Summary
In a dispute over defective cables, the buyer invoked the supplier's performance bank guarantees, which were paid, and then started arbitration. On the supplier's Section 9 application, the Commercial Court ordered the buyer to deposit the encashed sums in court, and the Gujarat High Court agreed. The Supreme Court set the order aside. Securing the amount in dispute under Section 9(ii)(e) of the Arbitration and Conciliation Act is an interim measure governed by Order XXXVIII Rule 5 CPC. It needs specific allegations and cogent material showing, prima facie, that the other party is likely to defeat the award. Nothing of the kind was shown, and the claims were seriously disputed. The buyer was instead to give an undertaking, backed by a board resolution, to honour any award.
Issues
- Whether a court acting under Section 9(ii)(e) of the Arbitration and Conciliation Act could direct a party to deposit the amounts it had realised by invoking bank guarantees, without the conditions of Order XXXVIII Rule 5 CPC being satisfied.
- What protection should replace the deposit order pending arbitration.
Provisions considered
- Section 9(ii)(e), Arbitration and Conciliation Act, 1996Interim measures to secure the amount in dispute are governed by the principles of attachment before judgment. They require a prima facie showing that the respondent is trying to defeat a likely award. (¶¶ 3, 4, 4.1)
- Order XXXVIII Rule 5, Code of Civil Procedure, 1908Unless its conditions are met, backed by specific allegations and cogent material about conduct aimed at frustrating the award, a court cannot order a party to deposit or secure the disputed amount. (¶¶ 4, 4.1)
- Section 13, Commercial Courts Act, 2015Under this provision the High Court heard the appeal from the Commercial Court's Section 9 order and wrongly affirmed the deposit direction. (¶ 3)
Held
- The guarantees had already been invoked and paid by the bank well before the Section 9 order. The Commercial Court's direction to deposit those sums was in substance an order to secure the amount in dispute under Section 9(ii)(e). (¶¶ 3, 4)
- Such an order cannot be made unless the conditions of Order XXXVIII Rule 5 CPC are satisfied, with specific allegations, cogent material and prima facie satisfaction that the opposite party is likely to defeat the award by disposing of its property or otherwise. The amounts claimed by both sides were also seriously disputed and were for the tribunal to decide. (¶¶ 4, 4.1)
- To protect both sides, the appellant was directed to file before the Commercial Court, within four weeks, an undertaking backed by a board resolution to honour any arbitral award, subject to its right to challenge the award. (¶ 5)
Result
Appeal allowed. The Commercial Court's order of 13.10.2021 directing deposit of the encashed guarantee amounts, and the High Court's judgment affirming it, were set aside. The appellant was to file within four weeks an undertaking, backed by a board resolution, to honour any award. No costs.