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Global Company. v. National Fertilizers Ltd
Factual and Procedural Background
The petitioner filed a petition on January 16, 1998 under Section 9(ii) of the Arbitration and Conciliation Act, 1996, seeking an interim measure for the respondent to furnish security for US$ 88,250 plus interest at 9% per annum, pursuant to an arbitral award dated December 31, 1997. The arbitral tribunal, consisting of arbitrators appointed by both parties and a presiding arbitrator, had awarded this sum to the petitioner. The respondent replied denying the necessity of such security, contending that the arbitrators lacked jurisdiction since no valid contract existed and asserting a bona fide ground to challenge the award. The petitioner relied on the award and its dispatch to the respondent, while the respondent had not filed any application to set aside the award under Section 34 of the Act within the statutory period. The court heard arguments and considered the provisions of the Arbitration and Conciliation Act, 1996, as well as relevant provisions from the repealed Arbitration Act, 1940, and the Code of Civil Procedure, 1908, to decide on the interim relief sought.
Legal Issues Presented
- Whether the petitioner is entitled to an interim measure under Section 9(ii)(b) of the Arbitration and Conciliation Act, 1996, directing the respondent to furnish security for the amount awarded by the arbitral tribunal.
- Whether the respondent can resist such an interim relief on the ground of having a bona fide challenge to the arbitral award without filing an application under Section 34 of the Act within the prescribed time.
- What legal principles and precedents govern the grant of interim security in arbitration proceedings under the current Act, especially in the absence of explicit guidelines.
Arguments of the Parties
Petitioner's Arguments
- The petitioner relied on the arbitral award dated December 31, 1997, which awarded US$ 88,250 plus interest at 9% per annum.
- The petitioner sought protection of its financial interest by requesting the court to direct the respondent to furnish security for the awarded amount.
- The petitioner placed on record a copy of the award and covering letter showing the award was sent to the respondent on December 31, 1997.
Respondent's Arguments
- The respondent argued that the arbitrators lacked jurisdiction as no valid contract was concluded between the parties.
- The respondent challenged the award on bona fide grounds and denied the necessity of furnishing security.
- The respondent did not file any application under Section 34 of the Act to set aside the award within the prescribed period.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Section 9(ii) of the Arbitration and Conciliation Act, 1996 | Empowers the court to grant interim measures of protection, including securing the amount in dispute in arbitration. | Formed the statutory basis for the petition seeking interim security. |
| Section 34 of the Arbitration and Conciliation Act, 1996 | Provides the time limit and procedure for setting aside an arbitral award. | Used to determine that the respondent had not challenged the award within the prescribed period, weakening their objection. |
| Section 18(1) of the Arbitration Act, 1940 | Confers discretionary power to pass interim orders directing a party to furnish security to prevent defeat, delay, or obstruction of decree execution. | Applied analogically to guide the exercise of power under Section 9(ii)(b) of the 1996 Act in absence of explicit guidelines. |
| Section 41(b) of the Arbitration Act, 1940 | Empowers courts to make orders similar to those under the Code of Civil Procedure in relation to arbitration proceedings. | Supported the court’s view that procedural principles from CPC could inform interim relief under the Arbitration Act, 1996. |
| Rule 5 of Order XXXVIII CPC | Provides conditions under which a court may direct a defendant to furnish security to prevent obstruction or delay in execution of decree. | Referenced to emphasize the requirement of intent to obstruct or delay as a condition for furnishing security. |
Court's Reasoning and Analysis
The court first noted the procedural history and the undisputed fact that the arbitral award was communicated to the respondent on December 31, 1997. Since the respondent had not filed any application to set aside the award within the three-month period prescribed under Section 34 of the Arbitration and Conciliation Act, 1996, the court held that the respondent could not resist the petition on the ground of a bona fide challenge. The court then examined the scope of Section 9(ii)(b) of the Act, which allows for interim measures to secure the amount in dispute, but found that the statute does not specify the circumstances under which security can be ordered.
