VODAFONE AND INDIA

A REVIEW OF CLAIMS IN INVESTMENT ARBITRATION

This report is the first in a series detailing Indian involvement with international investment law, prepared by the Student Initiative to Promote Legal Awareness, National Law School of India University, Bangalore. RAAG YADAVA, SHIVA SANTOSH YELAMANCHILI, DIVYANSHU AGRAWAL

VODAFONE AND INDIA

A REVIEW OF CLAIMS IN INVESTMENT ARBITRATION
The Vodafone Groups investment in India has been shrouded with uncertainty. Starting in 2008, the Indian Government sought to tax Vodafones Share Purchase Agreement with Hutchinson Telecommunications International Limited for the purchase of the singular shareholding of CGP Investments, a Mauritian entity, which held a 66% interest in Hutchinson Essar Limited. The case aroused great interest amongst the legal and business communities alike, not only in terms of its legal and commercial significance, but also the astronomical figure in question: Rs. 12,000 Crores. With the Bombay High Court ruling in favour of the Government, the Indian Supreme Courts subsequent decision relieving Vodafone from tax liability seemed to be the final word in a protracted legal battle. The tale, however, had just begun. Soon after the Supreme Court judgment, Finance Minister Pranab Mukherjee mooted a retrospective amendment to Section 2(47) of the Income Tax Act, 1961. As it stood, the amendment sought to tax the Share Purchase Agreement. Despite lobbying from various multinational corporations, trading groups and sovereigns and repeated attempts by Vodafone itself, the Finance Bill was enacted into law. 1 Through this, calls for stability and predictability in the taxation regime (a sentiment expressed by the Supreme Court itself) and the investment environment were ignored. Fashioned as a clarification to the existing legal regime, the amendment effectively nullified the decision of the Supreme Court and cleared the path for a new tax bill. In the months following the Finance Act, the debate has raged on concerning the policy implications of the amendment, its effect on India as an investment destination and so on. Indeed, whether the actions of the Indian Government were prudent is a vital question in the larger discussion on economic policies and incentives. In fact,

Section 3 of the Finance Act, 2012, amends Section 2 of the Income Tax as follows: in clause (47), the Explanation shall be numbered as Explanation 1 thereof and after Explanation 1 as so numbered, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1962, namely: Explanation 2. For the removal of doubts, it is hereby clarified that transfer includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India

the Finance Minister also sought to clarify motives behind the amendment, amidst allegations of discrimination against Vodafone. However, the harm was done. Faced with the prospect of retrospective taxation, Vodafone sought to exercise its rights under the IndiaNetherlands Bilateral Investment Treaty. It served the Indian Government with a Notice of Dispute under the Treaty, threatening international arbitration if the amendment was not abandon[ed] or suitably amend[ed].2 Given Indias recent tryst with investment arbitration with the White Industries award, and a similar threat from Sistema concerning the cancellation of 2G licenses, the Vodafone case presents another example of Indian engagement with international investment law. Attracting greater investment comes with the responsibility of treating foreign investors equitably, and a risk of external scrutiny of state actions. Indeed, the media attention surrounding the Vodafone saga, coupled with the amount at stake, has transformed the political landscape as well. All eyes are now on the Calcutta High Court, as it deliberates upon the validity of the retrospective amendment.3 Political implications aside, the Vodafone case presents several intriguing legal issues. The lack of clarity on Indias obligations under the Bilateral Investment Treaty has led to great confusion in legal and business circles. This report operates to fill that void by providing a detailed account of possible disputes in the arbitration. We do not seek to argue in favour of either party, or pre-judge the situation, but rather, outline the legal issues involved in order to better understand the contours of the possible arbitration and allow all stakeholders to make informed decisions. In doing so, we hope that this document interests and assists students, lawyers and businesses alike, and serves as a platform for further discussion. Several strands of thought in this document emanate from the discussions at the International Arbitration Conference conducted by the National Law School of India University, Bangalore in March, 2012. We benefited greatly from the views expressed by the participants and thank them for their engaging discussions. We would also like to thank Dr. Sreenivasa Rao Pemmaraju, Special Advisor in the office of the Attorney-General, State of Qatar and former Chairman of the International Law Commission, Mr. Shreyas Jayasimha, Partner at AZB & Partners in Bangalore and Mr. Promod Nair, Partner at J. Sagar Associates in Bangalore for their comments on earlier drafts of this report, and for their continued assistance. We would also like to thank Ms. Jahnavi Sindhu for her help in the

See Press Release Concerning Notice of Dispute served by Vodafone International Holdings B.V. to the Indian Government, Annexure III.
3

McLeod Russel, First To Challenge Indias Retrospective Tax Laws, The Economic Times, June 13, 2012, available at <http://articles.economictimes.indiatimes.com/20120613/news/32215747_1_mcleod-russel-mcleod-russel-tax-laws> (last accessed on 22nd July, 2012).

preparation of the final draft. All views expressed, however, are our own and do not reflect those of our advisors, colleagues or the National Law School.

CONTENTS
I. II. MULTI-TIERED DISPUTE RESOLUTION UNDER ARTICLE 9 THRESHOLD JURISDICTIONAL REQUIREMENTS A. AN INVESTOR B. III. IV. AN INVESTMENT IN THE TERRITORY OF INDIA ARTICLE 4(4): EXCLUSION OF TAXATION MATTERS INDIRECT EXPROPRIATION 6 8 8 8 16 18 18 22 23 25 25 27 27 35 37 37 40 45 45 46 47 49 52 53

A. THE CONTOURS OF EXPROPRIATION IN INTERNATIONAL LAW B. EXPROPRIATION BY TAXATION

C. REASONABLY TO BE EXPECTED PROFIT V. FAIR AND EQUITABLE TREATMENT A. THE SCOPE OF THE FET CLAUSE B. NORMS INCORPORATED UNDER THE FET CLAUSE

C. LEGITIMATE EXPECTATIONS AND DUE PROCESS VI. VII. DENIAL OF JUSTICE BREACH OF PREVIOUSLY PROVIDED ASSURANCES

A. A BINDING OBLIGATION UNDER ARTICLE 4(5) B. VIII. A CLAIM UNDER INDIAN LAW AND GENERAL INTERNATIONAL LAW POSSIBLE REMEDIES

A. PROVISIONAL REMEDIES B. 1. 2. IX. FINAL REMEDIES NON-PECUNIARY REMEDIES VALUATION OF PECUNIARY REMEDIES ISSUES CONCERNING ENFORCEMENT

A. APPLICABILITY OF THE NEW YORK CONVENTION

B. 1. 2. 3. 4.

STATE IMMUNITY
WAIVER OF IMMUNITY

55 55 56 58 59 60 61 62 63 64 65

THE EXTENT OF SUCH WAIVER OF IMMUNITY THE KINDS OF PROPERTY AVAILABLE FOR ATTACHMENT IN VARIOUS JURISDICTIONS SPECIAL REQUIREMENTS IN SOME MUNICIPAL LAWS

C. APPLICABILITY OF THE INDIAN ARBITRATION ACT, 1996 1. 2. 3. JURISDICTION OF THE INDIAN COURTS UNDER SECTION 34 OF THE ACT THE PUBLIC POLICY OF INDIA EFFECT OF SETTING ASIDE BY INDIAN COURTS VIS--VIS ENFORCEMENT IN OTHER JURISDICTIONS

CONCLUDING REMARKS ANNEXURE 1 AGREEMENT BETWEEN THE REPUBLIC OF INDIA AND THE KINGDOM OF THE NETHERLANDS FOR THE PROMOTION AND PROTECTION OF INVESTMENTS ANNEXURE 2 OWNERSHIP AND HOLDING STRUCTURE OF THE VODAFONE GROUP ANNEXURE 3 PRESS RELEASE CONCERNING NOTICE OF DISPUTE SERVED BY VODAFONE INTERNATIONAL HOLDINGS B.V. TO THE INDIAN GOVERNMENT

65 72 72 73

73

I.

MULTI-TIERED DISPUTE RESOLUTION UNDER ARTICLE 9

As a requisite to the commencement of arbitration, Vodafones Dutch subsidiary, VIHBV, served notice to the Indian Government under the India-Netherlands BIT. Article 9 of the BIT provides for a multi-tiered dispute resolution mechanism.4 Assuming the applicability of Article 9, which we will discuss in the following section, we shall examine the nature of multi-tiered dispute resolution clauses. The primary reasons for such clauses are time and efficiency. The essential issue arises with regard to enforceability of all the stages in the dispute resolution clause,5 and in particular, such issues in relation to non-determinative procedures, as negotiation or mediation. Article 9 of the BIT requires amicable negotiation and conciliation as procedures before referral to arbitration. The opponents to enforcement of pre-arbitral procedures state that consensual cooperation between parties cannot be mandated. Rejecting this argument of futility, the supporters contend that the choice to not cooperate cannot trump the right to such procedures as common ground is often found between hostile parties.6 The International Court of Justice adopted the latter approach based on a holding that the applicable text unambiguously indicated that pre-arbitral procedures were mandatory before commencing arbitration.7 Several ICC cases have proceeded to arbitration only after deciding whether the pre-arbitral processes such as negotiation have been satisfied.8 This position rests on the basis that a mandatory condition precedent is created by
4

The relevant portion of Article 9 reads: (1) Any dispute between an investor of one Contracting Party and the other Contracting Party in connection with an investment in the territory of the other Contracting Party shall, as far as possible, be settled amicably through negotiations between the parties to the dispute. The party intending to resolve such dispute through negotiation shall give notice to the other of its intentions. (2) If the dispute cannot be thus resolved as provided in paragraph (1) of this Article within three months from the date of notice given thereunder, then the dispute may be referred to conciliation in accordance with the United Nations Commission on International Trade Law Rules of Conciliation 1980, if both parties to the dispute so agree. (3) If either party to the dispute does not agree to conciliation within one month of the reference or where it is so referred but conciliation proceedings are terminated other than by the signing of a settlement agreement, or if no reference is made to international conciliation, the dispute may be referred to arbitration as follows (Emphasis supplied).
5 6 7

Pryles, Multi-Tiered Dispute Resolution Clauses 18 JOURNAL OF INTERNATIONAL ARBITRATION 159, 161 (2001). Suter, The Progress from Void to Valid for Agreements to Mediate 75 ARBITRATION 28, 34-37 (2009).

Georgia v. Russian Federation, General List No. 140 (April 1, 2011) (Rejecting the majority interpretation that the applicable clause lays down procedural preconditions precedent to jurisdiction, the joint dissenting opinion of President Owada, Judges Simma, Abraham and Donoghue and Judge Ad Hoc Gaja held that the point of text cannot require a State to go through futile procedures solely for the purpose of delaying or impending access to court.)
8

ICC Case Nos: 6276; 8642; 9977; see Article 13, UNCITRAL Model Law (Arbitral tribunals determine their jurisdiction to proceed to the merits on the basis of the well-recognized competence-competence doctrine).

the applicable law before arbitration.9 Art. 9 uses certain terms like as far as possible and may be referred to which might suggest the non-enforceable nature of these pre-arbitral conditions.10 Thus, given the strict textual basis for determining enforceability of pre-arbitral procedures, the various stages under Article 9 may be refused enforcement by an arbitral tribunal. In English law, courts exhibited a general reluctance to recognize the enforceability of pre-arbitral conditions as such procedures constituted agreement to terms not finalized.11 However, Lord Mustills comment that that those who make agreements for the resolution of disputes must show good reasons for departing from them indicates a shift. 12 In any event, it is evident that only careful drafting which plainly indicates the mandatory nature of pre-arbitral procedures will lead to their enforcement and consequently, raise issues of jurisdiction before an arbitral tribunal if such procedures are not followed.

Jolles, Enforcement of Multi-Tier Arbitration Clauses: Issues Of Enforcement 72 ARBITRATION 329, 335 (2006). ICC Case No. 10256. Halifax Financial Services Ltd. v. Intuitive Systems [1999] 1 All E.R. (Comm) 303.

10 11 12

Channel Tunnel Group Ltd. v. Balfour Beatty Construction Ltd. [1993] 2 WLR 262 (adopting the recommendations of the Woolfe Committee).

II.

