Even If Case Doesn't Fall Under Section 36(3) Second Proviso, Court Can Consider Whether To Grant Unconditional Stay: Bombay High Court

Section 36 of the Arbitration and Conciliation Act, 1996 deals with the enforcement of arbitral awards. It outlines the procedure for enforcing an arbitral award once the time for challenging the award under Section 34 has expired.

First Proviso of Section 36:

“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”.

Second Proviso of Section 36:

“Provided further that where the Court is satisfied that a prima facie case is made out that,--

(a) the arbitration agreement or contract which is the basis of the award; or

(b) the making of the award,

was induced or effected by fraud or corruption, it shall stay the award unconditionally pending disposal of the challenge under section 34 to the award.”

Brief Facts:

CFM Asset Reconstruction Pvt. Ltd (“Petitioner”) outlined a loan agreement executed between L & T Finance Company and SAR Parivahan Pvt. Ltd (“Respondent No.1”), detailing terms of a loan and security measures involving hypothecation of assets. Following default by Respondent, arbitration was invoked which led to several procedural steps and hearings. The arbitral award granted a sum of Rs.59,97,210/- to Petitioner but also upheld a counter claim by Respondent for Rs.1,25,69,768/-. Consequently, it directed Petitioner to pay Respondent Rs.65,72,558/- after adjusting the claim amount. The Petitioner approached the High Court under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) and challenged the decision of the arbitrator. Challenges from the Petitioner included objections to the timeliness and admissibility of Respondent's counter claim, the arbitrator's handling of asset sale disputes, and alleged procedural irregularities affecting natural justice principles.

In response, the Respondent contended that the Arbitral Award appropriately considered all relevant submissions and evidence. It asserted its validity and fairness in light of the proceedings and substantive arguments presented during arbitration.

Observations by the High Court:

The High Court referred to Section 36 of the Arbitration Act, which delineates the enforcement mechanisms for arbitral awards. Specifically, subsection (3) of Section 36 contains two provisos. The High Court noted that cases cited by the Respondent pertain to the second proviso, which mandates unconditional stay of an arbitral award if there is a prima facie case of fraud or corruption affecting the arbitration agreement or the award's creation.

The High Court held that the language used in the second proviso—"it shall stay the award unconditionally"—indicates a mandatory obligation upon the Court to grant such a stay under the specified circumstances. However, alongside this provision exists the first proviso to subsection (3) of Section 36. This proviso directs the court, in cases concerning monetary awards, to apply principles akin to those governing stays of money decrees under the Civil Procedure Code, 1908. The High Court held that to neglect this first proviso would render it redundant. Thus, even when the conditions of the second proviso are not met, the High Court held that the court retains discretion to determine whether an unconditional stay should be granted, taking into account the specific circumstances of the case.

The High Court referred to its decision in Ecopack India Paper Cup Pvt. Ltd. vs. Sphere International, where it was clarified that under the first proviso of Section 36(3), the Court possesses discretion regarding the grant of an unconditional stay. It emphasized that such discretion must be exercised judiciously, considering the factual matrix and the interests of justice.

The High Court noted that the Petitioner challenged the arbitral award primarily on the grounds of procedural irregularities and insufficient substantiation of the valuation report underpinning the award. The Petitioner contended that the reliance on an unproven valuation report amounted to a manifest error and rendered the award legally untenable.

The High Court held that the Petitioner demonstrated sufficient cause to warrant an unconditional stay of the arbitral award. It held that failure to grant such a stay would inflict substantial harm upon the Petitioner, who would otherwise be compelled to satisfy a contested claim based on an allegedly flawed valuation report.

Consequently, the High Court stayed the arbitral award.

Case Title: CFM Asset Reconstruction Pvt. Ltd and anr vs M/s. SAR Parivahan Pvt. Ltd. And ors

Case Number: I.A. (L) NO.6246 OF 2024 IN COMM. ARBITRATION PETITION (L)NO.5565 OF 2024

Citation: 2024 LiveLaw (Bom) 310 

Advocate for the Petitioner: Mr. Ranjeev Carvahlo with Ms. Aaushi Doshi and Mr. Deep Dighe i/b. DS Law

Advocate for the Respondent: Mr. Aditya Shiralkar with Ms. Garima Mehrotra and Mr. Satish Desai

Date of Judgment: 13th June, 2024

Click Here To Read/Download Order or Judgment