The Exchange Conundrum: Deciphering Currency Conversion in Foreign Arbitral Award
Adeeb Ahmad & Soumya Chakrabarti
3rd Year B.A. LL.B (Hons.) at Jamia Millia Islamia
“Arbitration is no longer an ‘alternative’, but it is in fact the preferred method of seeking commercial justice, which also provides a level playing field outside domestic court system”.
Introduction
India is currently aiming to become an arbitrarily friendly jurisdiction. One of the significant issues faced by Indian courts while rendering judgement in cross-border disputes is the conversion rate of foreign currency denominated in award into Indian currency. The consistently changing conversion exchange rates and currency variation could be either profit or loss to the decree holder. Owing to this volatility in currency exchange rates, the precise sum payable to the award-holder in Indian rupees remains indeterminate. Award debtors belonging to India would opt for the conversion date on which the Indian rupee is stronger, while the opposite would hold true for the foreign currency award holder. So, it persists as a concern in the enforcement of foreign awards and decrees. It is not peculiar for courts and arbitral tribunals to issue judgments and awards in a foreign currency. For example, Section 48(4) of the UK Arbitration Act, 1996 states that “The tribunal may order the payment of a sum of money, in any currency”.
This paper will analyse the recent judgment of the Supreme Court Bench of Justice Pamidighantam Sri Narasimha in DLF Ltd. & Anr. v. Koncar Generator & Motors Ltd., rendering principles to combat the issue of determining the appropriate date of conversion of currency where the arbitral award is denominated in foreign currency.
Apex Court’s Take on This Issue
The present dispute arose with respect to the enforcement of an arbitral award expressed in foreign currency wherein the appellants are Indian companies, and the respondent is a Croatian company. The parties entered a contract for the design, engineering, manufacturing, and supply of two generators by the respondent. When the dispute arose, it was referred to arbitration before the International Chamber of Commerce, Paris, wherein the award was passed in favour of the respondent-claimant. In the award, it was held that the appellants be jointly and severally liable to pay Euros 10,93,989, along with interest. In this case, the Supreme Court dealt with two issues:-
- What is the appropriate date to determine the foreign exchange rate for converting the award amount expressed in foreign currency into Indian rupees?
- What should be the date of conversion when the award debtor deposits a partial amount before the court during the pendency of proceedings challenging the award?
There are two uncertainties that directly affects the present issue: the time lapse between the date of the award and its enforceability i.e., Local factor, and ever-fluctuating exchange rates i.e., Global factor.
Critical Analysis of The Justice P.S. Narasimha Lens
Statutory Framework
In this case, the Supreme Court analysed the relevant statutory scheme vis-à-vis the case and stated that a foreign arbitral award is binding between the parties under Section 46 of the Arbitration & Conciliation Act, 1996 (“act”). Further, the enforceability of that award can be challenged under Section 48. Additionally, such order passed can be appealed under Section 50. A foreign award can be enforced when objections against it are decided and dismissed. There is no specific requirement for a separate decree by a court, the award is deemed to be a decree under Section 49.
Relevant Date of Conversion?
A seminal case of 1984 of the Apex Court in Forasol v. ONGC received the highest precedence in the present case wherein it was held that an award can be enforced either in foreign currency or in Indian rupee. And, if the contract provides for a rate of exchange, then the same should be used to convert the amount. If the contract is silent vis-a-vis the rate of exchange, then the court should consider six possible dates as the proper date for fixing the rate of exchange. The six possible dates are mentioned below:
- the date when the amount became due and payable;
- the date of the commencement of the action;
- the date of the decree;
- the date when the court orders execution to issue;
- the date when the decretal amount is paid or realised;
- and in cases where a decree is passed by the court in terms of an arbitral award in foreign currency, the date of the award.
In this judgment, the Supreme court undertook a detailed examination of each of the six dates and held that the date of the decree (iii) is the most appropriate date amongst them because the decree crystallises the amount payable to the decree-holder.
Additionally, the law laid down in Forasol was subsequently affirmed by the Supreme Court in Renusagar Power Co. Ltd v. General Electric Co., wherein it was held that the applicable law to determine the proper date for conversion is lex fori i.e., Indian law and the court also rejected the contention that Forasol required reconsideration.
