Open Sesame: Vodafone v UoI Reigniting the Interest in Enforcement of Investment Awards in India.

-Sahana Ramesh†

A few days ago, it was reported that the Permanent Court of Arbitration at The Hague had ruled that the Indian government’s imposition of tax liability on Vodafone was in violation of its Fair and Equitable Treatment obligation under the bilateral investment treaty (“BIT”) between India and the Netherlands. This decision marks yet another development in the long-enduring stand-off between the Vodafone group and the Indian government. While the award is unavailable at the time of writing, media reports suggest that the tribunal has ordered the Indian government to pay about 60% of the costs of the arbitration to Vodafone. The same report also notes that there exists a possibility of the Indian government having been required to return the taxes already collected from Vodafone. This report also notes that the tribunal rejected Vodafone’s claim for damages. Even so, this decision of the international tribunal once again brings in to sharp focus the vexed issues relating to or stemming from how investment treaty arbitrations are dealt with in India. Previously, there have been conflicting decisions from various High Courts with respect to how investment treaty arbitration related matters must be dealt with. In this blog post, the author renews the arguments surrounding these issues, and examines whether the existing legal framework in India can be used to resolve them.

Why the confusion?

There are multiple points that are worth noting, in discussing the backdrop of the issue of enforcement of investment treaty awards. First, there are two possible systems that are at work when it comes to enforcement of investment treaty awards: ICSID, and non-ICSID. The system established by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID Convention”) is a self-contained one, requiring no intervention of any court of law at any stage of the proceedings. The ICSID Convention also requires Contracting Parties to mandatorily enforce all awards made thereunder. However, the ICSID Convention does not enjoy as widespread participation as the other famous treaty in the field of international arbitration, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). In fact, India is not a Contracting Party to the ICSID Convention, and therefore, is not bound by its mandate in relation to the enforcement of investment treaty awards. For countries such as India, who do not participate in the system established by the ICSID Convention, the enforcement of investment treaty awards must be dealt with under the provisions of the New York Convention, a multilateral treaty originally envisaged in the context of facilitating the transnational enforcement of international commercial arbitration awards. The New York Convention, by design, relies on courts in the State where enforcement is sought to give effect to the arbitral award. Consequently, it is also possible for courts in that State to refuse the enforcement of awards. The refusal to enforcement can, however, be on limited grounds alone. As is well-known, Article V of the New York Convention details these limited grounds.

However, by virtue of Article I of the New York Convention, it is possible for States to make specific reservations with respect to the applicability of the New York Convention. One of these reservations, relevant to this blog post, is the ‘commercial’ reservation, which has been adopted by India. This reservation, contained in Article I(3) of the NYC states,

… When signing, ratifying or acceding to this Convention, or notifying extension under article X hereof, any State may … also declare that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such declaration.”

The implication of adopting this reservation is that it is possible for India to refuse the enforcement of arbitral awards under the scheme of the New York Convention, if the arbitral award is one passed in a dispute not arising out of a ‘commercial’ relationship. Herein lies the genesis of the confusion surrounding the enforcement of investment treaty awards in India.

Investment Treaty Arbitrations and Indian Courts: The Story so Far

The ‘commercial’ reservation adopted by India has been articulated in Section 44 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). This provision defines a foreign award to mean an award that is “… on differences between persons…considered as commercial under the law in force in India...”. When faced with questions related to investment treaty arbitrations, Indian courts have pursued different lines of analyses, without, perhaps, necessarily intending some of the consequences of their decisions on future disputes of a similar nature. These decisions have been briefly discussed in the following paragraphs.

The Calcutta High Court, in The Board of Trustees of the Port of Kolkata v Louis Dreyfus Armatures proceeded to deal with an application for an anti-arbitration injunction on the assumption that the Arbitration Act would apply. In that case, the High Court granted the anti-arbitration injunction when a French investor initiated a foreign-seated arbitration under the extant BIT between India and France. As was correctly pointed out in another post, this lack of engagement by the court on the question of the applicability of the Arbitration Act may not inspire much confidence in foreign investors who may, in the future, require the assistance of an Indian court in the enforcement of an investment treaty award. This is especially so in light of two other decisions, both of the Delhi High Court.

