Supreme Court clarifies jurisdiction over foreign arbitral awards: Noy Vallesina Engineering vs. Jindal Drugs Limited (26 November 2020)

Date of the Judgment: 26 November 2020
Citation: 2020 INSC 881
Judges: Indira Banerjee, J., S. Ravindra Bhat, J. (authored the judgment)

Can Indian courts set aside a foreign arbitral award? The Supreme Court of India recently addressed this crucial question in a dispute between Noy Vallesina Engineering SpA and Jindal Drugs Limited. The core issue was whether a challenge to a foreign award could be maintained under Section 34 of the Arbitration and Conciliation Act, 1996. The Supreme Court, in this judgment, clarified the scope of its jurisdiction over foreign arbitral awards.

Case Background

Noy Vallesina Engineering SpA (hereafter “NV Engineering”), an Italian company, was involved in setting up plants for synthetic fibers and ascorbic acid. Jindal Drugs Limited (hereafter “Jindal”), an Indian public limited company, sought to establish an ascorbic acid plant in India. In 1994, Jindal negotiated with Engineering Chur AG (Enco), a Swiss company. On 30 January 1995, Jindal entered into four agreements with Enco:

• ✓ Engineering Contract for Ascorbic Acid Plant (ECAAP or “plant contract”)
• ✓ Supply contract for Ascorbic Acid plant (SCAAP or “supply contract”)
• ✓ Service agreement for Ascorbic Acid plant (SAAAP or “service contract”)
• ✓ License agreement for Ascorbic acid plant (LAAAP or “license contract”)

Under the plant contract, Enco was to provide technical information and basic engineering documentation for the plant’s construction. Jindal agreed to pay Swiss Francs 8,600,000 to Enco. All four agreements contained an arbitration clause. In March 1995, with Jindal’s consent, Enco assigned the plant contract to NV Engineering, which took over all of Enco’s obligations to Jindal.

Disputes arose between Jindal and NV Engineering. NV Engineering terminated the agreement and claimed damages. On 31 October 1996, Jindal requested arbitration under the plant contract before the International Court of Arbitration (ICC) in Paris. NV Engineering filed a reply and a counterclaim. Jindal nominated Mr. Desai, and NV Engineering nominated Prof. ACC Alberto Santa Maria as arbitrators. The ICC confirmed these appointments, and Mr. Richard Fernyhough Q.C. was appointed as Chairman of the Arbitral Tribunal.

Timeline

Course of Proceedings

On 01 February 2000, the arbitral tribunal issued a partial award, rejecting Jindal’s claims and awarding NV Engineering SFr.44,33,416. On 20 February 2000, Jindal filed a petition before the Bombay High Court under Section 34 of the Arbitration and Conciliation Act, 1996, challenging the partial award. The High Court admitted the petition on 01 March 2000 and issued an interim injunction, restraining the tribunal from proceeding further. The tribunal, however, continued its proceedings, and NV Engineering filed written submissions on interest and costs on 14 March 2001. Jindal did not make any submissions. Mr. Desai, Jindal’s nominee, withdrew from the tribunal due to the interim order. The ICC appointed Mr. Ashok Sancheti as a replacement, and the tribunal issued its final award on 22 October 2001.

The Bombay High Court, in an order dated 6 February 2002, held that a challenge to a foreign award was not maintainable under Section 34 of the Act. Jindal appealed this order to the Division Bench of the High Court. Meanwhile, NV Engineering applied for enforcement of the partial and final awards under Sections 47 and 48 of the Act. The single judge allowed this petition, holding the awards enforceable, except for a portion of the partial award. Jindal appealed this enforcement order, and NV Engineering filed a cross-appeal.

The Division Bench, in the impugned judgment, set aside the single judge’s order, ruling that a petition under Section 34 was maintainable to challenge a foreign award. The Division Bench relied on the Supreme Court’s judgments in Bhatia International v. Bulk Trading S.A. & Anr and Venture Global Engineering v. Satyam Computer Services Ltd. & Anr to support its decision.

Legal Framework

The core legal issue revolves around the interpretation of the Arbitration and Conciliation Act, 1996, specifically:

• ✓ Section 34 of the Arbitration and Conciliation Act, 1996: This section deals with the application to set aside a domestic arbitral award. It outlines the grounds on which a court can set aside an award made within India.
• ✓ Section 48 of the Arbitration and Conciliation Act, 1996: This section deals with the conditions for enforcement of foreign awards. It allows a court to refuse enforcement of a foreign award under specific circumstances, such as if the award is contrary to the public policy of India.
• ✓ Section 2(2) of the Arbitration and Conciliation Act, 1996: This section states that Part I of the Act applies where the place of arbitration is in India.
• ✓ Section 50 of the Arbitration and Conciliation Act, 1996: This section specifies the orders against which an appeal can be filed, and it does not include an appeal against an order enforcing a foreign award.

