Case: – Skypower Solar India Private Limited v/s Sterling and Wilson International FZE; FAO(OS) (COMM) 29/2022
The High Court of Delhi, in a recent ruling, clarified the conditions under which a court, exercising powers under Section 9 of the Arbitration and Conciliation Act (A&C Act), can order the furnishing of a Bank Guarantee (BG) to secure claims during arbitration proceedings. The High Court emphasized that such an order is not to be granted indiscriminately and must be based on a showing that the party against whom the order is sought is disposing of assets or taking actions that could hinder the enforcement of the eventual arbitral award.
The case involved parties bound by an Offshore Supply Agreement containing an arbitration clause. A dispute arose over alleged breaches of payment terms, leading the respondent to file an application under Section 9 of the A&C Act, seeking security for the disputed amount. The Single Judge, in the impugned order, directed the appellants to furnish a bank guarantee for 50% of the disputed amount. Dissatisfied, the appellants appealed under Section 37 of the A&C Act.
The appellants challenged the order on grounds that it resembled an attachment before judgment, contrary to principles in Order XXXVIII Rule 5 of the Civil Procedure Code (CPC). They argued that the prerequisites for such an order were not met, as there was no evidence of actions by the appellants that would render the arbitral award unenforceable.
The respondent countered by asserting that the court’s powers under Section 9 of the A&C Act are broader than those under the CPC. The Respondent cited the Essar House Private Limited v/s Arcellor Mittal Nippon Steel India Limited case, arguing that the court can secure the disputed amount even without clear evidence of dissipation of assets if there is a risk of defeating the award.
In the above matter the Hon’ble High Court has observed as below: –
“73. In Sanghi Industries Limited v. Ravin Cables Ltd. & Anr. – which was delivered after the decision in Essar House Private Limited v. Arcellor Mittal Nippon Steel India Limited– the Supreme Court considered a case where the appellant was directed to deposit an amount realized by invocation of the performance guarantees. The respondent had filed a petition under Section 9 of the A&C Act seeking to interdict the invocation of the bank guarantees. However, before any order could be passed, the bank guarantees were invoked and the appellant had realised the payments in respect of the said bank guarantees. In the aforesaid context, the learned Commercial Court had passed an order directing the appellant to deposit the amount realized by it by invoking the bank guarantees, in the court. In the appeal preferred against the said order, the Supreme Court held as under:
“4. Having heard learned counsel appearing on behalf of the respective parties and in the facts and circumstances of the case, more particularly, when the bank guarantees were already invoked and the amounts under the respective bank guarantees were already paid by the bank much prior to the Commercial Court passed the order under Section 9 of the Arbitration Act, 1996 and looking to the tenor of the order passed by the Commercial Court, it appears that the Commercial Court had passed the order under Section 9(ii)(e) of the Arbitration Act, 1996 to secure the amount in dispute, we are of the opinion that unless and until the preconditions under Order XXXVIII Rule 5 of the CPC are satisfied and unless there are specific allegations with cogent material and unless prima facie the Court is satisfied that the appellant is likely to defeat the decree/award that may be passed by the arbitrator by disposing of the properties and/or in any other manner, the Commercial Court could not have passed such an order in exercise of powers under Section 9 of the Arbitration Act, 1996. At this stage, it is required to be noted that even otherwise there are very serious disputes on the amount claimed by the rival parties, which are to be adjudicated upon in the proceedings before the arbitral tribunal.
4.1 The order(s) which may be passed by the Commercial Court in an application under Section 9 of the Arbitration Act, 1996 is basically and mainly by way of interim measure. It may be true that in a given case if all the conditions of Order XXXVIII Rule 5 of the CPC are satisfied and the Commercial Court is satisfied on the conduct of opposite/opponent party that the opponent party is trying to sell its properties to defeat the award that may be passed and/or any other conduct on the part of the opposite/opponent party which may tantamount to any attempt on the part of the opponent/opposite party to defeat the award that may be passed in the arbitral proceedings, the Commercial Court may pass an appropriate order including the restrain order and/or any other appropriate order to secure the interest of the parties. However, unless and until the conditions mentioned in Order XXXVIII Rule 5 of the CPC are satisfied such an order could not have been passed by the Commercial Court which has been passed by the Commercial Court in the present case, which has been affirmed by the High Court.

  1. In the present case, there are no observations or findings to the effect that if the orders for furnishing of the bank guarantee are not granted, S&W would be unable to enforce the Arbitral Award against appellant nos. 2 to 6. There is also no material on record to even remotely suggest that appellant nos. 2 to 6 are alienating their assets or acting in a manner that would frustrate the enforcement of the Arbitral Award, if S&W India prevails in the arbitral proceedings. Clearly, an order directing them to furnish a Bank Guarantee, militates against the principles underlying under Order XXXVIII Rule 5 of the CPC.”

Author of this article:
Adv. Ravish Bhatt,
Partner, R&D Law Chambers,
Dual Qualified Lawyer Solicitor | International Tax Affiliate

Connect with Mr. Bhatt on Linkedin: https://www.linkedin.com/in/adit-ravishbhatt/

  • Readers should contact their attorney to obtain advice with respect to any particular legal matter. No reader or user should act or refrain from acting on the basis of information written above without first seeking legal advice from qualified law practitioner.
SideMenu