Proposal To Furnish Bank Guarantee, Not Enough For Stay Of Award, Should Establish Prima Facie Merits: Gujarat High Court

The Gujarat High Court bench of Chief Justice Mrs. Justice Sunita Agarwal and Justice Aniruddha P. Mayee has held that mere filing of an application under Section 34 of the Arbitration and Conciliation Act, 1996 does not render the award unenforceable. Further, the bench held merely requesting a stay on executing the decree upon furnishing a bank guarantee, without substantively arguing the merits of the award and demonstrating a prima facie case for potential success under Section 34 proceedings, is not acceptable. Section 34 of the Arbitration and Conciliation ActSection 34 of the Arbitration and Conciliation Act, 1996 provides for the setting aside of arbitral awards by a court. Brief Facts: Mother Dairy Fruit and Vegetable Pvt. Ltd. (Petitioner”) sought stay on the execution of an arbitral award totaling Rs.2,93,89,575/- plus 10% interest alongside arbitration costs amounting to Rs.6,45,000/-. It previously filed an application under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration”), challenging the arbitral award and seeking a stay on its execution. The Commercial Court, in its dismissal of the application, noted the absence of arguments on the merits or demerits of the award. The court exercised its discretion by directing the Petitioner to deposit the entire awarded amount and rejected the proposal to substitute it with a bank guarantee. The court held that a bank guarantee couldn't adequately compensate the decree holder for potential losses, and dismissed the argument lacking sufficient cause. Feeling aggrieved, the Petitioner approached the High Court. The Petitioner argued that there was a strong prima facie case under Section 34 and emphasized high chances of success. Additionally, it referred to Order XLI Rule 1 (3) of the Code of Civil Procedure, which empowers appellate courts to allow deposits or securities as they see fit. The Petitioner argued that the provisions under Section 36 (3) of the Arbitration Act, particularly the first proviso, require the court to be prima facie satisfied with its case when considering a stay application for an arbitral award involving monetary payment. Observations by the High Court: The High Court referred to Section 36 of the Arbitration Act and noted that an arbitral award is enforceable akin to a decree of the court under the Code of Civil Procedure. It held that the mere filing of an application under Section 34 of the Arbitration Act does not automatically render the award unenforceable. The High Court emphasized that Section 36(2) empowers the court to grant a stay on the operation of an arbitral award, subject to conditions it deems appropriate, which must be recorded in writing. The High Court further referred to first proviso of Section 36(3), which directs the court to consider the provisions relating to the grant of stay of a money decree under the Civil Procedure Code when evaluating applications for stay concerning arbitral awards for payment of money. Importantly, the High Court held the petition had absence grounds under the second proviso to Section 36(3), which would require unconditional stay of the award pending disposal of challenges under Section 34, such as fraud or corruption. Further, the High Court referred to Order XXI Rule 1 which deals with execution of money decrees and held that payment of the decreed amount into the court is typically required for stay on execution. Similarly, Order XLI Rule 1(3) allows appellate courts discretion to order deposits or securities when appeals involve decrees for payment of money. It noted under Order XLI Rule 1(5) that failure to comply with such orders may preclude the granting of a stay on execution. Upon reviewing the impugned order from the Commercial Court, the High Court held that arguments on the merits of the arbitral award were notably absent. The Petitioner primarily sought a stay on the execution by proposing a bank guarantee, yet failed to substantiate a prima facie case demonstrating a high likelihood of success under Section 34 proceedings. Regarding the discretion exercised by the Commercial Court, the High Court held that there was no rigid formula for directing deposits or accepting bank guarantees, and that such decisions must be made judiciously. The High Court held that granting an automatic stay on a monetary award merely upon application under Section 34 would defeat the expeditious resolution goals of arbitration. The bench held that: “Moreover, arbitration proceedings are essentially alternate dispute resolution method for early / quick resolution of disputes and in case of a money decree, if automatic stay is granted, the very purpose of quick resolution of dispute through arbitration would stand defeated, inasmuch as, the decree holder would be fully deprived of the fruits of the award on mere filing of the application under Section 34 of...

Proposal To Furnish Bank Guarantee, Not Enough For Stay Of Award, Should Establish Prima Facie Merits: Gujarat High Court

Rajesh Kumar

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