Moving further, the Supreme Court analysed various other cases where Forasol was widely considered and followed pertaining to various types of disputes. The court held that there is no restriction to apply the decision of Forasol in cases falling under the 1996 Act, even though it was decided under the Arbitration & Conciliation Act, 1940 Act (“1940 Act”). The court rejected the contention of the Delhi High Court that Forasol does not apply to cases under the 1996 Act.
At last, the Supreme court applied the principle laid down in Forasol under the 1996 Act and determined that the date on which the objections are finally decided and dismissed would be the proper date for determining the exchange rate.
Amount Paid During the Pendency of the Suit
Moving further, the Supreme Court first dealt with the deposit of Rs. 7.5 crores which was permitted to be withdrawn by furnishing a bank guarantee. However, the respondent didn’t withdraw the amount despite it being deposited in 2010.
The situation in Renusagar is similar with the present case wherein the court was hearing an appeal under the Foreign Awards Act, 1961. The court stayed the High Court’s order, subject to Renusagar depositing half of the decretal amount. General Electric was allowed to withdraw the deposited amount by providing a bank guarantee for any amount over ₹4 crores. However, General Electric was entirely unable to withdraw the amount, because it was not able to convert the amount to US dollars due to the pendency of the appeals. In both cases, the respondent failed to move the Court for necessary orders to be able to receive the amount. But in the present case, there is an added fact that the respondent consented to the deposit and the condition requiring security. Further, the court held that in the present case, it is appropriate to adopt the Court’s approach in Renusagar.
Finally, the court held that the deposit of Rs. 7.5 crores stand converted as of the date of deposit when the rate of exchange is 1 euro = Rs. 59.17.
The court then briefly discussed the statutory provisions in Order 21, Rule 1 and Order 24 of the Code of Civil Procedure, 1908, (“CPC”) to determine whether interest will continue on an amount deposited before a court. Moving ahead, the court relied on the judgment of the Supreme Court in Gurpreet Singh v. Union of India wherein it extensively discussed the rules governing interest calculation when the judgment-debtor deposits some part of the amount. Order 24 of the CPC, governs deposits at the pre-decretal stage whereas Order 21, Rule 1 of CPC at the post-decretal stage.
After discussing various judgments, the court concluded that once an award debtor is permitted to withdraw the deposited amount, wherein the withdrawal is conditional and subject to the final decision on the matter. The court must consider that the award holder could access and benefit from such a deposit.
Further, the court held that the remaining deposit of Rs. 50 lakhs with respect to the High Court order stands on a different footing from the first deposit. Since, the order of 03.06.2011 permits withdrawal of Rs. 50 lakhs on the completion of the proceedings, which would be the appropriate date for determining the foreign exchange rate.
Conclusion
The statutory framework stipulates that a foreign arbitral award becomes enforceable only after the resolution of any objections against it. Consistent with the Forasol case, the proper date for determining the conversion rate of an award expressed in foreign currency is the date of the decree.
When an award debtor deposits an amount with the court while objections are pending and allows the award holder to withdraw this amount, it must be converted based on the date of the deposit. This conversion ensures that the amount withdrawn reflects the accurate value as of that specific date. Once the deposited amount is converted and adjusted against any outstanding principal and interest from the arbitral award, the remaining balance must be recalculated using the exchange rate as of the date when the arbitral award becomes enforceable. This ensures that the conversion and payment of the remaining amount are aligned with the final enforceability of the award.
In conclusion, this judgment has established enforceability date as the benchmark which will minimize the impact of consistently changing conversion exchange rates on both parties. Additionally, the court’s decision to convert partial payments at the time the amount was deposited perfectly aligns with the economic reality of the situation. The award debtor will bear the risk for amount already paid and this has introduced an element of definiteness to the conversion process for the paid amount. To have an effective implementation of this judgment, it is important to have a balanced approach considering both parties. Moving further, this judgment has provided clarity, but significant challenges will still exist like delay in enforcement proceedings can cause significant time gaps between the award date and its enforcement. As India grows in International Commercial Arbitration, with the institutionalisation of arbitration in the major metropolitan cities throughout the nation, the need for a clear and comprehensive framework for currency conversion becomes crucial.
