Enforcement of BIT Awards in India

Recently, the Indian Government lost an arbitration dispute invoked by Vodafone International Holding BV (“Vodafone International”)under the India – Netherlands Bilateral Investment Treaty, at the Permanent Court of Arbitration (PCA). The PCA held[1] that the retrospective application of capital gains tax by the Indian Government on the company was a breach of the fair and equitable treatment standard[2] guaranteed under the treaty[3].The arbitration tribunal further imposed a cost of 4 million pounds on the Government of India payable to Vodafone for the legal costs borne by it.

This article does not deal with the merits of that dispute[4] but rather focuses on what lies ahead in terms of enforcement of the award secured by Vodafone. The article, therefore, discusses the legal regime for enforcement of such awards in India and the hurdles which stand in the way.

Generally, there are two manners in which the investment treaty awards are enforced. The first mode is, where the treaty-making countries have signed the ICSID Convention. In such a case, enforcement becomes quite easy as countries are under an obligation to implement the award rendered under the mechanism laid down in the treaty. However, India is not a party to the ICSID Convention[5]. Another road open for the enforcement of such awards is through the New York Convention, where the state signing the treaty are parties to the convention. However, to avoid a possible hiccup in the enforcement of such awards under the Convention it is necessary to tame the ‘unruly horse’ of public policy[6]. Moreover, under the Convention, the parties could have two reservations. The first reservation is grounded in reciprocity, meaning that countries are obliged to enforce arbitral awards only from those states which recognise the awards rendered in those countries. Secondly, they are obliged to enforce awards which arise out of commercial disputes.

Art. 253 of the Constitution of India gives the Parliament the power to enact any laws which would be needed to implement any obligation undertaken by the Government in pursuance of signing any international treaty. In the absence of any particular law regarding a specific treaty, the general rule laid down by the Supreme Court is that unless such obligations run counter to any municipal law of India they should be enforced. The Parliament of India has not enacted any law regarding how claims or awards under the ISDS mechanism are to be treated. India being a signatory to the New York Convention, which deals with the enforcement of foreign arbitral awards, incorporated it in Part II of the Arbitration & Conciliation Act, 1996 (Arbitration Act, 1996). Prior to this, such awards were enforced under a separate law. So, foreign arbitral awards from countries party to the Convention can be enforced in India. However, as aforementioned, India has adopted both the reservations to the Convention. Thus, in light of these reservations (particularly, the reservation related to enforcing arbitral awards which arise out of commercial disputes), can the Arbitration Act, 1996 be said to be applicable in case of investment treaty awards?

The answer to this question is muddied. There is a growing literature which answers the question in negative. There have been three cases related to this issue – The Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armatures[7](“LDA”) decided by the Calcutta High Court; Union of India v. Vodafone Group Plc and Ors[8](“Vodafone”) and Union of India v.Khaitan Holdings (Mauritius) Limited and Ors[9](“Khaitan”), decided by the Delhi High Court. A common thread amongst these cases was that the Indian Government approached the Courts to restrain the parties from initiating an arbitration process under a bilateral investment treaty. The following paragraphs try to provide a brief description of the issues in these cases and position undertaken by the different courts.

1. LDA

LDA, a French company had invested in an India company, Haldia Bulk Terminal Pvt. Ltd. Later, on Haldia Bulk Terminal entered into a contract with the Port Trust of Kolkata. This contract contained an arbitration clause. Later, some dispute arose between Haldia Bulk Terminal and Port Trust of Kolkata and under the contract, arbitration proceedings were commenced. In the meanwhile, LDA set in motion parallel arbitration proceedings under Art. 9 of the India-France BIT and made the Port Trust of Kolkata, State of West Bengal and the Republic of India, as parties to that proceeding. Aggrieved by being made as a Party to that proceeding, the Port Trust of Kolkata filed a petition in the Calcutta High Court seeking an anti-arbitration injunction against the LDA. The Court applied S.45 of the Act[10] and ordered LDA to discontinue the proceedings, as in its view LDA had wrongly identified the Port Trust of Kolkata as a party to the BIT arbitration and continuation of proceedings with Port Trust of Kolkata as a party would be oppressive. The Court observed that ‘unless the facts and circumstances of a particular case demonstrate that the continuation of such foreign arbitration would cause demonstrable injustice, a civil court in India would not exercise its jurisdiction to stay the foreign arbitration.’ The Court went further and laid down three conditions under which a civil court could restrain a party from pursuing arbitration proceedings:

a. where the validity of the arbitration agreement is disputed and the Court concludes that no such agreement subsists between the parties.

b. where the arbitration agreement is declared to be null and void, ineffective and cannot be honoured.

c. where such proceedings would act as “oppressive or vexatious or unconscionable”[11].

