The Treatment of Investments clause under the Indian Model BIT: Laden with greater certainty, restrictions and/or ambiguity?

Naman Lohiya

B.A. LL.B.(Hons.) Batch 2015-2020
Gujarat National Law University
Gandhinagar, Gujarat.

“No Party shall subject investments made by investors of the other Party to measures which constitute a violation of customary international law through:

  • Denial of justice in any judicial or administrative proceedings; or
  • fundamental breach of due process; or
  • targeted discrimination on manifestly unjustified grounds, such as gender, race or religious belief; or
  • manifestly abusive treatment, such as coercion, duress and harassment.”

 

India, akin to other developing countries, entered into several bilateral investment treaties (“BIT”) in 1990s. By the virtue of being a developing country and in quest of economic progress, the terms of her BITs were largely investor friendly. While they were feasible and supportive for foreign investors and incentivised them to invest in India; at the same time they were considered detrimental to India. India was soon at the receiving end of initiation of 24 various arbitration proceedings against her. It may be noted that most of these investors belonged to more economically developed nations than India. On the other hand, merely 5 disputes were initiated wherein India was the home state of the investor. In terms of arbitration proceedings, India was evidently not the advantaged party.

The growing number of disputes lead to what may be described as a radical departure from India’s existing practices.[1] It set the base for the Indian Model BIT of 2016. India accordingly sought to terminate its various existing BITs however unlike other countries, she once again intended to sign new treaties on renewed terms prescribed in its Model BIT.

Selling the sizzle, India’s deviation from its investor-friendly tilting approach towards what she deems a balanced position, is novel and unprecedented in multiple ways. India continues to appear and portray itself as an investor friendly state, while at the same time the formulation of its BITs provisions does not seem to precisely corroborate the same. The Model BIT reinforces India’s position as an equal and not a disadvantaged party in broadly two ways. First, the home state is visibly less prone to face proceedings against itself before an arbitral tribunal owing to more stringent thresholds, greater state autonomy and higher burden on the investor to exhaust remedies before initiation of dispute. Second, there has been a noticeable attempt to give greater certainty to the terms of the BIT, seeking to prevent unforeseeable arbitral interpretations which may more often be detrimental to the respondent state.

The two broad features may be evinced through the ‘Treatment of Investments’ clause in the Model BIT. The provision is not only precise in terms of drafting, but is also the result of adoption of a novel approach. The clause although unexampled, seems similar to the Fair and Equitable Treatment (“FET”) standard owing to embodiment of similar principles within it (and circumstantially deriving it from the Report of the Law Commission of India). Considered to be the most frequently invoked provision[2], the FET standard is incorporated in treaties roughly within the confines of three ways. First, an autonomous unqualified self-standing standard; second, qualified by customary international law[3] or third, either autonomous or qualified by international law along with additional substantive content for additional clarity. The Indian Model BIT roughly appears to fall within the boundaries of the third formulation.

The provision, by a noticeable omission to refer to FET standard and being qualified by customary international law, hints towards India’s attempt at not allowing the the standard to merely exist as one that serves the purpose of filling gaps left by other standards. Moreover, the qualification and subsequent laying of specific substantive content also appears to set precise high thresholds to prevent White Industries-like situations. The standard also takes a narrow view of full protection and security, limiting it to only physical security and implicitly excluding any legal protection.

Besides the aforementioned, the provision stipulates its breach only on four grounds:

  1. Denial of Justice in any judicial or administrative proceedings
  2. Fundamental breach of due process

Despite trying to ensure greater creditworthiness and portraying itself to be a business-friendly state, India’s governmental administration and judicial courts are plagued with inefficiency. Apart from being affected domestically by red-tapism and enormous backlog of cases, foreign investors have also apparently been aggrieved by such practices. Purely in terms of investor-state disputes, India has never been held liable for denial of justice. Although India was strictly not held liable for denial of justice in White Industries despite a claim being raised, the Tribunal noted that in light of the Indian Supreme Court’s inability to deal with White Industries’ claim for over nine years amounts to deprivation of effective means of asserting and enforcing rights. Moreover, India could potentially be subjected to the aforementioned claims in a plethora of pending disputes such as Vodafone, Devas, Naumchenko and Vedanta[4] amongst others.

