Preserving the Quintessential Value of the Arbitration and Conciliation Act, 1996: Analysing the Supreme Court’s Decision in Sundaram Finance Limited v. Abdul Samad

Preserving the Quintessential Value of the Arbitration and Conciliation Act, 1996: Analysing the Supreme Court’s Decision in Sundaram Finance Limited v. Abdul Samad.

[Megha Tiwari and Amrit Singh]

The authors are fourth-year students of WBNUJS Kolkata.

Arbitration has evolved as an efficacious alternative to litigation for settlement of disputes, and is now considered an important tool in promoting investment in Indian businesses. The recent amendments to the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) and the subsequent judicial pronouncements have strived to make dispute resolution swifter. In keeping with this philosophy, the Supreme Court delivered its judgment in the case of Sundaram Finance Limited v. Abdul Samad,[1] conclusively settling a matter dividing opinion between various high courts.  The issue in contention was whether the execution of an arbitral award could be done in the court in whose jurisdiction the assets are located without obtaining a transfer of decree from the court originally having jurisdiction, as provided for in the Code for Civil Procedure, 1908 (hereinafter referred to as “the Code”).

Facts of the Case

The Appellant had initiated arbitral proceedings against the Respondents for repayment of a loan granted for purchasing a vehicle. A notice was served upon the Respondents by publication, but the latter failed to appear for the arbitral proceedings. Hence, an ex-parte award was passed directing them to repay the loan amount to the Appellants, with post-judgment interest at the rate of 18%. Consequently, execution proceedings were filed in a trial court at Morena, Madhya Pradesh, where the assets of the respondents were located. However, the trial court returned the application for lack of jurisdiction, stating that since the award is to be executed in the manner of execution of a decree,[2] the Appellants would first have to obtain a transfer of decree from the court originally possessing jurisdiction. As the trial court’s order was in adherence to the view adopted by the Madhya Pradesh High Court in earlier decisions, the Appellants preferred an application directly to the Supreme Court by special leave.

The Supreme Court discussed in detail the view adopted by the Madhya Pradesh and the Himachal Pradesh high courts on one side favouring the requirement of transfer of decree, and that of the Delhi, Kerala, Madras, Rajasthan, Allahabad, Haryana and Karnataka high courts on the other.

The Opposing Views

Transfer of decree must be obtained before filing for execution of an award

In the case of Computer Sciences Corporation India Pvt. Ltd. v. Harishchandra Lodwal,[3] the Madhya Pradesh High Court explained that section 36 of the Act provides that an arbitral award must be enforced as a decree of the court under the Code. When a decree is sought to be enforced in a court where the assets are located, section 39 of the Code requires a transfer of decree from the court that passed the decree. The High Court opined that though an arbitral award is not passed by a court, the relevant court for arbitral proceedings is defined in section 42 of the Act read with section 2(e) thereof. Therefore, a transfer of decree must be obtained for the execution of the award in the court where the assets are located. In the case of Jasvinder Kaur v. Tata Motor Finance Limited,[4] the High Court of Himachal Pradesh came to the same conclusion by incorrectly relying on the decision of the Karnataka High Court in ICDS Ltd. v. Mangala Builders Pvt. Ltd.[5] to hold that a transfer of decree was required for execution of an arbitral award. In ICDS Ltd.,[6] the issue adjudicated upon was whether an arbitral award could be executed in a court lower than the principal civil court in a district, as required by section 2(e) of the Act. The court held that it could not, and ordered the respondents to file for execution in the principal civil court. Since the execution application was not filed in a court outside the jurisdiction of the court in section 2(e), the question of transfer of decree was not a matter of contention, and hence, not adjudicated upon.

Transfer of decree must not be obtained for execution of an award

In the case of Daelim Industrial Co. Ltd. v. Numaligarh Refinery Ltd.,[7] the Delhi High Court reasoned that the transfer of decree is to be obtained from the court that passed the decree, but an arbitral award is passed by an arbitrator, and not a court. It was then argued that the concerned court would therefore be the court mentioned in section 42. However, negating this argument, the Delhi High Court held that the jurisdictional clause in section 42 of the Act would only apply to arbitral proceedings, and execution of an award is not an arbitral proceeding. Therefore, the award must be executed directly by the court without requiring a transfer of decree. The same view was later adopted by the Rajasthan High Court,[8] and the Punjab and Haryana High Court.[9]

The Kerala High Court was of the opinion that since a decree is not required for the execution of an award, a transfer of decree could not be obtained, and execution should be done based on a certified copy of the award.[10] The Madras High Court, in its well-reasoned decision in the case of Kotak Mahindra Bank Ltd. v. Sivakama Sundari,[11] ruled that the provisions under the Act are different from those of the Arbitration and Conciliation Act, 1940, which required the district court to pass a decree to confirm the award. Since no confirmation of the award is required under the current Act, the award must be enforced directly. It also explained that the transfer of decree must be done by the court that passed the decree. However, in this case, there is no deeming provision anywhere in the Act stating that the court as defined in section 2(e) would be the court deemed to have passed the decree. Therefore, the award must be executed without requiring a transfer of the decree.

