News and developments
Supreme Court Ruling in the First Case of Enforcement of Foreign Arbitral Award
This article summarizes a Supreme Court ruling in the first case relating to recognition and enforcement of an arbitral award under the New York Convention.
Background
Hanil Engineering & Construction Co., Ltd. (“Hanil”), a South Korean company, entered into an agreement with Melamchi Water Supply Development Board (“Melamchi Board”) to construct access roads for the Melamchi Water Supply Project. Hanil subcontracted the construction work to KONECO Pvt. Ltd. (“Koneco”), a Nepali company, under the condition that the entire construction be completed by the deadline. Despite repeated warnings, Koneco failed to fulfill its obligations. As a result, Hanil was in breach of its main agreement with Melamchi Board, which forfeited Hanil’s bank guarantee, and Hanil suffered financial loss totaling USD 1,758,578 plus interest.
The agreement between Hanil and Koneco included an arbitration clause and Korean law as the choice of law for settlement of disputes. The arbitration clause also stipulated that any dispute between the parties shall be settled amicably and in good faith before resorting to arbitration. The parties didn’t adopt institutional arbitration in the agreement. Nonetheless, Hanil applied to the Korean Commercial Arbitration Board (“Arbitration Board”) to adjudicate its dispute with Koneco. In July 2009, the Arbitration Board awarded Hanil damages against Koneco in the amount of USD 1,758,578 plus interest. To enforce the award in Nepal, Hanil submitted an application before the then-Appellate Court Patan requesting that the Arbitration Board’s decision be enforced as required under Nepal’s Arbitration Act 2055 (1999) (“Arbitration Act”). The Appellate Court Patan declined to enforce the award. Hanil then filed a Writ Petition at the Supreme Court of Nepal seeking to quash the decision of the Appellate Court Patan and to enforce the Arbitration Board’s award under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (“New York Convention”) and the Arbitration Act.
Decision
The Supreme Court ruled that in the instant case the Arbitration Board’s foreign arbitral award was unenforceable in Nepal. In its decision, the Supreme Court laid down the following principles regarding enforcement of a foreign arbitral award in Nepal:
The Supreme Court found that the parties in the instant case had not agreed on the appointment of arbitrator(s) or the appointment procedure. Nonetheless, the Arbitration Board appointed arbitrator(s) based on Hanil’s ex parte request. As the arbitrators were not appointed under either the laws of Korea or Nepal, the arbitral award did not satisfy § 34(2)(a) of the Arbitration Act requiring that the arbitrator(s) be appointed as per the laws and procedures specified by the parties. The Supreme Court concluded that the appointment of the arbitrator(s) and arbitration proceedings were not done as per the agreement between the parties as well as the laws selected by the parties and that the arbitrators were not appointed based on the principle of fair and impartial hearing.
In the instant case, a notice for appointment of arbitrator(s) was served to Mr. Hyunil Chung, Managing Director of Koneco in Korea after the notice could not be delivered at Koneco’s address in Nepal. The Supreme Court stated that Koneco had not authorized Mr. Chung to participate in the arbitration proceedings on behalf of Koneco. Thus, Mr. Chung’s receipt of the notice failed to meet the requirement for notice to Koneco. Further, the Supreme Court noted, the notice served on Mr. Chung was solely for the purpose of appointment of arbitrator(s), and no other notice was issued to Koneco to participate in the arbitration proceedings. A notice must be served timely and properly to ensure the parties’ right to a fair hearing. The Supreme Court concluded that Koneco did not get a fair opportunity to be heard.
Analysis
Nepal is party to the New York Convention, the major international instrument for enforcement of foreign arbitral awards. An arbitral award rendered in a foreign jurisdiction is enforceable in Nepal provided that it meets the requirements specified in § 34 of the Arbitration Act, which is based on the New York Convention. After twenty years of enforcement of the Arbitration Act, the Supreme Court has rendered its judgment on enforceability of a foreign arbitral award for the first time in this case. The judgment affirms that a foreign arbitral award, which is intended to be recognized and enforced in Nepal, must ensure that the arbitration proceedings fulfill the requirements specified in § 34 of the Arbitration Act and the New York Convention.