Foreign Award Can Be Binding On Non-Signatories To Arbitration Agreement: Supreme Court

The Supreme Court has held that a foreign award can be binding on non-signatories to the arbitration agreement and can be thus enforced against them.

In this regard, the Court referred to Section 46 of the Arbitration and Conciliation Act, which deals with the circumstances under which a foreign award is binding. The Court noted that the provision speaks of "persons as between whom it was made" and not parties to the agreement. "Persons" can include non-signatories to the agreement.

"First and foremost, Section 46 does not speak of "parties" at all, but of "persons" who may, therefore, be non-signatories to the arbitration agreement", the Court said in its judgment in the case Gemini Bay Transcription Pvt. Ltd. vs. Integrated Sales Service Ltd.

Enforcement of foreign award cannot be resisted on the sole ground that it was made against a non-signatory

Further, the Court held that the enforcement of a foreign award cannot be resisted on the sole ground that it has passed against a non-signatory to the arbitration agreement.

A division bench comprising Justices RF Nariman and BR Gavai held that a non-signatory's objections will not fit into the grounds under Section 48(1) of the Arbitration and Conciliation Act, which specify the conditions on which the enforcement of a foreign award can be refused.

"The grounds are in themselves specific, and only speak of incapacity of parties and the agreement being invalid under the law to which the parties have subjected it. To attempt to bring non-parties within this ground is to try and fit a square peg in a round hole", the judgment authored by Justice Nariman stated.

Background facts

In this case, an Award was passed by International Arbitration Tribunal in the matter of dispute between Integrated Sales Services Ltd. ["ISS"], a company based in Hong Kong and DMC Management Consultants Ltd [DMC]. The award was also made binding on certain entities which were not signatories to the agreement. DMC filed an application for enforcement of this foreign award before the single bench of Bombay High Court. The Single Judge held that the agreement and the arbitration clause cannot be enforced against persons who are non-signatories, even though such non-signatories may participate in the arbitration, as no acquiescence or estoppel can apply to issues relatable to jurisdiction.

The single judge held that award would not be enforceable against Gemini Bay Transcription Pvt. Ltd. GBT and Arun Dev Upadhyaya since were not parties to the arbitration agreement,

In appeal, the Division Bench, setting aside the single bench judgment, observed that none of the grounds contained in Section 48 would apply so as to resist enforcement of the foreign award in this case.

Six ingredients to an award being a foreign award

While considering the appeal filed against the Division bench judgment, the court first referred to Section 44 and 47 as follows:

29. A reading of Section 44 of the Arbitration and Conciliation Act, 1996 would show that there are six ingredients to an award being a foreign award under the said Section.

First, it must be an arbitral award on differences between persons arising out of legal relationships.

Second, these differences may be in contract or outside of contract, for example, in tort.

Third, the legal relationship so spoken of ought to be considered "commercial" under the law in India.

Fourth, the award must be made on or after the 11th day of October, 1960.

Fifth, the award must be a New York Convention award – in short it must be in pursuance of an agreement in writing to which the New York Convention applies and be in one of such territories.

And Sixth, it must be made in one of such territories which the Central Government by notification declares to be territories to which the New York Convention  applies.

Pre-requisites for the enforcement of a foreign award

On Section 47, the court noted that the pre-requisites for the enforcement of a foreign award are:

(1) the original award or a copy thereof duly authenticated in the manner required by the law of the country in which it is made;

(2) the original agreement for arbitration or a duly certified copy thereof, and;

(3) such evidence as may be necessary to prove that the award is a foreign award.

All the requirements of 47(1) are procedural in nature,

The court, referring to Section 47, observed that all the requirements of sub-section (1) are procedural in nature,

35. From this, is clear that all the requirements of sub-section (1) are procedural in nature, the object being that the enforcing court must first be satisfied that it is indeed a foreign award, as defined, and that it is enforceable against persons who are bound by the award. Section 47(1)(c) being procedural in nature does not go to the extent of requiring substantive evidence to "prove" that a non-signatory to an arbitration agreement can be bound by a foreign award. As a matter of fact, Section 47(1)(c) speaks of only evidence as may be necessary to prove that the award is a foreign award.

Shri Vishwanathan and Shri Salve's arguments that to prove that a nonsignatory to an arbitral agreement can only be roped in to the aforesaid agreement on evidence being adduced before the enforcing court as to whether the non-signatory is a person who claims under a party or is otherwise affected by the alter ego doctrine, is disingenuous to say the least. This Section only has reference to the six ingredients of a foreign award that have been outlined hereinabove, which are contained in the definition section, namely, Section 44. Ingredients 1 to 4 can easily be made out from the foreign award itself as the award would narrate facts which would show the legal relationship between the 'persons' bound by the award (who need not necessarily be parties to the arbitration agreement), and as to whether the award deals with matters that can be considered commercial under the law in force in India. Equally, the date of the foreign award would appear on the face of the foreign award itself. Thus, Section 47(1)(c) would apply to adduce evidence as to whether the arbitration agreement is a New York Convention agreement. Also, the requisite Central Government notification can be produced under Section 47(1)(c), so that Section 44(b) gets satisfied. To argue that the burden of proof is on the person enforcing the award and that this burden can only be discharged by such person leading evidence to affirmatively show that a non-signatory to an arbitration agreement can be bound by a foreign award is outside Section 47(1)(c). This argument   consequently stands dismissed

Meaning of 'Proof'

The court observed that when enforcement of a foreign award is resisted, the party who resists it must prove to the court that its case falls within any of the sub-clauses of sub-section (1) or sub-section (2) of Section 48.

