Securing Amount under Section 9 of the Arbitration and Conciliation Act, 1996 - Pre and Post Arbitration

As a result of repeated and dedicated efforts of both the legislature and judiciary to make India the hub of arbitration, the arbitration law has evolved significantly and now provides for a time-bound and robust mechanism for securing an arbitral award. However, execution of an arbitral award and realization of the fruits of arbitration still remains challenging, particularly in cases where either the counterparty is financially incapable of honoring the arbitral award or is notorious enough to evade its execution. It is thus, prudent to take precautionary steps right at the beginning if it is anticipated that the execution of an arbitral award would be challenging. The article explores the intricacies involved in taking such precautionary measures to secure the arbitral award even before the conclusion of arbitral proceedings and the view taken by various courts across the country.

The provisions for interim measures under Section 9 of the Arbitration and Conciliation Act, 1996 (“Act”) made significant advancements under the Act, which went beyond the scope of both the earlier Arbitration Act of 1940 and the UNICTRAL Model Law. This legislation permitted parties to seek court’s assistance prior to the enforcement of the award in safeguarding the amount awarded in arbitration to prevent the award debtor from evading execution and rendering the award otiose. Section 9 provides for an interim measure to secure the amount in dispute even before the commencement of arbitral proceedings. However, seeking such an order can be a challenging process, and the party must satisfy the court that it has a prima facie case and that the other party will defeat the execution of an arbitral award. This can be a difficult threshold to meet, and the court may require detailed evidence and arguments to be presented to establish these conditions. The purpose of securing the claim amount under section 9 essentially amounts to preservation of the disputed amount which is analogous to attachment before judgment and is granted only in circumstances where the arbitral award bears the risk of becoming potentially meaningless.

The provisions of Order 38, Rule 5 of the Civil Procedure Code, 1908 (“the Code”) provides for ‘attachment before judgment’ and lays down the grounds for the same. For securing relief under Order 38 Rule 5, the court must be satisfied that the defendant has the intention to obstruct or delay the execution of any potential decree against him. This intention can be demonstrated if the defendant is found to be either disposing of or removing any part of their property from the local limits of the jurisdiction of the court. The granting of relief under Order 38 Rule 5 is conditional and the detailed requirements are essential for the grant of such relief, failing which, no relief can be secured under Order 38 Rule 5.

The law, therefore, allows the parties to approach the court even before the arbitration and pronouncement of the arbitral award, for the purpose of preserving the outcome of the arbitration or securing the disputed amount. It also becomes relevant to exercise this remedy in cases where the arbitral fees / institutional fees run into crores and the parties need to have some foreseeability of releasing the fruits of arbitration after spending such amounts on securing that arbitral award.  With regard to the award debtor, it acts as a preventive measure from evading their obligations under the award and rendering its realization impossible. In view of the same, the Courts have been empowered to even order the full deposit of the amount in some matters.

Even though the object under section 9 of the Act and Order 38 Rule 5 are shared, the legal recourses to both are different. While the powers of the Court under Section 9 are vast and diverse, under Order 38 Rule 5, the threshold is higher and all requisites are to be fulfilled in order to secure relief under Order 38 Rule 5.

The Court has the authority to enforce interim measures to preserve the sum in contention in the arbitration process, either in the form of a bank guarantee or by requiring the deposit of funds in the Court. This power extends not only to the parties involved in the arbitration, but also to any third party who is obliged to pay any amount to a party under the arbitration agreement, by directing such third party to deposit the funds on behalf of the party before the Court. The Apex Court has time and again held that the intention of the parties to deprive the other party from enforcing the decree should be manifestly clear, pleaded, proved and orders of attachment cannot be granted as a matter of routine. The Court would not be justified in granting interim orders and relief merely for the asking of it.

The Bombay High Court while deciding the question that whether the power exercisable under section 9 of the Act, by the Court in a matter seeking security in respect of the amount in dispute in the arbitration is restricted by the conditions of attachment before judgment as prescribed under Order 38 Rule 5, in the matter of National Shipping held that exercise of power cannot be restricted by importing the provisions of Order 38, Rule 5. The provisions of Order 38, Rule 5 cannot be read into the said provision as it is nor can power of the court in passing an order of interim measure under section 9(ii)(b) be made subject to the stringent provision of Order 38, Rule 5. Therefore, the question as to whether the power of Section 9 is controlled by the Order 38 Rule 5, was left open by the Hon’ble Supreme Court in its judgment of Arvind Constructions wherein it held that “the power under Section 9 of the Act is not controlled by Order XVIII Rule 5 of the Code of Civil Procedure is a view taken by the High Court of Bombay. But, how far these decisions are correct requires to be considered in an appropriate case. Suffice it to say that based on the submissions made in this case, we are not inclined to answer that question finally.

