This article is written by Preksha Bothra. The article analyzes whether prior consent of the Union Government is necessary in accordance with the sovereign immunity and Section 86(3) of CPC.
Table of Contents
Introduction
The verdict of an arbitral tribunal, in either domestic or international arbitration, is termed as an arbitral award. Interim awards are also included in arbitral awards.
Domestic awards are governed by Part I, whereas foreign awards are governed by part II of India’s Arbitration and Conciliation Act (1996). An award passed as per the provisions of Section 2 to Section 43 of the above-mentioned Act is termed as a domestic award.
India recognizes foreign awards under the New York Convention(1958) and the Geneva Convention(1949) as it is a signatory to the conventions above. If a party in India receives a binding award from a country that is a signatory to the New York or the Geneva Convention and the award is made in a territory that has been notified as one of the convention countries by India in its official gazette, the award would be enforceable in India.
According to Section 47 of the Arbitration and Conciliation Act, any party seeking to impose a foreign arbitral award, also known as an arbitration award, must make an application to any High Court having jurisdiction and provide the following:
- The original award or a copy certified by the country of origin.
- The original agreement or a certified copy.
- Any other evidence to prove that the particular award is not domestic but foreign.
If the award or agreement happens to be in a language not known or foreign dialect, the party must produce a translated copy that has been certified by the country of origin.
Although Foreign Arbitral awards are enforceable in India, the Central Government’s approval is not necessary.
What is sovereign immunity
When the sovereign or the State cannot commit any legal wrong and has immunity from criminal prosecution and civil suits, it is termed the doctrine of sovereign immunity.
The socio-legal structure demands an order of society free of inequalities, prejudice, and bigotry. The contribution of the educated and politically strong class is necessary to develop a nation that upholds these ideals and, therefore, the sanctity of the Indian Constitution. If practised appropriately, the doctrine of sovereign immunity would take a massive step towards forming such a society.
It is derived from the common law principle of the Britishers, i.e., ‘rex non potest peccare,’ which means that ‘the king can do no harm.’ A few reasons which make the doctrine appear truthful are:
- The state cannot be sued by its courts without its consent,
- The treasury of the crown would be affected by the award of compensation.
This concept promotes the theory that the king (of England in this context) cannot do any wrong because the king rules by the idea of divine right. The Indian law obtained the doctrine of sovereign immunity through the Britishers who ruled India for a little less than two centuries and brought this concept with them.
India has embraced the concept of sovereign immunity but only in a restricted sense. Under the Code of Civil Procedure of India, with the prior written consent of the Union, the foreign states, their organs, and instrumentalities can be prosecuted. Nonetheless, it is irrelevant when special laws hegemonize the matter (E.g., the Hindu Marriage Act(1955), the Muslim Women Act (1896)) or where the legal proceedings do not follow the nature of a suit, for example, an industrial dispute under the Industrial Disputes Act (1947). The Supreme Court of India, in the case of Ethiopian Airlines vs. Ganesh Narain Saboo (2011), restated the repetitive view that the doctrine of sovereign immunity was not absolute in India. It also stated that foreign states do not have immunity from legal proceedings involving trading and commercial activities and contractual obligations assumed by the foreign states in India.
What does Section 86(3) of CPC impart
Section 86(3) of the Criminal Procedure Code, 1882, states that “Except with the consent of the Central Government, certified in writing by a Secretary to that Government, no decree shall be executed against the property of any foreign State.” According to Section 86(3) of the CPC, no legislation shall be enforced against the property of any foreign state, except with the government’s consent. Subject to the declaration of the approval of the government, an order may be administered against a state.
Prior consent could not be brought in the ambit of the Arbitration and Conciliation Act for a binding and final arbitral award as it would defeat the sole purpose to enact the Act as mentioned earlier, which was to ease the procedural aspect of litigation less inconvenient for people with certain expectations.
With the increase in the significance and promotion of foreign investment in India, many agencies are being set up to deregulate and liberalize the Indian economy; multiple advancements have come to the forefront. The government is taking various routes to promote and broaden Foreign Direct Investment inflows into India. India has emerged as an alluring destination in so far as foreign investors are concerned. However, an increasing concern among the host country recipients is their recourse against these investors. When the investors are foreign-state-controlled, the situation becomes a lot more pressing because a thick veil of sovereign immunity safeguards them from Indian laws and statutes.
