It has to be said before stating anything else that in a major development, the Delhi High Court has just recently on 18 June, 2021 in a latest, landmark, laudable and learned judgment titled KLA Const Technologies Pvt Ltd vs The Embassy of Islamic Republic of Afghanistan in OMP(ENF)(COMM)82/2019 & OMP (EFA)(COMM)11/2016 held that a Foreign State cannot claim sovereign immunity under Section 86 of Code of Civil Procedure against enforcement of an Arbitral Award arising out of a commercial transaction.

This development came while the Bench was dealing with two petitions seeking enforcement of arbitral awards against Foreign States i.e. Embassy of Islamic Republic of Afghanistan and Ministry of Education, Federal Democratic Republic of Ethiopia respectively. It must be noted here that a Single Judge Bench of Justice JR Midha of Delhi High Court observed thus:
In a contract arising out of a commercial transaction, such as the transactions which are subject matter of the present petitions, a Foreign State cannot seek Sovereign Immunity for the purpose of stalling execution of an arbitral award rendered against it. Once a Foreign State opts to wear the hat of a commercial entity, it would be bound by the rules of the commercial legal ecosystem and cannot be permitted to seek any immunity, which is otherwise available to it only when it is acting in its sovereign capacity.

To start with, the Single Judge Bench of Justice JR Midha of Delhi High Court who authored this notable judgment after stating in para 1 of this notable judgment that the petitioners are seeking enforcement of arbitral awards against Foreign States then goes on put forth in para 2 that:
The petitioner in OMP (ENF) (COMM) 82/2019 is seeking enforcement of an arbitral award dated 26th November, 2018 against the Embassy of Islamic Republic of Afghanistan whereas the petitioner in OMP (EFA) (COMM) 11/2016 is seeking enforcement of an /arbitral award dated 25th October, 2015 against Ministry of Education, Federal Democratic Republic of Ethiopia.

The two important questions of law have arisen for consideration before this Court in these petitions:

1. Whether the prior consent of Central Government is necessary under Section 86(3) of the Code of Civil Procedure to enforce an arbitral award against a Foreign State?
2. Whether a Foreign State can claim Sovereign Immunity against enforcement of arbitral award arising out of a commercial transaction?

Brief facts of OMP (ENF) (COMM) 82/2019
To say the least, the Bench then states in para 3 that:
On 11th February, 2008, the respondent awarded a contract to the petitioner for rehabilitation of Afghanistan Embassy at New Delhi for consideration of Rs.3,02,17,066.83.

While mentioning about the origin of the disputes, the Bench then specifies in para 4 that:
Disputes arose between the parties during the course of execution of work whereupon the petitioner invoked the arbitration clause contained in the contract between parties on 10th February, 2012.

Simply put, the Bench then mentions in para 5 that:
The petitioner filed a petition under Section 11 of the Arbitration and Conciliation Act before the Supreme Court in which the Supreme Court appointed a sole Arbitrator on 05th January, 2015 to adjudicate the disputes between the parties.

While elaborating further, the Bench then specifies in para 6 that:
The respondent participated in the arbitration proceedings till 24th July, 2017. However, there was no appearance on 13th November, 2017 whereupon the learned arbitrator proceeded ex-parte against the respondent. The learned Arbitrator passed an ex-parte award on 26th November, 2018 in which the learned Arbitrator partially allowed the claims of the petitioner.

As it turned out, the Bench then narrates in para 7 that:
The respondent has not challenged the arbitral award which has attained finality. The respondent has not made any payment to the petitioner in terms of the arbitral award.

To put things in perspective, the Bench then points out in para 8 that:
The petitioner is seeking enforcement of the arbitral award dated 26th November, 2018. Notice of this petition was issued to the respondent on 13th May, 2019 in pursuance to which the respondent entered appearance through counsel on 02nd September, 2019 and sought time to take instructions but stopped appearing thereafter.

