Dismissal of Suits Upon Reference to Arbitration: Legal Implications

When a suit is referred to the arbitration, that suit is liable to be dismissed

An arbitral award may be contested by submitting an application per Section 34 of the Arbitration and Conciliation Act, 1996 ("Act"). Typically, a further application under Section 36(2) of the Act is submitted to request a stay on the award’s operation in addition to the motion to set aside an arbitral ruling. Before the Act’s 2015 modification, merely applying Section 34 would automatically halt the implementation of the award. Nevertheless, Section 36(2) of the Arbitration and Conciliation (Amendment) Act, 2015 was changed to clarify that applying to set aside an arbitral award does not automatically make it unenforceable. Instead, a specific order of stay of operation for the award must be granted upon filing a separate application for that purpose. The court may order a stay, subject to specific circumstances, in response to a second application that requests a stay of the arbitral award’s implementation. These requirements to secure the arbitral ruling include providing a bank guarantee or making a monetary deposit with the court. Each case’s specific facts and circumstances determine the security’s form and amount, primarily determined by the judgment debtor’s behaviour and financial resources.

The Godawari Marathawada Irrigation Development Corporation v. Manish case,[1] Due to the developing body of legal precedent on this issue, courts have begun requiring the parties contesting the award to deposit the whole sum as a prerequisite for being granted a stay of enforcement. The reasoning is that an award holder’s entitlement to benefit from the award must be safeguarded, and efforts should be made to ensure that an award is more than just a paper decree. 

The Act does not mandate that the hearing of an application to set aside an arbitral award is contingent upon the deposit of the awarded amount, which is imposed as a condition for a stay on enforcement. This means that an application under Section 34 can be heard on merits only on a pre-deposit of the awarded amount. Failure to comply with the conditions for stay would not impede the enforcement of the award. However, an application under Section 34 cannot be dismissed entirely on this account. Interpreting anything contrary would mean reading something into the Act that does not exist. Some earlier decisions on this issue are in the context of appeals filed under the Code of Civil Procedure, 1908, which may be relevant for an arbitration proceeding. 

Kayamuddin Shamsuddin Khan v. State Bank of India 

In addition to filing an appeal against the order, the appellant requested that the decree’s implementation be halted. The appellant was issued an order by the Hon’ble High Court of Bombay (Nagpur Bench) requiring him to deposit INR 75,000/-within two weeks, failing which the appeal would be rejected. The appeal was denied because the appellant did not deposit the required amount. In response to the appellant’s appeal to this decision, the Hon’ble Supreme Court of India concluded, citing sub-rule 5 of decision 41 of CPC, that the sole penalty for failing to comply with the directive or condition for stay would be the court’s failure to stop the decree’s execution. As stated earlier, the court could not order the rejection of the appeal itself. Still, it might reject the motion for a stay of the decree’s execution in light of the non-compliance. [2] A similar stance was also adopted in Devi Theatre v. Vishwanath Raju, where it was decided that it was illegal to require the deposit of funds before an appeal could be accepted for a merit hearing. [3] 

According to the Bombay High Court, the award holder had not deposited the whole sum granted, so the appeal under Section 37 of the Arbitration Act was dismissed. According to the Bombay High Court, the judgement debtor/appellant must deposit the whole sum due, plus interest, with the executing court before considering the appeal. The Bombay High Court’s directives could not be upheld and had to be overturned, according to the Supreme Court of India, which reviewed this ruling. This ruling was cited in a recent Delhi High Court judgement. The Hon’ble Division Bench of the Delhi High Court held that the judgement debtor’s failure to comply with the requirements outlined in Section 36(2) of the Act to stay the enforcement of the arbitral award does not give the court the right to refuse to hear an application under Section 34 of the Act. 

The Ld dismissed the application submitted under Section 34 of the Act. A single judge’s judgement, which was appealed, was allegedly due to the applicant’s failure to comply with the directive to deposit the whole sum granted in cash in court. The Hon’ble Division Bench concluded that although the award may be enforced if the order of stay is broken, this does not mean that the application made by Section 34 of the Act must be denied for this reason. A Special Leave Petition was submitted in opposition to the aforementioned ruling. However, it was dismissed by the Honourable Supreme Court of India, which maintained the Division Bench’s findings as establishing the proper legal framework.