SC: Section 34 of Arbitration Act Can’t Be Invoked to Challenge Foreign Award

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This case is an appeal to the Supreme Court relating to the question of whether the foreign award can be set aside by the municipal court under Sec. 34 of the Arbitration and Conciliation Act, 1996.

Brief Facts of the Case

The appellant-Company (NV Engineering), incorporated under Italian Law, was involved in the construction of a plant for the production of synthetic fibers, polymers, and ascorbic acid. The respondent (Jindal) was incorporated under relevant Indian law. The respondent entered into four related agreements with Engineering Chur AG of Sagenstrasse 97, 7001 Chur, Switzerland (hereafter,‘ Enco’), to set up an ascorbic acid plant in India. The agreements were: (i) Plant Contract, (ii) Supply Contract, (iii) Service Contract, (iv) License Contract. All agreements had an arbitration clause. 

Under Plant Contract, Enco agreed to provide Jindal, technical information and basic Engineering Documentation for construction, operation, and maintenance of the plant, for which Jindal had to pay swiss franc 86,00,000/-. In 1995, with the consent of the respondent, the plant contract was assigned by Enco to NV engineering. 

A dispute arose between NV Engineering and Jindal, the former terminated the agreement and claimed damages. Jindal filed a request for arbitration under plant contract before the International Court of Arbitration (ICC), Paris on 31.10. 1996. The Tribunal gave a partial award on 1.02.2000, awarding SFr. 44,33,416 to NV Engineering. On 20.02.2000, Jindal filed a petition before the Bombay High Court under Sec. 34 of The Arbitration and Reconciliation Act, 1996 challenging the award. 

On 1.03.2000, the petition was admitted for hearing, and an interim injunction issued to the tribunal to not pass any further order. The tribunal, however, was of the view that it is not bound by these orders and gave the final award on 22.10.2001. At this point, the petition before the High Court was pending and the Single Judge Bench held the petition was not maintainable as it was a foreign award and allowed the enforcement of the two awards (partial and final), except the part which directs the payment of SFr. 44,33,416. 

Jindal further appealed challenging the order rejecting its objection to enforcement and NV Engineering filed a cross-appeal for part of a single judge’s order to refuse the enforcement of part of the award, to the Division Bench. The Division Bench set aside the single judge’s order. Thus, an appeal was made to the Supreme Court by the Appellant.

Appellant’s Argument

The appellant argued that the impugned judgment is not supported in law because the foreign award cannot be challenged under sec. 34 of the Act. The counsel relied on the judgment of Bharat Aluminium Company v. Kaise Aluminium Technical Services Inc. (BALCO), in which,  the foreign award being rendered outside India under the aegis of ICC cannot be challenged solely because a clause or condition in the contract states that the law governing the agreement would be Indian law. Further, the caveat in the BALCO case that the foreign awards made before its pronouncement cannot aid Jindal’s argument regarding the maintainability of challenge under Sec. 34 and such challenge under Part I is unarguable. 

The BALCO case explicitly pronounced the principle that the seat of arbitration also stipulated the choice of law governing the arbitration. Also, as per the Shashoua principle, it was contended that the designation of “seat” of the arbitration would carry with it “something akin to an exclusive jurisdiction clause”. The identical conditions in each contract that “under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, Paris and Arbitration proceedings shall be in the English language and shall take place in London”. The Appellant, thus, argued that the intention of the parties was clearly expressed in the contract, that the arbitration was governed by the law of the seat i.e., U.K. law. Therefore, the findings of the impugned judgment were untenable.

Besides this, the appellants argued that in the case of Union of India v Reliance Industries, Harmony Innovation Shipping Ltd v Gupta Goal India Ltd, and Roger Shashoua v Mukesh Sharma, it has been established that pre-Balco awards involving agreements which specify that the juridical seat is in India and which stipulate that the arbitration would be governed by Indian law, would not be ruled by BALCO. But, in case the juridical seat is not in India and arbitration not governed by Indian law, one would be bound by BALCO

As per Sec. 50 of the Act, the Appellant contended that the order holding that the petition under Sec. 34 was not maintainable was not appealable, as in the case of Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. 

Respondent’s Argument 

The respondent contended that the observations in BALCO specify that the arbitration agreement before the decision and disputes under them would be ruled by pre-BALCO rules. In the given case, the agreement was entered, and the award rendered during the prevalence of the Bhatia principle i.e., the provisions of Part I would apply to international commercial arbitration unless the parties expressly or impliedly exclude all or any of the provisions. Thus, the Supreme Court held, in this case, that sec. 34 will apply to foreign awards as well. The decision of BALCO or any subsequent decision will not apply. 

Clause 12.4.1 of the Contract specified that the contract would be governed by Indian law, which indicates that the parties intended the arbitration, to be governed by Indian law as well. Thus, no question of the applicability of the ratio of BALCO. 

Observation of the Court 

The decision in Bhatia International v. Bulk Trading SA and Anr. and Venture Global Engineering v. Satyam Computer Services Ltd. & Anr. ruled that remedies under Part I of the Act will be available for foreign awards as well, despite the clear distinction between domestic awards (Part I) and foreign awards (Part II). Thus, resorted to the BALCO, where the territoriality principle was accepted which has been adopted in UNCITRAL Model Law. It was opined that Part I will have no application to international commercial arbitration held outside India. There will be no overlapping of provisions of Part I and Part II. 

The Shashoua Principle applied here, the court stated that “ICC having chosen London, leaves no doubt that the place of arbitration will attract the law of UK in all matters concerning arbitration.” 

Further, in the decision of the Government of India V. Vedanta Ltd. The seat of arbitration was Kuala Lumpur and the governing law of the contract was English law. It was held the curial law i.e., the law governing challenges to the award was Malaysian. Thus, ruled that substantive challenge to award was correctly adjudicated by Malaysian Court as the seat of arbitration was Kuala Lumpur.

Jindal’s appeal to the Division Bench was not maintainable, however, the appeal of NV Engineering against the order of Single Judge (to the extent it refuses enforcement) was maintainable as per the terms of Sec. 50 of the Act. 

The decision of the Court

The impugned Judgement was set aside by the court and the appeal was allowed in the above terms.  Costs quantified at ₹ 1,50,000/- shall be paid by respondent No. 1.

Click here to read Noy Vallesina Engineering v. Jindal Drugs Ltd.


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