EXAMINING THE STANDARD FOR ATTACHMENT IN AID OF ARBITRATION IN INDIA

[Shubham Sharma]

Introduction

“Attachment before judgment is a judicial measure used to protect the interests of the plaintiff against the loss that can arise from the defendant if he sells or alienates a property that is pending adjudication in a suit. Order 38 Rule 5 ("O38R5") of the Civil Procedure Code, 1908 ("CPC") empowers courts to issue an order for attachment before judgment to prevent any defendant from defeating the realisation of the decree that may ultimately be passed in favour of the plaintiff, either by attempting to dispose of or remove from the court's jurisdiction, his movables.”

“However, in litigation, this extraordinary and drastic measure is rather used to gain a tactical advantage over the other party by pressuring them to part with cash, undertake onerous bank guarantees, or coerce them into a settlement. Unfortunately, this ugly culture of litigation seems to have crept into arbitration too. There is an increasing trend where courts (in the pre-arbitration stage, Section 9) and tribunals (in the early stages, even before pleadings are filed, Section 17) in India are being pressed to compel the opponent to deposit their entire or substantial portion of their claim in escrow accounts or provide bank guarantees. “

“The jurisprudence on the applicability of O38R5 in litigation cases is clear and settled. However, there is ambiguity as to the applicability of these principles in arbitration proceedings. It is not clear whether the courts and tribunals are bound by the rigours of the CPC while adjudicating claims for security before judgment (Section 9 and Section 17 cases). The author of this piece attempts to examine this ambiguity by examining the various decisions of the court and proposes a ‘middle approach’ to resolving this conflict. “

Conflicting view of the courts in India

“Sections 9(1)(ii)(b) and 17(1)(ii)(b) of the Arbitration and Conciliation Act ("the Act") enable a party to apply for securing the amount in dispute in the arbitration before a court or arbitral tribunal in the same manner one can apply for attachment before judgment in civil cases before a court under O38R5 CPC. Thus, it is clear that the object of Sections 9(1)(ii)(b) and 17(1)(ii)(b) of the Act is similar to the object of O38R5 of the CPC. “

“In the landmark case of RAMAN TECH. & PROCESS ENGG. CO. & ANR. VERSUS SOLANKI TRADERS - 2007 (11) TMI 611 - SUPREME COURT, the Supreme Court (“SC”) laid down the twin principles that need to be established before a court grants relief under O38R5 CPC. First, the plaintiff needs to establish a reasonably strong prima facie case for succeeding in the suit, and second, the court should be prima facie satisfied that the defendant is acting in a manner so as to defeat the realization of the decree that ultimately may be passed. However, the courts in India have differed on the point of applicability of these principles while passing an order in Section 9(1)(ii)(b) or Section 17(1)(ii)(b) application. “

“The SC in ESSAR HOUSE PRIVATE LIMITED VERSUS ARCELLOR MITTAL NIPPON STEEL INDIA LIMITED - 2022 (9) TMI 672 - SUPREME COURT ruled that while granting an interim relief under Section of the Act, the court is not strictly bound by the provisions of the CPC. The court was of the view that if a strong prima facie case is made out and the balance of convenience is in favour of interim relief granted, the court exercising power under Section 9 of the Act should not withhold relief on the mere technicality of the absence of averments. However, the same court in SANGHI INDUSTRIES LIMITED VERSUS RAVIN CABLES LTD. AND ANR. - 2022 (10) TMI 50 - SUPREME COURT. took a contrary view and ruled that interim relief under Section 9 of the Act cannot be granted without satisfying the conditions stipulated under O38R5 of the CPC. The court was of the opinion that a court cannot pass an order in the exercise of its powers under Section 9 of the Act unless the prerequisites under O38R5 of the CPC are satisfied, there are specific allegations with cogent material, and there is a prima facie case that the opposite party is likely to defeat the award that may be passed by the arbitrator by disposing of the properties and/or in any other manner. Thus, there is a clear conflict of opinion on this issue in the SC. “

