The Indian Supreme Court’s Decision in Pam Developments: Upholding Equal Treatment over Sovereign Privilege

[Aditya Suresh is a third year B.A., LL.B. (Hons.) student at National Law University, Jodhpur and Associate Editor, Indian Journal of Arbitration Law] 

Section 34 of the Arbitration and Conciliation Act 1996 deals with set-aside proceedings initiated at the recognition stage, after the arbitral proceedings have been completed and an award has been made. However, this provision does not clearly provide for what the status as regards payment of the award amount would be, once an application to set aside has been filed before the relevant court. Earlier interpretations given by the Indian courts on this point, particularly those in National Aluminium Co Ltd v. Pressteel & Fabrications [(2004) 1 SCC 540] and Afcons Infrastructure Limited v. The Board of Trustees, Port of Mumbai [(2014) 1 Arb L.R. 512] operated to the effect that under section 36 of the Arbitration Act, the admission of a section 34 petition virtually paralyzed the process for the winning party/award creditor.[1]

Recognizing this problem, the 246th Report of the Law Commission of India  noted that this interpretation defeated the very purpose of arbitration as a dispute resolution mechanism. This was because arbitration aims at allowing the parties to choose their own process to arrive at arbitral awards, which could be duly and speedily enforced in courts of law. The Report further provided that this mischief as a result of the conjoint reading of the two provisions [sections 34 and 36] must be remedied by the insertion of section 36(2). Section 36(2) would provide that the filing of an application under section 34 would not ipso facto render the award unenforceable. Accordingly, payment of the award amount would have to be made, unless a stay application was granted by the court in accordance with the amended section 36.[2] By way of the 2015 Amendment to the Arbitration Act, section 36, which dealt with recognition and enforcement, was amended with retrospective effect and section 36(2) as discussed by the 246th Report was added to the Act.

Recently, in Pam Developments Pvt. Ltd. v. State of West Bengal (Civil Appeals No. 5432 and 5433 of 2019), the question before the Supreme Court pertained to whether the government, as a party to the arbitration proceeding, was exempted from making the award payment once a set aside application was filed, in spite of the explicit provision under section 36(2). The challenge by the State of West Bengal was based on Order XXVII, Rule 8A of the Code of Civil Procedure, 1908 (CPC), which expressly states that the government is exempted from paying any security in the form of costs. This provision was read with the proviso to section 36(3), which states that the court must “have due regard to” the provisions of the CPC when considering an application to stay the award. As regards arbitration law, this raised a larger question as to whether the Arbitration Act intended to accord any differential treatment to the government as a party to commercial arbitration proceedings.

The Decision in Pam Developments: Upholding Equal Treatment

Given the contrary positions taken by the parties as regards the intent behind section 36 vis-à-vis the government as a party to an arbitration proceeding, the Supreme Court delved into an analysis of the 246th Law Commission Report, in order to look into why the amendments to section 36 of the Act had been made. In doing so, the Court applied the mischief rule of interpretation and found that the legislative intent behind the insertion of section 36(2) was to abolish the earlier stance which had continually resulted in arbitral awards being declared unenforceable upon the filing of section 34 applications, without providing for any differential treatment to government. Additionally, the Court held that Order XXVII, Rule 8A of the CPC would not apply to the present matter. This was because the principle that the provision was founded on, which is that the government is always solvent and that payment against the government is essentially guaranteed, does not apply in the modern context. This was because first, the Court found that when in 1976, the amendment to the CPC mandating payment of decretal amounts was inserted under Rule 5(5) of Order XLI, Rule 8A of Order XXVII was not amended. This was indicative of how the CPC did not, for this specific purpose, intend to accord differential treatment to governments.

Second, the Court looked into the reasons behind the insertion of Rule 8A to Order XXVII to the CPC, finding that the same had been inserted by the British Crown in 1937, in order to protect its interests. It found that the presumption of “prerogative and perfection of the Crown”, which formed the basis of this Rule and reflected the English belief in Parliamentary supremacy and inalienability, could not apply where India was a democratic republic.

Third, the Court found that since quick redressal of disputes was part of the fundamental ethos of arbitration, to grant automatic stay of awards against the government would be patently disregarding the very nature of arbitration. Upholding the principle of equal treatment as enshrined under section 18 of the Arbitration Act, the Court held that the government must be considered to be a commercial party participating in a commercial proceeding, and must pay security for payments to the award creditor.

