In this article, Varun Sharma of CLC discusses the Challenges of Executing Foreign Arbitration Awards in India.
Arbitration has emerged as one the favourite Alternative Dispute Redressal mechanisms on the world stage. An increasing number of business organisations are opting for Arbitration as the preferred method for resolving their disputes. But the challenges involved in enforcing an Arbitral Award are plenty. Despite the Constitution of India advocating for the resolution of disputes through Arbitration, the enforcement of a Foreign Arbitration Award still remains a major challenge in India.
What is an Arbitral Award?
The definition of an Arbitral Award in Section 2(1)(c) the Arbitration and Conciliation Act, 1996 defines it as “includes an interim award”. In simple terms, an Arbitral Award is like a decree or an order passed by the Court of Law. The award is passed upon the merits of the case. In International Woollen Mills v. Standard Wool (U.K.) Ltd. (2001), the Supreme Court held that an award, where some evidence has been presented by the plaintiff, is considered to be given on merits. If a summary trial has been followed for giving of the award, it will not be considered to be based on merits. It is passed or awarded by an Arbitrator, who is a neutral third-party, in an arbitration hearing. It is not necessary for an Arbitral Award to be of monetary value.
There are certain general factors that are needed to be kept in mind for the enforcement of an Arbitral Award such as making effective service on the opposite party, following the Principles of Natural Justice, taking of necessary steps by way of attachment, notice, an appointment of receiver etc.
How is an Arbitral Award enforced in India
The procedure for the execution of Arbitral awards is mainly governed by the provisions contained in the Arbitration and Conciliation Act, 1996 as well as in the Civil Procedure Code (CPC). After getting the decision in his favour, an award holder will have to wait for a period of 3 months before he can apply for the enforcement of the award. During the period of these 3 months, the award can be challenged by the other party as per Section 34 of the Arbitration and Conciliation Act. Once, this period of 3 months is over, the award can be applied for execution in the appropriate court. If the award is enforced by the court at the execution stage, no further provision for challenging the award is available to the parties.
The enforcement of a decree can be initiated as per the provisions of Section 36 to 74 of the Arbitration and Conciliation Act, 1996 or Order XXI of the CPC. The limitation period for enforcement of such an award is twelve years.
According to the old law (i.e. before the 2015 amendment to the Arbitration Act), filing an objection under Section 34 would automatically put a stay on the order that is being objected to. But the 2015 amendment has made it necessary to file an additional application for putting a stay on that order. The objection u/s 34 would not suffice to stay the impugned order.
As to the question of which is the appropriate court for filing the execution petition, the Supreme Court, in Sundaram Finance Ltd. v. Abdul Samad and Anr, has said that the execution proceedings can be started before any court in India where the assets are located. In cases where the subject-matter of an Arbitration is of a specified value (in monetary terms), the commercial courts established under the Commercial Courts, Commercial Division and Commercial Appellate Division of High Court Act, 2015 would have the jurisdiction.
Domestic Award vs Foreign Award
The Arbitration and Conciliation Act, 1996 has distinguished between an award that is awarded by an Arbitration tribunal seated in India and that which is awarded by a foreign seated Arbitration tribunal. The process to be followed for the execution of a domestic award is different from that of a Foreign award.
An award, which is passed as per the provisions given under Section 2 to 43, are called Domestic awards. The parties involved in these proceeding belongs to the national territory of India. The Domestic awards and the process of their execution have also been differentiated as follows:
1: Awards arising out of an India seated Arbitration Institution (being an International Commercial Arbitration)
These awards are governed by the provisions of the Commercial Courts Act and the Amendment Act. For the execution of these awards, the subject matter being money, jurisdiction will be with the Commercial Division of those High Courts where the assets of the opposite party shall lie. In cases, where the subject matter of the award is other than money, the jurisdiction will lie with the Commercial Division of those High Court which would have jurisdiction if the subject matter of the award was a subject matter of a suit. In simple terms, where the opposite party resides or carries on business or personally works for gain.
2: Awards arising out of an India Seated Arbitration Institution (not being an International Commercial Arbitration)
These awards too, are governed by the provisions of the Commercial Courts Act and the Amendment Act. The proper jurisdiction for the execution of these awards would be the Commercial Courts exercising such jurisdiction which would ordinarily lie before any Principal Civil Court of original jurisdiction in a district, as well as the Commercial Division of a High Court in the exercise of its ordinary original civil jurisdiction.
