Section 36(3) gives the Courts hearing application under Section 34 the discretion:

1. to grant stay on the enforcement of the arbitral award; and if the Court decides that the case is fit for the grant of stay; and

2. to decide on what conditions the stay shall be granted.

If the Court decides to grant stay, then in imposing any conditions thereon it must have “due regard” to the provisions of the Code of Civil Procedure, 1908 (“CPC”) insofar as the provisions for the stay of a money decree are concerned. The phrase used here is “due regard” and not “in accordance with”, thus making the consideration of CPC only directory and not mandatory. This distinction is at the heart of the entire issue here, which is – how much amount should be directed to be deposited for the grant of stay, and what shall be the form in which the said amount shall be deposited?

How much to be deposited?

It is a settled law that the Act is a complete code in itself insofar as the proceedings pertaining to arbitration and arbitral awards are concerned. That is, unless the Act itself expressly allows reading into it a provision of any other law, the same will not have a bearing on the proceedings under the Act. Further, Section 5 of the Act leaves no doubt in stating that unless the Act allows it, no Court can interfere or intervene in any matter governed by Part I of the Act. It is in the backdrop of these two boundaries that we need to answer the aforesaid question.

To answer it, Section 36(3) has to be understood.

While the proviso to Section 36(3) requires the Court to only give due regard to the provisions of CPC for stay of money decree, it was the Supreme Court which had, in G H Pam Developments Pvt Ltd v. State of West Bengal^[1], distinguished the phrase “due regard” from “in accordance with” and held that it is not a compulsion that the Court u/s 36(3) must grant stay in accordance with the CPC (para. 20). That is, the Court is not bound by the provisions of the CPC for deciding whether and on what conditions the stay is to be granted. This is in line with the settled law that the Act is a complete code in itself for the matters contained in it.

What provisions of the CPC govern the grant of stay on a money decree?

- Order 21 rule 26 – stay on execution by Executing Court

- Order 41 rule 5 – stay by Appellate Court

It is only It is respectfully submitted that none of the said provisions apply, in stricto sensu, to an application u/s 36(3) filed before the Court hearing the challenge to the arbitral award, for the following reasons:

1. An Application u/s 34 is not an appeal against the impugned award. It is, at best, an objection on the limited grounds specified therein. The provision of Appeal has been specifically provided for u/s 37 of the Act;

2. At best it can be said that the Court, in exercising the discretion u/s 36(3, may find some guidance as to the conditions for the grant of stay stated in O. 41 r. 5(3) of the CPC. However, stay cannot be refused merely because the Judgment Debtor does not satisfy the conditions stated in sub-rule 3 of rule 5 of Order 41, as that would amount to interpreting “due regard” in the proviso of Section 36(3) as “in accordance with”, thus reading into the Act something which the Legislature consciously chose not to;

3. The discretion given to the Court u/s 36(3) is much wider also because the arbitral award is a product of an in-personam proceeding, and hence each award may present difficulties and circumstances far more unique than those in a decree made by a Court. Hence, the intention of the Legislature must not be supplanted in order to present a pro-enforcement stance.

Unfortunately, the High Courts have found it convenient to rely on the tenor of O. 41 r. 5 to decide whether and on what conditions the Judgment Debtor shall be granted stay on the enforcement of the award. Below are some of the illustrative cases on the point:

