Unenforceable Foreign Arbitral Award Does Not Extinguish Original Cause Of Action: Delhi High Court

The Delhi High Court has reiterated that a foreign arbitral award that has been found unenforceable in India does not extinguish the original civil claim between parties, while restoring a recovery suit filed by a U.S.-based almond supplier.

A Division Bench of Justice Anil Kshetarpal and Justice Amit Mahajan held, “the cause of action for recovery of the amount claimed does not cease to exist merely because a foreign arbitral award has been passed, particularly when such award has been held to be unenforceable in India. An unenforceable foreign award cannot, by itself, extinguish the underlying civil cause of action, as such award has failed to secure recovery of the amount in favour of the claimant"

Campos Brothers Farms had entered into four separate contracts in 2015 with Indian entities Matru Bhumi Supply Chain Pvt Limited and the other respondents for supply of Non-Pareil In-Shell Almonds. According to Campos Brothers Farms, the respondents failed to make complete payment for the supplied goods.

The dispute was referred to foreign arbitration, culminating in a foreign arbitral award dated July 25, 2016, in favour of the US entity. The plaintiff thereafter initiated enforcement proceedings in India under Sections 48 and 49 of the Arbitration and Conciliation Act, 1996. However, the enforcement petition was dismissed on May 2, 2019, and the appeal against that dismissal remains pending before the High Court.

Simultaneously, the US seller also instituted a commercial suit seeking recovery of the outstanding dues. The learned Single Judge rejected the plaint on the ground that the original cause of action had merged into the foreign arbitral award and therefore no independent suit could survive. This was appealed before the High Court.

The appellant submitted that a foreign arbitral award does not automatically become enforceable in India and attains enforceability only after Indian courts declare it enforceable under Sections 48 and 49 of the Arbitration Act.

It was further submitted that since the award had already been declared unenforceable, the original cause of action continued to survive.

Opposing this, the Indian buyers submitted that Section 46 of the Arbitration Act makes a foreign arbitral award binding on parties, thereby resulting in the merger of the original cause of action into the award.

They further argued that the civil suit amounted to parallel proceedings and was barred by principles analogous to res judicata.

The court observed that a civil suit can be rejected under Order VII Rule 11 of the CPC only on the grounds mentioned in the provision. The court further noted that the merger of a cause of action into a foreign arbitral award is not one of the grounds enumerated under Order VII Rule 11.

The bench observed that the learned single judge had neither concluded that the suit did not disclose a cause of action nor recorded a finding that it was barred by law under Order VII Rule 11(d) of the CPC.

It held, “the rejection of the plaint was premised on the reasoning that the cause of action forming the basis of the suit had merged into a foreign arbitral award. Such a ground, however, does not find place in any of the clauses of Order VII Rule 11 of the CPC.”

The court further held that the Arbitration and Conciliation Act does not completely oust the jurisdiction of civil courts and that exclusion of such jurisdiction must be strictly construed.

It observed, “It is also well settled that the Arbitration and Conciliation Act, 1996 does not absolutely exclude the jurisdiction of the civil court to adjudicate civil disputes merely because the parties were governed by an arbitration agreement. Section 8 of the 1996 Act enables a party to seek reference of disputes to arbitration, but such an objection is required to be raised by filing an appropriate application before the submission of the first statement on the substance of the dispute. Failure to do so results in waiver of the right to seek reference, and the civil suit is then liable to proceed in accordance with law."

Rejecting the respondents' reliance on Section 46, the court held that the binding nature of a foreign arbitral award cannot be equated with enforceability.

The bench said, “While Section 46 provides that a foreign award shall be binding on the parties, the expression 'binding' cannot be read in isolation so as to confer enforceability upon a foreign award which has not satisfied the requirements of Sections 48 and 49 of the Act.”

Distinguishing the judgments relied upon by the respondents, the court held that those decisions either involved domestic awards or suits based on foreign judgments rather than unenforceable foreign arbitral awards.

Accordingly, the court set aside the impugned order and restored the suit filed by the plaintiff to its original number.