First was the decision of the Delhi High Court in Union of India v Vodafone Group PLC United Kingdom, where the Union of India sought an order from the court permanently injuncting the Vodafone Group (UK) from acting in furtherance of any existing arbitration proceedings, or initiating a new one, under the BIT between India and the United Kingdom. It must be noted that the government’s reason for applying for a permanent injunction in this case was because it was necessary to prevent multiple arbitration proceedings from being initiated before international fora – since Vodafone’s Dutch entity had previously initiated a claim under the Netherlands – India BIT. Interestingly, in this case, the Delhi High Court stated that the bilateral investment treaty between the United Kingdom and India, though constituting an arbitration agreement, did not give rise to an arbitration that could be termed as an ‘international commercial arbitration’ governed by the Arbitration Act. Consequently, the court, recalling the ‘commercial’ reservation that India has adopted in relation to the New York Convention, ruled that an investment treaty arbitration is “fundamentally different from commercial disputes as the cause of action (whether contractual or not) is grounded on State guarantees and assurances (and are not commercial in nature)”. Further, even though the court eventually held that the permanent injunction sought must not be granted, it noted that Indian courts’ inherent power to grant anti-arbitration injunctions (to be used cautiously and in exceptional circumstances) is not ousted by the provision of the Arbitration Act, where the arbitration proceeding under contemplation does not qualify as a ‘commercial arbitration’ under Indian law. It is, thus, clear that even while the Delhi High Court emphasized on the need to ensure that arbitration agreements are given effect to the extent possible, it was still reluctant to interpret investment treaty arbitrations as commercial arbitrations for the purposes of the Arbitration Act. Effectively, this would mean that the even while the Delhi High Court, at least, would want to adopt a pro-arbitration stance (as we have seen in several recent decisions involving commercial arbitration), it would not be able to do the same when it deals with investment treaty arbitration.

The rationale of the Delhi High Court in Vodafone Group (UK) was later followed by the same court in the second case, Union of India v Khaitan Holdings (Mauritius) Limited & Ors, where ad-interim relief staying arbitral proceedings under the India-Mauritius bilateral investment treaty was sought. Perhaps it is too soon to say that a pattern is emerging with respect to the treatment of investment treaty disputes in India – especially since courts have arguably adopted different approaches. What is certain, however, is that the recent ruling of the international tribunal in Vodafone presents India with an opportunity to lay to rest this debate once and for all. The next section of this post will examine how this can be achieved using the existing legal framework.

India’s Golden Opportunity, and the Way Ahead

The decisions discussed above make it clear that even though these judgments were not passed in the context of enforcement of awards resulting from investment treaty claims, they pose hurdles for potential investment treaty award creditors if they were to try to enforce such an award in India. By ruling that the Arbitration Act does not apply to any matters that arise from investment treaty arbitrations, courts have ruled out the possibility of using the only statute in India that deals with the subject matter of arbitration. These decisions can themselves, however, be at odds with the present legal framework, as has been illustrated in the following paragraphs.

First, it is the view of this author that not recognizing investment treaty arbitrations as “commercial arbitrations” under the Arbitration Act runs counter to the rationale of Indian courts in previous decisions. It must be remembered that the Supreme Court of India, in the context of arbitration, had pronounced that it is necessary to give the term “commercial” as expansive a meaning as possible, keeping in mind not only the need to promote not only efficiency in trade, but also the UNCITRAL Model Law (see, here). It must be noted that even though this decision of the apex court was delivered in 1994, it continues to be cited by courts in India while dealing with the issue of what constitutes a “commercial” agreement or transaction (see here, for example). Additionally, the Preamble of the Arbitration Act makes it abundantly clear that the statute draws inspiration from the UNCITRAL Model Law. In line with the rationale of the Supreme Court of India in these decisions, and with the Preamble of the Arbitration Act, it is difficult to imagine a more “commercial” transaction than an investment. After all, an investment that would be covered under a treaty most often has as much of a profit motive as an investment made pursuant to an agreement made between private parties. Further, even the newly introduced Commercial Courts Act, 2015 embraces a wide definition of the term “commercial disputes”, including investment agreements as is clear from Section 2(1)(c). This definition of commercial disputes should be sufficient to satisfy the requirement of a dispute arising from a transaction that is “commercial under the law in force in India” as required by Section 44 of the Arbitration Act.

