September 2024
1. Introduction
The world has seen a tremendous growth in global trade and cross border transactions since the 1980s. Such heightened business activity has also resulted in a significant rise in contractual disputes compelling parties to seek resolution through alternate dispute resolution mechanisms, with a view to save both time and money. In the Indian legal system, Code of Civil Procedure, 1908 provides for such alternate mechanisms, including mediation, arbitration and conciliation. The Arbitration and Conciliation Act, 1996 (“Act”) is the substantive law governing arbitrations and conciliation in India. However, despite being an exhaustive legislation, enforcement in India has never been easy and, in fact, jurisprudence shows enforcement of arbitral awards turns out to be a much more tedious and complicated process than what the parties intended to be.
This newsletter analyses the manner of enforcement of domestic and foreign awards under the Act and sheds light on the recent legislative and judicial developments aimed at bolstering the arbitral framework in India.
2. Enforcement of Arbitral Awards
The Act provides for enforcement of domestic and foreign awards in two separate parts, Part I and Part II. The former deals with domestic awards, while the latter addresses foreign awards.
2.1 Domestic Awards: Section 36 encapsulated in Part I of the Act provides for enforcement of arbitral awards for India-seated arbitrations. However, prior to enforcement of an award, it is likely it may be contested by the losing party. Once an award is passed, there is a period of 3 months during which a losing party can challenge it in accordance with section 34 of the Act before a court of competent jurisdiction on the following limited grounds (a) parties to the arbitration agreement were under some incapacity; (b) arbitration agreement in question is contrary to the law of the country of the seat of arbitration; (c) failure to give proper notice pertaining to the appointment of arbitrator or qua the arbitral proceedings to the other party; (d) subject matter of the arbitration was not itself arbitrable; (e) composition of the tribunal was not in terms of the arbitration agreement; (f) enforcement of the award would be contrary to the public policy of India;[1] (h) patent illegality appearing on the face of award.
Prior to 2015, mere filing of an application under section 34 of the Act amounted to an automatic stay on the enforcement of an award. However, an amendment in 2015 introduced section 36 which mandated the requirement of filing a separate application seeking stay of the award. Furthermore, the section detailed the process of enforcement quite significantly, but it still did not cover all aspects clearly. For instance, the provision did not define or clarify the jurisdiction where a petition for award enforcement would lie. Owing to this ambiguity, there was a divergence of legal opinion of different High Courts. The question was if a section 36 application should be first filed in the court under whose jurisdiction execution will lie or where the award debtor’s assets are located. If the application is filed in a court which does not have jurisdiction,[2] it will be dismissed. This controversy was put to rest by the Supreme Court in Sundaram Finance Limited vs Abdul Samad and Another[3] wherein it was held that proceedings for enforcement of an award can be filed anywhere where the award debtor’s assets are located and need not be necessarily filed within the territorial jurisdiction of the court wherein the award was passed.
2.2 Foreign Award: Sections 44-60 in Part II of the Act provides for enforcement of a foreign award. India is a signatory to the New York and Geneva Conventions concerning recognition and execution of foreign arbitral awards. Section 44 mandates for any foreign award to be enforceable in India, it should originate from a country which is a signatory to either of these conventions and designated as a convention country by India.
Sections 48 and 57 under Part II of the Act specify the conditions under which an enforcement of an award may be refused by an Indian court. The grounds are similar to those stated in section 2.1 above. Additionally, foreign awards can be challenged if they are not binding or not set aside or suspended by a competent court of the country of seat of arbitration. And, of course, the nebulous ground of public policy has crept in, i.e., to say award enforcement may be refused if it is contrary to public policy of India. Public policy, as a ground, was highly misused as most award debtors would stall enforcement proceedings by objecting to the award on the ground of its conflict with public policy of India. The 2015 amendment incorporated an explanation in sections 48 and 57 which specifically stated, “the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.”
Here it is necessary to discuss some key jurisprudence on the subject. The Supreme Court (“SC”) dwelled on public policy in Vijay Karia vs Prysmian Cavi E Sistemi Sr[4] and refrained from reviewing the award on merits during enforcement. It held a contravention of lex loci is not a ground to challenge a foreign award under section 48. India is a signatory to the New York Convention and aims to ensure enforcement of awards unless there is a breach of a fundamental policy of Indian law which means breach of a legal principle or legislation which is so basic to Indian law that it cannot be compromised. The court clearly stated, “fundamental policy refers to the core values of India’s public policy as a nation, which may find expression not only in statutes, but also time-honoured, hallowed principles followed by the courts.” The SC also observed the scope to challenge a foreign award is much narrower than the grounds for a domestic award under section 34. In another significant ruling of Avitel Post Studioz Limited vs HPEIF Holdings 1 Limited[5] the apex court held that the enforcement of arbitral award should be refused only in case of bias and in extraordinary circumstances. The SC took the view that minimal judicial intervention in a foreign award is the norm and interference can only occur under the exhaustive grounds mentioned in section 48(2) of the Act, i.e., where the subject matter of arbitration is not capable of settlement as per Indian laws or where the enforcement would be contrary to India’s public policy.
3. Challenges in Enforcement & Changing Trends
Despite legislative enactments and an aggressive promotion of pro-arbitration regime in India, enforcement of awards is still subject to multifarious challenges. Some issues which lead to delay in enforcement are discussed below.
