Level Playing Field : No Preference to Government in Enforcement of Awards in Democratic India

In a recent judgment, Pam Developments (P) Ltd. v. State of W.B.1, the Supreme Court has ruled that in the event of an award-debtor Government filing an application under Section 34 of the Arbitration and Conciliation Act, 1996 (ACA) for stay of the award made against it, the Government is not entitled to any preferential treatment, rather it has to be treated like any other ordinary aggrieved party.

 

Under the Civil Procedure Code, 1908 (CPC), the normal rule for ordinary parties in civil suits in courts of law is that any judgment-debtor seeking interim relief from a money decree made against him is required to furnish a security for the due performance of the decree while applying in the appellate court for stay of the judgment and decree made against it. It is a pretty strict rule of civil procedure. The underlying reason is understandable, namely, to secure the interest of the winning party as against any default or delay in the satisfaction of the decree by the losing party in the event of the appeal being dismissed. However, a certain provision in CPC itself also provides for an exemption from that normal rule when the Government is the judgment-debtor. That provision, Order 27 Rule 8-A, basically of British colonial vintage, treats the Government as a relatively solvent and, therefore, the superior party not expected to act with default or delay in the payment of a money decree affirmed in appeal against it and thus gives relaxation to the Government in the matter of furnishing security.

 

ACA does tend to follow CPC to quite some extent in matters of procedure. But in Pam Developments1, the Supreme Court has departed from the provisions of CPC holding that in arbitration matters no such exemption or relaxation is available when the Government is the award-debtor. The court has cemented its ruling by holding that in an arbitration in India all parties should be treated equally. That is an ideal already envisaged under Section 18 of ACA viz. Equal treatment of parties. —The parties shall be treated with equality …’.

 

The Factual Context

On the facts of the case, an award had gone in favour of the claimant and against the West Bengal Government. On the Government’s application for setting aside and stay of the award under Section , the Calcutta High Court granted2 an unconditional stay to the Government without the Government being made to furnish any security or deposit of the decretal amount. This was done on the ground of Order 27 Rule 8-ACPC which exempts the Government from furnishing any security if stay is to be granted in its favour in an appeal filed by it against a money decree. In the appeal filed by the award-creditor against the High Court’s order, the Supreme Court in Pam Developments1 has reversed the order given by the Calcutta High Court. It has laid down the principle of not giving under Section 34 of ACA any special or differential treatment to the Government upon grant of stay of an award and money decree passed against it. Thereby, the Supreme Court has rendered the arbitral remedy in India to be a much more firm and decisive remedy by considering both the parties, the citizen (subject) and the Government (sovereign) as equals and on a par with each other.

 

The Legal Context

The case in Pam Developments1 primarily revolved around Section 36(3)ACA which provides for the court to have due regard to the provisions of CPC while deciding an application for stay of an award under Section 36(2).

 

Section 36(3) of ACA provides:

36.(3) Upon filing of an application under sub-section (2) for stay of the operation of the arbitral award, the court may, subject to such conditions as it may deem fit, grant stay of the operation of such award for reasons to be recorded in writing:

Provided that the court shall, while considering the application for grant of stay in the case of an arbitral award for payment of money, have due regard to the provisions for grant of stay of a money decree under the provisions of the Code of Civil Procedure, 1908 (5 of 1908).

 

As pleaded by the aggrieved Government, the Supreme Court first tackled the issue of unconditional stay. The court unraveled the decision in BCCI v. Kochi Cricket (P) Ltd.3 that has dealt with the question of unconditional stay in the wake of the 2015 Amendment in ACA. In the pre-amendment scenario prior to the 2015 Amendment, Section had provided for an automatic and unconditional stay of enforcement of an award until the expiry of time-limit for challenge of the award under Section or, after the filing of an application for such challenge, until the disposal of such a challenge by the court. Under the of 2015, that provision was deleted and a new provision was made to the effect that such stay could only be granted upon an application being made to the court and the court would have power to grant the stay only subject to certain conditions and having due regard to the CPC provisions. The furnishing of security and/or making a deposit of the decretal amount as per the CPC provisions would, therefore, be an obvious condition. The dispute in BCCI3 arose with regard to the question whether the 2015 Amendment with its new package of conditions would apply even to awards which had been made from before the enforcement of the 2015 Amendment. The Supreme Court in BCCI3 held that the amended Section , being procedural in nature, would apply retrospectively even to awards that had been made and applications under Section that had been filed prior to the commencement of the . In essence, the Court in BCCI3, not only endorsed the legislative abandonment of the concept of automatic stay on an application under Section but also made the said abandonment retrospectively applicable to pre-amendment awards.