THRESHOLD JURISDICTIONAL REQUIREMENTS

The India-Netherlands BIT, similar to other BITs, 13 prescribes certain threshold conditions that trigger the applicability of the treaty and the jurisdiction of the arbitral tribunal under Article 9. Jurisdictional objections relating to these requirements are common in investment arbitration, with a comprehensive and largely settled jurisprudence. In this case, Article 9 establishes the jurisdiction of the arbitral tribunal in respect of [a]ny dispute between an investor of one Contracting Party and the other Contracting Party in connection with an investment in the territory of the other Contracting Party This outlines three distinct jurisdictional requirements: first, the presence of an investor; secondly, the presence of an investment; and finally, a condition of territoriality. This section addresses these three issues. A. AN INVESTOR Article 1(d) of the BIT defines an investor in the following terms: nationals and companies of a Contracting Party. The term companies is further defined in Article 1(c) as: in respect of India: corporations, firms and associations incorporated or constituted under the law in force in any part of India; (ii) In respect of the Netherlands: legal persons constituted under the law of the Netherlands. The claimant in this arbitration, i.e. the investor, is Vodafone International Holdings BV (VIH), a limited liability company incorporated in the Netherlands, a fact accepted by the Indian Supreme Court as well. Accordingly, the qualification of Vodafone as an investor seems incontrovertible and it is unlikely that India will raise any jurisdiction objections on this ground. B. AN INVESTMENT IN THE TERRITORY OF INDIA The second and third requirements are conceptually distinct. Accordingly, they are dealt with independently by arbitral tribunals, and perhaps will be argued independently in this case as well. However, it is helpful for our purposes to address them together given the complex holding structure of the Vodafone group.14

13

See Rubins, The Notion of Investment in International Investment Arbitrations in HORN (ED.), ARBITRATING FOREIGN INVESTMENT DISPUTES 292, 293 (2003).
14

The holding structure of the Vodafone group is provided in Annexure II to this Report.

The placement of the transaction sought to be taxed by the retrospective amendment within the corporate structure of the Vodafone group was discussed in great detail by the Indian Supreme Court. This is extracted from the judgment as Annexure II. Broadly, Vodafone International Holdings BV acquired the entire share capital of CGP Investments (Holdings) Ltd. [CGP], a company resident in the Cayman Islands, which in turn held a 67% interest in Hutchinson Essar Ltd. [HEL], a company incorporated in India. The question of investment and territoriality, however, involves greater complexity. Before turning to those issues, it would be helpful to outline the relevant provisions of the BIT. First, an investment is defined under Article 1(a) of the BIT as: every kind of asset invested in accordance with the national laws and regulations of the Contracting Party in the territory of which the investment is made and in particular, though not exclusively, includes: (i) movable and immovable property as well as other property rights such as mortgages, leases, liens, or pledges; (ii) rights derived from shares, bonds and other kinds of interest in companies; (iii) rights to money or to any performance having value: (iv) intellectual property rights, technical processes, goodwill and know how in accordance with the relevant laws of the respective contracting parties; (v) rights granted under law or under contract such as business concessions to search for and extract oil, natural gas and other minerals. Second, Article 2 of the BIT extends the definition of an investment in the following terms: This Agreement shall apply to any investment made by investors of either Contracting Party in the territory of the other Contracting party including an indirect investment made through another company, wherever located, which is fully owned by such investors, whether made before or after the coming into force of this Agreement. Finally, the term territory, in respect of India, is defined under Article 1(e) as: the territory of the Republic of India including its territorial waters and the airspace above it and other maritime zones including the Exclusive Economic Zone and continental shelf over which the Republic of

India has sovereignty, sovereign rights or jurisdiction in accordance with its laws in force, the 1982 United Nations Convention on the Law of the Sea and Public International Law. In light of these provisions, Vodafone will claim its indirect shareholding in HEL as an investment in the territory of India. Clearly, shares of a company incorporated in India would qualify as an investment under Article 1(a)(ii) of the BIT. Indeed, establishing jurisprudence relating to the definition of an investment in treaties with similar formulations supports this argument.15 The broad wording of the term every kind of asset combined with the nonexhaustive nature of the definition has led tribunals to adopt an expansive interpretation. 16 It could hardly be contended that the shareholding in an Indian company does not qualify as an investment. Indeed, this would also qualify the territoriality standard as the shares are registered in India. However, the BIT requires an investment of the investor. The investment i.e. shareholding in HEL, is held by CGP, which will not be the Claimant before the arbitral tribunal. Instead, VIH, the Claimant, does not own any shares in HEL. Under the Share Purchase Agreement, VIH possesses a 100% shareholding in CGP which will clearly not be an investment in the territory of India. Accordingly, one must determine whether VIHs indirect shareholding in HEL through CGP and several other intervening companies qualifies as an investment nonetheless. In this context, Article 2 is relevant in so far as it includes indirect investment within the umbrella of investment protection. By way of an example, the Article allows a Dutch company A to claim BIT protection for an investment (through shareholding or otherwise under Article 1(a)) made by Mauritian (or any third-state) company B in India if B is wholly owned by A. Accordingly, a literal reading undoubtedly extends protection to VIH for CGPs shareholding in HEL, if that were to be the case, given VIHs 100% shareholding in CGP. The Vodafone Group shareholding structure, however, is not so. The presence of several intermediary companies spread across Mauritius, the Cayman Islands and India complicates this matter further and a closer look is required to determine whether the benefit of Article 2 may be extended to this case.
15

For a comprehensive understanding of this subject, see Rubins The Notion of Investment in International Investment Arbitrations in HORN (ED.), ARBITRATING FOREIGN INVESTMENT DISPUTES 292, 293 (2003); also see MCLACHLAN, SHORE &WEIGNER, INTERNATIONAL INVESTMENT ARBITRATION: SUBSTANTIVE PRINCIPLES 16 (2008).
16

Joy Mining Machinery Ltd v. Arab Republic of Egypt (Jurisdiction) (2004) 19 ICSID Rev-FILJ 486; William Nagel v. Czech Republic (Award) SCC Case 49/202 (SCC, 2003); Genin, Eastern Credit Ltd Inc and AS Baltoil v. Republic of Estonia (Award) 6 ICSID Rep 236 (2001); Fedax VN v. Republic of Venezuela (Jurisdiction) 5 ICSID Rep 183 (1997).

10

VIHs indirect shareholding in HEL is routed through one of two distinct ways (in terms of relevance to our discussion though the Indian Supreme Court has identified a different classification),17 which we shall refer to as Category I and II investments. Category I involves shareholding through a series of vertically placed, wholly owned subsidiaries (incorporated in Mauritius) downstream from CGP ending with an investment in HEL, an Indian entity which further holds shares in HEL or an Indian entity which does not hold any shares in HEL. Category II investments are different in one important respect the presence of a non-Indian entity in the vertical shareholding structure, usually at the penultimate stage, which is not a wholly owned subsidiary of the previous entity. The question arises whether Category I and II investments fall within the scope of Article 2. We believe the former would be entitled to such protection, while the coverage of the latter category of investments is doubtful. Article 2 allows for indirect investment routed through any third-state, provided that the intermediary entity is wholly owned. Thus, in an instance where VIH directly held a 100% shareholding in an intermediary entity which further invested in India the application of Article 2 would pose no significant problems. However, does Article 2 permit several intermediary entities? If so, is it necessary for all such entities to be wholly owned by the preceding entity and finally, leading to the investor? A positive answer to the first question would bring Category I investments within the fold of Article 2, while a positive answer to the second question would also include Category II investments. It is important to note here that Vodafone need not demonstrate an investment (shareholding), under the Article 2 standard, in HEL alone. Rather, any such investment in an Indian entity would suffice. Accordingly, investments routes involving a non-100% shareholding in an Indian entity at the penultimate level (which then, finally, holds shares in HEL) are included in the first category. The interpretation of Article 2 must be informed by Articles 31 and 32 of the Vienna Convention on the Law of Treaties [VCLT].18 Accordingly, a literal interpretation that accords an ordinary meaning, in light of the object and purpose of the BIT, is to be preferred. Any ambiguities or absurdities are then corrected by a reference to the travaux preperatoires. Article 2 employs the words through another company which is fully owned. This may be taken to mean that the investor must directly own the intermediary company. Alongside, another company is utilized in
17

Vodafone International Holdings B.V. v. Union of India & Anr., Civil Appeal No. 733 of 2012, arising out of S.L.P. (C) No. 26529 of 2010, Supreme Court of India 55 (To sum up, CGP held 42.34% in HEL through 100% wholly owned subsidiaries [Mauritius companies], 9.62% indirectly through TII and Omega [i.e. pro rata route], and 15.03% through GSPL route.)
18

For a discussion on methods of treaty interpretation, see SINCLAIR, THE VIENNA CONVENTION ON THE LAW OF TREATIES 131-4 (2ND EDN., 1984).

11

singular, rather than other companies and it would be open to argue that this formulation contemplates only one intervening entity, rather than several. However, this restrictive reading does not seem persuasive. Given the object and purpose of BITs to promote investment, 19 routinely reiterated in the preamble to most such instruments, 20 arbitral tribunals have allowed indirect claims in the absence of a specific proscription in the treaty, rather than looking towards specific terms that allow such claims.21 Further, it would seem anomalous that parties intended to exclude multiple intervening entities and allow one such entity. By implication, Vodafone may argue that the words fully owned include ultimate legal ownership as well, rather than a limited direct ownership. Indeed, similar reasoning was adopted by the Tribunal in RosInvest Co. UK Ltd. v. The Russian Federation,22 on which Vodafone may place reliance. It would seem that the rationale for inclusion of indirect ownership is to allow for the incorporation of commercial vehicles without affecting legal protections due under the BIT. The presence of a single, or of multiple intervening entities, would not result in any relevant change in circumstances.23 Alternatively put, an entity may be wholly owned, directly or indirectly. Indeed, the treaty contains no specific proscription. Quite to the contrary, the permissibility of indirect investments, in principle, lends credence to this view. Accordingly, it would seem that shareholding under Category I falls within the BIT regime, and consequently, injury sustained in relation to that shareholding is actionable, subject to the merits of the claim. Category II investments, however, pose an additional problem that of extent of ownership. Article 2 prescribes a strict requirement that intermediary entities must be wholly owned (emphasis supplied). While a fair reading of the BIT may allow indirect claims, Category II investments involve an entity that is not wholly owned. A literal interpretation under Article 31 of the VCLT would require that specific, clear and unambiguous prescriptions be

19 20

SGS Socit Gnrale de Surveillance S.A. v. Republic of the Philippines (Jurisdiction) ICSID Case No.ARB/02/6 116.

The Preamble to the India-Netherlands BIT incorporates a similar sentiment: to extend and intensify the economic relations Recognising that reciprocal protection of such investments under an agreement will subserve the aforesaid objective and will be conducive to the stimulation of individual business initiative
21

Siemens A.G. v. Argentine Republic, ICSID (W. Bank) Case No. ARB/02/8 137; Socit Gnrale v. Dominican Republic LCIA Case No. UN 7927 48, 51; Encana Corp. v. Ecuador LCIA Case No. UN 3481 115; Waste Management v. United Mexican States (Award) UNCITRAL (2004) 80, 85; Azurix Corp. v. Argentine Republic ICSID Case No. ARB/01/12 73-74; Lauder v. Czech Republic 2001 WL 34786000.
22 23

RosInvest Co UK Ltd. v. The Russian Federation SCC Case No. Arb. V079/2005.

Similar reasoning was adopted by the Tribunal respect to the requirement of control in Aguas Del Tunari, S.A. v. Republic of Bolivia ICSID Case No. ARB/02/3 299-323.

12

followed; as a contrary interpretation would render the words wholly owned otiose. Indeed, Tribunals have been reluctant to accept such an interpretation in the past. Thus, while the issue may be arguable, we believe that the weight of authority cited above falls against the inclusion of Category II investments under Article 2.24 While the Indian stance is not clear in the absence of a formal reply to the Notice of Dispute, officials in the Indian Government have disputed the presence of an investment in the territory of India. A Finance Ministry Official is quoted as arguing: The deal happened in Cayman Islands and they are invoking India-Netherlands BIPA while in the Supreme Court Vodafone said that the deal happened outside India, under BIPA it is saying it has made substantial investment in India.25 However, we believe that this line of argumentation is incorrect. Arbitral practice recognizes that that municipal law regime and the international law regime represent two distinct legal orders.26 While a fact may be true in one regime, it may not be so in the other. Undoubtedly, Vodafone argued and the Indian Supreme Court agreed that the transaction has no nexus with the underlying assets in India.27 This position, however, is correct with respect to Indian law, or specifically, the Income Tax Act, 1961. The legal regime applicable to determine the presence or absence of an investment in a possible arbitration is not the Income Tax Act, but rather, the provisions of the India-Netherlands BIT. Indeed, the presence of Article 2 in the BIT specifically allows such claims and renders the investment as one within the scope of the BIT, independent of its characterization in a domestic law proceeding. This question touches upon the relevance of the decision of the Indian Supreme Court, which we deal with in the following section. C. THE DECISION OF THE INDIAN SUPREME COURT The Indian Supreme Courts decision on the tax liability of Vodafone is crucial, no doubt. However, its treatment in international law is to be closely studied. The international and domestic legal norms are especially in relation to
24

Though broad, the reasoning in arbitral practice limits itself to the text of the treaty. See Encana Corp. v. Ecuador LCIA Case No. UN 3481 115; Waste Management v. United Mexican States (Award) UNCITRAL (2004) 80, 85; Azurix Corp. v. Argentine Republic ICSID Case No. ARB/01/12 73-4.
25

Vodafone-Type Deals Taxed Globally, says Gujral, The Hindu, April 20, 2012, <http://www.thehindu.com/business/companies/article3333211.ece> (last accessed on 22nd July, 2012).
26

available

at

Impregilo S.p.A v. Republic of Pakistan ICSID Case No. ARB/04/19 254 (even if the two perfectly coincide, they remain analytically distinct, and necessarily require different enquiries.)
27

Vodafone International Holdings B.V. v. Union of India & Anr., Civil Appeal No. 733 of 2012, arising out of S.L.P. (C) No. 26529 of 2010, Supreme Court of India 187.