Put simply, it is then disclosed in para 9 that:
Vide order dated 19th November, 2019, this Court directed the Union of India to confirm whether the prior consent of the Central Government is necessary under Section 86(3) of the Code of Civil Procedure to enforce this arbitral award.

Brief facts of OMP (EFA) (COMM) 11/2016

To be sure, the Bench then reveals in para 10 that:
On 25th June, 2012, the petitioner entered into a contract with the respondent for supply and distribution of books to the Respondent at various places in Ethiopia. The total value of the contract was fixed at USD 25,52,754.60.

While narrating the sequence of events of this contract, the Bench then lays bare in para 11 that:
The petitioner claims to have shipped the goods to the respondent from 31st December, 2012 and completed the last shipment on 24th December, 2013. The petitioner shipped the complete order in 86 shipments and the books were distributed in Ethiopia by the petitioner‟s agent at the designated sites as facilitated by the Government of Ethiopia. The petitioner raised 86 invoices totaling USD 25,56,442.37 against which the respondent paid USD 20,22,981. The respondent cancelled the contract by letter dated 24th April, 2014.

As a corollary, the Bench then brings out in para 12 that:
The petitioner initiated the arbitration proceedings to recover the balance amount against the respondent and a sole arbitrator was appointed under UNCITRAL Arbitration Rules on 04th December, 2014.

Of course, the Bench then mentions in para 13 that:
The respondent chose not to participate in the arbitration proceedings and was proceeded ex-parte on 25th May, 2015. The learned Arbitrator passed an ex-parte award on 25th October, 2015.

As anticipated, the Bench then observes in para 14 that:
The respondent has not challenged the arbitral award dated 25th October, 2015 thus, it has attained finality.

Furthermore, the Bench then states in para 15 that:
The petitioner is seeking enforcement of the arbitral award dated 25th October, 2015. Notice of this petition was issued to the respondent on 24th October, 2016 but the respondent did not appear despite service.

Moving on, the Bench then reveals in para 16 that:
On 10th May, 2019, the petitioner received an email from the respondent asking for copy of the arbitral award whereupon the petitioner visited the Embassy of Ethiopia at New Delhi on 15th May, 2019. The petitioner furnished the copy of the arbitral award to the respondent on 18th May, 2019 which was acknowledged by the respondent on 30th May, 2019.

What's more, the Bench then also mentions in para 17 that:
Vide order dated 19th November, 2019, this Court directed the Union of India to examine whether the prior consent of the Central Government is necessary under Section 86(3) of the Code of Civil Procedure to enforce the arbitral award.

Be it noted, the Bench then also brings out in para 18 that:
On 15th March, 2021 the Central Government placed on record e-mail dated 22nd May, 2019 from the Under Secretary (E&SA), East & Southern Africa Division, Ministry of External Affairs according to which, prior consent of the Central Government is not necessary for enforcement of an arbitral award under Section 86(3) of the Code of Civil Procedure. Relevant portion of the e-mail of the Ministry of External Affairs is reproduced hereunder:

This has reference to your mail requesting consent to Matrix Global Pvt Ltd. Under Section 86 (3), Code of Civil Procedure, 1908 for execution of the arbitral award/decree against the Ethiopian Government.

In this regard, I have been directed to convey the views of the Legal and Treaties Division of this Ministry that the execution proceedings in respect of an arbitral award cannot be regarded as a suit for the purpose of Section 86 of the CPC. Thus, we understand that, for execution of an arbitral award, MEA's concurrence under Section 86 (3) CPC may not be required.

It is worth noting that the Bench then states in para 27 that:
India is a signatory to the United Nations Convention on Jurisdictional Immunities of States and their Property, 2004 (hereinafter referred to as the Convention). Article 10 of the Convention prohibits a Foreign State from resorting to Sovereign Immunity in the case of disputes arising out of commercial transactions. More particularly, Article 19 of the Convention expressly restricts a Foreign State from invoking the defense of sovereign immunity against post-judgment measures of constraint, such as attachment, arrest or execution, against a property of the State in cases arising inter-alia out of an international commercial arbitration.

