Supreme Court Upholds Enforcement of Foreign Award Despite Initial Document Deficiency: PEC Ltd. vs. Austbulk Shipping (2018)

Date of the Judgment: 14 November 2018

Citation: 2018 INSC 998

Judges: A.M. Khanwilkar, J. and L. Nageswara Rao, J.

Can a foreign arbitral award be rejected for enforcement if the original arbitration agreement was not filed with the initial application? The Supreme Court of India addressed this critical question in a recent case concerning the enforcement of a foreign award. The core issue revolved around whether the procedural requirement of submitting the original arbitration agreement at the time of filing an enforcement application is mandatory or directory. The Court clarified the interpretation of Section 47 of the Arbitration and Conciliation Act, 1996, and its alignment with the New York Convention.

The judgment was delivered by a division bench comprising Justice A.M. Khanwilkar and Justice L. Nageswara Rao. Justice L. Nageswara Rao authored the judgment.

Case Background

The case involves a dispute between P.E.C. Limited (the Appellant), an Indian company, and Austbulk Shipping SDN BHD (the Respondent), a shipping company. The dispute arose from a charter party agreement dated 20 April 2000, where the Respondent chartered its vessel, MV “Rubin Halycon,” to the Appellant for transporting chickpeas from Australia to India. The charter party included clauses regarding laytime, demurrage, and discharge rates. The vessel was to carry a minimum of 16,500 MT and a maximum of 17,000 MT of chickpeas in bulk from Geraldton Port, Australia to Jawahar Lal Nehru Port, India (JNPT).

After loading the cargo at Geraldton Port between May 1 and May 2, 2000, the vessel arrived at JNPT on May 15, 2000. Following a request by the Appellant, the vessel was redirected to Mumbai port. The Respondent calculated demurrage based on the time taken for discharge and submitted a final freight account to the Appellant. The Appellant did not agree with the calculations, leading to the dispute.

The charter party contained an arbitration clause, and the Respondent initiated arbitration proceedings in London. The Appellant did not participate in the arbitration, and the sole arbitrator awarded US $150,362.18 to the Respondent, along with interest. The Respondent then sought to enforce the award in the High Court of Delhi.

Timeline

Course of Proceedings

The Respondent filed a petition in the High Court of Delhi for the enforcement of the foreign arbitral award. The High Court noted that the award was made in London, a signatory to the New York Convention. The High Court observed that while the Respondent did not initially file the original arbitration agreement, a certified copy was placed on record by the Appellant, and the original was later submitted by the Respondent. The High Court held that there was substantial compliance with the Arbitration and Conciliation Act, 1996, and rejected the Appellant’s objection that the enforcement petition was not maintainable due to the absence of the original agreement at the time of filing.

The High Court also rejected the Appellant’s argument that no valid arbitration agreement existed, referring to the arbitrator’s detailed discussion and the correspondence between the parties. The High Court concluded that the award was a valid foreign award under Section 44 of the Act.

Legal Framework

The Supreme Court examined the following key legal provisions:

• Section 44 of the Arbitration and Conciliation Act, 1996: Defines a “foreign award” as an arbitral award made in pursuance of an agreement in writing for arbitration, to which the New York Convention applies.
• Section 47 of the Arbitration and Conciliation Act, 1996: Specifies the documents that a party applying for enforcement of a foreign award “shall” produce before the Court. These include:
  • “(a) The original award or a copy thereof, duly authenticated in the manner required by the law of the country in which it was made;”
  • “(b) The original agreement for arbitration or a duly certified copy thereof;”
  • “(c) Such evidence as may be necessary to prove that the award is a foreign award.”
• Section 48 of the Arbitration and Conciliation Act, 1996: Lists the grounds on which the enforcement of a foreign award may be refused, such as incapacity of parties, invalidity of the agreement, lack of notice, or the award dealing with matters beyond the scope of submission.
• Article II of the First Schedule of the Arbitration and Conciliation Act, 1996: Defines “agreement in writing” to include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.
• Article III of the New York Convention: Provides for recognition of arbitral awards by each contracting state as binding.
• Article IV of the New York Convention: Requires the party applying for recognition and enforcement to file an authenticated original award or duly certified copy thereof and the original agreement referred to in Article II or a duly certified copy thereof at the time of the application.

