Home » Between The Lines » Between the Lines | Supreme Court: A foreign award is enforceable against non-signatories under Part II of the Arbitration and Conciliation Act, 1996

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The Hon’ble Supreme Court (“SC”) has in the matter of M/s Gemini Bay Transcription Private Limited v. M/s Integrated Sales Services Limited and Others (Civil Appeal No. 8343-8344 OF 2018), held that the foreign arbitral awards are binding on non-signatories under Part II of the Arbitration and Conciliation Act, 1996 (“Act”).

M/s Integrated Sales Services Limited (“ISS”), a company based in Hong Kong, entered into a representation agreement dated September 18, 2000 (“Agreement”) with M/s DMC Management Consultants Limited (“DMC”), a company registered in India. As per the Agreement, ISS was required to assist DMC to sell its goods and services to prospective customers, and in consideration thereof, receive commission. In 2009, a dispute arose between ISS and DMC and a statement of claim dated June 22, 2009, was filed before the arbitrator by ISS against DMC, Mr. Arun Dev Upadhaya (chairman of DMC and DMC Global) (“ADU”), DMC Global (company registered in Mauritius), Gemini Bay Consulting Limited (company registered in British Virgin Islands) and Gemini Bay Transcription Private Limited (company registered in India) (“GBT”). It was alleged by ISS that DMC is trying to evade its contractual obligations in the Agreement by shifting the client brought by ISS to other entities mentioned hereinabove. ISS further alleged that ADU, who owns the other companies, is using other companies as alter egos of himself to evade DMC’s contractual obligations under the Agreement.

The substantive law of the arbitration proceedings was the law of Delaware, the United States. The arbitral tribunal, as per the Delaware law and on the basis of oral and documentary evidence, held that the doctrine of alter ego is an appropriate justification for lifting the corporate veil and ADU, DMC and GBT are jointly and severally liable for breaching the Agreement (“Award”).

To enforce the Award, ISS went to the High Court of Judicature at Bombay, Nagpur Bench (“BHC”) however, the hon’ble single judge of BHC held that as per Sections 48(1)(c) to (e) of the Act, the Award cannot be enforced against persons who are non-signatories, even though such non-signatories may have participated in the arbitration proceedings. The said decision of the single judge of BHC was appealed under Section 50 of the Act and the hon’ble division bench of BHC held that the Award could only be challenged under Section 48 of the Act if the Delaware law has not been followed on the alter ego principle. The division bench, being satisfied that the Delaware law has been properly applied, held that none of the grounds contained in Section 48 of the Act would apply so as to resist enforcement of the Award. Consequently, the BHC allowed the appeal and set aside the judgment of the single judge by the judgment dated January 4, 2017. A review petition was subsequently dismissed on February 24, 2017. On account of this decision by the division bench of BHC, GBT and ADU filed an appeal before the SC seeking an order that the foreign Award is not enforceable against GBT and ADU as they are non-signatories to the arbitration agreement.

Whether a foreign award is enforceable against non-signatories (GBT and ADU) under Part II of the Act.

Contentions raised by GBT:
GBT, inter alia, contended that as per Section 47(1)(c) of the Act, the burden of proving that a foreign award may be enforced under Part II of the Act is on the person in whose favour that award is made, and that such burden in the case of a non- signatory to an arbitration agreement can only be discharged by adducing evidence which would independently establish that such non- signatory can be covered by the foreign award in question.

It was further contented that as per Section 48(1) of the Act, a foreign award against a non-signatory to an arbitration agreement would be directly barred by sub-clause (a) as well as sub-clause (c) of Section 48 of the Act. Further, it was also contented that no proper reasoning was given in the Award and it should also be set aside on the basis of Section 48(1)(b) of the Act.

GBT also relied on the Supreme Court of Victoria, Australia case of IMC Aviation Solutions Private Limited v. Altain Khuder LLC [(2011) VSCA 248] to submit that, where a party resists enforcement of a foreign award on the ground that it is not a signatory to the arbitration agreement, the enforcing court is duty bound to examine the question of jurisdiction by itself. Lastly, it was argued that the Award is perverse as two clients of DMC that were shifted to GBT were vital evidence in the case, and the non-examination of these two clients would vitiate the Award.

Contentions raised by ADU:
ADU, first, contented that the dispute is in relation to a tort which is outside contractual disputes that arise under the Agreement and that since the cause of action really arose in tort, the Award was vitiated on this ground. Secondly, relying on the judgement of Dallah Real Estate and Tourism Co v. Ministry of Religious Affairs of the Government of Pakistan [(2010) 3 WLR 1472], it was contented that a full review based on oral and/or documentary evidence ought to have been undertaken which was not done by the BHC and BHC merely echoed the Award’s findings. Lastly, ADU, comparing Section 46 and Section 35 of the Act, argued that under Section 46, a foreign award is to be treated as binding only on “parties” of the Agreement and not on any other non-signatory.

