August Attorneys LLP
May 28, 2021
It is most opportune now for the Supreme Court to not only settle this question of law, but also to settle the ancillary question on the power of courts under Section 34 to modify arbitral awards.
Recently, a Division Bench of the Karnataka High Court in Sierra Constructions v. Padma Mahadev held that a “losing” party in an arbitration is not entitled to invoke Section 9 of the Arbitration and Conciliation Act, 1996 for post-award interim measures.
The question in Sierra Constructions arose from a Section 9 proceeding initiated by a losing claimant in an arbitration. Even as a challenge to the award under Section 34 of the Act was pending before a commercial court, the respondent had attempted to dissipate the subject matter of the arbitration post-award. The applicant was denied interim relief by the Karnataka High Court. To arrive at this finding, the High Court relied on the view of the Bombay High Court in Dirk India v. Maharashtra State Electricity Generation Company Limited.
Section 9 provides for grant of interim measures for protection of the subject-matter of arbitration “before”, “during” and at any time “after” the passing of the award. The language in Section 9 refers to “party”, which is defined plainly in Section 2 (h) of the Act as a party to the arbitration agreement. While interpreting Section 9, Dirk India reasoned that a court exercising power under Section 34 has no power to modify an award and that it can either uphold or set aside an award as a whole. Relying on a stray observation of the Supreme Court in McDermott International Inc v. Burn Standard Co. Ltd, the Bombay High Court held,
(a) “…. Where an arbitral claim has been rejected by the arbitral tribunal, the court under Section 34 may either dismiss the objection to the arbitral award or in exercise of its jurisdiction set aside the award…….”
(b) “….the setting aside of an arbitral award rejecting a claim does not result in the claim which was rejected by the arbitrator being decreed as a result of the judgement of the court in a petition under Section 34….”
Based on such a premise, the Bombay High Court took the view that “...interference of the court at this stage to grant what in essence is a plea for a mandatory order of interim specific performance will negate the sanctity and efficacy of arbitration as a form of alternate dispute redressal….” and declined to grant interim relief under Section 9 to a party whose claims had been rejected by the arbitral tribunal.
Though post Dirk India, the Act has been amended several times and substantial changes have been effected to Section 9, Section 34 and Section 36, the Karnataka High Court has supported and applied this view in Sierra Constructions.
Dirk India: Shortcomings
Even if it assumed that the Court under Section 34, has no power to modify an award, Dirk India completely overlooks an examination of Section 9 in the light of the consequences of setting aside of an award as under :-
If the court sets aside the award finally, the original contract between the parties would stand restored and the parties would be relegated to their original positions thus reviving their rights and obligations under the contract.
The applicant would then be entitled to enforce/protect its rights under the contract de novo for which it would have to take recourse to arbitration only. The interpretation in Dirk India, if accepted, would render such a party entirely remediless.
When an award is set-aside, the right to re-agitate inter-se disputes through arbitration is expressly preserved. Section 43(4) specifically preserves the rights of the parties to pursue arbitration by excluding the time spent in the earlier proceedings/arbitration. When such a right has been reserved to the parties by statute, it is imperative that the subject-matter of the dispute be preserved by invoking powers under Section 9. It is glaring that Dirk India does not consider the effect/consequence of Section 43(4) of the Act.
Plain language of Section 9
In Sundaram Finance vs. NEPC Limited, while examining the scope of Section 9 to grant interim measures “before” commencement of arbitration, the Supreme Court ruled,
“…there is no reason why Section 9 of the 1996 Act should not be literally construed. Meaning has to be given to the word “before” occurring in the section. The only interpretation that can be given is that the court can pass interim order before commencement of arbitral proceedings…reading the section as a whole it appears to us that the court has jurisdiction to entertain an application under Section 9 either before arbitral proceedings or during arbitral proceedings or after making of the arbitral award but before it is enforced in accordance with Section 36 of the Act.”
This dictum has not been followed in Dirk India. The plain language of Section 9 does not distinguish between a losing party and a winning party to entitle them to interim measures under Section 9. Dirk India has erroneously read such a distinction into the provision, which is not the intent of the Act. The Gujarat High Court in Gail India Limited v. Latin Rasayani Limited has declined to follow Dirk India for this very reason.
2019 Amendment to Section 17
After the 2019 amendment, the right of parties to approach the arbitral tribunal post-award for interim measures stands curtailed. Arbitral tribunals are no longer empowered to grant interim measures after the award is pronounced. If the interpretation adopted in Dirk India is accepted as correct even post the 2019 Amendment, then the party interested in protecting the subject-matter of arbitration will be rendered remediless as it can neither approach court nor the arbitral tribunal for any interim measure even with a bona fide apprehension that the subject-matter of arbitration is being dissipated pending a challenge to the award.
McDermott International - No precedent for scope of Section 9 or Section 34
In Sierra Constructions, the Karnataka High Court has relied on McDermott International and a more recent decision of the Supreme Court in Hindustan Construction Company Limited v. Union of India to reiterate the proposition that a court exercising power under Section 34 has no power to modify an award except setting it aside or upholding it in toto. However, in McDermott International and in Hindustan Construction, the Supreme Court did not even remotely consider either the scope of Section 9 or its applicability in a post-award situation.
In Hindustan Construction, the Supreme Court was considering a challenge to the constitutional validity of the 2019 amendment to the Arbitration & Conciliation Act, 1996 and certain provisions of the Insolvency & Bankruptcy Code. Also, the reference to Dirk India in this decision is in the context of Section 36 of the Act in relation to stay of arbitral awards and not in relation to grant of interim measures under Section 9 of the Act. The issue of post-award relief to an award-debtor under Section 9 was neither raised before the Supreme Court nor argued. No reasons on the specific issue have been recorded by the Supreme Court.
Therefore, on a correct application of the principles of ratio decidendi, both McDermott International and Hindustan Construction are no precedents at all for deciding a question under Section 9 of the Act. For a judgement to apply as a precedent, all relevant laws and earlier judgements ought to have been brought to the court’s notice and should have been discussed. Mere observations in a previous judgment may not be binding if they are not applicable to the facts and controversies in a subsequent case.
Contrary views of other High Courts
In sharp contrast to the views expressed by the Bombay High Court in Dirk India (which is followed by the Karnataka High Court in Sierra Constructions), the High Courts of Andhra Pradesh, Telangana and Gujarat, in almost identical factual circumstances, have held that an award-debtor is entitled to interim relief under Section 9 in equal measure as an award-creditor. The Gujarat High Court, applying Sundaram Finance, has supported a plain interpretation of the word “party” appearing in Section 9 to confer the right to seek interim relief on all parties to an arbitration agreement without any distinction. The stark dichotomy of views of several High Courts has rendered res integra the question of the award-debtor’s right to seek interim relief.
It must be remembered that the main objective of the Act is expeditious resolution of disputes and their finality. Unless a purposive and a practical interpretation is given to the provisions of the Act, especially to Section 9 and Section 34, it is obvious that the main objective of the Act will never be achieved. It is most opportune now for the Supreme Court to not only settle this question of law, but also settle the ancillary question on the power of courts under Section 34 to modify arbitral awards and the consequences thereof.