Arbitral Awards Can Be Enforced Against Non-Signatories, Rules Supreme Court
In yet another pro-arbitration decision, the Supreme Court has held that a foreign award can only be challenged on limited grounds under the Indian law. That an entity is not a party to the arbitration agreement is not one of those, the apex court said.
A division bench of Justices RF Nariman and BR Gavai said the grounds for refusal of enforcement of foreign award under the Indian law cannot be "expansively interpreted".
To attempt to bring non-parties within this ground is to try and fit a square peg in a round hole.Supreme Court Order
The judgment vanquishes the creative attempts of shrewd award-debtors to resist the enforcement of foreign arbitral awards by compelling the courts to adopt an expansive interpretation of the specific grounds enumerated in the Arbitration Act, said Sameer Jain, managing partner at PSL Advocates & Solicitors.
The Privity Predicament
Hong Kong-based Integrated Sales Services Ltd. had entered into a commission agreement with DMC Management Consultants Ltd., an Indian company.
Due to a dispute, arbitration proceedings were initiated by ISS. The agreement was governed by laws of Delaware, U.S. and contained an arbitration clause which stated that any dispute between the parties was to be referred to a single arbitrator in Missouri.
The proceedings culminated in arbitral award against DMC and some entities which were not a party to the arbitration agreement. This included DMC's chairman and two other companies in which he exercised substantial control, Gemini Bay Consulting Ltd. and Gemini Bay Transcription Private Ltd.
ISS approached the Bombay High Court to enforce the award under Section 48 of the Arbitration Act.
The single judge held that the arbitral award was enforceable only against DMC and not against others as they were non-signatories to the arbitration agreement. This was reversed by the division bench of the high court, prompting GBT and others to move the apex court.
Refusal Grounds Must Be Construed Narrowly, Says Supreme Court
GBT relied on Section 48 of the Arbitration Act to argue that a non-signatory to an arbitration agreement would be directly covered by sub-clause (a).
Section 48 lays down grounds for refusal of enforcement of a foreign award. And clause (a) says if a party is under some incapacity or the agreement is invalid under the law that governs it, enforcement can be refused.
The Supreme court said there is nothing in the grounds which precludes enforcement of awards against non-signatories. The provision speaks only of parties to the agreement being under some incapacity, or the agreement being invalid under the law to which parties have subjected it, the court said.
There can be no doubt that a non-party to the agreement, alleging that it cannot be bound by an award made under such agreement, is outside the literal construction of Section 48(1)(a). -Supreme Court
Next, GBT pressed the argument that since the award's reasoning was perfunctory in nature, it would be a breach of natural justice.
This too was dismissed by the Supreme Court. Absence of reasons in an arbitral award is not a natural justice ground that can be used to refuse enforcement. The only natural justice ground for refusal relate to events anterior to the making of the award, it held.
Finally, the argument that an award is perverse can no longer be used to refuse enforcement post the 2015 amendment to arbitral law. "...the public policy of India ground after the 2015 amendment does not take within its scope “perversity of an award” as a ground to set aside an award in an international commercial arbitration," the apex court said.
This judgment is yet another step towards ease of doing business in India and will build trust of foreign investors in the Indian judicial system, Dinesh Pardasani, partner at DSK Legal said.
Progressive judgments like this will open up the Indian market for third party funding—a concept where an unrelated party to a dispute finances the legal cost of one of the parties, Jain said.
Uncertainty around enforcement is one of the reason that international Third Party Funders avoid funding cases where the enforcement would have to be done in India.Sameer Jain, Managing Partner, PSL Advocates & Solicitors.
Rulings like this will give impetus to such models, Jain said.