2 July 2021
INTRODUCTION
1. On June 18, 2021, the Delhi High Court, in proceedings seeking enforcement of arbitral awards against foreign states, has reiterated the principle of restrictive immunity and upheld the basic tenets of International Commercial Arbitration – flexibility, stability, efficiency, and its legally binding nature. The Court held that prior consent of the Central Government under Section 86 of the Code of Civil Procedure, 1908 (“Code”), is not required for enforcement of arbitral awards against a foreign state. Importantly, it also held that foreign state cannot claim sovereign immunity for the purpose of stalling enforcement of an arbitral award rendered against it, and which arises out of a commercial transaction.
FACTS
2. The Court dealt with enforcement proceedings arising out of two different arbitration proceedings, both against foreign states (The Embassy of Islamic Republic of Afghanistan and The Ministry of Education, Federal Democratic Republic of Ethiopia).
3. In OMP (ENF) (COMM) 82/2019, The Embassy of Islamic Republic of Afghanistan (“Embassy of Afghanistan”) awarded KLA Const Technologies Pvt. Ltd. (“KLA”) with the contract for rehabilitation of the Embassy of Afghanistan at New Delhi. Since disputes arose between the parties during the execution of work, KLA invoked the arbitration clause in the contract. Consequently, KLA filed a Section 11 application before the Supreme Court for appointment of an arbitrator.
4. The Sole Arbitrator appointed by the Supreme Court conducted the arbitration proceedings. The Embassy of Afghanistan participated in these proceedings up to July 24, 2017. However, since the Embassy of Afghanistan did not appear on November 13, 2017, the Sole Arbitrator proceeded ex parte and passed an ex parte award, allowing KLA’s claims on November 26, 2018. The Embassy of Afghanistan neither challenged this award, nor made any payment in terms of the award. In the enforcement proceedings, the Embassy of Afghanistan entered appearance on September 2, 2019, and sought time to seek instructions. However, it stopped appearing thereafter.
5. In OMP (EFA) (COMM) 11/2016, Matrix Global Pvt. Ltd. (“Matrix”) entered into a contract with The Ministry of Education, Federal Democratic Republic of Ethiopia (“Ministry of Education, Ethiopia”) to supply books to the Ministry of Education, Ethiopia. Matrix shipped the complete order and raised invoices totalling USD 25,56,442.37. The Ministry of Education, Ethiopia, paid USD 20,22,981, and thereafter cancelled the contract on April 24, 2014. Matrix initiated arbitration proceedings to recover the balance amount, and a sole arbitrator was appointed under the UNCITRAL Rules on December 4, 2014. Since the Ministry of Education, Ethiopia, refrained from participating in the arbitration proceedings, an ex parte award was passed against the Ministry of Education, Ethiopia, on October 25, 2015.
6. Even in this case, the Ministry of Education, Ethiopia neither challenged the award nor made payment in terms of the award. The Ministry of Education, Ethiopia did not appear in the enforcement proceedings despite service. The Ministry of Education, Ethiopia however did ask Matrix for a copy of the arbitral award on 10 May 2019 and acknowledged having received it on 30 May 2019.
ISSUES
7. The Delhi High Court framed two questions of law to be answered:
(I) Whether prior consent of the Central Government was necessary under Section 86(3) of the Code to enforce an arbitral award against a Foreign State?
(II) Whether a Foreign State could claim Sovereign immunity against enforcement of arbitral award, arising out of a commercial transaction?
Requirement of prior consent
8. KLA and Matrix relied on the decision in Bharat Aluminium Company v. Kaiser Aluminium Technical Services Ltd.[1] and argued that an arbitral award passed in an international commercial arbitration held in India would constitute a domestic award under the Arbitration and Conciliation Act, 1996 (“Act”), and would be enforceable under Section 36 of the Act. Reliance was also placed on Paramjeet Singh Patheja v. ICDS Ltd.[2] to contend that the legal fiction under Section 36 of the Act was merely for the limited purpose of enforcement of an award as a decree, by providing it with the associated legitimacy and validity, and it did not have the effect of making it a decree under the Code.
9. They also submitted that there was no requirement to obtain the Central Government’s consent under Section 86(3) of the Code for enforcing an arbitral award against a foreign state. To buttress this submission, they relied on Nawab Usman Ali Khan v. Sagarmal[3] (which was subsequently also reiterated by the Supreme Court in McDill & Co. Pvt. Ltd. v. Gouri Shankar Sarda[4]), where it was held that Section 86(1) was only applicable to suits.
