The Supreme Court (“SC”) has in its judgment dated November 26, 2020 in the matter of M/s Noy Vallesina Engineering SpAv. M/s Jindal Drugs Limited and Others [Civil Appeal No. 8607 of 2010], held that proceedings under Section 34 of the Arbitration and Conciliation Act, 1996 (“ACA”) are not maintainable against a foreign award.

Facts
M/s. Noy Vallesina Engineering SpA (“Appellant”), is a company incorporated under Italian laws involved in the setting-up and construction of plants for production of synthetic fibres, polymers and ascorbic acid. M/s Jindal Drugs Limited (“Respondent”), is a public limited company incorporated under Indian laws. The Respondent had entered into four agreements with one Engineering Chur AG of Switzerland (“Enco”) to set up an ascorbic acid plant (“Plant”) in India, being; (i) an engineering contract for construction of the plant (“Plant Contract”); (ii) a supply contract; (iii) a service agreement; and (iv) a license agreement (collectively the “other Agreements”). The aforesaid Plant Contract and other Agreements were executed on January 30, 1995. Under the Plant Contract, Enco agreed to provide the Respondent with technical information and basic engineering documentation for the construction, commission, operation and maintenance of the Plant. In consideration of Enco’s obligations, the Respondent was to pay a total fee of Swiss Francs 86,00,000 in the manner provided in the Plant Contract. The Plant Contract and the other Agreements contained an arbitration clause which expressly stated that arbitration would be “under the Rules of Conciliation and arbitration of the International Chamber of Commerce, Paris and Arbitration proceedings shall be in the English language and shall take place in London.” In March 1995, Enco assigned the Plant Contract to the Appellant with the consent of the Respondent, pursuant to which all obligations of Enco towards the Respondent were taken over by the Appellant.

However, due to certain disputes arising between the Respondent and the Appellant, the Appellant terminated the Plant Contract claiming damages from the Respondent. Subsequently, on October 31, 1996, the Respondent filed a request for arbitration under the Plant Contract before the International Court of Arbitration, Paris (“ICC”) which was followed by the Appellant filing its reply to the Respondent’s claim and also making a counter claim. After considering the claims and counter claims, the ICC arbitral tribunal passed a partial award on February 1, 2000, under which the Respondent’s claims were rejected and the Appellant was awarded Swiss Francs 44,33,416 (“Partial Award”) towards its counterclaims under the Plant Contract. The ICC arbitral tribunal then called upon the parties to present written representations on interest and costs to enable it to frame the final award.

On February 20, 2000, the Respondent filed a petition before the Bombay High Court (“BHC”) under Section 34 of the ACA challenging the Partial Award. The petition was admitted for final hearing on March 1, 2000 and notice was issued to the Appellant, the ICC and the ICC arbitral tribunal, whereupon an interim injunction was issued restraining them “from receiving any further submissions, and/or passing any further direction and/or Ruling and/or Award in the arbitration proceedings….”. However, the ICC arbitral tribunal held the view that the interim order passed by the BHC was not binding on it and consequently, proceeded with granting its final award on October 22, 2001 (“Final Award”). When the Final Award was made, the Respondent’s challenge to the Partial Award, and the interim application were both pending before the BHC.

The petition under Section 34 of the ACA challenging the Partial Award was decided by an order dated February 6, 2002 passed by a single judge bench of the BHC (“Single Bench Order”), which held that the partial award was a foreign award, and therefore a challenge through a petition under Section 34 of the ACA was not maintainable. Thereafter, the Respondent preferred an appeal against the Single Bench Order before a division bench of the BHC (“Division Bench”). During the pendency of the appeal, the Appellant had applied before the BHC for enforcement of the Partial Award and Final Award under Sections 47 and 48 of the ACA. The said petition for enforcement of the Partial Award and Final Award was allowed and the Respondent’s objections against enforceability of the two awards were overruled. The single judge who decided the petition held, in a judgment, (“Enforcement Order”) that the two awards were enforceable, save and except thatpart of the award which directs payment of Swiss Francs 14,53,316 by the Respondent to the Appellant.

