2022 (10) TMI 50 - SC - Indian Laws

Supreme Court emphasizes legal preconditions for interim orders under Arbitration Act

The Supreme Court allowed the appeal, setting aside the High Court and Commercial Court orders that directed the appellant to deposit performance bank ... Interim measures under Section 9 of the Arbitration and Conciliation Act, 1996 - preconditions of Order XXXVIII Rule 5 CPC for attachment before decree/award - invoked performance bank guarantees - security for enforcement of prospective arbitral award - deposit or undertakingInterim measures under Section 9 of the Arbitration and Conciliation Act, 1996 - invoked performance bank guarantees - preconditions of Order XXXVIII Rule 5 CPC for attachment before decree/award - Validity of the Commercial Court's order under Section 9(ii)(e) directing deposit of amounts of performance bank guarantees already invoked and paid by the bank - HELD THAT: - The Court held that orders under Section 9 of the Arbitration Act are essentially interim measures intended to secure the amounts in dispute. Where the performance bank guarantees had already been invoked and payments realised by the bank prior to the Section 9 order, the Commercial Court could not have directed deposit of those amounts unless the preconditions of Order XXXVIII Rule 5 CPC were satisfied. The Court emphasised that absent specific allegations supported by cogent material and prima facie satisfaction that the opponent was likely to defeat any future decree/award (for example by disposing of properties), the Commercial Court should not exercise Section 9 powers to require deposit. The existence of serious disputes on the merits regarding the amounts claimed militated against such an order in the circumstances of the case, and the Section 9 order could not be sustained. [Paras 4]The Section 9(ii)(e) order directing deposit of amounts of the performance bank guarantees already invoked and realised was quashed and set aside.Security for enforcement of prospective arbitral award - deposit or undertaking - interim measures under Section 9 of the Arbitration and Conciliation Act, 1996 - Procedure to protect parties' interests after quashing the Section 9 order - HELD THAT: - While setting aside the impugned orders, the Court directed a protective measure short of the deposit ordered below. It required the appellant to furnish an undertaking, supported by a board resolution, to the Commercial Court that any award passed in the arbitration will be honoured by the appellant subject to any challenge before a higher forum. The undertaking is to be filed within four weeks, thereby securing the respondent's interest without the invocation's deposit which the Court found unsustainable in the absence of Order XXXVIII Rule 5 CPC preconditions. [Paras 5]Appellant to file an undertaking backed by a company resolution before the Commercial Court within four weeks; appeal allowed and impugned orders quashed with no costs.Final Conclusion: The Section 9(ii)(e) order directing deposit of amounts of invoked performance bank guarantees was quashed for lack of satisfaction of Order XXXVIII Rule 5 CPC preconditions; appeal allowed subject to the appellant filing an undertaking backed by its company resolution to honour any award. Issues:1. Dismissal of appeal by High Court regarding deposit of performance bank guarantees.2. Validity of order under Section 9 of the Arbitration Act, 1996.3. Conditions for passing orders under Order XXXVIII Rule 5 of the CPC.Issue 1 - Dismissal of Appeal by High Court:The appellant appealed against the High Court's decision confirming the Commercial Court's order to deposit performance bank guarantees. The dispute arose from three purchase orders where the appellant claimed a loss due to defective cables supplied by the respondent. The respondent, in turn, claimed outstanding payment. The appellant invoked bank guarantees, leading to arbitration. The Commercial Court directed the appellant to deposit the guarantees, which had already been paid by the bank. The High Court upheld this decision, prompting the present appeal.Issue 2 - Validity of Order under Section 9 of the Arbitration Act, 1996:The Supreme Court found that the Commercial Court's order under Section 9 of the Arbitration Act, 1996 was not justified. The Court stated that unless specific conditions under Order XXXVIII Rule 5 of the CPC were met, such orders should not have been passed. The purpose of such orders is to secure the disputed amount, especially if there is a risk of defeating a future decree or award. In this case, the Court noted serious disputes on the claimed amounts, which should be resolved through arbitration.Issue 3 - Conditions for Passing Orders under Order XXXVIII Rule 5 of the CPC:The Court emphasized that orders under Section 9 of the Arbitration Act, 1996 are interim measures. They should only be passed if all conditions of Order XXXVIII Rule 5 of the CPC are satisfied, and there is evidence that one party may try to defeat a future award. In this case, the Commercial Court's order was deemed premature as the preconditions were not met. The Court quashed the High Court and Commercial Court's orders but directed the appellant to provide an undertaking to honor any future award.In conclusion, the Supreme Court allowed the appeal, setting aside the previous orders. The Court stressed the importance of meeting legal preconditions before passing such interim orders, highlighting the temporary nature of measures under Section 9 of the Arbitration Act, 1996.