An arbitral award arising out of a commercial transaction can’t be enforced by a foreign state
With respect to KLA Const. Technologies Pvt. Ltd. v. The Embassy of the Islamic Republic of Afghanistan (“KLA Const”) (2021), the Delhi High Court, ruled that initial consent of the Central Government is not a definite requirement for the enforcement of the arbitral award against a foreign as specified under Section 86 of CPC. Furthermore, a foreign sovereign state is incapable of claiming sovereign immunity under Section 86 of CPC against executing an arbitral award vis-à-vis a commercial transaction. The Delhi High Court delivered this judgment while focusing on foundational doctrines of arbitration:
- Effectiveness,
- Impartiality,
- Liberty of the party
- Legal character
The Court propounded that as soon as the foreign state prefers to be a commercial entity, it is bound by the rules of the legal commercial ecosystem. It cannot be allowed to seek any kind of immunity which it would otherwise be allowed only if it were acting in its sovereign capacity. There were two enforcement appeals in the discussion, wherein the petitioners sought the implementation of arbitral awards against the foreign state entities, in the first petition, KLA Const. Technologies Pvt. Ltd., sought enforcement of an award against the Embassy of the Islamic Republic of Afghanistan. In the second petition, Matrix Global Pvt. Ltd. (“Matrix”), against the Federal Democratic Republic of Ethiopia’s Ministry of Education, attempted implementation of an award. The respondent foreign nations or states that failed to participate in the arbitral proceedings were the point of commonality between both petitions, due to which arbitral awards were passed without the consent of the respondents in both cases.
The Delhi High Court concluded with two primary issues:
- Whether the consent of the Central Government under Section 86(3), CPC was a mandate to implement an arbitral award against a foreign state
- Whether such an entity against the award could claim sovereign immunity passed vis-à-vis a commercial transaction.
The necessity of prior consent to enforce an arbitral award
According to the Supreme Court, Section 86(1) of the CPC is applicable only to suits as under Nawab Usman Ali Khan v. Sagarmal(1965). Both KLA and Matrix contested that there was no express provision under Section 86(3) to have the prior consent of the Central Government. Such a decree for passing a concluding and obligatory award would not be in accordance with arbitration law’s very principles, and tenets were derived under Union of India v. U.P. State Bridge Corporation Ltd.(2012) They are as follows:
- Expeditious, efficient, and just trial,
- Party autonomy, and
- The restricted intervention of courts,
Moreover, an award enacted in international commercial arbitration in India under the Arbitration and Conciliation Act, Section 36 would de facto be regarded as a domestic award, which would additionally direct its enforceability. The ‘legal fiction’ produced under Section 36 of the Arbitration Act was primarily provided for the execution of the award as a law or decree and to present it with efficiency and legally; it did not indefinite terms change it into an order under the CPC. While raising these contentions, KLA and Matrix relied on Bharat Aluminum Company v. Kaiser Aluminum Technical Services Ltd.(2012) and Paramjeet Singh Patheja v. ICDS Ltd.(2006) The High Court of Delhi agreed with the position of KLA and Matrix, and the Hon’ble Court also instructed the Union of India to verify whether, under Section 86(3), the Central Government’s prior consent is a requirement. The Central Government replied via email, confirming that prior concurrence is not required since the process vis-à-vis passing an ultimate and binding arbitral award cannot be viewed as a suit for Section 86 of the CPC. The Delhi High Court additionally mentioned Indian Metals & Ferro Alloys Ltd., Cuttack v. Collector of Central Excise, Bhubaneshwar(1990). It applied the doctrine of contemporanea expositio, under which the court while interpreting a statute or provision gives a lot more importance to the interpretation put upon it by those whose duty is to analyze, administer and implement it. In layman’s terms, the Central Government’s approval was a fundamental factor that the Court kept in mind while interpreting the requirement of prior consent.
Applicability of sovereign immunity for enforcement of the arbitral award
Verification and implementation of arbitral awards against sovereign lands are not administered by any definite rules. In any event, Section 86 of the Civil Procedure Code (which governs the issue of foreign state immunity) stipulates that the central government must consent before the commencement of any legal action against a foreign state; enforcement proceedings are not excluded from this entitlement. Indian courts have given the word ‘suit’ a restricted meaning in relation to the fulfilment of arbitral awards. In a decision on a law governing arbitral awards (Nawab Usmanali Khan v. Sagarmal 1965), it was held that the court’s decision would not begin with a plaint or a petition of that nature. Therefore, an arbitral award execution proceeding cannot be characterized as a suit for purposes of Section 86 of the CPC. According to the Hon’ble Supreme Court of India, in Ethiopian Airlines v. Ganesh Narain Saboo (2011), sovereign immunity doesn’t apply to commercial transactions between foreign states. Contracting parties should be held accountable for their contractual and commercial activities.