13

investment law distinct, and incorporate rights and obligations within their own structures. 28 Often, they do interact and define rights and obligations by reference to the other. 29 For example, the principle of legitimate expectations under the rubric of fair and equitable treatment views state conduct vis--vis rights vested in domestic law.30 In this background, the Indian Supreme Court operates in the municipal regime. On the international place, its acts are acts of the State.31 Indeed, Article 4 of the International Law Commissions Articles on State Responsibility stipulates that [t]he conduct of any State organ shall be considered an act of that State under international law, whether the organ exercises legislative, executive, judicial or any other functions. Here, the question concerns the status of Vodafones indirect interests. The Indian Supreme Court held that these interests lie outside the tax jurisdiction of India under the Income Tax Act, 1961. Does this holding of the Court, or its reasoning, have a bearing upon conclusions reached in international investment law? The answer closely relates to the specific norm in question. At one level, the process of characterizing indirect interests under the Income Tax Act and the BIT are distinct exercises. While Vodafone vigorously argued the lack of a connection between its shareholding and the Indian tax jurisdiction during the Supreme Court hearings an argument which the Court accepted, this does not affect a characterization under Article 2 of the Treaty, which prescribes a distinct framework. In the ELSI case, a Chamber of the International Court of Justice emphasized this very fact, stating that: Compliance with municipal law and compliance with the provisions of a treaty are different questions. What is a breach of treaty may be lawful in the municipal law and what is unlawful in the municipal
28

SGS Socit Gnrale de Surveillance S.A. v. The Republic of Paraguay (Decision on Jurisdiction) ICSID Case No. ARB/07/29; Impregilo S.p.A v. Republic of Pakistan ICSID Case No. ARB/04/19; SGS Socit Gnrale de Surveillance S.A. v. Islamic Republic of Pakistan (Decision on Jurisdiction) ICSID Case No. ARB/01/13; see MCLACHLAN, SHORE & WEIGNER, INTERNATIONAL INVESTMENT ARBITRATION: SUBSTANTIVE PRINCIPLES Ch. I (2008).
29

See Crawford, Commentary to International Law Commission Draft Articles on State Responsibility, 2(2) Y.B. INTL. L. COM. 40 (2001) (In every case it will be seen on analysis that either the provisions of internal law are relevant as facts in applying the applicable international standard, or else that they are actually incorporated in some form, conditionally or unconditionally, into that standard.)
30

See Schill, Fair and Equitable Treatment, the Rule of Law, and Comparative Public Law in SCHILL (ED.), INTERNATIONAL INVESTMENT LAW AND COMPARATIVE PUBLIC LAW 151 (2010).
31

Crawford, Commentary to International Law Commission Draft Articles on State Responsibility, 2(2) Y.B. INTL. L. COM. 40 (2001) (No distinction is made for this purpose between legislative, executive or judicial organs); Difference Relating to Immunity from Legal Process of a Special Rapporteur of the Commission on Human Rights (Advisory Opinion) [1999] ICJ Rep 62 62 (According to a well-established rule of international law, the conduct of any organ of a State must be regarded as an act of that State.)

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law may be wholly innocent of violation of a treaty provision. Even had the Prefect held the requisition to be entirely justified in Italian law, this would not exclude the possibility that it was a violation of the FCN Treaty.32 Further, the Chamber explained: the fact that an act of a public authority may have been unlawful in municipal law does not necessarily mean that that act was unlawful in international law, as a breach of treaty or otherwise. A finding of the local courts that an act was unlawful may well be relevant to an argument that it was also arbitrary; but by itself, and without more, unlawfulness cannot be said to amount to arbitrariness Nor does it follow from a finding by a municipal court that an act was unjustified, or unreasonable, or arbitrary, that that act is necessarily to be classed as arbitrary in international law, though the qualification given to the impugned act by a municipal authority may be a valuable indication.33 At another level, the fact that the Supreme Court negated Vodafones tax liability under the original tax framework is extremely relevant. Acting as a state organ, a clear representation by the judiciary that the legislative framework at the time did not, and objectively so, tax such transactions is an important fact in the determination of substantive claims. 34 International law does not appraise the precise reasoning behind judicial acts, or sit in appeal over judgments.35 Indeed, a standard of review is to be adopted in relation to claims of denial of justice; however, in other instances, at least in relation to our present discussion, the decision of the Supreme Court and its related remarks are important as acts of a state organ charged with the interpretation and application of domestic law.

32

Difference Relating to Immunity from Legal Process of a Special Rapporteur of the Commission on Human Rights (Advisory Opinion) [1999] ICJ Rep 62 62; Elettronica Sicula S.p.A. (ELSI) [1989] ICJ Rep 15 73.
33 34

Elettronica Sicula S.p.A. (ELSI) [1989] ICJ Rep 15 74.

See Crawford, Commentary to International Law Commission Draft Articles on State Responsibility, 2(2) Y.B. INTL. L. COM. 40 (2001) (Especially in the fields of injury to aliens and their property and of human rights, the content and application of internal law will often be relevant to the question of international responsibility.)
35

BROWNLIE, PRINCIPLES OF PUBLIC INTERNATIONAL LAW 530 (7th edn., 2008); KLGER, FAIR AND EQUITABLE TREATMENT IN INTERNATIONAL LAW 245 (2011) ( international tribunals are not supposed to act as appellate courts reviewing decisions upon very fine points of national law.)

15

III. ARTICLE 4(4): EXCLUSION OF TAXATION MATTERS

Several treaties exclude state action in certain matters of municipal law from the purview of the Bilateral Investment Treaty. Indeed, states are free to do so, but the nature and extent of the exclusion must be analysed. Article 4(4) of the India-Netherlands BIT is in this fold. It states: The provisions of paragraphs 1 and 2 in respect of the grant of national treatment and most favoured nation treatment shall also not apply in respect of any international agreement or arrangement relating wholly or mainly to taxation or any domestic legislation or arrangements consequent to such legislation relating wholly or mainly to taxation. This article has led to some confusion amongst legal circles. Some have argued that the amendment contained in Section 3(iv) of the Finance Act is a taxation measure, and thus, excluded from the BIT. 36 However, we believe this position is incorrect. Article 4(4) does not exclude taxation measures in toto from the BIT, such that the Arbitral Tribunals jurisdiction to consider the validity of taxation measures as against the substantive protections in the BIT is wholly excluded. Rather, this exclusion is limited in express terms to the norms of national treatment and most favoured nation treatment (incorporated in paragraphs one and two). Vodafones BIT Notice does not claim a violation of these norms, but rather, it claims an expropriation of investment, violation of the fair and equitable standard, etc. Further, the purpose of the exclusion in Article 4(4) is to disallow investors from relying upon tax treaties between India and third states (or any Indian legislation consequent to such treaty) to their benefit through the national treatment and most favoured nation standards, where such benefit is intended solely for investors from third states. Indeed, no such beneficial tax treaty exists here, nor is the rationale applicable by analogy as the substantive norms relevant to the Vodafone Dispute are defined under the treaty and in customary international law in absolute terms, rather than in relation to the treatment accorded to others. As Walde and Kolo note, if a contracting party accords special advantage to investors of any third state by virtue of an agreement on the avoidance of double taxation, it shall not be obliged to accord such advantages to investors of the other contracting party.37 Indeed, such an interpretation is consistently
36

This topic was debated in some detail at the International Arbitration Conference organized by the National Law School, Bangalore. Participants at the Conference took conflicting views on the scope of Article 4(4), and the ensuing discussion within the Panel has informed our analysis greatly. For this, we are grateful to them.
37

Wlde & Kolo, Coverage of Taxation under Modern Investment Treaties in MUCHLINSKE, ORTINO & SCHREUER (EDS.), THE OXFORD HANDBOOK OF INTERNATIONAL INVESTMENT LAW 305, 325 (2008).

16

applied to other bilateral investment treaties with similar formulations.38 In fact, this interpretation is expressly clarified in Article 7 of the UK-Argentina BIT.39 In contrast, several treaties contain provisions which would be sufficient to exclude a review of municipal taxation measures. 40 For example, Article XII of the Canada-Ecuador Agreement for the Promotion and Reciprocal Protection of Investments states: Except as set out in this Article, nothing in this Agreement shall apply to taxation measures.41 This clause was considered by the tribunal in EnCana Corporation v. Educator,42 and interpreted to exclude a review of all substantive assurances given the absence of specific limitations. Thus, under that standard, if considered under this treaty, the Vodafone amendment may be excluded from the scope of the BIT. The IndiaNetherlands BIT, however, falls within the first category, and is markedly different. Accordingly, a review of taxation measures is not precluded in this case, although arbitral tribunals are undoubtedly deferential to the sovereign prerogative of a state to impose taxes. This caution, however, does not translate to a complete exclusion of review.

38

Article 3(6) China-Netherlands BIT; Article 3(4) Germany Model BIT; Article 7 UK Model BIT; Article 4 Netherlands Model BIT; Articles 21(3)(a) and (7)(a) Energy Charter Treaty; Article 3(4) Japan-Turkey BIT; Article 4 Korea-Bolivia BIT; Article 4(1)(b) Brazil-Finland BIT; Article 4(3) Lithuania-Kuwait BIT; Article 7 UK-Angola BIT; Article 2(4) KazakhstanTurkey BIT; Article 7 UK-Vanuatu BIT; Article 3(3)(b) Saudi Arabia-Malaysia BIT; Article 3(2)(b) Egypt-Malaysia BIT; Article 7 Korea-Nigeria BIT; Article 3(3) Chile-UK BIT; also see, Wlde & Kolo, Coverage of Taxation under Modern Investment Treaties in MUCHLINSKE, ORTINO & SCHREUER (EDS.), THE OXFORD HANDBOOK OF INTERNATIONAL INVESTMENT LAW 305, 325-6 (2008).
39

Article 7 of the treaty, United Kingdom Treaty Series No. 25 (1967), Cmnd. 3255, states: The provisions of this Agreement relative to the grant of treatment not less favourable than that accorded to the investors of either Contracting Party or to the investors of any third State shall not be construed so as to oblige one Contracting Party to extend to the investors of the other the benefit of any treatment, preference or privilege resulting from (a) any existing or future customs union, regional economic integration agreement or similar international agreement to which either of the Contracting Parties is or may become a party, or (b) the bilateral agreements providing for concessional financing concluded by the Republic of Argentina with Italy on 10 December 1987 and with Spain on 3 June 1988 respectively, or (c) any international agreement or arrangement relating wholly or mainly to taxation or any domestic legislation relating wholly or mainly to taxation.
40 41 42

Articles 2103(1) and 2103(4)(b) of the North American Free Trade Agreement. Article XII, Canada-Ecuador BIT, 2027 UNTS 196. EnCana Corp v. Republic of Ecuador (Award) LCIA Case No. UN3481 (2006).

17

IV.

INDIRECT EXPROPRIATION

Vodafone has claimed an indirect expropriation of its investment under the Notice of Dispute. This claim rests on Article 5 of the BIT, which reads as follows: (1) Investments of investors of either Contracting Party shall not be nationalised, expropriated or subjected to measures having effect equivalent to nationalisation or expropriation, hereinafter referred to as expropriation, in the territory of the other Contracting Party except in the public interest in accordance with law, on a non-discriminatory basis and against compensation. Such compensation shall represent the genuine value of the investments effected, shall include interest at a normal market rate until the date of payment, shall be effectively realizable without undue delay, and shall be freely convertible and transferable. (2) The investor affected shall have a right to review, under the laws of the Contracting Party making the expropriation, by a judicial or other competent and independent authority of that Contracting Party, of its case, of the valuation of its Investment, and of the payment of compensation, in accordance with the principles set out in paragraph (1). The Contracting Party making the expropriation shall make every endeavour to ensure that such review is carried out promptly. To recount, Vodafones claimed investment under the BIT is its shareholding in certain Indian entities. Accordingly, this claim translates to an alleged expropriation of its shares as distinct property held by it. Before addressing the facts of this case specifically, a brief outline of the law relating to expropriation will be helpful. A. THE CONTOURS OF EXPROPRIATION IN INTERNATIONAL LAW Broadly, the concept of expropriation involves a governmental taking of property for which compensation is required.43 The precise contours of an expropriation have troubled tribunals for close to a century, with one commentator noting the absence of a precise definition. 44 Indeed, the definitions of expropriation appearing in
43

For a comprehensive overview, see Higgins, The Taking of Property by the State 176 RECUEIL DES COURS 259 (1982). For recent trends, see Dolzer, Indirect Expropriation: New Developments? 11 N.Y.U. ENVT'L L. J. 64 (2002); Fortier & Drymer, Indirect Expropriation in the Law of International Investment: I Know it When I see It, or Caveat Investor 19(2) ICSID REVFILJ 293 (2004); United Nations Conference on Trade and Development, The Taking of Propety (UNCTAD Series on International Investment Treaties, 2000).
44

MCLACHLAN, SHORE & WEIGNER, INTERNATIONAL INVESTMENT ARBITRATION: SUBSTANTIVE PRINCIPLES 8.03 (2008).

