This case is a part of our Annual Arbitration Review 2020.
Judgement Name: Vodafone International Holdings BV v. The Republic of India
Citation: PCA Case No. 2016-35 Tribunal: Permanent Court of Arbitration
Coram: L.Y. Fortier, R. Oreamuno Blanco an&d F. Berman
Date: 25th September 2020
Keywords: ISDS, Investment, enforcement, arbitral award, ICSID, Vodafone, Republic of India, PCA.
This case is about the enforcement of ISDS Awards in India and explores them through the lens of the Vodafone case. This case has sparked the question of the scope of enforcement of investment arbitration awards in India since it is not a party to the International Centre for Settlement of Investment Disputes ("ICSID").
Whether the Permanent Court of Arbitration has jurisdiction to hear the matter since India is not a party to the International Centre for Settlement of Investment Disputes?
In the year 2007, Vodafone acquired HEL. The deal took place in Cayman island due to the heavenly tax benefits offered by it, but the authorities in India were of the view that Vodafone is liable to pay capital gains from taxes. This led to a dispute which went to Bombay High Court, which held that Vodafone is liable to pay the remaining amount (total amount which Vodafone would have paid if the deal took place in India – the amount paid by Vodafone). Vodafone took the matter before the Apex Court, which decided the matter in favour of Vodafone. This matter would have ended here had the government of India not retrospectively amended the tax laws, which formed the base of the Court’s judgement in favour of Vodafone in 2012. Triggered by this action of the Government of India, Vodafone invoked the India- Netherlands Bilateral Investment Trade (hereinafter referred to as "BIT") and in 2016 went to the Permanent Court of Arbitration.
The primary contention of Vodafone was that India has acted in contravention with Article 4(1) of the BIT, which ensured fair and equitable treatment to the contracting party. The retrospective amendment of tax laws through the Finance Bill was a contravention of Article 4(1).
Non-interventionist Approach of Indian Court
It is a relief for foreign investors that Courts in India have adopted a non-interventionist approach while granting anti-arbitration injunctions. In cases such as the Khaitan holding case, where the government tried to get an anti-arbitration injunction issued, the Delhi High Court held that it would only intervene in rare and compelling circumstances. The reasoning behind this is that the root of BITs is located in public international law, and even the judgement of the Supreme Court of India can be questioned due to the fact that the judiciary is recognized as an organ of state in the ILC Draft Article on State Responsibility, and this would defeat the whole purpose of BITs if the Courts intervene in these matters. The Court also stated that the matter of investment arbitration is governed by the Code of Civil Procedure, 1908 ("CPC") and not the Arbitration and Conciliation Act, 1996 ("A&C Act") due to the reason that the A&C Act governs only commercial arbitration and hence for the enforcement of the foreign award, CPC must be looked into.
It is noteworthy that the BIT awards do not fall in the ambit of “foreign award” in CPC because it talks about enforcement of the foreign judgement by competent Court under Section 13, and it nowhere recognizes an ‘award’ by a tribunal as judgement.
Comparing International Commercial Arbitration and International Investment Arbitration
International Investment Arbitration is commonly known as Investor-State Dispute Settlement (hereinafter, to refer as ISDS) because they generally arise through specific public international law treaties (such as BIT) and due to this reason, these treaties form the foundation of rights and obligations. These rights and obligations under a BIT generally involve provisions such as Most Favoured Nation (MFN), National Treatment, Fair and Equitable. On the other hand, International Commercial Arbitration ("ICA") arises through the contractual obligation between the parties. The New York Convention of 1958 is the only relevant treaty in such cases.
The determination of law which shall be applied in arbitration proceedings differs in both ICA and ISDS. In ISDS, if the host State is not a signatory to conventions like ICSID, then the procedure of municipal law of the host State will be applicable, and similarly, the substantive national law of the host state will be applicable. While in ICA, the application of procedural law will be determined by the seat of Arbitration and substantive national law is applied by the arbitrators.
The legal battle between Vodafone and India is a lengthy one and is set to stretch further due to the decision of the Government of India to challenge the arbitration award[iv] in the case of Vodafone International Holdings BV v. Government of India (“Vodafone case”). The award by the Permanent Court of Arbitration ("PCA") was declared in favour of the telecom giant Vodafone on Sep 25, 2020. In the operative part of the judgement, the tribunal rejected the claim by the government that the tribunal does not have jurisdiction to hear the matter, and it stated that Vodafone is entitled to fair and equitable treatment. It also states that India has breached that standard, and the lack of such treatment would attract ‘international liability’. Future Prospects of the Case in the Singapore High Court
India’s legal duties in the international community will be determined on the basis of its ratification of international treaties and conventions. In this case, India is a party to the New York Convention, which contains that enforcement of arbitration award can be rejected on the grounds of public policy, and this is what India is most likely to contend before the High Court of Singapore against scrapping of levying INR 22,100 Crores.
State sovereignty is an underlying principle of every international institution, and it is beyond the scope of an Arbitration tribunal to rule over the nature of the public policy of the State. Although if the issue challenging the constitutionality and vires of the Finance Bill, 2012 would have been brought to the Supreme Court of India, it would have been in line with the legal framework of India. However, the main contention of Vodafone was the violation of fair and equitable treatment guaranteed under Art. 4(1) of India- Netherlands BIT. This argument would lose its substance if it is established that the retrospective amendment of tax laws was to enhance the financial structure of India and not to target any specific entity, but apparently, India failed to convince this issue to the tribunal.
Another point which is in favour of India is that Art. 4(4) of India-Netherlands BIT states that the provisions of FET with respect to National Treatment does not apply in cases of any arrangements relating to taxation. This argument can be preceded by the fact that in investment arbitration, the investor is bound by future changes in municipal law.
The final decision, in this case, will have a significant impact on the future of investment in India. This leaves India in a tough situation because if India accepts the award and allows it to be enforced, then it would be compromising sovereignty since tax is considered a sovereign matter, and interfering with it via an award would be an intervention in policy decisions. On the other hand, If the government decides not to enforce the award in India, then it might severely hit the future investment prospects of India. The best solution in such a situation appears to be a back-door negotiation to find a middle ground that serves the interest of both parties. However, given the situation, it seems like the Indian government would opt for another legal battle in the High Court of Singapore.