Thus, the intention is clear not to extent to not extend Sovereign Immunity in cases of international commercial arbitration. Though the said Convention is yet to come into effect, India's assent thereto is significant and is an indicator of the espousal of a doctrine of restricted Sovereign Immunity. Reliance is placed on Syrian Arab Republic v. A.K. Jajodia, ILR (2004) 2 Delhi 704.

In addition, the Bench then also enunciates in para 28 that:
Union of India has filed their response in OMP (EFA) (COMM) 11/2016 in which it is stated that prior consent under Section 86 (3) is not required for execution of an arbitral award.

Quite significantly, the Bench then enunciates in para 31 that:
The United Nations Convention on Jurisdictional Immunities of States and their Property, 2004, as reflective of the modern international trends on this issue, contains provisions whereby the shield of sovereign immunity has been whittled down in the case of purely commercial transactions, as also an arbitration agreement has been construed as an indicator of the waiver of sovereign immunity against post-judgment measures of constraint. It is relevant to note that India became a signatory to the said Convention on 12th January, 2007, though it has not proceeded to ratify this Convention; and the Convention itself is not in force yet. The relevant Articles of the Convention are:

Article 10
Commercial Transactions

1. If a State engages in a commercial transaction with a foreign natural or juridical person and, by virtue of the applicable rules of private international law, differences relating to the commercial transaction fall within the jurisdiction of a court of another State, the State cannot invoke immunity from that jurisdiction in a proceeding arising out of that commercial transaction.
    
2. Paragraph 1 does not apply:
   1. in the case of a commercial transaction between States; or
   2. if the parties to the commercial transaction have expressly agreed otherwise.
       
3. Where a State enterprise or other entity established by a State which has an independent legal personality and is capable of:
   1. suing or being sued; and
   2. acquiring, owning or possessing and disposing of property, including property which that State has authorized it to operate or manage, is involved in a proceeding which relates to a commercial transaction in which that entity is engaged, the immunity from jurisdiction enjoyed by that State shall not be affected.

Article 17
Effect Of An Arbitration Agreement
If a State enters into an agreement in writing with a foreign natural or juridical person to submit to arbitration differences relating to a commercial transaction, that State cannot invoke immunity from jurisdiction before a court of another State which is otherwise competent in a proceeding which relates to:

1. the validity, interpretation or application of the arbitration agreement;
2. the arbitration procedure; or
3. the confirmation or the setting aside of the award, unless the arbitration agreement otherwise provides.
    

Article 19
State Immunity From Post-Judgment Measures Of Constraint
No post-judgment measures of constraint, such as attachment, arrest or execution, against property of a State may be taken in connection with a proceeding before a court of another State unless and except to the extent that:

1. the State has expressly consented to the taking of such measures as indicated:
   1. by international agreement;
   2. by an arbitration agreement or in a written contract; or (iii) by a declaration before the court or by a written communication after a dispute between the parties has arisen; or
2. the State has allocated or earmarked property for the satisfaction of the claim which is the object of that proceeding; or
    
3. it has been established that the property is specifically in use or intended for use by the State for other than government non-commercial purposes and is in the territory of the State of the forum, provided that post-judgment measures of constraint may only be taken against property that has a connection with the entity against which the proceeding was directed.

Relevant judgment
While stating the relevant case law, the Bench then observes in para 33 that, In Bharat Aluminium Company v. Kaiser Aluminium Technical Services Ltd. (2012) 9 SCC 552, the Supreme Court interalia explained the enforceability of an arbitral award passed in an international commercial arbitration held within India. The relevant portion of the judgment is reproduced hereunder:

88. ...In our opinion, the aforesaid provision does not, in any manner, relax the territorial principal adopted by Arbitration Act, 1996. It certainly does not introduce the concept of a delocalized arbitration into the Arbitration Act, 1996. It must be remembered that Part I of the Arbitration Act, 1996 applies not only to purely domestic arbitrations, i.e., where none of the parties are in any way foreign but also to international commercial arbitrations covered within Section 2(1)(f) held in India. The term domestic award can be used in two senses: one to distinguish it from international award, and the other to distinguish it from a foreign award.

