Sec 9 Arbitration Act: Commercial Court Cannot Pass Directions Until Pre-Conditions Under Order 38 Rule 5 CPC Are Satisfied- SC
A Supreme Court Bench of Justice MR Shah and Justice Krishna Murari heard an appeal against a judgment passed by the Gujarat High Court by which the High Court had confirmed an order passed by the Commercial Court through an application of Section 9 of the Arbitration and Conciliation Act, 1996.
Quashing the orders passed by the High Court and Commercial court, the Supreme Court held that "It may be true that in a given case if all the conditions of Order XXXVIII Rule 5 of the CPC are satisfied and the Commercial Court is satisfied on the conduct of opposite/opponent party that the opponent party is trying to sell its properties to defeat the award that may be passed and/or any other conduct on the part of the opposite/opponent party which may tantamount to any attempt on the part of the opponent/opposite party to defeat the award that may be passed in the arbitral proceedings, the Commercial Court may pass an appropriate order including the restrain order and/or any other appropriate order to secure the interest of the parties. However, unless and until the conditions mentioned in Order XXXVIII Rule 5 of the CPC are satisfied such an order could not have been passed by the Commercial Court which has been passed by the Commercial Court in the present case, which has been affirmed by the High Court."
Senior Advocate Vivek Chib appeared for the Appellant and Senior Advocate KV Viswanathan appeared for the Respondent.
In this case, the dispute was with respect to three purchase orders. The Appellant had served a notice upon the Respondent, claiming a loss of approximately 29.21 crore rupees, owing to the defective quality of the cables supplied. Thereafter, the Respondent served a legal notice to the Appellant claiming an outstanding payment of 1.30 crore rupees. Subsequently, the Appellant invoked bank guarantees issued by the Respondent.
Thereafter, the Appellant invoked the arbitration proceedings. On the next day, the Respondent filed applications under Section 9 of the Arbitration Act, 1996, regarding the three bank guarantees.
The Commercial Court passed an order under Section 9(ii)(e) of the Arbitration Act, 1996 to secure the amount in dispute and directed the Appellant to deposit the amount of respective performance bank guarantees, which as such had already been invoked and for which the payments were already made by the bank. This order was challenged before the High Court under Section 13 of the Commercial Courts Act, 2015, and the Court dismissed the appeal.
Consequently, the Appellant approached the Supreme Court.
The Supreme Court held that unless and until the preconditions under Order XXXVIII Rule 5 of the CPC are satisfied and unless there are specific allegations with cogent material and unless primafacie the Court is satisfied that the appellant is likely to defeat the decree that may be passed by the arbitrator the Commercial Court could not have passed such an order in exercise of powers under Section 9 of the Arbitration Act, 1996.
In that context, the Court observed that "unless and until the conditions mentioned in Order XXXVIII Rule 5 of the CPC are satisfied such an order could not have been passed by the Commercial Court which has been passed by the Commercial Court in the present case, which has been affirmed by the High Court."
To that end, the Supreme Court held that the appeal must succeed, and the order passed by the High Court and Commercial Court was quashed and set aside. To protect the interest of the parties, the Court directed the Appellant to furnish an undertaking backed by the Resolution of the Appellant's company before the Commercial Court that in case any award is passed by the Arbitrator in arbitration proceedings, the same shall be paid/honored by the Appellant subject to the challenge before the higher forum.
Cause Title - Sanghi Industries Limited vs Ravin Cables Ltd., and Anr.