Foreign State cannot claim sovereign immunity against enforcement of arbitral award arising out of commercial transaction: Delhi High Court

A foreign State cannot claim sovereign immunity against enforcement of an arbitral award arising out of a commercial transaction, the Delhi High Court ruled (KLA Const Technologies v. Embassy of Islamic Republic of Afghanistan)..In a contract arising out of a commercial transaction, a foreign State cannot seek sovereign immunity for the purpose of stalling execution of an arbitral award rendered against it, Justice JR Midha held..“Once a Foreign State opts to wear the hat of a commercial entity, it would be bound by the rules of the commercial legal ecosystem and cannot be permitted to seek any immunity, which is otherwise available to only when it is acting in its sovereign capacity,” the judgment said.Importantly, the Court also held that prior consent of Central government is not necessary under Section 86(3) of the Code of Civil Procedure (CPC) to enforce an arbitral award against a foreign State.“Section 86 of the Code of Civil Procedure is of limited applicability and the protection thereunder would not apply to cases of implied waiver. An arbitration agreement in a commercial contract between a party and a Foreign State is an implied waiver by the Foreign State so as to preclude it from raising a defense against an enforcement action premised upon the principle of Sovereign Immunity,” the Court said..The Court was hearing two pleas - one by KLA Const Technologies seeking enforcement of an arbitral award dated November 26, 2018 against the Afghanistan and another by Matrix Global seeking enforcement of an arbitral award dated 25th October, 2015 against Ministry of Education of Ethiopia.The petitioners contended that there is no requirement under law for obtaining the consent of the Central Government under Section 86(3) of the Code of Civil Procedure for implementation of an arbitral award against a Foreign State.An arbitral award passed in an international commercial arbitration held in India, as is the present case, would be construed as a “Domestic Award” under the Arbitration and Conciliation Act and would be enforceable under Section 36 of the Arbitration and Conciliation Act, it was submitted. Reliance was placed on Bharat Aluminium Company v. Kaiser Aluminium Technical Services Ltd..The requirement of prior-consent for execution of an otherwise final and binding arbitral award against the judgment debtor, evidently cannot be sought to be imported into a reformed and modernized legislation such as the Arbitration and Conciliation Act, it was contended. On sovereign immunity it was submitted that a foreign State does not have sovereign immunity against an arbitral award arising out of a commercial transaction. Further entering into an arbitration agreement constitutes waiver of sovereign immunity..The agreement by the respondent to arbitrate the disputes would operate as a waiver of the said requirement. When a foreign State enters into an arbitration agreement with an Indian entity, there is an implicit waiver of the sovereign immunity, otherwise available to such foreign State, against the enforcement of an arbitral award, it was submitted.They also submitted a slew of judgments in support of their arguments..The Court after examining the relevant judgments and legal provisions including Sections 35 and 36 of the Arbitration and Conciliation Act and Section 86 of the CPC ruled that arbitration being a consensual and binding mechanism of dispute settlement, it cannot be contended by a foreign State that its consent must be sought once again at the stage of enforcement of an arbitral award against it.“A foreign State cannot claim a Sovereign Immunity against enforcement of an arbitral award arising out of a commercial transaction,” the Court said.Once a foreign State opts to wear the hat of a commercial entity, it would be bound by the rules of the commercial legal ecosystem and cannot get any immunity which it gets when acting in its sovereign capacity.“It is the purpose and nature of the transaction of the foreign State which would determine whether the transaction, and the contract governing the same, represents a purely commercial activity or whether the same is a manifestation of an exercise of sovereign authority,” the Court ruled..If foreign States are permitted to stymie the enforcement of arbitral awards, which are the ultimate fruits of the above consensual process, on the ground that they are entitled to special treatment purely on account of being foreign States, then the very edifice of International Commercial Arbitration would collapse, the Court opined..On obtaining prior consent under Section 86, the Court, the Court ruled that the protection would not apply to cases of implied waiver.An arbitration agreement in a commercial contract between a party and a Foreign State is an implied waiver by the Foreign State which will preclude it from raising a defense against an enforcement action premised upon the principle of sovereign immunity.The Court, therefore, ruled against Ethiopia and Afghanistan and directed them to specifically disclose the following assets in their affidavits:(i) All assets owned and held by the respondents in India;(ii) All bank accounts and bank account statements of the respondents held with any bank in India; (iii) All the commercial ventures of the respondents in India, including state-owned airlines, companies, undertakings etc., having commercial transactions with Indian companies, commercial entities or citizens, and disclosure of all assets in India (including bank accounts) of such commercial ventures;(iv) All commercial transactions entered into by the respondents and their state-owned entities with Indian companies, commercial entities or citizens where money is due and payable by such Indian companies, commercial entities or citizens along with details of the amounts so owed..The case will be heard again for compliance on July 30, 2021. .[Read Judgment]