[Subodh Asthana and Madhur Bhatt are penultimate year law students at Hidayatullah National Law University, Raipur]
Cairn Energy PLC has approached the US District Court for the Southern District of New York (“US Court”) seeking enforcement of a $1.2 billion arbitration award against India. It won the award in December 2020 for proving the breach of fair and equitable treatment (“FET”) obligations by India under the Indo-UK Bilateral Investment Treaty (“BIT”). In order to enforce the arbitral award, Cairn has asserted that Air India Ltd. can be construed to be an alter-ego of the Indian Government and therefore, the corporate veil of Air India must be lifted to enforce the arbitral award.
Apart from challenging the arbitral award, the Indian Government has the burden to challenge the parallel execution proceedings instituted by Cairn in different jurisdictions. In this post, the authors analyze whether assets of State-Owned Enterprise (“SOE”) can be subjected to enforcement proceedings in pursuance of an arbitral award against the national government. Furthermore, we also attempt to analyze the applicability of the Broches Test and the doctrine of alter ego for State-Owned Enterprises in the lawsuit against Air India.
Is Air India a separate entity in the USA?
The proceedings initiated by Cairn against Air India are subject to the Foreign Sovereign Immunities Act, 1976 (“FSIA”) and precedents of US courts. Pursuant to FSIA, such proceedings against the instrumentality of state are immune to subsequent liability owing to the doctrine of presumption of independent status. According to this doctrine, such instrumentalities of the state are created to perform commercial functions. Undoubtedly, the motive of such state instrumentality is to maximize profits, which cannot be interlinked with the traditional governmental functions. Moreover, in accordance with provisions of FSIA and precedents of US Courts, a majority shareholding of a particular state in a SOE cannot be a ground to treat such instrumentalities as an alter ego of a particular state.
Apparently, Cairn has cited the precedent of the United States Supreme Court (“USSC”) in the case of First National City Bank v. Banco Para El Comercio (“Bancec”) to plead that Air India is an alter ego of the Indian Government and therefore a principal-agent relationship exists between them. However, Bancec imposes a higher threshold for establishing the test of principal-agent relationship. Notably, Bancec envisaged that such enforcement proceedings against the instrumentalities of the state can only be allowed wherein extensive control of the state is evident from the conduct of the business of such instrumentality. The USSC therein agreed that the separate status has to be presumed and lifting the corporate veil without any substantive evidence by the applicant would defeat the obligations of FSIA and the purpose of creating SOEs.
The recent judgment pronounced by the Columbia District Court in UAB Skyroad Leasing v. OJSC Tajik Air affirmed that mere ownership of shares by a national government in SOE is not enough to satisfy the requirements of principal-agent nexus. This case is akin to the present issue of Cairn enforcement proceedings.
The US court in Tajik Air considered various circuit precedents to hold that the power to appoint senior executives to the board cannot constitute indicia of control to invoke principal-agent relationship. Under this principle it must be factually deduced that the government has an involvement in the day-to-day business of a particular instrumentality. Having failed to establish the above exception shall lead to applicability of presumption of separateness.
Air India is an SOE that should be considered as a separate entity, liberated and independent from the state’s control. The New York headquartered office cannot be said to be under the pervasive control of the Indian Government upon which enforcement proceedings can be allowed. Such SOE cannot be said to discharge extensive governmental functions. The motive of creating these instrumentalities in different jurisdictions is entirely commercial and profit-based. Air India enjoys the protections of the due process clause of the Fifth Amendment pursuant to FSIA. Hence it may stimulate the applicability of presumption of separateness to Air India, thereby saving it from the rigours of attachment and execution.
Can Air India be treated as State’s Alter Ego?
Alter Ego doctrine is used as a safeguard against the doctrine of a separate legal entity which provides immunity to owners and shareholders from the liabilities of a corporation. The lifting of the corporate veil triggers the alter ego doctrine by treating the shareholders and corporation as the same entity. In MCI Telecommunications v. O’Brien Marketing, the Florida District Court set down the essentials for the applicability of this doctrine. Firstly, there must be complete and total control of finances, policy and business practices; secondly, this control must have caused a legal injury; and lastly, the control must have caused the breach of duty and subsequent damages.