The Respondent subsequently preferred an appeal before the BHC and the Appellant filed a cross appeal thereafter. While these appeals were still pending, the Division Bench, relying on the judgments of the SC in Bhatia International v. Bulk Trading S. A. and Another [(2002) 4 SCC 105] (“Bhatia Judgement”) and Venture Global Engineering v. Satyam Computer Services Limited and Another [2008 (4) SCC 190] (“Venture Global Judgement“) held that the proceedings under Section 34 of the ACA could be validly maintained to challenge a foreign award and set aside the Single Bench Order. The Appellant subsequently preferred the present appeal before the SC, challenging the order of the Division Bench.

Issue
Whether proceedings under Section 34 of the ACA can be maintained to challenge a foreign award.

Arguments

Contentions raised by the Appellant:

The Appellant, inter alia, contended that the order passed by the Division Bench of the BHC was not supported by law because a foreign award cannot be challenged under Section 34 of the ACA. It argued that the three-judge decision in the Bhatia Judgment (supra) and the subsequent holding in the Venture Global Judgment (supra) were both held to be incorrect in the larger, five judges ruling in Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc [2012 (9) SCC 552] (“BALCO Judgement”). Relying on the BALCO Judgement, it was contended that foreign awards, having been rendered outside India under the aegis of the ICC could not be challenged merely because a condition in the underlying contract provided that the law governing the agreement, would be Indian law. It was also argued that the BALCO Judgement clearly enunciated the principle that the seat of arbitration also indicated the choice of the law governing the arbitration basis the ‘Shashoua’ principle that states that the designation of a “seat” of the arbitration would carry with it “something akin to an exclusive jurisdiction clause”.

Referring to identical terms in the Plant Contract and other Agreements, in the present case, which expressly stated that arbitration would be “under the Rules of Conciliation and arbitration of the International Chamber of Commerce, Paris and Arbitration proceedings shall be in the English language and shall take place in London.” the Appellant argued that the intention of the parties, expressed unambiguously in the contract, was that the arbitration was governed by the law of the seat, which was UK law. Therefore, the findings in the impugned judgment were clearly untenable. The Appellant also contended that the judgements passed in Union of India v. Reliance Industries [2015 (10) SCC 213], Harmony Innovation Shipping Limited v. Gupta Goal India Ltd [2015 (9) SCC 172] and Roger Shashoua v. Mukesh Sharma [2017 (14) SCC 722] (“Shashoua Judgement”) have now established that disputes arising prior to the BALCO Judgement involving agreements which stipulated that the juridical seat was in India, and which stipulate or could be read as stipulating that the law governing arbitration would be Indian law, should not be decided basis the BALCO Judgement. However, cases where the juridical seat was not in India, or the law governing arbitration was not Indian law, would be bound by the BALCO Judgement. Therefore, the impugned judgment, which held to the contrary, could not be sustained. Lastly, relying on the judgment passed by the Supreme Court in Fuerst Day Lawson Limited v. Jindal Exports Limited [(2011) 8 SCC 333] (“Fuerst Day Lawson Judgement”) it was contended by the Appellant that basis Section 50 of the ACA (Provides for a restrictive category of appealable subject matters, and prohibits appeals in other matters), the order holding that the petition under Section 34 was not maintainable, was not appealable.

Contentions raised by the Respondent:

The Respondent on the other hand contended that the impugned judgment was unexceptionable and not liable to be interfered with, and that Section 34 of the ACA operated in a field different from Section 48 of the ACA. It argued that the latter enabled the enforcement of a foreign award, and the court could only refuse enforcement, whereas under Section 34 of the ACA, the legality of an award could be gone into and the court had the jurisdiction to set it aside and that this crucial difference was recognized by Indian courts, as was evident from the decisions in the Bhatia Judgment and Venture Global Judgment. Relying on the observations in the BALCO Judgement that arbitration agreements entered into before the decision, and disputes which arose under them, would continue to be bound by the rules set prior to the BALCO Judgement, it was argued that, since, in this case, the agreements were entered into, and awards too were rendered during the prevalence of the principles set out under the Bhatia Judgment, the later decision in the BALCO Judgement or any subsequent judgment could not apply. It was further argued that, though the Plant Contract stated that the arbitration was to be held in London, under the ICC, Clause 12.4.1 of the Plant Contract clearly stated that the contract would be governed by Indian law, which unambiguously pointed to the fact that the parties intended that the law governing arbitration too was Indian law. Therefore, there was no question of the applicability of the ratio under the BALCO Judgement in the instant matter.

