Deposit of money as an interim measure in aid of arbitration

Zarir P Bharucha

ZBA Advocates and Solicitors, Bombay High Court, Mumbai

Introduction

In Ultra Deep Subsea Pte Ltd v Hindustan Oil Exploration Company Ltd, the Bombay High Court liberalised the grant of an order directing the deposit of money in aid of a foreign seated arbitration.[1] In so doing, it ruled that Indian courts have the jurisdiction to direct payment into court of money as security in aid of a foreign seated arbitration in circumstances where the recalcitrant debtor had illegally withheld monies that were contractually due to its counterpart. The judgment clarifies that the Indian court is statutorily empowered to grant interim measures in aid of a foreign seated arbitration unless parties expressly exclude the Indian court’s jurisdiction.

This decision is a welcome development for claimants whose contractual counterparts are based in India or have assets in India.

The facts

Hindustan Oil Exploration Company (HOEC) time-chartered the vessel OSV Lichtenstein (the ‘Vessel’) owned by Ultra Deep Subsea Pte Ltd (UDS) for diving support operations on a 2017 BIMCO Supplytime form (C/P). The C/P was subject to London arbitration and governed by London Maritime Arbitrators Association Rules (LMAA).

Admissions of liability

UDS periodically issued invoices to HOEC in accordance with the C/P. HOEC repeatedly admitted liability to pay the invoices but sought additional time claiming: (1) COVID-19 restrictions; and (2) awaiting a withholding tax order by the Indian tax department.

Pay now argue later clause

The 2017 BIMCO Supplytime form contained the standard clause 12(e), which is a ‘pay now argue later’ clause. Pursuant to clause 12(e), of the C/P, HOEC was obliged to convey to UDS its objection (if any) to each invoice within seven days of receipt of such invoice. HOEC was required to pay the invoiced amounts immediately within seven days if it failed to promptly notify UDS of its objections to any invoice. HOEC could reclaim payment in arbitration of any invoice that it disputed after the seven-day period prescribed by Clause 12 (e) of the C/P.

Default

The duration of the C/P was extended ten times by UDS on identical commercial and legal terms.

Once the drilling operations were completed and the Vessel redelivered, HOEC in a volte face disputed payment, alleging that the Vessel was sub-standard and that the invoices were discrepant.

On HOEC’s payment default, UDS applied to the Bombay High Court for an order of deposit of monies admittedly due under the C/P in aid of its London seated arbitration.

The judgment

Section 2(2) of the Indian Arbitration and Conciliation Act 1996 (the ‘Arbitration Act’) was amended in 2015 authorising Indian courts to grant interim measures in aid of a foreign seated arbitration unless parties agreed to the contrary.

Before this statutory amendment, Indian law did not permit Indian courts to grant interim measures in aid of a foreign seated arbitration if the agreement to arbitrate was governed by foreign law.

HOEC argued that the Indian courts’ jurisdiction to grant any interim relief in aid of the London arbitration was impliedly ousted, because the C/P was subject to English substantive law and the arbitration was under the LMAA Rules.

The court rejected this submission by ruling that merely because the substantive and curial law of the contract and/or the agreement to arbitrate was foreign, that was insufficient to oust the jurisdiction of Indian courts to grant interim measures. The court held that there must be a specific and express agreement clearly indicating the parties’ intention to exclude the Indian courts’ jurisdiction to grant interim measures as security for the claim in arbitration.

Test for granting deposit of money as security

The conventional test for obtaining a deposit of money as security for a claim is not easy. The claimant must establish a case of dissipation of assets by the debtor to defeat any award to obtain such an order. HOEC argued that this test was not satisfied as it was in good financial health and there was accordingly no warrant for such an order.

The court disagreed and held that its power to order a deposit of money was not restricted or limited to only those cases of dissipation of assets. In advancing the law, the court ruled that it had the power to order deposit of money where there was an admission of liability by the debtor that amounts were due  to the claimant. The court had the flexibility to grant appropriate orders as it was not strictly bound by the rigors of the CPC whilst granting interim measures under Section 9 of the Arbitration Act.

The court held that an order of deposit in aid of arbitration ought to be granted where:

• there are unequivocal admissions of liability by the debtor; or
• the debtor’s defence is mere moonshine.

The court found that there were unequivocal admissions of liability by HOEC in relation to the invoices raised by UDS. It also noted that the C/P was extended on ten occasions on identical commercial and legal terms. No grievance was made by HOEC while extending the C/P. HOEC’s objections were belated and advanced only after UDS approached the court. In the circumstances, the court held that the interests of justice warranted that HOEC deposit the admitted amounts in court as security for the LMAA arbitration.

Clause 12(e) of the C/P

HOEC was held to be contractually barred from withholding the invoiced amounts as it had failed to dispute the invoices within seven days of receipt.

The court explained that the commercial rationale underlying clause 12(e) in the 2017 BIMCO Supplytime form was to ensure continuous, uninterrupted cash-flow to the owner of the vessel. The court approved of the decision of the English Commercial Court in The Atlantic Tonjer, where clause 12(e) was similarly interpreted.[2]

Philosophical justification for this approach

The approach adopted by the Indian courts to grant deposit of money as security where there are admissions of liability or the defence of debtor is moonshine is commercially more compelling than other jurisdictions such as the United Kingdom or Singapore, where the conventional test of dissipation of assets prevails.

One could argue that the approach adopted by the Indian courts amounts to excessive judicial interference trespassing on the domain of the arbitral tribunal. However, these reliefs are granted by an Indian court only when the admissions of liability or infirmity in the debtor’s defence is ex facie apparent (or) the contractual terms expressly create an unconditional obligation on the debtor to pay. In other words, the court does not conduct a mini-trial to ascertain whether the debtor has no real defence. It strikes a balance between the competing principle of non-interference by courts in the arbitration process when juxtaposed against the commercial immorality of illegally withholding payment of admitted amounts by a recalcitrant debtor.

The other concern is that it may open the floodgates to parties applying to the court instead of the arbitral tribunal for enforcement of contractual obligations pending resolution of the dispute.[3] However, the test adopted by the Indian courts limits the orders that it will grant in aid of arbitration. A deposit of money is ordered only when there is an admission of liability, or the contract clearly provides that such amounts cannot be withheld irrespective of the dispute. For instance, in another case, the Bombay High Court ordered the deposit of tax deducted at source, an amount withheld by the debtor when it was clear that no tax was leviable in respect of such transaction.[4] In these cases, the Indian courts have held that where there is no dispute or admissions by parties, a deposit order will be made in the interests of justice. There are therefore adequate safeguards and self-imposed limitations by the court to ensure that parties do not bypass the agreed dispute resolution mechanism of arbitration.

Conclusion

The judgment demonstrates the flexibility of the Indian courts in granting interim measures in aid of arbitration.[5] It is a welcome addition to the Indian courts’ armoury and ensures that India remains an attractive and arbitral friendly jurisdiction that is in sync with commercial reality.