Applying these criteria, it is clear that Air India cannot be construed to be the alter ego of the Indian Government. Air India is solely responsible for its finances, business plans etc. and the government does not have complete control. Further, the loss caused to Cairn was not due to the relationship of the Government or Air India, it was caused due to a different set of facts by completely distinct entities and organs of the Indian Government.
Applicability of Broches Test and international law
Alternatively, FSIA recognises some exceptions to this principle relating to international law obligations. Section 1605(3) of FSIA provides that where non-enforcement leads to violation of international law, then the presumption of separateness shall not apply.
However, such enforcement would prima facie lead to the violation of international law and established tests devised by the International Centre for Settlement of Investment Disputes (“ICSID”). At the time of drafting the ICSID Convention, a question arose as to the status of bringing enforcement claims against SOEs. It was concluded that a government-owned corporation should not be disqualified as a national of another contracting state unless it is acting as an agent for the government or is discharging an essentially governmental function.
The Broches test was devised to divine the motives of an SOE in an objective manner. According to this test, an enterprise must be “principally engaged in commercial activities”. These activities must satisfy the following three criteria: an orientation towards profit making; the production of a good or service that will be sold to a consumer in the relevant market in quantities; and at a price determined by the enterprise. Air India is a profit-making enterprise that operates in multiple jurisdictions and thus satisfies the above criteria. Furthermore, mere ownership and supervisory control is not enough to attribute the liability to such instrumentalities. The conduct of Air India in the USA nowhere suggests the involvement of the Indian Government in its day-to-day business as the airline enjoys a certain flexibility in performing those obligations as was held in Tajik Air.
Indeed, the Broches Test is the “mirror image” of the test for attribution of responsibility to States under international law, specifically under Articles 5 and 8 of the ILC Draft Articles. The threshold for attributing the liability of the state organ and instrumentalities of state under international law is also placed at a very high pedestal which involves day-to-day performance of a governmental and legislative function by such agencies in the particular disputed territorial jurisdiction. The day-to-day activities of Air India cannot be literally construed as a governmental function.
Hence, the arbitration award cannot be enforced against Air India due to its independent and separate nature from the sovereign. The actual functioning of Air India headquarters located in the USA shows no apparent proof of the Indian Government’s pervasive control over the assets owned and operated by Air India. In the event the US court declares Air India as an alter-ego of the Indian Government, it might lead to serious ramifications on the pending enforcement proceedings at different jurisdictions and this may even frustrate the whole purpose of creating SOEs. Nevertheless, USA being a signatory to the New York Convention, 1958 is not under the obligation to attach the assets of Air India for the purpose of enforcement by the virtue of Article 5(2) of the Convention which states that any award which contravenes the national law of the state cannot be enforced in a particular state i.e. FSIA in the present case.
Therefore, recognizing Air India as a separate entity would work as fraud or injustice under exceptions to FSIA due to the presence of a higher threshold which requires Cairn to prove that the Indian Government actually exercises the real and apparent control over the assets with an exception given to the SOEs.
Conclusion: The way ahead for enforcers
Meanwhile, Devas Multimedia, which won an international arbitration case, is also finding ways to seize the assets of Air India. However, the moot point remains the same whether the overseas assets of SOE can be utilised to settle the outstanding debts of the sovereign state. Considering the realm of investment arbitration and the arbitral award, Cairn has the right to seize the assets of the Indian Government on which it exercises absolute and day to day control rather than seizing the assets of SOEs.
In another recent development, a French Court has allowed Cairn to institute execution proceedings by allowing seizure of Indian Government’s properties. Therefore, the way ahead for Cairn should be to look out for these assets as they did in France rather than initiating enforcement proceedings against SOEs due to a higher threshold of piercing the corporate veil. The seizure of Air India’s assets would also serve as a bad precedent wherein parties enforcing the arbitral award would be given a free reign to seize assets of SOE even when the State does not control them completely which might have global ramifications.
– Subodh Asthana & Madhur Bhatt