Recognition Of Doctrine Of ‘Transnational Issue Estoppel’ By Supreme Court In Enforcement Of Foreign Arbitral Awards

The Supreme Court of India (SC) in the recent case of Nagraj V. Mylandla v. PI Opportunities Fund-I and Ors. [1] , elucidated the principle of ‘transnational issue estoppel’ while upholding the enforcement of a foreign arbitral award. Even though the principle itself is well recognized around the world, the same has not been deployed affirmatively in any previous enforcement of foreign award proceedings in India, as is also noted by SC. The application of this principle is another step forward in India’s pro-enforcement stance by rejecting the practice of parties to relitigate issues which have already been dealt with by the arbitral institutions and/or the principal seat court.

The Respondents- Investors executed a shareholders agreement with one company viz. Financial Software and Systems Private Limited (FSSPL) and its promoters (Mylandlas), through which the Investors became shareholders in FSSPL. The Investors were promised Qualified Initial Public Offering (QIPO), which would ensure substantial return on investments. FSSPL and the promoters were required to ensure that the QIPO occurred by 31 March 2016. The shareholders agreement also envisaged that if the QIPO was not completed before 31 March 2016, the Investors could avail of a waterfall exit scheme. The shareholders agreement provided for disputes to be referred to Singapore International Arbitration Centre (SIAC). The governing law as per the shareholders agreement was Indian Law and the seat of arbitration was Singapore.

The QIPO having not materialized and the waterfall mechanism of exit having been ignored by FSSPL and Promoters, the Investors initiated arbitration before SIAC. SIAC passed a final award directing FSSPL and Investors to pay damages to the Investors, in lieu of the investors surrendering shares in FSSPL. The Award further directed that if the promoters failed to pay the damages to the Investors within 90 days, the Investors would be entitled to enforce a strategic sale of its shares. The said award was challenged by the Promoters before the Singapore High Court (Seat Court/ Singapore HC), primarily on the ground of breach of ‘fair hearing rule’. The Singapore HC dismissed the same.  Even though a further appeal to the Supreme Court of Singapore was available, the said remedy was not adopted by FSSPL and the Promoters.

The Investors initiated enforcement proceedings under Sections 47 to 49 of the Arbitration and Conciliation Act, 1996 (A&C Act) before the Madras High Court. The Mylandlas (Promoters) objected to the said enforcement proceedings on the ground that the same would be contrary to the public policy of India. However, the closer scrutiny of the objections reveal that these objections pertain to merits of the matter i.e. interpretation of the shareholders agreement and the question whether awarding damages tantamount to buy-back of shares or surrender of shares.

The Madras High Court relied upon the judgment of Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL & Ors. [2]  and Cruz City 1 Mauritius Holdings v. Unitech Limited [3] , and held that it is essential to recognize the need to restrain from examining the correctness of foreign awards. The Madras High Court further held that if courts of an enforcing country start refusing awards merely on account of contravention of local laws, the object and purpose of “Convention of the Recognition and Enforcement of Foreign Arbitral Awards, 1958”, would be defeated. Further, the Madras High Court held that as the contentions raised by the Promoters were already raised before Singapore HC and decided against them, the same could not be reargued at the enforcement stage. In view of the same, the foreign award was held to be enforceable by the Madras High Court. It was against this order, the Promoters of FSSPL approached SC.

Before the SC, it was urged that the enforcement of the arbitral award would be in breach of the public policy of India, in terms of Section 48 (2)(b) of the A&C Act. The SC, now, through a detailed order dismissed the SLP filed by the Mylandlas in terms of the following:

