Binding nature of Foreign Award on non-signatory parties of an Arbitration

On September 18, 2000, a representation agreement was entered between a company based in Hong Kong, Integrated Sales Services (through its director Mr Terry Peteete of ISS), and a company based in Nagpur, India, DMC Management Consultants Ltd. (through it managing director Mr Rattan Pathak), wherein the agreement was meant for assistance by the former to sell the latter’s goods and services to prospective customers along with not only identifying potential sources of investment but also assisting the latter in negotiating the terms of purchase, sale and/ or investment in exchange for a commission as a consideration to the former. The agreement came into force on October 3, 2000. Multiple amendments were made to the original agreement (first in 2000 and second on January 1, 2008) via Mr Arun Dev Upadhyaya, a signatory representative for DMC and Mr Terry Peteete, where the second amendment shift the applicable laws on the agreement from the State of Missouri to the State of Delaware in the United States of America under Clause 8 (d) (1) of the agreement. The amendment led to a dispute between the parties to the agreement and a notice of arbitration was sent on June 22, 2009, to Mr Arun Dev Upadhyaya, the chairman who owns and controls all the stock of DMC Global (registered in Mauritius), which has assumed the obligations of the DMC Management Consultants Ltd. (DMC). In the course of the agreement, ISS represented DMC to bring two major customers to the latter: MedQuist Transcriptions Ltd. (registered in Mt. Laurel, New Jersey) and AssistMed Inc. (registered in Los Angeles, California); consequently, under the terms of the agreement, ISS was entitled to receive 20% of the gross revenue to DMC from the two customers for as long as they continue to be customers of DMC. It is worth noting that from September 18, 2000, to June 30, 2008, the terms and obligations of the agreement were upheld by ISS and DMC. On June 22, 2008, DMC served a notice of Contract Termination via email to the aforementioned customers, wherein the notice asked the customers to complete the “ramping down process” within 90 days of receipt of the notice. In the same duration, a new contract was presented to the two customers by Gemini Bay Consulting Ltd. (GBC, a company registered in the British Virgin Islands), wherein the employees of DMC and DMC Global were extended to Gemini Bay Transcriptions Pvt. Ltd. (GBT, a company registered in India) to perform the work for the customers (thus, evading the payment to ISS of commissions) in the same facilities, same equipment (being managed by the same managerial team). The termination notices appeared to divert the business from the two customers away from DMC and DMC Global to GBC and GBT with an underlying motivation of evading the contractual obligations of DMC to pay commissions to the ISS under the agreement (approximately $100,000 per month). The dispute between the two was adjudicated via an arbitrator, Alain Frecon as was decided by the two with the arbitration agreement, dated September 18, 2000, such that the two sides were given the complete opportunity to present their respective case (including all the proofs, demonstrative pieces of evidence, submissions and allegations of each party); consequently, the respondents (DMC, DMC Global, GBC and GBT) were directed to pay $6,948,100/- to ISS within thirty days of the date of transmittal of the said award to the parties to the arbitration; however, if the sum is not paid by the respondents, then they were mandated to pay an interest to ISS, wherein the ISS were entitled to compute interest at the highest legal rate allowable by the law of the state of Delaware from the date of termination of the agreement (July 22, 2008); additionally, ISS was entitled to receive $63,903/-, including the administrative fees and expenses of the International Centre for Dispute Resolution (ICDR: $14,000/-) and the portion of compensation and expenses of the arbitrator incurred by ISS ($49,903/-).

One of the core observations in this case made by a Single Judge of the High Court of Judicature at Bombay, Nagpur Bench on April 18, 2016, was that the arbitration could not be enforced against non-signatories to the agreement even though such individuals may participate in the process of arbitration, i.e. GBC, GBT and Mr Upadhyaya are not mandated to bear the brunt of the arbitration award since they were non-signatories to the agreement between DMC and ISS; however, the same award was enforceable against DMC and Mr Rattan Pathak.