Mere reliance on the substantive principles suggests that the Model BIT adopts the usual investor friendly formulation. However, in a subsequent sub-clause, it requires the Tribunal to consider as a mitigating factor whether investor sought remedy in domestic courts. Such consideration may implicitly put additional duty on the investor and provide the host state with a tenable shield. The foregoing duty satisfied, the ball would fall within the Court of the tribunal to subjectively interpret the provisions as they deem fit, similar to India’s previous experiences.

  1. Targeted discrimination on manifestly unjustified grounds, such as gender, race or religious belief
  2. Manifestly abusive treatment, such as coercion, duress and harassment

Manifesta probatione non indigent: Things manifest do not require proof”

-7 Coke, 40.

The two principles currently take their shape after being carved out (and possibly toned down) from a rather high standard to prove breach which may possibly be deemed unfair in itself. This previous post recognised the sky-high bar that an investor is supposed to meet to claim a remedy. The Law Commission of India also noted the same, owing to the usage of words such as ‘outrageous’, ‘egregious’ and ‘manifestly abusive’. While the former two terms were dropped, the later was reserved for two principles.

The scope of the FET provision has been narrowed down and in so far as the threshold is concerned, the terms are ambiguous. In any case, the formulation accounts for higher levels of legal certainty, as opposed to the previous treaties. In terms of the previous experiences, India has not been subjected to these contentions raised by investors and seems unlikely to be raised owing to India’s economic and political stability in this context. ‘Manifest’ grounds or treatment may require the investors to display glaring evidence of violation of rights, which may not conclusively be determined if not for grant of leeway by the tribunal.

Conclusion

The ‘Treatment of Investments’ clause in the Indian Model BIT appears to be based on the Canada-European Union Trade Agreement, but only obtrusively restricted. Notwithstanding the effort to lay down precise standards which may aid both the investor and the host state in regulating their conduct, it nevertheless has the capacity of opening the Pandora’s box. Usage of qualifying words such as ‘fundamental breach’, ‘targeted discrimination’, ‘manifestly unjustified grounds’ and ‘manifestly abusive treatment’ may require choosing between the text of the treaty or principles of equity. Essentially, the treaty insinuates that only grave breaches which are unmistakably apparent must be considered and not the lesser wrongs by the host state. Hence, an investor may only claim remedy on exceptional (and limited) grounds for significant and not trivial breaches. An uncommon and unusual distinction between degrees of breaches is sought to be made.

Significantly, the clause impliedly excludes other key components of fair and equitable treatment standard such as good faith, transparency and legitimate expectations. India accordingly seems to abandon such principles which are open to judicial interpretation and often bend in favour of foreign investors as evinced in an array of decisions.

While not appearing to be the best bet for the investors, the Indian Model BIT regardless seems to be a ray of hope for developing states who have lost more than they have gained out of this process. What is left to be seen is whether developed states would be willing to negotiate with India on such terms and if the text in its current form tilts towards state control merely on paper or also in practice.


[1] Manu Thadikkaran, Model Text for the Indian Bilateral Investment Treaty: An Analysis, NUJS Law Review, Vol. 8(1-2) (2015)

[2] Rudolph Dolzer and Christoph Schreuer, Principles of International Investment Law 119 (2008).

[3] Reference to International Law and International Minimum Standards may also be included within this category.

[4] Cairn India Limited, a subsidiary of Vedanta Resources plc received a notice to pay tax and interest on the basis of retrospective application of a tax legislation. It is similar in terms of domestic legislative basis as the Vodafone dispute. Therefore the claims may largely be of similar character.

The Concept of Arbitrability of Arbitration Agreements in India

by Harshal Morwale*

“Arbitration is the grease that helps economies flow and brings us benefits around the world.”

