(1) On 15th January 1969, M/s. Uttam Singh Duggal & Co. Pvt. Ltd. (hereinafter called 'the conttractors' had entered into a contract with the United States of America Agency for International Development (hereinafter called 'the Us AID') for the construction of Us Aid staff house and apartments projects near Mehrauli, New Delhi. The contract contained an arbitration clause which reads as under: Notice of the demand for arbitration of a dispute shall be filed in writing with the other party to the contract. The demand for arbitration shall be made within a reasonable time after the dispute has arisen; in no case, however, shall the demand be made later than the time of final payment, except as otherwise expressly stipulated in the contract. In all cases the Contracting Officer. Us Aid, Mission to India, shall be the sole arbitrator.'
(2) Disputes arose between the parties. The contractors called upon the Us Aid to refer the disputes to arbitration in accordance with arbitration clause. The Charge d' Affairs ad interim. Embassy of the United States of America. New Delhi, wrote to the contractors that the U.S. Government does not, due to statutory restriction, submit disputes of this type to formal arbitration.
(3) The contractors have filed a petition under section 20 of the Arbitration Act for the filing of the arbitration agreement in Court and for the reference of the disputes to arbitration in accordance with law.
(4) The respondent has raised a preliminary objection, namely, that the Us Aid is an Agency of the United States. of America and wholly directed and controlled by the Government of United States of America and it is, thereforee. immune from the processes of this Court: in other words, the contention is that the Us Aid being part of a foreign sovereign is immune from the jurisdiction of the Indian Courts. In the first instance, the respondent has taken an objection that Us Aid being part of a foreign state it can be sued in a Court only with the consent of the Central Government under section 86 of the Code of Civil Procedure. It be noticed here that the Central Government vide its letter dated 26th March 1981 accorded its consent under section 86 of the Code of Civil Procedure for suing Us Aid regarding the performance of the contract dated 15th January 1969. It now is a common case that a petition under section 20 of the Arbitration Act is not a suit within the meaning of the provisions of section 86 of the Code of Civil Procedure.
(5) The contention on behalf of the respondent is that under the International law a foreign sovereign or a sovereign foreign state was immune from the Indian Courts and. thereforee, this Court will not be competent to entertain the proceedings. On behalf of the contractors it is contended that assuming Us Aid to be an Agency of the United States of America and wholly directed and controlled by the Government of United States of America, it has no immunity in respect of its non-governmental acts. It is contended that the present dispute has arisen purely out of the commercial transaction and no immunity can be claimed in respect of such a transaction.
(6) It appears the common law rule of immunity in England until 1975 was that a foreign state was immune even with regard to its purely commercial activity. However, this wide immunity was rejected by the Privy Council in the case of the Phillippine Admiral v. Wellem Shipping (1976) 1 All E.R. 78 where it was held that a foreign Government was not entitled to claim sovereign immunity in cases where an action in rem was brought against a vessel owned by that Government if the vessel was being used, either by the Government itself or by a third party, for trading purposes and not for the public services. Lord Denning in Trendtex Trading Corporation Ltd. v. Central Bank of Nigeria, (1977) 1 All E.R. 881, went a step further and held that there shell be no immunity in the cause of action in personam with regard to a state commercial activity. The above developments led to the enactment of the State Immunity Act. 1978. Section 3 of the said Act provides an exception of major significance. A foreign state now is not immune in respect of any proceedings relating to a commercial transcation entered into by that State. In a recent case I Congreso del Partido (1981) 2 All E.R. 1064 the House of Lords after a review of the entire case law on the subject has drawn a distinction between sovereign public Act and a private act and it has held that a sovereign state had no absolute immunity as regards commercial or trading transactions. Lord Wilberforce at page 1074 has concluded thus:
'THEconclusion which emerges is that in considering, under the restrictive theory, whether state immunity should be granted or not. the Court must consider the whole context in which the claim against the state is made. with a view to deciding whether the relevant act(s) on which the claim is based should, in that context, be considered as fairly within an area of activity. trading or commercial or otherwise of a private law character, in which the state has chosen to engage or whether the relevant act(s) should be considered as having been done outside that area and within the sphere of governmental or sovereign activity.'
(7) Mr. Mridul. learned counsel for the respondent referred to Article 372 of the Constitution of India and contended that the law laid down and prevailing in England before 1950 would govern the present case and the restrictive theory introduced in the doctrine of immunity after 1975 would not be applicable. I have not been able to understand what relevance Article 372 of the Constitution of India has in the interpretation of the doctrine of immunity. The doctrine of immunity is a subject of international law and as is apparent from a discussion of the judgments noticed above it has been undergoing a change in its application in England from time to time. So much so that in 1978 the State Immunity Act, 1978 was enacted and which now regulates the immunity from the jurisdiction of the Courts which foreign sovereign states can claim. In the case I Congreso del Partido (supra) the House of Lords has gone into the question of immunity in depth and held that if a governmental act is of a commercial nature, the fact that it was done for governmental or political reasons does not attract soveriegn immunity.
