Kajal Singh and Nikunj Maheshwari[i]
Introduction
India, for long, has been striving to adapt to arbitration as the new form of dispute resolution. The same is evident from the recent amendments made to the Indian Arbitration and Conciliation Act, 1996 (the arbitration act) and continuum pro-arbitration judicial pronouncements of various High Courts and the Supreme Court of India (SCI). One such judgment of SCI in the case of Government of India v. Vedanta Limited and others.[1]
SCI in the instant case ascertained the nature of a foreign arbitral award and settled the long-drawn debate of applicability of the Indian Limitation Act, 1993 (limitation act) on enforcement and execution of foreign arbitral awards.
In the instant post the author(s) will first briefly discuss the facts of the case followed by observations made by the SCI and lastly, conclude with the implications that the judgment beholds.
The Facts, Arguments, and the Judgement
The Government of India (‘GOI’) and Vedanta Ltd. and Ors. (‘Vedanta’) entered into a production sharing contract to develop Ravva Gas and Oil fields. As per the plan the Vedanta was supposed to extract 35000 barrels of crude oil per day.
Article 15 of the said contract provided for the reimbursement of the cost incurred by the Vedanta in furtherance of extraction of the crude oil. Due to the different interpretations of Article 15, a dispute arose between the parties regarding the quantum of reimbursement to be paid by the GOI to the Vedanta. Consequently, in accordance with the arbitration clause as provided in the contract, the dispute was referred to arbitration in 2008, with Malaysia as the seat of arbitration.
In 2011, the arbitral tribunal passed an order in favour of the Vedanta. Subsequently, the award was challenged by the GOI before a series of courts of Malaysia. The Malaysian Court of Appeal in its judgment of 2014 rejected the claims of the GOI and refused to set aside the order. Finally, the Vedanta in 2014 approached the Delhi High Court (DHC) for the enforcement of the arbitral award under sections 47 and 49 of the Arbitration Act. In response, the GOI challenged the enforcement application under section 48 of the arbitration act before the DHC.
The DHC ruled in favour of the Vedanta. Resultantly, GOI preferred an appeal before the SCI. The SCI adopted a different line of reasoning from that of the DHC and upheld the contentions of the Vedanta and allowed the enforcement of the arbitral award.
Analysis
The Apex Court in the present judgment made multifarious observations. However, this article will restrict its scope in discussing observations made by the SCI with reference to the nature of an arbitral award and application of the limitation act.
A. The Nature of An Arbitral Award
The exact nature of an arbitral award has been the focal point of much debate. The divergent opinions were predicated upon the judiciary’s approach in interpreting section 49 of the arbitration act which provides for the execution of a foreign arbitral award as if it were a ‘decree of that Court’. One side of the spectrum in interpreting ‘decree of that Court’ presupposed that a foreign award is a deemed decree, whereas the other side was of the opinion that a foreign award is not a decree by itself.
In the instant judgment, the SCI putting an end to a prolonged legal debate clarified that a foreign arbitral award does not become a foreign decree at any stage of the proceedings. Relying upon the judgment of the Bombay High Court in the case of Noy Vallesina Engineering Spa v. Jindal Drugs, the SCI observed that enforcement and execution of a foreign award are two different stages. In the first stage, the court would adjudicate the enforceability of the award in accordance with section 48 of the arbitration act. Once the court has decided upon the enforceability of the award it will proceed to take steps for the execution of the award under section 49 of the arbitration act.
Thus, the foreign award will be deemed to be a decree of the Indian Court once it passes the test of enforceability under section 48 of the arbitration act. In view thereof, the award will be deemed decree only at the stage of execution and not during enforcement.
B. Application of Limitation Act
After ascertaining that foreign award will not be deemed to be a decree until it passes the muster of section 48 of the arbitration act, the SCI forayed into answering the next bewildering question – Applicability of the limitation act on enforcement of foreign awards.
Notably, Article 136 of the limitation act, stipulates a period of twelve years for execution of a decree or order of a civil court. Any other kind of application which does not fall within the ambit of Article 136 or any other provision, is governed in accordance with Article 137 of the Limitation Act which prescribes a residual limit of three years.