 

Developing the BCCI3 theme further, now in Pam Developments1, the Supreme Court has taken a cue from the 246th Law Commission Report which recommended that there should be no automatic stay of an arbitral award on the mere filing of a petition challenging an award and has refused to carve any exception for the Government as an award-debtor.

 

The Law Commission in the said Report had actually relied on a previous judgment of the Supreme Court. Back in the year 2004, in NALCO v. Pressteel & Fabrications (P) Ltd.4, the Supreme Court itself had observed that the automatic suspension of execution of an award, the moment an application under Section is filed, defeats the very object of the alternative dispute resolution system. Endorsing that point of view, the court has now in Pam Developments1 rejected at the very outset, the Government’s claim of an unconditional stay.

 

Thus, taking aid from the 2015 Amendment, the Law Commission recommendation, and an earlier suggestion made by itself, the court has subjected the Government in Pam Developments1 to furnish security or make deposit of the decretal amount like any other ordinary litigant and award-debtor and refused to give to the Government the higher status it has traditionally enjoyed in civil matters in courts.

 

Exploring ‘Discretion’ of the Court Under Provisions of CPC

Although ACA and CPC stand on different footings, Section 36(3) of ACA has given CPC a privileged place by demanding it (CPC) to be given due regard while granting stay of a money decree. For a long time, it had been believed that the “due regard” expression implied a blind application of CPC to all arbitration proceedings. However, in Pam Developments1, the Court has abandoned the myth that CPC applies to Section 36(3) of ACA mechanically in all its aspects. It has held that ACA is a self-contained Act. Hence, in proceedings under ACA, the provisions of CPC apply to arbitration applications in the court only insofar as the same are not inconsistent with the spirit and provisions of ACA. The Court has held that the expressions “having due regard” used in the proviso to Section 36(3) of ACA in relation to provisions of grant of stay of a money decree under CPC would only mean that the provisions of CPC are only to be taken into consideration by the court, not that they are mandatory for the court to follow while passing the order. The verdict has the effect of declaring that the provisions of CPC are merely directory and guiding in nature in the context of arbitration applications in court. The provision regarding imposition of conditions while granting stay against an award cannot be construed in such a manner that it takes away the power conferred on the court under Section .

 

The Court in this context, has followed the dictum in Shri Sitaram Sugar Co. Ltd. v. Union of India5. In that case, the Court held that the expression “having due regard” is not strictly mandatory but in essence a directory provision made as a legislative instruction for the general guidance of the Government in determining the price of sugar. Likewise, the Court in Pam Developments1 has drawn an inference that CPC provisions do not apply to ACA completely or mechanically. Thereby the sanctity of ACA has been kept alive and intact by the Supreme Court.

 

Highlighting the importance of discretion being granted to the court, the Supreme Court in Pam Developments1 has also followed the ruling in Union of India v. Amitava Paul6. The High Court in Amitava Paul6 held that:

… Under such circumstances, when the Court chooses to exercise its discretion in favour of the appellant State to grant stay of execution of a money decree it must balance the equities between the parties and ensure that no undue hardship is caused to a decree-holder due to stay of execution of such decree. Hence, in appropriate cases, the Court in its discretion may direct deposit of a part of the decretal sum so that the decree-holder may withdraw the same without prejudice and subject to the result of the appeal. Such direction for deposit of the decretal sum is not for the purpose of furnishing security for due performance of the decree but an equitable measure ensuring part satisfaction of the decree without prejudice to the parties and subject to the result of the appeal as a condition for stay of execution of the decree. …To hold that the Court is denuded of such equitable discretion while granting stay of execution of a money decree in favour of the Government, would cause grave hardship to deserving decree-holders who in the facts of a given case may be entitled to enjoy part satisfaction of the decree without prejudice and subject to the result of the appeal as a condition for stay of execution of the entire decree.7

(emphasis supplied)

