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2021 Supreme(Del) 1412
IN THE HIGH COURT OF DELHI AT NEW DELHI
J.R. Midha, J.
KLA Const Technologies Pvt. Ltd. - Appellant
Versus
Embassy Of Islamic Republic Of Afghanistan - Respondent
O.M.P. (ENF) (Comm) No. 82 of 2019; I.A. No. 7023 of 2019
Decided On : 18-06-2021
Amit George, Advocate, K.K. Shukla, Advocate, Kartickay Mathur, Advocate, Amol Acharya, Advocate, Piyo Jaimon, Advocate, Rayadurgam Bharat, Advocate, Devashish Bharuka, Advocate, Jaya Bharuka, Advocate, Ravi Bharuka, Advocate, Sarvshree, Advocate, Srishti Agarwal, Advocate, Ankit Agarwal, Advocate, Taniya Bansal, Advocate
A Foreign State cannot claim Sovereign Immunity against enforcement of an arbitral award arising out of a commercial transaction.
Headnote:
ARBITRATION - ENFORCEMENT OF AWARD - AGAINST FOREIGN STATE - PRIOR CONSENT OF CENTRAL GOVERNMENT - WHETHER REQUIRED - SOVEREIGN IMMUNITY - WHETHER AVAILABLE - COMMERCIAL TRANSACTION - WHETHER ATTRACT SOVEREIGN IMMUNITY - ARBITRATION AGREEMENT - WHETHER IMPLIED WAIVER OF SOVEREIGN IMMUNITY.
Fact of the Case:
Two petitions were filed for enforcement of arbitral awards against Foreign States. The issue was whether prior consent of the Central Government is necessary under Section 86(3) of the Code of Civil Procedure to enforce an arbitral award against a Foreign State and whether a Foreign State can claim Sovereign Immunity against enforcement of an arbitral award arising out of a commercial transaction.
Finding of the Court:
1. Prior consent of Central Government is not necessary under Section 86(3) of the Code of Civil Procedure to enforce an arbitral award against a Foreign State. 2. A Foreign State cannot claim a Sovereign Immunity against enforcement of an arbitral award arising out of a commercial transaction. 3. 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.
Issues: 1. 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 ? 2. Whether a Foreign State can claim Sovereign Immunity against enforcement of arbitral award arising out of a commercial transaction ?
Ratio Decidendi: 1. 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. 2. 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. 3. In a contract arising out of a commercial transaction, such as the 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. 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. It is the purpose and nature of the transaction of the Foreign State which would determine whether the transaction, and the contract governing the same, represents a purely commercial activity or whether the same is a manifestation of an exercise of sovereign authority.
Final Decision: Both the petitions for enforcement of the arbitral awards are maintainable and the respondents are directed to deposit the respective award amounts with the Registrar General of this Court within four weeks. If the amounts are not deposited by the respondents within four weeks, the petitioners shall be at liberty to seek attachment of the assets of the respondents.
JUDGMENT
J.R. Midha, J. - The petitioners are seeking enforcement of arbitral awards against Foreign States.
2. The petitioner in OMP (ENF) (COMM) 82/2019 is seeking enforcement of an arbitral award dated 26th November, 2018 against the Embassy of Islamic Republic of Afghanistan whereas the petitioner in OMP (EFA) (COMM) 11/2016 is seeking enforcement of an /arbitral award dated 25th October, 2015 against Ministry of Education, Federal Democratic Republic of Ethiopia. The two important questions of law have arisen for consideration before this Court in these petitions:
I. 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 ?
II. Whether a Foreign State can claim Sovereign Immunity against enforcement of arbitral award arising out of a commercial transaction ?
Brief facts of OMP (ENF) (COMM) 82/2019
3. On 11th February, 2008, the respondent awarded a contract to the petitioner for rehabilitation of Afghanistan Embassy at New Delhi for consideration of Rs.3,02,17,066.83.
4. Disputes arose between the parties during the course of execution of work whereupon the petitioner invoked the arbitration clause contained in the contract between parties on 10th February, 2012.
5. The petitioner filed a petition under Section 11 of the Arbitration and Conciliation Act before the Supreme Court in which the Supreme Court appointed a sole Arbitrator on 05th January, 2015 to adjudicate the disputes between the parties.
6. The respondent participated in the arbitration proceedings till 24th July, 2017. However, there was no appearance on 13th November, 2017 whereupon the learned arbitrator proceeded ex-parte against the respondent. The learned Arbitrator passed an ex-parte award on 26th November, 2018 in which the learned Arbitrator partially allowed the claims of the petitioner.
7. The respondent has not challenged the arbitral award which has attained finality. The respondent has not made any payment to the petitioner in terms of the arbitral award.
8. The petitioner is seeking enforcement of the arbitral award dated 26th November, 2018. Notice of this petition was issued to the respondent on 13th May, 2019 in pursuance to which the respondent entered appearance through counsel on 02nd September, 2019 and sought time to take instructions but stopped appearing thereafter.
9. Vide order dated 19th November, 2019, this Court directed the Union of India to confirm whether the prior consent of the Central Government is necessary under Section 86(3) of the Code of Civil Procedure to enforce this arbitral award.
Brief facts of OMP (EFA) (COMM) 11/2016
10. On 25th June, 2012, the petitioner entered into a contract with the respondent for supply and distribution of books to the Respondent at various places in Ethiopia. The total value of the contract was fixed at USD 25,52,754.60.
11. The petitioner claims to have shipped the goods to the respondent from 31st December, 2012 and completed the last shipment on 24th December, 2013. The petitioner shipped the complete order in 86 shipments and the books were distributed in Ethiopia by the petitioner's agent at the designated sites as facilitated by the Government of Ethiopia. The petitioner raised 86 invoices totaling USD 25,56,442.37 against which the respondent paid USD 20,22,981. The respondent cancelled the contract by letter dated 24th April, 2014.
12. The petitioner initiated the arbitration proceedings to recover the balance amount against the respondent and a sole arbitrator was appointed under UNCITRAL Arbitration Rules on 04th December, 2014.
13. The respondent chose not to participate in the arbitration proceedings and was proceeded ex-parte on 25th May, 2015. The learned Arbitrator passed an ex-parte award on 25 th October, 2015.
14. The respondent has not challenged the arbitral award dated 25th October, 2015 thus, it has attained finality.
15. The petitioner is seeking enforcement of the arbitral