3.1 Objections disguised as appeals: It is settled law that any arbitral award can be challenged on the limited grounds mentioned in sections 34 and 48 of the Act. However, in an endeavour to bring their challenge within the ambit of permissible statutory grounds parties often present their objections exhaustively, almost as appeal of the award, and do a deep dive into the merits which, in turn, stalls enforcement.
3.2 Absence of fixed timeline for disposal of award challenges: One reason why India has struggled to establish itself as an arbitral hub is the time taken to complete arbitration proceedings. In 2015 when the law was amended, section 29A was incorporated and which prescribed timelines for completion from 12-18 months. Any extension beyond 18 months requires court approval. Yet, there is no fixed duration for disposal of applications challenging a domestic or a foreign award. Rather, the Act itself facilitates challenges. The case below demonstrates that even if the first hurdle is crossed successfully, the losing party again can appeal.[6] Finally, parties are also known to approach the SC when they fail in lower court proceedings.
In a recent development, the SC set aside an award originally passed in favour of Delhi Airport Metro Express Private Limited (“DAMEPL”) in 2017. After a long-drawn litigation, the award debtor, i.e., Delhi Metro Rail Corporation Limited (“DMRC”) managed to get the award set aside by the SC in exercise of its curative jurisdiction on grounds of perverse illegality and grave miscarriage of justice. The original award was challenged by DMRC in a section 34 petition before Delhi High Court. When dismissed, DMRC challenged the dismissal order in a section 37 petition before a two-judge bench of the same court who, in turn, partly set aside the single judge’s order. However, in a review petition, the SC again restored and affirmed it. But it was finally set aside by them in a curative petition.[7] This entire process lasted over a decade.
In other words, absence of a time bound disposal coupled with the ability to go through the hierarchy of courts, all the way to the highest court, and appeal the award compounds the process and the agony of the award creditor. This requires a radical shift of mindset amongst all relevant stakeholders in the process.
3.3 Changing Trends: In view of persisting issues with enforcement, the SC has tried to send a strong message surrounding the ability of courts to interfere with an award. Some key jurisprudence in this regard are:
(a) Reduced intervention of courts in section 34: There is no dispute that an award can be challenged under section 34 on limited grounds only. In Dyna Technologies Private Limited vs Crompton Greaves Limited[8] the SC clarified that “arbitral awards should not be interfered with in a causal and cavalier manner, unless the court comes to a conclusion that the perversity of the award goes to the root of the matter without any possibility of an alternative interpretation which may sustain the arbitral award.” In another noteworthy judgment of McDermott International Inc vs Burn Standards Co Limited,[9] the SC held that the Act only makes a provision for the supervisory role of courts, i.e., for the review of arbitral award to ensure fairness. Intervention of courts is envisaged in few circumstances only, like fraud or violation of principles of natural justice and the courts cannot correct errors of the arbitrators in a section 34 proceeding.
(b) Speedy Disposal of Execution: The SC has, time and again, impressed upon the fact that an award creditor cannot be made to wait indefinitely for reaping its fruits and an award’s enforcement should be quick and timely. Keeping an enforcement in abeyance for an extended period due to pending challenges negates the purpose of resorting to arbitration. In this background, in Rahul S Shah vs Jinendra Kumar Gandhi and others,[10] the SC held that an executing court is duty bound to dispose an execution petition within 6 months from the date of its filing. If such court is unable to abide by this timeline, it must record its reasons in writing behind doing so.
From the above, both the legislature and judiciary have taken crucial steps to ensure the arbitration process in India is friendly and cost effective for the parties. However, to minimize challenges, the contracting parties must ensure the arbitration clause is unambiguous. While drafting, they must ensure it is detailed and covers all relevant aspects. These include disputes which can be arbitrated; the possibility of resolution through mutual discussions or mediation (this will substantially reduce burden on the judiciary); constitution of tribunal; applicable rules and venue of arbitration proceedings. Most importantly, there should be a reference to timelines within which the proceedings are completed and acceptance of findings rendered in an award. The key objective should be to ensure swift closure of proceedings and ideally, no challenge.
4. Conclusion
The amendment act of 2015 was enacted with a view to facilitate the arbitration regime which, in turn, encourages parties to choose arbitration to settle disputes in an efficacious and time bound manner. Additionally, it was necessary to convey the right message to India Inc and foreign investors that India is pro arbitration. The apex court has also repeatedly underscored the requirement of quick disposal of enforcement petitions to encourage contracting parties to view India as an arbitration friendly destination. While some lacunas remain to be addressed in the Act, the approach adopted is a step in right direction to ensure India takes its rightful place on the global stage as an arbitration friendly destination.
Author
[1] Ssangyong Engineering and Construction Company Limited vs NHAI, (2019) 15 SCC 131
[2] Sometimes, parties file this application in courts of the city where the arbitration took place or the award was passed.
[3] (2018) 3 SCC 622
[4] (2020) SCC Online SC 177
[5] 2024 SCC Online SC 345
[6] For domestic awards, appeals lie under section 37 and for foreign awards, under section 50 of the Act
[7] Delhi Metro Rail Corporation Limited vs Delhi Airport Metro Express Private Limited, 2024 SCC Online SC 522
[8] (2019) 20 SCC 1
[9] (2006) 11 SCC 181
[10] (2021) SCC Online SC 341