To enhance the attraction of arbitration, the Supreme Court ruled in Pam Developments Pvt Ltd v State of West Bengal that the government, as a party to arbitration, is not entitled to special or exceptional treatment. The provisions of the Arbitration and Conciliation Act, 1996 (act), apply equally to all the parties.
The respondent awarded Pam a special repairs contract in 2001. The work was completed in 2002. In May 2003, Pam made a claim for monies under the contract and disputes arose. A sole arbitrator was appointed by the Calcutta High Court, and he made his award in favour of Pam in January 2010. The award was challenged by the respondent in the high court. While the challenge was pending, section 36 of the act was amended with retrospective effect from October 2015, and the mere filing of a challenge under section 34 of the act would not automatically stay the execution of an award. A stay of execution would have to be ordered by a court, under the provisions of the Code of Civil Procedure, 1908 (CPC). Further, the Supreme Court’s judgement in BCCI (what does this stand for?) held that the amendment to the act would apply even to challenges awaiting adjudication.
Pam filed an execution application in the high court seeking attachment of the amounts held by the Reserve Bank of India on behalf of the respondent. The respondent succeeded in securing an unconditional stay of the execution of the award by relying on the provisions of order 27 rule 8A of the CPC. Pam challenged the order in the Supreme Court.
Pam argued that the order only exempted the government from furnishing security pending execution of a decree, but did not entitle it to an unconditional stay. The court could therefore direct payment of the amount. The respondent argued that post amendment the CPC had to apply while the execution of an award was stayed. Order 41 rule 5(5) of the CPC required an applicant seeking a stay of a decree to pay in or furnish security, to guarantee that a successful opponent would receive the sums due to him. As a government can never be insolvent, order 27 rule 8A of the CPC exempted the government from paying in or furnishing security in furtherance of a decree. Paying in is a category of furnishing security and as security was not required to be furnished, therefore a payment could not be required of a government.
The court noted that an amendment to section 36 of the act was recommended in the 246th report of the Law Commission, which highlighted the mischief caused by the automatic stay on the execution of an award, pending adjudication of a challenge. The Law Commission therefore recommended doing away with the automatic stay of execution with no exemption recommended for the government. Furthermore, section 18 of the act mandated equal treatment of all parties to an arbitration. The government therefore did not enjoy a special status under the act.
Regarding the amended section 36(3) of the act, the court noted that the proviso did not make the CPC mandatory as it only required that due regard be paid to the provisions of the CPC concerning the grant of stay of a money decree. The provision regarding the applicability of the CPC was therefore advisory only and not directory. Provisions of the CPC only give guidance to a court, but the act’s provisions are core and self-contained, and are to be applied first. If the government was not subject to terms for the grant of a stay, the grant of a stay on the filing of a challenge would be mechanical and the unamended section 36 of the act would be applicable in favour of the government.
The court agreed with the high court’s ruling that provisions of order 27 rule 8A only exempted the government from furnishing security to guarantee the performance of a decree. However, a court exercising discretion in favour of a government in staying execution of a money decree must balance equities by directing, where appropriate, a payment into court to enable a successful litigant to withdraw it after disposal of the challenge.
The court also observed that even if the CPC were mandatory, the restriction was only in requiring the government to furnish security and not depositing the amounts ordered. The provisions in the CPC protecting the government were inserted in 1937 to safeguard the Crown. However, such provisions are not applicable in today’s democratic society. While the CPC provides for unequal treatment of the government and private parties, the act makes no such distinction.
Karthik Somasundram is a partner and Sneha Jaisingh is a managing associate at Bharucha & Partners.
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