Foreign Awards can be binding on non-signatories to Arbitration Agreement: Supreme Court

The Supreme Court (“SC”) in its judgment Gemini Bay Transcription Pvt Ltd. v. Integrated Sales Service Ltd. held that a foreign award can be binding on non-signatories to the arbitration agreement and cited Section 46 of the Arbitration and Conciliation Act (“Act”) that deals with the conditions under which the foreign award is binding. The Court observed that Section 46 does not speak of ‘parties’ to the agreement but of ‘persons’ who may be non-signatories to the agreement.

Background

The dispute in the present case was between a company based in Honk Kong named Integrated Sales Service Ltd. (ISS) and DMC Management Consultants Ltd. (DMC) an Indian Company. A representation agreement (RA) was executed between the two companies that did not have any specific period of validity. ISS initiated arbitration proceedings and impleaded Mr. Arun Dev Upadhyaya, DMC, DMC Global, Gemini Bay Consulting Ltd. (GBC), and Gemini Bay Transcription Ltd. (GBT) as respondents. The allegation put forward by ISS was that Mr. Arun being the chairman of DMC was controlling the affairs of DMC as well as of other respondents.

ISS contented that it had introduced two customers, MedQuist Transcriptions Ltd and AssistMed to DMC. Thereby, Mr. Arun deflected the two aforementioned customers from DMC to GBT and GMC by using other respondents with an intent to deprive ISS of its commission. Consequently, the Arbitrator awarded USD 6,948,100 as compensation to be paid by the respondents to ISS within 30 days from the transmittal of the award.

Additional proceedings were initiated and a single judge of Bombay High Court on 16th April 2016 held that the foreign award would be enforceable only against DMC and not on other respondents acting as non-signatory to the arbitration agreement. Further, an appeal was filed and the previous decision by a single bench was set aside on 4th January 2017 and held that none of the grounds mentioned under Section 48 would be available to withstand enforcement of the foreign award and the award would be enforceable against the non-signatories. Finally, a special leave petition (SLP) was filed, and SC granted the leave on the mandatory payment of USD 2.5 million within 3 months. As DMC failed to deposit the amount the leave was revoked and the foreign award against them was enforced.

SC observations –

1. The Court observed six ingredients for an award to be a foreign award under Section 44 of the Arbitration and Conciliation Act, 1996.
   • It must be an arbitral award on differences between persons arising out of legal relationships.
   • These differences may be in contract or outside of contract i.e., tort.
   • The legal relationship so spoken of ought to be considered commercial under Indian law.
   • The award must be made on or after the 11th day of October 1960.
   • The award must be a New York Convention award, it must be in pursuance of an agreement in writing to which the New York Convention applies and be in one of such territories.
   • 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.
2. Pre-requisites under Section 47 The Court further noted the pre-requisites mentioned in Section 47 (the said section is based on Article IV of the New York Convention which is contained in Schedule I to the Arbitration Act, 1996) for the enforcement of a foreign award,
   • The original award of copy, duly authenticated in the manner required by the law of the country in which it is made.
   • The original agreement for arbitration or a duly certified copy.
   • Such evidence that may be necessary to prove the award is a foreign award.
3. The requirements under Section 47(1) are procedural in nature, intending to satisfy the enforcing court that it is indeed a foreign award. “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.”
4. The burden of proof lies on the party resisting the enforcement of the foreign award and shall prove that its case falls within the subclauses of either Section 48(1) or 48(2). The court referred to Emkay Global Financial Services Ltd v. Girdhar Sondhi (2018) The term ‘proof’ in Section 48 would only imply ‘establish based on the record of the arbitral tribunal’.
5. Section 48(1)(b) does not speak of the absence of reasons in an arbitral award at all. The only ground on which foreign awards cannot be enforced is in the natural justice grounds.
6. The court cited Ssangyong Engineering & Construction Company v. National Highway Authority of India (NHAI)and remarked perversity of an award cannot be a ground to refuse enforcement of the foreign award in international commercial arbitration.

Conclusion

The court rightly affirmed the decision delivered by the arbitral tribunal that ISS was deprived of commission due to it under the representation agreement and the loss had to be sustained by ISS. DMC was gaining at the cost of ISS sustaining loss. The assessment of the damages was made by considering the commission earned by GBT from the two clients of DMC and arrived at the figure of 100,000 USD per month (continued to be clients for next four years), the final amount for damages was 6,948,100 USD.