David W. Rivkin[1]

  1. Introduction

Arbitration is a dynamic dispute resolution technique. An arbitrator’s powers normally derive from the arbitration agreement. With increasing number of cross border transactions and international trade contracts, the arbitrability of arbitration agreements holds a prominent place in the resolution of international and domestic arbitrations.

  1. Effect given to an arbitration agreement by court

Traditionally, the parties move to court when the dispute relating to an arbitration agreement arises. So the question that needs to be dealt with is how does a court give effect to an arbitration agreement? It can be dealt in parts.

  • Where one party wants to institute arbitration and another one is uncooperative, court may pass order compelling arbitration.
  • Where litigation is initiated over a claim falling within the scope of arbitration agreement, court may dismiss the suit on grounds of lack of jurisdiction.
  • Depending on the law of the seat, the Court may even have powers to support the arbitral tribunal – witnesses, documents, opinions.[2]

However, question is when can parties approach court even in presence of an arbitration agreement? In other words, what makes a dispute non-arbitrable?

  1. The Golden Rule

The Golden Rule is that if the dispute is covered by an Arbitration agreement, the said dispute should be resolved by Arbitration. Ordinarily every civil or commercial dispute whether based on contract or otherwise which is capable of being decided by a civil court is in principle capable of being adjudicated upon and resolved by arbitration subject to the dispute being governed by the arbitration agreement.[3] However, there are exceptions to this Rule. There are several scenarios and circumstances, which might render the dispute non-arbitrable.

  1. Arbitrability

Arbitrability can be found in UNCITRAL Model Law, which permits the courts of the seat to set aside an arbitral awards on the grounds that the subject matter of the dispute is not capable of resolution by arbitration under the law of the State.[4] The term arbitrability has different meanings in different contexts. The three facets of arbitrability, relating to the jurisdiction of the arbitral tribunal, are as under: [5]

  • Whether the disputes are capable of adjudication and settlement by arbitration?

That is, whether the disputes, having regard to their nature, could be resolved by a private forum chosen by the parties (the arbitral tribunal) or whether they would exclusively fall within the domain of public fora (courts).[6]

  • Whether the disputes are covered by the arbitration agreement?

That is, whether the disputes are enumerated or described in the arbitration agreement as matters to be decided by arbitration or whether the disputes fall under the excepted matters excluded from the purview of the arbitration agreement.[7]

  • Whether the parties have referred the disputes to arbitration?

That is, whether the disputes fall under the scope of the submission to the arbitral tribunal, or whether they do not arise out of the statement of claim and the counter claim filed before the arbitral tribunal.[8]

  1. Drawing a line

While deciding the issue of arbitrability courts are required to draw a line between arbitrable and non-arbitrable disputes on the basis of two different policy objectives:

  • Ensuring that sensitive matters of public interest are debated and resolved before national courts, and
  • Promoting arbitration as a vibrant system of dispute resolution for parties who freely chose to arbitrate rather than litigate their differences.[9]

While the first two procedural requirements must be satisfied at the beginning of an arbitral proceeding, the issue of the subject-matter arbitrability can arise when it comes to the recognition and enforcement of a foreign arbitral award.[10]

Number of pronouncements have been rendered laying down the scope of judicial intervention, in cases where there is an arbitration clause, with clear and unambiguous message that in such an event judicial intervention would be very limited and minimal. However, the Arbitration Act, 1996 contains provisions for challenging the arbitral awards. These provisions are Section 34 and Section 48 of the Act. Section 34(2)(b) and Section 48(2) of the Act, inter alia, provide that an arbitral award may be set aside if the Court finds that the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force. Even when such a provision is interpreted, what is to be shown is that there is a law which makes subject matter of a dispute incapable of settlement by arbitration.[11]

  1. Which law makes a dispute non-arbitrable?

The Courts have held that certain kinds of disputes may not be capable of adjudication through the means of arbitration. Disputes like criminal offences of a public nature, disputes arising out of illegal agreements and disputes relating to status, such as divorce, cannot be referred to arbitration.[12]

