KLA v. The Embassy of Afghanistan: No Foreign Immunity to Enforcement of Foreign Awards in India

[This guest post is authored by Raushan Kumar, a second year student at Damodaram Sanjivayya National Law University, Vishakhapatnam]

Section 86 of the Code of Civil Procedure, 1908 (‘CPC’) recognizes sovereign immunity in India and requires a claimant to obtain the Indian Government’s prior approval to institute a ‘suit’ against a foreign state or its organ in an Indian court. The doctrine of sovereign immunity is not absolute. States and their organs may not claim protection from judicial proceedings for obligations that are commercial and contractual in nature.

Recently, the Delhi High Court (‘HC’) in KLA Const. Technologies Pvt. Ltd. v. The Embassy of Islamic Republic of Afghanistan enforced arbitral awards against two foreign states and rejected claims for sovereign immunity to avoid compliance under the awards. The Court also held that the Indian Government’s prior approval under Section 86 of the CPC is not required to enforce an arbitral award against a foreign state.

Factual Matrix

KLA Const. Technologies Pvt. Ltd. (‘KLA’) and Matrix Global Pvt. Ltd. (‘Matrix’) sought enforcement of two arbitral awards; first, against the Embassy of Islamic Republic of Afghanistan (‘the State of Afghanistan’) and second, against the Ministry of Education, Federal Republic of Ethiopia (‘the Education Ministry, Ethiopia’).

The dispute between KLA and the State of Afghanistan arose out of a contract awarded to KLA for rehabilitation of Afghanistan Embassy at New Delhi. When the dispute arose during the execution of the contract, KLA invoked the arbitration clause in the contract.

A sole arbitrator was appointed by the Supreme Court (‘SC’) under Section 11 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’). While the proceedings went on, the State of Afghanistan failed to appear after 24 July, 2017. Consequently, on 26 November, 2018, the sole arbitrator proceeded ex-parte against the State of Afghanistan and partially allowed the claims of KLA. The State of Afghanistan neither challenged the award nor made any payment in terms of the award.

On the other hand, Matrix entered into a contract with the Education Ministry, Ethiopia for supply and distribution of books to the Education Ministry at various places in Ethiopia. Dispute arose when Matrix claimed that the Education Ministry had failed to clear dues. Subsequently, on 24 April, 2014, the Education Ministry cancelled the contract. Matrix initiated arbitration proceedings, and a sole arbitrator was appointed in accordance with the UNCITRAL Arbitration Rules. Since the Education Ministry did not participate in the arbitration proceedings, the sole arbitrator proceeded ex-parte and passed an ex-parte award on 25 October, 2015. The Education Ministry did not challenge the award and thus, it attained its finality. Matrix sought enforcement of the award. Despite the service of notice, the Education Ministry did not appear before the Court.

In both the cases, the HC directed the Union of India to examine whether the Central Government’s prior consent under Section 86(3) of the CPC is necessary for the enforcement of the arbitral award. In response, the Central Government placed on the record that it is not necessary.

The Court framed two important questions of law. First, whether the Central Government’s prior approval under Section 86(3) is required to enforce an arbitral award against a foreign state. Second, whether sovereign immunity can be claimed by a foreign state to resist enforcement of an arbitral award arising out of a commercial transaction.

Parties’ arguments

Petitioners placed their reliance on Bharat Aluminium Company v. Kaiser Aluminium Technical Services Ltd. (SC) to submit that an arbitral award passed in an International Commercial Arbitration (‘ICA’) held in India, as in this case, would be construed as a domestic award under the Arbitration Act. Thus, it would be enforceable under Sections 35 and 36 in the same way as a decree of an Indian court.

They also relied on the decision in Nawab Usman Ali Khan v. Sagarmal (SC), R. McDill & Co. Pvt. Ltd. v. Gouri Shankar Sarda And Others (SC), and M/s. Uttam Singh Duggal & Co. Pvt. Ltd. v. United States of America, Agency  (Delhi HC) to contend that the need for prior approval under Section 86 of the CPC cannot be incorporated into a reformed and contemporary law like the Arbitration Act. It is a settled principle of statutory interpretation that earlier general statutes are trumped by specific statutes that come later. It was also submitted that the applicability of Section 86(3) of the CPC in connection with an arbitral award would violate three main principles of the Arbitration Act i.e., speedy, inexpensive and fair trial by an impartial tribunal; party autonomy; and minimum court intervention. The Petitioners relied on Union of India v. U.P. State Bridge Corp. Ltd (SC) to support the aforesaid argument.

