The Vodafone Tax Dispute: Abuse of Process in International Investment Arbitration?

by Malcolm Katrak*

Recently, the Delhi High Court in the case of Union of India v. Vodafone Group, passed an ex-parte order restraining the Vodafone Group from pursuing an investment arbitration claim against India under the India-United Kingdom Bilateral Investment Treaty (India- UK BIT). The Court held that multiple claims cannot be permitted by corporate entities in a single vertical chain against the same measure of the host state under various bilateral investment treaties and protection agreements. Thereafter, the court proceeded to pass an anti-arbitration injunction against Vodafone from initiating arbitration proceedings under the India-UK BIT.

Before analyzing the issues in this case, it is necessary to consider the facts that led to the dispute. Vodafone (Netherlands) bought a Cayman Island entity of Hutchison group, in order to acquire controlling interest in the Indian entity Hutchison-Essar Ltd. The Indian Income tax statute, before amendment, did not tax transactions outside India which did not involve transfer of shares of any Indian entity. Thereafter, the Indian government amended the tax statute, which interpreted according to the government, included transactions which changed the control of an Indian entity, as was the Vodafone transaction. The Supreme Court of India rejected the Indian government’s contention that the text of the statute, as it stood then, could be interpreted to include such a transaction under the tax ambit.

In 2012, the Vodafone group initiated proceedings against India under the India-Netherlands BIT before the Permanent Court of Arbitration (PCA). Vodafone was challenging the imposition of a million-dollar tax bill arising out of the retrospective amendment of the Indian Income Tax Act in 2012. Thereafter, Vodafone on 24th January, 2017 issued another BIT arbitration notice for the same cause of action. However, the second BIT arbitration notice was initiated under the India-UK BIT. Since Vodafone had already initiated a BIT against India, on the issue of retrospective taxation, the Indian Government proceeded to the Delhi High Court, seeking an order restraining Vodafone from initiating parallel BIT proceedings on the same issue before another BIT Tribunal citing ‘abuse of process’.

The case has been much publicized and raises several intriguing legal propositions; the first being the domestic court’s jurisdiction to try the dispute, the second being basis to pass an anti-arbitration injunction and the third being whether there is an abuse of process by Vodafone by initiating arbitration proceedings under different BITs.

As far as the jurisdiction of the domestic court is concerned, the Delhi High Court held, “India constitutes a natural forum for the litigation of the defendants’ claim (the India-UK BIT claim) against the plaintiff.” The counsel for the government laid a two-pronged approach for the purpose of facilitating a jurisdictional argument; first being that disputes encompassing tax demands raised by host State are beyond the scope of arbitration provided under the BIT as taxation is a sovereign function and the second being that under the constitutional scheme of India, laws passed by the Parliament cannot be adjudicated by an arbitral tribunal. This, according to me, is a fallacious interpretation of the India-UK BIT. The BIT allows taxation to be considered under its ambit except for the provisions pertaining to National Treatment and Most-favoured Nation. A treaty must not be construed liberally or restrictively but literally. The India-UK BIT being broadly worded allows taxation to come under the ambit of the BIT.

The second issue being the anti-arbitration injunction, it is necessary to analyze when exactly is a domestic court allowed to pass an anti-arbitration injunction. In the case of Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armaturs SAS & Ors (behind paywall), the Calcutta High Court has held that an anti-arbitral injunction could be issued under the following circumstances – first, there is no arbitral agreement between the parties; second, the arbitration agreement is null and void, inoperative or incapable of being performed; third, continuation of foreign arbitration proceeding might be oppressive, vexatious or unconscionable.

The Vodafone case initiated under the India-UK BIT in itself constitutes a valid arbitration agreement and thus, the basis to pass an anti-arbitration injunction falls. However, it must be remembered that in the case of SGS v. Pakistan, the Supreme Court of Pakistan restrained the foreign investor from carrying out arbitration through the BIT albeit the ICSID Tribunal still took cognizance of the matter and exercised its jurisdiction.

The claims which have risen in the India-UK BIT and Indian-Netherlands BIT are based on the same cause of action and the reliefs sought are identical but from two different arbitral tribunals against the same host state. This is a perfect example of abuse of process. Emmanuel Gaillard states, ‘abuse of process in BIT arbitration does not violate any hard and fast legal rule but nonetheless causes significant prejudice to the party against whom it is aimed and can undermine the fair and orderly resolution of disputes by International arbitration.’ To facilitate the argument of abuse of process, the counsel for the State relied on the case of Orascom TMT Investments v. Algeria, wherein the ICSID Tribunal stated:

In particular, an investor who controls several entities in a vertical chain of companies may commit an abuse if it seeks to impugn the same host state measures and claims for the same harm at various levels of the chain in reliance on several investment treaties concluded by the host state. It goes without saying that structuring an investment through several layers of corporate entities in different states is not illegitimate […] Several corporate entities in the chain may be in a position to bring an arbitration against the host state in relation to the same investment. This possibility, however, does not mean that the host state has accepted to be sued multiple times by various entities under the same control that are part of the vertical chain in relation to the same investment, the same measures and the same harm.

As far as the abuse of process goes, it would be correct to say that Vodafone utilized the process which is formulated to enhance economic benefits to the host state and protect investments of the companies, in a negative manner. On the other hand, it can be argued that the law pertaining to abuse of process in international investment arbitration is not clear. For example, Yosef Maimam, a German-born Israeli businessman sought arbitration proceedings against Egypt under the US-Egypt BIT by one of his companies and another arbitration under the Egypt-Poland BIT through his own name. Thus, abuse of process in investment arbitration is not a clear picture.

It is fair to say that the Delhi High Court has exceeded its jurisdiction by restraining Vodafone from proceeding with its arbitration proceedings under the India-UK BIT. On the other hand, it cannot be denied that there was no abuse of process. As far as the consequence of an anti-arbitration injunction goes, the same would be impossible to analyze or presume. However, the Delhi High Court has failed to provide a comprehensive, logical and reasoned backing to its judgment, which only shows how far the Courts have been reluctant to interpret BITs.


Malcolm Katrak is currently a Law Clerk to Justice (Retd.) S. N. Variava, Former Judge, Supreme Court of India. In the past, he has worked under Mr. D. J. Khambata, Former Vice-President, London Court of International Arbitration and Justice S. J. Kathawalla, Jugde, Bombay High Court. He may be contacted at malcolmkatrak@yahoo.in.

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