1. Sihor Nagar Palika Bureau v. Bhabhlubhai Virabhai & Co.^[2] - The Respondent had filed a civil suit for wrongful termination of contract by the Appellant. The civil court decreed the suit in favor of the Respondent and against the Appellant, which was challenged before the High Court. Meanwhile the Appellant also moved an Application under O. 41 r. 5 of the CPC for stay on the money decree. The High Court allowed the said Application upon deposit of the decretal amount including interest. The Appellant filed another application seeking variation of the said order praying for furnishing a security (bank guarantee) instead of depositing the amount on account of financial difficulty. The High Court refused to interfere, against which the Appellant moved the Supreme Court in the instant case. The question before the Supreme Court was - Whether to insist on deposit in cash or permit a security being furnished? The Court examined the provisions of O. 41 r. 1(3) and r. 5 to hold:

a. that the Appellate Court is vested with a discretion to either allow deposit of the amount disputed in appeal or to direct furnishing of a security thereof;

b. That ordinarily the execution of a money is not to be stayed as the satisfaction of money decree does not amount to irreparable injury to the judgment - debtor and in the event of appeal being allowed, the remedy of restitution is available;

Thereupon the Court allowed the instant SLP by directing the Appellant to furnish a security of immovable property, on the ground:

a. That it was not the case of the Respondent that the decretal amount may not be recoverable in the event the appeal before the High Court was dismissed; and

b. That the Appellant had made out a prima facie strong case for the hearing of the said appeal on merits before the High Court, and also

c. that public interest would be better served by the amount being retained by the Appellant during the pendency of the said Appeal.

However, it must be noted that this case stems out of an appeal against a decree of the court, and not an arbitral award. It must also be noted that the Supreme Court was adjudicating only upon the form of the deposit / security and not the quantum thereof. Hence, the reliance placed by the High Courts on this order to order 100% deposit / security is misplaced.

2. Srei Infrastructure Finance Limited v. Candor Gurgaon Two Developers and Projects Pvt Ltd.^[3] - The Petitioner had filed three applications u/s 36(3) of the Act for stay on the execution of three arbitral awards. Calcutta High Court directed the Petitioner to deposit the entire decretal amount including interest as a condition for stay on the award. The Supreme Court, via the daily order dated 14.09.2018, varied the said order by allowing the Petitioner to deposit 60% of the total amount and furnish a bank guarantee for the remaining 40%.

3. GNG Exports v. Sinosteel Pvt Ltd.^[4] - The Calcutta High Court relied on the Supreme Court's judgment in Sihor Nagar Palika Bureau to erroneously conclude that the proviso to S. 36(3) of the Act makes it mandatory to follow O. 41 r. 5 for granting stay on execution of arbitral award. It is respectfully stated that this judgment is per incuriam as it failed to consider the proviso to S. 36(3) of the Act. However, this judgment precedes Pam Developments (supra) where the Supreme Court held that the provisions of CPC qua the stay of money decree are only directory in nature and not mandatory for the grant of stay u/s 36(3) of the Act. It may be said the Supreme Court sub silentio overruled the ratio on law in GNG Exports (supra).

4. Fair Deal Supplies Ltd v. R. Pyarelal Iron and Steel Pvt Ltd.^[5] - The Calcutta High Court erred in noting that Section 36 requires mandatory compliance of O. 41 r. 5(5) of the CPC. It drew support from the Supreme Court's Orders in Srei Infrastructure (supra) and Manish v. Godawari Marathawada Irrigation Development Corporation^[6] for its argument that a 100% deposit is the norm for stay on an arbitral award for the payment of money. It is respectfully submitted that the said judgment misses the fact that both these cases reached the Supreme Court during the pendency of appeal u/s 37 of the Act, the awards having been upheld u/s 34 of the Act.

5. Balmer Lawrie and Co. Ltd. v. Shilpi Engineering Pvt Ltd.^[7] - This is perhaps the most controversial precedent of all. In this case, the Bombay High Court is the “seat court” having jurisdiction to entertain Section 34 Application, while execution proceedings were instituted before the Calcutta High Court. The Petitioner herein had furnished a Bank Guarantee for the entire awarded amount including interest before the executing Court, whereupon the said Court adjourned the execution proceedings with a request to the seat Court to consider the said Bank Guarantee for the disposal of the stay application u/s 36(3) of the Act. This, along with the fact that the Petitioner has strong and sufficient grounds for setting aside the award, was argued by the Petitioner for the grant of stay on execution of the award. The Bombay High Court held that furnishing of Bank Guarantee before the executing Court is not a relevant factor for exercising discretion u/s 36(3) of the Act to grant stay. It further observed:

