INTRODUCTION

The intricacies involving the principle of sovereign immunity from the lens of enforcement in arbitral proceedings have been dealt for the first time by the Hon'ble Delhi High Court in the judgment titled "KLA Const Technologies v. The Embassy of Islamic Republic of Afghanistan"1 . The judgment sets a new paradigm by affirming the foundational tenets of efficiency, party autonomy, flexibility, stability, fairness etc. and delving into the jurisprudence of commercial transactions in an arbitration landscape.

BACKGROUND OF THE CASE

In this case, the petitioner was awarded a contract in 2008 by the respondent for carrying out the work of rehabilitation of the Afghanistan Embassy at New Delhi. However, a dispute arose between the parties pursuant to which the petitioner invoked arbitration in 2012. The arbitrator passed an award in favour of the petitioner and therefore, the petitioner sought enforcement of the arbitral award against the Embassy of the Islamic Republic of Afghanistan. However, the pertinent question of law emerged before the court was that whether a foreign state can claim sovereignty against enforcement of the arbitral award and whether prior consent of Central Government is required under Section 86(3) of the Code of Civil Procedure ("CPC") for the purpose of enforcement. The petitioner contended that a foreign state is not entitled to claim sovereign immunity against an arbitral award arising out of a commercial transaction as when a foreign state enters into an arbitration agreement, it implicitly waives sovereign immunity. Further, CPC is not binding and the legal fiction under section 36 of the Arbitration and Conciliation Act, 1996 ("the Act") is intended only for the enforcement of an arbitral award as a decree of the Court and such fiction cannot be expanded to surpass its legitimate arena.

The Petitioner substantiated that India being signatory to the United Nations Convention on Jurisdictional Immunities of States and their Property, 2004 should comply with Article 10 which explicitly prohibits a Foreign State from resorting to Sovereign Immunity in the case of disputes arising out of commercial transactions. Further, Article 19 also postulates that if an arbitration agreement subsists between a state and a foreign natural then the state cannot take the defence of sovereign immunity before the court. Furthermore, in Nawab Usman Ali Khan v. Sagarmal2 the Hon'ble Supreme Court stated in unequivocal terms that the enforcement proceeding under Section 17 of the erstwhile Arbitration Act, 1940 does not require prior-consent of the Central Government under Section 86 (1) of the CPC. It was also brought to fore that the core distinction between a sovereign and private act requires close scrutinisation of nature or to the purpose of the transaction. States engaging in trade, commerce and business with different entities/states must be subjected to the rules and conditions of the market. Emphasis was also placed on the case of Trendtex Trading Corporation Ltd. v. Central Bank of Nigeria3 wherein the court recognised the International Law Principle of restrictive immunity and held that a state-owned entity is not entitled to immunity for acts of a commercial nature.

DECISION OF THE COURT

The court dealt with the principles of law and determined that an arbitration agreement between a foreign state and party constitutes an implied waiver by the foreign state so as to prevent it from resorting to the claim of sovereign immunity. Further, Section 86 of CPC is restrictive in its application and would not apply in cases of implied waiver. The court went on to state that "once a foreign state opts to wear 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, which is otherwise available to it only when it is acting in its sovereign capacity." Reliance must be exclusively placed on nature and the purpose of the transaction to ascertain whether the contract was entered by the state in the exercise of sovereign powers or with the intention of carrying out commercial activity. The court stated that the rationale of International Commercial Arbitration would completely break down if foreign states escape themselves from the enforcement process of an arbitral award and thereby disentitling the successful party from enjoying the fruits of the consensual process. 

Therefore, the court held that prior consent of Central Government is not necessary under Section 86(3) of CPC to enforce an arbitral award against a Foreign State and a claim of Sovereign Immunity cannot be taken in cases of award arising out of commercial transaction.

ANALYSIS

In this judgment, new facets in contemporary dispute resolution regime cropped up which can be analysed through consideration of the following aspects:

  1. Casting shadow over the principle of sovereign immunity

Sovereign immunity is a principle emanated from customary international law which enunciates that one sovereign state cannot be sued before the courts of another sovereign state without its consent.4 In this judgment, it was categorically stated that when a foreign state assumes the role of a commercial entity, it must adhere to the tenets of the commercial ecosystem and cannot seek immunity which was available to it in a sovereign capacity. The judgment effectively highlights that a state under the garb of 'sovereignty' cannot claim exemption from its acts. It is relevant to emphasise a fine line of distinction between sovereign acts and pure commercial functions. Though the term 'commercial' has not been defined per se but the same has to be ascertained through the nature or character of the transaction. However, in an evolving sphere of globalisation there is a need to define the ambit of commercial transactions which would act as a guiding force in deciding such intertwined cases. The principle of 'substance over form' must be embedded in the commercial ecosystem involving enforcement of awards so that it comprehensively reveals the accurate picture of the transactions involving two entities. A favourable arbitration mechanism that provides clarity especially between parties involving foreign states would be viable for ease of doing business in India.

Further, India also does not have a legislation governing foreign state sovereign immunity unlike United Kingdom and United States.5 Section 86 of CPC is applicable while dealing with the issue of foreign state immunity and the government exercises discretion in granting the consent which depends on factual circumstances of the case. Though Law Commission in its 176th Report has underlined the need to incorporate a separate statute governing state immunity, however, the suggestion has not been considered yet.6 Therefore, in the absence of concrete law and parameters, it is excessively capricious to differentiate whether a defence claimed by the state falls under sovereign immunity or sovereign impunity. It is equally important to incorporate a consolidated sovereign immunity law to outline the boundaries of a State so far as arbitration disputes are concerned.

  1. Untangling the complexities of enforcement

In 1872, the Privy Council opined that the difficulties of the litigant in India begin when he has obtained a decree.7 Though the situation has not improved drastically, however, this judgment has unfolded a pro-enforcement stance especially in a case involving the state as a counterparty. Further, the court has drawn a sharp contrast between proceedings under arbitration set-up and suits initiated in a civil court. It has affirmed the principle of minimal judicial intervention and re-emphasised the position laid down in the case of Bhagwat Singh v. State of Rajasthan8 wherein it was held that "A proceeding which does not commence with a plaint or petition in the nature of plaint, or where the claim is not in respect of dispute ordinarily triable in a civil court, would prima facie not be regarded as falling within Section 86, Code of Civil Procedure." Through this judgment, the Court has affirmed that the courts only play the role of assisting the arbitral process and enforcing the outcome of such proceedings.

Therefore, this judgment delving into a tricky issue of sovereignty juxtaposed with arbitral mechanism though has pierced some loopholes which require consideration but has also scaled up to new heights of pro-enforcement approach in the global arbitration regime.

Footnotes

1. 2021 SCC OnLine Del 3424

2. (1965) 3 SCR 201

3. [1977] Q.B. 529

4. Sovereign Immunity, https://www.oxfordbibliographies.com/view/document/obo-9780199796953/obo-9780199796953-0018.xml?rskey=hA4UlP&result=1&q=sovereign+immunity#firstMatch

5. Sovereign immunity in India- Absolute or Qualified? http://arbitrationblog.kluwerarbitration.com/2014/06/04/sovereign-immunity-in-india-absolute-or-qualified/

6. 176th Report on the Arbitration and Conciliation (Amendment) Bill, 2001, Law Commission of India, https://lawcommissionofindia.nic.in/arb.pdf

7. The General Manager of the Raj Durbhunga, under the Court of Wards v. Maharajah Coomar Ramaput Singh 1872 SCC Online PC 16.

8. AIR 1964 SC 444.

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