[Sparsh Mallya is a 3rd Year BBA-LL. B (Hons.) Student at O.P Jindal Global University, Sonipat]
On June 18, 2021, the Delhi High Court held in KLA Const. Technologies Pvt. Ltd. v. The Embassy of Islamic Republic of Afghanistan (“KLA Const”) that prior consent of the Central Government under section 86 of the Civil Procedure Code (“CPC”) is not an express requirement for enforcement of arbitral awards against a foreign state. Moreover, a foreign state cannot claim sovereign immunity under section 86 of the CPC against enforcement of arbitral award vis-à-vis a commercial transaction. The Delhi High Court delivered this judgement whilst focusing on foundational tenets of arbitration: effectiveness, fairness, party autonomy and legal gravitas. The Court opined: “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.”
There were two enforcement petitions in discussion, wherein the petitioners sought the enforcement of arbitral awards against respondent foreign state entities. In the first petition, OMP (ENF) (COMM) 82/2019, KLA Const. Technologies Pvt. Ltd. (“KLA”) sought enforcement of an award against The Embassy of Islamic Republic of Afghanistan. In the second petition, OMP (EFA) (COMM) 11/2016, Matrix Global Pvt. Ltd. (“Matrix”) sought enforcement of an award against the Ministry of Education, Federal Democratic Republic of Ethiopia. The commonality between both petitions was that the respondent foreign states failed to participate in the arbitration proceedings, due to which ex-parte arbitral awards were passed in both instances.
Two primary issues were etched out by the Delhi High Court: (i) whether prior consent of the Central Government was a mandate under section 86(3) of the CPC to enforce an arbitral award against foreign state entity, and (ii) whether such entity could claim sovereign immunity against the award passed vis-à-vis a commercial transaction.
Is prior consent a mandate?
Using Nawab Usman Ali Khan v. Sagarmal, in which the Supreme Court held that section 86(1) of the CPC is only applicable to suits, KLA and Matrix both contended that there was no express requirement of prior consent of the Central Government under section 86(3) of the CPC. Such a mandate for passing a final and binding award would be against the very principles and tenets of arbitration law which markedly are: (i) speedy, effective and fair trial, (ii) party autonomy, and (iii) limited court intervention, as held in Union of India v. U.P. State Bridge Corporation Ltd.Moreover, an award passed in an international commercial arbitration in India would de facto be considered as a domestic award under section 36 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), which would also govern its enforceability. The ‘legal fiction’ created in section 36 of the Arbitration Act was merely to provide enforcement of award as a decree and to bestow it with validity and legitimacy; it did not in plain terms convert it into a decree under the CPC. Whilst making these arguments, KLA and Matrix relied on Bharat Aluminum Company v. Kaiser Aluminum Technical Services Ltd and Paramjeet Singh Patheja v. ICDS Ltd. The Delhi High Court agreed with the stance of KLA and Matrix.
The Delhi High Court had also directed the Union of India to confirm whether the prior consent of the Central Government is a requirement under section 86(3) of the CPC. The Central Government replied via email, stating that since the proceedings vis-à-vis passing a final and binding arbitral award cannot be considered as a suit for the purpose of section 86 of the CPC, prior concurrence is not required. The Delhi High Court further cited Indian Metals & Ferro Alloys Ltd., Cuttack v. Collector of Central Excise, Bhubaneshwar, and used the doctrine of contemporanea expositio which requires that courts, while interpreting a state or provisions, will give much weight to the interpretation put upon it, by those whose duty it has been to construe, execute and apply it. In plain terms, the Central Government’s confirmation was a crucial consideration that the Court kept in mind whilst interpreting the requirement of prior consent.
Can a foreign state entity claim sovereign immunity?
KLA and Matrix relied on United Nations Convention on Jurisdictional Immunities of States and their Property, 2004, which India is a signatory to, but has not ratified yet. While agreeing with this position, the Delhi High Court used articles 10, 17 and 19 that curtail foreign states from using sovereign immunity as a defence in disputes arising out of 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 to submit to arbitration differences relating to a commercial transaction, that State cannot invoke immunity from jurisdiction before a court of another State which is otherwise competent to deal with the proceedings…” This principle is also echoed in Ethiopian Airlines v. Ganesh Narain Saboo, in which the Supreme Court opined that the international law doctrine of ‘restrictive immunity’ increasingly bars states from claiming sovereign immunity vis-à-vis a commercial transaction. Moreover, Uttam Singh Duggal & Co. Pvt. Ltd. v. United States of America, Agency of International Development has also espoused that if a transaction in question is a private commercial action and not an explicitly sovereign action, a foreign state cannot claim immunity from Indian courts. In view of the above considerations, the Delhi High Court held that both pleas seeking enforcement of arbitral awards were maintainable.
This judgement is a quasi-clarification and an update, specifically with regards to arbitration, of Bombay High Court’s position on sovereign immunity discussed earlier in this Blog here. In Qatar Airways v Shapoorji Pallonji, the Bombay High Court concluded that Qatar Airways’ commercial activities were a relevant factor in determining whether it fell within the scope of section 86. In KLA Const, the fact that it was a commercial arbitration agreement meant that the foreign state had impliedly waived any chance of sovereign immunity by themselves. Section 86 of the CPC is of limited applicability and its protection cannot apply to cases of implied waiver. An arbitration agreement in a commercial contract between a party and a foreign state constitutes an implied waiver of immunity in the eyes of the court.
In line with the KLA Const judgement, the proceeding for passing an arbitral award will solely be governed by section 36 of the Arbitration Act. Moreover, as such a proceeding cannot be considered as a suit under section 86 of the CPC, there is no prior consent required by the Central Government. An important facet of the KLA Const judgement is that the Court did not ponder over the difference between a State or an independent juristic entity at all; rather, it opined that “if a foreign state dons 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.” Therefore, the Court automatically assumes that through international commercial arbitration, the only intention of the foreign state is to conduct business and not act in a sovereign capacity whatsoever. Accordingly, in international commercial arbitration in India, the ownership or control of State-owned corporation really makes no difference. The nature or purpose of activities taken by the State would be in question, and not its ownership structure.
KLA Const also embraces the principle of restrictive immunity laid down by the UK Court of Appeals in 1977 in Trendtex Trading v Central Bank of Nigeria, which was also codified in section 3(1) of the State Immunity Act 1978. It provides that immunity cannot be availed by a foreign state when: (i) a commercial transaction is entered into by the State; and (ii) an obligation of the State by virtue of a contract (whether a commercial transaction or not) fails to be performed wholly or partly in the United Kingdom. Notably, this principle of restrictive immunity is coherent only for arbitration proceedings in India. For suits, section 86 of the CPC still applies.
KLA Const is certainly a laudable judgment as it consciously develops a differential standard for sovereign immunity and requirement of prior consent in arbitration as compared to suits under the CPC. The foundational principles of arbitration need to be upheld and, as stated by the Court: “If foreign States are permitted to stymie the enforcement of arbitral awards, which are the ultimate fruits of the above consensual process, then the very edifice of International Commercial Arbitration would collapse.” This pro-enforcement approach is essential to minimize delays and obstructions in proceedings.
– Sparsh Mallya