This note is an analysis of the judgment dated 7th May 2018, in CS (OS) 383/2017 & I.A.No.9460/2017, titled Union of India v. Vodafone Group Plc United Kingdom & Anr., passed by the Hon'ble High Court of Delhi.
On 20th January 2012, the Supreme Court of India vide its judgment and order in Civil Appeal No.733/2012 discharged Vodafone International Holdings B.V. (hereinafter referred to as "Vodafone") of the tax liability imposed on it by the Income Tax Department of India. The Apex Court not only quashed the demand of USD 1,78,34,58,000/- by way of Capital Gains Tax but also directed refund of USD 37,17,50,000/- deposited by Vodafone in terms of the interim order dated 26th November 2010, along with interest at the rate of 4 % per annum within two months.
Subsequently, the Parliament passed the Finance Act 2012, which provided inter alia for the insertion of two explanations in Section 9(1)(i) of the Income Tax Act, 1961. This in effect gave the Union of India (hereinafter referred to as the "UOI") power to retrospectively tax Vodafone, consequently nullifying the order of the Supreme Court.
In response to the new legislative amendment, Vodafone, on 17th April 2012, served upon the UOI a Notice of Dispute under the India-Netherlands Bilateral Investment Protection Agreement (hereinafter referred to as “BIPA“) inveighing the tax liability cast upon it. The UOI replied to the Notice of Dispute stating that tax-related disputes are not within the ambit of the India- Netherlands BIPA and consequently, the Notice of Dispute was not maintainable as per the BIPA provisions. Pursuant to this, on 17th April 2014, Vodafone served the UOI with a Notice of Arbitration stating that the objections of the UOI can be dealt with by the tribunal constituted under the India-Netherland BIPA.
On 15th June 2015, Vodafone served another Notice of Dispute on the UOI under the India-United Kingdom BIPA. On 24th January 2017, Vodafone served upon the UOI the second Notice of Arbitration, under the India-United Kingdom BIPA
Upon receiving the aforementioned second Notice of Arbitration, the UOI filed a Civil Suit in the Delhi High Court (hereinafter referred to as "DHC"), for declaring the second Notice of Arbitration invalid. The Civil Suit also prayed for an anti-arbitration injunction as per which Vodafone would be barred from initiating arbitration under the India-UK BIPA. Prior to the filing of the Civil Suit, the UOI had obtained an interim stay against Vodafone, granted by the DHC. The interim stay prohibited Vodafone from initiating arbitration under the India-UK BIPA.
Submissions by the UOI
The UOI, by way of the Civil Suit in the DHC, submitted that the invocation of the two arbitrations under the BIPAs was an “abuse of process” as it would lead to a multiplicity of proceedings. It was the case of the UOI, that Vodafone had initiated the second arbitration because of the non-maintainability of its claim in the first arbitration. The UOI contended that Vodafone invoked the second arbitration clause through Vodafone UK under the India-UK BIPA to assert the same claims it had raised in the previous arbitration (under the India-Netherlands BIPA). The UOI claimed that as the India-Netherlands BIPA did not envisage tax disputes being arbitrated under it, Vodafone engaged in treaty shopping to make their claims maintainable. The UOI stressed on the fact that Vodafone UK and Vodafone Netherlands were one and the same entity as they were in the “same vertical corporate chain”. In the Civil Suit, it was prayed by the UOI, that the second Notice of Arbitration should be declared void and a permanent injunction be passed against Vodafone restraining them to initiate any proceeding under the India-UK BIPA.
It was also the case of the UOI that national courts were competent to pass anti-arbitration injunctions under the provisions of the Indian Civil Procedure Code, 1908 when arbitration was being used as a vexatious tool to harass and oppress the UOI.
Submissions by Vodafone
Vodafone further submitted that as per the existing BIPAs and international conventions like the Vienna Convention on Law of Treaties (hereinafter referred to as “VCLT“) the UOI was under a responsibility, to participate in the arbitration. To further their argument, Vodafone, relied on Articles 26 and 27 of the VCLT. Article 26 of the VCLT envisages the principle of "Pacta Sunt Servanda". The aforementioned principle states that obligations under an international treaty should be performed in good faith by the parties. Article 27 of the VCLT stipulates that a country may not invoke the provisions of its internal law as justification for its failure to perform a treaty obligation
Vodafone's legal submissions were supported by a plethora of case laws which in essence state that by virtue of the BIPAs the operation of domestic law to the present dispute was ousted. Vodafone submitted that India’s obligations under the BIPA provide Vodafone with rights under the public international law.
Vodafone relied upon the conduct of the parties and the facts of the ongoing dispute; it stated that the UOI had already raised jurisdictional objections in the arbitration under the India-Netherlands BIPA. Furthermore, the UOI had also appointed an arbitrator in both the arbitrations initiated under the India-Netherland and India-UK BIPAs. As a result of which, Vodafone submitted, that the UOI had already consented to be part of the arbitration, and by way of approaching the DHC; it was breaching its obligations under the BIPA.
Vodafone also argued that they did not intend to multiply proceedings. They submitted that due to the position of UOI, that tax matters could not be arbitrated upon; Vodafone chose a treaty without any such bar. The India-Netherlands BIPA states that the provisions of the "Most Favoured Nation" clause and "National Treatment" clause would not apply to matters related to taxation. Therefore, Vodafone chose the India-UK BIPA as it contained no such prohibition. Vodafone, by way of written communication to India, had also offered to consolidate the two arbitrations so as to save time and repetition of claims.
