Recently, the Supreme Court of India (hereinafter ‘Supreme Court’), in Evergreen Land Mark Pvt. Ltd. v. John Tinson & Company, observed that an interim measure cannot be granted under Section 17 of the Arbitration and Conciliation Act, 1996 (hereinafter ‘Arbitration Act’) where the liability to pay has been seriously disputed.
Evergreen Land Mark Pvt. Ltd. (hereinafter ‘tenant’) had entered into a lease agreement concerning two separate premises owned by Respondents 1 and 2 (collectively referred to as landlords) respectively. On both premises, the tenant was running a restaurant and a bar (hereinafter ‘retro-bar’). As disputes arose due to the termination of the lease agreement, the parties referred the disputes for arbitration.
During the pendency of the arbitral proceedings, the landlords filed applications under Section 17 of the Arbitration Act, praying that the tenant is directed to deposit the rent for the period between March 2020 and December 2021. The tenant contested the applications by arguing that due to Covid-19, the Indian Government had imposed a lockdown causing complete/partial closure, and thus the present dispute was covered by the force majeure clause contained in the lease agreement. However, by an order dated 5 January 2022, the arbitral tribunal allowed the applications filed under Section 17 of the Arbitration Act, thereby directing the tenant to deposit the entire rental amount for the period between March 2020 and December 2021.
The tenant challenged the order of the arbitral tribunal before the High Court of Delhi (‘High Court’) under Section 37(2)(b) of the Arbitration Act. However, the High Court dismissed the same on 10 February 2022. Therefore, the tenant has approached the Supreme Court in the present proceedings.
ARGUMENTS BEFORE THE SUPREME COURT
The counsel argued on behalf of the tenant that the arbitral tribunal had failed to consider the effect of the force majeure clause. In fact, the arbitral tribunal had observed in its order that it is not considering the issue of force majeure at the stage of deciding the applications filed under Section 17. Thus, it was argued that the liability to pay the entire rental amount during the lockdown period was seriously disputed by the tenant and the order of the arbitral tribunal under Section 17 of the Arbitration Act could not have been passed. It was further argued that there is no material on record to suggest a possibility of the tenant frustrating the monetary award which may be passed against it. Therefore, it was submitted that the arbitral tribunal’s order, which is akin to an order passed under Order XXXVIII, Rule 5 of the Code of Civil Procedure 1908 (hereinafter ‘CPC’), could have not been passed unless the conditions therein were satisfied.
Further, apart from the time when there was a complete lockdown, during the remaining period, the tenant was allowed to operate the premises with only 50% capacity from 12 PM to 10 PM. Finally, it was also argued that the tenant has already paid some amount as rent and does not have any intention of defrauding the landlords.
The landlords however argued that the tenant has continued to remain in possession of both the premises and has failed to pay the monthly rent. Further, it was also argued that Order XXXVIII, Rule 5 was inapplicable as, in the instant case, the arbitral tribunal’s order was only directing the tenant to deposit the rental amount while it continued to be in the tenant’s possession. Therefore, as long as the tenant continued to remain in possession, the liability of the tenant to pay the rent continued and the force majeure clause was inapplicable.
THE ISSUE BEFORE THE SUPREME COURT
The sole issue before the Supreme Court was whether the arbitral tribunal had rightly directed the tenant to deposit the entire rental amount as an interim measure under Section 17 of the Arbitration Act.
SUPREME COURT’S HOLDING
At the outset, the Supreme Court held that since the liability was seriously disputed by the tenant and the same had not yet been considered by the arbitral tribunal, the impugned order under Section 17 of the Arbitration Act could not have been passed by the arbitral tribunal.
Moreover, it was also observed that there was a complete lockdown for a considerable time, and for the remaining period; the tenant was operating the retro-bar with 50% capacity only. The Supreme Court, therefore, directed the tenant to deposit the entire rental amount except the period during which there was complete lockdown. It also held that the issue of non-deposit of rent for the period during which there was complete closure/lockdown will be ultimately decided by the arbitral tribunal.
Therefore, the Supreme Court directed the arbitral tribunal to consider the principle of force majeure and conclude the arbitral proceedings within nine months, subject to the cooperation of both parties.
