Enforcement of Arbitral Awards transcends all territorial barriers?

Bar & Bench June 6 2019

Payal Chawla & Hina Shaheen

The jurisprudence on enforcement of awards under Section 36 of the Arbitration and Conciliation Act, 1996 (‘the 1996 Act’) has recently undergone a change. Last year, in the matter of Sundaram Finance Ltd. v. Abdul Samad & Anr, a two-judge Bench of the Supreme Court held ‘the enforcement of an award through its execution can be filed anywhere in the country where such decree can be executed’.

This view was fortified by a three-judge Bench in Cheran Properties Ltd. v. Kasturi & Sons LtdPreviously, the law with regard to enforcement of an arbitral award followed the scheme of execution under the Code of Civil Procedure, 1908 (“the CPC”).

Law of Execution under the CPC

The law with regard to the execution of decrees under the CPC requires the decree-holder to first approach the court which passed the decree. Under Section 38 of the CPC, a ‘decree may be executed either by the Court which passed it or by the Court to which it is sent for execution’.

Section 39 of CPC deals with transfer of decrees, which, broadly, requires that on the application of the decree-holder, the court which passed the decree shall send the decree for execution to the court, where the judgment debtor resides or carries on business, works for gain, where the property (which is required for the satisfaction of the decree) is located. Therefore, under the CPC, a transfer is required from the Court that passed the decree to the Court where it is to be executed.

Law of enforcement under the 1996 Act

Unlike under the Arbitration and Conciliation Act, 1940 wherein a decree was required to be passed by civil court to make the award executable, under the 1996 Act, there is no such requirement of a decree to be passed, and the award itself is executed as a decree. Further, the Hon’ble Supreme Court in Sundaram Finance (supra) elucidates the law of enforcement under the 1996 Act and holds that an award under Section 36 of the 1996 Act is equivalent to a decree of the court for the purposes of execution.

There is no deeming fiction under the 1996 Act, whereby a court which has jurisdiction over the arbitral award should be considered the court which passed the decree for purposes of execution under Section 36.  Unlike Section 38 of CPC, in case of an arbitral award, there is no court that passes the decree. Therefore, there is no requirement to seek a transfer of the decree in terms of Section 39 of the CPC to the executing court. 

In view of Sundaram Finance, Sections 38 and 39 of the CPC have no application to arbitrations and an arbitral award can now be directly executed by filing the same in any court that is capable of executing the decree. 

Journey to Sundaram Finance:

The decision of Sundaram Finance was preceded by two distinct views on the subject. The High Courts of Madhya Pradesh and Himachal Pradesh took the view that for the execution of an award under Section 36 of the 1996 Act, a transfer from the Court, which has territorial jurisdiction over arbitral proceedings, is mandatory [Computer Science Corpn. India (P) Ltd. v. Harishchandra Lodwal 2005 SCC OnLine MP 338, Jasvinder Kaur v. Tata Motors Finance Ltd. 2013 SCC OnLine HP 3904].

Per contra, the High Courts of Delhi, Kerala, Madras, Rajasthan, Allahabad, Punjab & Haryana and Karnataka took the view that there is no transfer necessary and the execution can be filed anywhere where the assets are located [(Daelim Industrial Co. Ltd. v. Numaligarh Refinery Ltd. 2009 SCC OnLine Del 511, Maharashtra Apex Corpn. Ltd. v. Balaji G. 2011 SCC OnLine Ker 4039, Kotak Mahindra Bank Ltd. v. Sivakama Sundari 2011 SCC OnLine Mad 1290, Kotak Mahindra Bank Ltd. v. Ram Sharan Gurjar 2011 SCC OnLine Raj 2748, GE Money Financial Services Ltd. v. Mohd. Azaz 2013 SCC OnLine All 13365, IndusInd Bank Ltd. v. Bhullar Transport Co. 2012 SCC OnLine P&H 21674, Chandrashekhar v. Tata Motor Finance Ltd. 2014 SCC OnLine Kar 12146)].

Sundaram Finance evaluates these conflicting views and affirms the latter. 

Relevance of Sections 38 & 39 of the CPC

Interestingly, the Court in Sundaram Finance, upholds the view of both Daelim Industrial (supra) as well as GE Money Financial (Supra).  In GE Money, the Allahabad High Court held that Sections 38 and 39 of the CPC have no application to enforcement of arbitral awards. 

The Court in Daelim Industrial, however, carves out an exception for Section 39(4) which provides that nothing in Section 39 shall be deemed to authorise the Court which passed a decree to execute such decree against any person or property outside the local limits of its jurisdiction.  The Supreme Court’s position on this aspect remains unclear as the Court did not clarify its position qua Section 39(4).

It may not, however, be out of place to mention that s. 39(4) is clarificatory in nature, and its existence dehors the remainder of s. 39 may not be possible, more particularly in light of the Court’s observation that the 1996 Act ‘actually transcends all territorial barriers’. Seen in this light, the ratio of Mohit Bhargava v. Bharat Bhushan Bhargava in regard to Section 39(4), hangs in the balance in so far as its application to arbitral award enforcement is concerned.

