Source: Allahabad High Court 

Why in News? 

A bench of Justice Piyush Agarwal held that there is no automatic stay on award upon filing of Appeal under Section 34 of the Arbitration and Conciliation Act, 1996 (A & C Act). 

• The Allahabad High Court held this in the case of Matters Under Article 227(2025). 

What was the Background of Matters Under Article 227 (2025) Case?   

• The petitioner is a tenant of an industrial plot (C-156, Sector 10, NOIDA, ground floor) since July 1, 2008, with a monthly rent of Rs. 8,000. 
• The tenancy agreement was unregistered, for 11 months for manufacturing purposes, and continued after expiry. 
• A dispute arose between the petitioner and respondent no. 1 regarding rent payment, leading respondent no. 1 to file SCC Case no. 19 of 2011 for the petitioner's ejection. 
• The petitioner filed an application to reject the plaint under Order 7 Rule 11 Civil Procedure Code, 1908, citing an arbitration clause in the rent agreement. 
• The Additional Sessions Judge rejected respondent no. 1's plaint on September 19, 2015. 
• Respondent no. 1 then filed an Arbitration petition for the same relief, which was allowed by the Arbitrator through an award dated July 19, 2017. 
• The petitioner filed an objection under Section 34 of the Arbitration and Conciliation Act, 1996 (A & C Act), which was rejected on June 30, 2022. 
• The petitioner's subsequent Arbitration Appeal (Section 37) was rejected by the High Court on December 6, 2022, and their Special Leave Petition to the Supreme Court was also dismissed. 
• During the pendency of the Section 34 objection, respondent no. 1 sold the property to respondent no. 2 via a registered sale deed dated March 5, 2021. 
• The petitioner filed Suit No. 342 of 2021 to cancel this sale deed, which was rejected on May 29, 2023. 
• The petitioner challenged this rejection through First Appeal No. 1000 of 2023, which was admitted on April 10, 2024. 
• In Execution Case No. 108 of 2021, the decree holder filed an application on April 3, 2024, which the court allowed on June 24, 2024, directing the petitioner to pay Rs. 8,58,795. 
• The petitioner has now filed this petition under Article 227 to quash the court's order from June 24, 2024. 

What were the Court’s Observations? 

• The court determined that filing an application under Section 34 of the A & C Act does not automatically stay an arbitral award, as the petitioner had claimed. 
• The arbitration award was passed on 19th July 2017, directing the petitioner to vacate the premises within 30 days, but the petitioner only handed over possession in April 2024. 
• Section 34 application was filed by the petitioner in 2017, after the 2015 amendment to the Arbitration Act came into effect on 23rd October 2015. 
• The Supreme Court in Board of Control for Cricket in India and Shree Vishnu Constructions cases established that the Amendment Act applies prospectively to court proceedings commenced after it came into force. 
• The Court rejected the petitioner's argument regarding automatic stay of the award, noting that the Section 34 application was filed in 2017, well after the 2015 amendment was enacted. 
• The Court dismissed the petitioner's reliance on Small Scale Industrial Manufactures Association, finding that the case's facts were entirely different from the present matter. 
• The Court found that the petitioner had not proven that any competent court had stayed the arbitral award. 
• Based on State of Rajasthan v. J.K. Synthetics Ltd., the court determined that respondent no. 1 is entitled to mesne profits since the award was neither complied with nor stayed by any court. 
• The Supreme Court has established that parties must be restored to their original positions after dismissal of proceedings, meaning that interest or charges accrued during stay periods remain payable. 
• The court concluded that no interference is warranted in the impugned order that directed payment of mesne profits. 

What are the Provisions Regarding Stay under the A & C Act ? 

• Section 36 (2) of the A & C Act provides that: 
  • Filing an application under Section 34 to set aside an arbitral award does not automatically make the award unenforceable. 
  • The award remains enforceable despite the filing of a Section 34 application unless specifically stayed. 
  • To stay the operation of an arbitral award, a separate application must be filed specifically requesting a stay. 
  • The Court must explicitly grant an order of stay in accordance with sub-section (3) for the award to become unenforceable. 
  • Without such a specific stay order, the award continues to be valid and enforceable despite ongoing Section 34 proceedings. 
• Section 36 (3) of A & C Act provides: 
  • The Court may grant a stay of the arbitral award's operation upon filing an application under sub-section (2). 
  • Any stay granted must include reasons recorded in writing by the Court. 
  • The Court has discretion to impose conditions when granting such a stay. 
  • For arbitral awards involving payment of money, the Court must consider the provisions for staying money decrees under the Code of Civil Procedure. 
  • If the Court finds prima facie evidence that the arbitration agreement/contract or the making of the award was induced by fraud or corruption, it must grant an unconditional stay. 
  • The explanation clarifies that these provisions apply to all court cases related to arbitral proceedings, regardless of whether they began before or after the Arbitration and Conciliation (Amendment) Act, 2015.