18

investment treaties, including the India-Netherlands BIT, are of such a generality that they provide little guidance to parties or arbitral tribunals confronted by concrete cases.45 The formulation in Article 5 of the India-Netherlands BIT is similar to Article 1110 of the NAFTA, and other treaties.46 The breadth afforded by the language in most investment treaties has led to several arbitral decisions detailing the scope of an expropriation in international law. Accordingly, the development in this area of law must be largely traced to the decisions of the Iran-United State Claims Tribunals under the Algiers Accords and other arbitral awards since. 47 Here, we review some seminal decisions that have formed the basis of the law on expropriation. In Metalclad Corporation v. United Mexican States,48 the Tribunal noted: expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favor of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State. Accordingly, an expropriation may be direct or indirect.49 While a direct expropriation involves an outright transfer of title, the sophistication of regulatory regimes over the past decades has led to a decreased occurrence of direct expropriations. Rather, instances of the use of the administrative machinery of states to take property effectively, if not overtly, has arisen with greater frequency. As Walde and Kolo explain:
45

MCLACHLAN, SHORE & WEIGNER, INTERNATIONAL INVESTMENT ARBITRATION: SUBSTANTIVE PRINCIPLES 8.03 (2008) (language [of Article 1110(1) of NAFTA] is of such generality as to be difficult to apply in specific cases.)
46

US-Ukraine BIT; US-Argentina BIT; UK-Philippines BIT amongst others are relevant in this context; MCLACHLAN, SHORE & WEIGNER, INTERNATIONAL INVESTMENT ARBITRATION: SUBSTANTIVE PRINCIPLES 8.28-58 (2008).
47

For a historical context on the law relating to expropriation or nationalization, see Higgins, The Taking of Property by the State 176 RECUEIL DES COURS 259 (1982).
48 49

Metalclad Corporation v. United Mexican States ICSID Case No. CASE No. ARB(AF)/97/1103.

Indeed, a third category of measures tantamount to expropriation (as distinct from indirect expropriations) was noted by the Tribunal in Waste Management Inc. v. Mexico (Award) UNCITRAL (2004) 143 considering Article 1110 of the NAFTA. However, subsequently, in Feldman v. United Mexican States (Award) 7 ICSID Rep 341 (2002) 100, the Tribunal disagreed: indirect expropriation and tantamount to expropriation are functionally equivalent. Such linguistic differences have been unhelpful in clarifying the scope of an indirect expropriation, and we proceed on the basis that the via media approach in Feldman is correct.

19

[t]he economic role of the state has changed from direct intervention to an indirect rule. It is no longer the exercise of public ownership or direct commands to supervised private operators, but the manipulation of the levers of economic, environmental and fiscal regulation which are the main instruments to influence the economic environment.50 Indeed, that is Vodafones claim. It is not alleging a direct transfer of the ownership of its shares, but rather, an indirect expropriation of its property. What, then, is the scope of indirect expropriation in international law? In response to this question, Tribunals have fashioned several tests, and utilized determinants that prove an indirect expropriation, without any single dispositive test.51 Some broad principles are discernible from arbitral practice, though one must remember as several tribunals have also cautioned that the final outcome is closely linked to the facts of the particular case before the tribunal.52 To begin with, it is important to note that international law looks at the effect of the regulatory action to determine whether an expropriation has occurred, rather than the intention of the state.53 While proof of a mala fide intention may assist the investor, it is neither sufficient nor necessary.54 Rather, as the tribunal in Nykomb Synergistics noted, the decisive factor for drawing the border line towards expropriation must primarily be the degree of possession taking or control over the enterprise that the dispute measures entail.55 Thus, it is important to look at the resultant effect on the investors property. Here, one must refer to two documents that have influenced the definition of expropriation. The first is the 1961 Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens, which defines an expropriation as any such
50

Wlde & Kolo, Coverage of Taxation under Modern Investment Treaties in MUCHLINSKE, ORTINO & SCHREUER (EDS.), THE OXFORD HANDBOOK OF INTERNATIONAL INVESTMENT LAW 305, 307 (2008).
51 52

Dolzer, Indirect Expropriation: New Developments? 11 N.Y.U. ENVT'L L. J. 64 (2002).

MCLACHLAN, SHORE & WEIGNER, INTERNATIONAL INVESTMENT ARBITRATION: SUBSTANTIVE PRINCIPLES (2008) 8.90 (It is well settled in international law that the question of whether an expropriation has occurred is to be determined on a case-bycase basis.); in Tcnicas Medioambientales Tecmed, S.A. v. Mexico (2004) 43 ILM 133 (ICSID), the Tribunal noted that such actions have to be examined on a case-by-case basis
53

Tippets, Abbet, McMcarthy, Stratton v. TAMS-AFFA Consulting Engineers of Iran, the Government of the Islamic Republic of Iran (1983) Iran-USCRT 219, 226 (the form of the measures of control or interference is less important than the reality of their impact); CME v. Czech Republic Case No.10435/AER/ACS 604; Lauder v. Czech Republic 2001 WL 34786000 200.
54

Tippets, Abbet, McMcarthy, Stratton v. TAMS-AFFA Consulting Engineers of Iran, the Government of the Islamic Republic of Iran (1983) Iran-USCRT 219, 225; Harold Birnbaum v. Iran (1993) 29 Iran-USCRT 260, 270; Antione Biloune and Marine Drive Complex Ltd v. Ghana Investments Centre and the Government of Ghana (Award) 95 ILR 183 (1993).
55

Nykomb Synergistics Technology Holding AB v. Republic of Latvia (Award) SCC Case No. 118/2001 (2003) 4.3.1.

20

unreasonable interference with the use, enjoyment or disposal of property as to justify an inference that the owner thereof will not be able to use, enjoy or dispose of the property 56 The second is Article 3 of the 1967 OECD Drafting Convention on the Protection of Foreign Property that states: no Party shall take any measures depriving, directly or indirectly, of his property a national of another party.57 It is clear from these documents, as also arbitral practice that international law takes a material approach in such matters and looks towards the economic reality and not the legal form, in particular if the legal form is used to disguise the economic reality and intention.58 The necessary effect required, therefore, becomes crucial, because any interference is not rendered an expropriation, but only a significant interference. 59 Alternatively put, if the State authorized interference to a significant degree with the enjoyment of its use or its benefit, an indirect expropriation may be found.60 This standard is explained in several decisions, to which we now refer. In Eudoro, 61 the Tribunal noted: For an expropriation to occur, there must be actions that can be considered reasonably appropriate for producing the effect of depriving the affected party of the property it owns, in such a way that whoever performs those actions will acquire, directly or indirectly, control, or at least the fruits of the expropriated property. In Occidental, a case concerning indirect expropriation arising out of taxation (though a negative finding was recorded ultimately, the Tribunal agreed with the Claimant in that expropriation need not involve transfer of title to a given property, which was the distinctive feature of traditional expropriation under international law. It may of course affect the economic value of an investment.62

56

Sohn & Baxter, Convention on the International Responsibility of States for Injuries to Aliens, Draft No. 12, 55 AM. J. INTL. L. 545 (1961).
57

OCED, Drafting Convention on the Protection of Foreign Property and Resolution of the Council of the OCED on the Draft Convention (1976) available at <http://www.oecd.org/dataoecd/35/4/39286571.pdf> (last accessed on 22 July, 2012).
58

Wlde & Kolo, Coverage of Taxation under Modern Investment Treaties in MUCHLINSKE, ORTINO & SCHREUER (EDS.), THE OXFORD HANDBOOK OF INTERNATIONAL INVESTMENT LAW 305, 334 (2008).
59 60 61 62

CME Czech Republic BV v. Czech Republic (Partial Award) 9 ICSID Rep 121, 236. MCLACHLAN, SHORE & WEIGNER, INTERNATIONAL INVESTMENT ARBITRATION: SUBSTANTIVE PRINCIPLES 296 (2008). Mr. Eudoro Armando Olgun v. Republic of Paraguay ICSID Case No. ARB/98/5 (2001) 84. Occidental Exploration and Production Co v. Republic of Ecuador (Award) LCIA Case No. UN 3467 (UNCITRAL, 2004).

21

However, in Revere Copper,63 another case concerning expropriation through taxation, relief was granted. There, despite the presence of a stabilization clause in the investment agreement, the host state introduced an increase in taxation. The tribunal based its conclusion on the principle the measures had substantially the same impact on effective control, use and operation as if the properties were themselves conceded by a concession that was repudiated.64 Thus, although the investor maintained its mining lease and was in possession of the plant, its control and operation of its property was no longer effective in view of the regulatory action.65 It was further clarified in Pope & Talbot that reduced profits by themselves would not equate to sufficient interference.66 B. EXPROPRIATION BY TAXATION Thus, the question is: does retrospective taxation amount to substantial interference with Vodafones shareholding?67 Given the stringent threshold prescribed by international law, we believe that such a finding would be improbable. Undoubtedly, the profits resulting from Vodafones shareholding have been affected by the retrospective tax. However, Vodafone continues to exercise the rights arising out of its shareholding, as the underlying business continues to operate and profitably so, in fact. In Starrett Housing, the Iran-US Claims Tribunal held that it is recognized in international law that measures taken by a State can interfere with property rights to such an extent that these rights are rendered so useless that they must be deemed to have been expropriated, even though the State does not purpose to have expropriated them and the legal title to the property formally remains with the original owner. 68 However, the shareholding, presumably, remains extremely valuable. Vodafone remains in control of its investment, utilizing it for its day-to-day activities and without interference with the management or shareholders activities. These factors indicate an absence of expropriation.69
63 64 65

Revere Copper & Brass Inc v. Overseas Private Investment Corp (1980) 56 ILR 258 (1978). Ibid., 291.

For a review of the Revere Copper award, see MCLACHLAN, SHORE & WEIGNER, INTERNATIONAL INVESTMENT ARBITRATION: SUBSTANTIVE PRINCIPLES 8.89 (2008).
66 67

Pope & Talbot Inc. v. Government of Canada, 2002 WL 32824211.

One must remember here that the fact that a taking of that property by the host State may be legal under municipal law does not affect the question of whether the States conduct is expropriatory under international law. Article 3 of the International Law Commissions Articles on State Responsibility states: The characterization of an act of a State as internationally wrongful is governed by international law. Such characterization is not affected by the characterization of the same act as lawful by internal law.
68 69

Starrett Housing Corp et al v. Islamic Republic of Iran (Interlocutory Award) (1983) 4 Iran-USCTR 122, 154. Pope & Talbot Inc. v. Government of Canada (Interim Award) 7 ICSID Rep 69, 89 (2000).

22

Thus, although the profitability of its acquisition is no doubt reduced, it could hardly be claimed that the shareholding is rendered meaningless or its economic value effectively expropriated. In the words of the tribunal in EnCana, although Vodafone has suffered financially from the taxation, they were nonetheless able to continue to function profitably and to engage in the normal range of activities There is nothing in the record which suggests that the change in laws or their interpretation brought the companies to a standstill or rendered the value to be derived from their activities so marginal or unprofitable as effectively to deprive them of their character as investments.70 In fact, this is also supported, as we discuss in the next section, by the general deference of tribunals (as in the EnCana award) towards measures of taxation.71 However, we note that the determination of expropriation is a fact specific exercise (a self-professed fact across arbitral practice), and would depend largely on the harm demonstrated by Vodafone to the value of its shareholding. Nonetheless, the strict legal standards discussed above continue to apply, and the harm must necessarily be such that a significant interference can be inferred, rather than reduced viability of the investment. C. REASONABLY TO BE EXPECTED PROFIT The decision in Metalclad and subsequent arbitral practice have referred to the notion of reasonably to be expected economic profit.72 On this basis, Vodafone may claim that it is not receiving the economic profit that was reasonably expected.73 In fact, tribunals have linked the issue of legitimate expectation to expropriation. 74 However, while the issue of reasonable (or legitimate) expectations as to profits and regulatory measures in this case is itself subject to debate, and discussed later in this report, one must not conflate the measure of economic profit with the requirement of substantial interference. The two questions are distinct:75 while the first quantifies the profit, the second questions whether such profit, howsoever quantified, has witnessed a significant interference as per the
70 71

Encana Corp. v. Ecuador, LCIA Case No. UN 3481 174.

