Foreign arbitral award enforceable against non-signatories to agreement; ‘perversity’ no longer a ground to challenge foreign award; tort claims arising in connection with agreement are arbitrable: SC expounds law on foreign awards

Supreme Court: A Division Bench comprising of R.F. Nariman and B.R. Gavai, JJ. held that a foreign arbitral award is enforceable against non-signatories to arbitration agreement. The Supreme Court reiterated that grounds for resisting a foreign arbitral award contained in Section 48(1)(a) to (e) of the Arbitration and Conciliation Act, 1996 are to be narrowly construed, and that a non-signatory’s objection cannot possibly fit into Section 48(1)(a). Furthermore, a foreign arbitral award cannot be challenged on the ground of “perversity”.

Incidental to the main issue, it was also held that Section 44 recognises the fact that tort claims may be decided by an arbitrator provided they are disputes that arise in connection with the subject agreement.

The instant appeals before the Supreme Court raised interesting questions relatable to Part II of the Arbitration and Conciliation Act which provisions deal, inter alia, with recognition and enforcement of foreign awards.

Factual Matrix and Appeal

In September 2000, a Representation Agreement was entered into between Integrated Sales Services Ltd. (a company based in Hong Kong) and DMC Management Consultants Ltd. (a company registered in India, with principal business address at Nagpur). By this agreement, Integrated Sales was to assist DMC to sell its goods and services to prospective customers, and in consideration thereof was to receive commission. The agreement also had an arbitration clause as per which any dispute between the parties was to be referred to a single arbitrator in Kansas City, Missouri, USA.

Disputes arose between the parties, as a result of which a notice for arbitration was sent by Integrated Sales to Arun Dev Upadhyaya (Chairman of DMC). DMC and one Gemini Bay Transcription Private Limited were also made a party respondent to the statement of claim. This Gemini Bay was a company formed in India, owned and/or controlled and dominated by Arun Dev Upadhyaya. It was alleged that Arun Dev Upadhyaya used Gemini Bay to transfer funds away from Integrated Sales. It was alleged that DMC terminated contracts with clients brought in by Integrated Sales, and later caused execution of new contracts by same clients with Gemini Bay. This was done to evade payment of commission to Integrated Sales. It was alleged that Arun Dev Upadhyaya used Gemini Bay as alter ego of himself, and ignored the corporate forms of DMC to achieve his improper purpose of breaching the Representation Agreement. Gemini Bay objected that the arbitration agreement entered into between Integrated Sales and DMC was not enforceable against it.

In March 2010, the international arbitrator gave award to the tune of USD 6,948,100 in favour of Integrated Sales, which then approached a Single Judge of the Bombay High Court to enforce the foreign arbitral award. The Single Judge held that the arbitral award was enforceable only against DMC and not against Arun Dev Upadhyaya and Gemini Bay as they were non-signatories to the arbitration agreement. However, on appeal, the Division Bench of the High Court reversed the judgment of the Single Judge. Aggrieved, Gemini Bay and Arun Dev Upadhyaya approached the Supreme Court.

Analysis and Observations

Foreign award

Foremost, the Court noted that a reading of Section 44 of the Arbitration and Conciliation Act, 1996 would show that there are six ingredients to an award being a foreign award. First, it must be an arbitral award on differences between persons arising out of legal relationships. Second, these differences may be in contract or outside of contract, for e.g., in tort. Third, the legal relationship so spoken of ought to be considered “commercial” under the law in India. Fourth, the award must be made on or after 11-10-1960. Fifth, the award must be a New York Convention award. And sixth, it must be made in one of such territories which the Central Government by notification declares to be territories to which the New York Convention applies.

Pre-requisites for enforcement of foreign award

Then the Court referred to Section 47 (Evidence), sub-section (1) of which provides pre-requisites for the enforcement of a foreign award: (a) the original award or a copy thereof duly authenticated in the manner required by the law of the country in which it is made; (b) the original agreement for arbitration or a duly certified copy thereof; and (c) such evidence as may be necessary to prove that the award is a foreign award.

