The Vodafone Saga and India’s Position on Investor State Arbitration

The case of Union of India v. Vodafone Group PLC United Kingdom & Anr. (“Vodafone Group”), decided by the High Court of Delhi (“Court”) on 7 May 2018, posed significant questions pertaining to investment treaty arbitration (“BIT arbitration”), and offered India a crucial opportunity to express its position on such questions. The questions at the center of the dispute in the said case were – (A) whether Indian courts are empowered to issue an anti-arbitration injunction (“AAI”) in BIT arbitrations on the pretext of “abuse of process” by a party; (B) whether the Arbitration and Conciliation Act, 1996 (“1996 Act”) applies to BIT arbitrations. This blog post attempts to critically analyze the aforesaid issues in the light of the said case, while also drawing on the interpretation of such issues in other jurisdictions.

To briefly summarise the facts, Vodafone International Holdings BV (VIHBV) (registered in The Netherlands) initiated an investment arbitration against the Republic of India on 17 April 2014 under the India – Netherlands Bilateral Investment Protection Agreement (“BIPA”). VIHBV claimed that the tax liability imposed upon it by a retrospective amendment to the Income Tax Act violated its substantive rights under the BIPA. On 24 January 2017, Vodafone Group Plc., U.K. (“Vodafone U.K.”) (Parent Company of VIHBV) served India a Notice of Arbitration under the India – U.K. BIPA on the same grounds as raised by the VIHBV under the India – Netherlands BIPA. The latter arbitration was contended to amount to an abuse of process by India before the Court, seeking an AAI against the such arbitration proceedings. The Court granted an interim stay on 22 August 2017 while restraining Vodafone U.K. from proceeding with the arbitration.

A. Indian courts’ power to issue anti-arbitration injunction for ‘abuse of process’

The Court while dealing with the issue of ‘abuse of process’ observed that abuse of process is an offshoot of the doctrine of abuse of rights, aimed at preventing misuse of one’s procedural rights before a forum [Para 106 & 108]. The court also observed that although common law systems do not statutorily recognize the principle of abuse of rights, unlike civil law systems, it does not stop the courts from exercising their inherent powers to prevent a party from abusing its procedural rights [Para 106 & 107]. The Court placed reliance on the case of Excalibur Ventures LLC v. Texas Keystone Inc. & Others, [2011] 2 Lloyds Law Report 289 while arriving at the said observations [Para 111]. However, the Court held that the question of abuse may be determined by the India – U.K. tribunal.

Although the said position finds itself in line with the prevailing common law perception, there are inherent faults in such reasoning. The doctrine of abuse of process finds its origin in civil law systems,[1] however, it finds a more ambitious application in the common law systems. This is evident from the stark difference in approach between the two systems vis-à-vis the regime of AAI. While the doctrine of abuse of process remains statutorily recognized in civil law systems, its courts have ruled against the validity of AAIs.[2] The regime of AAIs has also been generally criticized by the arbitral community at large.[3]

It is suggested that the doctrine of abuse of process has been consistently misapplied to issue AAIs while losing sight of two factors at play – the forum whose process is under abuse, and the principle of non-interference in arbitral process. A fundamental understanding of the doctrine of abuse of process reflects a forum’s inherent power to “prevent a misuse of its procedures” by a party who claims such procedural rights.[4] Therefore, interference by a foreign forum to check misuse of procedural rights relating to another forum would be highly misplaced. It is hence suggested that in cases of an alleged abuse of process before an arbitral tribunal, the most appropriate forum to address such abuse would be the tribunal itself, or the courts at the seat in exercise of their supervisory powers.[5] Such an approach was also adopted by the India – Netherlands tribunal while rejecting an application made by the Republic of India to restrain VIHBV and its affiliates from proceeding with the arbitration under the India – U.K. BIPA on the ground of abuse of process [Vodafone Group, Para 61 (xxv)]. Further, approaching another forum for a relief in the presence of a binding agreement to resolve all disputes before a certain forum would itself amount to an abuse of process by a party – in this case, resort to the Court by the Republic of India [Yuval Shany, p. 258]. The Court in Vodafone Group, however, overlooked such factors.

While inherent powers of courts in common law systems remain undisputed, one may question their exercise in a manner which trumps the intent of an arbitration friendly legislation. It is also apposite to suggest that jurisdictions – as India – that uphold the primacy of seat[6] should revisit the consistency of such approach while issuing AAIs against foreign seated arbitrations.

B. Does the 1996 Act apply to investment treaty arbitration?

The analysis of the applicability of the 1996 Act to BIT arbitrations must be done while appreciating that India is not a party to the ICSID Convention and is a signatory to the New York Convention, 1958 (“NYC”) with a reservation to apply the NYC to disputes considered as “commercial” in Indian law. Consequently, the NYC (read with the 1996 Act) remains the only multilateral instrument at the disposal of investors seeking to enforce an investment award in India. More so, since Section 2(2) of the 1996 Act permits Section 9 (interim relief) and Section 27 (court assistance in taking evidence) to apply to arbitrations seated abroad, applicability of the 1996 Act to BIT arbitrations will also determine whether investors can avail the said reliefs from the Indian courts at all.

The Court in Vodafone Group observed that the 1996 Act does not apply to BIT arbitrations. The said observation was based on two primary reasons – (1) Part II of the 1996 Act (enforcement of foreign awards) only applies to disputes considered as “commercial” under the law prevalent in India [Para 90], and (2) investment arbitrations are “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)” [Para 91]. The said reasons are misplaced and call for a review of the scope of the 1996 Act so as to extend its applicability to BIT arbitrations.

