Direction To Deposit Proceeds In Escrow Warranted Only In Limited Circumstances: Supreme Court

The Supreme Court has recently held that a direction to deposit proceeds in an escrow account cannot be issued as a matter of routine in arbitration dispute.

The court observed that such an arrangement is ordinarily warranted only where the underlying contract providing for escrow is subsisting or where there is material to show that the party receiving the money is likely to divert it and lacks sufficient assets to satisfy the award if it goes against it.

A Bench of Justices Manoj Misra and Manmohan recently allowed an appeal filed by A2Z Infraservices Ltd, setting aside a Calcutta High Court order which had directed deposit of contractual receipts into an escrow account during the pendency of arbitration proceedings.

“Ordinarily, a direction to deposit the proceeds in an Escrow Account is to be made where either the contract between the parties envisaging such arrangement is subsisting or the party who is to receive the money is likely to divert it and, if allowed to do so, has insufficient assets to make good the amount in case the award goes against it. In short, the purpose of directing such an arrangement is to ensure the execution of the award ultimately passed,” the Court observed.

The dispute arose from a Master Service Agreement dated April 28, 2017 between A2Z Infraservices and Quippo Infrastructure, in relation to a concession agreement dated December 2, 2016 awarded by the South Delhi Municipal Corporation (SDMC). The agreement had earlier provided for an escrow arrangement.

Following termination of the contract on May 28, 2020, arbitration was invoked, and claims and counterclaims were raised.

Quippo Infrastructure approached the high court under Section 9 of the Arbitration and Conciliation Act, seeking interim protection. While a single judge declined relief on January 21, 2021, the court's division bench, in appeal, directed deposit of all future receipts from SDMC into an escrow account.

The Supreme Court noted that Quippo's claim was essentially one for damages and therefore a pure money claim. It found no material to show that the appellants were financially unsound or that any eventual award would become irrecoverable if escrow protection was not granted.

The apex court said, “As we do not find any finding or observation in the order passed by the Division Bench of the High Court that the appellants were not in a financially sound condition and the amount(s) if not deposited would be rendered irrecoverable in the event an award is passed in favour of the first respondent, the order passed by the Division Bench cannot be sustained, particularly, when arbitral proceedings had commenced and parties could have invoked jurisdiction of the arbitral tribunal under Section 17 of the 1996 Act for interim measures.”

Accordingly, the high court's order was set aside, and the parties were left to pursue their remedies before the arbitral tribunal.

For Petitioner: Senior Advocate Jayant Mehta; Advocate-on-Record Anupam Kishore Sinha; Advocate Arbaaz Hussain; Advocate Naman Singh Bagga; Advocate Kashish Mathur; Advocate Jayestha Kambhoj; Advocate Pradeep K. Tiwari; Advocate Apoorv Jha; Advocate Sahitya Srivastava; Advocate Manasvini Jain.

For Respondent: Advocate Arjun Syal; Advocate Shreyan Das; Advocate Rohit Kumar; Advocate Indhrajit P M; Advocate-on-Record Mithu Jain.

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