2. Vodafone

After failing to get a favourable ruling from the Supreme Court, Government of India retrospectively amended the Income Tax Act to bring certain offshore transactions within the fold of the Act. As a consequence of this, arbitration proceedings were commenced by Vodafone in April 2014 under the India – Netherlands BIT. While these proceedings were underway, Vodafone in 2017 notified the Indian Government of challenging the retrospective amendment of tax provisions under the India – United Kingdom BIT as well. The Indian Government sought an anti-arbitration injunction restraining Vodafone from invoking parallel proceedings under the India – United Kingdom BIT. While at first, the Delhi High Court granted an ex parte order in favour of India, later on, it dismissed the Government’s plea. However, it made some very interesting observations. First of all, in its view, the LDA judgement by the Calcutta High Court had no precedential value[12] and therefore it cannot be a ground to establish the applicability of the Arbitration Act. India had made reservations under the New York Convention and limited its applicability only to commercial disputes. In its view BIT arbitrations were in nature fundamentally different from an international commercial arbitration dispute as they were not borne out of commercial disputes but rather failure to abide by obligations undertaken an Agreement between two sovereign states. As far as the question of jurisdiction was concerned, it stated that it had jurisdiction under S. 20 of the Civil Procedure Code, 1908.

In such a situation, the only remedy left to the party who wants to enforce the award is to approach the Court under Order XXI of Civil Procedure Code, which again would be problematic, considering the fact that only “judgements” from foreign courts can be enforced under it and an arbitral award is not a judgement of a foreign court. The distinction drawn between the Delhi High Court between an ICA and BIT (and their consequences) on the ground of commercial nature has been discussed later.

3. Khaitan

The Court reiterated the position undertaken by it in Vodafone case. In the instant case, the parties to the dispute had initiated arbitration proceedings under the India – Mauritius BIT. The Court observed as the parties were Indian citizens, the company (Loop Telecom) was incorporated in Delhi and therefore it had jurisdiction under S. 20 of the Civil Procedure Code, 1908. It observed that arbitration proceeding initiated in pursuance of BIT is a different species of arbitration, one not contemplated under the Arbitration Act, 1996.

Different Species – Lack of Commerciality Reasoning by Delhi High Court

The Delhi High Court reasoned in the Vodafone case that arbitral proceedings initiated under a BIT lacked a commercial element as contemplated under S. 44 of the Arbitration Act, 1996. However, did the Delhi High Court really labelled the two kinds of arbitrations as different species based on commerciality or something else? Prabhas Ranjan and Pushkar Anand argue otherwise. The Court did not appreciate the fact that “whether the legal relationships that gives rise to investment disputes, subject to a BIT arbitration, can be considered as commercial in nature.”[13] In fact, it distinguished between the two on the basis of “cause of action”. In their opinion, in S. 44 of the Arbitration Act, 1940, the emphasis has been laid down not on the commercial nature of the cause of action which gives rise to such rights, but rather “on the commerciality of the legal relationship”[14]. They give an example to solidify their point. If a Government enters into a commercial contract with a foreign company and later on changes their policy and thereby revokes the contract, then too a BIT dispute can take place. If in such a scenario, if the Delhi High Court’s reasoning is applied, then despite there being a commercial relationship between the two parties, Arbitration Act, 1996 would remain inapplicable as the cause of action herein arises from the use of sovereign powers of a State.[15]Further, if we look into the practice of other states who have opted for reservation under the New York Convention, for example, in the United States, a very broad interpretation to the word commercial[16] has been adopted[17].

It is very likely that the judgement of the Delhi High Court in abovementioned two disputes would be treated as obiter dicta, particularly in light of numerous judgements of Courts in which they have leaned in favour of a wider interpretation. Also, the UNCITRAL Model Law on Arbitration, 1985 gives an expansive definition of the phrase “commercial” and includes the term “investments”. Moreover, if one looks into the explanation to S. 2(1)(c) of the Commercial Courts Act, 2015, it lays down that just because one of the parties to the dispute is the State itself, it would not mean that such dispute cannot be termed commercial. Furthermore, Art. 27 of India’s Model BIT also stipulates that disputes which are arbitrated in pursuance to that BIT would be considered as commercial for the purpose of New York Convention and would become enforceable under it. In such a scenario, there is nothing which would stop the enforcement of an arbitral award under Part II of the Arbitration Act, 1940, provided they do not breach the conditions laid down in S. 48 of the Act.