Referring to Emkay Global Financial Services Ltd. v. Girdhar Sondhi, (2018) 9 SCC 49, it said that the expression "proof" in Section 48 would only mean "established on the basis of the record of the arbitral tribunal" and such other matters as are relevant to the grounds contained in Section 4

New York Convention has a pro-enforcement bias

The court added that the New York Convention, which the Arbitration Act has adopted, has a pro-enforcement bias

40. It is important to remember that the New York Convention, which our Act has adopted, has a pro-enforcement bias, and unless a party is able to show that it's case comes clearly within Sections 48(1) or 48(2), the foreign award must be enforced. Also, the grounds contained in Sections 48(1)(a) to (e) are not to be construed expansively but narrowly

A non-signatory's objection cannot possibly fit into Section 48(1)

The court then held that a non-signatory's objection cannot possibly fit into Section 48(1)

42. Given these parameters, let us examine arguments of the appellants insofar as Section 48(1)(a) is concerned. If read literally, Section 48(1) (a) 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. 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).

Also, it must not be forgotten that whereas Section 44 speaks of an arbitral award on differences between "persons", Section 48(1)(a) refers only to the "parties" to the agreement referred to in Section 44(a). Thus, to include non-parties to the agreement by introducing the word "person" would run contrary to the express language of Section 48(1)(a), when read with Section 44. Also, it must not be forgotten that these grounds cannot be expansively interpreted as has been held above. The grounds are in themselves specific, and only speak of incapacity of parties and the agreement being invalid under the law to which the parties have subjected it. To attempt to bring non-parties within this ground is to try and fit a square peg in a round hole

Without delving deep into this problem, it may perhaps be open in an appropriate case for a non-signatory to bring its case within Section 48(2) read with Explanation 1(iii), the bench noted.

"Perversity of an award" not a ground to refuse enforcement of foreign award

Referring to the judgment in Ssangyong Engineering and Construction Company, the judgment noted that perversity of award of patent illegality are not grounds available to set aside a foreign award.

59. The judgment in Ssangyong (supra) noted in para 29 that Section 48 of the Act has also been amended in the same manner as Section 34 of the Act. The ground of "patent illegality appearing on the face of the award" is an independent ground of challenge which applies only to awards made under Part I which do not involve international commercial arbitrations. Thus, 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 under Section 34, and concomitantly as a ground to refuse enforcement of a foreign award under Section 48, being a pari materia provision which appears in Part II of the Act. This argument must therefore stand rejected

Section 48(1)(b) does not speak of absence of reasons in an arbitral award at all.

Section 48(1)(b) does not speak of absence of reasons in an arbitral award at all. The only grounds on which a foreign award cannot be enforced under Section 48(1)(b) are natural justice grounds relatable to notice of appointment of the arbitrator or of the arbitral proceedings, or that a party was otherwise unable to present its case before the arbitral tribunal, all of which are events anterior to the making of the award

Section 46 does not speak of "parties" at all, but of "persons"

Rejecting the argument that a foreign award would be binding on parties alone and not on others, the court said:

"First and foremost, Section 46 does not speak of "parties" at all, but of "persons" who may, therefore, be non-signatories to the arbitration agreement. Also, Section 35 of the Act speaks of "persons" in the context of an arbitral award being final and binding on the "parties" and "persons claiming under them", respectively. Section 35 would, therefore, refer to only persons claiming under parties and is, therefore, more restrictive in its application than Section 46 which speaks of "persons" without any restriction.

Though the court upheld the Division Bench judgment citing above reasons, it pointed out an incorrect reasoning given by it:

Quite apart from this, another important conundrum arises from the Division Bench judgment in the present case. The Division Bench judgment applied Delaware law to satisfy itself that such law had indeed been followed to apply the alter ego doctrine correctly, as a result of which the foreign award would have to be upheld. We wish to indicate that this approach is completely erroneous. First and foremost, Section 48 does not contain any ground for resisting enforcement of a foreign award based upon the foreign award being contrary to the substantive law agreed to by the parties and which it is to apply in reaching its conclusion. As a matter of fact, whether the award is correct in law (applying Delaware 72 law), would be relevant if at all such award were to be set aside in the State in which it was made and that too if such law permitted interference on the ground that the arbitral award had infracted the substantive law of the agreement. As has been pointed out hereinabove, the arbitral award in this case was not challenged in the State of Missouri. Hence, the Division Bench's foray into this line of reasoning is wholly incorrect.

Case: Gemini Bay Transcription Pvt. Ltd.  vs. Integrated Sales Service Ltd. ; CA 8343-8344 OF 2018
Citation: LL 2021 SC 369
Coram: Justices RF Nariman and BR Gavai
Counsel: Sr. Adv K.V. Vishwanathan, Sr. Adv Harish Salve for appellants,  Arif Bookwala for respondent

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