  • The well recognized examples of non-arbitrable disputes are :
    • Disputes relating to rights and liabilities which give rise to or arise out of criminal offences;
    • Matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody
    • Guardianship matters
    • Insolvency and winding up matters
    • Testamentary matters (grant of probate, letters of administration and succession certificate)[13]
    • Eviction or tenancy matters governed by special statutes[14]
    • Mortgage[15]
    • Cases arising out of Trust Deed and the Trust Act[16]
    • Patent, trademarks and copyright
    • Anti-trust/competition laws
    • Bribery
    • Fraud[17]

 

  • Would mere allegation of fraud make Commercial Dispute Non-Arbitrable?

More recently, commentators and courts have taken the position that a mere allegation of illegality should not relieve a tribunal of jurisdiction to determine the dispute, including the question of illegality.[18]

Courts are of the opinion that mere allegation of fraud simplicitor may not be a ground to nullify the effect of arbitration agreement between the parties. It is only in those cases where the Court, while dealing with Section 8 of the Act[19], finds that there are very serious allegations of fraud which make a virtual case of criminal offence or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by civil court on the appreciation of the voluminous evidence that needs to be produced, the Court can sidetrack the agreement by dismissing application under Section 8 and proceed with the suit on merits. It can be so done also in those cases where there are serious allegations of forgery/fabrication of documents in support of the plea of fraud or where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, meaning thereby in those cases where fraud goes to the validity of the contract itself of the entire contract which contains the arbitration clause or the validity of the arbitration clause itself.

The reverse position thereof would be that where there are simple allegations of fraud touching upon the internal affairs of the party inter se and it has no implication in the public domain, the arbitration clause need not be avoided and the parties can be relegated to arbitration. While dealing with such an issue in an application under Section 8 of the Act[20], the focus of the Court has to be on the question as to whether jurisdiction of the Court has been ousted instead of focusing on the issue as to whether the Court has jurisdiction or not. It has to be kept in mind that insofar as the statutory scheme of the Act is concerned, it does not specifically exclude any category of cases as non-arbitrable. Such categories of non-arbitrable subjects are carved out by the Courts, keeping in mind the principle of common law that certain disputes which are of public nature, etc. are not capable of adjudication and settlement by arbitration and for resolution of such disputes, Courts, i.e. public for a, are better suited than a private forum of arbitration.

Therefore, the inquiry of the Court, while dealing with an application under Section 8 of the Act[21], should be on the aforesaid aspect, viz. whether the nature of dispute is such that it cannot be referred to arbitration, even if there is an arbitration agreement between the parties. When the case of fraud is set up by one of the parties and on that basis that party wants to wriggle out of that arbitration agreement, a strict and meticulous inquiry into the allegations of fraud is needed and only when the Court is satisfied that the allegations are of serious and complicated nature that it would be more appropriate for the Court to deal with the subject matter rather than relegating the parties to arbitration, then alone such an application under Section 8 should be rejected.[22]

  1. Whether Arbitrator can decide not arbitrable dispute?

If a non-arbitrable dispute is referred to an Arbitrator and even if an issue is framed by the Arbitrator in relation to such a dispute, there cannot be a presumption or a conclusion to the effect that the parties had agreed to refer the issue to the Arbitrator. There was a case where the respondent authorities had raised an objection relating to the arbitrability of the aforestated issue before the Arbitrator and yet the Arbitrator had rendered his decision on the said excepted dispute. In the opinion of courts, the Arbitrator could not have decided the said excepted dispute. Court, therefore, held that it was not open to the Arbitrator to decide the issues, which were not arbitrable, and the award was quashed.[23]

  1. Changing Scenario

Scenario on global level is changing. Increasingly, disputes involving antitrust laws, which were formerly considered inappropriate for arbitration, are being arbitrated. Securities issues are also arbitrable, at least in the United States.[24]

There has been seen the growing acceptance of arbitration, at least in the international sphere, public policy limits to arbitrability are gradually disappearing. Arbitrators now adjudicate disputes involving such public matters as intellectual property rights, antitrust and competition, securities laws, bankruptcy, corporate law, taxation, and allegations of fraud, corruption or bribery. [25]

