[Saranya Ravindran is a 4th year law B.A., LL.B. (Hons.) student at NALSAR University of Law in Hyderabad]
Interim reliefs are crucial to ensure the enforcement of an arbitral award, as the opposing party may no longer possess sufficient assets post-award, rendering enforcement ineffective. Section 9 of the Arbitration and Conciliation Act, 1996, which allows a party to seek interim relief from a civil court, does not prescribe specific conditions for claiming such relief, thereby granting widespread discretion to courts to order interim protections as may appear “just and convenient”. In contrast, Order XXXVIII Rule 5 of the Civil Procedure Code, 1908 (“CPC”) requires a party to establish that the defendant, with the “intent to obstruct or delay the execution of any decree” is about to part with the property to claim interim attachment. Consequently, a question that courts have consistently grappled with when adjudicating interim claims for attaching property or security is whether the principles under Order XXXVIII Rule 5 of CPC would also apply to a Section 9 application.
In Essar House Private Limited v. Arcelor Mittal Nippon Steel India, the Supreme Court clarified that proof of actual attempts to tamper with the property with the intent of defeating the award is not imperative for granting interim relief under Section 9. Instead, a “strong possibility of diminution of assets” would suffice. However, in Sanghi Industries v. Ravin Cables, a different bench of the Supreme Court held that interim relief can only be granted when the conditions under Order XXXVIII Rule 5 are met, requiring proof that the defendant is likely to defeat the award by deliberately disposing or removing the property from the court’s jurisdiction.
While much has been written on how Sanghi Industries deviates from Essar House, this post argues that a closer inspection of both judgments indicates that the Supreme Court, in effect, applied the same standard in both cases despite divergent holdings. Moreover, most High Courts, even when they claim to follow Sanghi Industries, in effect apply the standard set by Essar House. Through such an analysis, the author aims to demonstrate that while there is a need to reconcile the two decisions, the commercial pressures that underlie interim reliefs have to a large extent necessitated the application of a similar standard.
Essar House and Sanghi Industries
A detailed examination of Essar House and Sanghi Industries reveals that they represent different factual scenarios that arguably weighed heavily on the courts’ interpretation of Section 9. In Essar House, Essar Steel made a security deposit to Essar House. When Essar Steel’s corporate insolvency was approved and Arcelor acquired Essar Steel, it demanded a refund of this deposit. While Essar House argued that they had taken over a loan owed by Essar Steel, Arcelor contended that such an adjustment was not permissible and, further, that Essar House’s financial indebtedness jeopardized its recovery of the deposits. In this context, the Supreme Court held that that even if there is no demonstrable intent to evade the award by disposing the asset, relief could still be granted in so far as there is a “strong possibility of diminution of assets”. In holding this, the Court was both reducing the burden of proof to a strong likelihood, and what was required to be proven to “diminution of assets” to claim relief.
In contrast, Sanghi Industries involved a dispute over invoking a performance bank guarantee for contract breaches. The appellant sought to restrict the respondent from retaining amounts realized under the guarantee. Unlike Essar House, where the award risked being frustrated, Sanghi Industries did not involve any claim that the respondent’s actions would render the award unenforceable. It was in this context, where interim relief was claimed without demonstrating an irreparable injury the appellants would face, that the Supreme Court held that fulfilling the conditions under Order XXXVIII Rule 5 was integral to a successful Section 9 application. Given such circumstances, even applying the Essar House standard to Sanghi Industries would have still resulted in denying the claim for interim relief. Hence, while Sanghi Industries and Essar House lay out principles at opposite ends with respect to the applicability of CPC, this divergence stems in a large part from the completely different contexts in which these decisions were rendered.
The Delhi High Court in Dr. Vivek Jain v. Prepladder Private Ltd. briefly recognizes the distinct factual circumstances of Essar House and Sanghi Industries, holding that Essar House alluded to diminution of assets as a possible standard based on its specific facts where refundable deposits were being utilised by Essar House. This fact-specific nature of the inquiry under Section 9 is further reflected in subsequent High Court decisions, which often bend the rigours of Sanghi Industries to address the genuine commercial burdens of the parties in dispute.
