Harshvardhan Tripathi [1]
Introduction
The readers of arbitration law would be well aware that consent is considered the “cornerstone” of international arbitration. However, arbitrators are often presented with cases involving individuals and entities that did not intend to be bound by the arbitration agreement. This is sometimes referred to as “extending the arbitration clause”, “joining non-signatories” or simply as “joinder” of the non-signatories. When faced with such cases, the arbitral tribunals rely upon theories developed by courts and tribunals across jurisdictions that justify binding non-signatories in certain circumstances, such as when the fact of the case demonstrates that the non-signatory intended to be a party to the arbitration agreement. These theories have emanated from the contract law jurisprudence of countries of both civil law and common law tradition. While the theoretical bases of involving non-signatories has received a varying degree of support across jurisdictions, their application remains fact-specific and their frontier continues to expand as more and more novel fact situations are encountered.
In his commentary on International Commercial Arbitration (3rd edn, Wolters Kluwer 2020), Professor Gary Born has neatly categorized the more prevalent theories into purely consensual and non-consensual theories. The purely consensual theories include the theory of agency, implied consent, assumption, assignment and a third-party beneficiary. On the other hand, the non-consensual theories include the theory of estoppel and alter ego.
Without delving into the particulars of each theory, it should be noted at this point that the underlying purpose of these theories is to achieve the pragmatic end of bringing together all such parties that are closely connected, and therefore, relevant to the dispute before the Arbitral Tribunal. The Tribunal is better positioned to dispense a just award when the relevant entities and individuals are involved in the arbitration proceeding. Besides the legal aim of attaining just outcomes, joinder of relevant entities or individuals also enhances commercial efficiency by saving time, limiting costs, preventing parallel litigations in various forums and subsequent conflicting decisions by different forums etc.
Enforcement of foreign arbitral award against Non-signatories
If a third party either wishes to join the arbitration proceedings or avoid being joined to the arbitration proceedings, it can approach the Courts of the seat of arbitration. These Courts would apply the lex arbitri and determine if there is any legal and factual basis for allowing or refusing such a joinder[2].
However, the situation is different in those cases where an arbitral award has been issued against the non-signatory and it has not challenged the award in the courts of primary jurisdiction. Now, the non-signatory is resisting the enforcement of the foreign award before the enforcing court because it did not consent to be bound by the arbitration agreement. The enforcing court is then faced with several puzzling questions, such as whether it should defer to the arbitral tribunal's decision with respect to whether the non-signatory was or became, in fact, or by operation of law, a party to the arbitration agreement. Or should the court conduct an independent review to satisfy itself that the non-signatory legitimately became a party to the arbitration agreement? Does the burden of proof rest with the non-signatory to demonstrate to the enforcing court that it was not a party to the arbitration agreement? Or should the enforcing party affirmatively prove before the enforcing court that the non-signatory was, or should be treated as, a party to the arbitration agreement?
These questions inter alia other intriguing issues were discussed by the Supreme Court of India in the 2021 decision of Gemini Bay Transcription Pvt. Ltd. v. Integrated Sales Service Ltd. &Anr. (‘Gemini Bay’)
By examining the decision in Gemini Bay in light of the legislative framework of the Arbitration and Conciliation Act, 1996 (‘Indian Arbitration Act’) and legal position in England, Australia, and Singapore, the author intends to take a deeper look into the vexatious position surrounding enforcement of foreign awards against non-signatories in India in this article. So far, the commentary on Gemini Bay has lauded it as another instance of the ‘pro-enforcement’ stance of the Indian Courts because it facilitated speedy enforcement of foreign arbitral awards in India and minimized intervention of the domestic courts in this regard. However, the author in this article wishes to highlight that Gemini Bay has exposed a glaring loophole in the Indian Arbitration Act. The provisions concerning enforcement of a foreign award in Part II of the Act leave the non-signatories in a precarious condition by not allowing them an opportunity to resist enforcement in Indian Courts. While parties to the arbitration agreement are provided with an opportunity to resist enforcement, it is unfair that the individuals and entities that did not even intend to be bound by the arbitration agreement are not accorded the opportunity to do the same. Furthermore, it is highlighted how Gemini Bay diverges from the consistent interpretation of the New York Convention (‘NYC’) globally and makes India a convenient forum for claimants to easily target non-signatories because of the mechanistic approach of the Indian Courts in enforcing foreign awards against non-signatories.
