This article has been authored by Ms. Charvi Jain, a 3rd year B.A., LL.B. (Hons.) student at Rajiv Gandhi National University of Law, Punjab
Introduction
International arbitration owes its success to the assumption that the award rendered in the proceeding ought to be final, enforceable, and binding. The entire effort of successful proceedings goes to vain when the party suffers from unreasonable delay and difficulty when it comes to enforcing the award.
There is an obligation on States within whose jurisdiction arbitral proceedings are conducted to recognize and enforce awards rendered by arbitral tribunals. Article III of the New York Convention requires countries to recognize arbitral awards as binding and to enforce them in accordance with national laws, consistent with the provisions of the convention.
Understanding State Immunity
However, the enforceability of arbitral awards becomes difficult when the Judgment Debtor (the one against whom an arbitral award has been passed), is a State. This is because the doctrine of sovereign immunity, also known as state immunity, protects the states from being subjected to the jurisdiction of the courts and tribunals of another state without express consent (“par in parem non habet imperium”).
There are two types of state immunity: immunity from jurisdiction and immunity from execution. In contrast to immunity from jurisdiction, which prohibits courts in one state from taking on jurisdiction over claims made against another state, immunity from execution safeguards a State’s assets from being used to pay off its debts to third parties.
Although it is presently a generally accepted principle that an agreement to arbitrate entered into by a state party constitutes a waiver of immunity to jurisdiction, this waiver does not extend to enforcement or execution of an award obtained from the arbitral process against the State party. The shield of state immunity is further exacerbated in situations when the assets that form the subject matter of the execution proceedings are owned by the state or state-owned or state-controlled entities.
India’s Approach: The Restrictive Immunity Model
India follows the rule of restrictive immunity. This rule carves out a distinction between acta jure imperii (“public acts”) and acta jure gestionis (“commercial acts”). In jurisdictions where a restrictive approach to sovereign immunity is followed, execution is only possible against assets of the state which are used for commercial purpose, the party pursuing enforcement must initially locate and identify commercial assets, then demonstrate that these assets are owned by the State and utilized for a non-governmental, commercial purpose, which proves to be a challenging endeavor.
At the execution stage, the court employs the ‘purpose test’ to determine whether the property or asset was used for a commercial purpose. The “purpose test” is much more rigorous when compared to the “nature test”, which is employed at the jurisdiction stage. Because under the purpose test, states can argue that any act, no matter how commercial it looks, was done for a sovereign purpose like economic development, national security, or public welfare, and hence should be immune. This distinction creates a loophole for the states to abuse. The state uses this distinction to claim immunity from any act by attaching a sovereign rationale behind it.
Execution Immunity in Practice
In the notable decision of Republic of India v. CCDM Holdings, LLC, popularly known as the Devas-Antrix dispute, the Full Court reversed the decision of Federal Court of Australia by upholding that by ratifying the New York Convention with a commercial reservation, India has only waived immunity with regards to the execution of non-commercial awards. This ruling underscores the heightened importance of the distinction between commercial and non-commercial activity, as it greatly determines the outcome of immunity waivers. India has consistently maintained in several disputes, particularly arising from regulatory or investment disputes (like BIT arbitrations), that the awards arising from these disputes are concerned with non-commercial acts, hence non-enforceable against its assets. From the standpoint of foreign investors, this strategy might look like an aggressive or unfair measure to obstruct enforcement proceedings against its assets on the part of India, which undermines the credibility of India as an arbitration-friendly country.
This is not the first instance of India becoming more and more involved in arbitration cases brought by other foreign investors under BITs, as well as post-award proceedings that involve difficulties enforcing the award. The case of Cairn Energy v. Air India is another saga of India resisting the claim of another party by citing public policy concerns. The dispute was ultimately settled with India refunding Cairn around Rs. 7,900 Crores and Cairn dropping enforcement proceedings against Air India and other related parties in all jurisdictions. This showcases that even the most common exception to the rule of state immunity becomes inapplicable when it comes to execution immunity.
Legal Position under Indian Law
Article 19 of the United Nations Convention on Jurisdictional Immunities of States and Their Property states that a foreign state can take measures against the property of another state when it has been expressly consented to by the latter state through an agreement, declaration, or written communication. However, India has not ratified the convention yet, which makes the execution of an award difficult without any decisive legislation.
Since there is no standalone legislation, the rule of state immunity is governed by Section 86 of the Code of Civil Procedure (“CPC”). Sub-section (3) of the above-mentioned section lays down that:
Except with the consent of the Central Government, certified in writing by a Secretary to that Government, no decree shall be executed against the property of any foreign State (emphasis added)
Considering the bare reading of the provisions, one would assume that CPC grants absolute sovereign immunity to the executive branch of the government. However, the Indian Judiciary in practice has adopted a completely different stance.
The Delhi High Court (“DHC”) in the case of KLA Technologies v. Afghanistan answered two pertinent questions of law. The first issue pertains to whether prior consent is required under Section 86(6) of CPC when to comes to the enforcement of an arbitral award against the state. The court answered the same in the negative.
The second question pertained to whether a Foreign State can claim sovereign immunity against the enforcement of an arbitral award arising out of a commercial transaction. The court upheld that the rule of restrictive immunity prevails in India, and the state cannot use the shield of sovereign immunity to stall the proceedings for the enforcement of an arbitral award against it. The court further reasoned that, “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.”
Outstanding Issues in Arbitral Award Enforcement
The attitude of Indian Courts has been pro-arbitration, liberal, and pragmatic when it comes to the enforcement of arbitral awards. The Supreme Court ruled in Ethiopian Airlines v. Saboo that membership in a novel and specialized convention might be construed as an implicit waiver of immunity. Hence, the courts are in the best position to clarify whether entering into an international agreement would implicitly constitute a waiver of execution immunity.
Notwithstanding the above, even the DHC itself refrained from appreciating the distinction between immunity from jurisdiction and immunity from enforcement. The distinction is critical not only under international law but also under domestic statutes. Unlike India, where the legal framework on sovereign immunity and execution of arbitral awards remains fragmented and ambiguous, both the United States and the United Kingdom have enacted clear, codified statutes — the Foreign Sovereign Immunities Act (“FSIA”) and the State Immunity Act, 1978 (“SIA”) — that comprehensively regulate this area. The FSIA (Sections 1609–1611) explicitly defines the scope of immunity from execution and permits enforcement against property used for commercial purposes under Section 16. The SIA under Sections 9 and 13 distinguishes between immunity from jurisdiction and immunity from execution, restricting enforcement to commercial assets. This structured legislative approach ensures clarity, consistency in arbitral award enforcement, which India currently lacks.
The Way Forward
It is submitted that Indian jurisprudence, which lacks guidance on this issue, could have benefited from a more intricate analysis of the distinction between different stages of immunities, and the same could have been incorporated in its statutory provisions. An excellent way to create a more conducive ecosystem for this would be to introduce stand-alone legislation on the topic. The Law Commission of India in its 176th report recommended, “India needs an independent and exhaustive Act on State immunity specially in the context of acta jure gestionis, not only in the interests of certainty of law but also its expanding horizons of international trade and commerce.”
In this era of the interconnected globalised economy, the rule of absolute state immunity holds no space. Investors become wary of entering into arbitration agreements with States, which tend to create blockades in the enforceability of an award, as it proves to be a costly and time-consuming affair for them.
As India strives to create its reputation as an investment-friendly nation, India needs to make pragmatic decisions concerning foreign investment and foreign investors, and abide by its sovereign commitments under international treaties. The way forward is to recognise sovereign powers, but exercise them in a manner that honours international law and practice.