[This article has been authored by Shuchi Agrawal, a fourth year law student at JGLS, Sonipat]
Keywords: Investment treaty arbitration, enforcement of award
This article is the first installment of a two-part series. It provides a brief introduction of the mechanisms for enforcing investment treaty arbitration awards and presents India’s position on the issue. Subsequently, the second part offers a comparative analysis and suggests alternatives which the Indian State can follow to enforce investment treaty arbitration awards.
It has been claimed that the arbitration friendliness of a jurisdiction is determined by the efficiency of enforcement of arbitral awards. The confidence in the enforceability of an arbitral award, without being subjected to judicial review, makes international commercial arbitration “an attractive alternative to domestic litigation.” In India, Part I of the Arbitration and Conciliation Act, 1996 (“the Act”), governs domestic arbitrations, while Part II governs international arbitrations under the Geneva Convention and the New York Convention. Due to the prevalence of “commercial arbitration,” a great volume of jurisprudence has developed regarding the enforcement of arbitral awards in various jurisdictions, including India. Nonetheless, the enforcement of investment treaty arbitrations still lacks that level of jurisprudential development, especially in the Indian context.
Bilateral Investment Treaties (“BITs”) are agreements that are made between two countries, and contain the terms for the “promotion and protection of private investments” made by the nationals of the concerned signatories in “each other’s territories.” India is a developing country and is considered to be an attractive place for foreign direct investment. This is evidenced by the fact that the foreign direct investment in India has grown to USD 44 billion over the previous two decades. However, despite its popularity as the ninth largest destination for foreign direct investment, India has terminated fifty eight of its bilateral investment treaties. and has adopted a restrictive approach to “investor protection” . Additionally, it is not a signatory to the International Centre for Settlement of Investment Disputes (ICSID) Convention, which grants immunity to ICSID awards from being challenged in national courts. Due to this, India is not obligated to recognize and enforce BIT arbitration awards in the same manner as the judgments of a local court. Additionally, S. 44 of the Code of Civil Procedure, 1908, allows for the enforcement of a foreign judgment, but a bilateral investment treaty award is not considered to be a “judgment” and it is not “delivered by a court,” as required under S. 13 of the Code of Civil Procedure, 1908. Therefore, the only way to enforce investment treaty arbitration awards in India, is through the New York Convention.
The majority of BIT’s concerning India contain arbitration clauses which provide for arbitration to be administered according to the ICSID Additional Facility Rules, or through ad hoc arbitration as per the UNCITRAL Arbitration Rules. However, both these provisions do not improve the probability of enforcement of a BIT award in India. The Additional Facility Rules aid in dispute resolution in multiple situations, including when one of the parties to the dispute is not a signatory to the ICSID Convention. However, they do not offer “foolproof enforcement protection” to the concerned arbitral awards. Additionally, these rules primarily deal with the administration of arbitration proceedings and offer very limited assistance in the enforcement of awards. Hence, the enforcement of the awards is subject to the decision of the enforcing State.
Due to this, the Additional Facility Rules provide that an arbitration in accordance with the concerned rules may only be conducted in States which are party to the New York Convention. It has been claimed that this provision was created to ensure enforceability of awards made under the relevant rules. While this provision may increase enforceability in other countries, it may not be as effective in India. This potential ineffectiveness may occur because even though India is party to the New York Convention, it has opted for the reservation mentioned under Article I (3) of the New York Convention. Thus, according to this, only those New York Convention awards are enforceable in India that arise from a commercial dispute. It is also pertinent to note that the term ‘commercial’ has not been defined under the Arbitration and Conciliation Act, 1996.
