In a recent decision in KLA Const. Technologies Pvt. Ltd. and Ors. v. The Embassy of Islamic Republic of Afghanistan and Ors.1 the High Court of Delhi (High Court) held that the prior consent of the Central Government under Section 86(3) of the Code of Civil Procedure, 1908 (Code of Civil Procedure) was not required for the enforcement of arbitral awards passed against a foreign State. The present article briefly summarises the findings of the High Court in the decision mentioned above.

Brief Facts

The instant matter pertains to two enforcement petitions wherein the petitioners seek the enforcement of arbitral awards against the respondent foreign States. In the first petition, OMP (ENF) (COMM) 82/2019, the petitioner seeks the enforcement of an arbitral award dated 26 November 2018 against the Embassy of the Islamic Republic of Afghanistan. Whereas, in the second petition, OMP (EFA) (COMM) 11/2016, the petitioner seeks to enforce an arbitral award dated 25 October 2015 against the Ministry of Education, Federal Democratic Republic of Ethiopia.

In both the cases above, the respondents did not participate in the arbitration proceedings, leading to the passing of the ex-parte arbitral awards. The two moot questions that arose in these petitions are:

  1. Whether the prior consent of the Central Government is necessary under Section 86(3) of the Code of Civil Procedure to enforce an arbitral award against a foreign State?
  2. Whether a foreign State can claim sovereign immunity against the enforcement of an arbitral award arising out of a commercial transaction?

Submissions of the Petitioners

The petitioners at the outset contended that there was no requirement under law to obtain the consent of the Central Government under Section 86(3) of the Code of Civil Procedure for implementation of an arbitral award against a foreign State. The petitioners submitted that the requirement of prior consent for execution of an otherwise final and binding arbitral award against the judgment debtor was against the tenets of the law of arbitration.

The petitioners stated that an arbitral award passed in an international commercial arbitration held in India would be construed as a 'domestic award' under the Arbitration and Conciliation Act, 1996 (Arbitration Act).  Domestic awards would be enforceable under Section 36 of the Arbitration Act. The petitioners argued that the legal fiction created under Section 36 of the Arbitration Act was for a limited purpose of providing legitimacy to the arbitral awards by deeming them to be the decrees of the courts. Merely because an arbitral award was deemed to be a court decree, it would not become one under the Code of Civil Procedure.

Moreover, the petitioner submitted that the applicability of the provisions of Section 86(3) of the Code of Civil Procedure would violate the three main principles of the Arbitration Act, which were (i) speedy, inexpensive, and fair trial by an impartial tribunal, (ii) party autonomy, and the (iii) minimum intervention of the courts.

Findings of the High Court

The High Court referred to the decision in Bharat Aluminium Company v. Kaiser Aluminium Technical Services Ltd.,2 where the Hon'ble Supreme Court held that the legal fiction created under Section 36 of the Arbitration Act was for the limited purpose of enforcing an arbitral award as a decree. The fiction was not intended to make an arbitral award a decree for all purposes under all statutes. It was emphasised that legal fiction ought not to be extended beyond its legitimate field.

The High Court then referred to the case in Uttam Singh Duggal & Co. Pvt. Ltd. v. United States of America, Agency of International Development3. In Uttam Singh, the maintainability of a petition under Section 20 of the Arbitration Act, 1940 was brought into question. It was contended that the respondent being a foreign State, was immune from the jurisdiction of the Indian courts. The High Court rejected the contention by holding that no sovereign or public act was involved in a transaction. Additionally, the High Court held that a petition under Section 20 of the Arbitration Act, 1940 was not a suit under Section 86 of the Code of the Civil Procedure.

The High Court then referred to the case of Union of India v. U.P. State Bridge Corporation Ltd.4 to stress upon the three main principles of the Arbitration Act namely (i) speedy, inexpensive and fair trial by an impartial tribunal, (ii) party autonomy, and (iii) minimum court intervention.

On examining multiple other decisions5, the High Court summarised its findings as follows:

  1. The prior consent of the Central Government is not necessary under Section 86(3) of the Code of Civil Procedure to enforce an arbitral award against a foreign State. A foreign State cannot claim sovereign immunity against the enforcement of an arbitral award arising out of a commercial transaction.
  2. Section 36 of the Arbitration Act treats an arbitral award as a decree of the court for the limited purpose of enforcement of an award under the Code of Civil Procedure which cannot be read in a manner that would defeat the very underlying rationale of the Arbitration Act, i.e., speedy, binding and legally enforceable resolution of disputes between parties.
  3. An arbitration agreement is an implied waiver of the foreign State to preclude it from raising a defence against the enforcement of the principle of sovereign immunity. Once the foreign State wears the hat of a commercial entity, it would be bound by the rules of the commercial legal ecosystem and cannot be permitted to seek any immunity otherwise available to it in sovereign capacity.
  4. If foreign States were allowed to halt the enforcement of arbitral awards, which is the ultimate fruit of the arbitration, then the very edifice of International Commercial Arbitration would collapse.

In conclusion, the High Court held that both the petitions in the instant matter were maintainable. The respondents were directed to deposit the respective award amounts with the Registrar of the court within four weeks. If the respondents failed to deposit the amount, the petitioners were at liberty to seek attachment of the respondents' assets.

Comments

The decision deals with a very crucial point of law in the context of the Indian arbitration legal framework. As an evolving jurisdiction, the courts need to ensure that moot points such as the one discussed in the present case are settled beyond doubt. It is a common phenomenon for entities that might otherwise be accorded with sovereign privileges to act as a party in private commercial contracts. In the domain of private commercial transactions, sovereign immunity must be deemed to have been waived off either by the nature of the transaction or by the agreement to arbitrate. This would ensure that the arbitration that may follow in case of a dispute is binding upon the parties. The decision in the instant matter is in line with the tenets of modern arbitration and the principle of restrictive immunity under international law.

* The author would like to acknowledge the research and assistance rendered by Harshvardhan Korada, a student of Amity Law School, Delhi.

Footnotes

1. KLA Const. Technologies Pvt. Ltd. and Ors. v. The Embassy of Islamic Republic of Afghanistan and Ors., OMP (ENF) (COMM) 82/2019, I.A. No. 7023/2019, O.M.P. (EFA) (COMM) 11/2016 and E.A. 666/2019.

2. Bharat Aluminium Company v. Kaiser Aluminium Technical Services Ltd., (2012) 9 SCC 552.

3. Uttam Singh Duggal & Co. Pvt. Ltd. v. United States of America, Agency of International Development, ILR 1982 2 Del. 273.

4. Union of India v. U.P. State Bridge Corporation Ltd., 2015 2 SCC 52.

5. Satyawati v. Rajinder Singh, 2013 9 SCC 491; Ethiopian Airlines v. Ganesh Narain Saboo, 2011 8 SCC 539; Syrian Arab Republic v. A.K. Jajodia, ILR 2004 2 Delhi 704; Rahimtoola v. Nizam of Hyderabad, 1957 3 WLR 884; Trendtex Trading Corporation v. Central Bank of Nigeria, 1977 2 WLR 356; Birch Shipping Corp. v. The Embassy of the United Republic of Tanzania, 507 F. Supp. 311, 1981 A.M.C. 2666.

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