By Amisha Mittal

Abstract

Arbitration is an emerging and widely practiced source of dispute resolution across nations. It thrives on autonomy and the focal point behind the use of arbitration as an effective means to dispute resolution lies behind the premise of avoiding litigation and the immense time and costs that hail with it. How friendly a nation is to arbitration is generally ascertained from how efficiently can arbitral awards be enforced in that particular jurisdiction without being subject to any extensive judicial review.

Introduction

In India, arbitration is governed by the Arbitration and Conciliation Act, 1996 (hereinafter mentioned as “the Act”). Part 1 of the Act governs domestic arbitration, while Part II governs international arbitrations under the Geneva and the New York Conventions and deals with the enforcement of foreign awards. The inconvenience with respect to investment treaty arbitration in India arises with the prevalence and domination of commercial arbitration in the discourse of international arbitration. Major jurisprudence around arbitration in India is based on its commercial aspect and leaves behind the matters concerning international law. Hence, the trajectory of enforcement of awards arising out of investment treaty arbitration is primarily traced through case precedents and an in-depth reading of the current laws which albeit have several lacunas.

Investment treaties are governed by Bilateral Investment Treaties (“BITs”) which essentially are agreements made between two countries that govern the protection and treatment of their investments in each other’s countries. India is a developing country with a fast-growing GDP and is considered as an attractive place to invest and garners huge sums of foreign direct investment. This is demonstrated by the fact that during the past 20 years, foreign direct investment in India has increased by an approximate of USD 50 billion. India has canceled more than fifty of its bilateral investment treaties, despite the fact that it is the ninth-largest recipient of foreign direct investment. This primarily hails from India’s view of investment treaties and its treatment of its investors for it follows a very restrictive approach to investment treaty arbitration.

What’s more is that many invest treaties (BITs) provide for arbitration as their dispute resolution mechanism and follow the International Centre for Settlement of Investment Disputes (ICSID) rules for the same. ICSID rules also govern the enforcement of invest treaties and since India does not ratify the ICSID convention, it is not bound to follow the rules either in order to enforce arbitration treaty awards in the same manner as the judgments of its national courts. Efficiency in the enforcement of arbitration awards is important to determine how much a jurisdiction is friendly and open to arbitration and how easy, fast, and effective the dispute settlement in case of treaty disputes in the country would be. Hence, an effective mechanism to enforce investment treaty arbitration awards is important. Furthermore, enforcement of foreign judgements in India is governed by the Code of Civil Procedure, 1908, wherein, Section 44 allows for the enforcement of a foreign judgment, however, it does not encompass in itself bilateral treaty awards as the definition of judgment since such awards are not delivered by a court in order to confirm with the procedure envisaged in Section 13 of the Code of Civil Procedure.

ADDRESSING THE LACUNAS – AUTONOMY AND PREVALENCE OF COMMERCIAL ARBITRATION 

In the presence of such lacunas, the only legitimate way to enforce investment treaty awards remains that of enforcing them through the New York Convention. The problem with respect to the enforcement of treaty awards in India remains two-fold. The first one being stringent autonomous power to the state with respect to such enforcement and the second being the superior presence of commercial arbitration. The substance of BITs pertaining to India contains arbitration clauses that specify how the dispute will be resolved. Such clauses primarily provide for arbitration either through ad hoc arbitration in accordance with UNCITRAL Arbitration Rules or under the administration of the ICSID Additional Facility Rules, however, the existence of these rules seldom has any impact on the enforcement of BIT awards in situations when a country is not a signatory to the underlying convention of such rules. For instance, when one of the parties to the dispute is not a signatory to the ICSID Convention, the Additional Facility Rules provide assistance in the resolution of the issue in a variety of circumstances. They do not, however, provide an infallible and dependable solution to enforcement of such awards for these rules largely address the management of arbitration hearings and provide very little support for the execution of verdicts/awards. As a result, the enforcing State’s decision will determine whether the awards are enforced and thus, the state has complete autonomy on such enforcement.

As a result, the Additional Facility Rules stipulate that an arbitration under the relevant rules may only be held in States that are parties to the New York Convention. According to some, the purpose of this clause was to guarantee the enforceability of judgments rendered in accordance with the applicable laws. While this clause might make it more enforceable in other nations, it might not have the same impact in India. This contention is primarily based on the fact that India, despite being a party to the New York Convention has opted for a reservation under Article I (3) of the Convention, which could lead to this possible ineffectiveness. This reservation implies that only awards made under the New York Convention that are related to commercial disputes are enforceable in India. However, it is also paramount to note that the term ‘commercial’ has not been defined under the Arbitration and Conciliation Act, 1996 which consequently leaves a whole lot of room open for speculation. 