In EnCana, id., the tribunal noted that only in extreme cases will taxation which is general in its incidence be considered expropriation; SD Myers Inc. v. Government of Canada (First Partial Award) (UNCITRAL, 2001) 263 (determination must be made in the light of the high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders.); Feldman v. United Mexican States (Award) 7 ICSID Rep 341, 366-70 (2002).
72 73 74

Metalclad Corporation v. United Mexican States ICSID Case No. CASE No. ARB (AF)/97/1 103. See infra, Section V(C), 27 (Legitimate Expectations and Due Process).

Texaco Overseas Petroleum Co, California Asiatic Oil Co v. Government of the Libyan Arab Republic (Award) 53 ILR 389 (1979).
75

Encana Corp. v. Ecuador LCIA Case No. UN 3481 177.

23

strict standards discussed above. In fact, in International Thunderbird Gaming Corp v. Mexico,76 the tribunal recognized this distinction: the question is whether the foreign investor could reasonably have expected that the economic value of its property would have been lost in whole or significant party by the regulatory measures taken by the State. Accordingly, we believe that the standard of interference required for a positive finding of expropriation would be hard to justify in this case.

76

International Thunderbird Gaming Corp v. Mexico (UNCITRAL, 2006); Metalclad Corporation v. United Mexican States ICSID Case No. CASE No. ARB(AF)/97/1 103. Moreover, such an argument was raised by EnCana in a recently concluded arbitration. However, the tribunal dismissed the claim, stating: From the perspective of expropriation, taxation is a special category. In principle, a tax law creates a new legal liability on a class of persons to pay money to the State in respect of some defined class of transactions, the money to be used for public purposes. In itself such a law is not a taking of property; if it were, a universal State prerogative would be denied by a guarantee against expropriation, which cannot be the case. Only if a tax law is extraordinary, punitive in amount or arbitrary in its incidence would issues of indirect expropriation be raised. (EnCana Corp v. Republic of Ecuador (Award) LCIA Case No. UN3481 (2006) 177.)

24

V.

FAIR AND EQUITABLE TREATMENT

The second substantive breach claimed by Vodafone resides in Article 4(1) of the India-Netherlands BIT, incorporating the standard of fair and equitable treatment [FET]. Perhaps one of the most contested norms in international investment law, the legal standards applicable to FET claims necessarily depend on the context of the claim. Broadly though, and at the risk of gross generalization, the FET standard contemplates certainty and predictability in the actions of the host state.77 Indeed, the words by themselves are vague and do not provide any discernible concrete content to the principle. 78 In fact, one tribunal has characterized the norm as vague. 79 However, a deluge of arbitral practice has interpreted the norm in a multitude of ways, pointing to certain facts relevant to determine such claims. Nonetheless, the lack of a precise definition must be mistaken for lack of content.80 As the tribunal in GAMI noted:81 the standard is to some extent a flexible one which must be adapted to the circumstances of each case. Broadly, the FET standard can be categorized into a review of treatment of investors by administrative decisions, or a review of the decisions of local courts (or denial of justice). In this section, we deal with the first limb. A. THE SCOPE OF THE FET CLAUSE Tribunals (also also scholars) are divided between different readings of the FET standard. Is one to read the norm autonomously as it appears in the text of the treaty, requiring state actions to be fair and equitable in the ordinary or plain meaning of the terms: just, even-handed, unbiased and legitimate?82 Or is one to relate the norm to the more stringent international minimum standard in customary international law, which contemplates conduct that amounts to an outrage, to bad faith, to willful neglect of duty, or to an insufficiency of governmental action so far short of international standards that any reasonably and impartial man would readily recognize its inefficiency?83

77

Occidental Exploration and Production Co v. Republic of Ecuador (Award) LCIA Case No UN 3467 (UNCITRAL, 2004) 191; KLGER, FAIR AND EQUITABLE TREATMENT IN INTERNATIONAL LAW CH I (2011).
78 79 80

KLGER, FAIR AND EQUITABLE TREATMENT IN INTERNATIONAL LAW 3 (2011). CME v. Czech Republic Case No.10435/AER/ACS 273.

MCLACHLAN, SHORE & WEIGNER, INTERNATIONAL INVESTMENT ARBITRATION: SUBSTANTIVE PRINCIPLES 7.99-100 (2008).
81 82 83

GAMI Investments Inc. v. United Mexican States (2005) 44 ILM 545 96. Siemens v. Argentina, ICSID Case No.ARB/02/8 (2007) 290.

The latter standard is derived from the landmark decision in Neer, LHF & Pauline Neer (USA) v. United Mexican States (1926) IV RIAA 60 (hereinafter referred to as the Neer standard).

25

It would be incorrect to state that the two standards exhaust views on the FET standard. Indeed, a number of tribunals have fashioned other legal standards. For example, in SD Myers,84 the tribunal noted that a breach occurs when it is shown that an investor has been treated in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective. Alternatively, in MTD, the tribunal was concerned with treatment that does not affect the basic expectations of the investor.85 In fact, it is often possible that the difference between the two standards is slight in an application to a set of concrete facts.86 Accordingly, several tribunals have also decided to adopt a fact-specific inquiry and thus, negated any difference between the two standards. For example, the ICSID Tribunal in Waste Management87 made what it called a survey of standards of review applied by international tribunals dealing with complaints under Article 1105 (which incorporates the FET standard). It observed the emergence of a general standard for Article 1105.88 While this standard rejected the Neer test, it did not do so in favour of or to the exclusion of any other existing standard. Moreover, the varying formulations of the standard in BITs have given rise to debate. While some treaties refer to fair and equitable treatment simpliciter,89 certain others qualify the words with a reference of international law90 or customary international law.91 For example, the reference to international law in Article 1105 of the NAFTA led the Free Trade Commission to the conclusion that the Article does not require treatment in addition to or beyond that which is required by [the] minimum standard.92 Despite this, and typifying the prevailing uncertainty, the tribunals in Waste Management93 and Mondev94 favoured an autonomous reading to give effect to the words fair and equitable.

84 85

SD Myers Inc. v. Government of Canada (First Partial Award) (UNCITRAL) 2001 263.

MTD Equity Sdn Bhd & Anor v. Republic of Chile (2005) 44 ILM 91, 105-6; see also Tcnicas Medioambientales Tecmed, S.A. v. Mexico (2004) 43 ILM 133, 154.
86 87 88 89

KLGER, FAIR AND EQUITABLE TREATMENT IN INTERNATIONAL LAW 88 (2011). Waste Management Inc. v. United Mexican States (Preliminary Objections) 6 ICSID Rep 538. Waste Management Inc. v. United Mexican States (Preliminary Objections) 6 ICSID Rep 538 98.

For example, the India-Netherlands BIT; Ecuador-Canada BIT (arbitrated in the Occidental case); Netherlands-Czech Republic BIT (arbitrated in the CME case).
90 91 92 93 94

For example, Article 1105 of the North American Free Trade Agreement. For example, the US-Singapore Free Trade Agreement; US-Chile Free Trade Agreement. NAFTA Free Trade Commission, Notes of Interpretation (31 July, 2001). Waste Management Inc. v. United Mexican States (Preliminary Objections) 6 ICSID Rep 538. Mondev International Ltd. v. United States of America 42 ILM 85 (2002) 120-4.

26

Article 4(1) of the India-Netherlands BIT does not refer to international law or customary international law. Indeed, several tribunals have provided a broad understanding to similar FET clauses. 95 While this seems to be the predominant trend, it is by no means uncontested.96 Importantly, one must remember a simple reference to one standard or another does not assist beyond a point in deciding violations of the FET standard, given limitations to the norm generally admitted by tribunals and fact specific nature of the enquiry. 97 Accordingly, while an autonomous reading or instead a reference to the Neer standard may provide the framework in which the claim may be considered and perhaps influence the approach of the tribunal, one must recognize that cases have rarely been decided by reference to any single legal standard. Rather, the FET norm has through arbitral practice been classified into further categories, which provide greater specificity. It is to these norms that we now turn to, though mindful of the broader debate surrounding the meaning accorded to the FET clauses. B. NORMS INCORPORATED UNDER THE FET CLAUSE Prof. McLachlan notes that the review of administrative actions under the FET standard may be divided under the heads of due process requirements and protection of legitimate expectations. This classification is well-represented in arbitral decisions, and is useful to understand Vodafones claim in this case. C. LEGITIMATE EXPECTATIONS AND DUE PROCESS The standard of legitimate expectations, borrowed from municipal administrative law, has been described as the dominant element of the FET norm. 98 Before attempting to elaborate on the application of this multi-faceted standard to the facts of the present dispute, an understanding of the standard in its totality is essential. One of the clearest expositions of the principle is found in Tcnicas Medioambientales Tecmed, S.A. v. Mexico,99 decided under the Mexico-Spain BIT. There, the Tribunal noted:

95

Occidental Exploration and Production Co v. Republic of Ecuador (Award) LCIA Case No UN 3467 (UNCITRAL, 2004) 180; CME v. Czech Republic Case No.10435/AER/ACS 24-5; Lauder v. Czech Republic 2001 WL 34786000 193; Siemens A.G. v. Argentine Republic ICSID Case No. ARB/02/8 273.
96 97

Genin, Eastern Credit Ltd Inc and AS Baltoil v. Republic of Estonia (Award) 6 ICSID Rep 236, 367 (2001).

Vasciannie, The Fair and Equitable Treatment Standard in International Investment Law and Practice 70 BRIT. Y.B. INTL. L. 99, 103 (1999).
98 99

Saluka Investments BV (The Netherlands) v. Czech Republic (Partial Award) (UNCITRAL, 2006) 302. Tcnicas Medioambientales Tecmed, S.A. v. Mexico (2004) 43 ILM 154 (ICSID).

27

The Arbitral Tribunal considers that this provision of the Agreement, in light of the good faith principle established by international law, requires the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment Any and all State actions conforming to such criteria should relate not only to the guidelines, directives or requirements issued, or the resolutions approved there under, but also to the goals underlying such regulations. The foreign investor also expects the host State to act consistently, i.e. without arbitrarily revoking any pre-existing decisions or permits issued by the State that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial and business activities. The investor also expects the State to use the legal instruments that govern the actions of the investor or the investment in conformity with the function usually assigned to such instruments, and not to deprive the investor of its investment without the required compensation. In fact, failure by the host State to comply with such pattern of conduct with respect to the foreign investor or its investments affects the investors ability to measure the treatment and protection awarded by the host State and to determine whether the actions of the host State conform to the fair and equitable treatment principle. Indeed, a similar sentiment was expressed by the Indian Supreme Court in its judgment in the Vodafone case as well, in the following words: Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner Investors should know where they stand.100 This concern with the stability of the legal and business framework is central to the FET clause. In Occidental,101 the tribunal noted: [t]he stability of the legal and business environment is thus an essential element of fair and equitable treatment. As an extension of this sentiment, the principle of legitimate expectations protects the actions the investor took in reliance on [the] undertaking provided by the host state.102 While in CME, the fact that Argentina entirely transform[ed] and alter[ed] the legal and business environment was relevant,103 the tribunal in Metalclad was concerned with the effect of specific representations made by the host state.104
100

Vodafone International Holdings B.V. v. Union of India & Anr., Civil Appeal No. 733 of 2012, arising out of S.L.P. (C) No. 26529 of 2010, Supreme Court of India 91.
101

Occidental Exploration and Production Co v. Republic of Ecuador (Award) LCIA Case No UN 3467 (UNCITRAL, 2004) 183.
102 103 104

CME v. Czech Republic Case No.10435/AER/ACS 157. CME v. Czech Republic Case No.10435/AER/ACS 275. Metalclad Corporation v. United Mexican States ICSID Case No. CASE No. ARB(AF)/97/1.

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Broadly put, if an act of the host state creates a legitimate expectation on the part of the investor, the FET norm mandates that such expectations be protected. Accordingly, in this case, one must ask whether a legitimate expectation existed that the taxation regime would not be retrospective amended? Did the amendment contravene any specific or general representations made by the Indian Government? The broader question remains: What can a foreign investor legitimately expect? One answer is found in the decision in TecMed: The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations 105 Section 2(47) of the Income Tax Act, 1961 in its original form did not tax the Share Purchase Agreement. This was confirmed by the Indian Supreme Court. Given the facts narrated in that judgment, and indeed, the representations of the Government in those proceedings as well, the taxability of the transaction was an important factor considered by Vodafone in making the investment. For the purpose of international law, the acts of any state organ (including the judiciary) are attributable to that state. 106 Was the original representation in the Income Tax Act, confirmed by the judgment of the Supreme Court, disregarded by the Indian Government by retrospectively amending the legislation? One must remember here, as the tribunal in Occidental emphasized, that the relevant legal question under international law was not whether there was an obligation to refund VAT, but whether the legal and business framework met the requirements of stability and predictability. 107 The arbitral tribunal considering this dispute is not an appellate court considering a tax matter,108 and indeed, the precise correctness of the decision of the Supreme Court is irrelevant for that purpose.
105 106

Tcnicas Medioambientales Tecmed, S.A. v. Mexico (2004) 43 ILM 133 (ICSID) 154.