To fill this gap, the court referred to provisions of the repealed Arbitration Act, 1940—specifically Sections 18(1) and 41—and Rule 5 of Order XXXVIII of the Code of Civil Procedure, 1908. These provisions collectively empower courts to order security where there is a risk that a party may obstruct or delay execution of a decree. The court emphasized that such orders require a demonstration of intent to obstruct or delay by the respondent, which must be established on the facts.
Considering the respondent is a Government of India undertaking and that the petitioner’s only ground was the protection of financial interest without adequate material indicating a real danger of obstruction, the court concluded that it could not legally direct the respondent to furnish security. Therefore, the petition for interim relief was dismissed.
Holding and Implications
The court’s final decision is DISMISSED the petition filed under Section 9(ii)(b) of the Arbitration and Conciliation Act, 1996, seeking an order directing the respondent to furnish security for the arbitral award amount and interest.
The direct effect of this decision is that no interim security was granted to the petitioner. The court clarified that such relief requires adequate material demonstrating a real risk of obstruction or delay in execution, particularly when the respondent is a Government entity. No new precedent was established; rather, the court applied existing principles from prior legislation and procedural codes to interpret the current Act’s provisions governing interim relief.
K.S Gupta, J.— In this petition filed on January 16, 1998 under Section 9(ii) of the Arbitration and Conciliation Act, 19% (for short ‘Act’), it is inter-alia alleged that the petitioner moved A.A.NO 42/96 under Sections 8 & 11 of the Act. By the order dated October 17, 1996 said petition was disposed of and the arbitrators by both the parties were duly appointed. Arbitrators, namely, Justice R.P Bhat (Retd.) nominee of the petitioner and Sh. V. Kumar, nominee of the respondent in turn appointed and Justice Avadh Behari Rohtagi (Retd.) as the presiding arbitrator. The arbitrators have made the award dated December 31, 1997 and have awarded to the petitioner US$ 88,250 together with interest @ 9% p.a from December 27, 1995. Financial interest of the petitioner for that amount needs to be protected. It is prayed that respondent be directed to furnish security for US$ 88,250/- plus interest @ 9 % p.a in terms of the arbitral award dated December 31, 1997
It the reply it is, inter-alia, alleged that the arbitrators after having reached the conclusion that no valid contract was concluded between the parties, ought not have exercised jurisdiction in awarding US$ 88,250 with interest at the exhorbitant rate of 9% p.a and the respondent has a bonafide ground to challenge the award. It is denied that any order is required to be passed for securing the said amount as claimed.
I have heard the learned counsel of the parties.
Under Section 34 of the Act, application for setting aside arbitral award can be filed within three months of the receiving of the arbitral award and therafter delay of 30 days in making such an application can be condoned on sufficient cause being shown by the court. Petitioner has placed on record the photostat copies of the said award alongwith covering letter Annexure-1. Annexure-1 goes to show that a signed copy of the award in terms of Section 31 (5) of the Act was simultaneously sent to the respondent by the arbitrators on December 31, 1997 itself. Respondent being located in New Delhi must have received the copy of the award within 2-3 days of the dispatch thereof by the arbitrators. Admittedly, even after lapse of more than 4 1/2 months of the making of the award the respondent has chosen not to file any application under aforesaid Section 34 of the Act for setting it aside. That being so, respondent cannot resist the present petition on the ground of having a bonafide ground to challenge the award as pleaded in the reply.
This brings me to the crucial point if the petitioner by way of interim measure can be granted the relief sought for. Section 9 of the Act under which the petition has been filed, read as under:—
“A party may, before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with Section 36, apply to a court:—
(i) for the appointment of a guardian for a minor or a person of unsound mind for the purpose of arbitral proceedings; or
(ii) for an interim measure of Protection in respect of any of the following matters, namely:—
(a) the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement;
(b) securing the amount in dispute in the arbitration;
(c) the detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any part, or authorising any samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence;
(d) interim injunction or the appointment of a receiver.
