Unconditional Stay on Arbitral Award

Arbitration has emerged as a pivotal method for resolving intricate commercial disputes in India. Promising speed, cost-efficiency, and reduced procedural complexity compared to litigation in regular courts, arbitration has garnered significant attention from corporations, investors, and businesses. However, despite its benefits, arbitration in India faces substantial procedural hurdles, particularly in proceedings to challenge arbitral awards under Section 34 of the Arbitration and Conciliation Act, 1996. One of the primary challenges in these cases involves seeking a stay on the execution of the award pending the resolution of the challenge. This article delves into the legal and judicial principles employed by the courts in granting such stays.

In brief, once an arbitral award is rendered by the Ld Arbitrator, either party aggrieved by the award may file an application for its setting aside under Section 34 of the Arbitration and Conciliation Act, 1996. If no challenge is initiated within the prescribed period under Section 34, either party may proceed to enforce the award under Section 36 of the Act. Notably, following the 2015 amendment to the Act, the mere filing of a Section 34 application does not automatically stay the enforcement of the award. Instead, a separate application under Section 36(2) must be filed to seek a stay.

Section 36- Enforcement of an Arbitral Award: Section 36 was substantially amended by the Arbitration and Conciliation (Amendment) Act, 2015. Prior to the amendment, the mere filing of a challenge under Section 34 automatically stayed the enforcement of the award under the unamended Section 36. This mechanism of ‘automatic stay’ was heavily criticized for obstructing the enforcement of arbitral awards, counteracting India’s objective to become an arbitration-friendly jurisdiction. The 2015 amendments addressed this concern by substituting the entire Section 36. Under the revised framework, Section 36(2) clarifies that filing a challenge to the arbitral award does not, by itself, render the award unenforceable; a separate court order granting a stay must be obtained through a specific application.

Section 36(3)- Court’s Discretion to Grant Stay: Section 36(3) empowers the court to stay the operation of an arbitral award once an application seeking stay is filed, subject to conditions the court may deem appropriate and for reasons recorded in writing. The language of Section 36(3) particularly the use of “may” and “such conditions as it may deem fit” emphasizes that the power to grant a stay is discretionary and not automatic.

First Proviso to Section 36(3): Additionally, the first proviso to Section 36(3) mandates that where the award involves payment of money, the court must have “due regard” to the principles governing the stay of a money decree under the Code of Civil Procedure, 1908.

Second Proviso to Section 36(3): The 2021 amendment added a second proviso to Section 36(3), stipulating that if a prima facie case is established showing that the arbitration agreement, the underlying contract, or the award itself was induced or affected by fraud or corruption, the court must grant an unconditional stay on the award pending the disposal of the challenge.

Scope of Unconditional Stay Beyond the Second Proviso
This statutory evolution raised a pertinent question: Whether courts can grant an unconditional stay of an award even in cases not covered by the second proviso? In other words, does the principal provision of Section 36(3) also permit an unconditional stay independent of allegations of fraud or corruption?

In Sepco Electric Power Corporation v. Power Mech Projects, 2022 SCC OnLine SC 1243, the Hon’ble Supreme Court considered an appeal challenging a judgment of the Hon’ble Delhi High Court. In that case, the Single Judge had granted a stay on the arbitral award, conditional upon the deposit of 100% of the awarded amount. The stay was granted pursuant to an application filed under Section 9 of the Arbitration and Conciliation Act, which was heard alongside an application under Section 36(3) of the Act in a related petition. The Supreme Court upheld the High Court’s decision, finding no justification to interfere with the order. While examining the appellant’s arguments, the Court observed that it is within a court’s discretion to grant an unconditional stay where appropriate. However, it clarified that such unconditional stays are specifically contemplated under the second proviso to Section 36(3). The relevant excerpts from the judgment are set out below:

“The power under subsection (3) of Section 36 to grant stay of an award is coupled with the duty to impose conditions which could include the condition of securing the award by deposit in Court, of the amount of the Award. It may be true as argued by Mr. Vishwanathan that the Court may not impose condition for stay, if it deems appropriate not to do so. The power of Court to grant unconditional stay of an Award is not unfettered. The power of unconditional stay is subject to the condition in the second proviso that is: The Court is satisfied that a prima facie case (sic) is made out that (i) the arbitration agreement or contract which is the basis of the award; or (ii) the making of the award, was induced or effected by fraud or corruption”

(Emphasis supplied)

Furthermore, in the matter of CFM Asset Reconstruction Pvt. Ltd and Anr vs M/s. SAR Parivahan Pvt. Ltd. And ors; Comm. Arbitration Petition (L) No.5565 Of 2024, wherein the Hon’ble High Court of Bombay held that the Courts can grant a conditional or unconditional stay in the case of monetary decree as well. It is to be mentioned that the principles enunciated in this case are no less applicable as more deserving and enforceable in the instant case. 