Vodafone had also argued that the relief being sought by the UOI could have been obtained by them within the BIPA arbitration. The Amicus Curiae, as appointed by the DHC, also provided valuable input to the legal discussion. He submitted that Vodafone merely sought one route to arbitration and did not seek double recovery and therefore there was no abuse of process. He emphasized that the absence of double recovery by Vodafone excluded the possibility of abuse of process. The Amicus Curiae, submitted before the Court that Vodafone's position was a direct result of the jurisdictional objection by the UOI.
Submissions on behalf of the UOI and their correspondence with the UOI never indicated that Vodafone wanted to pursue their claims twice. Upon the invocation of the second arbitration, Vodafone had informed the UOI that they are relying on the India-UK BIPA to overcome the jurisdictional objection raised by the UOI in the first arbitration. Specifically, Vodafone had also informed the UOI that if the tribunal was constituted under the India-UK BIPA then they would wish to consolidate the claims in the two arbitrations.
Observations by the Court
The DHC, vide its judgment dated 7th May 2018, rejected Vodafone’s contention that it had no jurisdiction to try arbitrations arising out of BIPA. It relied on the submissions by the Amicus Curiae and the UOI to hold that domestic courts could interfere in international investment arbitration when the proceedings were clearly vexatious and unconscionable to the court. However, in the present facts and circumstances, it agreed with the submissions made by Vodafone regarding the consent of the UOI to participate in the arbitration. It was also observed by the DHC, that at the time of filing the present Civil Suit, the UOI had appointed an arbitrator in the arbitration under the India-UK BIPA. Therefore, the submission of Vodafone, regarding the UOI's consent to arbitrate was accepted by the Delhi DHC. The DHC also agreed with Vodafone that the guiding principle of VCLT was to ensure that the terms of BIPA are respected and enforced.
The DHC held that the invocation of the second arbitration was not “abuse of process” as Vodafone had already offered to consolidate the two arbitrations. The DHC interpreted the two BIPAs to come to the conclusion that obligations of the UOI under both the BIPAs should be construed in a manner which is in resonance with the objective of the said BIPAs. The DHC further held that the objective of the BIPAs was to provide a safe investment environment and afford protection to the investor from the actions of the UOI. The DHC discussed the fact that if the judiciary passes an anti-arbitration injunction it would actually amount to a further breach of BIPA as the judiciary is a part of the state in international investment arbitrations. Furthermore, it was held that the courts should be hesitant and cautious while granting any anti-arbitration injunction.
The DHC considered the UOI's argument that it would have to appear for two arbitrations for the same claim. In light of the submissions made by Vodafone, the DHC rejected this argument advanced by the UOI. It stated that it was Vodafone's intention to consolidate the arbitrations which would deal with the issue of multiplicity of proceedings.
The DHC also drew a clear distinction between international commercial and international investment arbitration and held that the provisions of the Domestic Arbitration Act, 1996 could not be applied to international investment arbitrations. The DHC held that the settled law in international commercial arbitrations (as cited by the UOI in their submissions) would not be applicable to the present proceedings. The DHC further reiterated that the settled law of international commercial arbitrations could not be applied to international investment arbitrations as the same falls within the realm of public international law. The DHC on the basis of its observations and the operation of the BIPAs rejected the submissions of the UOI regarding the relief sought by them.
The present decision by the DHC is a welcome step in the realm of international investment arbitration. This decision reinforces the changing stance of the Indian judiciary being pro-arbitration and the present decision further aligns itself with the approach adopted by various international arbitration-friendly jurisdictions. Interestingly, Vodafone's claim that the courts in the UOI would not have jurisdiction over the subject matter in such investment arbitrations was rejected by the DHC. As explained by the court-appointed Amicus there have been several instances where courts in other jurisdictions have interfered in international investment arbitrations on the ground that the procedure was vexatious and/or was instituted with the sole aim of harassing the other party. At the same time, DHC in the present decision made it abundantly clear that if such interference is warranted in any scenario, then it should be with extreme caution and hesitation.
In present judgment, the DHC while accepting the arguments advanced on behalf of Vodafone pertaining to the applicability of international law in the present dispute held that the principles of VCLT, even though the UOI is not a signatory to the same, would be the guiding principle for the interpretation of the provisions of BIPA. The DHC, while holding that the UOI had consented to the dispute resolution clauses of the same, stated that all international laws should be interpreted in a way which upholds the treaty obligations of the UOI. The DHC while interpreting the public international law in letter and spirit held that such investment treaties could not be compared to international commercial arbitrations. The reason for this was that in international commercial arbitrations rights arise out of a contract whereas in investment arbitration the rights arise from international treaties between sovereigns.
The DHC, in the present decision, also dealt with various criticisms of investment arbitration to ensure that this decision does not set a precedent for those investors who act maliciously and drag the governments to arbitrate. The interpretation of international law coupled with the good faith evidenced by Vodafone was the main ratio behind the judgment. The DHC while concluding held that all claims (like abuse of process etc.) of the UOI could be raised in the arbitration and that the court would not subsume the jurisdiction of the tribunal. This is a welcome approach as it is illustrative of the fact that Indian courts are upholding the investment treaty obligations of India and actively setting precedent on the principle of Kompetenz-Kompetenz.
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