Enforcement of investment treaty arbitration awards against the Indian State

Arbitration, contract and company law are some of the fastest developing areas of laws in India today. It is therefore difficult yet important and necessary to stay abreast with the latest developments in these fields. I attempt to provide the readers with an update on the issues and position of law on one different aspect of these areas in every edition of the “The State of Commercial Law”. .The trigger for international investment arbitration in India appears to have been pressed like it was in the western world in the 1990’s. On the face of it, international investment arbitration offers investors new found ammunition in their frequent battles against the Indian Government. However, on a deeper examination, there are certain crucial differences between India and most of the western countries which might render international investment arbitration less efficacious a remedy for investors in India. These are:.– India is not a signatory to the ICSID Convention and consequently Article 54 of the ICSID Convention will not bind India. This provision states:.“Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State.”.The above provision ensured that international investment awards are not subject to domestic Court intervention thereby providing such awards some extra teeth. In India, however, this will not be so..– India has developed a sui generis jurisprudence in relation to domestic arbitration which even applies to foreign seated arbitrations in certain situations. An international investment arbitral award could therefore be tested before the Indian Courts in certain circumstances..At the out-set it must be said that a lot of the issues raised in this article have never been tested as they have never come up in the past. This article is aimed more at bringing to light these issues for the purpose of future discussions..A typical case study that will be considered is a case of “expropriation” by the Indian Government/ judiciary resulting in a contravention of the “right against expropriation” of an investor. “Expropriation” refers to the taking over of an “investment”, by an act of the State, either directly or indirectly, and this could include taking over or denying the investor of a valuable right guaranteed to it. There is authority to suggest that acts of the judiciary are also attributable to the State (Saipem v Bangladesh: ICSID Case No. ARB/05/07) and consequently “judicial expropriation” could also fall within the ambit of the provision under consideration. Two typical foreseeable situations where a tribunal could reach the conclusion that the Indian State is in breach of the provision under consideration are where:.– A right of an investor is taken away by a legislation. A typical example would be a situation such as the one arising in the Vodafone dispute where a retrospective legislation enacted by the Indian Government has a direct adverse impact on an investor..– A foreign arbitral award, which is recognized to be an “investment” by virtue of it being a crystallization of a parties contractual rights (Saipem v Bangladesh: ICSID Case No. ARB/05/07), is set aside in India following the power (exercisable in certain circumstances) of an Indian Court to do so as recognized by the Supreme Court of India in Venture Global Engineering v. Satyam Computer Services Ltd: (2008) 1 ARB LR 137 (SC) (“Venture Global”)..The fundamental point that this piece endeavors to make is that even if an international investment arbitral tribunal rules against India on the above basis, enforcement of such an award would still be a challenge. Such an award would have to face numerous impediments. To name a few:.– The award could be set aside by an Indian Court under Section 34 of the Arbitration and Conciliation Act, 1996 (“The Section 34 challenge”)..– Such an award which has already been set aside by an Indian Court can be enforced only in jurisdictions which enforce annulled awards (“Enforcement of annulled awards”)..– Even if the foreign Courts are likely to enforce an annulled award, the principles of sovereign immunity place an enormous hurdle (“Sovereign immunity”)..Each of these issues is analyzed individually..The Section 34 challenge.The Supreme Court of India, in Venture Global has held that unless Part I of the Arbitration and Conciliation Act,1996 is expressly or impliedly excluded, Section 34 (contained in Part I), which provides the domestic courts the power to set aside an arbitral award, will apply. On the basis of the decision in Bhatia International vs Bulk Trading S. A. & Anr: 2002(4) SCC 105 (“Bhatia International”) the proposition that has emerged is that merely because the seat of arbitration is foreign does not mean that Part I stands excluded. While both Bhatia International and Venture have been overruled by Bharat Aluminium Co v Kaiser Aluminium Technical Service:(2012) 9 SCC 552 (BALCO) this decision only applies to arbitration agreements entered into after the date of the decision i.e. 6th September 2012..It is apposite to note that all of India’s BIT’s have been entered into prior to the decision in BALCO. Further a majority of these treaties, while applying to a scenario of a foreign investment in India, would be governed by Indian law. While the seat of investment arbitration would be foreign, on the basis of the decisions in Venture Global and Bhatia, Part I of the Arbitration and Conciliation Act, 1996 and consequently Section 34 would apply. It would therefore be possible for the Indian Government to challenge the award before Indian courts..One of the primary grounds of challenge under section 34 is that the award contravenes the public policy of India. In this regard it has been held in Oil & Natural Gas Corporation Ltd v Saw Pipes Ltd:2003 SC 2629, that an award is against public policy if it is ‘patently illegal’ and an award is ‘patently illegal’ if it contravenes the law of the land. That being so every award which provides for compensation/damages for an act of expropriation by way of a legislation or a case of judicial expropriation would contravene either a