Roping in a non-signatory

It was noted that all the requirements of sub-section (1) are procedural in nature, the object being that the enforcing court must first be satisfied that it is indeed a foreign award, as defined, and that it is enforceable against persons who are bound by the award.  The Court was of the opinion that:

“Section 47(1)(c) being procedural in nature does not go to the extent of requiring substantive evidence to ‘prove’ that a non-signatory to an arbitration agreement can be bound by a foreign award. As a matter of fact, Section 47(1)(c) speaks of only evidence as may be necessary to prove that the award is a foreign award.”

The Court dismissed the argument of the appellant that the burden of proof is on the person enforcing the award and that this burden can only be discharged by such person leading evidence to affirmatively show that a non-signatory to an arbitration agreement can be bound by a foreign award. It was held that such argument is outside Section 47(1)(c).

Refusal to enforcement of foreign award

Next, the Court referred to Section 48 (Conditions for enforcement of foreign awards).  It was noted that when enforcement of a foreign award is resisted, the party who resists it must prove to the court that its case falls within any of the sub-clauses of sub-section (1) or sub-section (2) of Section 48. The Court said:

“Given that foreign awards in convention countries need to be enforced as speedily as possible, … the expression ‘proof’ in Section 48 would only mean ‘established on the basis of the record of the arbitral tribunal’ and such other matters as are relevant to the grounds contained in Section 48.”

It was also observed that the New York Convention which has been adopted by the Arbitration Act has a pro-enforcement bias, and unless a party is able to show that its case comes clearly within Section 48(1) or Section 48(2), the foreign award must be enforced. Also, the grounds contained in Sections 48(1)(a) to (e) are to be construed narrowly. Reliance was placed on Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131; and Vijay Karia v. Prysmian Cavi E Sistemi SRL, (2020) 11 SCC 1.

Non-signatory’s objection cannot fit into S. 48(1)(a)

The appellant had argued that a non-signatory to an arbitration agreement would be directly covered by Section 48(1)(a) as well as Section 48(1)(c), and if the Award were to be read, it would be clear that the reasons given are extremely sketchy and based on ipse dixit and not on facts, rendering the Award liable to be set aside on these two grounds.

Section 48(1)(a) provides that enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the court proof that “the parties to the agreement referred to in Section 44 were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made”.

The Court said that if read literally, Section 48(1)(a) speaks only of parties to the agreement being under some incapacity, or the agreement being invalid under the law to which parties have subjected it. It was observed:

“There can be no doubt that a non-party to the agreement, alleging that it cannot be bound by an award made under such agreement, is outside the literal construction of Section 48(1)(a).”

The Court further said that the ground is in itself specific, and only speaks of incapacity of parties and the agreement being invalid under the law to which the parties have subjected it. To attempt to bring non-parties within this ground is to try and fit a square peg in a round hole. It was categorically stated:

“A non-signatory’s objection cannot possibly fit into Section 48(1)(a)”

The Court said that what it was being asked to do in the guise of applying Section 48(1)(a) was really to undertake a review on merits. However, given the fact that the foreign award gave reasons on facts to apply the alter ego doctrine, it was not possible for the Court to reappreciate the facts especially when the burden lay on the appellants to establish the grounds made out in Section 48(1), none of which go to the merits of the case.

Perversity not a ground to set aside international commercial arbitration

The appellant also argued that the Award was perverse since vital evidence was not led in support of the claimant’s case before the arbitrator. Rejecting the argument, the Court answered:

“Perversity as a ground to set aside an award in an international commercial arbitration held in India no longer obtains after the 2015 amendment to the Arbitration Act, 1996.”