The position of the commercial Nature of Investment Treaty Arbitration Awards:
Different High Courts in India have given conflicting views on the applicability of the Act to BIT arbitrations. In the Board of Trustees of the Port of Kolkata v. Louis Dreyfus[i], the Calcutta High Court had exercised jurisdiction over a dispute involving the India-France BIT, under S. 45 of the Act. By doing so, the Court had assumed that the Act would apply to arbitral awards arising from BITs in the same manner as it applies to foreign seated commercial arbitrations. Subsequently, the Delhi High Court adopted a contrasting view in Union of India v. Vodafone Group PLC,[ii] and Union of India v. Khaitan Holdings (Mauritius) Ltd. & Ors.[iii] In both of these cases, the it held that arbitrations conducted under a BIT are excluded from the purview of the Arbitration and Conciliation Act, 1996.
The Delhi High Court had stated that Part II of the Act would not be applicable to these cases due to the definition of a “foreign award,” as established under S. 44 of the Act. As per S. 44 of the Act, a foreign award has been defined as an arbitral award that is “considered as commercial” in nature under the laws of India. It held that an investment arbitration is fundamentally distinct from a commercial dispute because the “cause of action” is based on State assurances. Further, it was stated that an investment arbitration is grounded in “public international law, obligations of State and administrative law.”
While the Delhi High Court has stated that investment treaty arbitration cannot be considered “commercial,” the international position on this question is different, since investment treaty arbitrations are considered to be “ commercial” as per the New York Convention. Moreover, it has been held in numerous cases, that the term “commercial” must be interpreted widely. Additionally, the UNCITRAL Model Law also suggests interpreting the term ‘commercial’ broadly, so as to include investments. Notably, as per Article 27.5 of the 2016 Model BIT, a dispute submitted to arbitration under the BIT must be considered to have arisen from a commercial transaction, with regard to Article I of the New York Convention.
In addition to this, the nature of BITs as instruments signed by countries in order to establish the conditions for investing in one other, must be considered. BITs serve the aim of furthering trade and economic development, and therefore arise from commercial relationships. Additionally, investment treaties work to encourage foreign direct investment, and safeguard a “foreign investor’s commercial interests.” In this regard the Gujrat High Court in Union of India v. Lief Hoegh Co., had established that “trade transactions in any of their forms,” even when occurring between citizens of different nations constitute commercial relationships. Therefore, in light of this judgment, investment treaty related disputes must also be considered to be commercial. However, in the present circumstances, there is a lack of clarity on whether or not an investment treaty arbitration award can be enforced in India.
Hence, a probably way to seek the enforcement of a BIT award could be by identifying “the assets of the award debtor” which are situated in jurisdictions that have well-developed jurisprudence for the enforcement of BIT awards. This approach has become very popular to enforce arbitral awards and for recovery purposes. For instance- recently, a UK based company, Cairn Energy, won an award in its favor against the levying of retrospective taxes by the Indian government. In order to enforce the USD 1.2 billion award, it had sued Air India in the United States of America.
Similarly, in 2020, the Vodafone Group won an international arbitration against the Government of India. It was held that the Indian government had breached the India-Netherlands BIT by retrospectively imposing a tax liability on Vodafone. However, owing to the lack of clarity on the regime for enforcing investment treaty arbitration awards, in India.it had been claimed that the enforcement of this award would constitute “new territory”. Nonetheless, the government’s recent decision to reverse the policy of retrospective taxation had the effect of preventing this development, as Cairn and Vodafone agreed to withdraw their cases. Regardless of this, it is imperative for India to develop its own mechanism for enforcing investment treaty awards, in order to remain a relevant destination for foreign direct investment. In this context, it may be beneficial for India to observe the procedures which have been adopted by other countries for enforcing such awards. A discussion of different international approaches has been provided in the second part of this blog series.
[i] The Board of Trustees of the Port of Kolkata v. Louis Dreyfus, 2014 SCC OnLine Cal 17695. [ii] Union of India v. Vodafone Group PLC United Kingdom & Anr., 2018 SCC OnLine Del 8842. [iii] Union of India v. Khaitan Holdings (Mauritius) Ltd. & Ors., 2019 SCC OnLine Del 6755.