The Supreme Court of India, in the case of DLF Ltd and Ors v. Koncar Generators and Motors Ltd, provided a significant ruling on the determination of the applicable foreign exchange rate for converting foreign arbitral awards denominated in foreign currency into Indian rupees.
The Court reinforced the principle laid down in Forasol v. Oil and Natural Gas Commission, asserting that the relevant date for determining the conversion rate of a foreign award expressed in foreign currency is the date when the award becomes enforceable. The judgment further clarified that under the Arbitration and Conciliation Act, 1996, the enforceability date is established when objections against the award are definitively dismissed, rendering the award final.
This case involved a contract dispute between Indian companies (DLF and others) and a Croatian company (Koncar Generators and Motors). The heart of the dispute was a contract for the design, engineering, manufacturing and supply of two generators by Koncar.
After disagreements arose, the parties sought resolution through arbitration held by the International Chamber of Commerce (ICC) in Paris. The arbitral tribunal passed an award in 2004 in favour of Koncar, granting it 10,93,989 Euro plus interest. The award included a detailed breakdown of the principal amount and interest, including provisions for storage and maintenance costs, legal fees and arbitration expenses. Seeking to enforce this award in India, Koncar filed for execution in 2004. DLF contested this enforcement through legal challenges, utilising provisions under Sections 34 and 48 of the Indian Arbitration and Conciliation Act, 1996.
The legal proceedings that followed involved several key events:
During these proceedings, DLF agreed to deposit a sum of ₹7.5 crore with the executing court, and Koncar agreed to accept the release of this deposit only upon the provision of a bank guarantee from a scheduled Indian bank.
In connection with a revision petition against the dismissal of its Section 48 objections, DLF deposited an additional ₹50 lakh, bringing the total deposit to ₹8 crore. This deposit was made pursuant to a High Court order that stipulated the funds would be disbursed to the successful party upon completion of the legal process.
On July 1, 2014, the High Court’s dismissal of DLF's revision petition finalised the award in India. Later, in 2016, Koncar received the entire ₹8 crore deposit along with accrued interest.
However, a point of contention remained: the exchange rate to be used for converting the Euro-denominated award into Indian rupees. Finally, the execution petition filed by the Koncar was allowed by the trial court in 2017. It was held that the relevant date for conversion of the award amount was July 1, 2014 - the date when all objections against the award were finally decided.
Aggrieved with the ruling, DLF filed a revision petition. However, the High Court rejected this petition on February 26, 2018, upholding the trial court's determination of the foreign exchange rate. This rejection led DLF to appeal before the Supreme Court.
DLF's central argument was that using the exchange rate from July 1, 2014 for the entire award, including the deposited ₹8 crores, was unfair. It contended that the portions of the award covered by its deposits should be converted using the exchange rates prevalent on the dates of those deposits.
The case presented two crucial questions for the Supreme Court's determination:
Determining the proper date for exchange rate conversion:
This issue arose from the need to establish a clear and consistent rule for fixing the exchange rate when converting a foreign arbitral award expressed in foreign currency into Indian rupees. The challenge stemmed from the inherent volatility of exchange rates and the potential for significant discrepancies depending on the chosen conversion date. The Court recognised the need to balance the interests of both the award holder and the award debtor, taking into account the time elapsed between the date of the award and its final enforceability.
Exchange rate conversion for amounts deposited during proceedings: This issue involved the specific scenario where the award debtor makes a deposit with the court while objections to the award are still pending. The question was whether the exchange rate should be applied as of the deposit date or a later date. This consideration became particularly relevant in cases where there were substantial delays in resolving objections, leading to potential disparities in the converted amount due to exchange rate fluctuations.
The Supreme Court's analysis relied on the interpretation and application of several key legal provisions:
Arbitration and Conciliation Act, 1996: Sections 46, 48, 49 and 50 of the Arbitration Act 1996, govern the enforceability of foreign arbitral awards in India. Section 46 establishes the binding nature of enforceable foreign awards. Section 48 outlines the grounds on which a court may refuse enforcement. Section 49 declares that a foreign award, once deemed enforceable, shall be considered a decree of the court. Section 50 provides for appeal against orders which refuse to – (a) refer parties to arbitration u/s 45 and (b) enforce a foreign award u/s 48.