Relying on the law laid down in Ssangyong, (2019) 15 SCC 131, the Court explained that Section 48 has also been amended in the same manner as Section 34 of the Arbitration Act. The ground of “patent illegality appearing on the face of the award” is an independent ground of challenge which applies only to awards made under Part I which do not involve international commercial arbitrations. It was observed:

“Thus, the ‘public policy of India’ ground after the 2015 amendment does not take within its scope ‘perversity of an award’ as a ground to set aside an award in an international commercial arbitration under Section 34, and concomitantly as a ground to refuse enforcement of a foreign award under Section 48, being a pari materia provision which appears in Part II of the Act.”

Limited scope of challenge under S. 48(1)(c)

Section 48(1)(c) provides that enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the court proof that “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”.

The Court was of the view that given the fact that the expression “submission to arbitration” would refer primarily to the arbitration agreement, sub-clause (c) only deals with disputes that could be said to be outside the scope of the arbitration agreement between the parties – and NOT to whether a person who is not a party to the agreement can be bound by the same.

Natural justice grounds under S. 48(1)(b)

The appellant next argued that though Section 48(1)(b) refers to a natural justice ground, the giving of reasons being part of natural justice ought to be included in this ground, and as no proper reasons have been given by the Arbitrator, the Award should be set aside on this ground.

Section 48(1)(b) provides that enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the court proof that “the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present his case”.

The Court stated that Section 48(1)(b) does not speak of absence of reasons in an arbitral award at all. It was explained:

“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, all of which are events anterior to the making of the award.”

While rejecting the appellant’s argument, the Court relied on Vijay Karia, (2020) 11 SCC 1 to note that in any case Section 48(1)(b) is to be narrowly construed.

Tort claims and scope of arbitration

The appellant contended that since damages were given in tort by the Arbitrator in the instant case, they would be outside the scope of the arbitration agreement.

For answering this contention, the Court referred to the arbitration clause between the parties which expressly said “in the event a dispute arises in connection with this Agreement, such dispute shall be referred to a single arbitrator …”. Rejecting the appellant’s contention, the Court observed that:

“Section 44 recognises the fact that tort claims may be decided by an arbitrator provided they are disputes that arise in connection with the agreement.”

Power of enforcing court

The appellant argued that a comparison between Section 35 (Finality of arbitral awards) and Section 46 (When foreign award binding) of the Arbitration Act, 1996 would show that the legislature circumscribed the power of the enforcing court under Section 46 to persons who are bound by a foreign award as opposed to persons which would include “persons claiming under them” and that, therefore, a foreign award would be binding on parties alone and not on others.

Rejecting this argument as well, the Court stated that Section 46 does not speak of “parties” at all, but of “persons” who may, therefore, be non-signatories to the arbitration agreement. Also, Section 35 speaks of “persons” in the context of an arbitral award being final and binding on the “parties” and “persons claiming under them”, respectively. Section 35 would, therefore, refer to only persons claiming under parties and is, therefore, more restrictive in its application than Section 46 which speaks of “persons” without any restriction.

Damages awarded do not shock conscience of the court

The final argument of the appellant was that the damages which were awarded by the arbitrator had no basis whatsoever.

Finding no merit in this final contention, the Court said that such challenge to enforceability of the Award would again not fall within any of the exceptions contained in Section 48(1). Furthermore, in order to attract Section 48(2) read with Explanation 1(iii), it is only in exceptional cases which involve some basic infraction of justice which shocks the conscience of the court that such a plea can be entertained.

The Court found that the Arbitrator correctly held that as nothing was forthcoming from the appellant, he would have to make a best judgment assessment for damages. It was also noted that it has been established that such “guesstimates” are not a stranger to the law of damages in the USA and other common law nations. The Court was of the opinion that:

“In any case, the damages so awarded in the facts of this case cannot even remotely be said to shock the conscience of this Court so as to clutch at ‘the basic notion of justice’ ground contained in Section 48(2) Explanation (1)(iii).”

Decision

In view of the above, the appeal was dismissed by the Supreme Court. [Gemini Bay Transcription (P) Ltd. v. Integrated Sales Service Ltd., 2021 SCC OnLine SC 572, decided on 10-8-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

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