Enforceability of Foreign Arbitral Awards on Non-signatories

[Anand Singh is a third year student at Hidayatullah National Law University, Raipur]

The Supreme Court on 11 August 2021 in Gemini Bay Transcription Pvt. Ltd vs. Integrated Sales Service Ltd.  held that foreign arbitral awards are enforceable against non-signatories to the agreement. The judgment clarifies a critical issue, settling the position that the grounds contained under the Arbitration Act (“Act”) for rendering a foreign award unenforceable should be construed in a narrowed manner, and the argument that a party is non-signatory to the arbitration agreement does not fall under any of the grounds. This post seeks to discuss the factual background of the case and analyse the reasoning behind this judgment.

Factual Background

Integrated Sales Service Ltd. (“ISS”), a Hong-Kong based company and DMC Management Consultants Ltd. (“DMC”), an Indian company entered into a representation agreement. Through this agreement, ISS was to assist DMCto sell its goods and services to prospective customers, and in consideration for the services rendered by ISS, it was to receive compensation. The agreement also consisted of an arbitration clause, according to which any dispute between the parties was referred to a single arbitrator in Kansas City, State of Missouri, USA, under the laws of the State of Delaware, USA. 

Disputes arose between the parties, which resulted in the initiation of arbitration proceedings by ISS. The statement of claim listed Mr. Upadhyaya, DMC (India), DMC Global, Gemini Bay Consulting Ltd. (“GBC”) and Gemini Bay Transcription Pvt. Ltd. (“GBT”) as respondents. It is pertinent to note that Mr Upadhyaya, DMC Global, GBC, and GBT were non-signatories to the agreement. ISS alleged that Mr. Upadhyaya was the chairman of DMC and in fact, the person in control of the other respondent companies as well, which were owned by the family members of Mr. Upadhyaya, who acted according to his instructions. It was contended that DMC terminated the contracts with the companies introduced by ISS, and later Mr. Upadhyaya caused new contracts to be executed with GBC and GBT, intending to evade payment of commission to ISS. Thus, GBC and GBT were in fact the alter egos of Mr. Upadhyaya and thereby were bound by the arbitration clause of the representation agreement. 

Award

The sole arbitrator held that the alter ego doctrine can be applied for lifting the corporate veil and passed an arbitral award following the Delaware law against the DMC and Gemini Bay entities. 

Enforcement Proceedings

Thereafter, ISS approached a Single Judge Bench of the Bombay High Court for the enforcement of the award, which rejected the enforcement against Mr. Upadhyaya and Gemini Bay on the basis of them not being signatories to the arbitration agreement. The decision of the Single Judge Bench was overruled by the Division Bench of the Bombay High Court, which on the examination of the Delaware law found that alter ego principle is a valid ground for lifting the corporate veil and passed an award against Gemini Bay. Subsequently, an appeal was filed before the Supreme Court by Mr. Upadhyaya and Gemini Bay entities against the Division Bench judgment.

Analysis of the judgment

The Supreme Court, while dismissing the present appeal, was mainly concerned with the issue of whether a foreign award can be enforced against non-signatories. While answering the question in affirmative, the following observations were made by the SC.

No substantive evidence is necessary to bind a non-signatory by a foreign award

To arrive at this conclusion, the SC first referred to section 47 of the Act, which provides the pre-requisites for the enforcement of a foreign award. The Court referred to Article IV of the New York Convention on which the provisions of section 47 is based, and discussed that Article IV provides for a maximum standard of proof necessary for determining the existence of a foreign award, and the contracting states should refrain from imposing stricter requirements of proof. Thus, the Court concluded that section 47(1) is procedural in nature, and dismissed the appellant’s contention that there needs to be substantive evidence to bind a non-signatory by the foreign award. The objective of section 47 is the satisfaction of the enforcing court that the award is indeed a foreign award as specified under section 44, and is enforceable against the person bound by it.

