The decision of a French court to allow Cairn to take control of 20 GoI properties in central Paris, reportedly valued at over $23 million, means that India now faces the unpleasant prospect of a run on other assets, including strategic oil and gas assets across the globe. Investment treaty award holders like Cairn Energy PLC, Vodafone Group BV, and Devas (Mauritius) Ltd are on the hunt.
They are taking such actions because they find that enforcement of investment treaty arbitration awards may virtually be impossible before Indian courts.
To explain: all foreign arbitral awards are enforceable in India as India is a signatory to the New York Convention of 1963. However, India signed the New York Convention with one limitation, i.e. only awards that are “considered commercial under the law in force in India” shall be enforceable in India.
This limitation was accordingly incorporated in the legislation and has become a stumbling block for this specific category of awards – those passed under the provisions of a bilateral investment treaty (BIT).
A BIT is a reciprocal sovereign-to-sovereign guarantee that protects investments and investors of one country in the territory of the other. It additionally provides for dispute resolution mechanisms, such as arbitration, and gives investors the right to private action – the power to initiate a dispute with the government of the host country in case it is not treated fairly and equitably as envisaged by the BIT.
Delhi high court, hearing a case between the Union of India and Vodafone, was of a prima facie view that investment treaty awards could not be categorised as commercial under Indian laws. This, because they were born from a sovereign-to-sovereign guarantee, and not as a pure commercial contract between two contracting parties.
This view has subsequently been reiterated by the Delhi HC when considering a similar issue and ruling on a dispute between the Union of India and Khaitan Holdings (Mauritius) Ltd. Delhi being the seat of the Union of India, this view had cast a serious doubt over the enforceability of investment treaty awards before Indian courts.
What compounds the problem is that arbitral awards pronounced under BITs are by definition not judgments by foreign courts. In the case of the latter, there is domestic legislation that allows enforcement in India. BIT awards don’t have this advantage.
So, treaty award holders like Cairn identify GoI’s foreign assets and seek refuge before foreign courts. Cairn, and Devas, which also holds a BIT award in its favour, have also filed suits before the US district courts in Washington and New York seeking a declaration that Air India is an “alter ego” of the Union of India and thus its assets are amenable to satisfy money judgments in favour of BIT award holders.
As is well known, this story began with retrospective taxation being applied to Vodafone and Cairn. This prompted Cairn and Vodafone to take recourse to the dispute resolution/ arbitration clauses under India’s BITs with the UK and Netherlands, respectively.
In December 2020, the Permanent Court of Arbitration at the Hague ruled that India’s retrospective tax demand was in breach of the guarantee of “fair and equitable treatment” as contained in the India-UK BIT. An award of $1.2 billion was passed in favour of Cairn Energy Plc.
Similarly, the Permanent Court of Arbitration held the demand for collection of tax from Vodafone to be contrary to the fair and equitable treatment provision of the BIT between India and the Netherlands and awarded an undisclosed amount in favour of Vodafone BV.
There are, however, more arbitration disputes. India, from 1994 onwards, has been a signatory to 86 BITs and has been involved in 21 separate arbitration disputes.
GoI recognised these issues emerging from its legacy BITs when the present government reformulated and issued a model BIT in 2016. The model BIT, which has since formed the basis of various renegotiated BITs, attempted to carve out an exception from liability against measures and laws regarding taxation.
But it was also realised that carving out of such exceptions may not send the right signal to the investment community at large. Therefore, GoI has added a specific clarification that awards under the new BIT shall be treated as commercial, and will be enforceable under the existing legislative framework in India.
However, a similar provision does not exist in its previously signed legacy BITs under which most investment treaty arbitrations are being contested, and under which the awards have been passed in favour of companies like Cairn and Vodafone.
If these awards are presented for enforcement before courts in India, the government’s stance shall be closely watched by the entire international business and arbitration community. If the state decides not to contest jurisdiction, it may help settle the issue in favour of enforcement, just as in the case of foreign commercial arbitration awards.
Till then, the government has no option but to run around, trying to protect its foreign assets and face repercussions of a policy widely recognised as imprudent and erratic.
