Indian court intervenes in Vodafone investment arbitration against India – Ishbel McLachlan

(Photo by Arti Sandhu/Flickr)

The Delhi High Court has temporarily restrained British companies Vodafone Group Plc and Vodafone Consolidated Holdings Ltd (together, “Vodafone“) from taking any further action in respect of a claim against India under the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of India for the Promotion and Protection of Investments (“UK-India BIT“): Union of India v Vodafone Group PLC United Kingdom & Anr. CS(OS) 383/2017.

The Court’s decision was made on the basis that an arbitration under the UK-India BIT would duplicate a claim already filed by Vodafone’s subsidiary Vodafone International Holdings BV (“Vodafone BV“) under the Agreement between the Republic of India and the Kingdom of the Netherlands for the Promotion and Protection of Investments (“Netherlands-India BIT“) and that the “natural forum” for the dispute was the Indian courts. The Court has asked Vodafone to respond to India’s request for a permanent anti-arbitration injunction by 26 October 2017 before any further orders are made.

Prior to its application to the Delhi High Court, India applied to the appointing authority in the second arbitration, the President of the International Court of Justice, to refuse to appoint an arbitrator as requested by Vodafone under the default procedure in the UK-India BIT. When this proved unsuccessful, India applied to the tribunal constituted under the Netherlands-India BIT requesting interim measures in the form of an order that Vodafone BV not take any further action in the arbitration against India under the UK-India BIT. The tribunal, however, determined that it did not have competence to grant India’s request for interim measures.

India then requested the same injunctive relief from the Delhi High Court. In determining India’s application on a temporary basis, the Delhi High Court found that Vodafone and Vodafone BV prima facie seem to be a single economic entity as both are within the same corporate group and are run, governed and managed by the same set of shareholders. The Court held that, as a result of this common control, the proposed second arbitration amounts to an abuse of process. Further, the Court found the relief sought in both arbitrations to be “virtually identical” and formed the prima facie view that the duplication of claims under different BITs creates a risk of parallel proceedings and inconsistent decisions by two separate arbitral tribunals. In these circumstances, the Court considered that it would be “inequitable, unfair and unjust” to allow Vodafone to pursue both arbitrations.

Vodafone’s dispute with India arises out of Vodafone’s purchase of Hutchinson Essar, a Hong Kong based entity, in 2007, which India says triggered Vodafone’s liability to pay India $2.1 billion in capital gains tax. Vodafone argued from the outset that it did not owe any tax to the Indian government on the basis that the transaction was between two non-Indian entities for a target asset which was registered in the Cayman Islands. When the Supreme Court of India found in favour of Vodafone’s argument, the Indian government enacted legislation permitting retroactive capital gains taxation on offshore share transfers. The arbitrations commenced by Vodafone and Vodafone BV, under the UK-India BIT and Netherlands-India BIT respectively, challenge the amendments to the Income Tax Act 1961 introduced with retrospective effect.

Before the Delhi High Court, India submitted that as taxation is a sovereign function, disputes regarding tax demands are outside the scope of investment arbitration and may only be resolved before a constitutional court of the host State. While the Delhi High Court did not make a final decision on the issue, the Court expressed the prima facie view that India is the “natural forum” for Vodafone’s claim. With respect, this approach is concerning, primarily because the claims made by Vodafone and Vodafone BV in their respective investment arbitrations against India concern India’s alleged breach of the fair and equitable treatment (“FET“) standard of the relevant BITs. A claim for breach of the FET standard under a BIT is a cause of action arising under international law and hence distinct from a challenge to India’s retroactive tax legislation under India’s domestic legal framework. While the constitutional court of India may be the natural forum for the latter, it is difficult to see how an Indian court would be the natural forum for India’s alleged violation of its obligations under international law.

Further, India’s approach – seeking an anti-arbitration injunction in its own national courts – is unusual. Ordinarily, when a State wants to challenge a claim brought before an international investment tribunal, the State will object to the jurisdiction of the tribunal or the admissibility of the claims made by the investor. These objections are made to the tribunal itself. Indeed, India’s main authority in support of its allegation that Vodafone’s second arbitration constitutes an abuse of process is an ICSID award determining a State’s objections to jurisdiction and admissibility (Orascom TMT Investments S.a.r.l. v People’s Democratic Republic of Algeria, ICSID Case No. ARB/12/35, Award dated 31 May 2017). Orascom reflects the principle that arbitral tribunals are empowered to, and ordinarily do, determine their own jurisdiction and the admissibility of claims put before them. In the case at hand, it would have been open to India to object to the admissibility of Vodafone’s claims before the UK-India BIT tribunal.

Recognising the deference usually afforded to an arbitral tribunal on matters of jurisdiction and admissibility, the Delhi High Court acknowledged that it had to “exercise great caution, while restraining foreign arbitration” and referred to the rule under Indian law as set out in the Indian Supreme Court decision Modi Entertainment Networks v WSG Cricket Pte Ltd (2003) 4 SCC 341 that a court of “natural jurisdiction” may issue anti-suit injunctions against foreign courts having exclusive jurisdiction if the foreign forum is “oppressive or vexatious“. However, in temporarily restraining Vodafone from taking any further action in respect of their claim under the UK-India BIT the Delhi High Court did not make any findings as to whether the arbitral tribunal constituted under the UK-India BIT was an “oppressive or vexatious” forum.

The Delhi High Court’s interim decision, therefore, raises concerns about the approach of Indian courts towards international investment arbitration. In particular, the Court’s intervention in this case seems to not give due regard to the distinction between obligations under domestic law and obligations under international law. If such an approach continues – including in the Court’s final decision in the case at hand – questions may be asked about the depth of India’s recent commitment to being an arbitration friendly jurisdiction.

Ishbel McLachlan is a Law Graduate at Clifford Chance in Perth.

The views expressed in this article are the author’s and not necessarily those of Clifford Chance or any other person or organisation with whom the author is affiliated.