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This article examines how courts have interpreted Section 36(3) in light of Section 18 in the context of government authorities, exploring whether they are legally obligated to provide security on a challenge to set aside an arbitral award under Section 34, analysing the provisions of Code of Civil Procedure,1908 (the “CPC”) rationale behind such requirements, and the broader implications for enforcement of arbitral awards.
Introduction
The preferential treatment of government bodies under arbitration law has long been a subject of debate, especially in the context of securing a stay on an arbitral award. In the background of the 2015 amendment Arbitration and Conciliation Act, 1996 (the ”arbitration act”), a key question arises—are government entities required to furnish security when seeking a stay, or do they enjoy certain privileges that exempt them from this obligation?
Traditionally, courts have recognized that government bodies stand on a different footing from private litigants, often citing public interest and financial stability as factors when granting relief. However, arbitration law aims to ensure a level playing field, preventing undue advantage to any party. The requirement of furnishing security before obtaining a stay serves as a safeguard against delays and frivolous challenges, particularly in cases involving monetary awards.
Position before 2015: Prior to the amendment act in 2015, if an application was filed under Section 34 of the arbitration act, the award was automatically stayed on filing of such application. In the case of National Aluminum Co. Ltd. v. Pressteel & Fabrications1 The Supreme Court had opined that this provision of automatic stay on execution of the award the moment a Section 34 application is filed was problematic and that it left no discretion whatsoever with the court. In the instant case, the court was not able to pass a favorable order against the stay of the award that had been delayed for 16 years but had hoped that the Parliament would make the necessary amendments to change the position.
The Law Commission in its 246th report had suggested changes to Section 36 of the Arbitration act.
Parliament brought an amendment in 2015.
Post the amendment, on an application to set aside the award under Section 34, the provision for automatic stay on execution of the award was removed.
The amended Section 36(3) now requires a party challenging the arbitral award, to file a separate application under Section 36(2) for stay of the said arbitral award and it is left to the discretion of the court whether to consider or reject such application and the reasons for the same are to be recorded in writing. This in effect means, the bar on execution of an award solely on a Section 34 application has been removed.
This issue also came up for consideration before the Hon’ble Calcutta High Court in the case of The Director General, National Library, Ministry Of Culture, Government Of India v. Expression 360 Services India Private Limited 2where the court disposed of an application filed by the Government of India under Section 36(2) of the Arbitration Act seeking unconditional stay on enforcement of the award.
The Calcutta High court rejected the contentions of the government that Order 27 Rule 8-A of the CPC shall be applicable in this case.
While Order XLI Rules 5 and 6 of the CPC provides that if an appellant fails to make the deposit or furnish the security specified in sub-rule (3) of rule 1, the Court shall not make an order staying the execution of the decree.
Order 27 Rule 8-A of the Cpc provides that no such security as is mentioned in Order XLI Rules 5 and 6 shall be required from the Government.
The Calcutta High Court relied on the judgment of the Supreme Court in Pam Developments Private Ltd. Vs. State of West Bengal3 in this regard and ordered the Government to deposit in order to seek a stay on execution of arbitral award.
This landmark judgment of the Supreme Court is thus essential to analyse.
Herein, the apex court discussed at length the argument against depositing security in a suit against the Union of India under Order 27 Rule 8-A of the Cpc.
It differentiated depositing of security as written in Order 27 Rule 8-A of the CPC from depositing a decretal amount in a money decree holding that Order 27 Rule 8-A of the CPC only exempts the government from depositing of security and not monetary amount.
The apex court clarified the extent to which the CPC can prevail over the Arbitration act.
The court observed that the phrase “having regard to” is used in Section 36(3) of the Arbitration Act, rather than “in accordance with the provisions of the CPC.” Therefore, it cannot be said that the court, while deciding an application seeking a stay on an award under the Arbitration Act, is strictly bound by the provisions of the CPC. Instead, the provisions of the CPC serve only as a guiding factor for the court in adjudicating the application and do not impose strict procedural requirements.
It further held that the Arbitration Act is a self-contained Act and that the provisions of the CPC will apply only insofar as the same are not inconsistent with the spirit and provisions of the Arbitration Act. Since Arbitration Act is a special Act which provides for quick resolution of disputes between the parties and in case an award passed against the Government is allowed to be stayed without furnishing security, the very purpose of quick resolution of dispute through arbitration would be defeated as the decree holder would be fully deprived of the fruits of the award on mere filing of objection Under Section 34 of the Arbitration Act.
On the question of the treatment of private parties and government entities in an arbitration proceeding, the apex court held that Section 18 of the Act makes it clear that the parties shall be treated with equality. It concluded that under the scheme of the Arbitration Act, no distinction is made nor any differential treatment is to be given to the Government, while considering an application for grant of stay of a money decree in proceedings under Section 34 of the Arbitration Act. Moreover, Sections 9 and 17 of the Arbitration Act also provide for grant of ex-parte interim orders against the Government.
Conclusion
The judgement of the Supreme Court in Pam Developments Pvt. Ltd. (supra) has settled the jurisprudence regarding the defence taken by government entities under the Cpc to avoid depositing security and has held that government entities cannot claim special exemption under Order 27 Rule 8-A when seeking a stay on an arbitral award. The court’s special dictum on the dilution of CPC provisions in the context of the Arbitration Act is highly pertinent, as the court views the Arbitration Act as a self-contained code. The recent judgment of the Calcutta High Court in the Expression 360 Services case (supra) heavily relies on established precedent, marking the beginning of the law’s settlement on this issue.This jurisprudence reinforces the principle of equal treatment of parties under Section 18 of the Arbitration Act, emphasizing that government bodies, like private litigants, must adhere to the same legal standards, thereby preventing delays in the enforcement of arbitral awards.
1(2004) 1 SCC 540
2AP-COM/860/2024, AP-COM/644/2024 and EC-COM/245/2024
3(2019) 8 SCC 112