The Allahabad High Court held that the arbitrator cannot be treated as a court, and therefore, the provisions relating to transfer, i.e. sections 38 and 39 of the Code, will not be applicable, and the award must be executed directly. The Karnataka High Court also adopted a similar view.[12]

The Decision

While deciding upon the issue, the Supreme Court primarily relied on section 32 of the Act, which states that the arbitral proceedings stand terminated by the passing of the final arbitral award. It ruled that once the arbitral proceedings are terminated, the question of jurisdiction under section 42 could not arise, since the section only designates the proper court for hearing of applications arising out of the arbitral proceedings. The Supreme Court also appreciated the view taken by the Delhi High Court, which held that section 42 of the Act would not be applicable since execution proceedings are not part of the arbitral proceeding, as required under the section. The Supreme Court also affirmed the reasoning of the Madras High Court, which stated that in absence of a deeming fiction stating the court of jurisdiction under section 42 to be the court which would be deemed to have passed the decree, this assumption could not be made. Therefore, the award should be executable in every court with the power to execute such award.

A comparison was also drawn with the Arbitration and Conciliation Act, 1940, which mandated the procurement of a decree in lieu of the arbitral award for it to be executed. Since the Arbitration and Conciliation Act, 1996 does not contain such a provision, it seems that the general nature of the Act envisages direct execution of the arbitral awards. If obtaining a transfer of decree was made mandatory, the omission of the aforementioned provision from the 1996 Act would not serve any purpose. Therefore, having regard to the nature of the 1996 Act, direct execution of the arbitral award would do justice to the legislative intent too.

Analysis

While the judgment of the Supreme Court cannot be criticized on the grounds of its general impact, it lacks perspicuity so often expected of the highest court in the land. The Court has not provided an original analysis on the view taken by the high courts, and simply arranged all the arguments of the favouring high courts together. This is most visible in the Supreme Court’s analysis of the argument of section 42 not being applicable in light of the termination of arbitral proceedings under section 32.

At this juncture, reference is made to section 42 of the Act, which reads as follows:

Notwithstanding anything contained elsewhere in this Part or in any other law for the time being in force, where with respect to an arbitration agreement any application under this Part has been made in a court, that court alone shall have jurisdiction over the arbitral proceedings and all subsequent applications arising out of that agreement and the arbitral proceedings shall be made in that court and in no other court.[13]

The Supreme Court held that since the arbitral proceedings are terminated upon the final arbitral award being passed, section 42 would cease to apply. However, it does not discuss if section 42 could still apply after the termination of the arbitral proceedings by virtue of the phrase “arising out of that agreement” used therein. Intuitively, an execution application could be said to arise out of the arbitration agreement in the same manner as an interlocutory application. Since section 42 does not state that the jurisdiction clause ceases to apply after the termination of the arbitral proceedings, but instead uses the broad phrase “arising out of that agreement”, the Supreme Court ought to have clarified the application of section 42 vis-à-vis section 36 of the Act.

Considering its ramifications, the judgment in this case was a pragmatic one, preserving the quintessential value of the Act, one transcending local jurisdictional hurdles for the sake of expeditious settlement of disputes. Had a different view been taken by the Supreme Court, parties to the dispute would not only have to invest more time in obtaining the transfer of decree, but also invest more money in hiring a different set of lawyers for obtaining transfer of decree and execution of the same.

[1] Sundaram Finance Ltd. v. Abdul Samad, Civil Appeal No.1650 of 2018.

[2] Section 36, the Arbitration and Conciliation Act, 1996.

[3] AIR 2006 MP 34.

[4] CMPMO No 56/2013.

[5] AIR 2001 Kar 364.

[6] Ibid.

[7] 2009 159 DLT 579.

[8] Kotak Mahindra Bank Ltd. v Ram Sharan Gurjar, (2012) 1 RLW 960.

[9] MANU/PH/2896/2012.

[10] Maharashtra Apex Corporation Limited v. Balaji G, 2011 (4) KLJ 408.

[11] (2011) 4 LW 745.

[12] (2015) 1 AIR Kant R 261.

[13] Section 42, Arbitration and Conciliation Act, 1996.

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