayed. Once the security has been provided, the decree holder stands protected from the result of the continuing litigations being appeals or other applications arising out of such decree to the extent of the decretal amount at least subject to the result of such litigations. Similarly in case of an arbitral Award, the Court may subject the stay on execution of an Award to such conditions as it may deem fit which may also include the requirement of furnishing security. The type and means of the security has been left open to the Courts for determination on a case specific basis.

On various occasions, the Courts have had an opportunity to decide on the issue of whether a stay granted under Section 36(2) and (3) of the said Act must be guided by the principles of CPC. In Malwa Strips Private Limited vs. Jyoti Limited, the Court held that compelling reasons should be made out for stay of a money decree meaning that the stay must not be granted only for the asking, a condition embedded in Order XLI Rule 5(3) (a) of CPC. A money decree can only be stayed in exceptional cases and on the condition of depositing the decretal amount as security where the respondent faces no undue hardship due to the imposition of such condition. In Pam Developments Private Limited vs. State of West Bengal, scope of directing deposit of security was extended to Government as well in terms of Order XXVII Rule 8A of CPC. The Court considered the interplay between Section 36(3) of the said Act, and Order XLI Rule 5(3) of the CPC and held that the phrase “have due regard to” under the proviso to Section 36(3) would only mean that the Court needs to consider the provisions of CPC in matters of monetary awards and not that it is mandatory to follow the same. The proviso is merely directory in nature being a legislative instruction for general guidance. In Kolkata Metropolitan Development Authority vs. South City Projects (Kolkata) Ltd. the Calcutta High Court, relying on Pam Developments held that the Court is not bound by the strict provisions of CPC while exercising powers under Section 36(3) of the said Act. The power under Section 36(3) of the said Act must only be exercised on the satisfaction of the Court as to the conditions being conducive to grant of a stay as was held in Future Market Networks Limited vs. Laxmi Pat Surana.

In Sepco Electric Power Construction Corporation vs. Power Mech Projects Ltd., the Supreme Court observed that the grant of stay under Section 36(3) of the said Act is coupled with the duty to impose conditions which could include the condition of securing the Award by deposit in Court. The said Act provides a clear discretion to the Court for deciding the conditions which may be imposed as per the Calcutta High Court in Nitu Shaw vs. Bharat Hitech (Cements) Private Limited. Thus, there is no statutory fetter on a Court to compulsorily require security to be in the form of cash, bank guarantee or the like. In Fair Deal Supplies Limited vs. R. Piyarelall Iron and Steel Private Limited, it was observed that with regard to the applicability of Order XVI Rule 5 of the CPC in applications for stay of a monetary Award, compliance of the rules of CPC are to be mandatorily followed with the discretion lying in the scope of manner and mode of security to be provided by the party seeking stay of the Award.

Thus, a clear causal link has been established by judicial pronouncements between the provisions of Section 36(3) of the said Act and Order XLI Rule 5 of CPC wherein it has been expressly precedented that in an application for stay of the Award, the Courts are bound by the provisions of the CPC, however, the quantity and quality of the security may be discretionally decided by the Courts.

Amit Meharia is a Managing Partner and Paramita Banerjee is a Senior Associate at MCO Legals.