While Adjudicating On Challenges Against Arbitral Tribunals' Orders U/S 17 Of A&C Act, Court Not Strictly Bound By O.38 & O.39 CPC: Delhi HC

The court observed that interference with such orders is limited to cases where the orders are "perverse or manifestly arbitrary." The court found no fault with the tribunal's reduction of the security amount and requirement of robust security and held that such security was an interim measure and not a final determination of liability.

Brief Facts:

The arbitration proceedings arose from a Research and Collaboration Agreement dated 01.07.2017 which was for 5 years (20 quarters). Under the agreement, quarterly royalty payments were to be made to the respondent for the sales of 'Covered Devices' sold by appellant.

The appellant was ordered to pay Rs. 47.18 crores in an earlier arbitration. The award was challenged. During the pendency of the proceedings, the respondent filed a Section 9 petition to seek security of Rs.11.31 crore towards royalty for the 6th to 8th Quarters. The Section 9 petition was treated as a Section 17 application and disposed of by a consent order on 02.03.2020. Another Section 17 application was made for security relating to royalty for the 9th to 11th Quarters. On 10.01.2021, the tribunal directed the appellant to furnish security in the form of a cheque for the same amount as in the earlier order. The tribunal rejected the respondent's request to enhance the security amount and change in the nature of the security.

The appellant filed the appeal under Section 37(2)(b) of the Act challenging the two orders passed by the arbitral tribunal. The first order (dated 26.05.2024) required the appellant to furnish security of Rs. 62.154 crores for the 12th to 20th quarters. The second order (dated 03.08.2024) rejected the appellant's offer of security in the form of a cheque and a corporate guarantee. The appellant was given 15 days to furnish robust security such as a bank guarantee.

Contentions of the Appellant:

• The orders which enhanced the quantum of security and changed the form of security from a cheque to robust security were passed without regard to the principles underlying Order XXXVIII Rule 5 of CPC.
• The impugned orders were devoid of reason.

Observations:

1. On Scope of interference under Section 37(2)(b)

The court observed that the scope of interference with orders under section 17 is limited. Interim orders passed by an arbitral tribunal can only be challenged if they are "perverse” or “manifestly arbitrary”.

In this regard, the court referred to Dinesh Gupta v. Anand Gupta [2020 SCC OnLine Del 2099], where it was observed that:

“The power of the arbitrator to direct the furnishing of security is not in question under sub-clause (b) of Section 17(1)(ii) of the 1996 Act. The arbitrator's decision to secure the amount in dispute is within the scope of his authority, and judicial interference is limited to instances where the arbitrator's decision is found to be in violation of the law or manifestly arbitrary.”

The court also referred to Sanjay Arora v. Rajan Chadha [2021 SCC OnLine Del 4619], wherein the court had observed, “It is only where the order suffers from patent illegality or perversity that the court would interfere under Section 37(2)(b).”

2. Application of Order XXXVIII Rule 5 of the CPC

The court observed that the powers under Section 9 of the Act are broad in nature and not strictly bound by Order XXXVIII and XXXIX of CPC in Essar House (P) Ltd. v. Arcellor Mittal Nippon Steel India Ltd. [2022 SCC OnLine SC 1219] and Ajay Singh v. Kal Airways Private Limited [2017 SCC OnLine Del 8934]. The court noted that these provisions serve as valuable guiding principles.

The court referred to Essar House, where it was elucidated:

“If a strong prima facie case is made out and the balance of convenience is in favour of interim relief being granted, the Court exercising power under Section 9 of the Arbitration Act should not withhold relief on the mere technicality of absence of averments, incorporating the grounds for attachment before judgment under Order 38 Rule 5 of the CPC.
Proof of actual attempts to deal with, remove or dispose of the property with a view to defeat or delay the realization of an impending arbitral award is not imperative for grant of relief under Section 9 of the Arbitration Act. A strong possibility of diminution of assets would suffice.”

The court referred to Skypower Solar India (P) Ltd. v. Sterling and Wilson International FZE [2023 SCC OnLine Del 7240], where it was observed the Court is not strictly bound by the principles under Order 39 Rules 1 and 2 and Order 38 Rule 5 of the CPC, although guided by the same principles in determination of the appropriate interim measures of protection. It was observed that in the exercise of powers under Section 9 of the Arbitration Act, the court is “not unduly bound by their texts”. The court noted that in Essar House, the court had applied the principle that a claimant can be secured if the Court is prima facie satisfied that it would otherwise be unable to reap the benefits of a favourable award.

The court observed that the arbitral tribunal's findings about the appellant's diminished liquidity were sufficient to require security to ensure that the respondent could eventually realise any award made in its favour. The Court thus held that the tests laid down in Essar House and Skypower were satisfied by the reasoning of the tribunal in the order dated 26.05.2024.

3. Re: Quantum of security

The court found no error in the adjustment of the figure and its reduction by 50% to Rs. 62.145 crores by the tribunal. The court clarified that the security was an interim measure, not a final determination of liability.

4. Nature of security

The Court noted that a large amount of the sales revenue of the appellant had been transferred to bank accounts abroad, its cash flow had been reduced and it had a liability of Rs.320 crores as on 30.06.2022 in respect of a consent award.

The court observed that the tribunal's conclusion that a cheque was not adequate security in the given circumstances was neither perverse nor arbitrary. Therefore, it did not warrant interference by the Court under Section 37 of the Act. The Court also found that the tribunal rightly rejected the additional offer of a corporate guarantee in its order dated 03.08.2024, as this guarantee was not tied to any asset of the appellant. The Court found no fault with the direction of the tribunal to provide a bank guarantee.

(v) Additional points raised:

The Court rejected the Appellant's argument that the orders were not reasoned. The Court relied upon the decision of the Supreme Court in OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr, where it was observed that:

“If reasons are intelligible and adequate on a fair-reading of the award and, in appropriate cases, implicit in the documents referred to therein, the award is not to be set aside for inadequacy of reasons.”

The court held that the findings of the arbitral tribunal were adequate. Thus, the court dismissed the appeal.

Case Title: LAVA INTERNATIONAL LIMITED Vs MINTELLECTUALS LLP

Citation: 2024 LiveLaw (Del) 1114

Case Number: ARB. A. (COMM.) 48/2024 & I.As. 39812-39814/2024

Counsel for the Appellant: Mr. Sonal Kumar Singh, Mr. Abhay Raj Verma, Mr. Ratik Sharma, Mr. Arjun Rekhi, Mr. Parth Sidhwani & Mr. Ritesh, Advocates.

Counsel for the Respondent: Mr. Samrat Nigam & Ms. Arpita Rawat, Advocates.

Date of Judgment: 04.10.2024

Click Here To Read/Download Order