a. that “the Supreme Court has taken a consistent stand that where the Award is in the nature of money decree, there is a requirement for deposit of 100% of the awarded amount for grant of stay.”;

b. That the distinction created by the Calcutta High Court between the grant of stay u/s 37 and 36(3) of the Act is not good in law as there is no such distinction created in the Act; and

c. That a liberal view is not contemplated u/s 36(3) of the Act whilst imposing the conditions for stay of the Award.

Basis the aforesaid, the seat Court directed the Petitioner to deposit the entire awarded amount including interest before it for the grant of stay on the award.

In addition to the above, there are several instances where the Courts have relied upon the aforesaid reasoning to direct a 100% deposit of the entire awarded amount as a condition for the grant of stay. Some of them have been tabulated below:

At this juncture, it is prudent to note the erudite words of caution of Justice Frankfurter on reading the statute ex-facie and not with the legislative context:

There is no surer way to misread a document than to read it literally.^[8]

It is respectfully submitted that the Bombay High Court has erred in treating the stay at appellate stage on the same footing as stay u/s 36(3) while the challenge to the arbitral award remains pending. There is no inconvenience in holding that the challenge to an arbitral award u/s 34 of the Act is neither in the nature of an appeal nor revision. It becomes more apparent when Section 37 of the Act is read which specifically provides for an 'appeal' against certain specific orders passed under the Act. Further, the word “court” under sub-sections (2) and (3) of Section 36 of the Act means the seat Court before whom the challenge to the arbitral award has been filed. It bears no indication to the appellate court u/s 37 of the Act. This distinction is relevant and crucial.

Once it is clear that 'appeal' under the Act is different and distinct from the challenge u/s 34 of Act, we must look at the proviso to Section 36(3) of the Act -

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).

(emphasis supplied)

It is respectfully submitted that the provisions of CPC qua the stay of a money decree cannot be applied stricto sensu to an application u/s 36(3) of the Act.

Why the provisions of CPC relating to the grant of stay of a money decree cannot be applied stricto sensu to an application u/s 36(3) of the Act –

CPC contains the following provisions for the grant of stay of a money decree:

1. Order 21 rule 26: power of the executing court to grant stay on the execution proceedings in order to afford the judgment-debtor an opportunity to approach the Appellate Court for obtaining stay on the execution or for any other Order relating to the decree or execution which might have been made by such Court of first instance or Appellate Court. Sub-rule (3) prohibits the grant of unconditional stay;

2. Order 41 rule 5: power to the Appellate Court to grant stay on the execution of a decree once sufficient cause is made out and the following conditions specified in sub-rule(3) therein are satisfied:

a. that the party applying for stay may suffer substantial loss unless the stay is granted;

b. that the application for stay has been made without unreasonable delay; and

c. That the party applying for stay has given security for the due performance of decree as may ultimately be binding upon such party.

Sub-rule (5) thereof further specifies that no Order for stay shall be made if the party applying for stay fails to make the deposit or furnish security as required under sub-rule (3).

Sub-rule (2) of rule 5 empowers the Court which passed the decree to grant stay on execution of the decree upon sufficient cause being shown by the party applying for stay.

