Tractor Maker Must Furnish ₹1.56-Crore Bank Guarantee To Financier Over Loss-Sharing Claim, Bombay HC Upholds Interim Order

The parties entered into a Memorandum of Understanding (MOU) under which Tyger Capital financed customers purchasing Action Construction Equipment’s tractors, with the MOU providing for a loss-sharing arrangement.

After terminating the MOU, Tyger Capital sought security for amounts claimed to be due.

The High Court appointed a sole arbitrator and permitted the Section 9 application to be converted into a Section 17 application.

The arbitrator directed Action Construction Equipment to furnish a bank guarantee for Rs. 1,56,19,419.22.

Action Construction Equipment appealed under Section 37(2)(b), challenging the arbitrator’s interpretation of the MOU and the basis for ordering security.

1. Whether the arbitrator’s direction to furnish a bank guarantee was perverse, arbitrary, or contrary to the MOU, such that it warranted interference under Section 37(2)(b).

2. Whether the arbitrator could direct security by applying principles analogous to Order XXXVIII Rule 5 of the CPC, including where the MOU prescribed a procedure for determining and claiming the net loss share.

3. Whether the inclusion of the interest component in unrealised EMIs, and the asserted absence of a finding on dissipation of assets, invalidated the interim order.

Section 37(2)(b) of the Arbitration and Conciliation Act, 1996 permits an appeal from an order granting or refusing an interim measure under Section 17.

Review of such an order is circumscribed: interference is warranted where the order is arbitrary, capricious, perverse, contrary to the contract, or reached by ignoring relevant material; a different possible view is insufficient.

In granting interim security, a tribunal may apply principles analogous to Order XXXVIII Rule 5 CPC, while the CPC does not apply to arbitral proceedings with the same strictness as court proceedings.

The court also considered Essar House Pvt. Ltd. v. Arcellor Mittal Nippon Steel (India) Ltd., SPML Infra Ltd. v. Hitachi India Pvt. Ltd., and Jagdish Ahuja v. Cupino Ltd. on interim relief, and distinguished Sanghi Industries Pvt. Ltd. v. Ravin Cables Ltd. on its facts.

The Court held that the arbitrator had considered Clause D and the material concerning NPAs, repossession losses, stock, and write-offs, and had made only a prima facie assessment for interim protection—not a final determination of liability or loss.

Clause D did not expressly exclude interest from “unrealised EMIs,” so including it at the interim stage was not a perverse or arbitrary interpretation.

The Court also found that the arbitrator had addressed the asset-dissipation concern and that the record, including alleged suppression in the asset-disclosure affidavit, supported the decision to require security.

Although Clause D prescribed a process for calculating and claiming net loss, the Court concluded that any failure to examine compliance with that process did not, in the circumstances, preclude interim security under principles analogous to Order XXXVIII Rule 5 CPC.

It dismissed the petition and left in place the direction to furnish a bank guarantee for Rs. 1,56,19,419.22; there was no order as to costs.