A Giant Leap for Investors? – Analysing the Delhi High Court’s Verdict in Union of India v. Vodafone

[Sharanya Shivaraman is a IV year B.A., LL.B (Hons.) student at ILS Law College, Pune]

Marking the dawn of a new era for investment arbitration in India, the High Court of Delhi pronounced its verdict last week in Union of India v. Vodafone Group plc dismissing the Government’s petition challenging the Vodafone Group’s move to initiate two international arbitrations against India. The judgment of the Court came as a relief to Vodafone group especially following the order in August 2017 restraining the Vodafone group from instituting arbitration.

Factual Background

In 2007, Hutchinson Telecommunications International Limited sold its stake to Vodafone International Holdings B.V (VIHBV) in an Indian company by the name of Hutchinson Essar Limited (HEL). Being subject to capital gains, a demand of about Rs. 20,000 crores was raised against Vodafone. The assessment of tax deductable at source under Section 195 of the Income Tax Act, 1961 was later quashed by the Supreme Court of India. However, a retrospective amendment to Section 9(1) and Section 195 of the Income Tax Act read with Section 119 of the Finance Act was made which revived the liability on Vodafone.

Aggrieved by this, in 2014 Vodafone invoked the arbitration clause provided under the Bilateral Investment Promotion and Protection Agreement (BIPA) between the Republic of India and the Kingdom of Netherlands. While the said arbitration proceedings were pending, the parent companies initiated arbitration under the India-UK BIPA on broadly similar issues.

The High Court granted an ex-parte ad-interim injunction restraining the Vodafone entities from pursuing the second arbitration. The order was criticised for want of procedural regularities and legal correctness. The need for an ex parte order in the absence of any urgency warranting the same, the application of principles of anti-suit injunction to retrain arbitration proceedings and the presence of an alternative and more efficacious forum for seeking the same relief raised apprehensions over the correctness of the order.

However, in its final decision, the High Court has set a clear precedent for exercising restraint when it comes to interfering with India’s international law obligations. The Court noted that the existence of an international investment treaty does not divest the court of its jurisdiction. However, the questions of law and fact will be assessed better by the specialised tribunals formed for this purpose under the treaties.

Bilateral investment treaties (BITs) are the gateway for international investments into India. Hence, frequent interference in the enforcement of rights under the treaty is likely to make India less investor friendly and dissuade future trade partnerships. Making a departure from the stance previously taken in the interim order, the  Court displayed a change in understanding of abuse of process allegations made by the Union of India.

Lack of Jurisdiction

The Court refused to accept the argument regarding the lack of jurisdiction ofdDomestic courts in case of investor state arbitration disputes simply because it would mean an implicit ouster of the power of court to enforce such awards as well. However, recourse to a court is permissible only to correct any error rather than to perpetuate or introduce one. It also stated that “the approach to arbitration agreements contained in investment treaties is for the court to support, so far as possible, the bargain for international arbitration. It is only with extreme hesitation that the Court would interfere with the process of arbitration”.

Abuse of Process

The Court pronounced the interim order on an interpretation of the principle of abuse of process as envisaged in the Orascom Award.[1]However, on careful analysis of the same Award, the Court came to the conclusion that there is no presumption or assumption that filing of multiple claims by entities in the same vertical corporate chain with regard to the same measure is per se vexatious. The Court noted that since it is the case of the Union of India that the claim under the Netherlands-India BIPA is without jurisdiction, invocation of another treaty by the parent company cannot be regarded as an abuse per se. It further stated no injunction will be granted if it deprives Vodafone of the advantages in the foreign forum, which would be unjust. The fact that it may be inconvenient or expensive for the Union of India to litigate before the arbitral tribunal is not an issue that would justify a finding of oppression.

A Step Forward

The Court categorically rejected the applicability of the principle of judicial non-interference as prescribed in the Arbitration and Conciliation Act, 1996 and the UNCITRAL Model law proprio vigoreto investment arbitration cases. However, it acknowledged the sacred duty cast upon India to abide by international law obligations despite being a non-signatory to the Vienna Convention on Law of Treaties. Such an observation by the Court sounds the death knell on any unreasonable attempts by Indian Government to stall enforcement of treat obligations by invoking the domestic court’s jurisdiction.

The introduction of Model BITs has been step in the right direction for India with regard to attracting investments. However, the judiciary needs to be distant from the arbitration proceedings, reserving its reliefs for exceptional and compelling circumstances. This verdict will definitely play a major role in inspiring the investors with requisite confidence in the Indian arbitration regime and stabilise the investment policy in the sub-continent.

Sharanya Shivaraman

[1]Orascom TMT Inestments S.a r.l. v. People’s Democratic Republic of Algeria [ICSID Case No.ARB/12/35, Award dated 31st May 2017].

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