An indemnity bond may replace an onerous bank guarantee for withdrawing deposited arbitral-award proceeds.

The petitioner, M/S Assam Steel Enterprise, succeeded before an arbitral tribunal, which by award dated 18 January 2025 directed BSNL and its officers to pay ₹77,47,660 with interest at 12% per annum.

The respondents challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, and sought stay of its execution under Section 36(2). The Trial Court granted interim stay subject to deposit of 100% of the monetary award.

The respondents deposited ₹77,41,660, ₹6,000 less than the awarded amount.

Subsequently, the Trial Court permitted the petitioner to withdraw 50% of the deposited amount, but made such withdrawal conditional upon furnishing an equivalent unconditional bank guarantee.

The petitioner challenged that condition under Article 227 of the Constitution, contending that an equivalent bank guarantee was onerous and proposing an indemnity bond instead.

The respondents defended the bank-guarantee requirement as necessary to secure restitution if the award were set aside.

Whether the Trial Court was justified in permitting withdrawal of 50% of the deposited arbitral award only upon furnishing an equivalent bank guarantee.

Whether the bank-guarantee condition could be substituted by an indemnity bond containing an undertaking to refund the amount if the Section 34 challenge succeeded.

Whether the stay of execution granted under Section 36 of the Arbitration and Conciliation Act could continue beyond the specified date without a specific order extending it.

The Court applied Sections 34 and 36(2)–(3) of the Arbitration and Conciliation Act, 1996. A court considering a Section 34 challenge may stay execution of an arbitral award under Section 36(3), but must record reasons in writing for granting such stay.

Where interim relief is granted for a specified period or until a particular date, the court must expressly determine its continuation thereafter; there is no automatic extension in the absence of a specific order.

Conditions attached to release of deposited amounts must serve the legitimate purpose of securing restitution but should not be unnecessarily onerous. An indemnity bond with a categorical undertaking to refund may adequately protect the opposing party in place of an equivalent bank guarantee.

The High Court exercised supervisory jurisdiction under Article 227 of the Constitution.

The Court held that the Trial Court was entitled to stay execution of the award at the preliminary stage because the Section 34 challenge could not then be conclusively assessed, and requiring deposit of the award amount was a permissible protective condition under Section 36(3).

However, requiring the award-holder to furnish a bank guarantee equivalent to 50% of the deposited amount would effectively require it to maintain equivalent funds or provide collateral, making the condition excessively burdensome for a party that had succeeded in arbitration.

Since the objective of the condition was only to ensure repayment if the award were ultimately set aside, that objective could be achieved through an indemnity bond accompanied by an express undertaking to refund the disbursed amount.

The Court also clarified that the original stay, having been granted only until the next date, could not be presumed to have continued automatically; nevertheless, it directed that the stay remain effective until further orders of the Trial Court.

The condition requiring an equivalent bank guarantee for withdrawal of 50% of the deposited amount was set aside and replaced with a requirement that the petitioner furnish an equivalent indemnity bond containing a categorical undertaking by its proprietor to refund the amount if the respondents’ Section 34 application succeeded.

The undertaking was also to state that failure to comply could be treated as contempt of court and attract consequential action.