Application of Article 136 or 137 was predicated upon the treatment that High Courts accorded to the nature of the foreign arbitral award. High Courts which presupposed the award to be a decree as in the case of Cairn India espoused application of section 136 of the limitation act. Conversely, High courts which interpreted it not to be a deemed decree argued in favour of the applicability of Article 137 of the limitation act. Notably, High Courts in favour of application of Article 137 argued that a foreign award does not become a decree or order of any civil court the moment it is pronounced by the arbitrator. It is only after the foreign award has passed the stage of enforcement that the same is considered to have become a decree of that civil court.
After careful analysis, the SCI explained that the application of the limitation act to foreign awards will vary depending upon the stage the proceeding.
Under stage one, i.e, the enforcement proceedings of the arbitral award, the SCI clarified that since the award is not deemed as a decree, the enforcement of the foreign award will be governed by Article 137 of the limitation act. This implies that the holders of foreign awards will have three years from the date of accrual of interest to get their awards enforced in India.
Finally, proceedings under stage two, i.e., execution proceedings will be carried in accordance with order 21 of Code of Civil Procedure (‘CPC’). Pertinently, execution of a decree under order 21 is governed by Article 136 of the limitation act. Thus, the award holder will have twelve years for execution of the same from when the decree becomes enforceable or from any subsequent order which directs any payment of money or when default in making of payment for which the execution is sought.
The judgment also has a bearing on the relief available under section 5 of the limitation act which provides for condonation of delay. Pertinently, section 5 of the limitation act prohibits any condonation of delay for decrees to be executed under order 21 of CPC. Thus, while the award holder stands a chance to receive condonation of delay in situations wherein the application for enforcement is time-barred the courts will be statutorily barred to condone any delay with reference to the execution application filed after the expiration of the prescribed time limit.
The Implication the Judgment Beholds
India’s attempt to become an arbitration-friendly jurisdiction has not yet reached fruition. What continues to delay India’s goal of becoming the ‘hub of arbitration’ is the long-drawn litigations and inefficiency of the arbitration proceedings. It still takes as much as 1,420 days and 39.6% of the claim value for dispute resolution. Further, as observed in the foregoing discussion an award holder’s fate lurks on the boundary of legal uncertainty and ambiguity in the application of law over arbitration procedure.
The looming threat of legal uncertainty and sluggish enforcement mechanism discourages foreign parties to either subject themselves to the jurisdiction of India or invest in the country. Thus, for India to promote domestic arbitration and make India a preferred international arbitration venue along with attracting investments it needs to streamline the governance framework for arbitration.
The instant judgment by the SCI is a conscious attempt by the judiciary to improve dispute resolution in India. It comes as a huge respite for foreign arbitral award holders who until now were at the mercy of varying interpretations of the High Courts. SCI has not just settled the law with reference to the applicability of the limitation act but has also clarified upon as to when a foreign arbitral award would be deemed to be a decree of a civil court in India.
Notably, after the judgment parties who have not yet initiated enforcement proceedings need to move fast and proceed with the same before the expiration of the time limit. Parties that have already missed the stipulated period will now have to seek condonation of delay. Further, the judgment will potentially affect the global perception of “ease of doing business” in India. By clarifying the law, India sends out the signal to the International business community that settling commercial disputes in India will no longer be a time-consuming affair.
To summarize, a legal system fraught with ambiguities and glaring inconsistencies is antithetical to the sought growth of arbitration in India. Therefore, by ending a long spell of legal uncertainty is in furtherance of bettering India’s arbitration regime and establishing confidence in its legal system.
[1] Civil Appeal No. 3185 of 2020.
[[i]] Kajal Singh and Nikunj Maheshwari, 4th-year law students at Institute of law, Nirma University. Preferred Citation – Kajal Singh and Nikunj Maheshwari, “Foreign Award and Application Of The Indian Limitation Act: - SC Ends The Confounding Saga”, Arbitration & Corporate Law Review, Published on 20th October, 2020.
This article was reviewed by Shebani Bhargava and Utsav Saxena.