Sovereign Immunity vis-à-vis enforcement of Arbitral Awards birthed from commercial contracts

In a recent judgment of the Hon’ble Delhi High Court in KLA Const Technologies Pvt. Ltd. v. The Embassy of Islamic Republic of Afghanistan and Matrix Global Pvt. Ltd. v. Ministry of Education, Federal Democratic Republic of Ethiopia, pertaining to the enforcement of the respective arbitral awards thereinunder, having underscored the principle of party autonomy, and the rationale of speedy, binding and legally enforceable resolution of disputes through arbitrations, the Hon'ble Court held that prior consent of Central government is not necessary under Section 86(3) of the Code of Civil Procedure ("CPC") for enforcement of an arbitral award against a foreign State, basis Section 36 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), whereby arbitral awards have been equated to a decree of the court, for the purposes of enforcement under CPC; 

“47. 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.”

“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."

Furthermore, in rejecting the fallacious defence against an enforcement action premised upon the principe of sovereign immunity, the Hon’ble Court held; 

"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."

“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." 

When a Foreign State enters into an arbitration agreement with an Indian entity, there is an implicit waiver of the sovereign immunity, that is otherwise available to such a contracting Foreign State, against the enforcement of an arbitral award.

Applying the aforementioned well settled principles of law, the Hon'ble Court held that prior consent of the Central Government under Section 86(3) of the CPC is not required for enforcement of the two arbitral awards in question against the respective respondents and that accordingly both the petitions for enforcement of the arbitral awards were maintainable. The Hon'ble Court also further directed the respondents to deposit the respective award amounts within four weeks and failing which the Petitioners were granted liberty to seek attachment of the assets of the Respondents and in furtherance of which the Respondents were directed to file an affidavit disclosing their assets, as specified in the Order.

The Judgment maybe accessed using the link provided below;