Supreme Court Upholds Enforceability of Foreign Arbitral Awards: LMJ International Ltd. vs. Sleepwell Industries Co. Ltd. (20 February 2019)

Introduction

Date of the Judgment: 20 February 2019

Citation: Not Available

Judges: A.M. Khanwilkar, J., Ajay Rastogi, J.

Can a party repeatedly challenge the enforceability of a foreign arbitral award after initial objections have been rejected? The Supreme Court of India addressed this crucial question in a case involving a dispute over the sale of rice. The Court’s decision clarifies the limited scope of interference allowed when enforcing foreign awards under the Arbitration and Conciliation Act, 1996. This judgment emphasizes the importance of finality in arbitration proceedings and discourages attempts to relitigate settled issues. The bench comprised of Justices A.M. Khanwilkar and Ajay Rastogi.

Case Background

The case involves two separate contracts for the sale of Non-Basmati Parboiled Rice between LMJ International Ltd. (the petitioner) and Sleepwell Industries Co. Ltd. (the respondent). The contracts stipulated that the quantity of rice would be final at the port of loading, as per the official weight certificate issued by SGS. The contracts also incorporated GAFTA 48 terms and specified that disputes would be resolved through arbitration in London under GAFTA 125 rules.

Disputes arose regarding the quality of the rice and non-payment of invoices. The respondent initiated arbitration proceedings on 28th July 2011, appointing Mr. R. Barber as its arbitrator. When the petitioner failed to respond, GAFTA appointed Mr. R. Eikel as the second arbitrator on 22nd September 2011, and later Mr. C. Debattista as the third arbitrator and Chairman of the Tribunal on 25th June 2012. The Arbitral Tribunal proceeded ex-parte against the petitioner, who did not participate in the proceedings. Consequently, two separate awards were passed in favor of the respondent.

Timeline

Course of Proceedings

The respondent filed two execution cases before the High Court at Calcutta for the enforcement of the foreign arbitral awards. The Single Judge of the High Court rejected the petitioner’s objections regarding the maintainability of the awards on 4th December 2014, noting that the petitioner had not filed any formal application to oppose the execution. The Single Judge held that the foreign award was enforceable and deemed it a decree of the Court under Section 48 of the Arbitration and Conciliation Act, 1996.

The petitioner raised several objections, including the lack of a formal declaration for the enforceability of the award, the pendency of a civil suit, and improper invocation of the arbitration clause. The High Court rejected these objections, stating that the legislative intent of the Act was to limit the supervisory role of the Court in arbitral proceedings.

The petitioner’s subsequent appeals and special leave petitions to the Supreme Court against the High Court’s order were dismissed. Later, the petitioner filed a review application, which was also dismissed. The petitioner then filed fresh applications (G.A. Nos. 3306/2016 and 3307/2017) raising objections to the enforceability of the awards under Section 48 of the Act, alleging fraud and procedural irregularities. The High Court rejected these objections, holding that they were barred by res judicata and did not fall within the scope of public policy violations.

Legal Framework

The primary legal framework in this case is the Arbitration and Conciliation Act, 1996, specifically Part II, which deals with the enforcement of foreign arbitral awards.

Section 48 of the Arbitration and Conciliation Act, 1996, outlines the conditions under which the enforcement of a foreign award may be refused. It states:

“48. Conditions for enforcement of foreign awards.—(1) Enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the court proof that—
(a) the parties to the agreement referred to in section 44 were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or
(b) the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
(c) the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:
Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be enforced; or
(d) the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or
(e) the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.
(2) Enforcement of a foreign award may also be refused if the court finds that—
(a) the subject-matter of the difference is not capable of settlement by arbitration under the law of India; or
(b) the enforcement of the award would be contrary to the public policy of India.
(3) Without prejudice to the generality of clause (b) of sub-section (2), it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption.
“

The Act aims to minimize judicial intervention in arbitration matters, particularly in the enforcement of foreign awards, promoting a speedy and efficient resolution of disputes.

Arguments

The petitioner, LMJ International Ltd., argued that the foreign awards were unenforceable due to several reasons:

• The awards were vitiated by fraud, as the respondent concealed the fact of filing a civil suit for a similar claim before the Arbitral Tribunal.
• The awards were contrary to the terms of the contract, violating Section 28(3) of the Arbitration and Conciliation Act, 1996.
• The Arbitral Tribunal considered an issue for which there was no pre-existing dispute.
• The Arbitral Tribunal made out a new case not presented by the claimant.
• The awards were not supported by reason, violating natural justice and the fundamental policy of Indian law.
• The Executing Court acted as a First Court of appeal, supplying new reasons and facts.
• The arbitration clause was not properly invoked, as there was no attempt to settle the dispute amicably before arbitration.
• The nominee arbitrator of the respondent was appointed improperly.
• The award was passed on the basis of GAFTA No. 48, which was not signed by the petitioner.
• The Arbitral Tribunal wrongly applied the rules of GAFTA Arbitration Rules.
• The petitioner was not given proper notice of the arbitration proceedings.