The key elements of the ruling in Amitava Paul6 showcase the requirement and imminent need of the equitable measure to balance the scales of justice between the parties so as to ensure part satisfaction of the decree without causing prejudice to either of the parties. This balance can only be determined by the courts who have been vested with the power to do so. In Pam Developments1, the Supreme Court has held that Section of the amended Act stipulates that if stay is to be granted under application of Section , then it shall be “subject to such conditions as it (the court) may deem fit”. The phrase “subject to such conditions as the court may deem fit” clearly establishes the court’s discretion to decide the manner in which and conditions subject to which the court desires to grant stay. The expression “the Court may deem fit” coupled with the expression “having due regard” clearly shows that the legislative intent is not to mandatorily compel the court under ACA to apply the provisions of CPC but only to remind the court to keep the CPC principles in mind and use its discretion when it deems their application necessary.

 

A Republican Arbitral Ecosystem

The Court in Pam Developments1, not only diluted the provisions of CPC as being merely guiding in nature and in no manner taking away discretion from the courts under ACA but also went a step ahead and examined as many as three provisions of CPC viz. Order 27 Rule 8-A, Order 41 Rule 1(3) and Order 41 Rule 5(5). These three provisions read together on the face of it supported the case of the Government. However, the Court examined the three provisions individually as well as in unison and came to the conclusion that the Government is to be treated like any other private party in the event of an application for stay of award being filed by it under Section 36 of ACA. The three provisions are reproduced below:

 

Order 27 Rule 8-A.

8-A. No security to be required from Government or a public officer in certain cases.—No such security as is mentioned in Rules 5 and 6 of Order XLI shall be required from the Government or, where the Government has undertaken the defence of the suit, from any public officer sued in respect of an act alleged to be done by him in his official capacity.

 

Order 41 Rule 1(3).

  1. Form of appeal.—(1)-(2) * * *

(3) Where the appeal is against a decree for payment of money, the appellant shall, within such time as the Appellate Court may allow, deposit the amount disputed in the appeal or furnish such security in respect thereof as the Court may think fit.

(emphasis supplied)

 

Order 41 Rule 5(5).

  1. Stay by Appellate Court.—(1)-(4) * * *

(5) Notwithstanding anything contained in the foregoing sub-rules, where the appellant fails to make the deposit or furnish the security specified in sub-rule (3) of Rule , the Court shall not make an order staying the execution of the decree.

(emphasis supplied)

 

The Supreme Court read the three provisions i.e. Order 27 Rule 8-A, Order 41 Rule 1(3) and Order 41 Rule 5(5) harmoniously and reached the conclusion that the Government cannot be given preferential treatment as Order 27 Rule 8-A does not provide in any way that the Government is to be exempted from depositing the decretal amount. The award-debtor Government contended that Order 27 Rule 8-A applies to the present case and therefore unconditional stay should be given to it. It argued that reading Order 27 Rule 8-A along with Order 41 Rule 1(3), the expression “subject to such conditions” mentioned under Section 36(3) of ACA gives the court complete discretion to grant stay subject to such conditions as it deems fit. The Government forged its defense under the garb of the assurance that since the Government, unlike private parties, is considered to be solvent and is expected to honor the decree made against it, it (the Government) would not avoid enforcement of the final decree and thus the award necessarily needs to be stayed when the Government is the award-debtor.

 

On the other hand, the award-creditor, the appellant in the present case, pleaded that Order 27 Rule 8-A does not exempt the Government from depositing the decretal amount but only exempts it from furnishing security. The appellant contended that Order 41 Rule 5(5) underlines rather unequivocally the court’s power to refuse stay in the event of the judgment-debtor failing to make the deposit of the money decree against it.

 

The Supreme Court in Pam Developments1 has agreed with the award-creditor on two counts : first, as explained above, on a purely textual and plain reading, the Court held that Order 27 Rule 8-A exempts the Government only from furnishing security and nothing more than that. Second, and most significantly, the Court took a historical perspective of the provisions, and seems to have been impressed by the fact that Order 27 Rule 8-A giving the Government (the British Crown) immunity from furnishing security was inserted in CPC by the British colonial rulers of India in 1937 whereas sub-rule (5) in Order 41 Rule 5 restraining the court from granting any stay of decree unless the judgment-debtor either furnishes security or deposits the decretal amount was inserted in CPC by Parliament of independent India in 1977. The Court has elaborated that after insertion of sub-rule (5) in Order 41 Rule 5 in 1977, there has been no amendment in Order 27 Rule 8-A which means that Order 27 Rule 8-A does not exempt the Government from making the deposit which the court now has the power to direct under Order 41-Rule 5(5).

