Introduction

In 2021, the Karnataka High Court in Padma Mahadev v. M/S. Sierra Constructions,^[1] set aside the lower court’s order granting interim protection to the award-debtor under Section 9 of the Arbitration and Conciliation Act, 1996. The Court was of the view that interim protection cannot be granted if an application under Section 34 is pending. It was further laid down that if a third-party interest has been created, the award debtor becomes disentitled to claim interim relief.

Background

The Appellants entered into a Joint Development Agreement (hereinafter, ‘JDA’) with the Respondent for the construction of a commercial complex on their property. When the Respondents defaulted on the terms of completion set out by the JDA and the two subsequent Memorandums of Understanding (hereinafter, ‘MoUs’), the Appellants sent a legal notice to the Respondents terminating the JDA and the MoUs. The Respondent contended that termination was unlawful and contravened the terms of the JDA. As per the terms of the JDA, this dispute was referred to a sole arbitrator for adjudication. The Arbitral Tribunal passed the award in favour of the appellants, holding that the notice of termination was valid and that the JDA stood terminated from the date of service of notice.

The Respondent filed an application under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter, ‘the Act”) against the award. While its application under Section 34 was pending adjudication, the Respondent also moved an application under Section 9 of the Act before the Commercial Court, Bangalore seeking interim injunction to restrain the appellants from making any alterations in the disputed property. The Respondent informed the Court that the Appellants had already entered into another JDA with a third-party concerning the disputed property. To protect the subject matter of the dispute, the Commercial Court allowed the application filed under Section 9 of the Act. Subsequently, against this order, the Appellants moved the High Court.

Contentions of the Parties

The Appellants contended that the order passed by the Commercial Court, Bangalore was incorrect and inconsistent with the law as interpreted by various High Courts. They relied upon the decisions of the Bombay High Court^[2] and the Delhi High Court^[3] to argue that when an application is pending under Section 34, the unsuccessful claimant cannot get relief under Section 9. The second argument of the Appellants was based on the decision given in McDermott International INC v. Burn Standard Co. Ltd (hereinafter, “McDermott International”), in which the apex court held that under Section 34, the power of the courts is limited to either upholding or quashing the award as a whole and that courts cannot go any further to correct the wrong; it is up to the parties to initiate arbitration again.

Appellants further contended that the interim relief can only be granted as an aid to the final relief claimed in the application filed under Section 34, and since that application is pending adjudication, the relief claimed under Section 9 cannot be allowed. Lastly, the Appellants pointed out that they had already entered into a new JDA with another developer, who was not made a party to the application filed under Section 9.

The Respondent, on the other hand, relied on the Madras High Court’s judgment in Gayatri Balaswamy v. ISG Novasoft Technologies Ltd,^[4] wherein the McDermott International case^[5] was discussed at length and finally, it was held that the Courts, under Section 34, have the power to modify, reverse or even vary the award.

The Respondent submitted that a plain reading of Section 9 will make it clear that there is no difference between a party who has lost and a party who has succeeded in arbitration so far as the filing of the application under this section is concerned. While placing reliance on I. Sudershan Rao and others v. Evershine Builders Pvt Ltd,^[6] the Respondent argued that the relief under Section 9 can be granted even when an application under Section 34 is pending. The Respondent further contended that the Appellants have entered into a new JDA with another developer and if the ongoing activities on the disputed property are allowed, then it will render the application filed under Section 34 futile.

Ratio-Decidendi

The Hon’ble Court set aside the order of the Commercial Court, Bangalore, and held that under Section 34, the courts can either uphold the award or set it aside but they cannot correct errors. Taking support of the decisions pronounced in McDermott International^[7] and Hindustan Construction Company Ltd. v. Union of India^[8] (hereinafter, “Hindustan Construction”), it was held that the relief under Section 9 can be granted only as an aid to the final relief claimed under an application filed under Section 34 of the Act. Since the said application is still pending in the present case, therefore, relief granted under Section 9 is invalid. The Court also observed that since the Appellants had entered into a second JDA with another developer, therefore, a third-party interest was created and in light of these observations, the interim injunction was set aside.

Analysis     

The decision passed by the Hon’ble Court can be challenged on three grounds: (1) Remedy under Section 9 is available to both the parties – the award debtor and the award holder; (2) such reading of the law will render Section 34 inefficacious, and (3) courts have the power under Section 9 to pass orders that impact third-party interests.