S. 42 and Enforcement

Section 42 of the 1996 Act reads:‘

"Jurisdiction.—Notwithstanding anything contained elsewhere in this Part or in any other law for the time being in force, where with respect to an arbitration agreement any application under this Part has been made in a Court, that Court alone shall have jurisdiction over the arbitral proceedings and all subsequent applications arising out of that agreement and the arbitral proceedings shall be made in that Court and in no other Court."

In effect, when any application has been made under Part I, then all subsequent applications arising out of the same arbitration agreement will need to be made to that Court alone. 

In State of West Bengal v. Associated Contractors, a three-judge Bench of the Supreme Court held that all applications made under Part I of the 1996 Act, whether before or during the arbitral proceedings, or after the arbitral award would fall within the mischief of Section 42.

The Supreme Court goes on to clarify that Section 42 will apply even to the applications made after the arbitral proceedings have come to an end provided they are under Part I. Although the Court in Associated Contractors does not deal with Section 36, it implicitly suggests that Section 36 would be covered by Section 42, since an application filed after the termination of arbitration proceedings under Part I is within the scope of Section 42. 

In Sundaram Finance, the Court recognises that the ‘line of reasoning supporting the award to be filed in a so-called court of competent jurisdiction and then to obtain a transfer of the decree is primarily based on the jurisdiction clause found in Section 42’.

The Court further recognises that Section 42 applies to applications filed under Part I and ‘subsequent applications arising from that agreement and the arbitral proceedings are to be made in that court alone’, but in the same breath defeats this afore-going reasoning with the scheme of Section 32, which according to the Court ‘provides for arbitral proceedings to be terminated by the final arbitral award’.

The Court reiterates that Section 42 will apply only to the arbitral proceedings and execution application is not an arbitral proceeding, therefore, is beyond the scope of Section 42. The Court appears to concur with the view taken by the Delhi High Court in Daelim Industrial quoting therefrom -  ‘Section 42 of the 1996 Act would not apply to an execution application, which is not an arbitral proceeding…..’, but does not say so directly. In Sundaram Finance, the Court breaks the shackles of Section 42 on Section 36 in view of Section 32. 

But ….. the Associated Contractors question

Neither the Court in Sundaram Finance nor the Delhi High Court in Daelim Industrial avers to Associated Contractors. The question that then arises is – is Sundaram Finance per incuriam? And if so, does the definition of ‘court’ in Section 2(1)(e) apply to Section 36? The three-judge Bench in Cheran Properties (supra) doesn’t think so.

Section 36 does not refer to any court, but simpliciter states that an award shall be enforced in accordance with the provisions of CPC in the same manner as if it were a decree of the court. Associated Contractors held that the court under Section 2(1)(e) contains an exhaustive definition of court for the purpose of Part I. By sequitur, all applications made under Part I have to be filed as per the jurisdictional mandate of Section 2(1)(e). Interestingly, Sundaram Finance refers to the definition of ‘court’ in Section 2(1)(e) in the context of execution of arbitral awards, but does not elaborate further on the point. 

The decision of Sundaram Finance was followed by Cheran Properties. Cheran Properties cites Associated Contractors, but just leaves it there — the Court neither distinguishes it, nor refers the question to a larger bench. 

Associated Contractors and the Halsbury Test

One possible way to explain the side-stepping of Associated Contractors in Cheran Properties by the Apex Court might be the Halsbury Test, which was enunciated by Lord Halsbury in Quinn v. Leathem, where he observes,

every judgment must be read as applicable to the particular facts proved, or assumed to be proved, since the generality of the expressions which may be found there are not intended to be expositions of the whole law, […] a case is only an authority for what it actually decides’.

The Halsbury principle was relied on by the Constitution Bench in Krishena Kumar v. Union of India and observed that,

"ratio decidendi is the underlying principle, namely, the general reasons or the general grounds upon which the decision is based on the test or abstract from the specific peculiarities of the  particular case which gives rise to the decision."

Applying that principle, it is possible that the Court in Cheran Properties was of the view that since the issue in question in Associated Contractors was s. 34 and not s. 36; it cannot be a universal proposition for the latter, although the Court does not say so.

Conclusion

With the decisions of Sundaram Finance and Cheran Properties, there is a new scheme for enforcement of arbitral awards — arguably, a more efficacious one. But equally, there is a three-judge Bench of Associated Contractors that stares at the two-judge Bench decision in Sundaram Finance and the three-judge Bench decision in Cheran Properties. Whether the Courts intended the Halsbury principle to apply, we cannot say with certainty, but can only hope. 

 

About the authors: Payal Chawla is the founder of JusContractus, a Delhi-based full-service law firm, with a primary focus on arbitrations. Hina Shaheen is an advocate at JusContractus. For feedback, contact payalchawla@juscontractus.com. 

Disclaimer: This article is for informational purposes only and is not intended to provide, and should not be relied on, for legal advice. Readers are advised to seek independent legal advice in accordance with their peculiar facts and circumstances.

 

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