Brief facts of the case:

SAR Parivahan Pvt. Ltd. obtained a loan from L&T Finance Company (“Lender”) for the sum of INR 28,570,000/-, for a term of 34 months, at an interest rate of 6.26% p.a (“Loan Agreement”). The Loan Agreement was to be secured by hypothecation of the assets for which SAR Parivahan availed the loan facility. On the occurrence of any event of default under the Loan Agreement, the Lender was entitled to sell/transfer/assign the assets and appropriate the proceeds towards repayment of all outstanding amounts. The Loan Agreement contained an arbitration clause. Accordingly, Respondent executed a deed of hypothecation in favour of the Lender as security, in terms of the Loan Agreement. Additionally, SAR Parivahan and Respondent Nos. 2 and 3 (who are individuals) executed various deeds of guarantee and demand promissory notes as further security. Following a default by the Respondents in repaying the loan, on 1 June 2011, the Lender issued a notice demanding payment of the outstanding dues amounting to INR 28,249,868/- and invoking arbitration. 

On 28 June 2011, the Lender filed a Statement of Claim to recover the outstanding dues. The Respondents submitted a valuation report for the Assets (“Valuation Report”). Meanwhile, the Lender sold the Assets for INR 11,000,000/- and wrote to the arbitrator to reduce its claim in arbitration to INR 17,249,868/-. Pursuant to further procedural hearings, the Lender once again amended its claim to INR 5,997,210.65/-. Respondent Nos. 1-3 then filed a counterclaim, seeking compensation to the tune of INR 23,543,476/- from the Lender for allegedly undervaluing the Assets while selling them (“Counter Claim”). 

Thereafter, the arbitrator, upon an application filed by CFM Asset Reconstruction (P) Ltd. (“Petitioner No. 1”), passed an order substituting it in place of the Lender and directing it to amend the Statement of Claim. Integro Finserv Private Limited (“Petitioner No. 2”) wrote to the arbitrator informing him that the subject debt had been assigned to it by Petitioner No. 1. 

Several procedural hearings took place thereafter. Due to the Petitioners’ failure to comply with a procedural direction, the arbitrator proceeded with Respondent Nos. 1 to 3’s arguments on the CounterClaim and closed the matter to pass the award. Petitioner No. 2 wrote to the arbitrator and to counsel for Respondent Nos. 1-3 noting that it did not have a complete copy of the CounterClaim and therefore sought an extension to file its reply and written arguments. Despite this, the arbitrator passed its award, whereby it allowed the claim of Petitioner No. 1 for the sum of INR 5,997,210/- and also allowed the Counter Claim for a sum of INR 12,569,768/-, thereby directing Petitioner No. 1 to pay Respondents a sum of INR 6,572,558/- (“Award”). Notably, the arbitrator had passed the Award by relying on the Valuation Report, for which no oral evidence was led, nor was any examination of the correctness of the findings in the Valuation Report carried out. Aggrieved by the Award, the Petitioners filed a petition under Section 34 of the Act (“Petition”). 

The relevant portion is reproduced herein below:

23. It is within the discretion of this Court to consider whether to grant a conditional stay or an unconditional stay, even in the case of a monetary decree. In the present case, as already held hereinabove by me, the entire claim which has been granted by the Arbitrator is on the basis of a Valuation Report which has not been proved before the learned Arbitrator. As held by me, no oral evidence, whatsoever, has been given for proving the said Valuation Report. Nobody has deposed to the correctness of the contents of the said Valuation Report which is the opinion of the valuers. In these circumstances, granting of the claim by the learned Arbitrator by relying upon the said Valuation Report is, in my view, perverse and amounts to a patent illegality on the face of the Award. Therefore, there is sufficient cause for granting an unconditional stay of the Award at this stage. If an unconditional stay is not granted then the Petitioner would suffer substantial loss as it would have to make payment in respect of a claim which has been perversely granted by the learned Arbitrator for the reasons mentioned above.

The Division Bench of the Hon’ble Bombay High Court in the matter of Ecopack India Paper Cup Pvt. Ltd. v. Sphere International [2018 SCC OnLine Bom 540].

