Supreme Court of India: Whether the Objections Regarding Enforceability of A Foreign Award and Objections Regarding Maintainability of the Execution of Foreign Award Are To Be Heard Separately Or Simultaneously

In case of LMJ International Ltd. and Ors. v. Sleepwell Industries Co. Ltd. decided on 20 February 2019, the Supreme Court of India considered the question of whether the objections regarding enforceability of a foreign award and objections regarding maintainability of the execution of foreign award are to be heard separately or simultaneously. The Court inter alia held that the scheme of Section 48 of the Indian Arbitration and Conciliation Act, 1996 (‘Act’) does not envisage piecemeal consideration of the issue of maintainability of the execution case concerning the foreign awards, in the first place; and then the issue of enforceability thereof. Whereas, keeping in mind the legislative intent of speedy disposal of arbitration proceedings and limited interference by the courts, the Court is expected to consider both these aspects simultaneously at the threshold. Detailed case analysis given below:

Factual Matrix

Dispute arose out of a supply contract between the parties which eventually became the subject matter of arbitration proceedings. The contract in “other terms” envisage that on terms and conditions not in contradiction with the stipulated terms of contract shall be governed by GAFTA 48 and disputes to be resolved by Arbitration 125 as per GAFTA 125 in London. The Respondent invoked the arbitration Clause and two awards (foreign awards for the purpose of the Indian Arbitration and Conciliation Act, 1996) were passed against the Petitioner one of which was decided ex parte.

The Respondent filed two execution cases in India for enforcement of the foreign arbitral awards. This was contested by the Petitioner purportedly regarding the ‘maintainability of the subject foreign awards.’ These objections were rejected first by the Single Judge of the High Court and later affirmed by its Division Bench. Both legal forums concurred that the legislative intent underlying the Act was to circumscribe the supervisory role of the Court in arbitral proceedings and that it predicated limited interference. The decision of the High Court was assailed in the Supreme Court which was also dismissed.

Thereafter, since the objections raised against the execution of these foreign award were refuted in all forums, the matter proceeded before the Single Judge of the High Court in the execution proceedings. These proceedings were again objected by the Petitioner on new ground with regard to the ‘enforceability of the foreign awards.’

The High Court rejected these objections and held that the subject foreign awards were deemed to be decrees. The Petitioner filed a review which was also dismissed. The Single Judge noted that such a challenge was not maintainable after the rejection of the objections in the first round had attained finality with the dismissal of petitions by the Supreme Court. It held that the objections now taken would be hit by the principles of res judicata. In substance, the learned Single Judge after adverting to the settled legal position and the factual matrix of the case on hand, concluded that the objections of the Petitioner, regarding enforceability of the subject foreign award, were devoid of merit and thus rejected the same.

This decision of the Single Judge was assailed before the Supreme Court of India in the present proceedings.

Arbitration Clause

“All other terms and conditions not in contradiction with the above as per GAFTA 48 Arbitration as per GAFTA 12 in London.

ARBITRATION

All disputes in connection with this contract or the execution thereof shall be settled amicably by friendly negotiations between the two parties. If no settlement can be reached, the case in dispute shall then be submitted GAFTA, LONDON for arbitration as per GAFTA Clause for rice and amendment if any and Arbitration Rule 125.”

Applicable Legal Principles

Section 48 of the Act

“Section 48 – Conditions for enforcement of foreign awards

(2) Enforcement of an arbitral award may also be refused if the court finds that—

…

(b) the enforcement of the award would be contrary to the public policy of India.

Explanation 1.– For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,–

(i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or

(ii) it is in contravention with the fundamental policy of Indian law; or

(iii) it is in conflict with the most basic notions of morality or justice.

Explanation 2.– For the avoidance of doubt, 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.”

Section 28(3) of the Act

“Section 28 – Rules applicable to substance of dispute

(3) While deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract and trade usages applicable to the transaction.”

Parties’ Contentions

The Petitioner contended as under:

• that the subject foreign awards are vitiated by fraud;
• that the awards are contrary to the terms of the contract and thus violative of Section 28(3) of the Act;
• that the Arbitral Tribunal has considered an issue in respect of which there is no pre-existing dispute;
• that the Arbitral Tribunal has made out a new case which was not even made out by the claimant in the statement of claim;
• that the subject foreign awards are not supported by reason and are in violation of natural justice and in contravention of the fundamental policy of Indian law;
• that the Executing Court considering the application under Section 48 of the Act has acted as a First Court of appeal and assumed powers under Order 41 Rule 33 of Code of Civil Procedure and sustained the arbitral award by supplying new reasons and facts, which is not the basis on which the impugned awards have been passed.

The Respondent countered as under:

• that the application filed by the Petitioner was not maintainable as it was hit by the principles of res judicata, issue estoppel and cause of action estoppel and principles analogous thereto;
• that the grounds urged by the Petitioner would not come within the purview of Section 48 of the Act, which is very narrow and does not require the Court to have a second look at foreign awards;
• that the grounds, at best, could be urged by the Petitioner in the appeal to be filed against the foreign award governed by English Laws (UK Arbitration Act, 1996);
• that the conduct of the Petitioner which was indicative of an attempt to overreach the Court;
• that the Petitioner filed a petition under Section 10 of the Insolvency and Bankruptcy Code, 2016 before National Company Law Tribunal, so as to invoke a moratorium against the release of any further amount to the Respondent, in the event the Respondent succeeded in the present petitions.

Judgement

The Court held:

• that the argument of the Petitioner that in the first round of litigation, the objections were limited to the questions of maintainability of the execution case and not in reference to the enforceability of the subject foreign awards as such is an attempt to indulge in hair-splitting and nothing more;
• that such argument in desperation only to protract the execution of the foreign award on untenable grounds;
• that the grounds urged by the Petitioner in the earlier round regarding the maintainability of the execution case could not have been considered in isolation and de hors the issue of enforceability of the subject foreign awards. For, the same was intrinsically linked to the question of enforceability of the subject foreign awards;
• that the scheme of Section 48 of the Act does not envisage piecemeal consideration of the issue of maintainability of the execution case concerning the foreign awards, in the first place; and then the issue of enforceability thereof. Whereas, keeping in mind the legislative intent of speedy disposal of arbitration proceedings and limited interference by the courts, the Court is expected to consider both these aspects simultaneously at the threshold;
• that the application filed by the Petitioner is barred by constructive res judicata;
• that the Arbitral Tribunal has considered all aspects of the matter and even if it has committed any error, the same could, at best, be a matter for correction by way of appeal to be resorted to on grounds as may be permissible under the English Law, by which the subject arbitration proceedings are governed.

Observing as above, the Court dismissed the petition and imposed an exemplary cost of Rs. 20,00,000 on the Petitioner. The Court also acceded to the request of the Respondent and passed a specific order directing the High Court to encash the Fixed Deposits of the Petitioner lying deposited in the credit of the concerned stated execution case and remit the amount to the Respondent subject to other approval from Reserve Bank of India. A direction to this effect was passed considering the peculiarity of the case in order to save the amount of foreign awards from the impact of moratorium which might have been imposed on the Petitioner in terms of Insolvency and Bankruptcy Code, 2016 of India as urged by the Petitioner in a separate application filed before the National Company Law Tribunal, Kolkata, India.