The Hon’ble Supreme Court in DLF Limited. v. Koncar Generators and Motors Limited, Civil Appeal No. 7702 of 2019 has clarified what should be the date to determine the foreign exchange rate for converting the award amount expressed in foreign currency to Indian rupees. The judgment further clarifies what would be the date of such conversion in a situation where the award debtor deposits a portion of the award amount before the court during the pendency of proceedings challenging such award.

Brief Facts:

Certain disputes arose between DLF Limited. (“DLF”), the Appellant (award-debtor), an Indian company and Koncar Generators and Motors Limited. (“Koncar”), the Respondent (award-holder), a Croatian company, in relation to their contract for design, engineering, manufacturing, and supply of two generators by the Respondent, which was referred to arbitration before the International Chamber of Commerce, Paris. On May 12, 2004, the arbitral tribunal passed an award of Euros 10,93,989 (along with interest) in favor of Koncar. However, a petition under Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”) was filed by DLF, which was only dismissed in 2010, after which, they filed an appeal under Section 37 of the Act before the High Court and also filed objections under Section 48 of the Act before the trial court.

The High Court dismissed the appeal on October 15, 2010, ordering DLF to deposit an amount of Rs. 7.5 crores before the court on or before November 8, 2011, which would be released to Koncar only after furnishing a bank guarantee of a scheduled bank of India, where such bank guarantee would be kept alive during the proceedings under Section 48 and for 60 days thereafter. DLF deposited this amount of Rs. 7.5 crores with the court on October 22, 2010.

The Trial Court dismissed the objections filed under Section 48 of the Act, to which DLF filed a revision before the High Court. The High Court, on June 3, 2011, stayed the Trial Court’s order dismissing the objections, and ordered DLF to deposit a further amount of Rs. 50 lakhs with the court, which could only be disbursed to Koncar on the final adjudication of the pending proceedings. Subsequently, the High Court dismissed the revision petition on July 1, 2014, on which date the award attained finality.

In the execution petition, the Trial Court on February 3, 2017 held that the relevant date to convert the award amount expressed in Euros to Indian rupees is July 1, 2014 because it is the date on which all the objections against the award were finally decided and the award was deemed to be a decree. DLF filed a revision petition against this order of the Trial Court, which was dismissed by the High Court on February 26, 2018. The High Court’s order was challenged before the Hon’ble Supreme Court.

Main Issue:

1. What is the correct and appropriate date to determine the foreign exchange rate for converting the award amount expressed in foreign currency to Indian rupees?
2. What would be the date of such conversion, in a situation where the award debtor deposits some amount before the court during the pendency of proceedings challenging the award?

Submissions of the Parties

Koncar’s Submissions:

Koncar submitted that the award amount should be converted on the exchange rate prevailing on July 1, 2014. It was urged that Koncar did not consent to the deposit of Rs. 7.5 crores and that the High Court while ordering DLF to deposit Rs. 7.5 crores had not converted the award amount (since the award, not having attained finality, was not deemed to be a decree as on that date) but merely directed deposit of a lump sum amount. It was further submitted that the deposit of Rs. 8 crores made by DLF lis pendens does not pass the title of such amount to Koncar.  

DLF’s Submissions:

DLF submitted that the deposited amount should be converted on the exchange rate prevailing on the date of the deposit, i.e., October 22, 2010 and not on July 1, 2014. It was urged that when the High Court ordered DLF to deposit Rs. 7.5 crores with the court, Koncar was permitted to withdraw such amount on furnishing a bank guarantee of a scheduled Indian bank in Indian rupee; and that Koncar’s submission on their inability to withdraw the amount should not be accepted because they agreed to the condition at the time of the deposit, and also failed to apply for a modification of the condition. Thus, DLF should not be faulted for Koncar’s failure to withdraw the amount at that time.

Further, if the relevant date of conversion of the award amount is held to be July 1, 2014 then DLF would be required to pay Rs. 6.48 crores, which is more than double the amount payable if the relevant date of conversion is held to be October 22, 2010.

Consideration of Submissions by the Court:

As regards the first issue i.e., what is the correct and appropriate date to determine the foreign exchange rate for converting the award amount expressed in foreign currency to Indian rupees, the Supreme Court relied on the statutory scheme for the enforcement of foreign arbitral awards in India, and the caselaw of Forasol v. ONGC, 1984 Supp SCC 263. It held that under Part II of the Act which governs the enforcement of certain foreign arbitral awards, a foreign arbitral award becomes binding between the parties when it becomes enforceable under Section 46 of the Act; and that a foreign arbitral award becomes enforceable when the objections against it are finally decided and dismissed. Once a foreign arbitral award becomes enforceable under the Act, under Section 49, it is then deemed to be a decree of the court.

Further, the Supreme Court also relied on the caselaw of Forasol v. ONGC, which held that the “court must select a date which puts the plaintiff in the same position in which he would have been had the defendant discharged his obligation when he ought to have done, bearing in mind that the rate of exchange is not a constant factor but fluctuates, and very often violently fluctuates, from time to time”. Applying this principle, the Supreme Court, in the present case found that the date on which the objections are finally decided and dismissed will be treated as the relevant date for determining the exchange rate for converting the award amount expressed in foreign currency to Indian rupees. The Supreme Court further explained that the enforceability of a foreign award is automatic and deemed under Section 49 of the Act. Accordingly, the Supreme Court ruled that the arbitral award in the present case attained finality on July 1, 2014.

As regards the second issue i.e., what would be the date of such conversion in a scenario where a portion of the amount of the arbitral award has been deposited by the award debtor before the court, during pendency of the proceedings challenging the award, the Supreme Court held that regardless of whether the award holder withdraws a portion of the amount from the total amount deposited by the award debtor, the conversion of the award amount should be based on the exchange rate on the date of the deposit. The Supreme Court rejected Koncar’s argument that the conversion date in a situation where the amount was not withdrawn, should be the date when the award becomes enforceable. The principle relied upon by the Court was that the award holder should not be permitted to serve his own interest to be able to benefit from a higher exchange rate prevailing on a later date. It also emphasized on the consequence and effect of a deposit made during the pendency of proceedings, where the award debtor parts with the money on the deposit date and the passes on the benefit of such money to the award holder, who can convert, utilize and benefit from the same; and that it would be inequitable and unjust to hold that the award amount does not stand converted on the date of deposit. The Supreme Court also held that the award debtor cannot be made liable to pay interest on such portion of the award amount which has already been paid/deposited by him, lis pendens. Pertinently, the Court also clarified that after the conversion of the portion of the award amount deposited, the pending amount should be converted on the date when the arbitral award becomes enforceable.

Now, in relation to the second deposit of Rs. 50 lakhs made by the award debtor, which could not have been withdrawn by the award holder during the pendency of the proceedings, the Supreme Court applied the same principle and ruled that since the Koncar could not have benefited from this amount, the date for conversion of this amount should be July 1, 2014, i.e., when the award became enforceable.

Conclusion:

The Supreme Court has made it abundantly clear that the correct and appropriate date to determine the foreign exchange rate for converting the award amount expressed in foreign currency to Indian rupees, is the date on which such award attains finality.

Further, in a situation where the award debtor deposits some amount before the court during the pendency of proceedings challenging the award, and the award holder is allowed to withdraw such amount, the correct and appropriate date to determine such conversion is the date of deposit; whereas, on the other hand, where the award holder is not allowed to withdraw such amount, the correct and appropriate date to determine such conversion is the date on which such award attains finality.

This update has been contributed by Armaan Patkar (Partner) and Ayushi Khetan (Associate).

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