Worldwide: Swiss Federal Tribunal Refuses To Set Aside The Deutsche Telekom v India Award

Last Updated: 29 January 2019
Article by Nicholas Peacock, Karan Talwar and Kritika Venugopal

We previously reported here that a Geneva-seated UNCITRAL tribunal (the "Tribunal") constituted under the India-Germany Bilateral Investment Treaty dated 10 July 1995 (the "India-Germany BIT") found India in breach of its treaty obligations in relation to its cancellation of a spectrum allocation contract1 (the "Contract") in an interim award dated 13 December 2017 (the "Award").

The Contract was entered into in 2005 between Devas Multimedia Private Limited ("Devas"), an Indian company and Antrix Corporation Limited ("Antrix"), an Indian state-owned satellite company, wherein Devas agreed to pay a fee in return for the lease of the S-band electromagnetic spectrum provided by two orbiting Indian satellites. In the arbitration before the Tribunal, the Claimant, Deutsche Telekom AG ("DT") (which indirectly held a 20% stake in Devas via a Singaporean subsidiary) alleged a breach of the fair and equitable treatment standard under the India-Germany BIT.

In the Award, the Tribunal dealt with issues of jurisdiction and liability (leaving aside issues of quantum for a later award), and held that it possessed jurisdiction to hear the dispute and that India had indeed violated the standard of fair and equitable treatment under the India-Germany BIT.

India sought to challenge the Award in the Swiss Federal Tribunal ("Federal Tribunal"), being the court of supervision of the arbitration. In a decision last month, the First Civil Law Court of the Federal Tribunal rejected India's application for the annulment of the Award by a 3:2 majority in a judgment dated 11 December 2018 (available here (in French)).

Issues before the Federal Tribunal

In January 2018, India filed a civil appeal before the Federal Tribunal requesting annulment of the Award on the basis that the Tribunal lacked jurisdiction to hear the dispute. The Federal Tribunal agreed that it had the power to determine the jurisdiction or lack thereof of the Tribunal under Swiss law.

The Federal Tribunal considered the following three main arguments made by India regarding the Tribunal's lack of jurisdiction:

  • DT's investment was indirect: DT's investment into India was made indirectly through a Singaporean subsidiary and was not protected by the India-Germany BIT which protected only direct investments. That the intention of the India-Germany BIT was to protect only direct investments was revealed by the lack of any express reference to "indirect" investments (unlike other BITs entered into by India and Germany with other states).
  • The India-Germany BIT excluded "pre-investment" activities: There existed a distinction under treaty law between two kinds of treaties: (i) "right of establishment" treaties, granting protection to the investor on the establishment of an enterprise in the territory of the host state and (ii) "admission type" treaties which granted their protection only after the establishment of the enterprise had become effective and which excluded "pre-investment activities". The India-Germany BIT was an example of the latter and the Tribunal had erred in focusing on DT's purchase of shares in Devas, and not on the fact that the project was still at a pre-investment/preparatory stage at the time of cancellation of the Contract (as the requisite licenses for the project had not been granted (including a crucial Department of Telecommunications licence)).
  • India was protecting its "essential security interests": India took the action to terminate the Contract in order to protect its "essential security interests" as defined in Article 12 of the BIT, and DT was therefore precluded from availing of the substantive rules of the BIT as per its terms.

The Federal Tribunal's judgment

The Federal Tribunal considered the Tribunal's Award and agreed with its findings, dismissing the arguments by a 3:2 majority. In its decision, it made the following observations in relation to India's arguments:

  • India's attempt at using comparative convention practice was superfluous where the primary interpretation of the treaty in question suggested that it was sufficient that the invested assets were located in the territory of the host State for the protection to apply. Most arbitral tribunals examining this issue had noted that a BIT that does not expressly address indirect investments can nonetheless cover them (the Federal Tribunal distinguished allegedly unfavourable decisions and academic opinions cited by India). The Federal Tribunal was therefore opposed to a restrictive interpretation of the treaty, also noting that the use of special purpose investment vehicles was fairly commonplace in foreign investment.
  • The distinction between the types of treaties sought to be made was not as clear cut as India suggested and would depend on an analysis of the clauses of the relevant treaty. In any event, the Federal Tribunal agreed with the Tribunal that DT's investment went further than "pre-investment activity".
  • India had erred on a procedural front by raising the argument as one that related to the jurisdiction of the Tribunal while it had chosen not to do so during the course of the arbitration. The Federal Tribunal agreed with DT that a reliance on alleged "essential security interests" related to the merits of the dispute which it would not engage with in the appeal.

Concluding thoughts

Whilst the two dissenting opinions were not published in the final judgment, it is understood that in the dissenting judges' view, DT had invested into Singapore and that it was DT's Singaporean subsidiary that had invested into India. One of the dissenting judges suggested that the practice prevalent when the India-Germany BIT was drafted was relevant to the interpretation of the BIT. As the Germany-Kuwait and India-Netherlands BITs used the term "indirect investments" but the India-Germany BIT did not, the inference should have been that the omission was deliberate.

The Federal Tribunal's judgment is the latest in a series of setbacks for the Indian government relating to the project for the commercialisation of the S-band spectrum, which has also led to two other arbitrations: (i) where Devas was awarded a sum of over US$ 550 million in an ICC arbitration which is currently being challenged by Antrix in the courts of Washington state in the US, and (ii) an investment treaty arbitration brought by other investors in Devas under the 1998 India-Mauritius BIT which also held against India with the quantum of liability to be decided at a later stage.

The Tribunal is now deliberating the quantum of the award to be made in DT's favour.

Footnotes

1 The project for which the Contract was entered into related to the commercialisation of the S-band spectrum and "contemplated offering mobile multimedia and broadband data services to the Indian market via a hybrid satellite-terrestrial communications platform".

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