[Siddharth S. Aatreya is a V Year B.A., LL.B. (Hons.) Candidate, National Law School of India University, Bangalore]
In May 2018, the Delhi High Court issued its judgment in Union of India v Vodafone Group plc. The judgment vacated an interim order that had been passed in August 2017, by which the Court had temporarily restrained Vodafone from commencing arbitration proceedings under the India-UK BIT, owing to similar ongoing proceedings under the India-Netherlands BIT. In the first ever dispute connected to an investment arbitral proceeding before an Indian court, the Court decided to respect the kompetenz-kompetenz principle and leave the admissibility of Vodafone’s claim under the India-UK BIT to the Tribunal constituted under it. In this context, this post looks to understand the implications of the general relationship between investment arbitral tribunals and domestic Indian courts that has been fashioned in this case.
The dispute arose out of a retrospective amendment to India’s Income Tax Act that fastened liability of $1.7 billion on Vodafone as capital gains tax for an offshore transaction. In 2012, Vodafone International Holdings B.V., a Dutch holding company, commenced arbitration proceedings challenging this tax demand under the India-Netherlands BIT. In 2014, a notice of dispute was served to India under the India-UK BIT by Vodafone Group plc, an English subsidiary of the Dutch holding company, on the same grounds as before. India refused to participate in the subsequent proceedings and argued that the ICJ should refuse to appoint an arbitrator on its behalf (as was required under the BIT) owing to the similarity of both proceedings. When this was unsuccessful, it approached the Delhi High Court seeking an anti-suit injunction. In its judgment, the Court held that, in general, it had the power to pass an anti-suit injunction to prevent the commencement of an investment arbitration proceeding. In this particular instance, however, it chose to leave the decision of whether to either admit Vodafone’s subsequent claim or merge the two proceedings to the Tribunal already constituted under the India-UK BIT.
The Court’s Reasoning
Despite the non-interventionist outcome of its decision, the Court’s reasoning on jurisdiction has serious consequences for the relationship between Indian courts and investment arbitral tribunals. Some of these are discussed below.
First, the Court extends the coverage of India’s domestic Code of Civil Procedure (CPC) to the arbitral proceedings on the basis of a flawed application of the territoriality principle. Its holding, in essence, was that the investment that formed the subject matter of the dispute under the BIT was located in India, meaning that Vodafone had availed of Indian Courts’ jurisdiction. It then held that Vodafone’s Dutch holding company and its English and Indian subsidiaries were a ‘single economic entity’, vesting Indian courts with jurisdiction over them.
This application of the principle ignores the fact that investment arbitral proceedings take place under international law with a separate set of agreed upon procedural and substantive rules, intended to allow investors to opt out of having to litigate in domestic courts. Thus, while Vodafone’s investment in India and the presence of its Indian subsidiary would ordinarily grant jurisdiction over all connected matters to Indian courts, proceedings under the India-UK BIT should have been held to be immune from this jurisdiction to give effect to the parties’ intention of arbitrating under the BIT. The Court here chose not to give effect to this intention and previous investment arbitral awards such as SGS v. Pakistan that highlight the need for investment arbitration proceedings to be independent of domestic courts’ jurisdiction at the procedural stage. Instead, it held that the absence of a specific provision in the India-UK BIT that excludes domestic Courts from having jurisdiction over procedural disputes under it meant that it was competent to assert jurisdiction at the procedural stage and pass an anti-suit injunction in this case.
In extending the application of the CPC to investment arbitrations, the Court does not articulate a limit on the circumstances in which it could exercise power under it. The effect, therefore, is that Indian procedural law may be applied to restrain parties’ conduct in any investment arbitration proceeding with an Indian party or dealing with Indian situated assets as its subject matter. Such a broad application of domestic procedural law to an ongoing investment arbitration is unprecedented. Indeed, the Court’s reliance on the English decision of Republic of Ecuador v. Occidental Exploration,  EWCA Civ 1116, to justify this reasoning is incorrect because that judgment dealt with the jurisdiction of English courts to decide upon the enforceability of a final awardrendered under a BIT, as against jurisdiction in respect procedural issues connected to an ongoing proceeding.
Second,the Court erred in creating an imbalance in the rights accorded to parties to an investment arbitration proceeding. It observed that the treaty is distinct from a contractual agreement to arbitrate between the State and the investor. It then relied on this to hold that its power to restrain the conduct of parties to commercial arbitration proceedings at the procedural stage may be used in a similar manner only against investors in investment arbitration cases too. Not doing so, it held, would be like “lifting the status of the private investor to the pedestal of a foreign State”.
While rendered in the context of an anti-arbitration injunction, the principle underlying the judgment is that an investor’s conduct during the procedural stages of an investment arbitration may be controlled by an Indian court. What is unclear, however, is whether similar control may be exercised over the conduct of a State (in a variety of possible instances, such as the presentation of a counter-claim against an investor, the introduction of evidence etc.) during these procedural stages. If a State’s (either Indian or foreign) conduct is, in fact, outside the scope of an Indian court’s control, it would mean that a State may approach an Indian court to restrain an investor’s actions at the procedural stage in this manner, but an investor would not have the reciprocal right to do so against a State.
This would result in a regression to an old understanding of international law, which saw only States as having rights and any independent standing in it. BITs have for long been acknowledged as instruments that disrupt that understanding, vesting direct rights in international law with private investors so as to place them on an equal footing with States for the purposes of the arbitration. In possibly creating this imbalance between an investor’s and State’s powers to approach an Indian court at the procedural stages of an investment arbitration, the judgment may unfairly skew the process in the State’s favour.
Third,despite its laborious reasoning used to extend the CPC to arbitration proceedings under BITs, the Court’s ultimate decision of choosing not to interfere in this case makes no reference to it. Instead, the Court acknowledges that an injunction in this case that is valid in domestic law may still not be valid in international law. It therefore holds that Indian courts would only retain jurisdiction to restrain international treaty arbitrations that are “oppressive, vexatious, inequitable or constitute an abuse of the legal process”, observing that it must always interfere on these grounds “with extreme hesitation”. While this language seems promising insofar as it appears to set the bar for interference very high, the Court never analyses how the facts of the present case do not fall within its scope. From a precedent-setting perspective for subsequent decisions by Indian courts, therefore, the judgment does not provide any guidance on what factors are to be considered in instances of anti-arbitration injunctions or other potential interventions at the procedural stage of investment arbitration proceedings.
Vodafoneis not the first instance of domestic courts asserting jurisdiction over investment arbitration disputes before the rendering of a final award. In fact, in GPF GP S.a.r.l. v. Republic of Poland rendered on 2 March 2018, the England and Wales High Court set aside an investor-state arbitral award on jurisdiction, precluding a hearing on merits by the tribunal. However, it did so by conducting a “rehearing” under the English Arbitration Act, 1996, as it does when deciding upon the validity of a final award at the enforcement stage too. English courts, therefore, may apply the Arbitration Act to determine the validity of an award, whether on jurisdiction or merits, but may not use general English civil procedural law to restrain any party’s conduct in an ongoing investment arbitration proceeding.
Vodafone, therefore, stands alone in extending domestic procedural law to ongoing investment arbitrations without a clear prescription of a limit on that power. It also draws an artificial distinction between States and private investors, giving States an outlet to further restrain the actions of investors during the pendency of a case. While it appears to be an “arbitration friendly” decision at first glance, a second look reveals that it has the potential to be misused to justify an interventionist approach to investment arbitrations by Indian courts in the future.
– Siddharth S. Aatreya