The Act distinguishes between domestic and foreign awards. Domestic awards are governed by Part I of the Act, which includes Section 34, while foreign awards are governed by Part II, which includes Sections 47-59. The main point of contention is whether Section 34, which provides for setting aside an award, can be applied to foreign awards.

Arguments

Arguments of NV Engineering (Appellant):

• ✓ The impugned judgment is legally flawed because a foreign award cannot be challenged under Section 34 of the Arbitration and Conciliation Act, 1996.
• ✓ The decisions in Bhatia International v. Bulk Trading S.A. & Anr and Venture Global Engineering v. Satyam Computer Services Ltd. & Anr, which allowed challenges to foreign awards under Section 34, were overruled by the five-judge bench in Bharat Aluminium Company vs. Kaiser Aluminium Technical Services Inc (BALCO).
• ✓ The arbitration agreement specified that the arbitration would be under the rules of the ICC, in London. This choice of London as the seat of arbitration implies that the arbitration is governed by UK law, not Indian law.
• ✓ The principle established in Roger Shashoua v Mukesh Sharma, that the designation of a seat of arbitration carries with it an exclusive jurisdiction clause, should apply.
• ✓ The judgments in Union of India v Reliance Industries, Harmony Innovation Shipping Ltd v Gupta Goal India Ltd and Roger Shashoua v Mukesh Sharma have clarified that pre-BALCO awards are not ruled by BALCO if the juridical seat is in India or the law governing the arbitration is Indian law. In this case, the juridical seat is not in India.
• ✓ An order holding that a petition under Section 34 was not maintainable is not appealable, based on Section 50 of the Act and the judgment in Fuerst Day Lawson Ltd. v. Jindal Exports Ltd.

Arguments of Jindal (Respondent):

• ✓ The impugned judgment is correct and should not be interfered with.
• ✓ Section 34 and Section 48 operate in different fields. Section 48 allows for refusal of enforcement of a foreign award, while Section 34 allows the court to examine the legality of an award and set it aside.
• ✓ The decision in BALCO does not apply to this case because the agreements were entered into and the awards were rendered before the BALCO decision.
• ✓ Clause 12.4.1 of the plant contract states that the contract would be governed by Indian law, which implies that the law governing the arbitration is also Indian law.

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether a foreign award can be challenged under Section 34 of the Arbitration and Conciliation Act, 1996.
2. Whether the choice of a seat of arbitration outside India implies that the arbitration is governed by the law of that seat.
3. Whether an appeal is maintainable against an order refusing to set aside a foreign arbitral award.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court relied on the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• ✓ Bhatia International v. Bulk Trading S.A. & Anr [(2002) 4 SCC 105]*: Overruled. The Court stated that this case was incorrect in applying Part I of the Arbitration Act to foreign awards.
• ✓ Venture Global Engineering v. Satyam Computer Services Ltd. & Anr [2008 (4) SCC 190]*: Overruled. The Court stated that this case was also incorrect in applying Part I of the Arbitration Act to foreign awards.
• ✓ Bharat Aluminium Company vs. Kaiser Aluminium Technical Services Inc (BALCO) [2012 (9) SCC 552]*: Followed. The Court extensively relied on BALCO, which clarified that Part I of the Act does not apply to international commercial arbitrations held outside India.
• ✓ Roger Shashoua v Mukesh Sharma [2009 EWHC 957 (Comm)]*: Followed. The Court applied the principle that the designation of a seat of arbitration carries with it an exclusive jurisdiction clause.
• ✓ Union of India v Reliance Industries [2015 (10) SCC 213]*: Followed. The Court used this case to support the position that pre-BALCO awards are not ruled by BALCO if the juridical seat is in India or the law governing the arbitration is Indian law.
• ✓ Harmony Innovation Shipping Ltd v Gupta Goal India Ltd [2015 (9) SCC 172]*: Followed. The Court used this case to support the position that pre-BALCO awards are not ruled by BALCO if the juridical seat is in India or the law governing the arbitration is Indian law.
• ✓ Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. [(2011) 8 SCC 333]*: Followed. The Court relied on this case to support the position that the Arbitration Act is a self-contained code and appeals not mentioned in Section 50 are not permissible.
• ✓ Government of India v Vedanta Ltd [2020 SCC Online (SC) 749]*: Followed. The Court relied on this case to reiterate that the curial law is determined by the seat of arbitration.
• ✓ IMAX Corporation v . E-City Entertainment (India) (P .) Ltd [2017 (5) SCC 331]*: Followed. The Court relied on this case to support the position that the choice of a seat of arbitration outside India excludes the applicability of Part I of the Arbitration Act.
• ✓ BGS SOMA JV v. National Hydro Electric Power Corporation [2020 (4) SCC 234]*: Followed. The Court relied on this case to reiterate that the seat of arbitration amounts to an exclusive jurisdiction clause.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of territoriality in international commercial arbitration. The Court emphasized that the seat of arbitration is the center of gravity and that the law of the seat governs the arbitration proceedings. The court was also influenced by the need to maintain consistency with international conventions and the principle of party autonomy in choosing the seat of arbitration.