Section 44 of the Arbitration and Conciliation Act, 1996 defines a Foreign Award as an arbitral award on the differences relating to the matters considered as commercial under the law in force in India. Two conditions are needed to be fulfilled in order for an award to be qualified as a “Foreign Award”. One, it needs to deal with the differences arising out of a legal relationship that is commercial or is considered commercial, under the laws in force in India. Two, the country issuing the award must be a country that has been notified by the Indian government to be a country to which the New York Convention applies. India itself is a signatory to this convention. Only those awards, as issued by these countries, are recognised as Foreign Awards and are enforced in India. The enforcement of these awards is governed by the second part of the Arbitration Act.
A three-step process is followed for the enforcement of a Foreign Award in India. First, the party, in whose favour the award is issued, will make an application u/s 47 of the Arbitration and Conciliation Act along with all the evidence. Second, the party against whom the award is issued is required to raise a defense prescribed u/s 48 of the act along with all the evidence. Lastly, if, on the basis of all the evidence adduced by the parties, the court is satisfied that the award is enforceable, it will enforce it u/s 49 of the act.
There are two major differences in the enforcement of a domestic award and a Foreign Award. First, a Foreign award is not capable of being executed as a decree by itself. A procedure is required to be followed for its execution, Second, the provision of setting aside a foreign award is absent. The only power that an Indian court has in this regard is to either enforce it or refuse to enforce it. The problems created by this gap has been recently rectified by the Supreme Court in Venture Global Engineering vs Satyam Computer Services Ltd and Anr, where it said that a foreign award can be set aside by an Indian Court u/s 34 of the Act.
Where the subject matter of a Foreign Award is money, the jurisdiction will lie with the Commercial Division of those High Courts, in whose jurisdiction, the assets of the opposite party shall lie. In case the subject matter of the award is otherwise, the jurisdiction will lie with the Commercial Division of those High Court which would have jurisdiction if the subject matter of the award was a subject matter of a suit.
As for the question of limitation on foreign awards, different High Courts have given divergent views. The High Court of Bombay, in Noy Vallesina v Jindal Drugs Limited, has said that since a Foreign Award is not a decree per se and requires enforcement by a competent court, its application would fall within the residuary provisions of the Limitation Act, i.e., the limitation period will be 3 years. On the other hand, the High Court of Madras, in Compania Naviera ‘Sodnoc’ v. Bharat Refineries Ltd, referred to the Foreign Awards as deemed decrees and held that the limitation period will be 12 years. The Calcutta High Court, in Rudolf A Oetkar Vs Mohammed Ori (1999 SCC Online Cal), held that the residuary Article 113 of the Limitation Act, 1963 would apply in the case if a suit is filed seeking to enforce the foreign arbitration award and if an application seeking enforcement of the domestic arbitration award is filed Article 137 would apply.
The Supreme Court, in M/s. Fuerst Day Lawson Ltd v. Jindal Exports Ltd,, held that a single proceeding can have different stages. A court can, in one stage, decide upon the enforceability of the award. Once the enforceability is decided, it can take further steps for execution of the same.
Problems of executing Foreign Arbitral Awards in India
Getting an award issued in your favour, from an international tribunal, does not always means good news as you still have to get your award enforced in India. Most Arbitral awards are voluntarily complied with. The problem occurs when one of the parties disputes the award and need for its enforcement arises. There have been various cases, where, despite receiving a favourable award, the party failed to get it enforced by a competent court in India. The reasons for these failed enforcements ranges from one party deciding not to participate in the Arbitral proceedings to other situations where the party has challenged the award on the grounds of cost awarded or the jurisdiction of the Arbitration Tribunal.
The Arbitration and Conciliation Act, 1996 was enacted with the purpose to provide a swift method of dispute resolution in the national and international arena. As discussed above, an award issued by a foreign arbitral seat is not automatically enforced in India. The amount of Litigation that is involved in enforcing a foreign arbitral award almost beats its purpose of ensuring swift disposal of disputes. Only a handful of the parties agree to the award issued by the Arbitrators. A majority opts the option of fighting the awards in the Indian Courts at the stage of execution and enforcement. A foreign Arbitration award can be challenged u/s 48 of the Act. It provides for the grounds on which a foreign Arbitral award can be challenged.
These grounds are:
Ground 1: Either party is under some Incapacity
If one or both of the parties, involved in the arbitral proceedings were under some incapacity as per the applicable law, then such an award cannot be enforced. This incapacity can be due to reasons such as involuntariness, fraud, duress, undue influence or misrepresentation.
