Deconstructing the Delhi High Court’s Anti-Arbitration Injunction against Vodafone UK’s BIT Arbitration

[Ritvik M. Kulkarni  is Associate, Wadia Ghandy & Co., Mumbai. Views are strictly personal]

The Delhi High Court (the Court) in its order dated 22nd August 2017 has passed an ex-parte interim injunction restraining Vodafone UK entities (Defendants) from initiating investment arbitration against the Union of India (UOI) under the India-UK Bilateral Investment Treaty (BIT) (the Order). Amidst the post-amendment fervor of the Indian arbitration regime, the Order is arguably reminiscent of India’s erstwhile interventionist approach to arbitration.

Backdrop

The dispute emanates from India’s infamous tax tussle with Vodafone International Holdings B.V (VIHBV). Even though VIHBV emerged victorious in the legal dispute, the Indian Government negated this victory with a fresh claim pursuant to a retroactive amendment to its taxation laws. In 2014, VIHBV responded with an arbitration notice against India under the India-Netherlands Bilateral Investment Treaty (BIT).

During the pendency of these proceedings, the Defendants served a notice of dispute upon India in 2015, followed by an arbitration notice in January 2017 to invoke UNCITRAL arbitration under the India-UK BIT.  

The Order

The UOI successfully sought an ad-interim injunction from the Court to supplement its suit for declaration and permanent injunction under Sections 34 and 37 of the Specific Relief Act, 1963 (SRA) (the Suit). It was submitted that the Defendants will have abused the legal process by initiating two independent arbitral proceedings through separate entities, which were part of the same corporate group.

The Court relied on Orascom v. Algeria to observe that “…[the Defendants] and VIHBV seem to be one economic entity”. It was also found that the reliefs sought by VIHBV under the India-Netherlands BIT were substantially similar to those sought by the Defendants under the India-UK BIT. The Court concluded that it would be inequitable, unfair and unjust to permit the Defendants to prosecute investment arbitration against India.

Comment

It seems likely that the Defendants are part of VIHBV’s larger corporate structure. Their arbitration claim too may overlap with VIBHV’s claim in ongoing investment arbitration proceedings. Even if this is true, the Court has erred in granting an anti-arbitration injunction in the present case, for the following reasons:

Maintainability of the suit

Courts have discretion under Section 34 of the SRA to return a declaration of one’s entitlement to any legal character or as to a right and/or title to any property. However, the subject matter of this dispute is limited only to India’s quasi-contractual obligations arising out of the India-UK BIT. It involves no claim of entitlement to any legal character or any right or title to any property. Similarly, the relief(s) sought by the UOI from the Court, i.e. a declaration towards the non-existence of an arbitration agreement, cannot be categorized as one relating to legal character or right/title to any property. Accordingly, a suit for declaration under Section 34 should not be maintainable in the prevailing set of facts.

It is settled law that an applicant is required to make out a prima-facie case on merits to be entitled to an injunction. In the present dispute, the UOI cannot said to have met this requirement since the relief sought clearly falls outside the scope of Section 34 of the SRA. Since the suit itself is ex-facie non-maintainable, the UOI could not have established a prima-facie case for obtaining an injunction. Accordingly, the UOI should not have been entitled to an anti-arbitration injunction in the present case.  

In Roshan Lal Gupta v. Parasram Holdings, the Delhi High Court was previously faced with a similar suit relating to domestic arbitration. Endlaw, J. noted that Section 16 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) empowers an arbitral tribunal to rule on its own jurisdiction, and that a party aggrieved by the tribunal’s decision can subsequently challenge the arbitral award before a Court. Dismissing the suit, the Learned Judge observed that the Court’s discretion under Section 34 of the SRA ought not to be exercised in a manner that adversely affects arbitral proceedings. 

Further, Endlaw, J. applied the principle of judicial non-intervention embodied by Section 5 of the Arbitration Act and observed that it would tantamount to negation of the changes introduced in the Act if the Court was to hold that a suit is maintainable where the contract containing the arbitration clause is challenged and if the Court is empowered to injunct arbitration proceedings on these grounds. 

The Learned Judge refused injunctive relief also in light of Section 41(h) of the SRA, since the applicant could obtain equally efficacious relief from the arbitral tribunal pursuant to (i) Section 16 of the Arbitration Act to challenge the Tribunal’s jurisdiction and (ii) Section 34 to challenge an adverse award before a court.