The authors respectively submit that the approach of the Supreme Court in the present case is contrary to the settled principles of law. It was rightly argued on behalf of the tenant that the order under Section 17 of the Arbitration Act was akin to an order passed under Order XXXVIII, Rule 5 of the CPC. The order of the arbitral tribunal had the effect of securing the amount in dispute which is covered by Section 17(1)(ii)(b) of the Arbitration Act.
Under Order XXXVIII, Rule 5 of the CPC, courts can order attachment before judgment to prevent a decree from becoming infructuous. Thus, where a court is satisfied that the defendant, with the intent to obstruct or delay the execution of any decree that may be passed against him, is either about to dispose of the entire property or any part thereof or is about to remove the same from the court’s jurisdiction, then the court may call upon the defendant to furnish security or to show cause why security should not be furnished. Under Section 9(1)(ii)(b) or 17(1)(ii)(b) of the Arbitration Act, an arbitral tribunal is empowered to pass an order for securing the amount in dispute in the arbitration. The object behind these provisions is to prevent the party against whom the claim has been made from dispersing its assets or from acting in a manner to frustrate the award that may be passed (see Navtrip Implementation Society v. IVRCL Limited).
The Delhi High Court, in Navtrip Implementation Society v. IVRCL Limited, had observed that the object of Section 17(1)(ii)(b) of the Arbitration Act is similar to that of Order XXXVIII, Rule 5 of the CPC and therefore its conditions have to be kept in mind while passing orders under Section 17(1)(ii)(b) of the Arbitration Act. In the said case also, the Delhi High Court had refused to pass an order under Section 17(1)(ii)(b) of the Arbitration Act because there was no allegation of the defendant disposing of its assets or acting in a manner which would frustrate the award that may be eventually passed against it.
Conditions for granting an order under Order XXXVIII, Rule 5 of the CPC have been explained by the Supreme Court in Raman Tech. & Process Engg. Co. v. Solanki Traders. In para 4 of the said judgment, it was held that a plaintiff will be entitled to an order under Order XXXVIII, Rule 5 of the CPC where it can be shown that there is a prima facie case in favor of the plaintiff and the defendant is attempting to remove or dispose of his assets to defeat the decree that may be passed.
However, without discussing the applicability or inapplicability of Order XXXVIII, Rule 5 of the CPC, the Supreme Court focused on the fact that the liability was seriously disputed by the tenant and that the issue of force majeure was yet to be adjudicated by the arbitral tribunal. In State Bank of India v. Ericsson India Private Limited, the Supreme Court has held that an order passed under Section 17 of the Arbitration Act, which is akin to an order passed under Order XXXVIII, Rule 5 of the CPC, but has not satisfied its requirements, must be set aside.
In light of the above, the Supreme Court should have considered the present dispute by analyzing if there was any material on record to suggest that there was a prima facie case in favor of the landlords and whether the tenant was attempting to make the decree that may be eventually passed against it, infructuous.
Rather, the Supreme Court placed undue reliance on the fact that the liability was seriously disputed. Placing reliance on the fact that the liability is seriously disputed by a party at the time of deciding interim measures is a dangerous precedent. Rather than considering whether there is a prima facie case in favor of the plaintiff and the threat of the defendant frustrating the decree that may be eventually passed against it, courts/arbitrators, after this judgment, will take into account whether the liability was seriously disputed while deciding applications under Sections 9/17 of the Arbitration Act.
Therefore, this judgment sets a dangerous precedent, and it would be interesting to see if there are any future developments on this point of law.
(Raghav Bhatia, is an advocate practising at the Supreme Court of India and Aastha Kapoor, the second author, is a final year law student at Jindal Global Law School. The author may be contacted via mail at email@example.com and firstname.lastname@example.org).
Cite as: Raghav Bhatia and Aastha Kapoor, ‘Evergreen v John Tinson: Analysing Supreme Court’s Erroneous Ruling on Section 17 of Arbitration Act’ (The RMLNLU Law Review Blog, 09 September 2022) <https://rmlnlulawreview.com/2022/09/09/arbitrationintenancy/> date of access.