(8) Mr. Mridul contended that the Indian authorities on the subject have learned in favor of the view of absolute immunity. The counsel in support of this contention relied upon United Arab Republic and another v. Mirza, Ali Akbar Kashani, : AIR1962Cal387 and The German Democratic Republic v. The Dynamic Industrial Undertaking Ltd. : AIR1972Bom27 . In United Arab Republic and another (supra) a Division Bench of the Calcutta High Court observed :
'SOfar as the Calcutta High Court is concerned, it has adopted the rule of English law as the rule of Private International Law applicable to our country. The decisions of English Courts are uniform that in a personal action the immunity of a foreign State is absolute, unless it submits to the jurisdiction either by invoking it as a plaintiff or by appearing as a defendant with- out objection. The doctrine of restricted immunity based on the distincition between jure imperial and jure gestionis (Sovereign and noneovereign acts) cannot be accepted as the positive International Law of our country. The only restriction to the immunity of a foreign State recognised by the law of our country is that enacted by Section 2 of the Government Trading Taxation Act (III of 1926) and Section 86(2)(b) of the Civil P.C. Where there is no allegation that the, defendant 'trades' within the local limits of the Calcutta High Court, it does not fall within the exception and is entitled to immunity.'
'SECTION 84 and the following sections of the Civil P.C. do not exhaustively lay down the law on the subject of the immunity of a foreign State and cannot be construed as overriding principles of International Law. '
(9) In the German Democratic Republic (supra), a Division Bench of the Bombay High. Court observed as under :
'Aforeign Sovereign State is entitled to immunity from being sued in municipal courts under the principles of International Law. The principles of International Law would be applicable in India, but in its application section 86 creates an exception. In International law the immunity is absolute, subject only to the exception or exceptions recognised in International Law, one of such exceptions being when foreign sovereign State waives the privilege of immunity. Section 86 creates another exception, the exception being where the requisite consent is given by the Government of India as provided under section 86. But the provisions of section. 86 would to that extent operate as another exception and to that extent modify the principles of International Law. But subject to such exception the relevant principles of International Law would still be applicable in India.'
'THEdoctrine has yet not been curtailed in England to exclude its applicability to commercial transactions. If the doctrine which is well established for over a large number of years requires, in view of changed circumstances, to be at all modified in India, it is highly desirable that the Supreme Court as the highest Court of the land should, in a proper case, lay down the principles.'
(10) A perusal of the authorities cited above would show that both the Courts had hold in favor of absolute immunity following the English law as it then was. I have on a consideration of the latest English law on the subject observed that the international law on the doctrine of immunity has in England Since 1975 undergone a change and restrictive theory of immunity has been accepted as the part of the English law on sovereign immunity. The American law also seems to be taking a similar view. See Alfred Puphill of London Inc. v. Republic of Cuba, (1976) 425 Us 682.
(11) I find no plausible reason why the prevalent English law on sovereign immunity be not adopted in India. This also is in consonance with justice, equity and good conscience.
(12) Mr. Mridul contended that assuming the concept of restrictive sovereignty applies that the commercial transactions are not immune, the transaction in question is not a commercial transaction because there is-no buying and selling involved and, thereforee, the restrictive theory of immunity cannot be applied. I do not agree in this contention. The Us Aid had entered into a building contact with the plaintiff M|s. Uttam Singh Duggal and Company. Mr. Mridul may be right in contending that the contract is not a transaction or a trading or commercial character but, in my view the transaction cannot be placed anything above a purely private act. No sovereign or public act is involved in the transaction. It may sometime become difficult to differentiate between a sovereign private and public acts; in order to differentiate between a sovereign act and a private act one will have to look into the nature or to the purpose of the transaction. The transaction as already stated was purely a construction contract and it would, in my opinion, would best be termed a private commercial act.
(13) There also is another reason for not accepting the plea of immunity. The Central Government had by its letter dated 26th March 1981 accorded its consent under section 86 of the Code of Civil Procedure for suing Us Aid regarding the performance of the contract dated 15th January 1969. Mr. Mridul contended that section 86 is applicable only to a suit and since a petition under section 20 of the Arbitration Act is not a suit section 86 will not be applicable and, thereforee, the consent accorded by the Central Government is of no avail to the petitioner. It appears to be a commen case that section 86 only applies to a suit and that a petition under section 20 of the Arbitration Act is not a suit within the meaning of the expression 'suit' as used in section 86 of the Code of Civil Procedure. In my opinion, the fact that section 86 is only applicable to a suit and. the petition in. hand not being a suit is not governed by section 86 will not make any difference. The. fact remains that the Central Government has not chosen to uphold the plea of. immunity on the facts of this case and this in a way suggests that the Central Government wants to restrict the theory of immunity only to sovereign act and not to a sovereign private act or commercial activity.
