Vodafone Versus India – BIT by BIT, International Arbitration Becomes Clearer

The detailed facts reported in the Delhi HC judgement show that the conduct of the Indian government in dealing with Vodafone leaves much to be desired.

The recent judgement of the Delhi high court in Vodafone versus India is another twist in the long legal saga involving a foreign investor.

Before we delve into the judgement, a brief background is useful to understand the overall political economy context. The story began in 2006 when Vodafone’s Netherland entity entered into an agreement with Hutchison Telecommunications – a Cayman Island company – to buy its share of 67% interest in an Indian company Hutchison Essar for $11 billion. Subsequent to this transaction, the Indian tax authorities slapped a capital gains tax of $2.2 billion on Vodafone. Vodafone contended that the transactions did not involve a capital asset situated in India and hence no capital gains tax was payable. The matter went up to the Supreme Court of India, which, in 2012, ruled in favour of Vodafone.

After the Supreme Court’s ruling, it was believed that the last word had been said on this complex tax battle. However, the battle had just begun.

No sooner had the Supreme Court given its decision, the finance minister of the day, Pranab Mukherjee, moved a bill in the parliament to amend the Income Tax Act not just to clarify that Vodafone-kind of offshore transactions are taxable, but also to give this clarification retrospective application from 1 April 1962. Sanjaya Baru, who was prime minister Manmohan Singh’s media advisor, claims that Singh was not “even aware till the day before the budget was to be presented that his finance minister was going to introduce a new corporate tax policy, with retrospective effect, that would have disastrous consequences for investor sentiment”.

This amendment was targeted to overrule the Supreme Court’s decision and to ensure that Vodafone pays the tax that even the highest court of the country believed it didn’t owe. Subsequent to this change in the tax laws, Vodafone brought a BIT claim against India in 2012 under the India-Netherlands BIT. India used all possible opportunities to drag its heels to avoid BIT arbitration. This case is pending before the Permanent Court of Arbitration at The Hague. The Modi government on assuming office in 2014 criticised changes made to tax laws retrospectively. However, barring soaring rhetoric, it did nothing to correct the mistake. On the contrary, it pursued relentlessly the tax claim against Vodafone and continued to oppose the BIT arbitration.

On January 24, 2017, Vodafone issued a second BIT arbitration notice to India challenging the imposition of the multi-billion-dollar tax under the India-UK BIT. Since Vodafone had already initiated a BIT arbitration claim against India, on the issue of retrospective taxation, the Indian government knocked the doors of the Delhi HC, seeking an order to restrain Vodafone from initiating a parallel proceeding before another BIT tribunal citing ‘abuse of process’. The Delhi HC obliged the government by issuing an ex parte interim order on August 22, 2017, restraining the Vodafone Group from pursuing arbitration under the India-UK BIT. This was followed by an order of Delhi HC, on October 26, 2017, clarifying that the representatives/counsel for the parties were free to participate in the proceedings for appointment of a presiding arbitrator.

The Indian government challenged this order of the Delhi HC in the Supreme Court. The apex court on December 14, 2017, affirmed the October 26 order of the Delhi HC. However, the apex court did not make any observations on the merits of the contentions since the final arguments were to be heard by the Delhi HC. Finally, on May 7, 2018, the Delhi HC dismissed the plea of the Indian government seeking an anti-arbitration injunction against Vodafone from proceeding under the India-UK BIT arbitration. In this process, the Delhi HC dealt with several legal issues involving BIT arbitration of the kind that has not arisen before.

Jurisdiction of national courts over BIT arbitrations

An important question before the court was whether Indian courts inherently lacked jurisdiction to hear any dispute arising out of a BIT. The Delhi HC held that there is no threshold bar or inherent lack of jurisdiction in the court to deal with BIT arbitrations.

The court provided the following reasons for its decision. First, the court held that there is no statutory bar or a case law relating to treaty obligation that ousts jurisdiction of Indian courts in relation to BIT arbitration. In this context, the court held that though Article 253 of the Indian Constitution empowers the parliament to enact a law to give effect to international treaties, no such law has been enacted to give effect to BITs.

Second, India has not signed the ICSID Convention that, according to the court, ‘completely negates the role of national courts’. Therefore, it was held that India has not acceded to ouster of jurisdiction of domestic courts over BIT arbitration. While it is true that India has not signed the ICSID convention, it is not quite correct that the ICSID convention completely negates the role of domestic courts. Article 26 of the ICSID Convention allows a State to make exhaustion of local remedies, a condition of consent to arbitration under the ICSID convention. Third, the court held that if the argument of lack of jurisdiction is accepted, then the court will be powerless to execute a BIT award if a foreign investor were to approach the domestic court.