Non-signatory’s argument cannot fit into section 48(1)(a) of the Act

Gemini Bay was denied any relief under section 48(1)(a). The reasoning given by the Supreme Court was that the wording of section 48(1)(a) specifically requires that “parties to the agreement” shall bring a challenge against an award, whereas section 44 talks about an arbitral award on “differences between persons”, meaning that section 48(1)(a) refers only to the parties referred under section 44, and including non-signatories under it would be contrary to the language of section 48(1)(a). Therefore, noticing the difference in wordings of both the sections, the Court concluded that “persons”, who are non-signatories to the arbitration agreement can be bound by a foreign award under section 44, but a challenge against the enforcement of a foreign award on the ground of invalidity of the arbitration agreement under section 48(1)(a) can only be brought by the “parties” to the agreement.

The Court differed from the views expressed in the English judgment of Dallah Real Estate and Tourism Co vs. Ministry of Religious Affairs of the Government of Pakistan, that international practice shows that apart from a challenge to the validity of an arbitration agreement, section 103(2)(b) of the UK Arbitration Act (similar to section 48(1)(a) of the Indian Arbitration Act) also includes the case of a party being non-signatory to the arbitration agreement was rejected by the Court. Instead, the Court relied on the Aloe Vera of America, Inc v Asianic Food (S) Pte Ltd & Anr., and concluded that the arbitrator confined non-signatories to the arbitration agreement by applying the Delaware law to the facts of the case. It is a well-settled international practice that the findings of an arbitrator cannot be reconsidered by an enforcing court. Therefore, to ask the court to apply section 48(1)(a) to examine whether there was a valid agreement binding non-signatories is equivalent to asking an enforcing court, which has a secondary jurisdiction to the courts where the award was made, to review the award on its merits, by re-examining the facts of the case.

The question of whether a non-signatory can be bound by a foreign award is outside the scope of section 48(1)(c)

The argument that the award was outside the scope of the arbitration under section 48(1)(c), as it was made against a party non-signatory to the agreement was rejected by the Supreme Court. The Court relied on the Ssangyong Engg. & Construction Co. Ltd. v. NHAI to hold that the expression outside the scope of “submission to arbitration” under the said provision only deals with disputes that are outside the scope of the arbitration agreement between parties, and not with whether a non-signatory to the agreement can be bound by the same.

The ground that the award was made in the absence of proper reasoning by the arbitrator does not qualify as natural justice under section 48(1)(b)

The Court rejected the argument that the arbitrator’s award was based on no proper reasoning and giving of reasons being a part of natural justice, the award is liable to be set aside under section 48(1)(b). The Court clarified that section 48(1)(b) does not speak of the absence of reasons in an arbitral award at all. The said provision is only concerned with natural justice grounds related to notice of appointment of the arbitrator or of the arbitral proceedings, or that a party was otherwise unable to present its case before the arbitral tribunal, and all these events are applicable before the making of an award at the hearing stage.

The scope of section 46 is wider than section 35

Gemini Bay argued that the legislature intended to circumscribe the enforcing court’s authority under section 46, which specifies the circumstances under which a foreign award is binding, by only including “persons as between whom the award was made”, as opposed to section 35 that talks about “parties” and “persons claiming under them”. The Court rejected this contention while distinguishing between sections 46 and 35, and stated that section 46 does not mention “parties” at all. Instead it refers to “persons”, who may be non-signatories as well, whereas “persons” under section 35 speaks in the context of an arbitral award is final and binding, and therefore, includes “parties” and “persons claiming under the parties”. Thus, section 46 is much wider in its scope than section 35, which talks about “persons”, without any restrictions.

Conclusion

This case has resolved the long-standing question of whether an arbitral award can be enforced against a non-signatory to the arbitration agreement. The decision is welcome as it solidifies the pro-arbitration stance of the Supreme Court and clarifies that the reasons for objecting to the enforcement of an award cannot be given a wide interpretation. Due to the limited bases available under the Act, for denying the enforcement of an award, non-signatories to the arbitration agreement should challenge their inclusion within an international arbitration as soon as they are subjected to it, instead of waiting to challenge the enforcement of an award.

Anand Singh

 

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