Thus, the discourse around the applicability of the Indian Arbitration Act on BIT arbitration varies across various judicial decisions. For instance, the Calcutta High Court exercised jurisdiction over a dispute relating to the India-France BIT under S. 45 of the Act in the matter of Board of Trustees of the Port of Kolkata v. Louis Dreyfus. Herein, the court held that the Act would apply to arbitral awards resulting from BITs in the same way as it applies to commercial arbitrations with foreign seats. However, later in Delhi high court cases of Vodafone Group and Khaitan Holdings, the court took a different stance. In each of these cases, it was decided that the Arbitration and Conciliation Act of 1996 does not apply to arbitrations conducted in accordance with BITs. The Delhi High Court in these judgments had ruled that the definition of a foreign award established under Section 44 of the Act would preclude Part II of the Act from applying to these cases. Section 44 of the Act defines a foreign award as an arbitral award that is regarded as having a commercial aspect under Indian law. Because the basis for the claim in BIT awards is State declarations, it was decided that investment arbitrations are fundamentally different from commercial disputes. It was also asserted that the foundation of an investment arbitration is in public international law and administrative law which makes it distinct from commercial law and its related aspects.

However, the international stance on the inclusion of BITs as ‘commercial’ varies from that of India. For instance, while the New York Convention considers investment treaty arbitrations to be “commercial”, the Delhi High Court takes a different stance and takes them to be non-commercial. Additionally, it has been established in several situations that the term “commercial” must be broadly construed. The UNCITRAL Model Law likewise advises using a broad definition of “commercial” to encompass investments. Furthermore, a dispute submitted to arbitration under the 2016 Model BIT shall be deemed to have arisen from a commercial transaction, as defined in Article 27.5 of the 2016 Model BIT, pursuant to Article I of the New York Convention. Thus, the lines vis-à-vis the definition of what encompasses commercial varies significantly between Indian and the prevalent international approach to it.

Additionally, reliance must be placed on the very nature of BITs. BITs primarily are documents that different nations sign in order to set forth the terms of investment and matters related to the same while investing in each other’s countries. By this mere purpose, it can be rightly ascertained that BITs are a result of commercial ties and help to advance trade and economic development in both respective nations that sign them.  Investment treaties also serve to promote foreign direct investment by laying forth and protecting the commercial interests of foreign investors on their terms. In the case of Union of India v. Lief Hoegh Co., the Gujarat High Court had ruled that trade transactions in any of their arrangements, even when they take place between people of different countries, constitute commercial connections. Investment treaty-related issues must therefore be viewed as commercial if reliance is placed on this judgment. However, such judgements do not hold prime judicial value when they do not come from the apex court as landmark judgements and can only act persuasive in nature especially when such a large matter concerning different jurisdictions and international awards is concerned. Thus, the question of whether an investment treaty arbitration award can be implemented in India is unresolved at this time.

The recent trend of solutions that has paved the way as a practical course of action to enforce BIT arbitration awards has been that of asset recognition. This technique essentially implies that the investor finds the award debtor’s assets in other jurisdictions with established BIT award enforcement mechanisms and uses those jurisdictions to enforce the awards. For instance, using the same course of action, a UK-based company, Cairn Energy, in June 2021, was allowed by the Tribunal Judiciaire de Paris to freeze 20 residential real estate assets owned by the Indian government when the tribunal held that India had failed to comply by the obligations set out in the INDIA-UK BIT and directed India to pay Cairn a whopping $1.2 billion. After the said award, Cairn went ahead and registered for the enforcement of the award in various jurisdictions that had India-owned assets worth approximately over $70 billion along with an established BIT award enforcement mechanism. Similar instances took place during the 2020 Vodafone case when India was held liable to breach the obligations stated under India-Netherlands BIT. These arising cases offer a clear indication to India’s tarnishing image with respect to its taxation regime, arbitration friendliness, and investor-state arbitration enforcement. A continuing trend of the same can heavily impact India’s foreign direct investment and as a result its GDP and its status in the international economic ecosphere.

Conclusion

For investment treaty arbitration awards to be enforced in India, either the Supreme Court must clarify its stance or the legislature must provide a legal framework. It may be advantageous for India in this situation to follow the policies other nations have established for enforcing such awards. India’s intention to become a hub for arbitration and investments is imperative, but the uncertainty and absence of a solid enforcement structure work against that ambition. This is especially true in light of the two consecutive unfavorable arbitral decisions against India in investment arbitration. It is therefore more crucial than ever for India to develop a concrete apparatus for the enforcement of investment treaty arbitration in order to maintain credibility abroad. The solutions India could seek to address the lacunas with respect to enforcement of BIT awards could include widening the scope of the Indian Arbitration Act and include investor-treaty arbitration in its ambit, the scope of what includes commercial could also be revised to recognise BITs as commercial in nature. In another case, India could also become a signatory to ICSID convention for the convention provides for a dispute to be resolved on the basis of a law decided upon by the parties to the dispute for which parties seek arbitration. This would ensure that the enforcement does not stand against the public policy of India and abides by the Arbitration and Conciliation Act, 1996. If nothing of the above sort stands subsumed, India could propose an altogether different legislation to address Investment treaty arbitration and the enforcement of awards arising from the same.

The inclusion of such solutions could potentially help India recover its tarnishing image as a result of its restrictive taxation as well as treaty dispute resolution policies and aid in maintaining its image as well as a potentially attractive place to attract foreign direct investments which are crucial for the development of any developing country like India.

Link for image – https://www.pexels.com/photo/tiny-toy-flags-on-map-8828346/

Credit – Pexels 

Author Bio – 

The piece is authored by Amisha Mittal. Amisha is a final-year student at Jindal Global Law School. Her interest areas lie in Intellectual property and Competition law.