Gemini Bay: An introduction
A Hong Kong-based company named ‘Integrated Sales Services Limited’ (‘ISS’) signed a Representation Agreement (‘RA’) on 18th September 2012 with an Indian company based in Nagpur named ‘DMC Management Consultants Limited’ (‘DMC’). This agreement was signed by Mr. Rattan Pathak on behalf of DMC. Later during a subsequent amendment, one Mr. Arun Dev Upadhyaya, signed the agreement on behalf of DMC.
As per the RA, ISS was obligated to assist DMC in its efforts to sell its goods and services to prospective customers. Furthermore, ISS was also obligated to identify potential investors and assist DMC in negotiating contracts. Under the RA, ISS was to receive a commission for its services.
The RA stipulated that the agreement was subject to the laws of Delaware, USA and that every dispute arising in connection with the agreement was to be resolved by referring the dispute to a Sole Arbitrator in Kansas City, Missouri, USA.
Disputes arose between the parties and ISS alleged that as per the terms of the RA, it had introduced two customers- MedQuist Transcription Ltd. based in New Jersey USA, and AssistMed Inc. based in California USA, to DMC. But Mr. Upadhyaya had diverted the business of these two customers away from DMC and directed it to other companies owned by him and his family members- Gemini Bay Consulting Ltd. (“GBC”) and Gemini Bay Transcription Private Ltd. (“GBT”). This act of diversion by Mr. Upadhyaya deprived ISS of the commission it was owed as per the terms of the RA.
ISS initiated Arbitration proceedings on 22nd June 2009 against DMC and DMC Global and impleaded Mr. Upadhyaya, GBC and GBT as respondents. ISS contended that Mr. Upadhyaya was a proper party to the arbitration and his joinder was justified because Mr. Upadhyaya personally controlled the overall operations of DMC and other respondent companies. GBC and GBT were companies owned by the relatives of Mr. Upadhyaya and the Board of directors of these companies acted as per the instructions of Mr. Upadhyaya.
Procedural History
The Foreign Arbitral Award
At the conclusion of the Arbitration proceedings, an award was passed in favour of ISS to the quantum of USD 690 million, which was to be paid jointly by DMC, DMC Global, Mr.Upadhayay, GBC and GBT. The primary justification behind including Mr.Upadhayay, GBC and GBT as appropriate parties in the arbitration proceeding and putting an obligation on them to pay ISS the abovementioned sum of the award was the application of the ‘alter ego’ doctrine.
Motion for enforcement in the Indian Courts
1. Judgment of the Single Judge of the Bombay HC
ISS moved an application under Section 48 of the Indian Arbitration Act in the Bombay High Court for the enforcement of the foreign award. The Single Judge ruled that in the present case, the foreign award is enforceable only against DMC and not other respondents because they were non-signatories to the arbitration agreement and therefore not bound by the enforcement award.
2. First Appeal: Judgement of the Division Bench of the Bombay HC
ISS appealed the ruling of the Single Judge. When the matter came before the Division bench, it reversed the judgment and held that the enforcement of the foreign award could only be resisted under Section 48 if the Arbitrator had not applied the Delaware Law on the alter ego principle correctly. After examining the veracity of the application of Delaware Law, the Division bench was convinced that it was applied correctly and therefore the award was enforceable not only against DMC but also other Gemini entities.
3. Second Appeal: Judgement of the division bench of the Supreme Court
Now, GBT, GBC and Mr. Upadhyaya moved to the Supreme Court by a special leave petition (SLP) and appealed against the decision of the Division bench of the Bombay High Court.
An overview of the Supreme Court’s verdict:
The Supreme Court heard the contentions of both sides and observed the following with respect to the provisions of the Arbitration Act:
1. Section 47(1) (c): (Paragraph 37) This provision is strictly procedural in nature and the award creditor needs to satisfy only the three pre-requisites for the enforcement of the foreign award. The award creditor does not have to adduce evidence to prove that the foreign award binds the non-signatory at the stage of enforcement before the Indian Courts.
2. Section 48(1) (a): (Paragraph 42 and 57) Non-signatory’s challenge to the enforcement of foreign awards does not fall within the ambit of this provision. If such a challenge were to be allowed to be raised, it would require revisiting the merits of the case which is not permitted in light of the pro-enforcement bias of the New York Convention and the Indian Arbitration Act.
