Port Authority Denied Special Treatment in Arbitration Stay

The High Court let a port authority avoid depositing money by calling it 'not a fly-by operator.' The Supreme Court just shut that down.

Kamarajar Port Limited had won a stay on a Rs 21 crore arbitral award without putting a single rupee in court. The Madras High Court had required only a bank guarantee — a promise to pay, not actual money — because the Port was, in its words, "not a fly-by operator" but a government undertaking. The contractor who had won the award, International Seaport Dredging Pvt Ltd, was left holding a piece of paper — the bank guarantee document, crisp and official, but ultimately just a promise — while the Port challenged the award. Could a government entity really get easier treatment than a private company when it came to staying an arbitral award? The Supreme Court would have to decide whether the Arbitration Act makes any distinction between a state-owned port and a private company.

When a Rs 274 crore contract turned into a dispute

In 2015, Kamarajar Port Limited awarded a massive capital dredging contract — worth Rs 274 crore — to International Seaport Dredging Pvt Ltd. The work was supposed to be finished by April 2017. But disputes erupted between the two parties, as they often do in large infrastructure projects. The contractor invoked the arbitration clause in the contract, and a three-member arbitral tribunal was constituted to hear the case.

After hearing both sides, the tribunal delivered its award on March 7, 2024. The tribunal's award file — thick with evidence, submissions, and the tribunal's own reasoning — was finally signed and sealed. It directed the Port to pay the contractor approximately Rs 21,07,66,621 — over Rs 21 crore — plus interest and costs. The tribunal also dealt with post-award applications under Section 33 of the Arbitration Act (a provision that allows the tribunal to correct errors or interpret its own award), increasing the costs by an additional Rs 12 lakh.

The contractor had won. But winning an arbitral award is one thing. Getting paid is another.

The High Court's 'not a fly-by operator' reasoning

The Port authority did not accept the award. It filed a petition before the Madras High Court under Section 34 of the Arbitration Act (the provision that allows a party to challenge an arbitral award before a court). Along with that challenge, the Port also applied for a stay on the enforcement of the award under Section 36(3) of the Act (the provision that governs when a court can pause payment of an arbitral award while the challenge is pending).

The High Court granted the stay. But it imposed a condition that surprised the contractor: the Port only had to furnish a bank guarantee for the principal amount of Rs 21 crore. No actual deposit of money was required. The court's reasoning was simple and, to some, troubling. It said the Port was "not a fly-by operator" — it was a statutory undertaking, a government entity. Therefore, a mere promise to pay was enough. The bank guarantee document sat in the court file — a piece of paper, not cash.

The High Court also based its decision on a prima facie finding that the tribunal had made an error regarding one specific claim — the cess claim. But it did not examine the other claims that the tribunal had allowed. It granted a blanket stay on the entire award based on a partial reading of the case.

The contractor was not satisfied. A bank guarantee is not the same as money in the bank. It appealed to the Supreme Court.

What the Arbitration Act actually says about stay conditions

The contractor's argument was straightforward: the Arbitration Act does not give government entities any special treatment. Section 36(3) of the Act says that when a court grants a stay on an arbitral award, it must have "due regard" to the provisions of the Code of Civil Procedure that govern stays on money decrees. Under Order XLI Rule 5 of the CPC (the rule that governs when an appellate court can stay a money judgment), the court can require the party seeking the stay to deposit the full amount or provide security.

The contractor argued that the High Court had violated this principle by treating the Port differently simply because it was a government entity. The phrase "not a fly-by operator" was not a legal test. It was a preference, not a principle.

The Port, on the other hand, argued that its status as a statutory undertaking meant it was financially sound. It would not disappear. A bank guarantee was sufficient security. The contractor would not lose its money if the challenge failed.

But the Supreme Court had already dealt with this exact question before.

Why the Supreme Court said no to special treatment

The bench — Chief Justice Dr Dhananjaya Y Chandrachud, along with Justices J B Pardiwala and Manoj Misra — delivered its judgment on October 24, 2024. The courtroom fell silent as the judgment was read out. The bench did not mince words.

The Court held that the Arbitration Act is a self-contained code. It does not distinguish between government entities and private parties. When a court decides the conditions for a stay under Section 36(3), the status of the party — whether it is a statutory undertaking, a public sector company, or a private firm — is not a legally relevant consideration. Calling the Port "not a fly-by operator" was not a valid reason to impose a lighter condition.

The Court relied on two key precedents. In Pam Developments Private Limited v. State of West Bengal (2019), the Supreme Court had already held that government entities cannot claim special treatment when it comes to stay conditions on arbitral awards. In Toyo Engineering Corpn. v. Indian Oil Corpn. Ltd. (2021), the Court had reiterated that the purpose of the Arbitration Act — quick and efficient dispute resolution — would be defeated if award-holders had to wait indefinitely for payment while the losing party challenged the award without putting up real security.

The Court also found that the High Court had erred by not addressing all the claims that the tribunal had allowed. The High Court had focused only on the cess claim and granted a blanket stay on the entire award. That was not proper. When granting a conditional stay, the court must at least prima facie consider all the claims, not pick and choose.

The 75% deposit condition — what it means

The Supreme Court modified the High Court's order. Instead of a mere bank guarantee, the Port was directed to deposit 75% of the decretal amount — inclusive of interest — before the High Court. The deadline was November 30, 2024. Only upon making that deposit would the stay on the award continue.

The Court made clear that this was not an arbitrary percentage. Given the purpose of the Arbitration Act — to provide a speedy alternative to litigation — requiring a substantial portion of the award to be deposited was the appropriate condition. A bank guarantee, while not worthless, does not provide the same level of security to the award-holder. Actual money in the court's account ensures that if the challenge fails, the contractor gets paid without further delay.

The Court also noted that the High Court had the power under Section 36(3) read with Order XLI Rule 5 CPC to direct either full deposit, part deposit, or furnishing of security. But that power must be exercised without discrimination. A government entity cannot get a lighter condition simply because it is the government.

THE PLAY: When seeking a stay on an arbitral award, a government entity must deposit a substantial portion of the award amount — its status as a statutory undertaking is not a valid reason for a lighter condition.

What this judgment changes for every arbitration

For practitioners, this judgment closes a loophole that government entities had been exploiting. The "not a fly-by operator" argument was a convenient way to avoid depositing money while challenging awards. The Supreme Court has now made clear that the Arbitration Act treats all parties equally. A state-owned port is no different from a private contractor when it comes to the conditions for a stay.

For award-holders, the message is equally clear: if a court grants a stay on your award with only a bank guarantee from a government entity, you have grounds to appeal. The Supreme Court has set a benchmark — 75% deposit of the decretal amount inclusive of interest — as the appropriate condition.

For government entities, the lesson is blunt: your balance sheet does not entitle you to preferential treatment. If you want to challenge an arbitral award, you must put up real money, not just a promise.

The Port must now deposit 75% of Rs 21 crore plus interest — a sum that will run into several crores more — by November 30, 2024. The contractor, after years of waiting, may finally see payment. The calendar on the contractor's wall marks that date — a deadline that promises either relief or further delay.