Applicability of the A&C Act 1996 to BIT Arbitrations

A major conclusion of the court is that the Arbitration and Conciliation (A&C) Act 1996 does not proprio vigore (by its own force or independently) apply to BIT arbitrations. The present authors had previously commented that in its interim order of August 2017, the court had seemingly presumed that the A&C Act applied to BIT arbitration. The approach of the Delhi HC was same as that of the Calcutta HC in Board of Trustees of the Port of Kolkata v. Louis Dreyfus. We had problematised the Calcutta HC simply presuming the applicability of the A&C Act to BIT arbitration and issued an anti-arbitral injunction against a BIT arbitration under India-France BIT. In the recent judgement, the Delhi HC concurred that the Calcutta HC assumed applicability of the A&C Act without offering any explanation. Thus, it stripped that judgment of any precedential value in respect of applicability of A&C Act to BIT arbitrations.

The reason offered by the Delhi HC for the non-applicability of the A&C Act to BIT arbitration is that BIT arbitration is fundamentally different from international commercial arbitration (ICA). The ‘cause of action’ for BIT arbitration is not commercial in nature but based on State guarantees or treaty obligations undertaken by the State. Thus, BIT arbitration has its roots in public international law. While this distinction between BIT arbitration and ICA, globally, is quite well known and some Indian international investment lawyers have regularly talked and written about this, yet it is not very well understood in India.

This is because the BIT arbitration landscape in India, especially among law firms and practitioners, is dominated by lawyers having a background in commercial arbitration/private law without adequate training in public international law. Thus, BIT arbitration is often approached with the same mindset as commercial arbitration leading to many conceptual and normative problems. Hopefully, the conceptual clarification given by the Delhi HC will ensure that difference between the two is now well appreciated in India.

In our piece, we had critiqued the Delhi HC’s August 2017 interim order arguing that while restraining Vodafone from pursuing arbitration under the India-UK BIT, the court had not discussed McDonald’s India v Vikram Bakshi, a division bench ruling of the Delhi HC, on issuance of anti-arbitration injunction. In the McDonald’s case, although it did not involve BIT arbitration, the division bench had held an anti-arbitral injunction, in case of foreign arbitration, can only be granted under the conditions present under Section 45 of the A&C Act.

The Delhi HC has responded to this point by reasoning that since A&C Act is not applicable to BIT arbitration, the ratio of the McDonald case was not applicable. Consequently, the court’s inherent powers to grant an anti-arbitration injunction are not circumscribed by anything given in the A&C Act. Thus, according to the court, national courts of India have the inherent power to restrain BIT arbitration which are oppressive, vexatious, inequitable, or constitute an abuse of the legal process.

However, the court also said that where the subject matter of the dispute is governed by a dispute settlement clause of a BIT, the national courts should exercise self-restraint, except if there are compelling circumstances and the court has been approached in good faith, and no other efficacious remedy is available.

Abuse of process

Another important contribution the case has made is on the question of abuse of process in BIT arbitration. Indian government’s main contention was that filing multiple claims by entities in the same vertical corporate chain pertaining to same measure is per se an abuse of the legal process or is vexatious. The Delhi high court didn’t agree with the government. The court said that if there are substantial reasons to bring two sets of proceedings simultaneously, they will not be vexatious. The court also said that since the Indian government has consistently claimed that the BIT arbitration under India-Netherlands BIT is without jurisdiction, invocation of another treaty by the parent company cannot be regarded as abuse per se.

Another factor that weighed heavily on the mind of the court to dismiss government’s plea of abuse of process was the offer made by Vodafone to consolidate the two BIT proceedings. The court held that such an offer and undertaking is sufficient to placate India’s concerns regarding double relief which may be granted by two tribunals in respect of the same matter. Further, the court stated simply because it would be expensive or inconvenient for the government to litigate before an arbitral tribunal do not make the proceedings oppressive.

However, the court gave the government liberty to raise the abuse of process argument before the India-UK BIT, which would be the right forum to do so – a point we made in our previous piece.

Beyond legalities

While this case has clarified many conceptual legal issues pertaining to BIT arbitration, it also draws our attention to issues that go beyond law. The current government has emphasised much on the importance of making it easier to do business in India. An integral part of this is to treat foreign investors fairly and equitably. As the detailed facts reported in the Delhi HC judgement show, the conduct of the Indian government in dealing with Vodafone leaves much to be desired. The government has pulled out every technicality possible from the rule book to drag the dispute, which does not show it in good light.

Many in India argue that BITs are a tool to further a neoliberal economic order aimed at favouring big corporations against the interests of third world states. However, the Indian government’s treatment of Vodafone, over the last decade, is a grim reminder that the reality is more nuanced. This case shows how a third world state, often portrayed as a victim, can abuse its public power and delay BIT arbitration, thus undermining international rule of law.

A critical approach to BIT arbitration is welcome to bring about reforms in the system to ensure that foreign investors don’t abuse it. Likewise, it is equally important that states (first world or third world) are not allowed to escape scrutiny for their conduct under international law merely by playing the victimhood card. Else a fair rule-based international order shall remain a distant dream.

Prabhash Ranjan and Pushkar Anand are Assistant Professors at South Asian University and University of Delhi respectively. Views are personal.