By Nihit Nagpal and Anuj Jhawar
The earliest concept of Sovereign Immunity also known as State Immunity came from Britain common law where the doctrine was that ‘the King can do no wrong’. This further evolved into a Customary International Law which stated that in the courts of a Sovereign State, one cannot sue another Sovereign State without its consent. This doctrine was further ratified in the United Nations Convention on Jurisdictional Immunities of States and their Property, 2004 (hereinafter referred to as the “Convention”), though it still has not come into effect. India is a signatory to the Convention. Article 5 of the Convention states the following:
“A State enjoys immunity, in respect of itself and its property, from the jurisdiction of the courts of another State subject to the provisions of the present Convention.”
Similarly, there are other provisions in the Convention such as modalities for giving effect to state immunity, express consent to exercise of jurisdiction and effect of participation in a proceeding before a court.
The Delhi High Court Judgment in the case of KLA Const. Technologies Pvt. Ltd vs. Embassy of Islamic Republic of Afghanistan has addressed the issue whether immunity be extended to a Sovereign State, which took part in Arbitration Proceedings and for Enforcement of Arbitral Award?
Brief Facts of the Case
KLA Const. Technologies Pvt. Ltd (Petitioner) was awarded a contract by the Embassy of the Islamic Republic of Afghanistan (Respondent) for rehabilitation of the Afghanistan Embassy at New Delhi for consideration of Rs.3,02,17,066.83/- on 11.02.2008. Due to the disputes which arose between the parties, the Petitioner invoked the arbitration clause contained in the contract between parties on 10.02.2012. The Petitioner had filed a petition under Section 11 of the Arbitration and Conciliation Act 1996 before the Supreme Court in which the Supreme Court appointed a sole Arbitrator to adjudicate the disputes between the parties. The Respondent participated in the Arbitration Proceedings till July 2017, however, when there was no appearance on 13.11.2017 thereafter the learned Arbitrator proceeded ex parte against the Respondent. The learned Arbitrator passed an ex parte award on 2018 in which the learned Arbitrator partially allowed the claims of the Petitioner.
Though the Respondent had not challenged the Arbitral Award, they had also not made any payment to the Petitioner in terms of the Arbitral Award. The Petitioner, therefore filed a petition seeking enforcement of the Arbitral Award.
The facts of the case in Matrix Global Pvt. Ltd. vs. Ministry of Education, Federal Democratic Republic, are similar to the abovementioned case therefore the Hon’ble Delhi High Court clubbed the matters and adjudicated on them together.
The Hon’ble Court thereafter directed the Union of India to confirm whether the prior consent of the Central Government is necessary under Section 86(3) of the Code of Civil Procedure (CPC) to enforce this Arbitral Award. Section 86(3) of the CPC states that no decree can be executed against any Foreign State except without the consent of the Central Government, certified in writing by the Secretary. Subsequently, the Central Government clarified that the execution proceedings in respect of an Arbitral Award cannot be regarded as a suit for the purpose of Section 86 of the CPC and therefore, prior consent of the Central Government is not required.
Analysis of the Arguments
The Hon’ble Court framed two issues:
- Whether the prior consent of Central Government is necessary under Section 86(3) of the Code of Civil Procedure to enforce an Arbitral Award against a Foreign State?
While relying on the judgement of Hon’ble Supreme Court Bharat Aluminium Company vs. Kaiser Aluminium Technical Services Ltd., wherein the court held that an Arbitral Award which is passed in International Commercial Arbitration held within the territorial jurisdiction of India would be construed as a ‘Domestic Award’ under Arbitration and Conciliation Act, 1996 and would as enforced as such too.
“88. The term “international award” does not occur in Part I at all. Therefore, it would appear that the term “domestic award” means an award made in India whether in a purely domestic context, i.e., domestically rendered award in a domestic arbitration or in the international context, i.e., domestically rendered award in an international arbitration. Both the types of awards are liable to be challenged under Section 34 and are enforceable under Section 36 of the Arbitration Act, 1996. ..….”Also, the scope of Section 36 of the Arbitration and Conciliation Act, 1996 is limited and only for the purpose of enforcement of an Arbitral Award as Decree of the Court to provide the same with legitimacy and validity, however it would not make the same a Decree under CPC. As stated in the judgement of the Apex Court in Paramjeet Singh Patheja vs. ICDS Ltd., wherein the court observed:“42. The words “as if” demonstrate that award and decree or order are two different things. The legal fiction created is for the limited purpose of enforcement as a decree. The fiction is not intended to make it a decree for all purposes under all statutes, whether State or Central.43…… (v) A legal fiction ought not to be extended beyond its legitimate field. As such, an award rendered under the provisions of the Arbitration and Conciliation Act, 1996 cannot be construed to be a “decree” for the purpose of Section 9(2) of the Insolvency Act” Therefore, there is no requirement under law for obtaining the consent of the Central Government under Section 86(3) of the CPC for implementation of an arbitral award against a Foreign State and, the applicability and protection of the provisions of Section 86(3) of the CPC would not apply to cases of implied waiver like an Arbitration Agreement in a commercial contract between a party and a Foreign State. Here, there is an implied waiver by the Foreign State so as to prevent the same from raising a defence against an enforcement action premised upon the principle of Sovereign Immunity. While relying on the judgement of Supreme Court in the case of R. McDill & Co. Pvt. Ltd. vs. Gouri Shankar Sarda, wherein the court held that:“9. ….Now, by its own language Section 86(1) applies to suits only, and Section 141, Code of Civil Procedure does not attract the provisions of Section 86(1) to proceedings other than suits. Accordingly, by the conjoint application of Section 41(a) of the Indian Arbitration Act and Sections 86(1) and 141 of the Code of Civil Procedure, the provisions of Section 86(1) are not attracted to a proceeding under Section 14 of the Indian Arbitration Act, 1940. It follows that the court was competent to entertain the proceedings under Section 14 of the Indian Arbitration Act, 1940 and to pass a decree against the appellant in those proceedings, though no consent to the institution of those proceedings had been given by the Central Government.”