It must also be remembered that foreign award may well be a domestic award in the country in which it is rendered. As the whole of the Arbitration Act, 1996 is designed to give different treatments to the awards made in India and those made outside India, the distinction is necessarily to be made between the terms domestic awards and foreign awards. The scheme of the Arbitration Act, 1996 provides that Part I shall apply to both international arbitrations which take place in India as well as domestic arbitrations which would normally take place in India.

This is clear from a number of provisions contained in the Arbitration Act, 1996 viz. the Preamble of the said Act, proviso and the explanation to Section 1(2), Sections 2(1)(f), 11(9), 11(12), 28(1)(a) and 28(1)(b). All the aforesaid provisions, which incorporate the term international, deal with pre-award situation. The term international award does not occur in Part I at all. Therefore, it would appear that the term domestic award means an award made in India whether in a purely domestic context, i.e., domestically rendered award in a domestic arbitration or in the international context, i.e., domestically rendered award in an international arbitration.

Both the types of awards are liable to be challenged under Section 34 and are enforceable under Section 36 of the Arbitration Act, 1996. Therefore, it seems clear that the object of Section 2(7) is to distinguish the domestic award covered under Part I of the Arbitration Act, 1996 from the foreign award covered under Part II of the aforesaid Act; and not to distinguish the domestic award from an international award rendered in India. In other words, the provision highlights, if anything, a clear distinction between Part I and Part II as being applicable in completely different fields and with no overlapping provisions.

Going forward, the Bench then states in para 34 that:
In Paramjeet Singh Patheja v. ICDS Ltd. (2006) 13 SCC 322, the Supreme Court considered the scope and ambit of the legal fiction under Section 36 of the Arbitration Act which equated an arbitral award to a 'decree' within the meaning of the CPC for the purpose of enforcement. The specific issue before the Supreme Court was as to whether an arbitral award is a 'decree' within the meaning of Section 9 of the Presidency Towns Insolvency Act, 1909 so as to enable an insolvency notice to be taken out thereunder.

It was submitted before the Court that if an Award rendered under the Arbitration Act is not challenged within the requisite period by means of a petition under Section 34 of the Arbitration Act, then the same can be enforced as a decree under Section 36 of the Arbitration Act. On this basis, it was argued that there is no distinction between an 'award' and a 'decree', and hence, an arbitral award would amount to a decree within the meaning of Section 9 of the Presidency Towns Insolvency Act, 1909. The Supreme Court rejected this submission and observed that in certain contexts, the legal fiction of an arbitral award being the equivalent of a decree would not be applicable. The relevant portion of the judgment is reproduced hereunder:

42. The words as if demonstrate that award and decree or order are two different things. The legal fiction created is for the limited purpose of enforcement as a decree. The fiction is not intended to make it a decree for all purposes under all statutes, whether State or Central.

43. For the foregoing discussion we hold:
(v) A legal fiction ought not to be extended beyond its legitimate field. As such, an award rendered under the provisions of the Arbitration and Conciliation Act, 1996 cannot be construed to be a decree for the purpose of Section 9(2) of the Insolvency Act.