3. Section 48(1) (b): (Paragraph 58 and 63) This provision concerns instances that occur before the making of the award and does not include the ground of absence of reasons or perfunctory reasons given in the foreign award.
4. Section 48(1) (c): (Paragraph 60) This provision is strictly concerned with situations where the foreign award has determined issues beyond the scope of the arbitration agreement and does not apply to the present case.
5. In light of the phrasing in Section 44 which mentions ‘differences arising out of legal relationships, whether contractual or not’ even tort claims can be determined by the arbitrator. (Paragraph 66 and 67)
6. Appellants cannot raise the ground of the foreign award being violative of the substantial law of the agreement before the enforcing court. Only the Courts at the seat of the arbitration have the jurisdiction to determine such questions. (Paragraph 71)
7. Section 48(1) cannot be invoked in instances where damages have been awarded without forwarding any reason. It is possible to invoke Section 48(2) but the scope of such invocation would be very narrow and will only apply to cases of gross injustice that shocks the conscience of the court. (Paragraph 74)
Refusing the objection of non-signatories with respect to enforcement of the foreign award against them: In line with the global trend or a divergent approach?
In the present case, the appellant sought to convince the Court that the judicial trend with respect to enforcement of foreign awards against non-signatories globally has been that the enforcing court conducts an independent review of the findings of the arbitral tribunal. The enforcing court confirms the conclusion of the tribunal that the non-signatory is indeed a party to the arbitration agreement before allowing for enforcement of a foreign award against it. The decision by the Supreme Court of the UK in Dallah Real Estate and Tourism Co v Ministry of Religious Affairs of the Government of Pakistan and the decision of the Supreme Court of Victoria in IMC Aviation Solutions Pty Ltd. v AltainKhuder LLC was cited to support the approach of scrutiny.
Although this approach did not find favour with the Indian Supreme Court because it distinguished these case laws from Gemini Bay based upon the facts and the law, it is pertinent to note that the overwhelming majority of case laws in different civil and common law jurisdictions support the ‘Dallah principle’. Besides Dallah and IMC Aviation, a Norwegian case by the Halogaland Court of Appeal [3] (“the Halogaland case”), the decision of the Irish Supreme Court in Peter Cremer Gmbh& Co. v Co-operative Molasses Traders Ltd, decision of the British Columbia Supreme Court in Javor v Francoeur, decision of the Second Circuit Court of Appeals in Sarhank Group v Oracle Corporation, and decision of the English Court of Appeal in Svenska Petroleum Exploration AB v Government of the Republic of Lithuania lend credence to the position that instead of echoing the Arbitrator’s finding on the issue, the enforcing court should conduct an independent inquiry on whether the non-signatory intended to be bound by the arbitration agreement.
Similar to the Indian Supreme Court’s opinion, it can be argued that these case laws are not of persuasive value before Indian courts because of the difference between the Indian Arbitration Act with the Arbitration Acts in other jurisdictions. The Indian Supreme Court correctly distinguished the difference in the provisions surrounding enforcement of foreign awards in the Indian Arbitration act from the statutes in England and Australia. However, it interpreted the provisions in the Indian Arbitration Act sui generis and did not consider the fact that the national arbitration legislations are not strictly national in their essence and rather give effect to the principles and provisions of the New York Convention. Moreover, it is not uncommon for the Indian Courts to look at other advanced arbitration-friendly jurisdictions and their burgeoning case laws for direction and place reliance upon them whenever necessary. For instance, in the 2014 landmark ruling of the Supreme Court of India in Enercon (India) Ltd and Ors v Enercon Gmbh and Anr the Court heavily relied on the ratio of Naviera Amazonica Peruana S.A. v Compania Internacional De Seguros Del Peru, a landmark ruling of the English Court of Appeal, to incorporate the principle of ‘close and intimate connection test’ in determining the seat of arbitration. Therefore, even in Gemini Bay the Indian Supreme Court should not have shied away from looking at the international practice and should have strived towards adopting a uniform interpretation of the law.