1. Remedy under Section 9 is available to both parties.

Section 9 of the Act empowers the courts to grant interim protection, including that for preservation, interim custody, sale of goods (that are the subject matter of arbitration), securing the amount in dispute, interim injunction, appointment of a receiver, or guardian, etc. The relief under Section 9 is available at three stages i.e., (i) Before the commencement of arbitration proceedings, (ii) during arbitration proceedings, and  (iii) after the arbitral award has been given but before its enforcement.

Section 9 refers to the term ‘party’, which has been defined under Section 2(h) of the Act as a party to the arbitral proceeding. Thus, Section 9 does not specify which party can avail the relief under Section 9 at Stage III. By applying the rule of literal interpretation, it is clear that relief is available to both parties and the section does not discriminate between successful and unsuccessful parties. Thus, the Karnataka High Court’s interpretation does not align with the language of Section 9.

The objective of interim relief is to protect the parties’ interest until the matter in dispute has been disposed of. The grant of relief under Order 39 of the Code of Civil Procedure, 1908 and the Specific Relief Act, 1963 is based on the satisfaction of three principles, i.e., (a) whether there exists a prima-facie case, (b) whether the balance of convenience lies in favour of the applicant and (c) whether an irreparable injury will be caused to the applicant if relief is not granted.

When it comes down to granting relief under Section 9, no specific grounds have been listed based on which relief is to be granted, and in the absence of the same, there appears to be a consensus amongst the Courts that the principles of procedural law shall apply.^[9] The Apex Court in Adhunik Steels Ltd. v Orissa Manganese and Minerals (P) Ltd., observed that there exist settled principles of law, based on which the Court determines if interim relief is to be granted. It cannot be said that the legislature while enacting Section 9 of the Act intended to diverge from those accepted principles of law. On a perusal of Section 9, it is clear that no specific conditions have been mentioned under Section 9 on the satisfaction of which interim relief can be allowed. Thus, in such a case, the Court shall be guided by the principles governing its grant, emanating out of the Specific Relief Act and the various judicial decisions on the subject.

If the aforementioned rule is applied in the present case, it can be observed that all the three requirements for granting interim relief are being satisfied, and thus, the Hon’ble Court should not have allowed the appeal and that the order passed by the lower Court restraining courts from creating a third-party interest until the disposal of the application under Section 34 was, therefore, correct. Now, in the absence of any restriction, the creation of a third-party interest will result in irreparable loss to other parties. Stopping the award-debtor from making an application under Section 9 transgresses the basic principles based on which interim relief is granted.

To arrive at the finding that Section 9 is available only to the successful party in an arbitration proceeding, the Court relied upon the decision given by the Apex Court in McDermott International^[10] and Hindustan Construction Company.^[11] But neither of these two cases dealt, even remotely, with the issue as to who can file an application under Section 9 after an award has been passed.

In contrast to the approach of the High Court of Karnataka, the High Courts of Andhra Pradesh^[12], Delhi^[13], and Telangana^[14] have held that the remedy under Section 9 is available to both, the award-creditor and the award-debtor. In Leighton India Contractors Private Ltd. v. DLF Ltd.^[15], the Delhi High Court has reiterated that the scope of Section 9 of the Act is very broad and that it is an expansive provision that does not curtail the powers of the Court. According to the authors, this reading of Section 9 is correct and will help to protect the interest of all parties.

2. Section 34 will become inefficacious.

In McDermott International,^[16] the Apex Court held that under Section 34, the Court has the power to quash the award but it has no power to modify the same. Therefore, the parties are at liberty to institute arbitral proceedings again, if they so desire. Thus, when an award is set aside, parties have the right to invoke the arbitration clause of the contract again.^[17] For exercising this right, it is necessary to ensure that the subject matter of the dispute is safeguarded, but if the Hon’ble Court’s interpretation is applied on Section 9, it can render the award-debtor remediless.

Additionally, Section 34(4) grants power to the courts to adjourn the proceedings and remit the matter back to the arbitral tribunal, allowing it to eliminate the grounds based on which an award can be set aside. For example, if an award is challenged under section 34, on the ground that the tribunal did not give the applicant a chance to produce documents that were important for deciding the dispute and such an act impaired him from presenting his case, and on consideration of such an application and scrutinization of documents, the Court decided that there exist valid grounds for setting aside the award. At this junction, the Court has the power to either set aside the award or grant a chance to the tribunal under Section 34(4) to eliminate the grounds on account of which the award is liable to be set aside.

