Revisiting Section 48: Enforcement of Foreign Arbitral Award against Non-Signatories

[Darshil Sakhia is a second-year student at NALSAR University of Law, Hyderabad.]

In August 2021, a division bench of the Supreme Court of India, in its landmark decision in Gemini Bay Transcription v. Integrated Sales Service, ruled that a foreign arbitral award can be enforced against non-signatories to the arbitration agreement. The Court rejected the contention of the appellant that their case falls under section 48 of the Arbitration and Conciliation Act 1996, which laid down the conditions under which the enforcement of a foreign award may be refused. Further, it observed that the grounds contained in section 48(1)(a) to (e) of the Act are not to be construed expansively but narrowly. This post aims to critique the approach of the Court with respect to the interpretation of grounds for resistance of enforcement of foreign arbitral award under section 48 of the Act.

Facts

A representation agreement was entered between Integrated Sales Services Ltd. (“ISS”), a Hong Kong-based entity, and DMC Management Consultants Ltd. (“DMC”), a company registered in India. The Agreement was signed by the Managing Director of DMC and the Director of ISS. By this agreement, ISS was to assist DMC to sell its goods and services to prospective customers, and in consideration thereof was to receive a commission. Subsequently, the first amendment to the Agreement was signed by the Chairman of DMC, and the Director of ISS. This agreement was subject to the laws of the State of Delaware, U.S.A. and under the arbitration clause, any dispute between the parties was to be referred to a single arbitrator in Kansas City, Missouri, USA.

Disputes arose between the parties, and a notice invoking arbitration proceedings was sent by ISS to the Chairman. Subsequently, a statement of claim was filed by ISS before a learned single arbitrator, naming the Chairman, DMC (India), DMC Global (a company registered in Mauritius), Gemini Bay Consulting Limited (GBC), and Gemini Bay Transcription Private Limited (GBT). It was alleged by the ISS that DMC and other respondent entities were owned and/or controlled and dominated by the Chairman and were used to divert funds away from ISS and thereby depriving ISS of commission from the gross revenues earned by DMC.

Arbitral Award and its Enforcement

Subsequently, the arbitral award was passed by the sole arbitrator, holding DMC, DMC Global, the Chairman, GBC, and GBT jointly and severally liable for the damages of USD 6,948,100. The sole arbitrator relied on the ‘alter ego’ doctrine as an appropriate justification for lifting the corporate veil. The Agreement was not challenged by either party and was, therefore, a valid and enforceable Agreement.

The ISS sought enforcement of the arbitral award before the Bombay High Court, which relied on section 48(1)(c) to (e) of the Act and held that the arbitral award would not be enforced against the Chairman and GBT as they were non-signatories to the arbitration agreement. It held the award to be enforceable only against DMC as it was party to the Agreement.

On appeal, the Division Bench of the High Court reversed the impugned judgement. The Court ruled that the foreign award was not challenged in the USA, and hence it could only be challenged under section 48 of the Act if the Delaware law has not been followed on the alter ego principle. Aggrieved, the Chairman, GBC, and GBT approached the Supreme Court, resisting enforcement of the award.

Judgment

The Division Bench of the Supreme Court rejected the appeals and upheld the enforcement of the arbitral award against Mr. Upadhyaya, GBC, and GBT (non-signatories). While the Court upheld the conclusion arrived by the Division Bench of the Bombay High Court, it considered the approach of said bench to be incorrect. The Court observed that the High Court erroneously applied Delaware law to satisfy itself that such law had indeed been followed to apply the alter ego doctrine correctly, to uphold the enforcement of the foreign award.

The decision of the SC under Section 48 of the Act

The Supreme Court considered the “pro-enforcement bias” of the New York Convention, which has been espoused under section 48 of the Act, and ruled that the burden of proof is on the party objecting to the enforcement of the Award. Unless it is not shown that the case comes with section 48(1) or 48(2), the foreign award must be enforced. The Court distinguished the present case from the judgement of the English court in Dallah Real Estate v. Government of Pakistan, where the objection to bringing non-signatory to a foreign award was accepted. In the present case, the Court observed that on a literal interpretation, section 48(1)(a) refers only to the “parties” to the agreement referred to in section 44 of the Act. It is clear that including non-party to an agreement, alleging that it is not bound by an award under such agreement, runs contrary to the expression language of section 48(1)(a). The only grounds available to resist enforcement under section 48(1)(a), are incapacity of parties and invalidity of governing law to an agreement.

