At a time when investor confidence in India is low due to corruption scandals and the manner in which many big-ticket foreign investment projects like Cairn-Vedanta and Posco have been dealt with, the last thing India wanted was to be dragged by a foreign investor to an international arbitration?further denting its claim to be an attractive destination for foreign investment. An Australian company, White Industries, has taken India to international arbitration under the India-Australia Bilateral Investment Treaty (BIT) for alleged breaches of the treaty. The hearings in the case are over and the ruling is awaited.
The current case is the first BIT dispute after India was flooded with a number of BIT claims by foreign corporations involved in the Dabhol power project in the mid-2000s. BITs are international treaties granting substantive rights to foreign investors in the host country, including the right to enforce these substantive rights through binding arbitration. India
has entered into BITs with more than 70 countries with the hope of wooing investors.
The essential facts of the case leading to the current arbitration are as follows. White Industries obtained an arbitral award in its favour in a contractual dispute with Coal India and sought enforcement of the award before the Delhi High Court. Simultaneously, Coal India approached the Calcutta High Court to have the award set aside, for which the request was granted by the Calcutta High Court.
White Industries appealed to the Supreme Court in 2004 and the final decision of the Supreme Court in the matter is pending. Meanwhile, White Industries has taken the matter to investment treaty arbitration under the India-Australia BIT, which gives foreign corporations the right to challenge the host country?s sovereign actions in international arbitration without necessarily exhausting local remedies. White Industries has challenged the power of the Indian courts to set aside a foreign arbitral award and also alleged that the inordinate delay involved in litigation in Indian courts amounts to a denial of justice and a violation of its rights under the India-Australia BIT.
While the arbitration tribunal will decide on the allegations of White Industries, for the purpose of policymaking and to avoid such disputes in the future, it is imperative that the genesis of this dispute is understood. The root cause of the current dispute is the ambiguity in the language of Section 2(2) of the Arbitration and Conciliation Act, 1996 (A&C Act). The interpretation of that Section by the Indian judiciary. Section 2(2), which is in Part I of the Act, states: ?This Part shall apply where the place of arbitration is in India.? In Bhatia International vs Bulk Trading SA (AIR 2002 SC 1432), a party approached courts in India for an interim measure when arbitration was proceeding before a tribunal seated in Paris. If Section 2(2) was read as limiting the territorial application of Part I to arbitrations held in India alone, the Indian courts would be powerless to grant such remedy.
However, the power of courts to grant interim relief is often critical to the success of arbitration, say where one of the parties attempts to alienate the disputed property. The Court attempted a creative interpretation of Section 2(2) by reasoning that the wording of the Section, ?[t]his Part shall apply where the place of arbitration is in India?, is not the same as, ?[t]his Part shall apply only where the place of arbitration is in India?. Accordingly, the Court held: (i) where the place of arbitration is India, Part I mandatorily applies; (ii) where the place of arbitration is not India, Part I applies unless a specific exclusion was made by the parties.
While the judgment in Bhatia was an attempt to assist arbitration, the effect was contrary. In Venture Global Engineering vs Satyam Computers (2008), the Supreme Court held that the rule laid down in Bhatia would empower Indian courts to set aside foreign awards as the power to do so flows from Section 34, a provision in Part I.
It is this extensive reading of the power to set aside a foreign award that has given rise to the dispute between White Industries and India. This extensive power grabbing, when read with another chain of decisions on what constitutes ?public policy?, for the violation of which an arbitral award can be set aside culminating in ONGC vs Saw Pipes (2003), has given rise to a situation where an award rendered anywhere can be set aside by an Indian court if it goes against (i) the fundamental policy of Indian law, or (ii) the interests of India, or (iii) justice or morality, or it patently violates Indian law.
In an attempt to find a solution to this confusion, a recent consultation paper issued by the ministry of law and justice proposes to amend Section 2(2) of the A&C Act to state ?this part shall apply only where the place of arbitration is in India? with some qualifications. This proposed amendment will be a welcome change. However, we argued in a paper published in the Asian Journal of Comparative Law that even this will still not guarantee that investment disputes like the current one do not arise again.
Whatever be the outcome of this case, it is important to appreciate the fact that is not just the actions of the executive and the legislature that can violate a BIT but also those of the judiciary. Hence, it is significant that institutional capacities, at all levels, are bolstered, and legislations related to foreign investments and BITs are carefully re-visited.
Otherwise, India might have to pay a heavy price quite literally, as there are many instances where arbitral tribunals have ordered developing country governments to pay massive damages to foreign investors for violating their BIT obligations. Recently, Bangladesh was ordered to pay more than $6 million plus interest at a rate of 3.375% per annum to an Italian company because the actions of Bangladesh?s judiciary violated the Italy-Bangladesh BIT. It will be a criminal waste of taxpayer?s money if India is also ordered to pay such high damages to foreign corporations for its sovereign actions breaching its BITs.
Prabhash Ranjan is an assistant professor at NUJS, Kolkata, and a PhD Candidate at King?s College London. Deepak Raju is a lawyer with Amarchand & Mangaldas and Suresh A Shroff & Co, Mumbai. Views are personal