 

Thereby, the Court has ruled that the “archaic” principle of the Government standing at a higher pedestal than an ordinary litigant and award-debtor stands rejected in the context of the arbitral remedy in India. Under the scheme of the , 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 . The Government and private entities/individuals are to be considered as equals and in an appeal by the Government against a money decree passed against it, the Government is bound to furnish security or deposit the decretal amount awarded against it. Order 27 Rule 8-A was incorporated in 1937 during the British Raj, giving certain safeguards to the Government. The Court has held that this principle is not applicable anymore “in today’s time when we have a democratic Government” in the country.

 

The Court by invoking Section 18 of ACA which commands that all parties shall be treated equally has moved towards a fair, equitable and just arbitral ecosystem and illustrated the judiciary’s determination to treat all parties equally.

 

The judgment in Pam Developments1 thus underlines the “rule of law” in the “democratic republic” of India. It brings the Indian arbitral process as well as the Indian court system much closer to the desired international standard of fair and equal treatment to all parties in a dispute. It should serve as a great re-assurance to all spectators of foreign investment who have been seeking a “level playing field” in international and even domestic commercial arbitrations in India.

 

Post Script

The 2015 Amendment Act sought to set right what was perceived to be an aberration in the original ACA, namely, the presence of the automatic stay regime in Section . It was a big reform. The Supreme Court by its dictum in BCCI3 gave that reform a greater impetus by clarifying that the cessation of automatic stay regime by the 2015 Act would apply also to arbitral and court proceedings that had commenced before the commencement of the 2015 Act. But strange are the ways of Parliament and politicians who brought an end to the reform by a fresh amendment in ACA by an Amendment Act in August 2019. The 2019 Amendment inserted Section 87 in ACA which declared that the cessation of automatic stay regime would not govern the arbitral and court proceedings which had commenced before the commencement of the 2015 Act. This new development clearly gave a jolt to the arbitration world. Many award-creditors who were about to benefit from the reform of the 2015 Amendment were left high and dry. They would either not be paid the decretal amount or, worse, may even have to refund the sum, if they had received any from the award-debtor on account of the 2015 reform. Various such award-creditors led by Hindustan Construction Company challenged the insertion of Section 87 in ACA by the 2019 Act. The Supreme Court heard and decided the issue with lightning speed in Hindustan Construction Co. Ltd. v. Union of India8 declaring that, in the first place, it was a misconception that (even) in the original ACA there was any automatic stay regime and secondly, in any case, Section was a manifestly arbitrary step which had put the highly conducive 2015 reform on the back-burner. The Court held the 2019 change to be contrary to public interest and working in the reverse direction. In the words of the Court:

  1. 56. … The retrospective resurrection of an automatic-stay not only turns the clock backwards contrary to the object of the Arbitration Act, 1996 and the 2015 Amendment Act, but also results in payments already made under the amended Section to award-holders in a situation of no-stay or conditional-stay now being reversed.9

 

With the above ruling of the Supreme Court within weeks of the 2019 Amendment, the cloud of confusion and uncertainty that had come to hang over the salutary effects of the 2015 Amendment has been removed. But for the HCC7 ruling, who knows, the award-debtor Government of West Bengal in Pam Developments1 would have been able to escape the order of deposit made against it by the court. So, Pam Developments, stands out as the finally triumphant party notwithstanding the 2019 attempt of Parliament to deprive it of the fruits of its award. Arbitration in India continues on fast track with all the hope and promise of a speedy legal remedy and an effective alternative dispute resolution mechanism.


**The article has been published with kind permission of Eastern Book Company. Cite as (2020) 4 SCC J-41

Manavendra Gupta, Advocate. Associate, Shardul Amarchand Mangaldas & Co.

1 (2019) 8 SCC 112.

2 State of W.B. v. Pam Development (P) Ltd., 2018 SCC OnLine Cal 14141.

3 (2018) 6 SCC 287.

4 (2004) 1 SCC 540.

5 (1990) 3 SCC 223.

6 2015 SCC OnLine Cal 872.

7 Ibid.

8 2019 SCC Online SC 1520.

9 Id, para 56.

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