Equal Justice in Arbitration: A Case Analysis of International Seaport Dredging Pvt Ltd vs. Kamarajar Port Limited
Introduction
The issue of whether government entities should receive preferential treatment under arbitration law poses a fundamental challenge to the principle of equality in legal proceedings. This question becomes particularly relevant when determining the conditions for granting a stay on the enforcement of arbitral awards. The top court recently addressed this issue in International Seaport Dredging Pvt Ltd v.Kamarajar Port Limited[1]and scrutinized a High Court ruling that allowed a government entity to deposit only the arbitral award amount, excluding interest and costs, as a prerequisite for staying the enforcement of the award.
The apex court disapproved of subjective assessments, such as determining a party’s reliability based on its statutory status, operational size, or perceived credibility. Instead, it reaffirmed that the conditions for granting a stay must adhere strictly to statutory provisions without bias or exception. This judgment not only reinforces the principle of equality before the law but also clarifies the legal obligations of government entities within the arbitration framework. The nuances of the said case and the broader implications of the ruling will be discussed further in this article.
Brief Facts Of The Case
The respondent awarded a contract valued at approximately Rs. 274 crores to the appellant for executing Capital Dredging Phase-III at Kamarajar Port. The contract, finalized on 12.08.2015, detailed tasks including the capital dredging of container and cargo berths, removal and transportation of onshore and offshore boulders and debris, and environmental monitoring. The stipulated timeline for completion of these works was set for 11.04.2017. However, disputes arose between the parties after the commencement of the project, prompting the appellant to invoke the arbitration clause in the agreement.
Following arbitration proceedings, on 07.03.2024, the arbitral tribunal issued its award, directing the respondent to pay the appellant Rs. 21,07,66,621 towards the claims allowed in its favor. Additionally, the tribunal awarded interest on this amount at the rate of 9% per annum from 15.11.2017 until the date of the award, escalating to 12% per annum if payment was delayed beyond three months. Costs amounting to Rs. 3,20,86,405 were also awarded to the appellant. Both parties subsequently filed applications under Section 33 of the Arbitration and Conciliation Act, 1996, seeking clarifications and corrections in the award. While the tribunal dismissed the respondent’s application, it partially allowed the appellant’s application by increasing the costs awarded by Rs. 12,00,000 to account for tribunal fees incurred post-submission of cost memos.
The respondent, however, challenged the arbitral award under Section 34 of the Arbitration Act and sought a stay on its execution. On 09.09.2024, the High Court granted the stay, conditional upon the respondent furnishing a bank guarantee for Rs. 21,07,66,621 within eight weeks.
Issues
Whether the High Court was justified in directing the respondent to furnish a bank guarantee for the principal amount alone, instead of requiring the deposit of the entire awarded amount, as a condition for granting a stay on the execution of the arbitral award under Section 36 of the Arbitration and Conciliation Act, 1996?
Analysis Of The Case
Section 36(2) of the Arbitration and Conciliation Act, 1996, states that filing an application under Section 34 to set aside an arbitral award does not automatically render the award unenforceable unless the court grants a stay in accordance with Section 36(3). Sub-section (3) empowers the court to stay the enforcement of the award, subject to conditions it deems appropriate and with reasons recorded in writing. Further, the 2015 amendment to the Act introduced two provisos to Section 36(3). The first mandates that, in cases involving monetary awards, courts must consider the provisions for granting a stay of a money decree under the Civil Procedure Code (CPC). The second allows the court to grant an unconditional stay in certain circumstances.
The appellant was awarded Rs. 21,07,66,621 by the arbitral tribunal. The High Court, while directing the respondent to provide a bank guarantee, addressed only one claim related to the refund of cess under the Building and Other Construction Workers Welfare Cess Act, 1996, amounting to approximately Rs. 3 crores. The court did not consider the remaining claims, which totaled approximately Rs. 18 crores. It granted a stay on the award, conditioned on the respondent furnishing a bank guarantee for the principal amount of Rs. 21,07,66,621, but refrained from issuing orders regarding interest and costs, citing the respondent’s status as a statutory body. The Hon’ble apex court emphasized that arbitration law must apply equally to all parties, regardless of their nature.
The Hon’ble Supreme Court thereafter referred to the decision in Pam Developments Private Limited v. State of West Bengal[2] and observed that the phrase “having regard to” the provisions of the CPC in Section 36 of the Arbitration Act is directory, not mandatory. The CPC serves as a guiding factor but must align with the Arbitration Act, which is a self-contained statute. The Court stressed that arbitration aims for quick dispute resolution, and granting automatic stays against the government would defeat this purpose. Therefore, the government should not receive special treatment under Section 34, and all parties must be treated equally as per Section 18 of the Arbitration Act.
Further, the apex court observed that the High Court erred in not considering the entirety of the arbitral award in favour of the appellant, which included claims beyond the issue of cess. Additionally, the High Court improperly based its decision to grant a stay on the respondent’s status as a statutory authority. The Arbitration Act, being a self-contained code, does not distinguish between governmental and private entities. The Court emphasized that decisions regarding the reliability of a party should not depend on subjective factors such as the size or reputation of the entity. It is inappropriate for courts to apply such standards when determining conditions for granting a stay on an arbitral award. Furthermore, the form of security required should not vary based on whether the party is a government entity or a private one. All parties must be treated equally under the Arbitration Act, except where specifically provided by law.
The decision in Toyo Engineering Corpn. v. Indian Oil Corpn. Ltd.[3]was also referred by the Hon’ble Court wherein it was held that the discretion to grant a stay on enforcing arbitral awards should not be based on the involvement of public corporations or the size of the amounts involved. The Court emphasized that these factors are irrelevant and that the principles under Order XLI Rule 5 must apply consistently, regardless of the party’s status.
Accordingly, the Hon’ble Court, after considering the guiding principles under Order XLI Rule 5 of the CPC, found the High Court’s order to be insufficient and accordingly modified it. The Court directed the respondent to deposit 75% of the decretal amount, inclusive of interest. The stay on enforcement of the arbitral award remained and was conditional upon the respondent’s compliance with this deposit requirement. Consequently, the High Court’s impugned judgment was modified and the appeal was allowed.
Conclusion
The instant decision of the apex court affirms the principle of equality in arbitration proceedings, ensuring that government entities are not afforded preferential treatment. While rendering the decision, the Hon’ble Court emphasized that the conditions for granting a stay on the enforcement of an arbitral award should be governed by the statutory provisions of the Arbitration and Conciliation Act, 1996, without any bias based on the party’s nature, size, or status. The Court further clarified that the provisions of the Civil Procedure Code, though relevant, should only guide, not override, the overarching framework of the Arbitration Act. By modifying the High Court’s order and directing the respondent to deposit 75% of the decretal amount, the Supreme Court reinforced the objective of timely and impartial resolution of disputes. The decision underscores that all parties, governmental or private, must be treated equally under the arbitration law.
[1]2024 SCC OnLine SC 3112.
[2](2019) 8 SCC 112
[3]2021 SCC OnLine SC 3455