Code of Civil Procedure, 1908: Order 21, Rule 1 and Order 24 of the CPC address the calculation of interest on amounts deposited in court by the defendant/judgment-debtor. Order 24 of the CPC governs deposits at the pre-decretal stage and Order 21, Rule 1 at the post-decretal stage.
Statutory interpretation
The Supreme Court emphasised that unlike the Arbitration Act, 1940, the 1996 Act does not require a separate court decree for a foreign arbitral award to become enforceable. Instead, under Section 49 of the Arbitration Act 1996, a foreign award is automatically deemed a court decree upon the final determination of any objections raised against it, thereby attaining finality. This interpretation underscores the significance of the objection resolution process in determining the enforceability date.
Applicability of Forasol
The Court addressed the High Court's view that the principle established in Forasol v. ONGC was not applicable to cases under the 1996 Act. The Supreme Court firmly rejected this view, affirming the continued relevance of Forasol's core principle: the exchange rate should be fixed based on the date the award becomes enforceable. The Court recognised that while the procedural mechanisms for achieving enforceability may differ between the 1940 Act and the 1996 Act, the underlying principle of using the enforceability date for exchange rate conversion remains valid and applicable.
Treatment of deposited amounts:
The Court provided detailed guidance on handling deposited amounts, drawing parallels with its decision in Renusagar Power Co Ltd v. General Electric Co. It held that when the award debtor deposits an amount with the court, and the award holder is allowed to withdraw it, even if such withdrawal is conditional, the deposited amount must be converted using the exchange rate prevailing on the deposit date. This approach acknowledges that the award holder gains access to and potential benefit from the deposited sum upon deposit, even if subject to certain conditions.
Rationale for deposit conversion date
The Court's decision to use the deposit date for conversion in cases where the award holder can access the funds aligns with the principles embodied in Order 21, Rule 1 and Order 24 of the CPC. These provisions aim to prevent the award debtor from being unjustly penalised by having to pay interest on amounts already deposited. By using the deposit date for conversion, the Court recognised the award holder's ability to utilise the deposited amount and potentially benefit from exchange rate fluctuations.
Analogy to interest rules
The Supreme Court further strengthened its rationale by drawing an analogy between the treatment of deposited amounts in the context of exchange rate conversion and the rules governing interest calculation on such deposits. Just as interest ceases to accrue on a deposited sum once the decree-holder can access it, the exchange rate should be fixed at the point where the deposited amount becomes available to the award holder. This analogy highlights the importance of fairness and preventing unjust enrichment by considering the actual benefits derived by the parties from deposited funds.
Distinguishing deposits based on withdrawal
The Court recognised the need to differentiate between deposits that allow for immediate withdrawal by the award holder and deposits where withdrawal is contingent on the final outcome of the objections. In the case of the former, as with the initial deposit of ₹7.5 crore, the Court held that the deposit date should be used for conversion. This is because the award holder could immediately access and benefit from the funds. However, for deposits like the subsequent ₹50 lakh, where withdrawal was conditional on the final resolution of objections, the Court determined that the exchange rate should be applied as of the date the objections were definitively settled. This distinction ensures a more equitable outcome by considering the actual availability and potential utilisation of the deposited funds.
The Supreme Court's judgment offers valuable clarity and guidance for parties involved in the enforcement of foreign arbitral awards in India. The judgment's key takeaways are:
Enforceability date as the guiding principle: The judgment unequivocally establishes the date of enforceability, marked by the final disposal of any objections, as the decisive factor for determining the applicable exchange rate.
Deposit date conversion for accessible funds: Deposits made by the award debtor that the award holder can withdraw, even if subject to conditions, must be converted using the exchange rate prevailing on the deposit date.
Equitable treatment and preventing unjust enrichment: The judgment underscores the importance of ensuring fairness and preventing unjust enrichment by considering the actual benefit derived by the parties from deposited sums, including potential exchange rate fluctuations.
This judgment contributes significantly to the consistency and predictability of legal proceedings involving the enforcement of foreign arbitral awards in India. By emphasising the enforceability date as the primary determinant for exchange rate conversion, the judgment establishes a clear and uniform rule, mitigating uncertainty and potential disputes. The Court's nuanced approach to handling deposits, distinguishing between those immediately accessible and those subject to conditions, further ensures a fairer and more equitable outcome for all parties involved.
Juhi Bansal is an Associate at Mahendra Bhavsar & Co., a law firm based in Gujarat.