Citation codes: 2021 SCC OnLine Del 3424, 2021:DHC:1892
Date of Judgment: 18 June 2021
Court: High Court of Delhi
Judges: Justice J.R. Midha
Facts of the case
There were two enforcement petitions against foreign states and both petitions raised same questions of law, hence they were clubbed and disposed of through this judgment.
In the first petition, petitioner, KLA Const. Technologies Pvt. Ltd., was awarded a contract by the respondent for the rehabilitation of the Afghanistan Embassy in New Delhi. Subsequently, disputes arose between the parties, which led to arbitration. The petitioner filed a petition under Section 11 of the Arbitration and Conciliation Act before the Supreme Court, which appointed a sole arbitrator. Arbitration proceedings were progressing regularly when, unexpectedly, the respondent ceased participation. The arbitrator passed an ex parte award, partially allowing the petitioner’s claims. The award was finalized and was not challenged by the respondent and neither paid to petitioner in terms of arbitral award. Consequently, the petitioner filed petition for enforcement of the award.
In the second petition, petitioner, Matrix Global Pvt. Ltd entered into a contract with the Ministry of Education of the Federal Democratic Republic of Ethiopia for the supply and distribution of books in Ethiopia. The petitioner executed the agreement, shipping the entire order in 86 shipments. The petitioner then issued 86 invoices, however was not fully paid up by the respondent and contract came to be cancelled by the respondent. The petitioner initiated the arbitration process, and the arbitrator passed an ex parte award. The award went unchallenged by the respondent and was finalized. The petitioner filed petition for enforcement of the award.
Issues involved in the 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?
Petitioners Arguments (KLA Const. Technologies Pvt. Ltd and Matrix Global Pvt. Ltd.)
Issue 1
Petitioners contended that there is no legal requirement to obtain the consent of the Central Government under section 86(3) of the Code of Civil Procedure for the enforcement of an arbitral award against a foreign state.
The legal fiction created under Section 36 of the Arbitration and Conciliation Act is for the limited purpose of enforcement of an arbitral award as a decree of the Court by providing it an associated legitimacy and validity. The fiction is not intended to make it a decree under the Code of Civil Procedure. This legal fiction cannot be extended beyond its legitimate field.
The petitioners argued that applying the provisions of Section 86(3) of the Code of Civil Procedure to an arbitral award would violate the three main principles of the Arbitration and Conciliation Act: an inexpensive and fair trial by an impartial tribunal, party autonomy, and minimal court intervention.
Issue 2
A Foreign State does not have Sovereign Immunity against an arbitral award arising out of a commercial transaction. Further entering into an arbitration agreement constitutes “waiver of Sovereign Immunity”. The respondents, who voluntarily entered a commercial contract containing an arbitration agreement with the petitioners, are not entitled to claim sovereign immunity to defeat the legitimate claims of the petitioners.
The petitioners further stated that under Articles 10, 17, and 19 of the United Nations Convention on Jurisdictional Immunities of States and their Property (2004), to which India is a signatory, “a foreign State does not have sovereign immunity against an arbitral award arising out of a commercial transaction”.
Judgment
The court ruled that no prior consent is needed, from the Central Government under section 86(3) of the Code of Civil Procedure, to enforce the arbitral awards against the respondents. A Foreign State cannot claim a Sovereign Immunity against enforcement of an arbitral award arising out of a commercial transaction.
Principles laid down
Section 36 of the Arbitration and Conciliation Act treats an arbitral award as a decree of a Court for the limited purpose of enforcement of an award under the Code of Civil Procedure which cannot be read in a manner which would defeat the very underlying rationale of the Arbitration and Conciliation Act namely, speedy, binding and legally enforceable resolution of disputes between the parties.
Section 86 of the Code of Civil Procedure is of limited applicability and the protection thereunder would not apply to cases of implied waiver. 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. 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.
Author(s)
Maritina Leontiou
Student at University of Athens, Greece