Petitioners also relied upon the Ethiopian Airlines v. Ganesh Narain Saboo (SC), Rahimtoola v. Nizam of Hyderabad (House of Lords), Trendtex Trading Corporation v. Central Bank of Nigeria (Court of Appeal)and Birch Shipping Corp. v.  The Embassy of the United Republic of Tanzania (United States District Court, District of Columbia) to submit that the parties consciously entered into a commercial contract containing an arbitration agreement, which would constitute a waiver of sovereign immunity. It should not be open for the Respondents to claim sovereign immunity to oppose the Petitioner’s legitimate interests at the enforcement stage.

Petitioners also submitted that India is a signatory to the United Nations Convention on Jurisdictional Immunities of States and their Property, 2004 (‘Convention’). They referred to Articles 10, 17 and 19 of the Convention to indicate the adoption of restricted sovereign immunity by India and not extend sovereign immunity in cases of ICA.

Court’s ruling

The Delhi HC concluded that the Central Government’s prior consent under Section 86(3) of the CPC is not required to enforce an arbitral award against a foreign state. Sovereign immunity cannot be claimed by a foreign state to resist the enforcement of an arbitral award resulting from a commercial transaction. It was also found that an arbitral award under Section 36 of the Arbitration Act was to be treated as a decree only for the limited purpose of enforcement under the CPC; it cannot be read in a manner that would render useless the very object of the Arbitration Act.

The Court also clarified that Section 86 of the CPC would not apply to cases of implied waiver of claiming the defense of sovereign immunity. When a party and a foreign state enter into a commercial contract containing an arbitration agreement, that agreement constitutes an implied waiver of sovereign immunity.

The Court reiterated that because of its efficient, flexible, stable, and legally binding nature, ICA has witnessed growing adoption by parties engaged in global transactions; while eschewing the particularistic complexities and difficulties faced in national legal systems. If foreign states are allowed special treatment for stalling enforcement of arbitral awards, the very edifice of ICA would collapse.

The Court accordingly allowed both the Petitioners to enforce the arbitral awards. Both the Respondents were directed to deposit their respective award amounts with the Registrar General of this Court within four weeks, failing which the Petitioners will have the right to seek attachment of the Respondents’ assets.

Concluding Remarks

This progressive ruling by the Delhi HC aligns the Indian position on sovereign immunity to that prevalent in the international sphere. Unlike the United Kingdom (the State Immunity Act, 1978) and the United States (the US Foreign Sovereign Immunities Act, 1976), India still does not have a separate statute to govern foreign state sovereign immunity.

Considering its importance and the fact that the other countries have also enacted separate statutes, the Law Commission of India in its 176th report, while referring to Justice V.A. Mohta’s commentary on the Arbitration Act emphasized the need to have a separate statute dealing with state immunity. [1] The Commission particularly stressed on addressing issues related to arbitrations as to whether the state or its instrumentality can be deemed to have waived its state immunity in international commerce by entering into a contract containing an arbitration clause. Despite this, there has been no development on this issue till date.

However, India’s signing of the Convention, though not in force yet, shows its inclination to formally adopt the approach of no absolute immunity from jurisdiction, which is also evident in the way the courts have dealt with this issue over the decades.

This judgment is yet another landmark development in India’s pro-arbitration approach. It has reiterated the principle of restrictive immunity. The Delhi High Court has rightly reinforced the moral percept that States are equally bound by law to honour their commercial or contractual obligations, they will not be provided with an exemption or privilege simply for the asking.

While upholding the basic tenets of ICA i.e., efficiency, flexibility, stability, and its legally binding nature, the Court also maintained its endeavour of minimizing delays and obstructions in the enforcement of arbitral awards and yet again. Hence, it gave arbitration another reason to be given primacy over other mechanisms of dispute resolution.

[1] V.A. Mohta, The Arbitration and Conciliation Act, 1996, 1st ed. 2001.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.