  • Arbitration of competition law

Being regulatory law, it is foremost related to the governmental apparatus of supervision over market practices purporting to prevent and/or sanction abusive actions in the forms of antitrust agreements and abuse of dominant position, in broad terms. Hence, competition law is primarily enforceable by designated regulatory bodies. [26]

  • In spite of that, both doctrine and case law confirm that competition law may be subject to private enforcement. US Supreme Court opined that where the Court confirmed that obligations arising out of statutory rules would be arbitrable to the same extent as contractual duties.[27] This constitutes private enforcement of competition law since private claims are allowed to seek sanctions for breaches of statutory competition rules (though private enforcement may lead only to a single remedy – compensation)
  • Spanish Court of Appeals also recently ruled on the arbitrability of competititon law. The Court concluded that the EU law or Spanish law does not preclude the arbitrability of the competition disputes as long as the relevant award applied the mandatory competition rules. Therefore, competition law claims are considered to be at free disposition of the parties.[28]
  • Arbitration of Copyright disputes

The Canadian Supreme Court opined that – In order to determine whether questions relating to ownership of copyright fall outside arbitral jurisdiction, we must more clearly define the concept of public order in the context of arbitration, where it may arise in a number of forms, as it does here, for instance, in respect of circumscribing the jurisdiction ratione materiae of the arbitration. Thus a matter may be excluded from the field covered by arbitration because it is by nature a matter of public order. The concept also applies in order to define and, on occasion, restrict the scope of legal action that may be undertaken by individuals, or of contractual liberty. The variable, shifting or developing nature of the concept of public order sometimes makes it extremely difficult to arrive at a precise or exhaustive definition of what it covers.

The development and application of the concept of public order allows for a considerable amount of judicial discretion in defining the fundamental values and principles of a legal system. In interpreting and applying this concept in the realm of consensual arbitration, we must therefore have regard to the legislative policy that accepts this form of dispute resolution and even seeks to promote its expansion. For that reason, in order to preserve decision‑making autonomy within the arbitration system, it is important that we avoid extensive application of the concept by the courts. Such wide reliance on public order in the realm of arbitration would jeopardize that autonomy, contrary to the clear legislative approach and the judicial policy based on it.[29]

In these recent matters, even Bombay High Court opined that it is possible to lose sight of the fact that in trademark and copyright disputes, we very often are confronted with written agreements. In copyright matters, agreements are in fact a statutory requirement for an assignment. There must be a written document. The law does not say that the written document of assignment should have an arbitration clause. [30]

To quote Hon’ble G.S. Justice Patel –

What Mr. Dhond (counsel for plaintiff) suggests, in effect, is that in every one of these cases, all these arbitration clauses must be treated as entirely null, void and otiose. No law that I am aware of even remotely suggests anything of the kind. I think it would do a very great violence not only to the language but to the purpose and ambit of the Arbitration Act as also the Copyright Act, if I would have to read it in the manner Mr. Dhond suggests. I find Mr. Dhond’s protests, to the effect that the view I am inclined to take would turn the entire edifice of intellectual property law on its head, needlessly alarmist. It will do nothing of the kind. On the contrary, I believe an acceptance of Mr. Dhond’s view must result in widespread confusion and mayhem in commercial transactions. We often have complex commercial documents and transactions that routinely deal with intellectual property rights of various descriptions as part of the overall transaction. This can be said of mergers, acquisitions, joint ventures, the setting up of special purpose vehicles, technology transfer and sharing agreements, technical tie-ups, licensing and so on. The range of fields of human activity that could possibly be covered by any one or more of these is limited by nothing but our own imagination: steel manufacturing, setting up of power plants, software, motor car manufacture, computer hardware, music, films, books and literature, performances and even services. If Mr. Dhond is correct, then in any of these cases, where intellectual property rights are transferred or, for that matter, in any way dealt with, no dispute arising from any such agreement or transactional document could ever be referred to arbitration, and every single arbitration clause in any such document would actually, in his formulation of it, be void and non-est ab initio. It would have to be so — Sukanya Holdings[31] will not allow a dispute relating to intellectual property rights to be segregated from other disputes. I do not think the world of domestic and international commerce is prepared for the apocalyptic legal thermonuclear devastation that will follow an acceptance of Mr. Dhond’s submission.[32]

Therefore, it is safe to say that intellectual property dispute or at least copyrights disputes are arbitrable.