Article 4 of the International Law Commissions Articles on State Responsibility states: 1. The conduct of any State organ shall be considered an act of that State under international law, whether the organ exercises legislative, executive, judicial or any other functions, whatever position it holds in the organization of the State, and whatever its character as an organ of the central Government or of a territorial unit of the State. 2. An organ includes any person or entity which has that status in accordance with the internal law of the State. Professor Crawford, in his Commentary to the Draft Articles, 2(2) Y.B. INTL. L. COM. 40 (2001), notes that [n]o distinction is made for this purpose between legislative, executive or judicial organs.
107

Occidental Exploration and Production Co v. Republic of Ecuador (Award) LCIA Case No UN 3467 (UNCITRAL, 2004) 191.
108

International Thunderbird Gaming Corp v. Mexico (UNCITRAL, 2006) 145 (Having considered recent investment case law and the good faith principle of international customary law, the concept of legitimate expectations relates, within the context of the NAFTA framework, to a situation where a Contracting Partys conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct, such that a failure by the NAFTA Party to honour those expectations could cause the investor (or investment) to suffer damages. That is self-evidently a matter covered by the phrase taxation measures; and this Tribunal is not a court of appeal in, and (subject to the two exceptions set

29

Rather, one must determine whether the actions of the Indian state were consistent, and whether Vodafone could have expected as a matter of international law that the taxation regime would not be retrospectively amended? The question of consistency relates, in part, to the due process requirements incorporated in the FET standard as well. Indeed, both questions are related, and we shall deal with them together. At first instance, the decisions in Tcnicas Medioambientales Tecmed109 and others cases110 require that an investor knows beforehand any and all rules and regulations that will govern its investments. It would seem that the retrospective amendment violates this protection. Moreover, the international law prescription that a state act consistently is seemingly violated, with the Indian Supreme Court indicating (on a reading of a legislation enacted by the Indian Parliament) that the Indian state does not tax such transactions and the Parliament subsequently deciding otherwise. Indeed, the decisive factor in MTD was the inconsistency of conduct vis--vis the investor between State agencies: encouragement and approval of the investment by the Foreign Investment Commission on the one hand, and denial of necessary zoning permits on the other.111 At one extreme, the Indian Government may claim that these measures were not mala fide. However, it is well accepted in international law that the FET standard is objective and [does] not depend on whether the Respondent acted in good faith or not.112 Nonetheless, at other levels, some countervailing concerns are relevant to this issue. Such concerns are informed, in part, by developments in municipal law. In that regard, the English Courts have consistently linked the concept of legitimate expectations with a duty to act fairly in administrative decision-making. They have been more concerned to provide protection for specific representations made to individuals, rather than general policy statements.113 Similar sentiments have been expressed in the realm of international investment law. Thus, one must see whether Section 2(47) of the Income Tax Act was a representation capable of protection or a general policy statement?
out in Article XII) has no jurisdiction over taxation matters. It does not matter whether Ecuador is right or wrong about the fabricacion argument. It is a question to be settled by the taxation courts of Ecuador in accordance with the law of Ecuador.)
109 110 111

Tcnicas Medioambientales Tecmed, S.A. v. Mexico (2004) 43 ILM 133, 154. MTD Equity Sdn Bhd & Anor v. Republic of Chile (2005) 44 ILM 91, 105-6.

MTD Equity Sdn Bhd & Anor v. Republic of Chile (2005) 44 ILM 91 188; this factor, which is closely linked to the idea of transparency, was also treated as important in Occidental Exploration and Production Co v. Republic of Ecuador (Award) LCIA Case No UN 3467 (UNCITRAL, 2004).
112

Occidental Exploration and Production Co v. Republic of Ecuador (Award) LCIA Case No UN 3467 (UNCITRAL, 2004) 186.
113

MCLACHLAN, SHORE & WEIGNER, INTERNATIONAL INVESTMENT ARBITRATION: SUBSTANTIVE PRINCIPLES (2008) 7.112 (citing, inter alia, Preston v. Inland Revenue Commissioners [1985] 2 All ER 327, 342, per Lord Templeman; WADE & FORSYTH, ADMINISTRATIVE LAW 372-6, 500-5 (9TH EDN., 2004)).

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It would be difficult to classify the Income Tax Act either as a specific representation (a term used in international law) or as a general policy statement (a domestic law nomenclature). Specific representations usually require a specific mention by the host state in terms of a stabilization agreement, or an express assurance in another form. Indeed, this is not the case here.114 Neither can legislation, determining the obligations of parties to pay taxes be characterized as a general policy statement. However, the inconsistency in state action (despite the existence of specific assurance to the contrary) resulting from the retrospective creation of rights would tend towards the markers that indicate a violation of the standard. In a similar situation, the tribunal in Occidental concluded a violation of the FET standard as [t]he tax law was changed without providing any clarity about its meaning and extent, and the practice and regulations were also inconsistent with such changes. 115 As Prof. McLachlan comments, the basis for this decision was that the framework, under which the investment had been made and operated, was changed in an important manner by the actions adopted by the SRI.116 Indeed, similar considerations operate in this case. However, as noted before, certain limitations are prescribed within the FET standard. The obligations assumed by the state are tempered with a concern to allow regulatory freedom. Accordingly, on one hand, the investor must take the foreign law as he finds it. 117 On the other, the FET clause does not entitle an investor to a change of the normative framework of the country where it invests.118 As the Tribunal in Saluka observed:119 [n]o investor may reasonably expect that the circumstances prevailing at the time the investment is made remain totally unchanged. In order to determine whether frustration of the foreign investors expectations was justified and reasonable, the host States legitimate right subsequently to regulate domestic matters in the public interest must be taken into consideration as well. Most arbitral decisions are concerned with prospective changes to the regulatory regime. Indeed, unless the modification is arbitrary, or affects the basic expectations of the investor, the FET standard provides legitimate scope

114 115

Metalclad Corporation v. United Mexican States ICSID Case No. CASE No. ARB(AF)/97/1.

Occidental Exploration and Production Co v. Republic of Ecuador (Award) LCIA Case No UN 3467 (UNCITRAL, 2004) 184.
116 117

MCLACHLAN, SHORE & WEIGNER, INTERNATIONAL INVESTMENT ARBITRATION: SUBSTANTIVE PRINCIPLES 7.125 (2008).

For example, see, GAMI Investments Inc. v. United Mexican States (2005) 44 ILM 545 91 (International law does not appraise the content of a regulatory programmes extent before an investor decides to commit.)
118 119

MTD Equity Sdn Bhd & Anor v. Republic of Chile (2005) 44 ILM 91 205. Saulka Investments BV (The Netherlands) v. Czech Republic (Partial Award) (UNCITRAL, 2006) 305.

31

for regulatory flexibility. In this respect, incremental changes to taxation regimes are common in international practice, and as such, that would hardly amount to breach of an international obligation. Thus, the general tax framework does not create legitimate expectations of its future continuity. The question in this case, however, is can the legal framework existing at the time be retrospectively modified? The FET clause may not generate, in fault, expectations of its continuity. As the tribunal in MTD notes, [a]ll that an investor may expect is that the law be applied.120 The retrospective amendment to Section 2(47) of the Income Tax Act would seem to contravene this guarantee incorporated in Article 4(1) of the BIT. However, it would be unreasonable and perhaps incorrect as a matter of law to state that retrospective amendments, ipso facto, violate the FET standard. Countervailing public interest considerations may, no doubt, negate any liability. However, much would depend on context and one must analyse the facts of this dispute closely to determine whether a precipitant public purpose mandated the retrospective amendment. To begin with, one must note that rights created under domestic law, and made actionable by the BIT under Article 4(1) are not to be equated with a vested property right. 121 Moreover, one must take into account that the determination must be made in the light of the high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders. 122 Accordingly, the precise sufficiency of the public purpose must not be questioned as an appellate court, but rather, international would respect the regulatory flexibility of the host state to respond to changing circumstances in the public interest. 123 In this case, no change in circumstances (other than the decision of the Supreme Court interpreting Section 2(47)) seemingly mandated the amendment. The amendment is fashioned as an explanation or clarification to the existing law, putatively indicating that the law remains unchanged and consequently, demonstrating an absence of change in circumstances. While Finance Minister Mukherjee has offered several justifications for the amendment, including the Governments wish to prevent India from becoming a tax haven,124 these would best be described as policy changes resulting in legislative amendments, rather than factual changes mandating an amendment in the public interest. Indeed, one would assume that the legislature was aware of the objective scope of Section 2(47) as it existed, and
120

MTD Equity Sdn Bhd & Anor v. Republic of Chile (2005) 44 ILM 91 205; also see GAMI Investments Inc. v. United Mexican States (2005) 44 ILM 545 91 (The inquiry is whether the state abided by or implemented that programme.)
121 122 123

MCLACHLAN, SHORE & WEIGNER, INTERNATIONAL INVESTMENT ARBITRATION: SUBSTANTIVE PRINCIPLES (2008) 7.114. SD Myers Inc. v. Government of Canada (First Partial Award) (UNCITRAL) 2001 263.

Saluka Investments BV (The Netherlands) v. Czech Republic (Partial Award) (UNCITRAL, 2006) 305 (In order to determine whether frustration of the foreign investors expectations was justified and reasonable, the host States legitimate right subsequently to regulate domestic matters in the public interest must be taken into consideration as well.)
124

We Cannot Declare India a Tax Haven to Attract FDI: Pranab, The Hindu, May 8 2010, available at <http://www.thehindu.com/news/national/article3397628.ece> (last accessed on July 22, 2012).

32

accordingly, its consequences on the taxation of offshore transactions. While no single standard exists to determine the existence of a public purpose, the facts of the case in Genin125 may throw some light on the issue. In that case, the tribunal concluded that the host state did not violate the FET standard on account of revocation of licenses, considering it imperative to recall the particular context in which the dispute arose, namely, that of a renascent independent state, coming rapidly to grips with the reality of modern financial, commercial and banking practices and the emergence of state institutions responsible for overseeing and regulating areas of activity perhaps previously unknown.126 Further, the tribunal accepted Respondents explanation that the circumstances of political and economic transition prevailing in Estonia at the time justified heightened scrutiny of the banking sector. Such regulation by a state reflects a clear and legitimate public purpose.127 In this sense, it would be hard to argue that the amendment to Section 2(47) was necessitated in public interest. However, it would be apt to note that the definition of public purpose is not limited by that case and remains fluid, leaving considerable scope for argumentation. Indeed, it would be apt to state that tribunals respect state action relating to essential security interests, in economic or political terms128. Undoubtedly, investors bear certain risk on account of market forces and a consequent change in national economic or taxation policies.129 These larger, and no doubt legitimate, considerations that trigger state action pose inherent risks to foreign investment, but are not considered actionable. This reluctance to second-guess the decisions of state in core fiscal decisions (economic, taxation policies and the like) reflects a broader concern of public international law to respect fiscal sovereignty of states.130 For example, as Knechtle writes: Up to the present, there has been no internationally recognized principle in public international law which limits the sovereignty of states in fiscal matters Fiscal jurisdiction, i.e. sovereignty in the sphere of fiscal law means the non-derivative sovereignty of a state, which is in principle internally as well as externally unlimited. 131 Whilst this must be taken with a pinch of salt, given the emergence of restrictions prescribed under the body of international economic law, this central concern has informed the development of this body of law and prevented an over-reach by arbitral tribunals.

125 126 127 128 129

Genin, Eastern Credit Ltd Inc and AS Baltoil v. Republic of Estonia (Award) 6 ICSID Rep 236 (2001). Ibid. 348. Ibid. 370. See Vandevelde, A Unified Theory of Fair and Equitable Treatment 43 NYU J. INTL. L. & POL. 43, 80 (2010).

For example, see Saulka Investments BV (The Netherlands) v. Czech Republic (Partial Award) (UNCITRAL, 2006) 303; Lauder v. Czech Republic 2001 WL 34786000.
130

Martha, Extraterritorial Taxation in International Law in MEESSEN (ED.), EXTRATERRITORIAL JURISDICTION IN THEORY AND PRACTICE 19, 22-3 (1996); North Atlantic Coast Fisheries Case (Great Britain, United States) XI RIAA 167, 187 (1910).
131

Knechte, Basic Problems in International Fiscal Law 37 (1979).