KLA and Matrix relied on the United Nations Convention on Jurisdictional Immunities of States and Their Property, 2004, to which India is a signatory but has not enacted as of now. The Delhi High Court, while agreeing with this position, used Articles 10, 17, and 19 that reduce the scope of foreign states from using sovereign immunity as a defence in disputes resulting in relation to commercial transactions as the basis of its discussion. Article 17 states that if a State enters into an arbitration agreement with a foreign natural or juridical person and submits the differences relating to a commercial transaction to arbitration, that State cannot request immunity from jurisdiction before a court of a different state which is otherwise qualified to deal with the procedures. This belief is also repeated in Ethiopian Airlines v. Ganesh Narain Saboo(2011). The Supreme Court is of the opinion that the international law doctrine of ‘restrictive immunity’ increasingly prohibits states from exacting sovereign immunity vis-à-vis a commercial transaction. Moreover, Uttam Singh Duggal & Co. Pvt. Ltd. v. The United States of America, Agency of International Development(1982) has also upheld that if a transaction in question is a private commercial activity and not an explicitly sovereign action, a foreign state cannot demand immunity from Indian courts. The Delhi High Court, given the above deliberations, held that both pleas seeking implementation of arbitral awards were maintainable.
Findings of the Court
The Hon’ble Court cited the provisions of Section 36 of the Arbitration and Conciliation Act and Section 86(3) of CPC along with various relevant judgments to make out the following summary based on principles of law-
- The Central Government does not need to have given prior consent under Section 86(3) of the CPC if it is not essential to execute an arbitral award against a Foreign State.
- A foreign state cannot claim sovereign immunity against implementing an arbitral award stemming from a commercial transaction.
- Section 36 of the Arbitration and Conciliation Act treats an arbitral award as a “decree” of a Court for the restricted purpose of implementation of an award under CPC, which cannot be read in a method that would destroy the very underlying explanation of the Arbitration and Conciliation Act namely, expeditious, binding and legally enforceable interpretation of disputes between the parties.
- Section 86 of the Code of Civil Procedure is limited in scope, and implied waivers would not be covered by its protections. With respect to a commercial contract between 2 parties, one being a foreign state in an arbitration agreement is an implied waiver by the Foreign State to preclude it from raising a defence against an enforcement action premised upon the principle of Sovereign Immunity.
- When a contract between a foreign state and a party is in place, the foreign state cannot request sovereign immunity for delaying the execution of an arbitral award declared against it. On opting to become a commercial entity, the foreign state will have to be bound by the rules of the commercial legal ecosystem. While acting as a sovereign state, it is entitled to immunity but in the case of it becoming a commercial entity, it cannot be permitted to seek any immunity.
Applying the above-mentioned proved principles of law, the Hon’ble Court held that prior permission of the Central Government under Section 86(3) CPC is not required to enforce the two arbitral awards in question against the respondents. Holding that both the petitions are maintainable, the Court ordered the respondents to deposit the corresponding award amounts with the Registrar General of this Court within four weeks.
Conclusion
In my opinion, KLA Const. Technologies Pvt. Ltd. v. The Embassy of the Islamic Republic of Afghanistan judgment is highly commendable since it establishes a different standard for sovereign immunity and the requirement of prior consent in arbitration than in suits brought under the CPC. According to the Court, the foundational principle of arbitration is that if a foreign commercial entity is permitted by the courts to hinder the fulfilment of any arbitral award, it would lead to this pro-enforcement approach as the founding system of the international commercial arbitration to prove dysfunctional. It is therefore deemed to have been necessary to enforce this principle against the foreign entities whose main purpose is in relation to trade, carrying on business, etc. with India.
Finally, the High Court concluded that both appeals, in this case, were maintainable. The respondents were given four weeks to transfer to the Court’s Registrar their award sums. The petitioners were free to pursue attachment of the respondents’ assets if the respondents failed to deposit the money.
References
- https://www.tclindia.in/the-prior-consent-of-central-government-is-not-necessary-under-section-863-of-the-code-of-civil-procedure-to-enforce-an-arbitral-award-against-a-foreign-state/
- https://www.lexology.com/library/detail.aspx?g=5521ec58-6c1c-4577-a285-abed6baae0b4
- https://www.mondaq.com/india/sovereign-immunity-public-sector-government/1092652/invoking-of-sovereign-immunity-by-foreign-state-in-execution-of-an-arbitration-award-a-reviewal
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