(14) Mr. Watel has against the plea of immunity presented another argument and this is that the parties had entered into a contract containing an arbitration clause and that by the parties agreeing on the reference of any dispute to arbitration meant submitting to the jurisdiction of the court and it can be compelled to arbitrate. The counsel referred to Russel on Arbitration, 19th Ed. page 326. The relevant para reads as under :
'FOREIGNsovereign. The point has not yet arisen in English law, but the courts of the United States of America take the view that where a foreign sovereign his entered into a contract containing an arbitration clause, he has submitted to the jurisdiction and can be compelled to arbitrate.'
(15) Mr. Mridul firstly contended that the statement in the above paragraph that this point has not arisen in English law is not correct. The counsel referred to Duff Development Co. Ltd. v. Kelantan Government and another (1924) All E.R. 1. The facts in the cited case were that the government of Kelantan had entered into an agreement with the Duff Development Company Ltd. whereby the Government of Kelantan granted to the company rights of mining, timber cutting and road making and other rights to be exercised in that State. The deed contained an arbitration clause which incorporated the Arbitration Act, 1889. Disputes arose and they were referred in accordance with arbitration clause to an arbitrator who made an award whereby , he made certain declarations in favor of the company. On December 22. 1921. the government of Kelantan moved the Chancery Division of the High Court of Justice in England to set aside the award on the ground of error in law appearing on the face of it, but this application was dismissed. The decision was affirmed by the Court of Appeal and later by the House of Lords. On 12th June 1922, the company applied to the Kings Bench Division of the High Court for leave to enforce the award and an order to that effect was made by Master Bonner. On July 7, 1922 Master Ball, on the application of the company, made a garnishee order whereby certain monies said to be owing to the government of Kelantan from the Grown Agents for the Colonies were attached for payment of the taxed cost of the arbitration. On Deccmbsr 12, 1922, Master Jelf made an order whereby he set aside; the order made by master Bonner on the ground that the Sultan of Kelantan was an independent sovereign ruler and the state of Kelantan was an independent sovereign state and that the court had no jurisdiction over the Sultan or the Government of Kelantan. An appeal against the order of Master Jelf was allowed by justice Roche, but on an appeal to the Court of Appeal, that Court reversed the decision of Justice Roche and restored the order of Master Jelf. The company appealed to the House of Lords and one of the contentions raised was that the Government of Kelantan had voluntarily submitted to the jurisdiction of the courts of that country and, thereforee, the courts had power to make any such order against the Government of Kelantan as to payment of costs or otherwise in the proceedings as to the courts should seem fit. The Court (Lord Carson dissenting) held :
'THEREwas nothing in an agreement by a foreign state for the settlement of disputes by arbitration to import a waiver by that State of its right as a sovereign power to refuse to submit to the jurisdiction of the English Courts on an application for leave to enforce the award by the other party to the agreement; the motion by the foreign State to set aside the award was a proceeding independent of the application by the company for leave to enforce it, and did not constitute a submission to the jurisdiction of the court wien dealing with that application; and, thereforee, the company was not entitled to leave to enforce the award.'
(16) Mr. Mridul next referred to Compania Mercantil Argentina v. United States Shipping Board, (1924) 93 L J R W B D 816. The facts in the above case were that the plaintiff therein had chartered the Onekama ship owned by the defendants therein to carry a full cargo of maize from Montevideo to ports in Spain. The freight was payable 50 per cent on the signing of the bill of lading and the balance in cash at the current rate of exchange for bankers' sight bills on New York on the delivery of the cargo. The Charter provided that any dispute as to freight was to be settled by arbitration. Disputes arose. The plaintiff therein claimed reference to arbitration. The plaintiff notified the appointment of their arbitrator and the defendants in reply notified the appointment of their arbitrator. The defendants subsequently refused to proceed with the arbitration and on an action being brought by the plaintiffs the defendants raised the plea that they were a sovereign body being a department of the government of United States of America and, thereforee, could not be sued in the English Court. The plea was upheld by the Master and his order was affirmed by Mr. Justice Roche. The company went in appeal and the Court of appeal held :
'Asovereign independent state does not, by entering into a trading contract with a foreigner, lose its immunity from process in foreign courts as regards matters arising out of the contract; nor does a sovereign and independent State by making a submission to arbitration in a foreign country, lose its immunity from being imp leaded in the Courts of the foreign country.'