In addition to these, the Indian Courts should also take lead from Art. 51 of Constitution of India and keep in mind the principle of pacta sunt servanda. The Court should not forget that India entered these treaties of its own volition and therefore it must fulfil the ensuing obligations.

Conclusion

One of the features of India’s BITs is that they lack specificity, with most of them being silent on important issues such as the enforcement of awards. In a 2011 study, based on 67 international investment agreements of India, Prabhas Ranjan and Deepak Raju, found out that 51 of them did not contain any provision or mechanism regarding enforcement of awards[18].Even the India – Netherlands BIT is silent regarding enforcement of awards. The Model BIT of 2016 is a huge step in this regard, especially the fact that disputes arising under such agreements would be treated as ‘commercial’ for the purposes of the New York Convention. Even though the preceding paragraphs try to make a case for the enforcement of investment treaty awards under Part II of the Arbitration Act, 1996, it would be more sensible for the legislature to come up with a definitive law on this issue and not leave the job to the will of the Courts. If India is truly serious about becoming a $5 trillion economy and attract foreign investment into the country, then it also needs to get serious about giving foreign investors a definitive legal system. With numerous BIT disputes lining up, it is high time that India honours its international legal obligations by putting in place a proper legal regime governing such disputes. Undue delay in the enforcement of awards is bound to shake the confidence of foreign investors in the Indian market.

By- Utkarsh Srivastva, Researcher at Indian Society for Legal Research.
The views expressed by the author are personal.


Selected references
[1] Aditi Shah, Vodafone wins international arbitration against India in $2 billion tax case, Reuters, September 25, 2020.

[2] In an investment treaty, the states guarantee the respective foreign investors several protections such as fair and equitable treatment, national treatment, most-favoured-nation treatment, guarantee to secure access to justice and fair procedure and other similar protections. For a detailed analysis of the different standards of protection afforded under investment treaties, see Dolzer&Schreuer, Principles of International Investment Law (1st ed.), 119-191.

[3]Art. 4, Para 1India – Netherlands Bilateral Investment Treaty.

[4]One cannot really talk about the merits of the dispute because the Report is not available in public yet due to the confidentiality provision invoked by the Government of India.

[5]Besides this, wherein agreed,countries can avail the additional rules facility under the ICSID mechanism, where one of the parties to the dispute is a party to the ICSID convention. Interestingly, the Indo-Dutch BIT contemplates such a mechanism under Art. 9.

[6]Art. V, Para 2 New York Convention.

[7] The Board of Trustees of the Port of Kolkata v Louis Dreyfus Armatures, G.A. 1997 of 2014 & C.S. No 220 of 2014 (CalcuttaHigh Court, 29 September 2014).

[8] Union of India v Vodafone Group Plc United Kingdom &Anr, CS(OS) 383/2017 & I.A. No 9460/2017 (Delhi High Court,7 May 2018).

[9]Union of India v Khaitan Holdings (Mauritius) Limited &Ors, CS (OS) 46/2019, I.As. No 1235/2019 & 1238/2019 (Delhi HighCourt, 29 January 2019).

[10]It is pertinent to point out here that the Calcutta High Court simply presumed the applicability of the Arbitration & Conciliation Act, 1996 to the dispute. None of the parties had brought forward this argument, neither did the Court substantiate its decision regarding the applicability of the Act in a BIT arbitration with reasoning. Moreover, S. 44 talks about differences arising between persons. If the Calcutta High Court had explained its reasoning it would have been a very interesting read.

[11]supra note 6.

[12]See note 9.

[13]Ranjan & Anand, Indian Courts and Bilateral Investment Treaty Arbitration, India Law Review 2020, 11.

[14]ibid.

[15]ibid.

[16]Marc Bungenberg&AugustReinisch, EYIEL Special Issue: From Bilateral Arbitral Tribunals and Investment Courts to a Multilateral Investment Court 171, Springer 2020.

[17]This does not mean that the author is arguing that India is bound by such interpretation. The definition of what constitutes a commercial dispute very much depends on the national legislation of a country. 

[18]Ranjan&Raju, The Enigma of Enforceability of Investment TreatyArbitration Awards in India, 6 AJIL 1, 29.

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