The Court noted that the Arbitration and Conciliation Act, 1996, was enacted taking into account the UNCITRAL Model Law on International Commercial Arbitration. The Model Law, specifically Article 35(2), initially required the presentation of the original award or a copy thereof. However, a 2006 amendment to Article 35(2) liberalized the formal requirements by no longer requiring the presentation of a copy of the arbitration agreement.

Arguments

Appellant’s Submissions:

• The Appellant argued that Section 47 of the Arbitration and Conciliation Act, 1996, mandates the production of the original arbitration agreement at the time of filing the enforcement application. The use of the word “shall” in Section 47 makes it a mandatory requirement, and non-compliance should result in the dismissal of the application.
• The Appellant contended that they did not sign the Charter Party agreement and, therefore, were not bound by the arbitration clause. They argued that there was no valid arbitration agreement between the parties, and the arbitral proceedings lacked jurisdiction.
• The Appellant also tried to argue that the Charter Party agreement initially filed was not the original agreement and that there were certain discrepancies in the agreement presented before Court.

Respondent’s Submissions:

• The Respondent argued that the High Court correctly interpreted Section 47 of the Act. The Respondent argued that the word “shall” in Section 47 should be read as “may” to align with the pro-enforcement bias of the New York Convention.
• The Respondent contended that the correspondence between the parties and the conduct of the Appellant demonstrated that they were bound by the arbitration agreement, even if they did not sign the Charter Party.
• The Respondent relied on the arbitrator’s findings and the High Court’s analysis to support the existence of a valid arbitration agreement.

The innovativeness of the argument of the Appellant was that the word “shall” should be interpreted as mandatory under Section 47 of the Arbitration and Conciliation Act, 1996.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether an application for enforcement under Section 47 of the Act is liable to be dismissed if it is not accompanied by the arbitration agreement?
2. Whether there is a valid arbitration agreement between the parties and what is the effect of a party not signing the Charter Party?

Treatment of the Issue by the Court

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

Authorities

The Supreme Court considered the following authorities:

Judgment

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

How each authority was viewed by the Court?

• The Supreme Court referred to Rani Drig Raj Kuer v. Raja Sri Amar Krishna Narain Singh [1960 (2) SCR 431]* to support its interpretation that the word “shall” can be construed as “may” depending on the context.
• The Supreme Court referred to Caldow v. Pixwell (1876) 2 C.P .D. 562* to support its interpretation that the scope and object of a Statute are the only guides in determining whether its provisions are directory or imperative.
• The Supreme Court referred to Craies on Statute Law, 5th Edition* to support its interpretation that it is the duty of the Courts of Justice to try to get at the real intention of the Legislature by carefully attending to the whole scope of the statute to be construed.
• The Supreme Court referred to Mohan Singh v. International Airport Authority of India (1997) 9 SCC 132* to support its interpretation that the Court is required to keep in mind the mischief that would ensue by the construction of the word “shall” as “may”.
• The Supreme Court referred to Dardana Limited v. Yukos Oil Company [2002] 1 ALL ER (Comm.) 819* to support its view that the object and purpose of the New York Convention is to facilitate the recognition of the arbitration agreement within its purview and the enforcement of the foreign arbitral awards.
• The Supreme Court referred to The New York Arbitration Convention of 1958 – by Albert van den Berg* to support its view that Courts in several countries have been liberal in interpreting the formal requirements of Article IV of the New York Convention.
• The Supreme Court referred to “ICCA’S Guide to the Interpretation of the 1958 New York Convention: A Handbook for Judges” (2011)* to support its view that the approach of the Court for enforcement should be having a strong pro enforcement bias, a pragmatic, flexible and non formalist approach.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to uphold the pro-enforcement bias of the New York Convention and to avoid a hyper-technical interpretation of procedural requirements. The Court emphasized that the object of the Convention is to facilitate the smooth and swift enforcement of foreign awards. The Court also considered the practical implications of a strict interpretation of Section 47, noting that it could lead to the rejection of meritorious enforcement applications due to minor procedural lapses. The Court was also influenced by the fact that the arbitration agreement was eventually placed on record by both the parties and the fact that the Model Law, which was the basis of the 1996 Act, had been amended to liberalize formal requirements.

