Thursday, March 24, 2011

Res Judicata, Venture Global and s. 48 of the Arbitration Act

It was commonly believed until the well-known decision of the Supreme Court in Venture Global that s. 34 of the Arbitration and Conciliation Act, 1996 did not apply to foreign awards. We have discussed at length the subsequent development of the law on implied exclusion and a challenge to a foreign award. A single judge of the Delhi High Court, in Anita Garg v Glencore, recently considered a different issue arising out of this controversy – the interaction between s. 11 of the Code of Civil Procedure (res judicata) and ss. 34 and 48 of the Arbitration Act. In short, the question was whether a failure to challenge a foreign award under s. 34 before Venture Global was decided bars a subsequent challenge by virtue of constructive res judicata.

Glencore had obtained an interim award upholding jurisdiction and a final award against M/s Shivnath Rai Harnarain, a registered partnership firm, from the Grain and Feed Trade Association [“GAFTA”] in 1997. This arbitration qualified as an international commercial arbitration and it appears that the seat of arbitration was outside India. The firm filed a civil suit in the Delhi High Court in 1997 challenging the validity of the underlying contracts that formed the subject matter of the arbitration [“the firm suit”]. An identical challenge had been rejected by the GAFTA Tribunal in its interim award. Glencore also filed a civil suit in the Delhi High Court, to enforce the foreign award. That was treated as a suit under ss. 47 and 48 of the Arbitration Act and decreed on 27 November, 2008 [“the first suit”]. The firm’s civil suit was consequently dismissed and its appeal was found to be not maintainable. Glencore commenced execution proceedings against the firm and its partners. The partners attempted to challenge the decree but were held not entitled to do so because Order 21 Rule 50 CPC only permits objections, collusion apart, as to the status of the judgment-debtor as a partner at the relevant date. The partners then filed a petition under s. 34 of the Arbitration Act, relying on Venture Global, which was decided on 10 January, 2008, and the question that arose was whether the challenge to the legality of the underlying contracts was barred by res judicata.

Before turning to the judgment of the single judge, a preliminary point should be noted, although it is not expressly considered in the judgment. S. 11 of the CPC, which applies to a “suit”, may nevertheless be a bar to an arbitration “petition” under s. 34. In Smita Conductors v Euro Alloy, the Supreme Court held, in the context of the 1940 Arbitration Act, that a decision as to the existence or validity of the contract by a court in an arbitration petition is binding on the parties because the court has jurisdiction under the Act to adjudicate such questions. In any event, it is settled law that s. 11 is a manifestation of a principle of public policy and that res judicata may therefore be invoked even when s. 11 is not in terms applicable (Lal Chand v Radha Kishan).

The single judge (Sanghi J.) upheld the res judicata objection for three reasons. First, Sanghi J. noted that the fact that the firm suit had been filed in the name of the partnership firm was immaterial, because the implied authority of a partner under the Partnership Act extends to the resolution of disputes. Secondly, Sanghi J. held that the issue in the s. 34 application had been “directly and substantially in issue” in the first suit and in the firm suit. Thirdly, it was held that the dismissal of the objections preferred by the partners in execution proceedings was binding in the s. 34 proceeding as well. In addition, the application was found to be time-barred. Of these, the second and the third conclusions are of some importance, and are discussed below in turn.

The test under s. 11 CPC is inter alia that what is directly and substantially in issue in the subsequent suit must have been directly and substantially in issue in the former suit. In the firm suit, the case of M/s Shivnath Harnarain was that the underlying contracts were invalid and that very issue was raised in its s. 34 application. The objection had been rejected in the first suit (and therefore in the firm suit) on the ground that s. 48 of the Act, under which that suit had been filed, required the court to construe “public policy” narrowly, and that it must necessarily involve the element of fraud or corruption. A challenge under s. 34 had not been made, because the first suit pre-dated Venture Global and it was thought that s. 34 was inapplicable. Sanghi J. held that this is irrelevant, because Explanation IV to s. 11 provides that any matter which ought to have been raised in the former suit as a ground of defence or attack shall be deemed to have been a matter directly or substantially in issue in that suit. This is the well-known doctrine of constructive res judicata. Nor did the fact that Venture Global was decided subsequently matter, because the Supreme Court only “declared the pre-existing legal position and did not vest or create any fresh right” (para 25). This is a close point. Although the theory that a court merely declares pre-existing law has been described by no less an authority than Lord Browne-Wilkinson as a “fairy tale in which no one any longer believes”, it is clear, as Lord Goff noted (Kleinwort Benson v Lincoln City Council), that retrospectivity of decisionmaking is inevitable in a system that is committed to the doctrine of precedent. Nevertheless, there is room for the view that it is not appropriate to apply constructive res judicata to a ground of defence or attack that at the time was contrary to the “settled understanding of the law”. It might also be said that the object of constructive res judicata is that a party cannot be permitted to disturb the finality of proceedings by raising subsequently points he ought to have raised earlier, but failed to do so for reasons of negligence or strategy. The obvious difficulty with this approach is that it requires the court trying the subsequent suit to investigate whether the plaintiff’s failure to raise the point in the former suit arose out of a settled understanding or strategy, especially where it was possible to have attacked the settled understanding itself (for example through interlocutory proceedings). Sanghi J. appears to have had this in mind as well, for his alternative reason for rejecting the s. 34 application was that the plaintiffs had failed to rely on Venture Global in the first suit although the suit was decreed eight months after Venture Global was decided.

A corollary to this problem is jurisdiction, because s. 11 also requires that the parties must have litigated under the same title, that the former suit must have been finally decided, and that the court that tried the former suit must have had jurisdiction to try the subsequent suit. In this case, it was argued that the court that tried the firm suit did not have jurisdiction to try that suit, because s. 5 of the Act mandates that there is to be no judicial interference in arbitration except as provided in Part I. Sanghi J. rejected this contention (para 23) reasoning that the “petitioner cannot blow hot and cold at the same time” and in any event that the first suit was delivered by a court of competent jurisdiction. The point was moot in this case because the court that tried the first suit (the Delhi High Court) would have had jurisdiction to entertain a s. 34 application, if maintainable (Fountain Head Developers v Maria Arcangela Sequeira, ¶ 14). However, it is not clear that s. 11 will apply in a case where constructive res judicata is pleaded in the subsequent suit in respect of an issue that could not have been raised before the court that tried the former suit.

The third reason Sanghi J. gave is, with respect, more doubtful, because it is difficult to see why the bar on challenging a decree in execution proceedings under Order 21 Rule 50 constitutes res judicata if the challenge is subsequently brought in a civil suit. It may be the case – as it was in Glencore – that the decree that was sought to be executed may itself constitute res judicata, but if it does not, Order 21 Rule 50, it is submitted, cannot come to the rescue.


Anonymous said...

I have a related issue here, which I am not getting an answer. IF a foreign award passed by UK arbitrator, is challenged under section 34 of the Act in India, say High Court, will that put a blanket stay over or suspension over the award or the award can be enforced in any other jurisdiction, eg. USA, Singapore etc.

Badrinath Srinivasan said...

@ Anonymous: There is a possibility that the award can be enforced in a jurisdiction which recognises the seat theory. The problem would then be what if the party applying to the Indian court under S 34 approaches the Indian court and gets a stay order against the enforcement proceedings as well? Assume the enforcement court proceeds with the matter despite the Indian court's order. What if the Indian court passes an order restraining the award holder from proceeding with the enforcement?