Mareva

MAREVA INJUNCTION: A Nuclear Weapon in aid of Arbitration?

by Laghavi Pahwa

Mareva Injunction or ‘freezing order’ is an ad personam, interlocutory order which essentially means freezing the assets of the defendant. This injunction can be sought by the claimant during the pendency of the proceedings or even after judgement is passed to ensure its smooth execution without actually defeating its purpose. It is one of the most common and draconian of reliefs especially in cases wherein the stakes of money involved is high or in the event of fraud. Its main purpose is to preserve the respondent’s assets until judgement can be obtained or enforced. It differs from prohibitory injunction as, a prohibitory injunction prohibits someone from doing something whereas a Mareva injunction is focused on asset preservation. In the case of Dynasty Rangers v SBSK Plantations certain criteria were laid down for the grant of a Mareva injunction such as ‘existence of a cause of action at the time of granting the order, the defendant must have assets within the jurisdiction of the court’, ‘the balance of convenience must be in favor of the plaintiff being granted the injunction’, ‘must establish the real risk of dissipation of assets’, ‘there has been no delay in applying for the injunction’ but other than these, there are no fixed guidelines. Due to the current pandemic, there may be a possibility of an increase in the number of cases in which Mareva injunction is sought but it always needs to be granted with extreme caution due to its extreme effect on the party such order is imposed on.

Position in India

The first question which arises is, from where do Indian courts derive their power to grant a Mareva injunction as there is no specific legislation for it. There have been divergent opinions over the course of several years. The Bombay High Court in the case of Iridium India Telecom Ltd. Vs. Motorola Inc. observed that Mareva injunction and attachment before judgement are separate concepts and the former can only be given when the latter remedy does not exist. The threshold required for a Mareva injunction is merely the requirement of the risk of dissipation of assets. However, the Delhi High Court in the case of Rite Approach Group Ltd. Vs. Rosoboronexport opined that even though Mareva injunction is different from attachment before judgement, it still has to pass the test under Order 38 Rule 5 of the Code of Civil Procedure, 1908. The view taken by the Delhi High Court seems to ignore the demarcation between an injunction and attachment before judgement. There is an ambiguity as to the thresholds involved. The test for attachment before judgement involves an intent to delay the institution of a judgement/award, intent to dispose of the whole or a part of the property outside the jurisdiction of the court. But for Mareva injunctions, the test commonly followed by courts is that mere risk of dissipation of assets is sufficient. Considering the threshold is low compared to other countries, chances of misuse become higher so to avoid this and to strike a balance, the courts have put conditions while granting the Mareva injunction that the plaintiff has to give an undertaking to compensate the defendant if it is subsequently found that the purpose of the injunction is not served or that the injunction was not required in the first place.

Mareva Injunctions in Arbitration proceedings in India

The game-changing judgement of the Supreme Court in Bharat Aluminium Co v. Kaiser Aluminium Technical Services (‘BALCO’) concluded the eternal debate about the applicability of Part 1 of the Arbitration and Conciliation Act, 1996 (‘Act’) on international commercial arbitration. It was held that Part 1 will only apply to the arbitration seated in India. However, clarity was brought after the 2015 Amendment which stated that Section 9, Section 27, Section 37(1)(a) and 37(3) of the Act will apply to international commercial arbitration as well. So now, parties can seek interim protection regardless of where the arbitration is seated. An interim relief under section 9 can be sought before the commencement of proceedings, during the proceedings or after the award is passed but before its execution. An interim order granted by a court will stand vacated in 90 days unless arbitration is invoked. So, the parties can seek a Mareva injunction under Section 9 and Section 17 of the Act.

Courts or Arbitral Tribunal?

Arbitration is a consensual proceeding so ideally the Arbitral Tribunal (‘tribunal’) should be approached for the grant of Mareva injunction provided that the arbitration agreement of the parties empowers the tribunal to give such relief. In Singapore, an arbitral tribunal has concurrent jurisdiction with the High Court with regards to granting interim relief but there is still a lack of clarity on the powers of the tribunal and whether it can grant such a remedy in the absence of prior agreements. If the tribunal is capable of being formed or is already formed then the tribunal shall be preferred over the court as arbitration was voluntarily decided by the parties. In order to go to the court for such a relief, the parties must be able to prove that the constituted tribunal is unable to provide the relief being sought and they must have a strong prima facie case. The court proceedings for a Mareva injunction are usually ex parte because if notice is given to the other party then the purpose of the injunction is defeated as now money can be transferred globally in just a few minutes and the Mareva injunction will prevent the defendant from dissipating his assets which ensures smooth proceedings. Over the years, the concept of an emergency arbitrator has also emerged. An emergency arbitrator is appointed on an urgent basis usually to deal with applications for interim relief which cannot wait until the constitution of the Arbitral Tribunal. However, an emergency arbitrator cannot grant relief on an ex-parte basis and the application for a Mareva injunction is usually heard without giving notice to the defendant, so because of this, the parties might rather prefer to go to court.

Orders against Third-Party

Usually, only the parties to a contract or an agreement are bound to the orders but under the English Law, the Chabra jurisdiction allows the courts to grant a freezing injunction against a third party who holds assets for the defendant and against whom there is no substantive cause. In the case of Cruz City 1 Mauritius Holdings v Unitech Ltd and others, it was held that this relief is not provided in the course of an arbitration proceeding as in order to exercise the Chabra jurisdiction, the proceedings must be adjudicated before the court. In India, after the 2015 Amendment, the powers of the court and the tribunal under Section 9 and Section 17 have been made at par to grant interim relief. When orders against third parties are concerned, the Supreme Court in the case of MD Army Welfare Housing vs. Sumangal Pvt Ltd held that an arbitral tribunal cannot pass interim orders against a third party. There is no express bar by the legislature that under Section 9 the court cannot pass interim orders against a third party, therefore, the arbitral tribunal can pass interim orders against third parties.

Conclusion

The Mareva injunction is an innovative judicial outcome of 1975. It has evolved since then in various jurisdictions especially in England where through a plethora of cases it has given some explanation and clarity about the interim relief. It is a ‘nuclear weapon’, a powerful tool to protect the plaintiff from the defendant when there is a genuine risk of dissipating assets which ultimately ensures that the judgement is executed without its purpose being defeated. Mareva injunctions are generally granted in cases of fraud or when huge monetary stakes are involved and such reliefs are not granted easily. The plaintiff needs to have a substantial prima facie case which meets the tests and guidelines laid down by various precedents. Keeping in mind the current COVID-19 situation, there may be more disputes in the market due to the stress and pressure this situation has caused as now many people may be under situations wherein they cannot fulfill their part of the contract. Now that moratorium has been introduced in most countries, these orders can not be enforced as quickly as they normally would have. Overall, there will be some sort of sympathy towards the defendant as the pandemic is affecting everyone, however, it ultimately depends on the merit of every case.

Views are personal.

Image credits: Image provided by the author.

ABOUT THE AUTHOR

Laghavi Pahwa is a fifth year student at School of Law, Manipal University, Jaipur.

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