  1. Conclusion

Arbitration offers significant advantages for the resolution of many disputes. An arbitrator’s powers normally derive from the arbitration agreement. In general, arbitration is not part of the state’s judicial system, although the state sometimes assigns powers or functions directly to arbitrators. Nonetheless, arbitration is still, in a broader sense, a part of the dispute resolution system the legitimacy of which is fully recognized by the legislative authorities.

The law establishes a mechanism for overseeing arbitral activity that is intended to preserve certain values that are considered fundamental in a legal system, despite the freedom that the parties are given in determining the methods of resolution of their disputes

Today, on global level most of the disputes are considered arbitrable. Therefore, initially while negotiating national or international arbitration agreements it is necessary to look at national laws and present issues with their arbitrability. It cannot be emphasized enough that effective planning is very important in arbitration.

In cutting edge environment of international commercial arbitration, if India has to emerge as a global hub for arbitration, national law and international law has a wide role to play.


* Harshal Morwale, Final Year, B.A. LL.B. (5 Years), SNG Law College, Akola.


Endnotes

[1] David W. Rivkin (Former President at the International Bar Association) (Quiet Triumph : How Arbitration Changed The World)

[2] ‘How does a Court give effect to arbitration agreements? ‘ (Law Web) <http://www.lawweb.in/2017/09/how-does-court-give-effect-to.html> accessed 20 September 2017

[3] Hindustan Petroleum Corporation Ltd v Kamalkant Automobiles , 2017 (123) ALR 369 [High Court of Allahabad]

[4] Section 34.2. – UNCITRAL Model Law, 1985

[5] Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd, (2011) 5 SCC 532 [Supreme Court of India]

[6] Ibid

[7] Ibid

[8] Ibid

[9] L. Yves Fortier, ‘Arbitrability of Disputes’ [2005] International Law, Commerce and Dispute Resolution, 269-284

[10] Luljeta Plakolli-Kasumi, ‘The Notion of “Ordre Public”: Arbitrability of Patent Law Disputes’ [2015] 1(1) Journal of Alternative Dispute Resolution in Kosovo, 12-24

[11] A Ayyasamy Vs A Paramasivam & Ors, AIR 2016 SC 4675 [Supreme Court of India]

[12] Ibid

[13] 6.1.1 – 6.1.5 Supra note 5

[14] Supra note 5 – Where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.

[15] Supra note 5  – Under the Arbitration and Conciliation Act, 1996 only parties to the arbitration agreement can refer their disputes to arbitration (being a right in personam). Since the rights of a third party may be affected in a mortgage suit (being a right in rem), such an action cannot be referred to arbitration under the Act.

[16] Shri Vimal Kishor Shah Vs Jayesh Dinesh Shah & Ors, (2016) 8 SCC 788, [Supreme Court of India]

[17]6.1.9 – 6.1.12 –  O.P. Malhotra on ‘The Law & Practice of Arbitration and Conciliation’, (3rd edn)

[18] Margaret L. Moses, The Principles and Practice of International Commercial Arbitration (3rd edn, Cambridge University Press 2017) pg. 35

[19] Section 8 – Power to refer parties to arbitration where there is an arbitration agreement – THE ARBITRATION AND CONCILIATION ACT, 1996

[20] Ibid

[21] Ibid

[22] Supra note 11

[23] M/S Harsha Constructions v Union of India (2014) 9 SCC 246 [Supreme Court of India]