Similarly in the present case, the Court ought not to have granted an anti-arbitration injunction since (i) the suit itself is not maintainable and (ii) the UOI can obtain equally efficacious relief from the Tribunal, when constituted, and seek non-enforcement of an adverse award in India under Section 48 of the Arbitration Act.

Judicial intervention in foreign arbitration 

Court observed that prima-facie there would be a duplication of claims before two separate forums; and that India constitutes the natural forum for litigation of the Defendants’ claims against the UOI. The Court then relied on the Supreme Court’s decision in Modi Entertainment v. WSG Cricket, which held that a court of natural jurisdiction may issue an anti-suit injunction even against a foreign court having exclusive jurisdiction if the said forum is oppressive or vexatious. However, the principles of granting an anti-suit injunction should not be readily conflated with those required for an anti-arbitration injunction. 

In a similar dispute, a Single Judge of the Delhi HC had restrained McDonald’s India from prosecuting LCIA arbitration against Vikram Bakshi. Shali J. prima-facie found that the arbitration agreement had become inoperative after McDonald’s initiated oppression-mismanagement proceedings before the Company Law Board. Accordingly, it was also observed that LCIA was forum non-conveniens and that the continuance of the arbitration proceedings would be oppressive and vexatious. 

A Division Bench (DB) of the Delhi HC in an emphatic decision subsequently set aside the aforesaid order. The DB laid special emphasis on Modi Entertainment v. WSG Cricket to draw an intricate contradistinction between the underlying principles of anti-suit injunctions and anti-arbitration injunctions. The DB found that an anti-arbitration injunction can be issued only when a party verily shows that it had not even consented to the arbitration agreement; or that such consent was obtained by fraud. The DB also held that a civil court, which could normally exercise its jurisdiction, would have to mandatorily refer the subject matter of such a suit to arbitration once a party to the arbitration agreement (or any person claiming under her) makes such a request. Lastly, it was also observed that the mere existence of multiple proceedings was not sufficient to render the arbitration agreement inoperative. 

In Kolkata Port Trust v. Louis Dreyfus, Sen J. of the Kolkata HC restrained Louis Dreyfus from proceeding against the Kolkata Port Trust since the latter was not a contracting party to the India-France BIT. The Learned Judge found that it would be vexatious and oppressive to do otherwise. However, the Learned Judge categorically refused to restrain the entire investment arbitration proceedings. Importantly, Sen J. acknowledged that the principle of judicial non-intervention under Section 5 applies even to foreign arbitration. It was further clarified that any kind of judicial intervention, if at all warranted, should be exercised by the appropriate foreign court having supervisory jurisdiction over the arbitration in question. 

In light of these decisions, it is more than apparent that the present dispute did not warrant the grant of an anti-arbitration injunction.

Ex-parte injunction 

In addition to substantive lacunae, the Order is also marred by non-compliance of Order 39 (Rule 3) of the Civil Procedure Code, 1908 [O39R3]

First, the Order lacks any reasons, or even the UOI’s contentions, to the effect that the underlying object of UOI’s injunction application would have been defeated if the Defendants had prior notice of the same. 

Secondly, sub-rule (a) of O39R3 expressly requires an applicant to deliver to the opposite party, immediately after the Order of injunction has been made, a copy of the injunction application along with other documents of the proceedings. Similarly, such applicant is also required to file, either on the day that the injunction is granted or the day after, an affidavit stating that the above pleadings have been delivered or sent to the opposite party. Surprisingly, the Court has granted a week’s time to the UOI for complying with the requirements of O39R3. The Order, therefore, clearly rests on shaky ground.   

A Constitutional Conundrum 

In addition to the above, the UOI argued that an investment arbitration tribunal lacks the jurisdiction to consider and adjudicate upon issues involving constitutional matters. In light of the retroactive amendment to India’s taxation laws, such a tribunal may be required in the present case to decide whether India violated its BIT obligations to mete out fair and equitable treatment to Vodafone. 

The question is whether, in investment arbitration, the constitutionality of a statute should be treated as a question of law, or that of fact. If it is the latter, then the corresponding question of law would presumably be as to whether the mere fact of unconstitutionality is enough, or would it require evidence of any malice and/or arbitrariness to constitute a violation of the standard of treatment.

An investment arbitral tribunal should ideally be permitted to consider the constitutionality of a statute and the facts leading up to its enactment as a question of fact in the determination of a Host State’s treatment to a protected investor. That said, any determination on this point would call for an interesting debate on the principles of international investment arbitration the treatment thereof by the Indian judiciary.    

– Ritvik M. Kulkarni

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