1. The SC would interfere at the enforcement stage only in an exceptional case of blatant disregard of Section 48 of the A&C Act.
2. Once the seat court has already considered and decided upon the issues raised by a party, the same stood settled conclusively and the party could not seek to reopen the same under the guise of Section 48 (2) of the A&C Act.
3. Rejecting the argument placed by the Mylandlas that a party is entitled to ‘two bites at the cherry ’[4]  one at the setting aside stage before the seat court; and second during the enforcement stage before the enforcement court, the SC referred to Section 50 of the A&C Act (which only provides for an appeal against an order refusing to recognize or enforce a foreign award but not the other way around) and concluded that a party is entitled to only ‘one bite at the cherry’ in a case where objections are made to a foreign award on the extremely narrow grounds contained in Section 48 of the A&C Act [5].
4. A party which has failed in its challenge to the arbitral award before the seat court cannot seek to reopen factual issues that were argued on merits and settled once again before the enforcement court.
5. It is the sovereign commitment of India to honour foreign awards, except on the grounds provided under Article V of the New York Convention.
6. A merit-based evaluation is beyond the scope of the enforcement court’s jurisdiction under Section 48 of the A&C Act and would be barred by application of the doctrine of ‘transnational issue estoppel’

‘Issue estoppel’ is a judicial determination directly involving an issue of fact or of law which disposes once for all of the issue, so that it cannot afterwards be raised between the same parties or their privies. The applicability of this doctrine to foreign judgments (transnational issue estoppel) has been accepted by many courts around the world.

While delivering the instant judgment, the SC delved exhaustively on the principle of ‘transnational issue estoppel’, referring to numerous judgments and literature to apply the principle of “transnational issue estoppel”. It is useful to discuss few of these judgments and literature.

In the case of Republic of India vs. Deutsche Telekom [6],  the Singapore Supreme Court identified the approach that an execution court should take while enforcing a foreign award. While fiercely promoting the principle of ‘Transnational Issue Estoppel’, the Court observed that such a principle helps to safeguard the place of arbitration within the transnational System of Commercial Justice, by promoting finality of decisions on the validity of awards. The court felt that this is important to ensure that a party who has succeeded before an arbitral tribunal and the seat court of challenge, is not deprived the legitimacy of its success. Without doctrines like ‘transnational issue estoppel’ to guard against relitigation of disputes, there is a real risk that the same award might be enforced in one jurisdiction but set aside in another, leading to uncertainty and unfairness that can undermine the value proposition of arbitration as a pre-eminent mode of international commercial dispute resolution.

In DSV Silo-Und Verwaltungsgesellschaft Mbh vs. Owners of the Sennar [7],  the concept of ‘issue estoppel’ from a foreign judgment were set out as follows;

“The first requirement is that the judgment in the earlier action relied on as creating an estoppel must be (a) of a court of competent jurisdiction, (b) final and conclusive and (c) on the merits. The second requirement is that the parties (or privies) in the earlier action relied on as creating an estoppel, and those in the later action in which that estoppel is raised as a bar, must be the same. The third requirement is that the issue in the later action, in which the estoppel is raised as a bar, must be the same issue as that decided by the judgment in the earlier action.”

The House of Lords have also recognized and accepted this principle as early as in 1966 in the case of Carl Zeiss Stiftung vs. Rayner and Keller Ltd. [8].  The House of Lords in this case observed that unfamiliarity with the modes of procedure in foreign courts may lead to difficulties in ascertaining whether a specific issue was decided by the court of origin or if its decision on that issue was fundamental, as opposed to collateral, to the foreign judgment, as only decisions of the former type give rise to ‘issue estoppel’.

In an article titled ‘Salami-Slicing and Issue Estoppel: Foreign Decisions on the Governing Law’, Adeline Chong dealt with whether ‘issue estoppel’ would arise over foreign decisions. Chong noted that ‘issue estoppel’ and ‘cause of action estoppel’ are part of estoppel per rem, which precludes a party from contradicting something which has previously been determined and is based on the Latin maxims  ‘interest reipublicae ut sit finis litium’ and ‘nemo debet bis vaxari pro una et eadem causa’, which mean, respectively, that it is in the interest of the State that there should be an end to litigation and that no one should be tried twice in relation to the same matter. Chong further noted that a foreign judgment must be recognized in order for it to have effect in the forum and, therefore, recognition is a pre-condition to accord a foreign judgment preclusive effect.