(17) Reference has also been made to Baccus S.R.L. v Servicio Nacional Del Trico (1957) 1 Q B D 438. The facts of this case briefly are that the plaintiffs therein were a limited company formed under the laws of Italy and carrying on business there; and defendants carried on business in Spain. In September 1952 the parties entered into two contracts for the sale by the defendants to the plaintiffs of 26,000 tons of rye, each contract provided 'for any divergence which may arise. . . both parties submit to the jurisdiction of the technical courts at London.' Disputes arose and the plaintiffs issued a writ out of the jurisdiction claiming damages for breach of contract. The defendants entered appearance through their solicitors. On November 19, 1955, the statement or claim was delivered and on January 30, 1956 and order was made by consent for security of the defendants' costs in the sum of 150. On April 18, 1956 a summons was issued on behalf of the defendants praying that all further proceedings in the action be stayed and that the writ and statement of claim be set aside on the ground that the defendants were a department of the State of Spain and that that State through its ambassader claimed sovereign immunity. It was admitted by the defendants that they possessed a legal personality, had power to make contracts on their behalf for the buying and selling of wheat and can sue and be sued in their name. It was not disputed that apart from the effect of their incorporation, the defendants would be a department of the sovereign state of Spain. The Court (Singleton, L.J. dissenting) held that the defendants were a department of the state of Spain notwithstanding that they were a corporate body and a separate legal entity, and they were, thereforee, entitled to claim sovereign immunity.
(18) From the above authorities it is clear that the English Courts had on more than one occasion considered the effect of an arbitration clause in a contract into by a foreign state on the jurisdiction of the Court to entertain the dispute. So Mr. Mridulis not wrong in contending that the statement in the book on Arbitration by Russel, 19th Edn. p. 326 that 'this point has not yet arisen in English law' is not correct.
(19) Now coming to the question whether an arbitration clause in a contract entered into with a foreign state amounted to submission to the jurisdiction of the Court the English decision seem to be clearly laying down that the contract providing for reference to arbitration does not amount to submitting to the jurisdiction of the Court. The authorities discussed above clearly lay down that the English courts have no jurisdiction over an independent foreign sovereign unless he submits to the jurisdiction; and such submission cannot take place until the jurisdiction is invoked. Also see Mighall v. Sultan of Johore, (1894) 1 Q B D 149.
(20) Mr. Watel, counsel for the petitioner, referred to Petrol Shipping Corporation v. Kingdom of Greece, Ministry of Commerce, Purchase Directorate, (United States Court of Appeals) Lloyd's List Law Reports 431(11). The facts in the case were that there was a contract between the Petrol Shipping Corporation with the Purchase Directorate of Greece, Ministry of Commerce for carriage of grain from U.S. to Greece. The Charter provided :
'SHOULDany dispute arise between owners and the Charterers, the matter in dispute shall be referred to three persons at New York, one to be appointed by each of the parties hereto, and the third by the two so chosen; their decision or that of any two of them, shall be final, and for the purpose of enforcing any award, this agreement may be made a rule of the Court. The Arbitrators shall be commercial men.'
(21) Disputes arose and the Corporation appointed its arbitrator but Charterers did not appoint their arbitrator. The Corporation initiated action for compelling Corporation but the action was resisted by the Charterers on the ground of sovereign immunity. The U.S. District Court of Appeals held that by entering into an arbitration agreement containing a submission sovereign became amenable to suit and should be treated as physically present. The Kingdom of Greece, Ministry of Commerce, filed an appeal and the Court of Appeals following the decision in Victory Transport Inc. v. Comisaria General de Abastecimientos v. Transportes. 336 F. 2d 354 1964 2 Cir. 12 dismissed the appeal.
(22) I have carefully gone through the authorities noticed above and I find that the arbitration clause in the case Petrol Shipping Corporation (supra) was materially different from the arbitration clause in the case in hand. The arbitration clause in the case decided by the United States Court of Appeals provided that dispute shall be referred to three persons at New York and for the purpose of enforcing any award, the agreement may be made a rule of the Court. The arbitration clause in the case in hand provides that in case of any dispute the contracting officer Us AID. Mission to India, shall be the sole arbitrator. The above clause, in my view, cannot be interpreted to mean that the respondent had submitted to the jurisdiction of the Municipal Courts in India or Delhi. I am of the considered view that only on the basis of the arbitration clause in the contract in Question it cannot be held that the respondent had waived the privilege of immunity.
(23) For the reasons stated the plea of immunity taken by the respondent is rejected.
(24) The respondent shall file the written statement within six weeks with advance copy to the counsel for the plaintiff who shall file the replication within two weeks thereafter.
(25) The parties shall appear before the Deputy Registrar for further directions on 2nd August 1982.