Briefly stated, the Bench then also mentions in para 35 that:
In Nawab Usman Ali Khan v. Sagarmal, (1965) 3 SCR 201, the Supreme Court categorically held that the prior-consent of the Central Government under Section 86 (1) of the CPC would not apply to an arbitral award enforcement proceeding under Section 17 of the erstwhile Arbitration Act, 1940. The factual background and ratio of the aforesaid judgment has been aptly captured and reiterated by the Supreme Court in the subsequent decision in R. McDill & Co. Pvt. Ltd. v. Gouri Shankar Sarda, (1991) 2 SCC 548 wherein it was inter-alia observed as under:

9. In Nawab Usmanali Khan v. Sagarmal [(1965) 3 SCR 201 : AIR 1965 SC 1798] on which reliance has been placed by learned counsel for the appellant it was held that a proceeding under Section 14 read with Section 17 of the Act for the passing of a judgment and decree on an award does not commence with a plaint or a petition in the nature of a plaint, and cannot be regarded as a suit and the parties to whom the notice of the filing of the award is given under Section 14(2) cannot be regarded as suit in any court otherwise competent to try the suit within the meaning of Section 86(1) read with Section 87-B, Civil Procedure Code.

To put it shortly, the Bench then also states in para 37 that:
In Union of India v. U.P. State Bridge Corporation Ltd., 2015 (2) SCC 52, the Arbitral Tribunal did not proceed for almost four years despite orders of the High Court directing the Tribunal to hold regular sittings and complete the proceedings within three months. The Supreme Court while substituting the Arbitral Tribunal noted three main principles of Arbitration & Conciliation Act namely, (i) speedy, inexpensive and fair trial by an impartial tribunal; (ii) party autonomy; and (iii) minimum court intervention.

Summary of Principles of law
It is worth noting that it is then stated most explicitly in para 44 that:
The prior consent of Central Government is not necessary under Section 86(3) of the Code of Civil Procedure to enforce an arbitral award against a Foreign State.

It is of utmost significance to note that the Bench then states unequivocally in para 45 without mincing any words that:
A Foreign State cannot claim a Sovereign Immunity against enforcement of an arbitral award arising out of a commercial transaction.

It would be pertinent to mention here that it is then observed in para 46 that, Section 36 of the Arbitration and Conciliation Act treats an arbitral award as a „decree‟ of a Court for the limited purpose of enforcement of an award under the Code of Civil Procedure which cannot be read in a manner which would defeat the very underlying rationale of the Arbitration and Conciliation Act namely, speedy, binding and legally enforceable resolution of disputes between the parties.

No doubt, the Bench then rightly states in para 47 that:
Section 86 of the Code of Civil Procedure is of limited applicability and the protection thereunder would not apply to cases of implied waiver. An arbitration agreement in a commercial contract between a party and a Foreign State is an implied waiver by the Foreign State so as to preclude it from raising a defense against an enforcement action premised upon the principle of Sovereign Immunity.

Most significantly, the Bench then remarkably observes in para 48 that:
In a contract arising out of a commercial transaction, such as the transactions which are subject matter of the present petitions, a Foreign State cannot seek Sovereign Immunity for the purpose of stalling execution of an arbitral award rendered against it. Once a Foreign State opts to wear the hat of a commercial entity, it would be bound by the rules of the commercial legal ecosystem and cannot be permitted to seek any immunity, which is otherwise available to it only when it is acting in its sovereign capacity. It is the purpose and nature of the transaction of the Foreign State which would determine whether the transaction, and the contract governing the same, represents a purely commercial activity or whether the same is a manifestation of an exercise of sovereign authority.

Equally significant is what is then stated in para 49 that:
Arbitration being a consensual and binding mechanism of dispute settlement, it cannot be contended by a Foreign State that its consent must be sought once again at the stage of enforcement of an arbitral award against it, while ignoring the fact that the arbitral award is the culmination of the very process of arbitration which the Foreign State has admittedly consented to.