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In fact, in the specific context of taxation, changes to the regulatory regime are accorded a great degree of deference in international law. As the Tribunal in EnCana noted: [i]n the absence of a specific commitment from the host State, the foreign investor has neither the right nor any legitimate expectation that the tax regime will not change, perhaps to its disadvantage, during the period of the investment. Of its nature all taxation reduces the economic benefits an enterprise would otherwise derive from the investment; it will only be in an extreme case that a tax which is general in its incidence could be judged as equivalent in its effect to an expropriation of the enterprise which is taxed.132 Similarly, the discussion in Feldman v United Mexican States,133 citing the Restatement Third, Foreign Relations Law of the United States134 notes that a state is not responsible for loss of property or for other economic disadvantage resulting from bona fide general taxation, regulation, forfeiture for crime, or other action of the kind that is commonly accepted as within the police power of states, if it is not discriminatory. While this general deference cannot be denied, it would be safe to remark that such comments contemplate prospective taxation. At the same time, one cannot rule out that the retrospective amendment is general in its incidence, and has an objective basis. These factors support a finding against a violation of the FET standard, and the tribunal must determine the weight accorded to these elements in light of the inconsistency in state action and legitimate expectations created. Indeed, it would be difficult, and perhaps an inaccurate description of the law, to attempt to provide a dispositive test to balance these countervailing considerations, or prioritize one. Thus, a host of factors indicate a possible violation of the legal assurances incorporated in Article 4(1) of the India-Netherlands BIT. At the same time, the general deference granted to general taxation measures is crucial, especially if they are objectively reasoned and non-discriminatory in their application as is the case here. While we do not offer any conclusive opinion in this section, it would seem that the inconsistency in state action would tend towards a finding in favour of violation of the FET norm.

132 133

EnCana Corp v. Republic of Ecuador (Award) LCIA Case No. UN3481 (2006) 173.

Feldman v. United Mexican States (Award) 7 ICSID Rep 341, 366 (2002) 197; Azurix Corp. v. Argentine Republic ICSID Case No. ARB/01/12 101-11.
134

Restatement Third, Foreign Relations Law of the United States, American Law Institute, Vol. II (1987) 712, comment (g).

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VI.

DENIAL OF JUSTICE

Vodafone contends that retrospective tax amendments135 result in a denial of justice under the India-Netherlands BIT obligations. Publicists differ on the interpretation of the term denial of justice.136 A restricted view is that denial of justice is limited to the refusal to grant access to courts. An expansive reading results in the inclusion of all arbitrary or wrongful conduct by the executive, legislature or the judiciary within this term.137 As recent investment arbitral practice indicates, tribunal have often gone beyond the narrow definition to term particular state actions as amounting to denial of justice. In Petrobart, interference by the government in court proceedings was considered to be a denial of justice.138 The contentions in AMTO that legislative acts influenced the judiciarys conduct, though not accepted, reveal increasing acceptance of a broader definition. 139 Given such acceptance, Vodafone can argue that legislatures conduct subsequent to the judicial ruling amounts to a denial of justice. Further, the objective of protection against denial of justice is to prevent unlawful treatment of foreign investors. 140 A logical extension of the objective includes legislations which negate a fair judicial ruling within the scope of the granted protection. Herein, the issue of exhausting local remedies (which arises in most cases of protection against denial of justice) is non-existent since the apex courts ruling has attained judicial finality.141 Thus, it is not possible for the government to take a stand that there are further local remedies which Vodafone can pursue before commencement of arbitration proceedings. Theoretically, since inappropriate taxation has been recognized to constitute indirect expropriation, government claims of legislative competence (combined within sovereign immunity) as a defence might stand on weak ground. However, the Government might justify the taxation policy 142
135

Without characterizing them as retrospective or retro-active, it suffices to say that the amendments to Section 9 of the Income Tax Act, 1961 negate the apex courts ruling in Vodafone.
136 137 138 139 140

Lissitzyn, The Meaning of the term Denial of Justice in International Law 30 AM. J. INTL L. 633-635 (1936). Eagleton, Denial of Justice in International Law 22 AM. J. INTL L. 538-541 (1928). Petrobart Limited v. Kyrgyztan SCC Award No 126/2003 (2005). AMTO LLC v Ukraine (Final Award) SCC Award No 080/2005 (2008).

Mavluda Sattarova, Denial of Justice Disguised? Investment Arbitration and the Protection of Investors from Judicial Misconduct INTL. & COMP. L. Q. 224-246 (2012).
141

See Loewen v. United States ICSID Case No ARB(AF)/98/3 (2003); Saipem v. Bangladesh ICSID Award No ARB/05/7 (2009).
142

Possibly, on the ground that Section 9 was always meant to be interpreted in this fashion and the Finance Act only codifies such legislative intention. Though, Finance Minister Mujherjees statements in Parliament would seem to cast doubt on this fact: I am fully aware of my right as a legislator, law-making power only vests in Parliament. The Supreme Court may

35

and prove that it subscribes to international standards (and even if not, it is within the sovereigns legislative competence to formulate such policy) to counter denial of justice claims. Strictly construed, Vodafones claims do not fall within a traditional conception of denial of justice. The present case does not involve any hindrance insofar as access to the judiciary is concerned.143 However, having recognized a broad definition, it is essential for the Government to limit the application of such a definition. In Mondev, the tribunal used international law to define the boundaries of denial of justice.144Azinian held that exercise of regulatory power in official functions cannot result in unlawful expropriation claims.145 Thus said, the amendments can be justified as an exercise of legislative authority. Vodafones counter would attack the amendment on account of nonconformance with international standards (and thereby, a violation of the guarantee for fair and equitable treatment). While this remains for the tribunal to determine, we have outlined the possible counters for a challenge to the amendments negating the Supreme Courts ruling.

interpret law but equally Parliament has right legislative right to express its intention by making amendment to correct the SC judgment (emphasis supplied) We Cannot Declare India a Tax Haven to Attract FDI: Pranab, The Hindu, May 8 2010 available at <http://www.thehindu.com/news/national/article3397628.ece> (last accessed on July 22, 2012).
143 144 145

Francioni, Access to Justice, Denial of Justice and International Investment Law EUR. J. INTL. L. 732-743 (2009). Mondev International Ltd v. United States of America ICSID (Additional Facility) Award No. ARB(AF)/99/2 (2002).

Robert Azinian, Kenneth Davitian and Ellen Baca v. United Mexican States ICSID (Additional Facility) Award No. ARB (AF)/97/2 (1999).

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VII. BREACH OF PREVIOUSLY PROVIDED ASSURANCES

In 2010, Indian Prime Minister Manmohan Singh addressed a letter to his British counterpart stating: I can assure you that Vodafone will have the full protection of law and access to the legal system in India. I also understand there is no retrospective application of taxation and a recent court judgment has affirmed this position. 146 The Indian Government has neither admitted nor denied this fact, and we will proceed on the basis that this assurance was provided by the Prime Minister in these terms. On the basis of this letter, Vodafone has claimed that the Indian Government is obliged to not breach previously provided assurances. In this, Vodafone seeks to argue that the retrospective amendment violates the Indian Prime Ministers statement. It may fashion its claim in two ways: first, as an obligation assumed by India under Article 4(5) of the BIT, or alternatively, as a unilateral binding undertaking or an undertaking enforceable by the principle of good faith/estoppel. We will proceed to examine the merits of both these approaches, and the legal principles applicable to the claim. A. A BINDING OBLIGATION UNDER ARTICLE 4(5) Article 4(5) of the BIT states: Each Contracting Party shall observe any obligation it may have entered into with regard to investments of investors of the other Contracting Party. Provided that dispute resolution under Article 9 of this Agreement shall only be applicable in the absence of a normal, local, judicial remedy being available. Article 4(5) is an umbrella clause, or a catch-all statement that conditions and privileges negotiated by the parties to an investment agreement will be protected by the treaty.147 Though relatively inconspicuous in arbitral practice till 2003, such clauses have recently acquired legal significance given the interpretation accorded to them by arbitral tribunals. Broadly, umbrella clauses internationalize contractual, and arguably other, commitments into treaty disputes, which may be litigated before the arbitral tribunal constituted under Article 9 of the BIT.

146

Pranabs Move to Amend Income Tax Act against PMs Assurance to Gordon Brown, India Today, April 3, 2012,available at <http://indiatoday.intoday.in/story/pranab-manmohan-income-tax-act-gordon-brown/1/182819.html> (last accessed on July 22, 2012); PM Assured No Retrospective Taxation, Times of India, March 30, 2012 available at <http://timesofindia.indiatimes.com/business/india-business/PM-assured-no-retrospectivetaxation/articleshow/12461124.cms> (last accessed on July 22, 2012). Indeed, the entire contents of this letter have not been revealed. Accordingly, the legal principles applicable and tentative conclusions drawn are contingent on the context of the letter and its precise wording.
147

SORNARAJAH, THE INTERNATIONAL LAW ON FOREIGN INVESTMENT 248 (2ND EDN., 2004).

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Arbitral opinion remains divided on the issue of umbrella clauses. Though the interpretation accorded to an umbrella clause is closely tied to its wording under Article 31 of the Vienna Convention on the Law of Treaties, most treaties contain a relatively similar formulation and thus, similar interpretative principles are applicable. Indeed, Article 4(5) of the India-Netherlands BIT is no different and closely resembles provisions in other treaties that have been the subject matter of arbitration in recent years. 148 Accordingly, a brief review at these arbitral opinions will be helpful. Broadly, two schools of thought prevail in arbitral practice, following the decisions in SGS v. Pakistan149 (SGS I) and SGS v. Philippines150 (SGS II). In SGS 1, the Tribunal rejected SGS extraordinary expansive reading of the umbrella clause, preferring to adopt a prudential approach that required greater specificity in order to impose international legal obligations under the BIT. 151 Moreover, the general nature of the clause (constantly [to] guarantee the observance) was insufficient to establish state consent, thus rendering the umbrella clause merely procedural. Alongside its textual reading, the Tribunal was persuaded by the consequence of a broad reading, which would render the provision susceptible of almost indefinite expansion, thereby opening the floodgates to numerous claims.152 The Tribunal in SGS II disagreed with the interpretation in SGS I, labeling it highly restrictive. 153 Here, the umbrella clause was substantially similar.154 In SGS II, the Tribunal noted that the term any obligation was allencompassing and did not require further qualification in order to meet the requisite standard of

148

For example, the Article 10(2) of the Switzerland-Philippines BIT stipulates that [e]ach Contracting Party shall observe any obligation it has assumed with respect to specific investments in its territory by investors of the other Contracting Party. This was considered in SGS Socit Gnrale de Surveillance S.A. v. Republic of the Philippines (Jurisdiction) ICSID Case No.ARB/02/6. Similarly, Article 3(4) of the Switzerland-Paraguay BIT states: Each Contracting Party shall observe any obligation it may have entered into with regard to investments of the other Contracting Party. This was considered in SGS Socit Gnrale de Surveillance S.A. v. The Republic of Paraguay (Jurisdiction) ICSID Case No. ARB/07/29 and BIVAC v. The Republic of Paraguay (Jurisdiction) ICSID Case No.ARB/07/9.
149 150 151

SGS Socit Gnrale de Surveillance S.A. v. Islamic Republic of Pakistan (Jurisdiction) ICSID Case No. ARB/01/13. SGS Socit Gnrale de Surveillance S.A. v. Republic of the Philippines (Jurisdiction) ICSID Case No.ARB/02/6.

SGS Socit Gnrale de Surveillance S.A. v. Islamic Republic of Pakistan (Jurisdiction) ICSID Case No. ARB/01/13 171.
152

SGS Socit Gnrale de Surveillance S.A. v. Islamic Republic of Pakistan (Jurisdiction) ICSID Case No. ARB/01/13 166.
153 154

SGS Socit Gnrale de Surveillance S.A. v. Republic of the Philippines (Jurisdiction) ICSID Case No.ARB/02/6 120.

As noted above, Article 11(2) of the Switzerland-Philippines Bilateral Investment Treaty stipulated that [e]ach Contracting Party shall observe any obligation it has assumed with respect to specific investments in its territory by investors of the other Contracting Party.

38

specificity. 155Second, the Tribunal referred to the object and purpose of the treaty, considering it legitimate to resolve uncertainties in the text in favour of the investor given the parties intention to create and maintain favourable conditions for investments.156 Since the two seminal decisions, a host of arbitral tribunals have been faced with similar questions, and a consistent answer has evaded international investment law. If Vodafone were to engage Article 4(5), the divide between a restrictive reading of umbrella clauses, 157 that views them only as procedural provisions, and an expansive reading,158 that views such clauses as embodying distinct international legal obligations, would no doubt become relevant. Vodafones claim would, thus, rest on an analysis of two legal claims. First, is Article 5(4) capable of supporting such non-contractual assurances based on the SGS I and SGS II decisions? And secondly, does the retrospective amendment violate this assurance and thus, engage international responsibility? The first question is to be judged as against the scope of the umbrella clause contained in the BIT. The wording of Article 5(5) is similar, though perhaps not identical, to the decisions cited above. Nonetheless, the Tribunal will be faced with the thorny issue of interpreting umbrella clauses in accordance with the SGS I or SGS II line of cases. However, it is pertinent to note that recent arbitral practice has supported an expansive reading of such clauses. For example, the latest decisions in BIVAC v. Paraguay 159 and SGS v. Paraguay 160 (the third SGS case) have internationalized municipal law obligations under the Switzerland-Paraguay Bilateral Investment Treaty.