[24] Supra Note 18

[25] Ibid

[26] Deyan Draguiev, ‘Arbitrability of Competition Law Issues Reinforced‘, Kluwer Arbitration Blog, January 10 2014,

[27] Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) [Supreme Court of United States]

[28] Camimalaga S.A.U. v. DAF Vehículos Industriales S.A.U., Audiencia Provincial [2013] Appeal no. 66/2013

[29] Desputeaux v. Éditions Chouett,  [2003] 1 S.C.R. 178, [Supreme Court of Canada]

[30] Eros International Media Limited v. Telemax Links India, 2016 SCC OnLine Bom 2179, [High Court of Bombay]

[31] Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya (2003) 5 SCC 531) [Supreme Court of India]

[32] Supra note 30

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.

India’s Federalism and Investment Arbitration

by Sarthak Malhotra*

A key area of exposition both in Public International Law and Investment Arbitration is what constitutes an ‘act of state’. The Draft Articles on State Responsibility have been a ground-breaking work in codifying the rules of attribution of responsibility to the states. A related issue in this regard is the attribution of liability to a State in cases of breach of its treaty obligations by its political sub-divisions.

In many countries, numerous policy related issues are not handled by the Central Government. Instead, sub-divisions or states or local governments have been delegated the power to decide on numerous policy and operational issues. There is a federal form of governance in many countries like United States of America, India, Australia, Canada, Brazil albeit in different forms.

The implication of a federal form of government is that the political sub-divisions of a country exercise internal jurisdiction, both regulatory and otherwise, subject to the internal law. For instance, in India, the states reserve exclusive power in issues of inter alia public health and sanitation and taxes on lands and buildings. This means that a foreign investor may find itself pitted against a state government for reasons such as discrimination, expropriation and other such protections guaranteed to it under a BIT. Even though it is the Central Government which enters into treaty obligations and thus owes responsibility to the foreign investor, it may be possible that a state or a local government is in breach of the State’s obligation under the BITs. Could, in such a case, the Central Government be held responsible for the state government’s actions?

Article 25 of the ICSID Convention extends ICSID’s jurisdiction to legal disputes arising directly out of an investment between a Contracting State or any constituent subdivision or agency of a Contracting State designated to it by that State and a national of another Contracting State. Considering that ICSID’s jurisdiction is consent based, Article 25(3) mandates that the consent by a constituent subdivision or agency of a Contracting State shall require the approval of that State unless that State notifies that no such approval is required.

In Vivendi v. Argentina, Argentina relied on its federal system under its Constitution in arguing that the acts of officials of the Province of Tucumán could not be attributed to the federal government and, accordingly, the Tribunal lacked jurisdiction over the Claimant’s claims. Moreover, Argentina had not made any designation or filed any consent pursuant to abovementioned Article 25(3). The Tribunal rejected this contention and observed that under international law, and for purposes of jurisdiction of the Tribunal, it was well established that actions of a political subdivision of federal state are attributable to the central government and that it was clear that the internal constitutional structure of a country could not alter these obligations. The tribunal also took notice of the First report on State responsibility by Prof. James Crawford, the then Special Rapporteur on State Responsibility that referred to the “established principle”  of  the inability of a State federal in structure to “rely on the federal or decentralized character of its constitution to limit the scope of its international responsibilities.” This principle is also enshrined in Article 7 of Draft Articles of State Responsibility. In this regard, the Commentary to Draft articles states that international law does not permit a State to escape its international responsibilities by a mere process of internal subdivision.  (Paragraph No. 7, Commentary)  Therefore, Article 25(3) does not restrict the subject matter jurisdiction of the Tribunal; rather, it expands of the scope of ICSID arbitration ratione personae to include subdivisions and agencies of a Contracting State.