No less significant is what is then stated in continuation in the same vein in para 50 that:
This proposition is in consonance with the growing International Law principle of restrictive immunity, juxtaposed with the emergence of arbitration as the favored mechanism of international dispute resolution in the past few decades. It needs no gainsaying that International Commercial Arbitration has witnessed increasing adoption across the world over the past few decades on account of it being a flexible yet stable, efficient, and legally binding mechanism of dispute resolution for entities engaging in global and cross-border transactions while eschewing the particularistic difficulties and complexities encountered in domestic legal systems. However, if Foreign States are permitted to stymie the enforcement of arbitral awards, which are the ultimate fruits of the above consensual process, on the specious ground that they are entitled to special treatment purely on account of being Foreign States, then the very edifice of International Commercial Arbitration would collapse. Foreign States cannot be permitted to act with impunity in this regard to the grave detriment of the counter-party in the arbitration proceedings.

Findings:
Needless to say, the Bench then holds in para 51 that:
Applying the above-mentioned well settled principles of law, this Court holds that prior consent of the Central Government under Section 86(3) of the Code of Civil Procedure is not required for enforcement of the two arbitral awards in question against the respondents.

Quite remarkably, the Bench then holds in para 52 that:
Both these petitions for enforcement of the arbitral awards are maintainable and the respondents are directed to deposit the respective award amounts with the Registrar General of this Court within four weeks. If the amounts are not deposited by the respondents within four weeks, the petitioners shall be at liberty to seek attachment of the assets of the respondents.

We need to also ought to see that the Bench then also reveals in para 53 that, Learned counsel for the petitioner in OMP (ENF) (COMM) 82/2019 submits that approximately Rs.1,72,65,000/- has become due to the petitioner under the arbitral award dated 26th November, 2018 as on 06th May, 2021.

On similar lines, the Bench then further states in para 54 that:
Learned counsel for the petitioner in O.M.P (EFA)(COMM) 11/2016 submits that approximately USD 6,99,738.91 has become due to the petitioner under the arbitral award dated 25th October, 2015 and the same in Indian currency comes to approximately Rs.7,60,75,997/- as on 06th May, 2021.

It cannot be glossed over that the Bench then directs in para 55 that:
The respondents in OMP (ENF) (COMM) 82/2019 and OMP (EFA) (COMM) 11/2016 are directed to file affidavit of their assets on the date of the cause of action, date of the award as well as today in Form 16A Appendix E under Order XXI Rule 41(2) of the Code of Civil Procedure along with the documents mentioned therein within 30 days of the receipt of the notice. The respondents are directed to specifically disclose the following assets in their affidavits:

1. All assets owned and held by the respondents in India
2. All bank accounts and bank account statements of the respondents held with any bank in India;
3. All the commercial ventures of the respondents in India, including state-owned airlines, companies, undertakings etc., having commercial transactions with Indian companies, commercial entities or citizens, and disclosure of all assets in India (including bank accounts) of such commercial ventures;
4. All commercial transactions entered into by the respondents and their state-owned entities with Indian companies, commercial entities or citizens where money is due and payable by such Indian companies, commercial entities or citizens along with details of the amounts so owed.

Now coming to the concluding paras. It is directed in para 56 that:
List for reporting compliance on 30th July, 2021. The Bench then further directs in para 57 that:
The authorized representatives of the respondents shall remain present before the Court on the next date. The Bench then also directs in para 58 that:
Copy of this judgment be sent by email to Embassy of the Islamic Republic of Afghanistan, Delhi at delhi@afghanistan-mfa.net and Embassy of the Federal Democratic Republic of Ethiopia, Delhi at: ambassador.newdelhi@mfa.gov.et and delethem@yahoo.com. It is then held in the last para 59 that:
The petitioner in both the cases are also permitted to send the copy of this judgment to the respondents by email.

In essence, the simple, short and straightforward message of this notable judgment is: A Foreign State cannot claim sovereign immunity under Section 86 of the Code of Civil Procedure against enforcement of an Arbitral Award arising out of a commercial transaction. It shall be held liable as mandated by the law. Very rightly so!

Sanjeev Sirohi, Advocate,
s/o Col BPS Sirohi, A 82, Defence Enclave,
Sardhana Road, Kankerkhera, Meerut – 250001, Uttar Pradesh.