- Whether a Foreign State can claim Sovereign Immunity against enforcement of Arbitral Award arising out of a Commercial Transaction?
As stated above, India is a signatory to the Convention, and according to the Convention the following Articles would apply:
- Article 10, which states that if a State engages in a commercial transaction with a foreign natural or juridical person and the differences relating to the commercial transaction fall within the jurisdiction of a court of another State, the State cannot invoke immunity from that jurisdiction in a proceeding arising out of that commercial transaction.
- Article 17, which states that if a State enters into an agreement in writing with a foreign natural or juridical person to submit to arbitration differences relating to a commercial transaction, that State cannot invoke immunity from jurisdiction before a court of another State which is otherwise competent in a proceeding.
- Article 19, which states that no post-judgment measures of constraint, such as attachment, arrest or execution, against property of a State may be taken in connection with a proceeding before a court of another State unless the State has expressly consented to the taking of such measures by the way of International Agreement, or by an Arbitration Agreement or in a Written Contract, etc.
Therefore, though the Convention is yet to come into effect, India by being the signatory has assented to the above mentioned principles. The general trend of private international law also seems to be turning towards similar principles, wherein in disputes arising out of contract in commercial transactions the Foreign State cannot seek Sovereign Immunity for stalling Arbitration Proceedings and enforcement of Arbitral Award. If a Foreign State enters into a contract with another entity as a commercial entity, the same has to follow the rules, regulations and laws of that particular jurisdiction.
Also, the since the Arbitration is consensual and binding mechanism of dispute settlement, it does not make sense to once again seek consent at the stage of Enforcement of Arbitral Award when the proceedings were entered with their consent in the first place. Relying on the Supreme Court Judgement of Ethiopian Airlines vs. Ganesh Narain Saboo, wherein the Court held that:
“79. Ethiopian Airlines is not entitled to sovereign immunity with respect to a commercial transaction is also consonant with the holdings of other countries’ courts and with the growing International Law principle of restrictive immunity….”
Similarly, the Delhi High Court in the case of Syrian Arab Republic vs. A.K. Jajodia, held that:
“14…..That being so, it would be legitimate to hold that the effect S. 86(1) is to be modify to a certain extent the doctrine of immunity recognised by international law. The section provides that foreign states can be sued within the municipal courts of India with the consent of Central Government and when such consent is granted as required by S. 86(1), it would not be open to a foreign State to rely on doctrine of immunity under international law, because the municipal Courts in India would be bound by the statutory provisions, such as those contained in the Code of Civil Procedure. In substance, S. 86(1) is not merely procedural; it is in the sense a counterpart of Section 84. Whereas S. 84 confers a right on a foreign State to sue, S. 86(1) in substance imposes a liability on foreign State to be sued.
The Hon’ble Delhi High Court, therefore, held that prior consent of the Central Government under Section 86(3) of the CPC is not required for enforcement of the two arbitral awards in question against the respondents. The Court further held that both the petitions for enforcement of the arbitral awards are maintainable and the Respondents were directed to deposit the respective award amounts.
The Hon’ble Delhi High Court in this judgment followed the general trend of the world with relation to Private International Law and International Commercial Arbitration. The decision of the Hon’ble Court is progressive and conforms to the objective of arbitration, i.e., minimum interference of the Court as provided under Section 5 of the Arbitration and Conciliation Act, 1996. The present legal proposition which emerge out from the judgment is that foreign states would be deemed to have impliedly waived their right to invoking the principle of sovereign immunity once they have entered in an arbitration agreement. Further, the purpose of Section 36 of the Arbitration and Conciliation Act, 1996 would be defeated if a state party is allowed to invoke the defence of sovereign immunity. This judgment would not only steer the issue of invoking sovereign immunity in arbitration proceedings but also give confidence to the parties to arbitration in pursuing their claims against Foreign States.
 Article 6, United Nations Convention on Jurisdictional Immunities of States and their Property, 2004.
 Article 7, United Nations Convention on Jurisdictional Immunities of States and their Property, 2004.
 Article 8, United Nations Convention on Jurisdictional Immunities of States and their Property, 2004.
 (2021) SCC OnLine Del 3424
 (2012) 9 SCC 552
 (2006) 13 SCC 322
 (1991) 2 SCC 548
 Article 10 of the United Nations Convention on Jurisdictional Immunities of States and their Property, 2004
 Article 17 of the United Nations Convention on Jurisdictional Immunities of States and their Property, 2004
 Article 19 of the United Nations Convention on Jurisdictional Immunities of States and their Property, 2004
 (2011) 8 SCC 539
 ILR (2004) 2 Del 704