Injunction in Investment Arbitration: Union of India v. Khaitan Holdings

[Aman Deep Borthakur is a 4th year student at the National Law School of India University, Bangalore]

Introduction

After two failed attempts at injuncting different investment arbitration cases, the Union of India recently made another attempt before the Delhi High Court. In Union of India v. Khaitan Holdings (Mauritius) Ltd and Ors.), the Union of India sought an interim injunction against bilateral investment treaty (BIT) proceedings initiated by Khaitan Holdings for lack of jurisdiction of the Tribunal under the India-Mauritius BIT. The Court denied the interim application, holding that the Tribunal itself must decide the question of jurisdiction.

In its decision dated 29 January 2019, the Delhi High Court dealt with key issues pertaining to international investment law, BIT arbitrations and their relationship with courts.

Factual Background

Loop Telecom, an Indian company, had applied for 21 Unified Access Services (UAS) licences to the Department of Telecommunications, Government of India. Subsequently, letters of intent for the same were issued. However, after the Supreme Court’s judgement in Centre for Public Interest Litigation (CPIL) v. Union of India, all 21 licences were inter alia cancelled. Loop Telecom did not participate in the subsequent bidding process and sought refund of its licence fee by filing a petition with the Telecom Disputes Settlement and Appellate Tribunal (TDSAT). Its petition was dismissed on 16 September 2015 and a special leave petition subsequently withdrawn.

After the cancellation of licences, Capital Global Limited (CGL) and Kaif Investment Limited (Loop Telecom’s investors) invoked Article 8.1 of the relevant BIT to settle the dispute with India. Kaif Investment then merged with Khaitan Holdings, a Mauritian company. Subsequently, Khaitan Holdings, which now held a 26.95% stake in Loop Telecom, initiated an arbitration as a company based in Mauritius. On 24 January 2019, Khaitan Holdings sought a pro-tem injunction from the Tribunal to restrain the Union of India from proceeding in Indian courts. The suit in question was filed immediately after this.

Analysis of the Decision

The Union of India argued that the entity filing the BIT claim was actually Indian. The only Mauritian stake in the company was the 26.95% held by Khaitan Holdings, the beneficial owners of which have also been revealed to be Indians. According to the Union of India, the BIT did not permit this as it was for the protection of investors from Mauritius vis-à-vis India, and its object was not to let Indians file BIT claims against India. The Court did not engage with this question in depth and left it for the Arbitral Tribunal.

The Court relied on Union of India v. Vodafone to rule that the Tribunal, due to the principle of kompetenz-kompetenz under Article 21 of the UNCITRAL Arbitration Rules, should rule on the question of its own jurisdiction. As in Vodafone, it continued to maintain a strict conceptual distinction between international investment arbitrations and international commercial arbitrations. Since the present case was a BIT arbitration, it would not be governed by the Arbitration and Conciliation Act, 1996, which applies only to commercial arbitrations.

This distinction in the case of monitoring of arbitrations by state courts is problematic. When a court exercises supervisory powers, BIT arbitrations should not be treated as a category entirely distinct from international commercial arbitrations. If the Vodafone approach is taken, Indian courts will be unable to aid parties with interim measures provided for in the Arbitration and Conciliation Act. There would be no specific statutory scheme to govern procedural aspects of a BIT arbitration should a party approach Indian courts for relief. Therefore, for these procedural issues, an investment arbitration should be treated as an international commercial arbitration and be governed by the Arbitration and Conciliation Act.

As I have argued here previously, issues such as the legality of an investment are purely jurisdictional issues in international investment law that only an investment tribunal can decide on. But, it would be untrue to state that issues such as injuncting a prima facie vexatious arbitration in relation to a BIT proceeding cannot be determined by a state court in any circumstance. This is because injuncting vexatious proceedings based on a prima facie analysis of whether there has been abuse of process is a procedural issue in relation to both investment and commercial arbitrations.

The present judgement and Vodafone are both in agreement that there is a threshold at which state courts can themselves injunct arbitrations –e.g., where there is a prima facie abuse of process or other compelling circumstances. Vodafone did not explain why the parallel BIT arbitrations in that case prima facie did not constitute such circumstances. It is evident that the allegations in the present case such as beneficial ownership of the investor being in Indian hands and lack of expropriation are squarely jurisdictional issues for the Tribunal. Nevertheless, the judgement would have benefited from a discussion of what these compelling circumstances for a state court to itself grant an injunction constitute. With both Vodafone and Khaitan Holdings having left that open, there is a need for clarity on this issue.

Comments on International Investment Law Issues

While leaving the Tribunal to decide this question was appropriate, the issue of ‘foreignness’ of the investor as framed by the Court can be unravelled at this juncture on two levels. First, awards in international investment law go both ways on the question of whether the corporate veil can be lifted to see whether the underlying owner is actually foreign or not. I rely here on the decision in Tokios Tokeles v. Ukraine (ICSID), where the company was incorporated in Lithuania, but 99% owned by Ukranians. The Tribunal in this case held that the investor was established in the territory of Lithuania and should be entitled to the benefits of the BIT.  On the other hand, the Tribunal in Vacuum Salt v. Ghana (ICSID) pierced the veil to identify the ultimate controllers of the legal entity in question. Notwithstanding the two decisions, as a rule of treaty interpretation, one must give effect to the words and phrases in the relevant BIT. In this case, the India-Mauritius BIT does not require foreign control in a company incorporated in the state of the other party.

The second count on which one can analyse the question of investor nationality is the timing of the change in investment. The change in shareholding in favour of Khaitan Holdings was carried out after the BIT settlement procedure was initiated. As held in Phillip Morris Asia Ltd.  v. Australia (PCA), this clearly amounts to an investor trying to obtain the benefits of a BIT when it does not qualify at the moment. While investors are allowed to plan their investments in advance to obtain treaty benefits, they cannot do so once the dispute has started or even been anticipated. This issue was not brought by the Union of India before the Delhi High Court.

The Court also briefly looked at the issue of the investor not seeking judicial remedies before Indian courts. However, since the BIT does not contain a requirement for seeking local remedies, but only to resolve the dispute amicably before seeking arbitration, Loop Telecom’s non-pursual of remedies in Indian courts is irrelevant.

Furthermore, the Court considered Article 6 of the BIT which deals with expropriation and stated that, for an expropriation for a public purpose after following due process of law, no compensation would be payable. This is contrary to both the provision and the meaning of expropriation in international investment law itself. Expropriation, whether for a public purpose or not, requires compensation. However, as held in Tecmed v. Mexico (ICSID), the proportionate exercise of the regulatory or police powers of a state does not require compensation. While that question is best left to the arbitral tribunal, the court should have made an attempt to determine whether India’s action in this case amounted to expropriation (compensation) or valid exercise of police powers (no compensation), if it did decide to make prima facie remarks on expropriation.

Aman Deep Borthakur

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