The latter argument tends to overlook the fact that investments may also be made pursuant to a commercial / contractual relationship between an investor and the State. From a constitutional perspective, Article 298 of the Constitution of India provides that the Union and the States are empowered to carry on trade or business, and enter into contractual obligations to fulfill the said purpose. While it is correct that investment arbitrations arise out of “State guarantees and assurances”, such assurances may manifest domestically in the form of commercial obligations entered into by the Union / State (contractual or not), and take the form of treaty obligations in international law. As regards investments made sans a formal contractual relationship, it will be argued that the term “commercial” can be broadly interpreted to include investments within its scope.

As regards the 1996 Act, the scope of the Act may be reconsidered and appreciated in the light of two seminal works on international arbitration – the UNCITRAL Model Law 1985 (“Model Law”) and the NYC. The 1996 Act is based on the Model Law and the Supreme Court of India has often placed reliance on the Model Law to interpret the 1996 Act.[7] Section 2(1)(f) of the 1996 Act defines “international commercial arbitration”, and subjects its scope to “disputes arising out of legal relationships…considered as commercial under the law in force in India”. The scope of what amounts to a “commercial” relationship under Indian law remains statutorily undefined and hence unrestricted. In that case, reliance on the definition of the term “commercial” as provided in the footnote to Article 1(1) of the Model Law may be helpful. Notably, the term “commercial” has been defined therein to include “investment” within its scope, and the opening sentence to the footnote states that the term “commercial” should be broadly interpreted to encompass all commercial relationships, contractual or otherwise. The Supreme Court of India in R.M. Investment and Trading Co. (P) Ltd. v. Boeing Co., (1994) 4 SCC 541while interpreting the scope of the term “commercial” under the Foreign Awards (Recognition & Enforcement) Act, 1961 (“1961 Act”) also relied upon the definition of “commercial” under Article 1(1) of Model Law to give it a wide import. Although the 1961 Act has been repealed, there is no indication to suggest that the scope of the term “commercial” has been curtailed under the 1996 Act. Therefore, drawing on the broad scope of the term “commercial” under the Model Law, the 1996 Act could be purposively interpreted to cover BIT arbitrations within its scope. Further, on a close appreciation of Section 2(1)(f) of the 1996 Act, the subparagraphs thereof permit parties to BIT arbitrations to be covered within its scope. Section 2(1)(f)(i) and (ii) require at least one of the parties to an “international commercial arbitration” to be an individual who is national of, or a body corporate incorporated in, a foreign country. Interestingly, Section 2(1)(f)(iv) provides that even “Government of a foreign country” may be a party to an “international commercial arbitration”. Therefore, parties typical to BIT arbitrations – a private investor or a body corporate, and a government – may qualify the requirements of Section 2(1)(f) to include such arbitrations within the scope of “international commercial arbitration” under the 1996 Act.

The NYC may also serve as a helpful tool to appreciate the scope of the term “commercial” in jurisdictions that have made a reservation under Article I(3) of the NYC. The drafting history of Article I(3) shows that a reservation to apply the NYC to “commercial” disputes was introduced to suit the need of civil law nations that drew a distinction between commercial and non-commercial civil transactions.[8] The Article I(3) reservation made by Norway sufficiently clarifies the intended purpose of the “commercial” reservation, which states that Norway “will not apply the Convention to differences where the subject matter of the proceedings is immovable property situated in Norway, or a right in or to such property”. Therefore, the “commercial” reservation was intended to exclude purely non-commercial matters from being arbitrable, than cherry pick among commercial matters themselves – in this case, BIT arbitrations. Additionally, countries that have made an Article I(3) reservation may deem disputes arising out of their bilateral investment treaties as “commercial” within the meaning of Article I of the NYC [Cuba – Mexico BIT, Article 9; United States Model BIT, Article 34 (10)]. Inspiration from such BITs could be taken to widen the scope of the Indian investment treaties, paving the way for investment arbitrations to be covered within the existing framework of the 1996 Act.

C. Conclusion

While one may argue that India carries the potential to be an investor friendly jurisdiction, the advances that India must make in its policy and legislative framework will play a crucial role in determining the extent to which such potential is tapped. Taking a cue from the above issues, the author suggests that the Indian approach to investment arbitrations needs to be revisited. While efforts of the Indian legislature and the judiciary cannot be negated, India’s status as an investor friendly jurisdiction continues to remain a work in progress.

 

[1]Yuval Shany, ‘Jurisdiction-Regulating Norms Governing Competition Involving Domestic Courts: Should They be Introduced into International Law?’, in The Competing Jurisdictions of International Courts and Tribunals, p. 255, OUP 2003 (‘Yuval Shany’).

[2]Air (PTY) Ltd. v. International Air Transport Association (IATA) and C SA in Liquidation, Case No. C/1043/2005-15SP, Republic and Canton of Geneva Judiciary, Court of First Instance, 2 May 2005.

[3]Stephen Schwebel, ‘Anti-suit Injunctions in International Arbitration—An Overview’ in Emmanuel Gaillard (ed.), Anti-suit Injunctions in International Arbitration (Juris Publishing, 2005) 5.

[4]The ILA Committee on International Commercial Arbitration, Interim Report: “Res judicata and Arbitration, 2004.

[5]Julian D.M. Lew, ‘Does National Court Involvement Undermine the International Arbitration Process?’, American University International Law Review, Vol. 24, Issue 3, 2009.

[6]Roger Shashoua v. Mukesh Sharma, (2017) 14 SCC 722.

[7]Reliance Industries Ltd. v. Union of India, (2014) 11 SCC 576.

[8]New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards – Commentary, ed. Dr. Reinmar Wolff, p. 81, 2012.