Delhi High Court Eases Bank Guarantee Requirements for Arbitration Awards

Delhi High Court Eases Bank Guarantee Requirements for Arbitration Awards

The Delhi High Court has ruled that a court, when exercising its powers under Section 9 of the Arbitration and Conciliation Act (A&C Act), will not mandate the provision of a Bank Guarantee to safeguard the claims of a party during the arbitration proceedings unless it is demonstrated that the order party is dissipating its assets or engaging in actions that would thwart the enforcement of the Arbitral Award.

The High Court bench comprising Justices Vibhu Bakhru and Amit Mahajan determined that an order issued under Section 9 directing the provision of a bank guarantee to secure the claims is analogous to an order of attachment before judgment as stipulated under Order XXXVIII Rule 5 of the Code of Civil Procedure (CPC). They held that while the court when exercising its powers under Section 9 of the A&C Act, is not unduly restricted by the provisions of the CPC, it cannot issue any order that disregards the fundamental principles enshrined in the CPC.

The Bench held that in granting security for the contested amount in the arbitration, the court must determine whether the petitioner has a prima facie case, whether the balance of convenience favours granting security, and whether the respondent's actions would hinder the enforcement of the arbitral award.

The case arose from an Offshore Supply Agreement entered into by the parties on May 19, 2017, which incorporated an arbitration clause.

A disagreement arose between the parties over the appellants' alleged breach of payment terms. Consequently, the respondent filed an application under Section 9 of the A&C Act to secure the disputed amount. The Single Judge, through the challenged order, directed the appellants to provide a bank guarantee covering 50 per cent of the contested amount. Displeased with this decision, the appellants filed an appeal under Section 37 of the A&C Act.

The appellant challenged the impugned order, asserting that the Single Judge's direction to furnish a bank guarantee to secure the disputed amount was analogous to an attachment before judgment, yet this directive contravened the principles established in Order XXXVIII Rule 5 of the CPC.

The appellant further argued that the Single Judge overlooked the absence of any assertion or evidence demonstrating that the appellants' actions would render the award unenforceable, thus failing to fulfil the prerequisites of Order XXXVIII Rule 5. Consequently, the appellant maintained that the Single Judge lacked the authority to issue the aforementioned directive in the absence of the necessary preconditions.

The respondent presented counter-submissions, contending that the court's powers under Section 9 of the A&C Act surpass those under the CPC. This reference was made in light of the decision in Essar House Private Limited v. Arcellor Mittal Nippon Steel India Limited. Therefore, the court can secure the amount in dispute, even in the absence of assertions regarding the dissipation of assets or any other conduct on the part of the opposing party that might amount to an attempt to defeat the award in the arbitral proceedings.

The Bench noted that the Single Judge's directive to provide a bank guarantee to secure the amount in dispute is similar to a directive that could be issued under Order XXXVIII Rule 5 of the CPC. Additionally, it observed that at the time of issuing the challenged order, the court did not make any remarks or findings indicating that the respondent would face challenges in enforcing the Arbitral Award against the appellants if the orders for the bank guarantee were not granted.

It maintained that when issuing an order for security in arbitration disputes, it must assess whether the petitioner has a prima facie case, consider the balance of convenience, and determine whether the respondent's actions might hinder the realization of the award.

The Court noted that there was no evidence on record to even hint at the possibility of the appellants dissipating their assets or taking actions that would hinder the enforcement of the Arbitral Award, should the respondents succeed in the arbitral proceedings. The Court concluded that the impugned order contravenes the principles enshrined in Order XXXVIII Rule 5 of the CPC.

The Bench affirmed that a court exercising its powers under Section 9 of the A&C Act will not mandate the provision of a Bank Guarantee to safeguard the claims of a party during the arbitration proceedings unless it is demonstrated that the order party is dissipating its assets or engaging in actions that would thwart the enforcement of the Arbitral Award.

The High Court determined that an order issued under Section 9 directing the provision of a bank guarantee to secure the claims is analogous to an order of attachment before judgment as stipulated under Order XXXVIII Rule 5 of the Code of Civil Procedure (CPC). It held that while the Court, when exercising its powers under Section 9 of the Arbitration and Conciliation Act (A&C Act), is not unduly restricted by the provisions of the CPC, it cannot issue any order that disregards the fundamental principles enshrined in the CPC.

Consequently, the Court partially granted the appeal by quashing the directive requiring the appellants to furnish a bank guarantee to secure the respondent's claims.