If the award-debtor is barred from making an application under Section 9, this remedy, available under Section 34(4), will become nugatory. To put it simply, let’s take the example of the present case, where the Appellants created a third-party interest and the Hon’ble Court refused to grant interim protection. Now, even if the Court exercises its power under Section 34(4) of the Act and remits the matter back to the Arbitral Tribunal, and it, in turn, decides to reverse the order, it will not be able to secure the interest of the Respondent. Therefore, if Section 9 is read in the way it has been done in the present matter, it will frustrate the objective of Section 34(4).

3. Court has the power to pass orders affecting third-party interests.

While setting aside the Commercial Court’s order on 13^th March 2020, the Karnataka High Court reasoned that since the Appellants have already entered into a second JDA with a new developer, interim protection under Section 9 would hamper the third party’s interest. The Court, by doing this, managed to safeguard the rights of the third party but it was at the cost of the interests of the Respondent. In M/S Value Advisory Services v. M/S Zte Corporation & Ors,^[18] it was held by the Delhi High Court that the courts have the power to pass directions against third parties under Section 9 of the Act. Thus, it can be said that if an application under Section 9 for seeking interim relief is sought and if allowing the same can affect third-party rights, the Court has the power to pass such orders.

Conclusion

The principle of “actus curiae neminem gravabit,” which translates to “an act of the court shall prejudice no-one,” should always be the guiding principle. The Court cannot shut the doors entirely for the Award-Debtor; this will result in impairment of justice. Section 9 has bestowed wide powers upon the courts including granting relief even if third-party interests have been created. While granting interim relief under Section 9, the courts should be guided by the settled principles of law regarding the grant of such reliefs and every case should be determined on its specific facts and circumstances.

References

[1]  Padma Mahadev v. Sierra Constructions Pvt. Ltd, 2021 (3) KarLJ 630.

[2]  Dirk India Private Limited v. Maharashtra State Electricity Generation Company Limited, 2013 (7) B.C.R. 493); Wind World (India) Ltd. v. Enercon GmbH, (2017) SCC OnLine  Bom 1147.

[3] Nussli Switzerland Ltd. v. Organizing Committee Commonwealth Games, (2014) SCC OnLine Del 4834 ; Singhania Horizons v. HRC Engineers Estate Pvt. Ltd., (2016) SCC OnLine Del 550.

[4]  Gayatri Balaswamy v. ISG Novasoft Technologies Ltd., 2014 SCC OnLine Mad 6568; See also, Gail (India) Ltd v. Latin Rasayani Private Ltd., 2014 SCC OnLine Guj 14836; Saptarishi Hotels Pvt. Ltd. v. National Institute of Tourism and Hospitality Management, (2019) SCC OnLine TS 1765.

[5]  McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181.

[6]  I. Sudershan Rao v. Evershine Builders Pvt Ltd., 2012 SCC OnLine AP 682.

[7]  Hindustan Construction Company Limited v. Union of India, 2019 SCC OnLine SC 1520.    

[8]  Hindustan Construction Company Limited v. Union of India, 2019 SCC OnLine SC 1520.

[9]  ITI v. Siemens Public Communication, (2002) 5 SCC 510.

[10]  Hindustan Construction Company Limited v. Union of India, 2019 SCC OnLine SC 1520.    

[11]  Hindustan Construction Company Limited v. Union of India, 2019 SCC OnLine SC 1520.    

[12]  I. Sudershan Rao v. Evershine Builders Pvt Ltd., 2012 SCC OnLine AP 682.    

[13]  Organising Committee Commonwealth Games v. M/s Nussli (Switzerland) Ltd., (2014) SCC OnLine Del 4834.

[14]  M/S. Saptarishi Hotels Pvt. Ltd., v. National Institute of Tourism & Ors., (2019) SCC OnLine TS 1765.

[15]  Leighton India Contractors Private Ltd. v. DLF Ltd., 2021 SCC OnLine Del 3772.

[16]  McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181.    

[17]  Steel Authority of India Limited v. Indian Council of Arbitration, (2016) SCC Online Del 1291.

[18]  M/S Value Advisory Services v. M/S Zte Corporation & Ors, 2009 SCC OnLine Del 1961.