GoI should not contest arbitral awards in Indian courts

Relevance: Issues in implementation of arbitral awards due to India’s legacy Bilateral Investment Treaty (BIT) structure.

Synopsis: In the aftermath of the Cairn arbitral award, a analysis of issues involved and probable future course of action.

Background

A French court recently allowed Cairn to take control of 20 government of India properties in central Paris, reportedly valued at over $23 million. This means that India now faces the unpleasant prospect of a similar run on other assets, including strategic oil and gas assets across the globe.

What are arbitral awards?

These refer to the decision of an arbitral tribunal, whether in a domestic or international arbitration. Arbitration is one of the methods of Alternative Dispute Resolution (ADR).

• ADR is the procedure for settling disputes without litigation. Arbitration is a procedure in which the dispute is submitted to an arbitral tribunal which makes a decision on the dispute that is binding on the parties.

India & arbitral awards 

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.

What is a 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.

Why treaty holders approach foreign courts?

Due to the following reasons, treaty holders like Cairns, Vodafone like to approach foreign courts:

1]. Arbitral awards are not commercial awards under Indian laws

• 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 categorized 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.

2]. Arbitral awards under BITs are not foreign court judgements: Arbitral awards pronounced under BITs are by definition not judgments by foreign courts. In the case of the foreign judgements, there is domestic legislation that allows enforcement in India. BIT awards don’t have this advantage.

So, treaty award holders like Cairn identify Government of India’s foreign assets and seek refuge before foreign courts.

Arbitration disputes – Retrospective taxation

India, from 1994 onwards, has been a signatory to 86 BITs and has been involved in 21 separate arbitration disputes.

• Retrospective taxation dispute: Retrospective taxation clause was 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, Vodafone BV was awarded an undisclosed amount by PCA.

Model BIT

GoI recognised these issues emerging from its legacy BITs 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.