Further, Chong noted that requirements for recognition of foreign awards and res judicata are substantively identical, recognition of a foreign judgment will, in most cases, accord it res judicata effect at the same time.

In Good Challenger Navegante S.A. vs. Metalexportimport S.A. [9] , a question arose as to whether the decisions of Romanian Courts in relation to the award had any impact on its enforcement in England. The Court of Appeal of England opined that, in order to establish ‘issue estoppel’, four conditions must be satisfied, namely: (1) that the judgment must be given by a foreign court of competent jurisdiction; (2) that the judgment must be final and conclusive and on the merits; (3) that there must be identity of parties; and (4) that there must be identity of subject matter, which means that the issue decided by the foreign court must be the same as that arising in the later proceeding. It was held that there must be ‘a full contestation and a clear decision’ on the issue in question for ‘issue estoppel’ to apply.

In Diag Human SE vs. Czech Republic [10],  the doctrine of ‘transnational issue estoppel’ was applied. In this case, the Austrian Supreme Court had declined to enforce an award made in Czech Republic on the ground that the award was not yet binding on the parties as it was subject to an additional arbitral review process. In the enforcement proceedings that came before the High Court of England and Wales, it was held that the Austrian decision gave rise to an ‘issue estoppel’ which prevented the party from raising the same issue as to whether the award was binding on the parties, in its effort to resist enforcement in the English proceeding. It was, however, observed that the issue of ‘public policy’ may be different from State to State and a decision of a foreign court refusing to enforce an award under the New York Convention on the ‘public policy’ grounds of that State would not ordinarily give rise to an ‘issue estoppel’ in England.

The US Court of Appeal, in TermoRio S.A. E.S.P. and Leaseco Group LLC vs. Elecranta S.P. [11],  stated that the New York Convention specifically contemplates that the court in the State in which, or under the law of which, the award is made will be free to set aside or modify an award in accordance with its domestic arbitral law and its full panoply of express and implied grounds for relief and this would mean that a primary State court may necessarily set aside an award on grounds that are not consistent with the laws and policies of the secondary contracting State. It was noted that the Convention does not endorse a regime in which secondary States, in determining whether to enforce an award, routinely second guess the judgment of a court in a primary State when the court in the primary State has lawfully acted pursuant to its authority to set aside an arbitral award made in that country. It was observed that it takes much more than a mere assertion that the judgment of the primary State court offends the public policy of the secondary State to overcome a defence raised under Article V(1)(e) of the Convention.

Relying upon the literature and judgments of other jurisdictions, the SC finally held  the following

“The application of the doctrine of ‘transnational issue estoppel’ would effectively curb the propensity of parties to relitigate settled factual issues taking advantage of the fact that they are before a different court in a different jurisdiction, viz., the enforcement court in a country other than the situs of the seat court. This would invariably narrow the scope of interference by the enforcement court with an arbitral award that has already passed muster with the seat court. This would add value and augment the efficiency of arbitration as a dispute resolution mechanism to settle trans-border commercial disputes.”

While SC noted that opposition to enforcement of a foreign arbitral award on ‘public policy’ violation grounds can still be maintained, the SC finally cautioned that “however, in the guise of mounting such an attack, it is not open to a party whose contentions on the merits of a particular issue on facts have been rejected by the seat court to seek review thereof by the enforcement court. Such a ‘merits-based’ evaluation is beyond the scope of the enforcement court’s jurisdiction under Section 48 of the Arbitration Act and would be barred by application of the doctrine of ‘transnational issue estoppel’.”

This judgment rendered by the SC steadily furthers Indian Courts’ pro-enforcement and pro-arbitration approach to make India a global arbitration hub. Applying the well settled principles of doctrine of transnational issue estoppel globally, India is now at par with the other countries insofar as this point of law is concerned.

This judgment also sets a precedent from precluding the litigants on consuming the valuable time of the courts in considering and evaluating settled issues. Therefore, this is a welcome decision for any party seeking to enforce foreign arbitral awards in India. As is seen from this judgment, the SC has further diluted the powers of the enforcement court and laid emphasis on the supremacy of the seat court. 

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