Gujarat High Court: Bank Guarantee Proposal Not Sufficient For Award Stay, Must Establish Prima Facie Merits

Gujarat High Court: Bank Guarantee Proposal Not Sufficient For Award Stay, Must Establish Prima Facie Merits

The Gujarat High Court bench, comprising Chief Justice Mrs. Justice Sunita Agarwal and Justice Aniruddha P. Mayee, ruled that simply filing an application under Section 34 of the Arbitration and Conciliation Act, 1996, does not automatically invalidate the award.

Moreover, the bench emphasized that merely seeking a stay on executing the decree by providing a bank guarantee without substantively arguing the merits of the award and establishing a prima facie case for potential success in Section 34 proceedings is insufficient.

Section 34 of the Arbitration and Conciliation Act, 1996, allows courts to set aside arbitral awards under specified conditions.

Mother Dairy Fruit and Vegetable Pvt. Ltd. (the plaintiff) sought a stay on the enforcement of an arbitral award totaling ₹ 2,93,89,575/-, along with 10% interest and arbitration costs amounting to ₹ 6,45,000/-. Previously, the petitioner had filed an application under Section 34 of the Arbitration and Conciliation Act, 1996 (the Arbitration Act), challenging the arbitral award and requesting a stay on its execution.

The Commercial Court, in rejecting the application, highlighted the absence of arguments addressing the merits or demerits of the award. The court used its discretion to instruct the petitioner to deposit the entire awarded sum and declined the proposal to substitute it with a bank guarantee. It reasoned that a bank guarantee would not adequately compensate the decree holder for potential losses, dismissing the argument for lack of sufficient justification. Dissatisfied, the petitioner approached the High Court, asserting a strong prima facie case under Section 34 and emphasizing a high likelihood of success.

Furthermore, the petitioner cited Order XLI Rule 1(3) of the Code of Civil Procedure, which allows appellate courts to accept deposits or securities at their discretion. It argued that Section 36(3) of the Arbitration Act, specifically the first proviso, mandates the court to be prima facie satisfied with its case when considering a stay application for an arbitral award involving monetary payment.

The High Court, referencing Section 36 of the Arbitration Act, underscored that an arbitral award holds enforceability akin to a court decree under the Civil Procedure Code. It clarified that the mere filing of a Section 34 application does not automatically render the award unenforceable. According to the High Court, Section 36(2) grants authority to the court to issue a stay on the operation of an arbitral award, contingent upon conditions it deems suitable, which must be documented in writing.

Additionally, the High Court pointed to the first proviso of Section 36(3), directing the court to consider provisions governing the stay of money decrees under the Civil Procedure Code when assessing applications to stay arbitral awards involving monetary payments. Notably, the High Court found that the petition lacked grounds under the second proviso to Section 36(3), which necessitates an unconditional stay of the award pending resolution of challenges under Section 34, such as allegations of fraud or corruption.

The High Court also referenced Order XXI Rule 1, which governs the execution of money decrees, asserting that payment of the decreed amount to the court is typically required for a stay of execution. Similarly, Order XLI Rule 1(3) grants appellate courts discretion to mandate deposits or securities in cases involving decrees for monetary payment. It emphasized that failure to comply with such orders could result in the denial of a stay of execution under Order XLI Rule 1(5).

In reviewing the Commercial Court's decision, the High Court noted the absence of arguments addressing the merits of the arbitral award. The petitioner primarily sought a stay on execution by proposing a bank guarantee but failed to substantiate a prima facie case demonstrating a high likelihood of success in the Section 34 proceedings.

Regarding the Commercial Court's discretion, the High Court concluded that there exists no rigid formula for directing deposits or accepting bank guarantees; such decisions must be exercised judiciously.

The High Court emphasized that granting an automatic stay on a monetary award solely upon the filing of a Section 34 application would undermine the expeditious resolution objectives of arbitration. It opined that:

"Arbitration proceedings are fundamentally an alternative dispute resolution method aimed at early or quick dispute resolution. Granting an automatic stay on a money decree upon mere filing of a Section 34 application defeats this purpose, as it fully deprives the decree holder of the award's benefits."

Consequently, the High Court held that the petitioner failed to establish a prima facie case justifying a stay on the execution of the arbitral award involving monetary payment.