The Court’s reasoning was driven by the following key points:

• ✓ The clear distinction between domestic and foreign awards under the Arbitration and Conciliation Act, 1996.
• ✓ The principle that the seat of arbitration determines the curial law.
• ✓ The need to adhere to the territoriality principle in international arbitration, as recognized in the UNCITRAL Model Law.
• ✓ The importance of party autonomy in choosing the seat of arbitration.
• ✓ The need to avoid overlapping or intermingling of provisions in Part I and Part II of the Act.
• ✓ The legal position established by BALCO and subsequent cases, which clarified that Part I of the Act does not apply to international commercial arbitrations held outside India.
• ✓ The principle that the designation of a seat of arbitration carries with it an exclusive jurisdiction clause.

Logical Reasoning:

The Court considered alternative interpretations, such as Jindal’s argument that the choice of Indian law to govern the contract meant that Indian law also governed the arbitration. However, the Court rejected this argument, emphasizing that the seat of arbitration determines the curial law. The Court also rejected the argument that BALCO did not apply to pre-BALCO contracts, clarifying that BALCO applies to cases where the juridical seat is not in India or the law governing the arbitration is not Indian law.

The Court concluded that the impugned judgment was not sustainable, as it incorrectly applied Section 34 to a foreign award. The Court also held that Jindal’s appeal against the enforcement order was not maintainable under Section 50 of the Act.

The Court quoted the following from the judgment:

• ✓ “It would, therefore, follow that if the arbitration agreement is found or held to provide for a seat/place of arbitration outside India, then the provision that the Arbitration Act, 1996 would govern the arbitration proceedings, would not make Part I of the Arbitration Act, 1996 applicable or enable the Indian courts to exercise supervisory jurisdiction over the arbitration or the award.”
• ✓ “The party which seeks to resist the enforcement of theaward has to establish that one or more of the grounds mentioned in Section 48 of the Arbitration Act exists.”
• ✓ “The Court has to keep in mind that the Arbitration Act is a self contained code and the Court has to interpret the provisions of the Act in a manner to give effect to the legislative intent.”

Final Decision

The Supreme Court set aside the impugned judgment of the Division Bench of the Bombay High Court and allowed the appeal. The Court held that a foreign award cannot be challenged under Section 34 of the Arbitration and Conciliation Act, 1996. The Court emphasized that the seat of arbitration determines the curial law, and in this case, the seat was London, implying that UK law governs the arbitration. The Court also held that an appeal against an order refusing to set aside a foreign arbitral award is not maintainable under Section 50 of the Act.

Implications:

• ✓ This judgment reinforces the territoriality principle in international commercial arbitration. It clarifies that Indian courts do not have supervisory jurisdiction over arbitrations seated outside India.
• ✓ The judgment upholds the principle of party autonomy in choosing the seat of arbitration, which carries with it an exclusive jurisdiction clause.
• ✓ The judgment clarifies that Section 34 of the Arbitration Act applies only to domestic awards and not to foreign awards.
• ✓ The judgment clarifies that Section 50 of the Act specifies the orders against which an appeal can be filed, and it does not include an appeal against an order enforcing a foreign award.
• ✓ The judgment reinforces the principle that the Arbitration Act is a self-contained code and that the Court has to interpret the provisions of the Act in a manner to give effect to the legislative intent.

Precedent:

• ✓ This judgment serves as a significant precedent for cases involving foreign arbitral awards. It clarifies the limited jurisdiction of Indian courts over foreign awards and reinforces the importance of the seat of arbitration.
• ✓ The judgment reinforces the legal position established by BALCO and subsequent cases, which clarified that Part I of the Act does not apply to international commercial arbitrations held outside India.