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

Introduction

Date of the Judgment: 20 February 2019

Citation: (2019) INSC 147

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

Can a party repeatedly challenge the enforceability of a foreign arbitral award after initial objections are dismissed? The Supreme Court of India recently addressed this question in a case concerning a dispute over the sale of non-basmati parboiled rice. The core issue revolved around whether the petitioner could raise new objections to the enforcement of a foreign arbitral award after its initial challenge was rejected by the High Court. The Supreme Court, in this case, upheld the High Court’s decision, emphasizing the limited scope of interference in the enforcement of foreign awards under the Arbitration and Conciliation Act, 1996. The judgment was delivered by a bench comprising Justice A.M. Khanwilkar and Justice Ajay Rastogi.

Case Background

The case originated from two separate contracts between LMJ International Ltd. (the petitioner) and Sleepwell Industries Co. Ltd. (the respondent) for the sale of non-basmati parboiled rice of Thailand origin. The contracts stipulated that the final quantity would be determined at the port of loading based on an official weight certificate issued by SGS at the seller’s cost. The contracts were FOB (Free on Board) contracts, and the goods were intended for the Government of the People’s Republic of Bangladesh. The contracts also stated that any terms and conditions not in conflict with the contract would be governed by GAFTA 48, and disputes would be resolved by arbitration under GAFTA 125 in London.

Disputes arose regarding the quality of the rice and non-payment for certain shipments. Consequently, the respondent invoked the arbitration clause on 28th July 2011, appointing Mr. R. Barber as its arbitrator. When the petitioner failed to respond, the respondent requested GAFTA to appoint an arbitrator on their behalf, which resulted in the appointment of Mr. R. Eikel on 22nd September 2011. Subsequently, Mr. C. Debattista was appointed as the third arbitrator and Chairman of the Tribunal on 25th June 2012.

The respondent filed its claim submissions on 11th May 2012 in two independent arbitration proceedings, concerning Contract-I and Contract-II, respectively. The Arbitral Tribunal proceeded ex-parte against the petitioner, who did not participate in the arbitration proceedings despite notice. The Tribunal passed two separate awards in relation to the contracts.

Timeline

Course of Proceedings

On 19th November 2013, the respondent filed two execution cases before the High Court at Calcutta under Part-II of the Arbitration and Conciliation Act, 1996, seeking enforcement of the foreign arbitral awards. The learned Single Judge rejected the objections raised by the petitioner regarding the maintainability of the foreign awards on 4th December 2014. The Single Judge noted that the petitioner had not filed any formal application to oppose the execution but raised objections orally through its counsel. The court recorded five objections raised by the petitioner: (i) no prayer for declaration of enforceability, (ii) a pending civil suit, (iii) improper invocation of the arbitration clause, (iv) non-compliance with Rule 3.1 regarding arbitrator appointment, and (v) irregular appointment of the respondent’s nominee arbitrator.

The High Court rejected these objections, stating that the legislative intent was to limit the supervisory role of the Court in arbitral proceedings. The Court observed that the objections were a desperate attempt to resist the enforcement of an enforceable award. The special leave petitions filed against this judgment were dismissed by the Supreme Court on 27th February 2015 and 17th August 2015.

Subsequently, the Single Judge directed the petitioner to examine its Principal Officer. The petitioner appealed this decision, which was disposed of by the Division Bench on 1st December 2015. The petitioner then filed a review application, which was dismissed on 8th June 2015. Following this, the petitioner filed G.A. Nos. 3306/2016 and 3307/2017, raising objections regarding the enforceability of the foreign awards under Section 48 of the Act, alleging fraud and procedural irregularities. The learned Single Judge held that these challenges were not maintainable due to the principle of res judicata, but also examined the objections on merit and rejected them.

Legal Framework

The primary legal framework for this case is the Arbitration and Conciliation Act, 1996, particularly Part II, which deals with the enforcement of foreign awards. Section 48 of the Arbitration and Conciliation Act, 1996, is central to this case, as it outlines the conditions under which a foreign award may be refused enforcement.

The relevant portion of Section 48 of the Arbitration and Conciliation Act, 1996, 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) If an application for the setting aside or suspension of the award has been made to a competent authority referred to in clause (e) of sub-section (1), the court may, if it considers it proper, adjourn the decision on the enforcement of the award and may also, on the application of the party claiming enforcement of the award, order the other party to give suitable security.”

Arguments

The petitioner, LMJ International Ltd., argued that the foreign arbitral awards were unenforceable based on the following submissions:

• The awards were vitiated by fraud, as the respondent allegedly concealed the fact of filing a civil suit for US$ 382,348.90 before the Arbitral Tribunal. The petitioner claimed that the respondent made false promises regarding joint inspections and settlement of claims, and suppressed the addendum to the contract dated 7th December 2010. They also alleged that the respondent provided a wrong email address to GAFTA and concealed that the balance 10% of the invoice was to be settled after inspection.

• The awards were contrary to the terms of the contract and thus violated Section 28(3) of the Arbitration and Conciliation Act, 1996. The petitioner contended that the arbitral procedure was not in accordance with the agreement of the parties, and the award was passed on the basis of GAFTA No. 48, which was not signed by the petitioner. They also argued that the award was based on clause 5 of GAFTA No. 48, which was in contradiction with the agreement dated 25th October 2010.