Further, under section 48(1)(c), enforcement of an award could be resisted if, the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration.” It does not deal with the contention whether the award is binding on a non-signatory to an agreement. Additionally, according to Ssangyong Engg v. NHAI and Olympus Superstructures v. Meena Vijay Khetan the expression ‘submission to arbitration’ would refer primarily to the arbitration agreement itself or to disputes submitted to arbitration.

The Court observed that the only grounds on which a foreign award cannot be enforced under section 48(1)(b) are natural justice grounds relatable 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. Court placed reliance on the judgement in the case Vijay Karia v. Prysmian Cavi, where grounds under section 48 of the Act were narrowly constructed.

Did the SC take the right approach under Section 48?

Arbitration as a mechanism of dispute resolution is fundamentally dependent on the consent of parties to arbitrate. The consent of parties gets manifested by being a signatory to an arbitration agreement. Moreover, foundational principles of contracts, namely, privity of contract and separate legal entity are also applicable to arbitration, and should accordingly guide the judicial decision making. Prima facie it may seem that binding non-signatories to agreement is in contravention to the foundational principle of consent and voluntariness of arbitration.

Nevertheless, courts across jurisdictions have developed various legal theories to bind non-signatories to an agreement in certain situations, like estoppel, veil piercing, incorporation by reference, agency, implied consent, assumption, assignment, subrogation, third-party beneficiary, alter-ego, and the group of companies doctrine. As business dynamics are changing at a greater pace and complexities of business transactions are increasing, these theories uphold larger commercial interests in the business world and avoid multiplicity of disputes. These theories have been widely accepted and dynamically applied by courts across different jurisdictions to bind non-signatories to arbitration agreements. The Supreme Court in Chloro Controls v. Severn Trent upheld the enforcement of the domestic arbitral award against non-signatories by applying the group of companies doctrine and thereby cleared its stance on arbitration seated in India.

The position of the Court that grounds for refusal of an arbitral award under section 48(1)(a) of the Act are not available to non-signatories on the ground of literal interpretation of section 48(1)(a) is debatable. The reasoning of the Court, that section 48(1)(a) refers only to the “parties” to the agreement referred to in section 44(a) and to attempt to bring non-parties within this ground is to try and fit a square peg in a round hole, is contrary to its previous judgements. In Chloro Controls, the Court ruled that the written agreement under section 7(4) of the Act, does not exclude the possibility to bind non-signatories. Further, under section 2(1)(h) of the Act, a party is defined as a ‘party to arbitration agreement’ and not as a ‘signatory’ to an arbitration agreement, which is aligned with the global interpretation of Article II (2) of the New York Convention. Therefore, the court’s refusal to allow objections of non-signatories under section 48(1)(a), doesn’t appear correct.

However, it is praiseworthy that the Court took a pro-arbitration and a non-interventionist stance. The Court correctly indicated that the HC took an erroneous approach while upholding foreign arbitral award against non-signatories, because the arbitral award was not challenged in the State of Missouri which was the seat of arbitration. The Court was correct in its observation that section 48 of the Act does not contain any ground for resisting the enforcement of foreign award as being contrary to the substantive law i.e. Delaware Law as agreed by parties. Hence, to resist the enforcement of foreign arbitral awards, the resisting party has to clearly show that ground(s) under section 48 of the Act is squarely applicable to the given case.

Conclusion

To conclude, the judgement of the SC is a step forward in the right direction, as it reaffirms the pro-enforcement approach taken by the Indian courts in their previous decisions. The SC upholding the true spirit of the New York Convention, abundantly made it clear that the limited grounds to resist the enforcement of a foreign arbitral award under section 48 of the Act, cannot be construed expansively but narrowly. Hence, any crafty attempt by award-debtors to resist the enforcement of foreign seated arbitral awards, by compelling courts to undertake a review on merits would be thwarted by the Indian courts.

Darshil Sakhia

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