Brief facts of the case: Disputes between the appellant and the respondent are subject matter of arbitration. The appellant is the claimant against the respondent in the arbitration proceedings. The respondent filed a written statement to the statement of claim of the appellant in which the respondent is stated to have made purported admission of liability towards the respondent of an amount of Rs.47,56,388/-. On this purported admission the Arbitral Tribunal made an interim award under Section 31(6) of the Arbitration and Conciliation Act,1996 in favour of the appellant. Being aggrieved by the impugned interim award, the respondent has filed a petition under Section 34 of the Act before this Court. By an order dated 13 December 2017 the learned Single Judge has admitted the Section 34 petition. As mere admission of the petition would not amount to stay on the execution of the interim arbitral award, the respondent filed Notice of Motion no.2039 of 2017 seeking an interim stay on the execution of the interim award. By the impugned order dated 21 December 2017, the learned Single Judge has allowed the said notice of motion thereby granting unconditional stay on the execution of the impugned interim award rendered by the arbitral tribunal. The appellant being aggrieved by the said order has filed this appeal.

The Hon’ble Bombay High Court held that (a) there cannot be a straitjacket formula that in every case the court would impose conditions or that there necessarily has to be a deposit of the decretal amount, and (b) the party opposing grant of stay cannot assert a proposition that it would be mandatory for the court to impose a condition for stay of execution. The said judgment was challenged in SLP(C) 16605/2018, but the Supreme Court declined to interfere

Paragraphs 9 and 10 of the said judgment are relevant and read as under:

“9. As regards the decisions as relied on behalf of the appellant, there cannot be any doubt on the proposition of law as these decisions lay down. However, in the facts and circumstances of the case, as noted above, this is not a case where the respondent could be saddled with an order to deposit the amounts under the interim award. Section 36 of the Act deals with enforcement of an arbitral award. Section 36 of the Act was amended by the Arbitration and Conciliation Act, 2015 with effect from 23 October 2015. Sub-Section (2) of Section 36 now provides that mere filing of an application in the Court to set aside the arbitral award shall not by itself render the award unenforceable, unless the Court grants an order of stay of the operation of the arbitral award in accordance with the provisions of Sub-Section (3) of Section 36, on a separate application made for that purpose. Sub-section (3) provides that upon filing of an application under Sub-section (2) for stay of the operation of the arbitral award, “the Court may, subject to such conditions as it may deem fit, grant stay of the operation of such award for reasons to be recorded in writing”. Proviso to sub-section (3) stipulates that the Court while considering the application for grant of stay of an arbitral award for payment of money shall have due regard to the provisions for grant of stay of a money decree under the provisions of the Code of Civil Procedure, 1908. 

10. A bare perusal of the provisions of Section 36 shows that the jurisdiction so conferred on the Court is a discretionary jurisdiction. The proviso to Sub-section (3) further makes it implicit that the provisions of Order 41 Rule 1 Sub-Rule 3 and Rule 5 would become relevant. In exercising powers under Order 41 Rule 5 the Court exercises its discretion and may grant a stay to the execution of a decree if “sufficient cause” is made out and the party seeking stay satisfies the Court that it will sustain substantial loss and inter-alia satisfies the condition as stipulated in sub-Rule 3 of Rule 5. Thus, the under scheme of the provisions of Section 36 read with Order 41 Rules 1 and 5 of the C.P.C., the party opposing grant of a stay cannot assert a proposition that it would be mandatory for the Court to impose a condition for a stay to the execution proceedings. It is for the Court to consider the facts and circumstances of the case and exercise its discretion either to grant a stay to the execution of the decree or impose or not impose any other condition, as the Court may deem appropriate. The above position in law has been clearly recognized by the Supreme Court in Malwa Strips Private Limited Versus Jyoti Limited. The discretion so vested in the Court is required to be exercised judicially and not arbitrarily and in the interest of justice. (Sihor Nagar Palika Bureau Versus Bhabhlubhai Virabhai & Co.). Adverting to these principles of law, the learned Single Judge in the facts of the case, has appropriately exercised discretion as vested with the court under the provisions of Section 36(3) of the Act read with provisions of Order 41 Rule 5 in passing the impugned order.”

Conclusion

As per the analysis of the abovementioned judicial precedents relevant decisions reveals a nuanced and somewhat unsettled position regarding the grant of unconditional stays of arbitral awards. While the principal part of Section 36(3) and the discretionary power it confers do not expressly prohibit unconditional stays, the Hon’ble Bombay High Court has, in certain cases, granted unconditional stays even outside the scope of the second proviso. This ambiguity underscores the need for legislative clarification, particularly given Parliament’s recent proactive efforts to address gaps in the Arbitration and Conciliation Act through targeted amendments. It goes without saying that such uncertainty in the law has significant practical implications. The Supreme Court itself has acknowledged that despite steps taken to enhance the arbitration framework, certain arbitral awards fall short of expectations. In such instances, the ability of award debtors to secure an unconditional stay becomes crucial, and any lack of clarity in the legal position can cause substantial prejudice.