• The Arbitral Tribunal considered an issue for which there was no pre-existing dispute.

• The Arbitral Tribunal made out a new case not made out by the claimant in the statement of claim.

• The awards were not supported by reason, violated natural justice, and contravened the fundamental policy of Indian law.

• The Executing Court acted as a First Court of appeal and sustained the arbitral award by supplying new reasons and facts.

The respondent, Sleepwell Industries Co. Ltd., countered these arguments by submitting that:

• The application filed by the petitioner was not maintainable due to the principles of res judicata, issue estoppel, and cause of action estoppel. The respondent argued that the petitioner was attempting to overreach the Court by changing its name and registered office and filing a petition under the Insolvency and Bankruptcy Code, 2016 to prevent the respondent from receiving the proceeds.

• The grounds urged by the petitioner did not fall within the purview of Section 48 of the Arbitration and Conciliation Act, 1996, which has a very narrow scope. The respondent contended that the grounds were more appropriate for an appeal under English Law, which the petitioner had failed to file. They also refuted the fraud allegations, stating that all relevant documents were produced before the Arbitral Tribunal.

• The respondent had produced a swift message dated 3rd June 2011 and subsequent correspondence, which were considered by the Arbitral Tribunal. The respondent stated that the petitioner had sufficient notice of the arbitration proceedings but chose not to participate.

• The awarding of compound interest at the rate of 4% per annum was in conformity with the governing laws.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section, but the core issue revolved around whether the petitioner could raise new objections to the enforcement of a foreign arbitral award after its initial challenge was rejected by the High Court.

Treatment of the Issue by the Court

Authorities

Judgment

How each authority was viewed by the Court?

• Shri Lal Mahal Ltd. Vs. Progetto Grano SPA [(2014) 2 SCC 433]*: The Supreme Court relied on this case to emphasize the limited scope of interference by courts in the enforcement of foreign awards as opposed to domestic awards.
• Renusagar Power Company Ltd. Vs. General Electric Co. [1994 Supp. (1) SCC 644]*: This case was also used to highlight the distinction in the approach between foreign and domestic awards, underscoring the limited grounds for refusing enforcement of foreign awards.
• Oil & Natural Gas Corporation Ltd. Vs. Saw Pipes Ltd. [(2003) 5 SCC 705]*: This case was cited to further emphasize the distinction in the approach between foreign and domestic awards.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the principle of res judicata and the need to ensure the finality of arbitral awards. The Court was also concerned with the petitioner’s conduct, which was seen as an attempt to overreach the legal process. The Court emphasized the limited scope of interference in the enforcement of foreign awards under Section 48 of the Arbitration and Conciliation Act, 1996. The court was also influenced by the fact that the petitioner had not participated in the arbitration proceedings despite notice.

Fact:Law Ratio

The sentiment analysis indicates that the court was primarily influenced by legal principles and procedural aspects, with a lesser emphasis on the factual details of the case. The ratio of law to fact shows a 70:30 split, indicating that the legal considerations played a more significant role in the court’s decision-making process.

Logical Reasoning

Key Takeaways

• The principle of res judicata is strictly applied in the context of foreign arbitral awards, preventing parties from repeatedly challenging enforcement.
• The scope of interference by Indian courts in the enforcement of foreign awards is very limited under Section 48 of the Arbitration and Conciliation Act, 1996.
• Parties cannot use the guise of “fraud” to re-litigate issues already decided by an arbitral tribunal.
• The conduct of parties, particularly attempts to overreach the court, will be viewed seriously and may lead to adverse outcomes.
• The court emphasized the legislative intent of speedy disposal of arbitration proceedings and limited interference by the courts.

Directions

The Supreme Court directed the Registrar (OS) of the Calcutta High Court to:

• Forthwith encash the fixed deposits (FDs) lying in the credit of the execution cases.
• Obtain permission from the Reserve Bank of India.
• Remit the entire amount, including accrued interest, in US Dollars to the respondent within eight weeks.
• Submit a compliance report to the Registry of the Supreme Court within two weeks thereafter.
• The directions were to 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 the principle of res judicata applies to the enforcement of foreign arbitral awards, preventing parties from re-litigating issues that have already been decided. The Supreme Court also reinforced the limited scope of interference by Indian courts in the enforcement of foreign awards under Section 48 of the Arbitration and Conciliation Act, 1996. This judgment reaffirms the pro-enforcement stance of Indian courts towards foreign arbitral awards and emphasizes the need for finality in arbitration proceedings. There is no change in the previous positions of law, but the judgment clarifies the application of res judicata in the context of foreign awards.

Conclusion

In summary, the Supreme Court dismissed the special leave petitions filed by LMJ International Ltd., upholding the High Court’s decision to enforce the foreign arbitral awards in favor of Sleepwell Industries Co. Ltd. The Court emphasized the limited scope of interference in the enforcement of foreign awards and the importance of the principle of res judicata. The Court also took a serious view of the petitioner’s conduct, which was seen as an attempt to overreach the legal process. The judgment underscores the pro-enforcement approach of Indian courts towards foreign arbitral awards and reinforces the need for finality in arbitration proceedings.