Business Laws

Needed, framework for enforcement of investment treaty arbitration

Harshvardhan Korada | Updated on September 05, 2021

India is not a signatory to the ICSID Convention and does not have a reliable framework for enforcement investment treaty awards   -  istock.com/tzahiV

Tax disputes by MNCs have an impact on India’s image as an investment destination

In June 2021, the Tribunal Judiciaire de Paris allowed Cairn’s application to freeze 20 residential real estate assets owned by the Indian government. The Award was passed by the Tribunal on December 12, 2020. The Award is not available in public domain but has been widely reported. The Tribunal held that India had failed to comply with its obligations under the India-UK BIT and directed payment of a compensation of $1.2 billion to Cairn. India has appealed against the Award in the Netherlands.

Meanwhile, Cairn has registered the Award for enforcement in several countries after identifying Indian assets worth approximately over $70 billion. The French Court’s order was part of Cairn’s efforts to enforce the arbitral award. The 20 residential properties which have been directed to be frozen are worth approximately $23 million. This is only a fraction of the $1.2 billion Award in favour of Cairn.

Looking for settlement

Taxation disputes by multinational companies (especially widely reported and long drawn ones like Cairn) certainly have an adverse impact on India’s image as an investment destination. It was important to do away with the tarnished image of the Indian tax regime at a juncture where post pandemic economic recovery was the need of the hour. The Indian government has the option to challenge the order of the French Court and/or pursue settlement and preserve Indian assets abroad. However, drawing out the dispute is not in favour of India’s international image. With the new law in place, it is likely that the Indian government is looking for a settlement. According to reports, Cairn is in talks with the Indian government.

Already, India’s reputation as an attractive destination for foreign investments had been severely affected by the infamous retrospective “2012 Amendment”, which was introduced to circumvent the Indian Supreme Court’s ruling in Vodafone International Holdings BV Vs Union of India against the retrospective reading of tax law. And now, the award of the Tribunal Judicaire de Paris only dented India’s image further.

Accordingly, the Indian government took a decision to scrap the 2012 Amendment, through the Taxation Laws (Amendment) Bill, 2021, which became law after the President of India gave his ascent on August 13.

Notably, the 2012 Amendment has resulted in three investment treaty arbitrations against India i.e., (i) Vodafone International Holdings BV Vs India; (ii) Cairn Vs India; and (iii) Vedanta UK Vs India. In our opinion, clearly this is not an isolated incident. A similar award was passed against India and in favour of Vodafone for $5.47 million as partial compensation in September 2020. The dichotomy here is the balance of a State’s sovereign taxation power and its commitment under international law.

Cairn has carefully selected jurisdictions such as US, UK, Singapore, France etc. which Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965 (“ICSID Convention”) to execute the arbitral award. Meanwhile, India is not a signatory to the ICSID Convention and does not have a reliable framework for enforcement investment treaty awards. The Indian Arbitration framework is ill-equipped to deal with awards from investment treaty arbitration. It is unclear whether dispute between the private investor and the State would fall within the purview of the Arbitration and Conciliation Act, 1996. On the one hand, it has been held that the dispute between the private investor and the State is neither an international commercial arbitration nor a domestic arbitration. This is because investment treaty arbitration arises from public international law, State obligations and administrative law. However, some High Courts have been of the view that the Arbitration and Conciliation Act, 1996 would apply to investment treaty arbitration.

Supreme Court’s clarification

In the coming years, there is a need for the Supreme Court to clarify this position or for the legislature to create a legal framework for enforcement of investment treaty awards in India. The ambiguity and lack of proper framework for enforcement is contrary to India’s goal of becoming an arbitration as well as investment hub. This is more so when coupled with the back-to-back adverse arbitral awards against India in investment arbitration. The evolution of a framework for enforcement of investment treaty arbitration in India has become more important than ever to save face internationally.

(The authors are lawyers with Phoenix Legal, a law firm)

Published on September 05, 2021

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