It is a settled law the proceedings under Section 34 of the Act are not in the nature of appeal. Section 36(2) makes it clear that the power to grant stay u/s 36 of the Act vests with the Court hearing the application u/s 34 of the Act. The Appellate Court u/s 37 of the Act is not empowered to grant stay on the enforcement of the award u/s 36(2) and (3) of the Act. Hence, most respectfully, it was improper for the Calcutta High Court in GNG Exports (supra) to hold that the provisions of CPC apply mandatorily to an application u/s 36(3) for the grant of stay. It was also improper for the Bombay High Court in Balmer Lawrie (supra) to hold that there is no distinction in the principles for the grant of stay u/s 36(3) and during appeal u/s 37 of the Act. The Calcutta High Court, by spotting the difference in the text of Sections 36 and 37 of the Act, is perhaps the only Court to have understood the anxiety of the Legislature in consciously omitting any mention of Section 37 in the provisions of Section 36 of the Act^[9]. The Parliament foresaw that an award which is yet to be tested on the narrow confines of Section 34 has to be treated differently than an award which has withstood the judicial scrutiny, however narrow, under Section 34. The latter assumes greater authority as the Court u/s 34 found no reason to interfere with the award on the grounds stated in Section 34. This argument finds favour with the Supreme Court as it reminded the legal and judicial fraternity in Toyo Engineering Corporation vs Indian Oil Corporation Limited ^[10], that the principles contained in O. 41 r. 5 are to be followed in deciding Applications for stay on execution of award filed before the Appellate Court u/s 37 of the Act. The same was also held in Manish v. Godawari Marathawada Irrigation Development Corporation^[11] where the Supreme Court was seized of an arbitral award upheld by the Court u/s 34 and pending appeal u/s 37 of the Act.

It is in this context that the finding of the Supreme Court in Pam Developments (supra) assumes greater significance. Even without distinguishing Sections 36 and 37 of the Act, the Supreme Court noticed the deliberate use of the phrase “due regard to” in the proviso to Section 36(3) of the Act and observed that had the Legislature wanted to make the provisions of CPC relating to the stay on money decree mandatory for the grant of stay on the execution of an arbitral award, it would have used “in accordance with”. The phrase used therein means that the aforesaid provisions of the CPC are to serve only as a guiding light and not as walls within which the Court u/s 36(3) shall consider such Applications.

Once the tyranny of literalness is rejected, all relevant considerations for giving a rational content to the words become operative^[12]. Thus, the practice of securing 100% of the awarded amount including interest to grant stay on award in an Appeal u/s 37 of the Act cannot be applied while the challenge to the arbitral award is yet to be decided.

What then should be a fair amount?

The purpose of securing the decretal amount is to ensure that the Decree Holder is ultimately able to enjoy the fruits of the decree. However, this is valid only when the stay is granted by the executing Court, or by an Appellate Court. Insofar as the purpose of deposit for the grant of stay u/s 36(3) is concerned, the full Bench of Calcutta High Court^[13] eruditely clarified that a 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. It further noted that 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. It is in this light that the provisions of the CPC pertaining to the grant of stay on a money decree are to be read, interpreted and applied to an Application u/s 36(3) of the Act.

Once the true purpose behind the practice of having deposit as a condition for the grant of stay on the enforcement of arbitral award is established, we may now consider the probable factors guiding the Court's discretion u/s 36(3) of the Act. It must be borne in mind that the standard of condition for the grant of stay of a money decree under O.41 r.5 of the CPC cannot be the same as that of an arbitral award u/s 36(3) of the Act, the reason being that while the decree is the outcome of a judicial proceeding in accordance with the rules of civil procedure and the law of evidence, an arbitral award is the outcome of a private adjudicatory mechanism where the rules of civil procedure and the law of evidence do not apply, and the findings of the Arbitral Tribunal are treated as unimpeachable except to the extent allowed u/s 34 of the Act. Hence, the risk of serious errors, both of fact and of law, is much greater in an arbitral award than in a decree of the court of law. This assumes greater significance as presently virtually anybody can be appointed by the parties as an Arbitrator who may assess the evidence by layperson's reason and not by the established principles of law.