statute or judge made law and consequently be patently illegal. It is therefore highly plausible for an Indian court to set aside such an award. If the award is set aside in India, it will not be enforceable in India; however it might still be enforceable in some foreign countries as discussed below..Enforcement of annulled awards.Once an award has been annulled it is debatable whether an annulled award can still be enforced. One view is that an annulled award cannot be enforced in a foreign court. Such a view has been taken in Supplier v. State Enterprise, Yearbook of Commercial Arbitration, Vol. XXXIII (2008), Germany No. 110, p. 510. And Baker Marine (Nig) v. Chevron (Nig), 191 F 3d 194 (1999) and by jurists such as Prof Albert Jan van den Berg, Eric Schwartz and Prof. Philippe Fouchard. The rationale behind this view is that an award once set aside by a competent Court becomes a nullity and there remains nothing to enforce..On the other hand some courts have also taken the view that they have jurisdiction to enforce annulled awards. The underlying reasoning is that international awards are not rendered a nullity because they have been set aside as the awards are not territorial in nature and consequently the decision of a domestic court cannot render them unenforceable worldwide. Further, the New York Convention provides Courts the discretion to enforce even an annulled award as opposed to the Geneva Convention which does not provide any such discretion. The Courts in a few countries have therefore gone ahead and enforced annulled awards. Most noticeable are the decisions of the US Courts in Philippines v. International Steel Services, Inc., Yearbook of Commercial Arbitration, Vol. XXXIII(2008), p. 1125, and French Courts in Omnium de Traitement et de Volorisation Ltd v. Hilmarton Ltd.: [1993] Rev. Arb 301 and RepubliqueArabed’Egypte v. Societe Chromalloy Aero Services: [1997] Rev. Arb 395..A foreign investor, seeking to enforce the international investment arbitral award, will therefore have to search for a country whose courts enforce annulled awards. After recognizing courts of this nature, the foreign investor will be able to enforce the award against assets of the Indian Government, subject to the principles of sovereign immunity prevailing in that foreign jurisdiction..Sovereign immunity.In the earlier days most countries had a system of absolute sovereign immunity based on which no asset of a sovereign nation in a foreign land could be proceeded against. Most countries have moved from a system of absolute sovereign immunity to restrictive sovereign immunity. In most jurisdictions, attachment of a sovereign State’s non-commercial property is not permitted. However, within the different regimes that incorporate this concept there are subtle differences to be noted. For instance, Section 3 of the UK Sovereign Immunity Act 1978 has a far narrower definition of “commercial property” compared to Section 1603 of the Foreign Sovereign Immunities Act of USA..Execution is possible against non-commercial property only if the State has waived its sovereign immunity. Such a waiver can be contained in the treaty itself; however almost all Indian BITs do not contain such a waiver. While it was initially the view that consent to the arbitral process itself meant consent to execution and that this amounted to a waiver of sovereign immunity, such a view has now been negatived by the US and Hong Kong Courts in LETCO v. Liberia: 650 F. Supp. 73 (SDNY 1986) and F G Hemisphere v Democratic Republic of Congo:508 F.3d 1062, 106465 (DC Cir. 2007) respectively. It is therefore rare to find an express waiver of sovereign immunity..When there exists no waiver, it is left to the domestic Courts at the place of enforcement to construe the term “sovereign immunity” and “commercial property”. Courts are known to adopt a very pro-sovereign immunity approach. This is perhaps because they expect similar reciprocation from other States..A typical case study of the problems that sovereign immunity poses to successful litigants is elucidated by the enforcement proceedings of the Noga awards against Russia in France. Three different properties were sought to be attached: the Russian embassy bank accounts, a Russian ship and a Russian military plane. In this case, the Ruassian Government had expressly waived sovereign immunity. Yet, the French Court, in Gouvernement de la Fédération de Russie v CompagnieNogad’importation et d’exportation: Rev. Arb. 2002, p. 736 held that bank accounts belonging to embassies were “diplomatic” assets and that a specific waiver of sovereign immunity with respect to “diplomatic” assets was needed if such assets were to be proceeded against. Hence the waiver did not extend to the attachment of such assets. Further, the ship was not permitted to be attached on the basis that it was owned by a University which was distinct from the Russian Government. This was despite the fact that the Constitution of the University stated that all property owned by the University was owned by the Government.The attachment of the airplanes was unsuccessful as pursuant to a tip-off the airplanes flew off before attachment..The above case clearly shows the difficulties faced by an investor to proceed against the assets of a Country in a foreign land..Conclusion.While the above issues are yet to arise in the Indian context, these are potential impediments that foreign investors could face while enforcing an international investment arbitral award against the Government of India. The scenario is therefore not as rosy as it appears to be during this ‘honeymoon’ period for international investment arbitration in India..Anirudh Krishnan is a graduate of NALSAR and completed his BCL at the University of Oxford. He is a qualified solicitor, England and Wales (after having worked at Clifford Chance, London) and specializes in commercial/ company litigation and arbitration. He handles matters in Tamil Nadu and Karnataka and is the Founder Partner of AK Law Chambers. He is also Chief Editor, Justice R.S. Bachawat’s Law of Arbitration and Conciliation. He can be contacted at anirudh@aklawchambers.com