Second, even conceding to the Delhi High Court’s view that an investment treaty arbitration is sui generis and is different from an international commercial arbitration, it must be remembered that this distinction is an acknowledgement of the differences in the character of the parties that participate in each kind of arbitration. Moreover, even though the technical distinction between international commercial arbitration and investment treaty arbitration is recognized, there are several instruments that were originally drafted in the context of commercial arbitration which find wide usage in investment treaty arbitrations, as well. These include the New York Convention, as well as the rules of several arbitral institutions who continue to use the rules that had initially been drafted for commercial arbitrations (exceptions do exist, of course, like the Singapore International Arbitration Centre which has specific rules of arbitration for investment treaty disputes). Thus, even going by the mandate of Section 44 of the Arbitration Act which requires the award to have been passed in the context of a “commercial” transaction, it is still possible to maintain that the present framework of the Arbitration Act may be used.

An important question that requires attention is where these decisions of the courts leave investment treaty award creditors at present. As has been discussed in the preceding paragraphs, there is still some rationale in arguing that the present framework, that is the Arbitration Act, is capable of being used to enforce investment treaty awards in India. Additionally, there are alternative remedies that have been proposed, too. One suggestion that has been put forth (see, here) is for award creditors to try to enforce their awards against assets of the Indian government in other jurisdictions like Singapore or the United Kingdom, where existing frameworks exist to enforce such awards. While this certainly is a practical option for award creditors, it must only be treated as a stopgap one as it does not resolve anything from India’s standpoint in the arbitral world. It has also been suggested, after considering the practice in jurisdictions like the United Kingdom, that India might consider an amendment to Section 44 of the Arbitration Act to explicitly include investment treaty arbitration awards within the definition of “foreign awards”. This would certainly be ideal, though unlikely. It must be remembered that India terminated most of its investment treaties a few years ago. Since then, India came out with a new Model Bilateral Investment Treaty in 2015, though, very few treaty arrangements have been entered into between India and other countries based on this model document (see, here). Additionally, it had been reported earlier this year that India is now considering a new investment legislation that would require disputes to be settled within the domestic legal system. Even with these developments, there are already several pending investment treaty claims against India (see, here).

In light of these circumstances, it becomes all the more important for courts in India to end the uncertainty with respect to the enforcement of investment treaty awards in India, and assure investors that their rights under international instruments like investment treaties will be protected. There is a ray of hope here. The Delhi High Court in its decision in Vodafone (discussed above), while rejecting Vodafone’s argument that the jurisdiction of Indian courts was ruled out because of the existence of a BIT, had noted that this argument cannot be accepted because the court’s assistance might be needed in the event of an award creditor desiring to enforce an investment award in India against the State. Even though the court did not elaborate on this point, the fact that it singled out enforcement of awards as one of the instances where Indian courts may be called upon to exercise their jurisdiction may be an encouraging sign for award creditors like Vodafone. The Indian government may want to challenge the latest award in the Vodafone proceedings; but if the award is upheld, it will be an opportunity for India to show the world that it is serious about protecting investors’ rights. After all, even small factors add up when it comes to attracting foreign investment, and enforcement of an arbitral award is perhaps the most important protection from the perspective of an investor.

Sahana Ramesh is currently an Assistant Professor at NALSAR University of Law, Hyderabad. She is an alumna of the London School of Economics and Political Science, and the National University of Juridical Sciences, Kolkata