Fact:Law Ratio

The Court’s reasoning was more influenced by legal considerations (70%) than factual aspects (30%). The emphasis was on interpreting the law in a manner consistent with the objectives of international arbitration.

Logical Reasoning

The Supreme Court considered the alternative interpretation that the word “shall” in Section 47 of the Act should be interpreted as mandatory. However, this interpretation was rejected because it would have had the effect of stultifying the enforcement proceedings and would have defeated the object of the New York Convention. The Court also noted that the Model Law, on which the Act was based, had been amended to liberalize formal requirements. The Court therefore concluded that the word “shall” in Section 47 of the Act should be read as “may” at the initial stage of filing the application.

The Court’s decision was based on a purposive interpretation of the law, taking into account the object of the New York Convention and the need to facilitate the enforcement of foreign arbitral awards. The Court also considered the fact that the arbitration agreement was eventually placed on record by both the parties.

The Supreme Court held that the word “shall” in Section 47 of the Arbitration and Conciliation Act, 1996, should be interpreted as “may” at the initial stage of filing the application for enforcement of a foreign award. This means that the application for enforcement cannot be dismissed solely because the original arbitration agreement was not filed at the time of the application. The Court also held that there was a valid arbitration agreement between the parties, even though the Appellant did not sign the Charter Party agreement.

The Court quoted the following from the judgment:

• “The object and purpose of the New York Convention is to facilitate the recognition of the arbitration agreement within its purview and the enforcement of the foreign arbitral awards.”
• “The object of the New York Convention will be defeated if the filing of the arbitration agreement at the time of filing the application is made compulsory.”
• “Reading the word “shall” in Section 47 of the Act as “may” would only mean that a party applying for enforcement of the award need not necessarily produce before the Court a document mentioned therein “at the time of the application”.”

There were no minority opinions in the judgment. The judgment was delivered by a division bench comprising Justice A.M. Khanwilkar and Justice L. Nageswara Rao, with Justice L. Nageswara Rao authoring the judgment.

The judgment clarifies that the procedural requirements for enforcing foreign awards should not be interpreted in a manner that hinders the enforcement of such awards. It emphasizes the pro-enforcement bias of the New York Convention and promotes a pragmatic approach to the enforcement of foreign awards. This judgment has implications for future cases involving the enforcement of foreign awards in India, as it clarifies the interpretation of Section 47 of the Arbitration and Conciliation Act, 1996.

Key Takeaways

• The word “shall” in Section 47 of the Arbitration and Conciliation Act, 1996, is to be read as “may” at the initial stage of filing an application for enforcement of a foreign award.
• An application for enforcement of a foreign award cannot be dismissed solely because the original arbitration agreement was not filed at the time of the application.
• A Charter Party agreement need not be signed to be binding under English law.
• The conduct of the parties and correspondence can establish the existence of a valid arbitration agreement.
• The judgment reinforces the pro-enforcement bias of the New York Convention and promotes a pragmatic approach to the enforcement of foreign awards.

Directions

The Supreme Court directed that the principal amount awarded by the arbitrator, which was deposited in the Court and reinvested, shall be paid to the respondent.

Development of Law

The ratio decidendi of this case is that the word “shall” in Section 47 of the Arbitration and Conciliation Act, 1996, should be interpreted as “may” at the initial stage of filing the application for enforcement of a foreign award. This interpretation is a departure from a strictly literal interpretation of the provision, and it is in line with the pro-enforcement bias of the New York Convention. This interpretation ensures that the enforcement of foreign arbitral awards is not stultified by minor procedural lapses.

Conclusion

The Supreme Court’s judgment in P.E.C. Limited vs. Austbulk Shipping SDN BHD upholds the enforcement of a foreign arbitral award, clarifying that the initial non-submission of the original arbitration agreement is not fatal to the enforcement application. The Court’s interpretation of Section 47 of the Arbitration and Conciliation Act, 1996, as directory rather than mandatory at the initial stage, aligns with the pro-enforcement spirit of the New York Convention. This decision ensures that minor procedural lapses do not impede the enforcement of foreign awards, promoting a more efficient and pragmatic approach to international arbitration in India.