(e) such other interim measure of protection as may appear to the court to be just and convenient,
and the Court shall have the same power for making orders as it has for the purpose of and in relation to, any proceedings before it.
Obviously, said Section is silent as to the circumstances under which a respondent can be asked to furnish security for securing the amount in dispute in the arbitration.
Sections 18 (1) and 41 of the Arbitration Act, 1940 and Rule 5 of Order XXXVIII CPC contain provisions for furnishing security and are relevant for deciding the issue at hand.
Said Section 18 (1) reads-
“Notwithstanding anything contained in Section 17, at any time after the filing of the has been award, whether notice of the filing has been served or not, upon being satisfied by affidavit or otherwise that a party has taken or is about, to take steps to defeat, delay or obstruct the execution of any decree that may be passed upon the award, or that speedy execution of the award is just and necessary, the court may pass such interim orders as it deems necessary.”
Section 41 runs as under-
“Subject to the provisions of this Act and of rules made thereunder-
(a) the provisions of the Code of Civil Procedure, 1908, shall apply to all proceedings before the court, and to all appeals, under this Act, and
(b) the court shall have, for the purpose of, and in relation to, arbitration proceedings, the same power of making orders in respect of any of the matters set out in the Second Schedule as it has for the purpose of, and in relation to, any proceedings before the Court:
Provided that nothing in clause (b) shall be taken to prejudice any power which may be vested in an arbitrator or umpire for making orders with respect to any of such matters.
Both the aforesaid sections operate in separate spheres. Section 18 (1), amongst others, confers discretionary power to pass interim order directing the respondent, to furnish security for the satisfaction of the decree at any time after the filing of the award in court on the fulfillment of the conditions noted in that sub-section, Section 41 (b) read with para 2 of the IInd schedule empowers the court to pas order for securing the amount of difference not only when the proceedings are pending before it but also when they are pending before the arbitrator(s). The practice and procedure of the court in issuing interim injunction or attachment before judgment would be equally applicable in such cases.
Rule 5 of aforesaid Order XXXVIII CPC provides thus:—
“(1) Where at any stage of a suit, the Court is satisfied, by affidavit or otherwise, that the defendant, with intent to obstruct or delay the execution of any decree that may be passed against him-
(a) is about to dispose of the whole or any part of his property, or
(b) is about to remove the whole or any part of his property from the local limits of the jurisdiction of the Court.
the Court may direct the defendant, within a time to be fixed by it, either to furnish security, in such sum as may be specified in the order, to produce and place at the disposal of the Court, when required, the said property or the value of the same, or such portion thereof as may be sufficient to satisfy the decree, or to appear and show cause why he should not furnish security.
(2) The plaintiff shall, unless the Court otherwise directs, specify the property required to be attached and estimated value thereof.
(3) The Court may also in the order direct the conditional attachment of the whole or any portion of the property to be specified.
(4) If an order of attachment is made without complying with the provisions of sub-rule (1) of this rule, such attachment shall, be void.”
For passing an order under the aforesaid provision the intention of the defendant is sine qua non. The question of intent alleged by the plaintiff is to be determined having regard to the particular facts and circumstances of the case.
It is true that the said Arbitration Act, 1940 stands repealed by the Act of 1996 and the Provisions contained in the Code of Civil Procedure are not applicable to the proceedings under the Act, still, in opinion, in the absence of guidelines how the power for grant of relief under Section 9(ii) (b) is to be exercised by the Court, the principles underlaying the aforesaid sections are to be applied. It is only on adequate material being supplied by the petitioner that the Court can form opinion that unless the jurisdiction is exercised under the said Section 9 (ii) there is real danger of the respondent defeating, delaying or obstructing the execution of the award made against it. On the basis of the only ground of protection of financial interest of the petitioner taken in para No. 6 of the petition, the respondent, a Govt. of India Undertaking cannot be legally directed to furnish security for the amount of US$ 88,250 together with interest @ 9% p.a Petition thus deserves to be dismissed.
Consequently, the petition is dismissed. No order as to costs.
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