Grant of Interim Reliefs by High Courts
High Courts have adopted varying approaches to reconcile the Supreme Court’s contradictory positions. While somerely solely on Essar House, others adhere to Sanghi Industries as the later decision by a bench of equal strength. However, across courts that took note of both Sanghi Industries and Essar House, it is clear that despite claiming adherence to Sanghi Industries courts in effect apply a lower standard that edges closer to the standard set in Essar House.
For example, in Sadbhav Engineering Limited v. Efftech Infra Engineers, the Gujarat High Court granted interim relief when Efftech had not received payment for work done under a project, despite Sadbhav Engineering having received the amounts from the contractor. In this case, Sadbhav Engineering was under severe financial distress, with huge losses and multiple creditor applications pending before the National Company Law Tribunal. Despite no evidence that Sadbhav Engineering was intentionally disposing property to defeat the award, the Court granted relief due to the strong likelihood that the award would be rendered unenforceable without interim relief. It held that where a strong prima facie case is made out and the balance of convenience is in favour of the appellants, proof of actual attempts to dispose property is unnecessary. Efftech’s arguments that the standard set by Sanghi Industries were not met in the instant case were held “untenable in view of the above noted facts and circumstances”, when in reality the court was not disagreeing on facts, but rather on the legal standard applicable and adopting the standard set in Essar House.
Similarly, in Tuf Metallurgical Private Limited v. BST HK Limited, a dispute arose over the supply of low-quality iron ore. BST sought attachment of Tuf Metallurgical’s iron ore to secure the award’s value, while the latter argued that their company’s high valuation made such attachment unnecessary. The Andhra Pradesh High Court, while acknowledging Sanghi Industries, held that in the absence of fixed assets interim protection was necessary to ensure enforcement of the award. Hence, interim relief was granted even though no submission was made that there was any intent to defraud the award, nor any evidence adduced to suggest that property was being deliberately removed. Instead, the Court focused on the prejudice likely to be caused without interim relief. Ultimately, while the judgement proceeded to conduct a detailed inquiry, following from Sanghi Industries, on whether the procedural technicalities under Order XXXVIII Rule 5 had been adhered to, it still resorted to a lower threshold when granting interim relief, moving closer to the standard set by Essar House. This is despite the dispute aligning closely with the factual scenario of Sanghi Industries, involving a contractual breach with respect to the quality of material supplied.
Conversely, in cases where courts cite Sanghi Industries affirmatively, the application of the Essar House standard would have likely yielded the same outcome. For instance, in Dr. Vivek Jain, a license agreement was allegedly breached, and interim relief was claimed, demanding the deposit of the license fees owed to the petitioner. In this case, the petitioner had not even made submissions on the award being rendered unenforceable in the absence of interim relief. Similarly, in Skypower Solar India Ltd v. Sterling and Wilson International, there were no submissions suggesting that enforcement of the award would be frustrated without interim relief. Thus, in both cases, the specific question of whether a claimant must prove that the award would be rendered unenforceable because of an intentional removal of property to frustrate it as opposed to merely a high likelihood of the property diminishing in value never arose. Moreover, even applying the Essar House standard, relief would not have been granted in both cases in the absence of any claim that the award would be rendered redundant.
Ultimately, in such cases where it is evident that interim relief would not be granted, courts are willing to defer to Sanghi Industries. However, its rigid standard, requiring proof of intentional disposition of assets, fails to accommodate the nuanced realities of various other cases. As highlighted above, situations may arise where assets are not explicitly disposed of, yet factors like severe financial distress or rapid depreciation create a substantial risk of rendering the award unenforceable. Unsurprisingly, when confronted with these practical challenges, High Courts often find it difficult to adhere to the stringent thresholds established in Sanghi Industries. They instead resort to an ad-hoc dilution of legal principles, while claiming adherence to a uniform standard, risking more inconsistency and unpredictability when granting interim reliefs.
– Saranya Ravindran