Khaitan Legal Associates recently represented Punj Llyod Limited (“PLL”) before the Bombay High Court and Supreme Court of India in a post award action involving a very pertinent question of law – whether the losing party in an arbitration is entitled to orders from Court to secure its lost claim.
The dispute between ONGC and PLL arose out of a contract in respect of a gas pipeline at Hazira. PLL made claims for excess costs etc. while ONGC filed a counter claim for delay. During the subsistence of the contract, PLL had extended a performance bank guarantee and a liquidated damages bank guarantee (“Bank Guarantees”) to ONGC. These Bank Guarantees were kept alive during the arbitral proceedings. However, the final arbitral award, while allowing the claims of PLL, directed that the Bank Guarantees be discharged. ONGC challenged the arbitral award before the Bombay High Court and while seeking stay on enforcement of the award, also sought extension of the Bank Guarantees.
The Bombay High Court, in an Order dated December 21, 2022, following the case of Dirk India Private Limited vs Maharashtra State Electricity Generation Company Limited, held that the scheme of the Arbitration & Conciliation Act, 1996, does not contemplate that a losing party in an arbitration can be allowed extension of Bank Guarantees in its favour. The rationale being that once a dispute has been adjudicated in arbitration, the measures of protection that can be granted are only those intended to safeguard the fruit of the arbitration until the eventual enforcement of the award. The measure of protection thus, has to be a step in aid of enforcement. Based on this rationale, the Bombay High Court, while granting stay on the award and deposit of 100% of the award amount by ONGC, denied any orders for extension of the Bank Guarantees. Aggrieved by this Order of the High Court, ONGC approached the Supreme Court. Upholding the decision of the Bombay High Court, by an Order dated March 17, 2023, the Supreme Court dismissed the plea of ONGC. While dismissing ONGC’s petition, the Supreme Court orally observed that even if a losing party were permitted extension of a bank guarantee post award, in the facts of the given case, such relief was not at all warranted.
The Order the Bombay High Court in the case of PLL and ONGC as affirmed by the Supreme Court, is not only in sync with the scheme of the Arbitration Act but also commercially sound. In a post award scenario, reliefs such as furnishing or extending a bank guarantee ought to only be granted to protect the subject matter of an arbitral award to protect the fruits of the award. And rightly so, as the losing party ought not to be granted a relief to protect a right which has been adjudicated and lost in arbitration. In any event, unlike an appeal against the decree in a civil suit, even if a losing party succeeds in proceedings for setting aside an award, it is settled law that the setting aside court cannot modify the award or grant to the losing party, what the Arbitrator did not. At best, once an award is set aside, parties are sent back to arbitration. Therefore, protecting the losing party in the interim would result in significant prejudice to a party who has an award in its favour.
Notably, in certain other special leave petitions before the Supreme Court, the question of law as to whether the losing party in an arbitration can be granted interim orders for protection post award, is pending adjudication. In the meantime, the judgment of the Bombay High Court in the case of Dirk India (supra) continues to hold the field.
AUTHOR: Smiti Tewari (Partner)