Section 44 of the Arbitration and Conciliation Act, 1996, states that a foreign award of arbitration made on or after October 11, 1960, is an award of differences between the legal persons to the arbitration, wherein the differences may be either contractual or non-contractual (ex: tort), such that the said parties have a legal relationship of commercial nature between them in an arbitration agreement in consonance with the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards for the recognition and enforcement of arbitral awards made in the territory of a State (the United States of America) other than the State (India) where the recognition and enforcement of the said award are sought, provided the later lies in a territory notified by the Central Government of India in Official Gazette to be territories to which the given convention applies.

It is worth noting that the Single Judge upheld the nature of the arbitral award to be foreign due to the representation agreement between DMC and ISS. Section 47 elucidates the requisites for the enforcement of the foreign award:

  1. Either the original award or the duly authenticated copy of the award in the manner required by the law of the country in which the award was made (the United States of America).
  2. Either the original agreement for arbitration or the duly certified copy of the agreement.
  3. Any piece of evidence as may be necessary to prove the foreign nature of the arbitration award.

Wherein, if either the award or the agreement exists in a foreign language, then the party wanting to enforce the award shall produce a respective translation into English (certified by either the diplomatic or consular agent of the country to which the aforementioned party belongs; alternatively, a certified copy of the translated document may be admitted by the court of law in India if found sufficient by the same.

It is worth noting that a foreign award is binding on a party; however, the said enforcement can be halted by the said party (X) under any one of the following conditions under Section 48 of the act:

  1. Sub-Section 1, Clause A: the parties to the agreement are under some incapacity under the law applicable to the parties (ex: Indian Contract Act, 1872, dictates a minor, person of unsound mind to be an individual of incapacity to form an agreement).
  2. Sub-Section 1, Clause A: the agreement is not valid under the law to which the parties have been subjected to (ex: agreement by a minor, etcetera).
  3. Sub-Section 1, Clause A: either of the parties to the agreement failsin accordance with the law of the country where the award of arbitration is made.
  4. Sub-Section 1, Clause B: X was either not given proper notice of the appointment of the arbitrator (or of arbitral proceedings) or unable to present its case and pieces of evidence.
  5. Sub-Section 1, Clause C: If certain decisions made on particular matters of a case lie beyond the scope of arbitration, then that part of the award which contains decisions on matters submitted to arbitration may be enforced.
  6. Sub-Section 1, Clause D: If the composition of the arbitration entity (including the choice of an arbitrator) is not in accordance with either the agreement of the parties to the arbitration or the law of the country where the arbitration takes place.
  7. Sub-Section 1, Clause E: The bindingness of the award has been withheld by a competent authority of the country where the said award was made.

Additionally, the binding and enforcement of an award may be withheld by the court of law if either the subject matter of the difference between the parties to the agreement is not capable of settlement by arbitration under the legal structures of India (Clause A) or the subsequent enforcement of the award would be contrary to the fundamental public policy of India, basic notions of justice and morality (Clause B).

The court held that Mr Upadhyaya, a non-party to the agreement cannot claim that it is not bound to the award (since it is a non-party to the agreement) under the aegis of Section 48, Sub-Section 1, Clause A even though the said section deals with parties to the agreement, it is limited to its interpretation by only including incapacity parties to the agreement and not everyone. The court observed the tussle of words between Section 44 and Section 48, Sub-Section 1, wherein the former speaks of an arbitral award on differences between legal persons to the arbitration while the latter refers to the parties to the agreement in reference to Section 44; consequently, the court held that the inclusion of non-parties to the agreement in the same room as parties to the agreement under the expansive and liberal interpretation of the word “person” within Section 44 would be wrong in the spirit of the specificity of Section 48 (it only talks about the incapacity of the parties to the agreement).

The court directed the attention to Section 46, which says that an enforceable foreign award would be binding for all purposes on the persons between whom it was made; hence, non-signatories to an arbitration agreement is included within the ambit of Section 46 since Section 35 binds an arbitral award on the parties and persons claiming under them; hence, the latter restricts the “persons” to the parties it associates itself with while the former (Section 46) holds no such restriction to the interpretation of “persons.”

Hence, the court concluded that the non-signatories to the arbitration agreement have a foreign award binding upon themselves.

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