Contentions raised by ISS:
In reply to the contentions of ADU and GBT, ISS, by taking the SC through the Award, argued that the Award is well reasoned and there is no requirement to state elaborate/detailed reasons in an arbitral award so long as the award happens to be reasoned. Further, with respect to Section 48 of the Act, ISS contented that neither Section 48(1)(a) nor Section 48(1)(c) of the Act deal with non-signatories to an arbitration agreement and since there is no objection to the enforcement of the Award with respect to Section 48(2)(b) that is, being contrary to public policy of India, the appeal should be dismissed.

Observations of the Supreme Court:
Burden of proof under Section 47(1)(c) of the Act: The SC stated that the requirement under Section 47(1)(c) of the Act 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. The said section only refers to the six ingredients for enforcement of a foreign award which are contained in Section 44 of the Act and, were met in this case.

The SC, citing various authorities, further observed that Part II of the Act is based on the Convention on Recognition and Enforcement of Foreign Awards, 1958 (New York Convention), which follows a pro-enforcement bias, and unless a party is able to show that it’s case comes clearly within Sections 48(1) or 48(2) of the Act, the Award must be enforced.

Objections under Section 48(1)(a) of the Act: The SC stated that in the guise of applying Section 48(1)(a), the SC is being asked to undertake a review on the merits which is not possible under Section 48 of the Act. It stated that the grounds mentioned in Section 48(1)(a) of the Act are in themselves specific, and only speak of incapacity of parties and the agreement being invalid under the law to which the parties have subjected it and the attempt to bring non-parties within this ground is “to try and fit a square peg in a round hole”. The SC further stated that the Dallah Real Estate (Supra) and the IMC Aviations (Supra) are different in terms of facts as well as on law and are inapplicable when construing Section 48(1)(a) of the Act.

Objection under Section 48(1)(b) of the Act: The SC stated that Section 48(1)(b) of the Act has to be narrowly construed and the only grounds on which a foreign award cannot be enforced under Section 48(1)(b) of the Act 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 and both the grounds were not met in this case.

Objections under Section 48(1)(c) of the Act: The SC stated that Section 48(1)(c) of the Act 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. This was further established by the SC by referring to the proviso to Section 48(1)(c) of the Act which stated that an award may be partially enforced, provided that matters which are outside the submission to arbitration can be segregated.

Perversity of the Award: The SC stated that perversity as a ground to set aside an award in an international commercial arbitration is no longer valid after the 2015 amendment to the Act as the “public policy of India” does not take within its scope the “perversity of an award”.

Dispute in relation to a tort: The SC stated that the dispute was a tort claim in relation to the Agreement and as per Renusagar Power Company Limited. v. General Electric Company, [(1984) 4 SCC 679], Section 44 of the Act recognises the fact that tort claims may be decided by an arbitrator provided they are disputes that arise in connection with the agreement.

Contention under Section 46 of the Act: The SC stated that Section 46 of the Act does not speak of “parties”, but of “persons” who may, therefore, be non-signatories to the arbitration agreement. It further stated that Section 35 of the Act 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 of the Act, therefore, refers to persons claiming under parties and is, therefore, more restrictive in its application than Section 46 of the Act which speaks of “persons” without any restriction.

With respect to the damages awarded, the SC stated that the facts of this case cannot even remotely be said to shock the conscience of the court so as to clutch at “the basic notion of justice” ground contained in Section 48(2) Explanation (1)(iii) of the Act. Lastly, the SC also pointed out that the approach of the division bench of the BHC to satisfy the proper application of Delaware Law on the Award is completely erroneous as Section 48 of the Act does not contain any ground for resisting enforcement of a foreign award based upon the foreign award being contrary to the substantive law agreed by the parties.

Decision of the Supreme Court:
In light of the abovementioned, the SC arrived at the conclusion that the foreign award is binding on non-signatories as there is no valid ground under Part II of the Act to restrict the application of a foreign award on non-signatories to the arbitration agreement.

VA View:
The SC’s decision, following a pro-arbitration approach, rightly restricts the grounds for non-enforcement of a foreign arbitral award to what is clearly specified in Section 48, Part II of the Act. The SC, by examiniting Section 44 and 47 of the Act, brings a lot of clarity with respect to substantive ingredients for enforcement of foreign arbitral awards.

The decision follows the spirit of New York Covention, on which Part II of the Act is based, by following a pro-enforcement bias towards enforcing a foreign arbitration award unless a party is able to show that its case comes clearly within the ambit of Section 48 of Act. This decision provides a great insight and guidance to foreign and Indian parties looking to enforce a foreign arbitral award on non-signatories to arbitration agreement in India and is a right step forward towards making India a global arbitration hub.

For more information please write to Mr. Bomi Daruwala at [email protected]