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No Post Award Security For The Losing Party In Arbritration

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.

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