“A similar divergence of views can be seen among the High Courts as well. The Bombay HC in NATIONAL SHIPPING COMPANY OF SAUDI ARABIA VERSUS SENTRANS INDUSTRIES LIMITED - 2004 (1) TMI 705 - BOMBAY HIGH COURT was of the view that the power of the Court under Section 9(ii)(b) cannot be restricted to the power conferred on the Court under CPC and that it is competent to pass an interim measure outside the provisions of O38R5 CPC. It further held that each case must be considered in light of its own facts and circumstances and on the principles of equity, fair play, and good conscience. However, recently, the Delhi HC in Tahal Consulting v. Proxmax Power took a contrary view, which is discussed in the next section. “

The twin test of Delhi HC

“In the instant case, Tahal was awarded a contract for the improvement of the water supply distribution system in Bangalore and subcontracted Promax for a portion of the works in 2021. When disputes arose due to the non-payment of sums due to Promax by Tahal, Promax initially filed a Section 9 petition, and Tahal agreed to deposit some amount in court. After this, the matter was taken before the Arbitral Tribunal, and Tahal filed an application under Section 17 seeking the release of amounts deposited by it before the court. The Tribunal passed a combined order that the interests of both parties would be preserved if the amounts deposited by Tahal stayed deposited, and nothing more was granted in favor of either party. Tahal challenged this order under Section 37, arguing that once the Tribunal held that Promax had failed to establish tests underlying Order 38 Rule 5 of the CPC (attachment before judgment), then there was no justification for refusing the release of amounts deposited by Tahal before the Court. “

“The court dismissing the appeal ruled that an order of attachment before judgement in Section 9 or Section 17 application can be passed on the basis of a two-fold test. First, the plaintiff should have a reasonably strong prima facie case for succeeding in the suit, and second, the court should be prima facie satisfied that the defendant is acting in a manner so as to frustrate any award that may be passed. The court was of the view that an order for securing the amount claimed prior to an arbitral award is essentially in the nature of attachment before judgement, and thus, the principles that are applicable for the grant of such orders in proceedings under O38R5 of the CPC would be equally applicable for the grant of relief under Sections 9(1)(ii)(b) or 17(1)(ii)(b) of the Act prior to the passing of the arbitral award. “

The Solution lies in harmony.

“It is imperative to note that while Section 19 of the Act states that an Arbitration tribunal shall not be bound by the CPC, there is no bar on taking reference from the established principles of the CPC. The Bombay HC in Sahyadri Earthmovers Vs. L & T Finance Limited and Anr. held that although CPC and the Evidence Act are not strictly applicable in an arbitration proceeding, their settled principles do apply. “

“It is no hidden truth that a lot of people are abusing the above provisions to short-circuit the arbitration proceedings and to use it as a recovery mechanism. But equally considering the onerous consequences and stringent nature of the relief, the author believes that the solution lies in the harmonizing the two extreme views held by the court. In this regard the author proposes that the courts or tribunals should instead of disregarding the established principles of O38R5 altogether, use these principles as a preliminary criterion while adjudicating a Section 9 or Section 17 application to weed out malicious or frivolous claims. However, the courts or tribunals can always exercise the discretionary power conferred upon them if there are special considerations in the case. This will help prevent the abuse while simultaneously upholding the purpose of the provision.

Way Forward

“From the above discussion, it is clear that there is a conflict of opinion among the courts in India on the issue of the applicability of principles of O38R5 of CPC to Section 9 or Section 17 applications under the Act. One group takes an “exclusive’ approach which holds that the principles of O38R5 are not applicable to Section 9 or Section 17 applications under the Act. The other group takes an “inclusive’ approach which holds that the principles of O38R5 are equally applicable to Section 9 or Section 17 applications under the Act. But both views seem impractical and the best way forward for courts or tribunals would be to adopt a middle approach as recommended by the author in the previous section. "