The Territorial Sovereignty Conundrum: A Barrier to Enforcement or a Bridge to Arbitration?
Adv. Chetna Alagh
(Advocate at the High Court of Delhi)
Recognizing and enforcing foreign arbitral awards has always been challenging due to various factors. The legal framework, judicial intervention, public policy defense, procedural issues, etc., have impacted the pace in recognizing and enforcing arbitral awards in the country. However, there is a beacon of hope as various developments have taken place, making India a more arbitration-friendly jurisdiction. The legislative amendments to the Arbitration and Conciliation Act 1996 (hereinafter the A&C Act) followed by the notable judicial pronouncements have paved the way for streamlining the arbitration process more particularly concerning the enforcement of an arbitral award, reflecting India’s commitment to becoming a hub of arbitration. However, there are still some impending issues that require consideration such as the issue of “territorial reservation” and its bondage with Sections 44 and 45 of the A&C Act.
Despite its popularity, the 1958 New York Convention (hereinafter referred to as the NY Convention), has faced some territorial constraints by India and several other countries while signing it, which means they will only recognize foreign arbitral awards if they come from countries designated specifically in the convention. This creates a delicate situation in relation to Article 1(III) of the NY Convention. Based on reciprocity, this reservation enables Contracting States to enforce awards rendered solely inside the borders of another Contracting State. Fundamentally, by upholding each country’s sovereignty in arbitration disputes, the territorial reservation was designed to make the Convention easier to ratify. It was intended to encourage contracting parties to accept arbitration awards from one another by allowing nations to designate which foreign awards they will uphold. However, because of this the enforceability of a foreign award in India also depends on whether India has a mutual recognition arrangement with the country where the award was rendered, and whether that country is designated as a ‘reciprocating territory’ under Indian law, adding another layer of complexity to the process.
As per Section 45 of the Arbitration and Conciliation (A&C) Act, a court may order parties to arbitration on the basis that the agreement is valid and conforms with the NY Convention. In addition, according to Section 44 of the A&C Act, there are two essential criteria which must be satisfied i.e. the award should have derived from a recorded contract within the scope of NY Convention and that this particular award must come from a nation having reciprocal arrangements with India. The first condition is met when a party to an agreement petitions an Indian court to refer the dispute to arbitration, which is governed by Section 45 of the A&C Act. In two landmark cases, it was made clear by the Indian Supreme Court i.e. in Sasan Power Limited v. North American Coal Corporation India Private Limited(2017) ibclaw.in 199 SC, and World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) Pte. Ltd. (2017) ibclaw.in 636 SC, the area of operation of Section 45 of the A&C Act. The SC Court held that its main function is just to check if the arbitration agreement is legal or illegal but not judging whether or not the contract itself is valid. In simple words, the Court is only interested in determining whether there is a legitimate arbitration agreement or not; if one exists then the parties must go forward with arbitration without any comment from the court about legitimacy of their contract. In other words, the Court’s mandate under Section 45 is solely to determine whether the arbitration agreement is null and void, inoperative, or incapable of being performed. If the agreement is deemed valid, the Court must direct the parties to proceed with arbitration, without pronouncing on the contract’s substantive validity.
Furthermore, as held by the Hon’ble Supreme Court of India in the case of Bhatia International V. Bulk Trading S.A. & Another, (2002) 4 SCC 105, the determination of whether an arbitration agreement falls under Part I or Part II of the A&C Act depends on a number of factors, including the identity of the parties to the agreement, the location of the arbitration, foreign-seated arbitration when one of the parties is an Indian entity, and whether the parties have excluded the application of Part I of the A&C Act. In light of Sections 44 and 45 of the A&C Act, the question that now has to be addressed is whether the court can refuse to refer parties to arbitration when the request is made in a nation that does not reciprocate.
The first ingredient of Section 44 is that the arbitration agreement should name a contracting state as the seat. If this condition is met then the requirement of the second condition i.e. the condition of reciprocity may go away from the picture and hence it raises the issue of whether the failure to meet the reciprocity requirement serves as an extra basis for denying a referral request under section 45 of the A&C Act. It is pertinent to note that India has incorporated the territorial sovereignty into the A&C Act. Section 44 pertains solely to the enforcement and not to referral which has to be read in harmony with Section 45 of the A&C Act as was held by the Hon’ble Supreme Court of India in the matter of Rashmi Mehra v. EAC Trading Ltd., 2006 SCC OnLine Bom 1105, that Section 44 and 45 should not affect each other and that Section 45 does not require the conditions to be fulfilled which are present in Section 44 as Section 44 deals with the situation after the award is made and Section 45 deals with the situation when the reference is made and there is no dispute between the two sections. Therefore, a cursory look at the preparatory discussions of the NY Convention is intended to include territorial reservation to take charge only against the awards and not to the reciprocating country which are notified by the government. Hence, the territorial reservation applies only at the stage of enforcement of the award and not at the stage of referral.
The territorial reservation in Article 1(III) of the NY Convention is confined to assessing the enforceability of the awards and not to assess the referral of awards. The principle of comity should be used to expand the scope of the territorial reservation to all the convention states which will promote uniformity and consistency. India’s territorial reservation does not restrict the court’s ability to refer the parties to foreign seated arbitration which aligns with the fundamental principles of the NY Convention. India has the right to assert its sovereignty by making a territorial reservation while signing or ratifying any convention, however, this reservation should only apply when the arbitral award has to be enforced and it cannot be used earlier and in no way during the referral of an arbitration. It has to be borne in mind that Sections 44 and 45 do not contradict each other and the reference procedure under Section 45 has no bearing on the aspect of territorial reservation. The only requirement for an Indian court to refer the parties to arbitration in a foreign seated arbitration is that the seat has to be located in a contracting state and the importance of notification necessitating a reciprocating country is not required as an additional ingredient as this will hamper the principles of the NY Convention, the A&C Act as well as India’s stance in becoming an arbitration-friendly jurisdiction. It is also important to note that Article 51 of the Indian Constitution states that there has to be respect and adherence to International law and this has to be kept in mind at all times. The NY Convention has more than 170 signatories and it is a document that has a uniform approach for enforcing foreign arbitral awards and is a benchmark for international commercial arbitration as well.
It is the need of the hour that there has to be a strengthening of legal and institutional reforms in the country with regard to arbitration, robust institutions have to be established. Creating a favorable environment for bilateral and multilateral agreements and enforcing the awards without any judicial intervention is important for making India a global hub for International arbitration. The concept of territorial sovereignty is important but it should not come into the picture while a court is referring the parties to the arbitration and this condition can only be applied at the stage of enforcing the arbitral awards and not otherwise as we have seen in various judicial pronouncements wherein it has been held that the scope of enquiry under Section 45 of the A&C Act is limited and the court cannot travel beyond the legislation, which prove that India supports referring the parties to arbitration. The interpretation of Sections 44 and 45 of the A&C Act by the courts in the future will be interesting to see, as various legal issues continue to emerge from the provisions of the Act. The evolving dynamics of the law and jurisdictional complexities surrounding the enforcement of awards in India and the referral of matters to arbitration will likely lead to a rich body of jurisprudence, shaping the contours of arbitration law in the country.
(Chetna Alagh is an Advocate at the High Court of Delhi and can be reached at alaghchetna@gmail.com.)
