Foreign State Cannot Claim Sovereign Immunity Against Enforcement Of Arbitral Award Arising Out Of Commercial Transaction: Delhi High Court

The Delhi High Court has held that a Foreign State cannot claim sovereign immunity under sec. 86 of Code of Civil Procedure against enforcement of an Arbitral Award arising out of a commercial transaction.

A single judge bench comprising of Justice JR Midha observed thus:

"In a contract arising out of a commercial transaction, such as the transactions which are subject matter of the present petitions, a Foreign State cannot seek Sovereign Immunity for the purpose of stalling execution of an arbitral award rendered against it. Once a Foreign State opts to wear the hat of a commercial entity, it would be bound by the rules of the commercial legal ecosystem and cannot be permitted to seek any immunity, which is otherwise available to it only when it is acting in its sovereign capacity."

Furthermore, it said:

"However, if Foreign States are permitted to stymie the enforcement of arbitral awards, which are the ultimate fruits of the above consensual process, on the specious ground that they are entitled to special treatment purely on account of being Foreign States, then the very edifice of International Commercial Arbitration would collapse. Foreign States cannot be permitted to act with impunity in this regard to the grave detriment of the counter-party in the arbitration proceedings."

The development came while the bench was dealing with two petitions seeking enforcement of arbitral awards against Foreign States i.e. Embassy of Islamic Republic of Afghanistan and Ministry of Education, Federal Democratic Republic of Ethiopia respectively.

The two important questions of law arisen for consideration of the Court were:

I. 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?

II. Whether a Foreign State can claim Sovereign Immunity against enforcement of arbitral award arising out of a commercial transaction?

Going through the submissions of the parties, the relevant provisions on the subject including sec. 35 and 36 of the Arbitration and Conciliation Act and sec. 86 of Code of Civil Procedure and plethora of judgments on the issue, the Court was of the view that prior consent of Central Government is not necessary under Section 86(3) of the Code of Civil Procedure to enforce an arbitral award against a Foreign State.

"Section 36 of the Arbitration and Conciliation Act treats an arbitral award as a „decree‟ of a Court for the limited purpose of enforcement of an award under the Code of Civil Procedure which cannot be read in a manner which would defeat the very underlying rationale of the Arbitration and Conciliation Act namely, speedy, binding and legally enforceable resolution of disputes between the parties." The Court said.

Furthermore, it observed thus:

"Section 86 of the Code of Civil Procedure is of limited applicability and the protection thereunder would not apply to cases of implied waiver. An arbitration agreement in a commercial contract between a party and a Foreign State is an implied waiver by the Foreign State so as to preclude it from raising a defense against an enforcement action premised upon the principle of Sovereign Immunity."

In view of this, the Court held that both the pleas seeking enforcement of the arbitral awards were maintainable and directed the two foreign states to deposit the respective award amounts with the Registrar General of the High Court within four weeks. 

"If the amounts are not deposited by the respondents within four weeks, the petitioners shall be at liberty to seek attachment of the assets of the respondents." The Court directed at the outset.

Title: KLA CONST TECHNOLOGIES PVT. LTD v. THE EMBASSY OF ISLAMIC REPUBLIC OF AFGHANISTAN

Click Here To Read Order