Although the Indian Supreme Court was interpreting provisions of Part II of the Indian Arbitration Act, in effect they were engaged in an interpretive exercise of Article III (Binding nature of NYC award), Article IV (Conditions for application of enforcement of an NYC award) and Article V (Conditions for resisting enforcement of an NYC award) of the NYC. While interpreting an international instrument like the New York Convention, Articles 31 and 32 of the Vienna Convention on the Law of Treaties come into play. These articles require that a plain meaning should be accorded to the words of the treaty and the prevailing international practice must also be kept in mind. As evident from the array of the case laws derived from varying jurisdictions of both civil and common law tradition, the consistent global interpretation of NYC demands strict scrutiny of the foreign awards made against a non-signatory by the enforcing court. The Indian Supreme Court adopted an incorrect approach by failing to take into account this global practice and consistent interpretation of the NYC and interpreting the provisions of the Indian Arbitration Act in isolation.
Excessive hardship for the non-signatories in resisting enforcement of foreign awards in India
It is submitted that the decision in Gemini Bay serves a valuable purpose of highlighting the disadvantageous position that the Arbitration and Conciliation Act 1996 places the non-signatories during the stage of enforcement. The disadvantage is primarily in terms of:
1. While an award can be made against a non-signatory, grounds of resisting its enforcement in India under Section 48 are only available to the parties.
According to the interpretation forwarded by the Supreme Court in Gemini Bay, a foreign award defined under Section 44 can be passed on the difference between “persons” which being a broader term includes not just the parties but also the non-signatories. Furthermore, the award is binding not just on the parties alone but on “persons” as per Section 46.
Glaringly, however, while the Act recognizes the possibility of a foreign award being passed against a non-signatory, only a “party” can invoke the grounds under Section 48 to resist the enforcement of the award. Allowing an award debtor who is a party to take recourse to Section 48 and resist enforcement of the foreign award against him but disallowing the same opportunity to a non-signatory who also happens to be an award debtor is unreasonable and causes unnecessary prejudice to non-signatories. In Gemini Bay , the Supreme Court denied the arguments made by GBT, GBC and Mr. Upadhyaya inter alia on the ground that they were not parties and hence could not rely on Section 48. This raises an important question- what are the recourses the non-signatories have to resist enforcement of a foreign award against them in India if they have earlier been unsuccessful before the curial court?
Unfortunately, after the Supreme Court’s interpretation of Section 48 in Gemini Bay, the non-signatories seem to have no recourse left to resist enforcement. This puts them in a severely disadvantaged position vis-a-vis parties to the arbitration agreement. In this regard, later in this article, it is submitted that there is an urgent need for amendment in the Indian Arbitration Act to account for the plight of the non-signatories.
2. Excess cost and burden on the non-signatories in moving the curial court
The proponents of the approach adopted in Gemini Bay would argue that even though the non-signatory cannot rely on Section 48 to resist enforcement of the foreign award against it in India, the option to approach the curial court (i.e., the courts at the seat of the arbitration) is always available to the non-signatory from the time the award is passed. They can further argue that if the non-signatory does not agree to being made part of the arbitration proceedings, then the non-signatory should obtain an anti-suit injunction from the court of primary jurisdiction. The obvious conclusion to this line of argument is that if the non-signatory fails to get such relief from the court of primary jurisdiction, then the non-signatory must face the consequence of the enforcement of the foreign award against him in the secondary jurisdiction. Placing such a burden on a party who has not consented to participate in the arbitration proceedings is harsh, unnecessarily expensive and unjustified. A non-signatory who finds herself roped into an arbitration proceeding would be required to seek expensive legal representation to get it annulled before a foreign court. Further challenges can arise if the limitation period to appeal against the foreign award at the seat of arbitration has expired. By closing the opportunity of resisting enforcement at the court of secondary jurisdiction, the non-signatory is put in a tight spot and is virtually deprived of any substantial legal recourse.
How can the non-signatories strategize in the light of Gemini Bay?
The question which then arises is that similar to Gemini Bay,if a non-signatory finds herself under the scope of jurisdiction of an arbitral tribunal to which it did not consent to, what should be the best course of action?
The first course of action would be a combination of moving the Courts at the seat of arbitration for setting aside the award and moving the courts in the enforcing states for resisting enforcement. The benefit of this approach is that it ensures that recourses to all legal forums are exhausted. However, this would require the client to seek legal advice in the jurisdiction of the seat of arbitration and other jurisdictions where the enforcement is likely to be sought which would substantially add to the expenditure of the client.