The Supreme Court, in Bhaurao Dagdu Paralkar v. State of Maharashtra and Ors, observed that “By fraud is meant an intention to deceive; ….. The expression “fraud” involves two elements, deceit and injury to the person deceived“. The Court further observed that “A fraudulent misrepresentation is called deceit and consists in leading a man into damage by wilfully or recklessly causing him to believe and act on falsehood. It is a fraud in law if a party makes representations, which he knows to be false, and injury in ensues therefrom …..“
Ground 2: Either party was not given Notice
If either party has not received a notice regarding the appointment of the arbitrator or regarding the arbitral proceedings, it would amount to a violation of the principles of natural Justice. Such awards are liable to be set aside. But if a party has voluntarily decided to sit out of the arbitral proceedings, such awards will be enforced because such sitting was with his free will. Only those awards can be challenged where one of the party was left out for reasons that were beyond its control.
Ground 3: The Arbitral Award is beyond the scope of Arbitration
The Jurisdiction of an Arbitration Tribunal is limited by the terms of reference. No tribunal is supposed to flout these limitations. They are only supposed to adjudicate on the questions that have been submitted and not go beyond that. An award, which is issued in excess of the scope of Arbitration, is liable to be set aside by the Courts.
It is important to note here that if it is possible to separate the awards which are awarded within limits of the terms of the arbitration from those that are awarded by exceeding those limit, it is possible to enforce the former.
Ground 4: Legality of the Composition or Procedure of the Arbitration Tribunal
An award is liable to be quashed if:
- i) the tribunal that has been composed is not in accordance with the agreement signed between the parties
- ii) the procedure followed during the arbitration proceedings was not as per the agreement between the parties
iii) if the composition or the procedure of the arbitration is not in accordance with the law of the country where the seat of the arbitration was situated
Ground 5: Award set aside before its enforcement
If an award, before it becomes binding on the parties, is set aside or suspended by the authorities of that country, in whose jurisdiction it was awarded, it will not be enforceable in the Indian Courts as the Courts of the country which issued the award has the exclusive jurisdiction to set aside the award.
Ground 6: Dispute not capable of being resolved under Arbitration
If the nature of a dispute is such that it cannot settled be under arbitration, either because the subject matter is not capable of being settled under different laws which are currently in force in different countries for the time being, or, the subject matter is such that, it is not capable of being enforced under the law currently in force in India. In such a case, the court will refuse the enforcement of the award.
Ground 7: Public Policy
An award, issued in violation of the Public Policy of India, will not be enforceable in India. Awards issued against public policy is a defense against the enforcement of such awards. The courts in India are bound to refuse the enforcement of an award, which is in contravention of the public policy in India.
Settling the dispute as to what will amount to the violation of Public Policy of India, the Supreme Court, in Renusagar Power Co. Ltd vs General Electric Co, held that the bar of public policy will be attracted only when there is a violation of something more than the Indian Laws. The enforcement would be refused if the award is contrary to the fundamental policy of Indian law or justice or public morality.
The Delhi High Court, in Daiichi Sankyo Company Limited vs. Malvinder Mohan Singh and Ors., held that the defense of the ground of public policy can be taken only when the award is against the fundamental policy of India, the interest of India or justice/ morality. It does provide the Indian Courts with an opportunity to take a second look at the award. It further held that claims barred by limitations, awards of consequential damages and awards against minors are liable to set aside by the Indian Courts.
Pressure by the Local Governments
A local party to an Arbitration will exercise more political power than a Foreign party. They will try to exert this power to annul the award or at least decrease the quantum of the award. This may result in frustrating the award issued by an International Arbitration Seat. This is due to lack of an authority to supervise the substantive as well as the procedural examination of the enforcement of these awards.
Inconsistent Application of Law
A Foreign Arbitral Award can be enforced in all those jurisdictions where the assets of the opposite party are situated. The possibility, that the courts belonging to different jurisdictions will interpret the same award differently, cannot be ruled out. Even if an award issued by an Arbitration seated in India, it may not be enforceable in the Jurisdiction of some other country.
There is still much confusion regarding the enforcement of a Foreign Award. A much-needed clarity is required to establish the trust among the parties choosing Arbitration as the preferred method of ADR. The only thing that can prevent the establishment of this mistrust is the enactment of legislation that can fix these loopholes. The amendments coupled with the judgments pronounced by the Supreme Court of India are a step in the right direction. It will help to provide a boost to the volume of Arbitration in India.