INTRODUCTION
The hon'ble Delhi High Court clubbed two petitions titled KLA Construction Technologies Pvt. Ltd. v. The Embassy of Islamic Republic of Afghanistan1 and Matrix Global Pvt. Ltd. v. The Ministry of Education, Federal Democratic Republic of Ethiopia2 to render a judgment dated 18.06.2021. This judgment elaborated upon important questions of law pertaining to enforcement of arbitral awards. The bench comprising of Justice JR Midha was dealing with two petitions seeking enforcement of arbitral awards against foreign states, i.e., the Embassy of Islamic Republic of Afghanistan and the Ministry of Education, Federal Democratic Republic of Ethiopia.
BRIEF FACTS
- Brief facts of petition3 seeking enforcement of arbitral award against the Embassy of the Islamic Republic of Afghanistan
The petitioner was awarded a contract by the respondent to rehabilitate the Afghanistan Embassy at New Delhi for a consideration of Rs. 3,02,17,066.83. A dispute arose during the execution of the work and consequently, the petitioner invoked the arbitration clause contained in the contract between the parties on 10th February 2012. Thereafter, a sole arbitrator was appointed by the hon'ble Supreme Court on January 05, 2015. The respondent after participating in the proceedings for a while, did not appear after November 13, 2017.
An ex-parte award was rendered by the learned arbitrator on November 26, 2018, in which the claims of the petitioner were partially allowed. The respondent did not challenge the arbitral award, which thus, attained finality. The respondent did not make any payment in terms of the award. This petitioner was, therefore, seeking enforcement of the arbitral award dated November 26, 2018.
- Brief facts of petition4 seeking enforcement of arbitral award against the Ministry of Education , Federal Democratic Republic of Ethiopia.
The petitioner and the respondent entered into a contract for supply and distribution of books in Ethiopia. The petitioner claimed to have completed the order, after which the respondent cancelled the contract by a letter. The petitioner initiated arbitration proceedings against the respondent, and a sole arbitrator was appointed under UNCITRAL Arbitration Rules on December 04, 2014.
The respondent did not participate in the proceedings and the learned arbitrator passed an ex-parte award on October 25, 2015. The respondent did not challenge the award, thus it attained finality.
In view of the above two enforcement petitions, the Delhi High Court sought confirmation from the Union of India to confirm if prior consent of the Central Government is necessary under section 86(3) of the Code of Civil Procedure to enforce the awards.
On March 15, 2021 the Central Government placed on record an email dated May 22, 2019 from the Under Secretary (E&SA)- East and South African division, Ministry of External Affairs, according to which prior consent of the Central Government is not necessary for enforcement of an arbitral award under Section 86(3) of the Code of Civil Procedure.
SUBMISSIONS
The petitioner argued that section 36 of the Arbitration and Conciliation Act, 1996 ("the 1996 Act") treats an award as a decree of a court for the limited purpose of enforcement of an award under the Code of Civil Procedure. This cannot be read in a manner that would defeat the provisions of the 1996 Act, which mandates resolution of disputes in a time bound manner (reliance was placed upon Nawab Usman Ali Khan v. Sagarmal5; R. McDill & Co. Pvt. Ltd. v. Gouri Shankar Sarda6,and M/s. Uttam Singh Duggal & Co. Pvt. Ltd. v. United States of America, Agency of International Development7).
The petitioners submitted that there is no requirement under law for obtaining 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. Section 86 is of limited applicability and the protection thereunder would not apply to cases of implied waiver, and an arbitration agreement in a contract arising out of a commercial transaction (such as the transactions which are the subject-matter of the present petitions), signifies an implied waiver. Thus, precluding the Foreign State from raising a defense against enforcement premised upon the principle of Sovereign Immunity. (Reliance was placed on Ethiopian Airlines v. Ganesh Narain Saboo8; Rahimtoola v. Nizam of Hyderabad9; Trendtex Trading Corporation v. Central Bank of Nigeria10 and Birch Shipping Corp. v. The Embassy of the United Republic of Tanzania11.
Further, the petitioner put forth that an arbitral award passed in an international commercial arbitration held in India, as in the present case, would be construed as a 'Domestic Award' under the 1996 Act and would be enforceable under section 36 of the 1996 Act. Reliance was placed upon the case of Bharat Aluminium Company v. Kaiser Aluminium Technical Service Ltd. 12
ISSUES IN QUESTION
Two important questions of law were deliberated upon by the bench in this case:
- Whether the prior consent of Central Government is necessary under Section 86(3) of the Code of Civil Procedure to enforce an arbitral award against a Foreign State.
- Whether a Foreign State can claim Sovereign Immunity against enforcement of arbitral award arising out of a commercial transaction.
OBSERVATIONS OF THE COURT
Upon analyzing the relevant provisions on the subject matter (sections 35 and 36 of the 1996 Act and Section 86(3) of the Code of Civil Procedure) and various judgments, the court observed, with respect to the first issue - prior consent of the Central Government was not necessary under section 86(3) for enforcement of an arbitral award against a Foreign State.
The court elaborated that section 36 of the 1996 Act treats an arbitral award as a decree of a court for the limited purpose of enforcement of the award; and that this cannot be read in a manner that defeats the underlying rationale of the 1996 Act i.e., speedy, binding and legally enforceable resolution of disputes between the parties.
With respect to the second issue, the court held that in a contract arising out of a commercial transaction, such transactions which are subject-matter of the present petitions, a Foreign State cannot seek Sovereign Immunity for the purpose of stalling execution of an arbitral award rendered against it. The bench elucidated 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."
The court further observed that section 86 of the Code of Civil Procedure is of limited applicability and protection thereunder would not apply to cases of implied waiver. The court in this respect observed that, "An arbitration agreement in a commercial contract between a party and a Foreign State is an implied waiver by the Foreign State, so as to preclude it from raising a defense against an enforcement action, premised upon the principle of Sovereign Immunity." In light of the above, the court directed the respective Foreign States to deposit award amounts with the Registrar General of the High Court within four weeks.
AUTHOR'S OPINION
The observations of the hon'ble Delhi Court in the instant case, further strengthen the pro-enforcement bias which has been adopted by the courts recently. 13
A step in the right direction, this judgment prevents Foreign States from stymieing the enforcement of arbitral awards which are the ultimate fruits of a consensual process, by basing their argument on a specious ground that they are entitled to a special treatment by virtue of being a Foreign State. If the sovereign immunity argument is allowed, this would, (as correctly observed by Justice JR Midha) lead to the collapse of the very edifice of International Commercial Arbitration. Foreign States cannot be allowed to act with impunity to the detriment of the counter party in such proceedings.
Footnotes
1 KLA Construction Technologies Pvt. Ltd. v. The Embassy of Islamic Republic of Afghanistan OMP (ENF) (COMM) 82/2019.
2 Matrix Global Pvt. Ltd. v. Ministry of Education, Federal Democratic Republic of Ethiopia O.M.P. (EFA) (COMM) 11/2016.
3 KLA Construction (n 1).
4 Matrix Global (n 2).
5 (1965) 3 SCR 201.
6 (1991) 2 SCC 548.
7 ILR (1982) 2 Del. 273).
8 (2011) 8 SCC 539.
9 (1957) 3 WLR 884.
10 (1977)2 WLR 356.
11 507 F. Supp. 311, 1981 A.M.C. 2666).
12 2012 9 (SCC) 552.
13 Vijay Karia. v. Prysmian Cavi E Sistemi SR,2020 SCC OnLine SC 177.
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