Citation: Civil Appeal Nos. 8343-8344 of 2018
Court: Supreme Court of India
Coram: Rohinton F. Nariman & B. R. Gavai, JJ.
Date: 10th August 2021
Keywords: Foreign Awards, Patent Illegality, Section 46, Section 47, Section 48, New York Convention, Arbitration & Conciliation Act.
Integrated Sales Service Ltd. (“ISS”) initiated arbitration proceedings against Mr. Arun Dev Upadhyaya, the Chairman of DMC Management Consultants Ltd. (“DMC”), and in these proceedings sought to implead several other parties by invoking the alter ego doctrine. The Arbitral Tribunal decided the matter in favour of ISS and acknowledged the potential liability of parties who were non-signatories to the arbitration agreement. After the Single and Division Benches of the Bombay High Court arrived at differing conclusions on the issue of enforcement of the foreign Arbitral Award against non-signatories, the Appellants approached the Supreme Court in appeal. The Supreme Court echoed the Arbitrator’s findings and held that foreign awards can be enforced against non-signatories to the agreement.
ISS is a company based in Hong Kong that entered into a Representation Agreement (“Agreement”) with DMC, an Indian company. The Agreement included an arbitration clause which prescribed that any dispute that may arise between the parties would be resolved by a Sole Arbitrator in Kansas City, Missouri, USA.
When disputes arose between the parties, ISS invoked the arbitration clause under the Agreement and filed its Statement of Claim dated 22nd June 2009. In its Statement of Claim, ISS sought to implead not only Mr. Upadhyaya, but also DMC, the Mauritius registered company DMC Global and the British Virgin Islands registered company Gemini Bay Consulting Limited (“GBT”) as Respondents. The Statement of Claim alleged that Mr. Upadhyaya used GBT as an alter ego of himself to transfer funds from ISS to GBT. ISS also alleged that DMC terminated two of its Customer Contracts with ISS, and later executed new contracts with GBT. DMC is also alleged to have ignored the corporate forms of DMC to manipulate and evade their contractual obligations under the Representation Agreement to pay ISS its commissions for revenues earned from its clients.
After proper assessment of the revenues earned by GBT from the two clients of DMC, the Arbitral Tribunal found that ISS was deprived of the commission that was owed to it by the terms of the Agreement. Consequently, the Arbitral Tribunal passed an Award in favour of ISS, and ordered DMC and the other Respondents to compensate ISS for an amount of USD 6,948,100.
This Award was challenged before the Single Judge Bench of Bombay High Court, which vide judgment dated 18th April 2016, held that Sections 48(1)(c) to (e) of the Arbitration and Conciliation Act, 1996 (“the Act”) did not permit the enforcement of arbitration agreements against non-signatories. Applying this finding to the present case, the Single Judge held that the Arbitral Award was not liable to be enforced against GBT and Mr. Upadhyaya.
Aggrieved by this decision of the Single Judge, ISS filed an appeal before the Division Bench of the Bombay High Court, which vide judgment dated 16th February 2018 reversed the position set forth by the Single Judge and held that the foreign award in question was enforceable against the non-signatories to the Agreement, because of none of the grounds for refusal of enforcement of the Arbitral Award enumerated under Section 48 were liable to be invoked in the present case. This judgment of the Division Bench was appealed before the Supreme Court by the Appellants.
Whether foreign awards are binding and/or enforceable against non-signatory parties to arbitration agreements?
I. Pre-requisites for Foreign Awards
While setting aside the Single Bench judgment of the Bombay High Court, the Division Bench identified six pre-requisites for an award to be recognized as a foreign award under Section 44 of the Act :
(i) It must be an arbitral award on differences between persons arising out of legal relationships.
(ii) These differences may be in contract or outside of contract, for example, in tort.
(iii) The legal relationship so spoken of ought to be considered “commercial” under the law in India.
(iv) The award must be made on or after the 11th October 1960.
(v) The award must be a New York Convention award – in short it must be in pursuance of an agreement in writing to which the New York Convention applies and be in one of such territories.
(vi) 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.
II. Proof of Foreign Awards
In regards questions pertaining to Evidence of Awards under Part II of the Act, the Court held that the requirement of proof under sub-clause (c) to Section 47(1) only refers to evidence that may be necessary to prove that the award was a foreign award, or that the arbitration agreement was a New York Convention agreement. The Court expressly rejected the proposition that sought to expand the scope of Section 47 to include substantive evidence to prove that a non-signatory to an arbitration agreement could be bound by a foreign award.
The Court clarified that when the enforcement of a foreign arbitral award is resisted, the burden of proof to lies on the resisting party to show that their case falls within the scope of sub-section (1) or (2) of Section 48. In regards the scope and meaning of the word “proof” as it occurs in Section 48, the Court sought to draw parallels from Section 34 of the Act, which is the pari materia to Section 48 in Part I of the Act. The Court relied on the verdict in the case of Emkay Global Financial Services Ltd. v. Giridhar Sondhi, and held that the “proof” referenced in Section 48 should be interpreted to only mean “established on the basis of the record of the arbitral tribunal” and such other matters as are relevant to the grounds under Section 48.
III. Enforcement of Foreign Awards against non-signatories to the agreement
In analyzing the invocation of Section 48(1)(a) for resisting the enforcement of the Arbitral Award, the Court relied on a combined reading of Sections 44 & 48(1)(a) of the Act. In the present case, the Court observed that the Arbitral Tribunal had considered the question of applicability of the alter ego doctrine on merits and decided in favour of its application after appreciating the submission of the parties, along with the evidence and testimony of the relevant persons. In lieu of this fact, the Court held that the grant of relief in the present case would in effect require a review of the case on merits, which was beyond the scope of Section 48 of the Act. Therefore, the Court determined that to conclude that a non-party to the agreement claiming to not be bound by an award made under such an agreement would be outside the scope of Section 48(1)(a) of the Act.
The Court also took note that the New York Convention that has been adopted by the Act has a pro-enforcement bias, which means that unless a party is able to prove that its case is clearly within the ambit of Sections 48(1) or 48(2), the foreign award must be enforced. Relying on the ratio of Ssangyong Engg. & Construction Co. Ltd. v. NHAI, the Court observed that the enforcement of a foreign award would be refused only on the ground that it is contrary to public policy, if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.
IV. Persons v. Parties – Comparing Sections 35 & 46 of the Act
The Respondents sought to draw a comparison between Sections 35 & 46 of the Act, arguing 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. The Section includes the word “persons” and not “parties.” Rejecting this argument as “erroneous”, the Court held 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.” Furthermore, Section 35 would only refer to persons claiming under parties and it is therefore more restrictive in its application in contrast to Section 46, which speaks of “persons” regardless of any restrictions.
The Supreme Court did not find any merit in the Appellant’s contentions. The Court observed that a challenge to the enforceability of the foreign award will only be entertained if it strikes at the “basic notion of justice”. The Court confirmed the USD 12.5 million (INR 100 crore) Arbitral Award against Mr. Arun Upadhyaya and GBT. The Court echoed the international arbitrator’s conclusion and held the Appellants liable to pay such amounts to ISS. The appeal was duly dismissed by the Supreme Court.