The second course of action is to abstain from participating in the arbitration proceeding and challenge it before the enforcing court after the final award is passed. This approach has the advantage of making it clear that the party does not accede to the jurisdiction of the arbitral tribunal. However, the risk associated with this course of action is that the non-signatory might lose the valuable opportunity of resisting the joinder before the arbitral tribunal on merits. Participation in arbitration proceedings is advisable because it allows the non-signatories to adduce evidence and rebut allegations such as the application of the ‘alter ego’ doctrine in Gemini Bay.
However, if the client is determined to not participate in the arbitral proceedings, it would be advisable to approach the Curial courts and seek either a declaration or an injunction against the arbitral tribunal's jurisdiction on the non-signatories.
The third course of action for the non-signatory would be to challenge the finding of the arbitral tribunal that the non-signatory is a proper party to the arbitration proceeding through an appeal to the curial court. This strategy ensures that the non-signatory decisively battles it out in the curial courts and does not have to engage in a long drawn round of litigation in other jurisdictions where enforcement is sought. This strategy is further useful if the client is worried that the enforcing court in jurisdictions such as India might adopt a mechanistic approach in enforcing the foreign award and echo the findings of the arbitral tribunal without scrutinizing them. If it is likely that the award creditor will seek enforcement in a jurisdiction where the enforcing courts do not strictly scrutinize foreign awards against non-signatories, or in such jurisdictions where the rules and the laws surrounding enforcement of a foreign award against non-signatories is less developed, the client would be well advised to seek a definitive determination from the courts at the seat of the arbitration itself rather than taking the risk of resisting enforcement of the award in the courts of secondary jurisdictions.
Conclusion
The decision in Gemini Bay has highlighted the kafkaesque results that can emerge as a result of non-uniform drafting of provisions in Part II of the Arbitration and Conciliation Act 1996. While the foreign award under Section 44 can be made between ‘persons’ and it is ‘binding on all persons as between whom it is made’ under Section 45, the opportunity to resist enforcement of a foreign award under Section 48 is available only to the ‘parties’. There seems to be no intelligible rationale behind bringing non-signatories within the binding scope of a foreign award but not allowing them the opportunity to resist its enforcement. This calls for the creation of an adequate statutory framework to prevent undue prejudice to the interests of the non-signatories.
It is submitted that ‘parties’ in Section 48 should be replaced with ‘persons’. This would be crucial in updating the Indian Arbitration Act’s focus from the traditional notion of involvement of ex facie parties towards the modern reality of increasing involvement of ‘non-obvious parties’ such as non-signatories and other third parties in international commerce and associated arbitration proceedings.
However, this in itself will not be sufficient in providing adequate opportunity to the non-signatories to resist enforcement. The Courts will then have to interpret ‘the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made” in Section 48(1)(a) in line with the global interpretation of the New York Convention to hold that it includes within its ambit the case where a non-signatory claims that the arbitration agreement is not binding on her because she was never a party to the arbitration agreement. Such interpretation would align the Indian position with the consistent global practice and at par with the interpretation forwarded in advanced arbitration jurisdictions such as England, Australia and Singapore.
In conclusion, although Gemini Bay interprets the law correctly, it does not lead the Indian jurisprudence on the issue in the right direction. It is understandable that because in this case, the foreign award had been passed in 2010 but its enforcement was mired in rounds of litigation before the Indian Courts, the Indian Supreme Court placed emphasis on speedy enforcement. While the Indian Supreme Court strived to demonstrate a ‘pro-enforcement approach’, unfortunately, it cannot be achieved by adopting a mechanistic approach of giving approval to all foreign arbitral awards by reading Section 48 of the Indian Arbitration Act in isolation. Therefore, it is emphatically suggested that the Indian Courts in subsequent cases, should reassess the conceptual tussle between swift enforcement and upholding consent of the parties to be bound by arbitration proceedings and awards.
[1] Harshvardhan Tripathi, Junior Editor ‘The Arbitration Workshop’, Class of 2022 NALSAR University of Law, Hyderabad. [2] For instance, see Arab Republic of Egypt v. Southern Pacific Properties Ltd. & Southern Pacific Properties (Middle East) Ltd. [3] Yearbook Comercial Arbitration XXVII (2002) p 519.