As noted above, the acts of a subdivision are attributable to the State in a treaty-based arbitration. Whether such acts are attributable to the State in a contract-based arbitration is debatable, given how a Central Government is not usually a signatory to a contract between the sub-division and the investor. (See Niko v. Bangladesh)

There are also numerous instances of NAFTA investment disputes involving local regulatory measures. In Metalclad v. Mexico, the tribunal presided by Professor Sir Elihu Lautherpacht made it clear that a State is internationally responsible for the acts of its organs and sub-national units. The Claimant was claiming violations of NAFTA Articles 1105 (“Minimum Standard of Treatment”) and 1110 (“Expropriation”) for the reason that the local municipal governments of SLP and Guadalcazar in Mexico denied a construction permit in an arbitrary and non-discriminatory manner.

Often termed as a quasi-federal constitution- a mixture of federal and unitary elements leaning more towards the latter, the Indian Constitution distributes power to legislate on different issues to both Central and state Governments. The Seventh Schedule to the Constitution lists down subjects on which the Central Government and the state Governments have the power to legislate on. The Concurrent list contains subject on which both levels of Government have concurrent jurisdiction. It is because of this distribution of legislative power that the states do not posses power to enter into treaties and agreements with foreign countries and their implementation. In this regard, Entry 14 of the Union List reads as follows: “14. Entering into treaties and agreements with foreign countries and implementing of treaties, agreements and conventions with foreign countries.”

Therefore, only the central government can enter into treaties and agreements such as Bilateral Investment Treaties with foreign countries. This may give rise to peculiar situation where a foreign investor is aggrieved by any policy/decision formulated by the state government, something in which, as per the constitutional design, the Central government would have had no role to play. The issue that then arises is whether a foreign investor could bring a claim against a state government’s actions? As discussed above, a government cannot escape responsibility in international law by hiding behind its internal federal structure.

Reference must also be made to Calcutta High Court’s judgment in Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armatures SAS (2014 SCC OnLine Cal 17695), the first decision by an Indian court on a case arising out of an investment treaty arbitration. The Respondent had initiated an investment treaty claim under the 1997 India-France BIT, naming the Republic of India, the State of West Bengal and the Port Trust as respondents. The Petitioner was seeking an anti-arbitration injunction against the Respondent, prohibiting it from proceeding with an investment treaty claim in which the Petitioner was identified as a respondent. The High Court ordered the Respondent to not continue with the proceedings against the Port.

One of the Port’s main contentions was that it did not have an arbitration agreement with the Respondent and therefore it could not be made a party to the BIT arbitration. The Court took note of Respondent’s Notice of Claim under the BIT, which referred to Port as an organ of the Union of India and stated that although the Union of India would be responsible for the acts of Port, it does not necessarily make Port a party to the arbitration agreement under BIT. In arriving on this conclusion the High Court relied on the ruling of the English Court of Appeal decision in City of London v. Sancheti ((2009) 1 LLR 117) in which the court refused to rule that the Corporation of London was a party to the arbitration agreement notwithstanding the fact that under certain circumstance the State may be responsible under international law for the acts of one of its local authorities, or may have to take steps to redress wrongs committed by one of its local authorities.

This judgment underlines the importance of how the courts perceive political sub-constituent units being made party to a treaty based arbitration. As noted by the High Court, although the Central Government would be responsible for its political sub-constituent units, such units cannot be made parties to a treaty based arbitration for the mere reason that there is no arbitration agreement under the BITs between an investor and such units. Moreover, making such units party to the arbitration agreement is wholly unnecessary since a Government would be responsible for their actions in international law.

While the old Model India BIT was silent on the liability for actions of the political sub-divisions or sub-governments, the provisions of India’s new Model BIT seem to reflect the international jurisprudence. Article 4 lays down the standard of national treatment and extends the obligation to the Sub-national Governments. Article 1.2 defines ‘Sub-national Governments’ as a State Government or a Union Territory administration but does not include local governments. Moreover, Article 2.4, states that the BIT will not apply to any measure undertaken by a local government. Therefore, measures undertaken by urban local bodies, municipal corporations, village level governments, or enterprises owned or controlled by either of them are not covered under the new BIT. In absence of any substantive new treaty negotiations, it remains to be seen whether this carve out would be acceptable to other countries.


* Sarthak Malhotra, B.Com./LL.B. (Hons.), Gujarat National Law University, India.