In a recent judgment, the Supreme Court of India modified an order from Madras High Court, which had granted a stay on the execution of an arbitral award. The high court had imposed a condition requiring the party, a statutory authority, to merely furnish a bank guarantee equivalent to the awarded amount, rather than directing the deposit of a portion of the awarded sum in court.
The Supreme Court held that such relief should not be granted solely based on the party’s status as a statutory authority.
The Supreme Court was deciding an appeal arising from an interim order of the Madras High Court, which stayed the execution of an arbitral award dated 7 March 2024. The award directed the respondent to pay INR210 million (USD2.4 million) with interest and costs to the appellant. The stay was granted on the condition that the respondent would furnish a bank guarantee for the principal amount, having regard to the respondent’s status as a statutory authority, as it was not “a fly-by operator”.
The appellant challenged this order, contending that, under the law, the respondent should have been directed to deposit the awarded amount in court as a condition for the stay.
The Supreme Court observed that the high court had declined to issue orders concerning the interest and costs awarded to the appellant, citing the respondent’s status as a statutory undertaking and “not a fly-by operator”.
The Supreme Court held that arbitration law cannot be applied differently based on the respondent’s status as a statutory entity. Referring to Pam Developments Private Limited v State of West Bengal, the court reiterated that arbitration law provides no special treatment to governmental bodies regarding stay applications. It also emphasised the mandate of equal treatment of parties, confirming that no exceptional leniency can be extended to the government in such matters.
The court criticised the high court for failing to consider, even prima facie, that the arbitral award covered claims beyond the issue of CESS (Central Excise and Service Tax). It held that the high court erred in basing its decision on the respondent’s status as a statutory authority.
The Supreme Court clarified that the Arbitration Act is a self-contained code that does not distinguish between governmental and private entities. The status or reliability of a party, whether governmental or private should not influence the conditions for granting a stay.
Further, the court highlighted that subjective assessments, such as a party being “not a fly-by operator”, are inappropriate as private entities could also claim similar credibility based on size, success or public image. In the absence of any statutory provision to this effect, courts must refrain from applying such standards. The form of security required for a stay must not depend on whether the party is a government body or a private entity.
The court concluded that governmental entities should be treated like private parties in arbitration proceedings, except where the law explicitly provides otherwise. Since the parties had knowingly entered into commercial transactions with full awareness of the legal implications, the argument that the high court was correct in allowing a bank guarantee solely because the respondent was a statutory body was rejected.
The Supreme Court observed that courts possess the authority to direct either a full or partial deposit, or the furnishing of security concerning the decreed amount. Considering the guiding principles applicable to such cases, the Supreme Court modified the high court’s order, directing the respondent to deposit 75% of the decreed amount, inclusive of interest.
The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at support@numenlaw.com. Readers should not act on the basis of this information without seeking professional legal advice.