Furthermore, the Court found that the use of ‘having regard to’ as opposed to ‘in accordance with’ reflected how section 36(3) of the Act never intended for CPC provisions to apply mandatorily, but as guidelines which were to be applied as the case may be. The Court relied on two aspects to arrive at this decision: first, the Court relied on its previous decision in Shri Sitaram Sugar Co Ltd v. Union of India [(1990) 3 SCC 223] wherein the phrase ‘having regard to’ was interpreted as being merely directory and not strictly mandatory. Second, it found that since the Arbitration Act acts a self-contained code pertaining to the law of arbitration, all provisions of the CPC had to be taken as merely being guidance. The Court concluded on this aspect by holding that the provisions of the CPC will apply only insofar as the same are not inconsistent with the spirit and provisions of the Arbitration Act itself.

Analysing the Decision of the Court: Sovereign Immunity v. Equal Treatment

Given that the Indian Supreme Court expressly rejected the argument that the government was to be treated differently as a party in a domestic arbitral proceeding, it is important to understand the meaning of ‘equal treatment’ and whether the requirements of arbitration law truly require according a differential treatment to the government as a party to an arbitration. The treatment of governments in civil suits in India is covered under sections 79 to 82, read with Order XXVII of the CPC. These provisions provide, inter alia, that the government has to be furnished with two months’ statutory notice before a suit is instituted against them [section 80], is exempted from appearing in person if the court is satisfied that he cannot absent himself from his duty without detriment to public service [section 81], along with several other privileges which have been categorically enshrined under Order XXVII.

The underlying theme behind these privileges is to enable government officers to act as officers responsible to the general public. Additionally, the government as an entity, as stated by the Court in Pam Developments, is presumed to be perennially solvent to the effect that they would not default in the payment of court-ordered decrees and arbitral awards. However, given the practicalities of bureaucratic procedure in terms of having to approach the court for execution of the award, as well as the delays in terms of government procedure of receiving payments, this rationale finds little contemporary significance, where commercial parties resort to arbitration in order to avoid the delays inherent to court proceedings. Additionally, as far as public interest is concerned, the Court in Pam Developments rightly distinguished between the government as an entity protecting public interest, versus the government as an entity participating in a proceeding which relates to its capacity as an employer liable to make payments for factor services rendered to it. This is consistent with commercial arbitration by nature, which does not involve the public interest element, which is necessary for allowing differential treatment of government as an entity.

Concluding Remarks

The decision in Pam Developments certainly provides some clarity pertaining to the treatment of government and governmental officers in commercial arbitrations in India. The position as a result of this judgment, the author believes, rightly acts in favour of equal treatment even in cases where the government acts as a party to the proceedings. Whether this case acts as precedent suggesting that differential treatment of government be abolished entirely in the context of arbitration, remains to be seen. However, this decision does initiate optimism in the Indian system, which has largely become the subject of criticism for having supported delays and procedural restrictions in the enforcement of arbitral awards.

Aditya Suresh

[1] See, the Arbitration and Conciliation Act, No. 26 of 1996. §36 [The pre-2015 provision read thus: Section 36: Enforcement – Where the time for making an application to set aside the arbitral award under Section 34 has expired, or such application having been made, it has been refused, the award shall be enforced under the Code of Civil Procedure, 1908 (5 of 1908) in the same manner as if it were a decree of the Court (emphasis added)].

[2] The Arbitration and Conciliation (Amendment) Act, No. 3 of 2016, §19.

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1 comment

  • To instantly Recall (for fancifully reiterating the essence of own thoughts):

    ‘Govt.’ (the ‘ruler’) X (vs) “THE PEOPLE” ( ‘subject ‘ – the ‘ruled’)
    Poser(s) : Does not such a development, in the realm of case law, make for an eerie read; in that, –
    a) the two mutually conflicting / contradicting concepts of ‘discrimination’ and ‘exploitation’ been pathetically mixed up , – thanks to ‘proactivism’ / stimulated litigation – thereby confusion happens to have been orse confounded ; and
    b) the objective behind the clear amended provisions have been sought to be tweeked/tinkered with , to such an extent that the common law / original concept of ‘arbitration’ and ‘conciliation’ , an innovation of recent origin have virtually been rendered a ‘laughing stiock’/ a single -track choice leading nowhere, except to a DEAD END ?!
    courtesy
    OPEN/ INvite to eminently EDIT!

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