This article deals with the position of law in India on the enforceability of foreign awards passed in the international arbitration arising out of bilateral investment treaty (“BIT Awards”) under the Arbitration and Conciliation Act, 1996 (“Act”).
On 24th July 2021, India will mark 30th year of implementation of monumental trade liberalization policy. Needless to say, India’s economic reform and trade liberalization policies contributed to a dramatic increase in its economic growth in mid-1990’s and the same is evident from the rise in percentage of gross domestic product and foreign direct investment. Before, 1991, foreign investment was negligible. The immediate year following 1991 witnessed a total foreign investment of only US$ 74 million whereas merely in April 2021, India attracted US$ 6.24 billion of total inflow of foreign direct investment.
Background Of Bit
As reported by Prabhas Ranjan, when the erstwhile Finance Minister of India Mr. Manmohan Singh announced the 1991 economic reforms and opened the door for foreign investors to invest through portfolio investment, he received a flood of concerns from prospective foreign investors regarding their investment protection. In response, Mr. Singh instructed his officials at the Ministry of Finance to prepare an international foreign investment treaty envisaging adequate protection to the investors and ensuring their safeguards.
Thereafter, India soon developed a model Bilateral Investment Treaty (‘BIT’) in line with Organisation for Economic Co-operation and Development’s (OECD) Draft Convention for Protection of Foreign Property of 1967 (“1967 OECD Convention”). On 14 March 1994 India signed its first BIT with United Kingdom. Till date, India has signed more than 75 BIT(s) with various states across the world.
Investor-Dispute Resolution Clause in BIT
One of the most significant and unique protection which BIT provides to the investors of its signatory states is investor-state arbitration, which allows for investors to bring proceedings against states against breach of BIT. Generally, the nature of breach involves the act of expropriation, manifestly abusive treatment or denial of justice to investors in any judicial or administrative proceedings.
Condition Precedent before initiating arbitration
Prior to initiating arbitration, a disputing investor is under an obligation in terms of Article 15 of Model Text of the Indian Bilateral Investment Treaty to submit its claim before the relevant domestic courts or administrative bodies of the defending state. The purpose of such claim is to pursue domestic remedies in respect of same measure or similar factual matter for which a breach of BIT is claimed.
If no resolution has been reached satisfactorily even after exhausting all judicial and administrative remedies relating to the measure underlying the claim, for at least a period of five years from the date on which the investor first acquired knowledge, the investor can commence a proceeding of arbitration by transmitting a notice of dispute to the defending state. After issuance of notice, the disputing parties shall use its efforts for not less than 6 months to try the dispute amicably.
In the event, the parties cannot settle the dispute amicably, the disputing investor may submit a claim to arbitration either under a) Convention on the Settlement of Investment Disputes between States and Nationals of other States (“ICSID Convention”), provided that both the parties are full members of the Convention; or b) Additional Facility Rules of ICSID Convention, provided that either Party, but not both is a member of ICSID Convention or c) the UNCITRAL Arbitration Rules.
Is India bound to enforce BIT Awards?
It is important to highlight that India is not a party to ICSID Convention. The ICSID (Article 53) Convention grants finality to the BIT Awards and prohibits the appeal before the national courts of foreign states. Moreover, ICSID Convention imposes an obligation upon states to recognise an award rendered pursuant to its scheme and enforce such an award as if it were a final judgement of a court in that State. As India is not a party to ICSID, it has no obligation to recognise BIT Awards.
Having said that, India is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). India has also signed the reservation under Article I (3) of New York Convention (“Commercial Reservation”). In terms of Article I (3) of New York Convention, India is bound to recognise or apply the convention only to the differences arising out of legal relationships, whether contractual or not, which are considered as commercialunder the national law of the state making such declaration.
In pursuant thereto, India has legislated Part II of the Act to recognize and enforce only those foreign arbitral awards which are on differences between persons arising out of legal relationships and considered as commercial under the law in force in India.
As such in order to enforce the BIT Award in India under the Act, it is necessary to show that BIT Award is rendered on differences between investor and state, which are commercial in nature.
Whether a BIT Award can be said to arise out of difference which are commercial or not?
The two judgements of the Delhi High Court in Union of India v. Vodafone Group PLC UK and Ors. (“Vodafone Group case”) and Union of India v. Khaitan Holdings (Mauritius) Limited and Ors (“Khaitan Holdings case”), have created a roadblock for foreign investors to enforce BIT Awards under the Act. Manmohan J. in Vodafone Groupcase has clearly held that BIT constitutes an arbitration agreement between a private investor on the one side and the host State on the other, yet it is neither an International Commercial Arbitration governed by the Act nor a domestic arbitration. The Court had concluded that investment arbitration disputes are fundamentally different from commercial disputes as the cause of action (whether contractual or not) is grounded on state guarantees and assurances and are not commercial in nature.
Concurring with the ratio in the abovementioned judgement, the same Court in Khaitan Holdings case refused to hold a position contrary to the one enunciated by Manmohan J. in Vodafone Groupcase. Resultantly, BIT Awards cannot be enforceable under the Act and the award-holder either needs to file a civil/commercial suit or need to enforce the BIT Award in a foreign territory where the assets of defending state are situated.
On the contrary, the Calcutta High Court in case of Port of Kolkata v. Louis Dreyfus Armatures SASupheld the applicability of Act on the issues relating to BIT Awards.
In view of the authors, any narrow interpretation given to the word “Commercial relationship” under the Act specifically under Section 44 and 55 is not justified. Moreover. Gujarat High Court in case of Union of India v. Lief Hoegh Co.has observed that the “[The term ‘commerce’] is a word of the largest import and takes in its sweep all the businesses and trade transactions in any of their forms, including the transportation, purchase, sale and exchange of commodities between the citizens of different countries.”
The judgement of Supreme Court in R.M. Investments and Trading Co. (P) Ltd. v. Boeing Co. (R.M. Investments) also merit attention at this point. In the said decision, while examining the ambit of the term “commercial” in relation to the Act, the Court held that: “The expression “commercial” should, therefore, be construed broadly having regard to the manifold activities which are integral part of international trade today”.
Further, in Kochi Navigation Inc. v. Hindustan Petroleum Corpn. Ltd, the same Court held that “… Act is calculated and designed to subserve the cause of facilitating international trade and promotion thereof by providing for speedy settlement of disputes arising in such trade through arbitration and any expression or phrase occurring therein should receive, consistent with its literal and grammatical sense, a liberal construction.” Undoubtedly, the whole objective of signing BIT is to promote and facilitate international trade and therefore, the relationship between the parties there is indeed commercial in nature.
Most importantly, for the purpose of compliance with Commercial Reservation under New York Convention, the Government of India has itself amended its Model BIT in 2016 to include a clause 27.5 which reads as “A claim that is submitted to arbitration under this Article shall be considered to arise out of a commercial relationship or transaction for purposes of Article I of the New York Convention.”. The said revision made it amply clear that relationship between Investor and the states under BIT is commercial in nature and the award rendered therein is enforceable under the Act.
On account of the unsettled position of law in relation to enforcement of BIT Award under the Act, and BIT Award not being decree under Section 44 of Code of Civil Procedure, 1908, the investors are reluctant to enforce such awards in India. Rather, they are securing the remedy in the countries where the assets of India are situated. One such example is that of Cairn Energy going after Indian assets overseas to recover the compensation awarded by three-member international arbitral tribunal constituted under the India UK Bilateral Investment Treaty. Thus, it is the need of an hour to implement relevant legislative changes giving recognition to BIT Award under the Act for the purpose of its enforcement in India.