When it comes to granting relief under Section 9 of the Act, it could not be said that the court must strictly abide by the provisions of Order 38, Rule 5 since the scope of Section 9 is quite broad and grants discretion to issue a wide range of interim measures as deemed just and appropriate. However, this discretion must be exercised judiciously and not arbitrarily and should be guided by the principles which civil courts ordinarily employ for considering interim relief. The Delhi High Court noted that while there is no specific mention that the Act is to follow the Code, the principles guiding the court's powers in the Code should still be kept in mind when making orders under Section 9 of the Act.

Just like the exercise of power under Section 9 cannot be carried out in an uncharted territory ignoring the basic principles of procedural law contained in the Code, the rigors of every procedural provision in the Code cannot be put into place to defeat the grant of relief which would sub-serve the paramount interests of justice. A balance has to be drawn between the two considerations, in accordance with the facts of each case. The principles laid down in the Code for the grant of interlocutory remedies must furnish a guide to the Court when it determines an application under Section 9 of the Act. 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 Act. The Bombay High Court observed that the court had the authority to issue interim measures to secure the amount in dispute in arbitration, which may take the form of a bank guarantee or deposit in court. The Court also went on to hold that this power could be exercised not only by the parties to the arbitration agreement, but against a third party who is not party to the arbitration agreement.

The law has however further crystalized by the Hon’ble Supreme Court in a recent case of Essar House wherein the Apex Court dwelled upon the parameters surrounding the securing of claim amounts. It stated that the Arbitration Act gave the court broad authority through Section 9 to issue orders safeguarding the amount in dispute in the arbitration process, whether it be before the start of the arbitration, during the arbitration, or after the award had been made but before its enforcement as per Section 36 of the Act. The court only needed to determine if the applicant for the interim measure had a credible case prima facie, and if the interim relief requested favoured the balance of convenience, and if the applicant has promptly approached the court.

The provision of Order 38, Rule 5 in the CPC concerning ‘attachment before judgment’ will not be applicable in post-award scenarios where the parties' rights have been solidified. The abilities of the court under section 9 of the Arbitration Act to preserve the awarded sum in a post-award scenario should not be contingent upon satisfying the conditions of Order 38 Rule 5 or demonstrating that the defendant is intending to dispose of or remove a portion or all of their assets from the local jurisdiction of the court. The amounts awarded in arbitration cannot be considered "amounts in dispute" if they are still being contested, including the costs incurred during arbitration. Once an award is pronounced, the rights of the parties are established. In such a case, the party in favor of the award can approach the court under Section 9(ii)(b) of the Arbitration Act to secure the awarded amount and prevent it from becoming a mere paper decree. This might occur when the party in favor of the award is unable to execute it due to pending section 34 petitions by the other party, but fears that there will be nothing left to execute by the time the section 34 petition is resolved.

In Sampson Maritime Limited, the Madras High Court proceeded to hear the Section 9 application and granted full deposit of the awarded amount while distinguishing a post award Section 9 application from an application made under Order 38 Rule 5. The Court held that a remedy under Order 38 Rule 5 squarely applies in situations where the attachment of the judgment debtor’s assets is sought before judgment and the rights of the award-holder have not crystallized. Hence, an application under Order 38 Rule 5 needs to necessarily be supported by material averments to establish how the award-holder expects his rights to be defeated by the conduct of the judgment debtor. However, in a post award Section 9 application, the rights of the award-holder have crystallised since he has a decree in his favour. In such a scenario, the Court need not go into the question of the intention of the judgment debtor. Interestingly, the High Court also held that pending Section 34, the award-holder can seek protection under Section 9 post the delivery of the award – not on any apprehended action of the respondent but as a matter of right.

The power of the court in passing the protection order to secure the amount in dispute in the arbitration before or during arbitral proceedings or at any time of making of the arbitral amount but before it is enforced cannot be restricted by importing the provisions set out in Order 38 of the Code but has to be exercised ex debito justitiae and in the interest of justice. The courts while considering the application for interim protection under section 9(ii)(b) are guided by equitable consideration and each case has to be considered in the light of its facts and circumstances. This would necessarily mean that in deciding an application under Section 9, the Court would, while bearing in mind the fundamental principles underlying the provisions of the Code of Civil Procedure, at the same time, have the discretion to mould the relief in appropriate cases to secure the ends of justice and to preserve the sanctity of the arbitral process.

Samir Malik is a Partner and Mahip Singh Sikarwar is a Principal Associate at DSK Legal.