In such circumstances, the Court before whom the party aggrieved by the arbitral award approaches for obtaining stay on its enforcement u/s 36(3) of the Act must consider the award ex facie for any such grave infirmity. The quantum of deposit must be determined by the proximity of such infirmity with the grounds laid down under the second proviso to Section 36(3) of the Act. That is, the graver the infirmity, more flexible should be the approach of the Court deciding an Application u/s 36(3) of the Act. In cases where the Award Holder is a Micro, Small or Medium Enterprise, the said Court may be guided by Section 19 of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) for granting stay on the enforcement of the arbitral award. In cases where ex facie it appears to the said Court that the arbitral award is not likely to fail the challenge on the grounds laid down in Section 34 of the Act, a greater quantum may be required by the Court for granting stay. In any case, the straitjacket formula of securing the entirety of the award including interest and costs while the challenge to the said award u/s 34 remains pending, is not proper and severely affects the party wronged by the award, and the perception of arbitration as a “reliable” mode of resolving commercial disputes which, otherwise than due to an arbitration clause, would be adjudicated upon the rigour of the rules of procedure and the law of evidence by a court of law, and will be open to re-examination on merits by the Appellate Court. The ill-effects of the design of the Act are now becoming apparent with various government departments and undertakings refraining from having arbitration clauses in their tenders and contracts, or restricting them to disputes involving a certain specific amount of money.

What should be the form in which the said amount shall be furnished?

Section 36(2) and (3) of the Act do not specify the form in which the amount is to be furnished for the grant of stay. O.41 r.3(c) of the CPC read with r.5 thereof gives the Appellate Court the discretion to either direct deposit of the amount or a security of any form to be furnished. The judicial opinion is at present leaning towards Bank Guarantee of a nationalised Scheduled Indian Bank, although the Courts are known to also accept the security in the form of immovable property for granting stay u/s 36(3) of the Act.

The anxiety of the Court in accepting Bank Guarantees from the Judgment - Debtor as security for granting stay u/s 36(3) of the Act is well known. While cash deposit offers greater security to the award, the purpose of directing deposit as a condition for stay under the said provision is not to completely secure the awarded amount, but to discourage frivolous applications for staying the execution proceedings. The bona fides of the Judgment - Debtor must be displayed in full view in order for the Court u/s 36(3) to have a more flexible posture in determining the form of such security. The same is the rationale behind demanding security from the Award Holder for remitting the deposited amount to it, pending the disposal of the challenge to the award u/s 34 of the Act. Thus, in appropriate cases, the entire amount required to be furnished may be secured by way of Bank Guarantee.

The Supreme Court has given mixed signals regarding the relevance of the provisions of the CPC for the grant of stay on a money decree, in an Application u/s 36(3) of the Act for the grant of stay on an arbitral award. On one hand it held that the provisions of CPC are merely to serve as a guide for the Court u/s 36(3) of the Act, and on the other hand it has applied strictly the provisions of O.41 r.5 of the CPC to direct the Judgement - Debtor to deposit the entire awarded amount including interest up-to-date as the condition for the grant of stay on the enforcement of arbitral award. This confusion has led some High Courts to interpret the proviso to Section 36(3) of the Act to mean that it is mandatory to apply the rules contained in Order XXI and Order XLI of the Code of Civil Procedure while deciding whether or not to grant stay on the enforcement of the award, and if yes, on what conditions. This, in my humble submission, is contrary to both the spirit of the Arbitration and Conciliation Act, 1996 insofar as it constitutes a complete Code in itself for the matters contained in it, the legislative intent behind the phrase “due regard to” used in the first proviso to Section 36(3) of the Act, and to the ratio of the Supreme Court itself in Pam Developments^[14]. It is imperative that the air is cleared over the application of CPC in adjudicating the Application u/s 36(3) of the Act for granting stay while the challenge to the arbitral award is pending u/s 34 of the Act. It must also be clarified that an Application for stay on enforcement of award in an Appeal u/s 37 must be adjudicated on principles different from that for the adjudication of an Application u/s 36(3) of the Act.

Shrayansh Singh is an engineer turned Advocate practicing before the Courts in Bengaluru and Delhi. Views are personal.