10. It was also contended that the requirement of prior consent for the execution of a final and binding award would violate the three main principles of the Act i.e., speedy, inexpensive and fair trial by an impartial tribunal; party autonomy; and minimum Court intervention, as held in Union of India v. U.P. State Bridge Corporation Ltd.[5]
11. In this case, the Delhi High Court had also directed the Union of India to confirm whether prior consent of the Central Government was necessary under Section 86(3) of the Code. As per the Central Government, since the execution proceedings in respect of an arbitral award could not be regarded as a suit for the purpose of Section 86 of the Code, the Central Government’s concurrence would not be required.
12. The Delhi High Court also relied on the doctrine of contemporanea expositio, and referred to the decision in Indian Metals & Ferro Alloys Ltd., Cuttack v. Collector of Central Excise, Bhubaneshwar[6], where it was held that the Courts were required to give due consideration to the interpretation of a statute or law by those whose duty it is to execute and apply it.
Sovereign Immunity against enforcement of arbitral award
13. KLA and Matrix relied on the United Nations Convention on Jurisdictional Immunities of States and their Property, 2004 (“Convention”), to which India is a signatory, although the Convention is not in force yet. Articles 10, 17, and 19 of the Convention restrict States from invoking Sovereign Immunity as a defence in disputes arising out of commercial transactions, and against post judgment measures of constraint.
14. It was contended that the mere act of entering into arbitration agreements constituted waiver of sovereign immunity on the part of the Embassy of Afghanistan and the Ministry of Education, Ethiopia. KLA and Matrix relied on the Supreme Court’s ruling in Ethiopian Airlines v. Ganesh Narain Saboo[7], where it was observed that sovereign immunity would not be applicable with respect to a commercial transaction, and the same was in consonance with the growing international law principle of restrictive immunity.
15. In Syrian Arab Republic v. A.K. Jajodia[8], it was observed that since a sovereign state can prescribe the right and liabilities of foreign states to sue and be sued in Municipal Courts, when such consent is indeed granted under Section 86 of the Code, it would not then be open to a foreign state to rely on the doctrine of immunity under international law.
16. They also relied on the decision in M/s. Uttam Singh Duggal & Co. Pvt. Ltd. v. United States of America, Agency of International Development[9], where the Supreme Court had observed that the transaction in question was a private commercial act and not a sovereign act, and thus, the foreign state could not claim immunity from the jurisdiction of Indian Courts. The decisions in Rahimtoola v. Nizam of Hyderabad[10], Trendtex Trading Corporation v. Central Bank of Nigeria[11], and Birch Shipping Corp. v. The Embassy of the United Republic of Tanzania[12] were also cited in support.
FINDINGS BY COURT
17. The Delhi High Court summarised the position of law on both the issues. It held that prior consent of the Central Government was not necessary under Section 86(3) of the Code for the enforcement of an arbitral award against a foreign state i.e., the Embassy of Afghanistan and the Ministry of Education, Ethiopia, in this case. The High Court also held that a Foreign State could not claim Sovereign Immunity against the enforcement of an arbitral award, arising out of a commercial transaction.
18. The Court then went on to hold that Section 86 of the Code being of limited applicability, it would not cover cases of implied waiver. An arbitration agreement in a commercial contract between a party and a foreign state would be an implied waiver by the foreign state, which would prevent it from resisting an enforcement action premised upon the principle of Sovereign Immunity. The foreign state, the Court held, could not be permitted to contend that its consent must be sought again at the stage of enforcement, since the award itself is the result of arbitration, which the foreign state had consented to.
19. Importantly, the Court also held that the purpose and nature of the transaction would determine whether it was purely commercial in nature or in the domain of exercise of sovereign authority. Lastly, it held that an arbitral award was to be treated as a decree only for the limited purpose of enforcement under the Code, and not in a manner that would render useless the rationale of the Act.
CONCLUSION
20. The decision is yet another instance of India’s pro-enforcement approach. The Court has maintained its endeavour of minimising delays and obstructions in the enforcement of arbitral awards. This decision also takes forward the amendments made to the Act and the consistent efforts of making India a hub of international arbitration. The speedy nature of arbitration, which makes it the preferred mechanism of dispute resolution, has rightly been given primacy. The decision also evidences the equal treatment afforded to parties in arbitral proceedings in India, by preventing foreign states from claiming sovereign immunity in dealings that do not pertain to sovereign activities.
For further information, please contact:
Omar Ahmad, Partner, Cyril Amarchand Mangaldas
omar.ahmad@cyrilshroff.com
[1] (2012) 9 SCC 552
[2] (2006) 13 SCC 322
[3] (1965) 3 SCR 201
[4] (1991) 2 SCC 548)
[5] (2015) 2 SCC 52
[6] 1991 Supp (1) SCC 125
[7] (2011) 8 SCC 539
[8] ILR (2004) 2 Delhi 704
[9] ILR (1982) 2 Del. 273
[10] (1957) 3 WLR 884
[11] (1977)2 WLR 356
[12] 507 F. Supp. 311, 1981 A.M.C. 2666