Observations of the Supreme Court

The SC observed that the Bhatia Judgment, and later, the Venture Global Judgment, had held that resorting to remedies under Part I of the ACA can be made in respect of foreign awards, despite the clear dichotomy in the enactment between domestic awards covered by Part I and foreign awards covered by Part II of the ACA. This understanding was re-visited in the BALCO Judgement where the SC held that “the Arbitration Act, 1996 has accepted the territoriality principle which has been adopted in the UNCITRAL Model Law. Section 2(2) makes a declaration that Part I of the Arbitration Act, 1996 shall apply to all arbitrations which take place within India. We are of the considered opinion that Part I of the Arbitration Act, 1996 would have no application to international commercial arbitration held outside India. Therefore, such awards would only be subject to the jurisdiction of the Indian courts when the same are sought to be enforced in India in accordance with the provisions contained in Part II of the Arbitration Act, 1996. In our opinion, the provisions contained in the Arbitration Act, 1996 make it crystal clear that there can be no overlapping or intermingling of the provisions contained in Part I with the provisions contained in Part II of the Arbitration Act, 1996.” Further, it was observed that the principle in the Shashoua Judgement had been followed repeatedly in a series of decisions by the SC, with respect to the law governing the seat as the law of the “seat” where the arbitration had been held. This view was reinforced in IMAX Corporation v. E-City Entertainment (India) (P.) Limited [2017 (5) SCC 331]. Taking into consideration the fact that the parties had expressly chosen to resolve the dispute through the ICC, in the form of a London based arbitration, the SC stated that “ICC having chosen London, leaves no doubt that the place of arbitration will attract the law of UK in all matters concerning arbitration.”

The SC further observed that even as per the latest decision on this issue in Government of India v. Vedanta Limited [2020 SCC Online (SC) 749], the dispute arose out of a pre-BALCO Judgement contract on January 18, 2011 where the seat of arbitration was Kuala Lumpur, however, the governing law of the contract, was English law.

The SC, in its three-judge bench decision, held that the law governing the challenge to the award was Malaysian law as the curial law of the arbitration was to be determined by the seat of arbitration.

The SC also noted that the decision in the Feurest Day Lawson Judgement unambiguously ruled out the maintainability of any appeal against an order granting enforcement of a foreign arbitration award. It accordingly observed that in the present case, both the Partial and Final Awards being foreign awards, the provisions of Sections 47 and 48 of the ACA were correctly invoked by the Appellant.

Decision of the Supreme Court

In allowing the instant appeal, the SC did not consider the merits of the substantive challenge to the Enforcement Order, because the parties had not been heard and therefore, it would not have been fair to comment on it. Further, the Respondent had proceeded on the assumption that its appeal to the Division Bench on this aspect was pending. In view of the finding of the court that such an appeal against an order of enforcement was untenable due to Section 50 of the ACA, the merits of the Respondent’s objections to the Single Bench Order, were open for it to be canvassed in appropriate proceedings. The SC also held that such proceedings could not also be a resort to any remedy under the Code of Civil Procedure, 1908. In the event the Respondent chose to avail of such remedy, the question of limitation was left open, as the court was conscious of the fact that although the Fuerst Day Lawson Judgment was a decision rendered over 10 years ago, it settled the law decisively and has been followed in later judgments.

Vaish Associates Advocates View:

The SC’s judgement in the present matter, highlights the importance of choosing the rules and seat of arbitration and governing law in contracts as per the intended agreement/understanding between parties. In allowing this appeal the SC has yet again clarified its stand on the application of Part I and Part II of the ACA with respect to domestic and foreign arbitration awards.

Parties to contracts having foreign seat of arbitration and Indian law as governing law should therefore be well advised and aware that they can no longer take recourse to the argument that since their contracts were entered into prior to the BALCO Judgement, the pre-BALCO rules would automatically apply to them. Accordingly, the seat of arbitration should be chosen in alignment/consonance with the governing law of the contract if the parties wish to ensure due enforcement of arbitral awards in India.

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

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