The respondent, Sleepwell Industries Co. Ltd., countered by arguing that:

• The petitioner’s application was barred by the principles of res judicata, issue estoppel, and cause of action estoppel.
• The petitioner’s conduct indicated an attempt to overreach the Court by changing its name and initiating insolvency proceedings.
• The grounds urged by the petitioner did not fall within the purview of Section 48 of the Act.
• The respondent had produced all relevant documents before the Arbitral Tribunal.
• The Arbitral Tribunal had the jurisdiction to decide the issue, and the petitioner had failed to participate in the arbitration proceedings despite notice.
• The award of compound interest was in conformity with the governing laws.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether it was open to the petitioner to raise grounds regarding the enforceability of the foreign awards despite the judgment of the High Court dated 4th December 2014, which rejected the objections in the context of the maintainability of the execution petition.

Treatment of the Issue by the Court

Authorities

Judgment

What Weighed in the Mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to uphold the finality of arbitral awards and to discourage repeated challenges to their enforceability. The Court emphasized the limited scope of interference under Section 48 of the Arbitration and Conciliation Act, 1996, and the importance of adhering to the legislative intent of minimizing judicial intervention in arbitration proceedings. The Court also took a dim view of the petitioner’s conduct, which appeared to be a deliberate attempt to evade the enforcement of the awards.

The Court rejected the petitioner’s arguments, emphasizing that the grounds raised were not within the purview of Section 48 of the Act. The Court noted that the petitioner’s attempt was to invite the executing court to have a re-look at the award, which is not permissible. The Court also found that the Arbitral Tribunal had considered all relevant documents and that the findings were based on the interpretation of said documents.

The Court observed that the petitioner had sufficient notice of the arbitration proceedings but chose not to participate. Therefore, the petitioner could not later complain about the non-consideration of any document. The Court held that the High Court had correctly noted the limited scope for interference in foreign awards under Section 48 of the Act.

The Court did not find any merit in the petitioner’s arguments and dismissed the special leave petitions with exemplary costs.

The Supreme Court’s reasoning was based on the principle of finality in arbitration, the limited scope of judicial intervention in foreign awards, and the need to prevent parties from repeatedly challenging awards on flimsy grounds. The Court emphasized that the executing court is not an appellate body and cannot re-evaluate the merits of the award.

“We are of the considered opinion that the scheme of Section 48 of the Act does not envisage piecemeal consideration of the issue of maintainability of the execution case concerning the foreign awards, in the first place; and then the issue of enforceability thereof.”

“Indeed, the petitioner had not filed any formal application to raise the issue of maintainability of the execution case but the Court had permitted the petitioner to orally urge “all available grounds”.”

“We find force in the grievance made by the respondent that the conduct of the petitioner is indicative of an attempt to overreach this Court.”

Key Takeaways

• Parties cannot repeatedly challenge the enforceability of foreign arbitral awards after initial objections have been rejected.
• The scope of interference in the enforcement of foreign awards under Section 48 of the Arbitration and Conciliation Act, 1996, is limited.
• Executing courts are not appellate bodies and cannot re-evaluate the merits of the award.
• The principle of res judicata applies to issues related to the enforceability of foreign awards.
• Courts will take a dim view of parties that attempt to evade the enforcement of awards through procedural maneuvers.

Directions

The Supreme Court directed the Registrar (OS) of the Calcutta High Court to encash the fixed deposits (FDs) related to the execution cases and remit the entire amount, including accrued interest in US Dollars, to the respondent within eight weeks, after obtaining permission from the Reserve Bank of India. The Court also clarified that these directions must be complied with irrespective of any order passed by any other Court/Tribunal in India.

Development of Law

The ratio decidendi of this case is that once objections to the maintainability of the execution of a foreign award are rejected, the same party cannot raise further objections to the enforceability of the award based on grounds that could have been raised earlier. This judgment reinforces the principle of finality in arbitration and clarifies the limited scope of judicial intervention in foreign awards. There is no change in the previous position of law, but this judgement reinforces the existing position.

Conclusion

The Supreme Court’s judgment in LMJ International Ltd. vs. Sleepwell Industries Co. Ltd. upholds the enforceability of foreign arbitral awards and reinforces the principles of res judicata and limited judicial intervention. The Court’s decision underscores the importance of finality in arbitration proceedings and discourages parties from attempting to relitigate settled issues. The judgment serves as a reminder that the scope of interference in foreign awards is narrow, and executing courts are not meant to act as appellate bodies.