155 156 157

SGS Socit Gnrale de Surveillance S.A. v. Republic of the Philippines (Jurisdiction) ICSID Case No.ARB/02/6 115. SGS Socit Gnrale de Surveillance S.A. v. Republic of the Philippines (Jurisdiction) ICSID Case No.ARB/02/6 116.

Joy Mining Machinery Limited v. The Arab Republic of Egypt ICSID Case No. ARB/03/11; Salini Construction S.p.A v. The Hashemite Kingdom of Jordan ICSID Case No. ARB/02/13; El Paso Energy International Company v. Argentine Republic ICSID Case No. ARB/03/15; Pan American LLC and BP Argentina Exploration Company v. Argentine Republic ICSID Case No. ARB/03/13.
158

Fedax N.V. v. Republic of Venezuela ICSID Case No. ARB/96/3; Consorzio Groupement L.E.S.I v. Democratic and Popular Republic of Algeria ICSID Case No. ARB/03/08; CMS Gas Transmission Company v. Argentine Republic ICSID Case No. ARB/01/8; Eureko B.V. v. Republic of Poland (Partial Award on Liability) Ad Hoc Investment Treaty Case (19th August 2005); Noble Ventures, Inc. v. Romania ICSID Case No. ARB/01/11; LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v. Argentine Republic ICSID Case No. ARB/02/1; Azurix Corp. v. Argentine Republic ICSID Case No. ARB/01/12.
159 160

BIVAC v. The Republic of Paraguay (Jurisdiction) ICSID Case No.ARB/07/9. SGS Socit Gnrale de Surveillance S.A. v. The Republic of Paraguay (Jurisdiction) Case No. ARB/07/29.

39

However, all decisions till date have focused on the elevation of contractual claims into treaty claims under the umbrella clause. Vodafones claim, however, rests on a non-contractual assurance and one must determine whether tribunals are willing to expand the scope of such clauses even further to include such unilateral assurances. Here, the decision in SGS III is of particular relevance.SGS argued that, in addition to contractual commitments, the Respondent made and broke additional promises to pay SGSs invoices through various oral and written representations during and after the term of the Contract. Claimant asserts that these additional representations are enforceable commitments under Article 11.161Though the Tribunal was not required to deal with the matter of extra-contractual commitments in the Merits Phase, the Tribunal noted in its Award on Jurisdiction that [o]ral and written representations outside the Contract could, therefore, be enforceable under Article 11 in certain circumstances,162 subject to proof of their binding nature. This question, however, is far from settled given the uncertainty in arbitral practice. Even if the Tribunal were to consider the Article 4(5) as capable of incorporating such obligations (referred to as commitments in the SGS II and SGS III decisions), Vodafone would be required to demonstrate that the letter indeed created an obligation. In order to do so, Vodafone would rely on the principles estoppel, unilateral binding undertaking and good faith under Indian law and general international law (both being applicable under Articles 13 and 15 of the BIT). Accordingly, this approach would conflate with the claim fashioned in its alternate sense, as noted above. The possible benefit of approaching under Article 4(5), as opposed to simply utilizing these principles, lies in the relative specificity of positive obligations assumed under the umbrella clause as opposed to the negative approach inherent in an estoppel or good faith claim. In reviewing general international law relevant to these claims, the second approach, as also the distinction between the approaches, will be studied in the following section. B. A CLAIM UNDER INDIAN LAW AND GENERAL INTERNATIONAL LAW The applicable law in arbitration is determined by the instrument containing the arbitration clause, in this case the India-Netherlands BIT. Indeed, the arbitral tribunal is constituted under the BIT and operates within that framework, from which it derives its power. Articles 11 and 13 of the BIT detail the applicable law in the following manner:

161 162

SGS Socit Gnrale de Surveillance S.A. v. The Republic of Paraguay (Jurisdiction) Case No. ARB/07/29 69. SGS Socit Gnrale de Surveillance S.A. v. The Republic of Paraguay (Jurisdiction) Case No. ARB/07/29 77.

40

Article 11: All investments shall, subject to this Agreement, be governed by the laws in force in the territory of the Contracting Party in which such investments are made. Article 13: If the provisions of law of either Contracting Party or obligations under international law existing at present or established hereafter between the Contracting Parties in addition to the present Agreement contain rules, whether general or specific, entitling investments by investors of the other Contracting Party to a treatment more favourable than is provided for by the present Agreement, such rules shall to the extent that they are more favourable, prevail over the present Agreement. Article 42 of the ICSID Convention,163 if invoked under Article 9(3) of the BIT, similarly notes: The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable. Again, Article 33 of the UNCITRAL Arbitration Rules defers to the determination of applicable law under the BIT: The arbitral tribunal shall apply the law designated by the parties as applicable to the substance of the dispute. Accordingly, the tribunals analysis will be informed by Indian law and general principles of international law. Within the framework of Indian law, the principle of estoppel is contained in Section 115 of the Indian Evidence Act, 1872: When one person has by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representative shall be allowed, in any suit or proceeding between himself and such person or his representative, to deny the truth of that thing. Whilst issues may arise as to whether the Prime Ministers letter was unconditional and demonstrated an intention to be bound, or indeed, whether estoppel creates a substantive cause of action or is limited to an evidentiary rule, a crucial prerequisite for estoppel to operate under Indian law is an act in reliance of the promise.164 Here, the Indian Prime Ministers assurance was made after

163 164

Convention on the Settlement of Investment Disputes between States and Nationals of Other States 575 U.N.T.S. 159.

Motilal Padampat Sugar Mills Co. Ltd. vs. State of UP (1979) 2 SCC 409; State of Jharkhand vs. Ambay Cements (2005) 1 SCC 368. Moreover, in Excise Commissioner vs. Ram Kumar (1976) 3 SCC 540, the Indian Supreme Court reiterated that it is now well settled by a catena of decisions that there can be no question of estoppel against the Government in the exercise of its legislative, sovereign or executive powers.

41

the investment by Vodafone. Accordingly, it would be difficult to prove the existence of an act in reliance of the Prime Ministers letter and thus, the principle of estoppel would seem to be inapplicable. A similar conclusion is apparent under general principles of international law relating to the doctrine of estoppel. Undoubtedly, estoppel is a general principle of international law; one that has been recognized across courts and tribunals. 165 Whilst international law has bypassed several technicalities of the doctrine in municipal law, it nonetheless requires reliance by the other party.166 As explained by the International Court of Justice in the Temple of Preah Vihar case:167 the principle operates to prevent a State contesting before that Court a situation contrary to a clear and unequivocal representation previously made by it to another state, either expressly or impliedly, on which representation that other State was, in the circumstances, entitled to rely and in fact did rely, and as a result that other State has been prejudiced or the State making it has secured some benefit or advantage for itself. Indeed, the Prime Ministers statement, even if considered unequivocal, was not relied upon by Vodafone in fact in relation to any investment. In fact, arbitral practice points is clear on the fact that protected expectations must rest on conditions or representations existing at the time of the investment, and not subsequently.168 However, as we noted above, the Prime Ministers assurance may be considered as a unilateral binding undertaking, independent of the other claims. The notion of unilateral binding undertakings is no doubt established under international law,169 based on the principle of good faith.170 However, its precise scope has been a vexed question.
165

See Reisman & Arsanjani, The Question of Unilateral Governmental Statements as Applicable Law in Investment Disputes 19 ICSID Rev-FILJ 328 (2004); also see NEWCOMBE & PRADELL, LAW AND PRACTICE OF INVESTMENT TREATIES 447-50 (2009).
166

Duke Energy International Peru Investments No. 1. Ltd v. Republic of Peru (Award) ICSID Case No ARB/03/28 334 (2008).
167 168

Temple of Preah Vihear (Cambodia v Thailand) (Merits) [1962] ICJ Rep 6, 39.

Southern Pacific Properties (Middle East) Limited (SPP) v. Arab Republic of Egypt (Award) 3 ICSID Reports 189 82-3; Saluka Investments BV (The Netherlands) v. The Czech Republic (Partial Award) (UNCITRAL, 2006) 329; Azurix Corp. v. Argentine Republic ICSID Case No. ARB/01/12 372; Siemens A.G. v. Argentine Republic ICSID Case No. ARB/02/8 299; Duke Energy International Peru Investments No. 1 Ltd v. Republic of Peru (Award) ICSID Case No ARB/03/28 334 (2008) 340, 347, 365, 366.
169

Legal Status of Eastern Greenland (Denmark v. Norway), PCIJ Series A/B No. 50 (1933) 50; Case Concerning the Arbitral Award made by the King of Spain on 23 December 1906 (Honduras v. Nicaragua) ICJ Reports 1960 192.

42

The relevant question largely revolves around the nature of the statement and the objective intention of its maker to be bound.171 As the International Court of Justice noted in Congo v. Rwanda, 172 the binding character is to be determined by its actual content as well as the circumstances in which it was made, requiring further that the declaration be made in clear and specific terms. International courts and tribunals have adopted a cautious attitude in considering unilateral undertakings as establishing binding obligations, mindful of not imposing obligations in the routine course of political exchanges.173 Accordingly, the context that triggered the statement and the burden it would impose are primary considerations. The sequence of events that led to the Prime Ministers letter must be considered here. Dr. Singhs letter was in response to two letters written by the British Prime Minister Gordon Brown, on December 9 and December 15, 2009, voicing concern over the retrospective amendment of the taxation regime. Allegedly, Brown had cautioned Singh at the time that taxing cross-border deals could affect India's investment climate by creating uncertainty for foreign investors.174 Dr. Singhs response, which we construct here from various sources, given the silence from the Prime Ministers Office, was in the following terms:175 I can assure you that Vodafone will have the full protection of law and access to the legal system in India. I also understand there is no retrospective application of taxation and a recent court judgment has affirmed this position.

170

Principle 1, Guiding Principles Applicable to Unilateral Declarations of States Capable of Creating Legal Obligations, Official Records of the General Assembly, Sixty-first session, Supplement No. 10 (A/61/10), Chapter LX, 27 July 2006 47 (When the conditions for this are met, the binding character of such declarations is based on good faith )
171

Nuclear Tests (Australia v. France) ICJ Rep 254 (1974) 51; Frontier Dispute (Burkina Faso/Republic of Mali) ICJ Rep 554 (1986) 39-40.
172

Case Concerning the Armed Activities on the Territory of the Congo (New Application: 2002) (Democratic Republic of Congo v. Rwanda) (Jurisdiction of the Court and Admissibility of the Application) ICJ Rep 6 (2006) 49.
173

Reisman & Arsanjani, The Question of Unilateral Governmental Statements as Applicable Law in Investment Disputes 19 ICSID RevFILJ 328 410-9 (2004).
174

Vodafone Issue: Manmohan Singh assured Gordon Brown on Retrospective Taxation, The Economic Times, March 30, 2012, available at <http://articles.economictimes.indiatimes.com/2012-03-30/news/31261179_1_vodafone-internationalholdings-bv-vodafone-hutchison-cross-border-deals> (last accessed on 12th August, 2012).
175

Id.

43

I would like to assure you that the Government of India is fully committed to providing a transparent and growth-oriented environment for profitable international investment. The nature of the precise clarification requested by Mr. Brown is unavailable to us. Indeed, the entire contents of the letter of the Indian Prime Minister are also not known. However, given the available information, it would be difficult to conclude that Dr. Singhs letter was in the form of a unilateral binding undertaking. The generality of Mr. Browns concern relating to the investment climate, and the equally indefinite response do not seem to be clear and specific.176 Indeed, the letter does not promise, or even contemplate, any check on future legislative action, but rather, addresses a factual situation as it existed then.177 The words do not lend to a reading that incorporates a guarantee that India would not amend its tax policy retrospectively in the interest of its public policy. The generality of the promise to grant full protection of law and the legal process limits the legal force of the Prime Ministers letter. Indeed, the crucial qualification in the letter that Dr. Singh understood no retrospective legislation to be in the pipeline speaks as to his personal knowledge of the existing factual situation, rather than an undertaking to maintain that status.178 Thus, while the Prime Ministers statement as discussed may be relevant in the context of the claim for violation of Article 4(1) of the BIT, we remain skeptical as regards its validity as an independent cause of action as claimed in the Notice of Dispute.

176

Case Concerning the Armed Activities on the Territory of the Congo (New Application: 2002) (Democratic Republic of Congo v. Rwanda) (Jurisdiction of the Court and Admissibility of the Application) ICJ Rep 6 (2006) 49.
177

Reisman & Arsanjani, The Question of Unilateral Governmental Statements as Applicable Law in Investment Disputes 19 ICSID RevFILJ 328, 414-6 (2004).
178

We are extremely grateful to Dr. Sreenivasa Rao Pemmaraju for his insight on the issue of unilateral binding undertakings.

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VIII. POSSIBLE REMEDIES

A crucial question in the possible arbitration will revolve around the nature of remedies available to Vodafone. In this section, we discuss possible provisional and final remedies. A. PROVISIONAL REMEDIES Pending a final award, Vodafone may request the tribunal for interim relief to prevent collection of taxes due under the amended Income Tax Act. Article 26 of the UNCITRAL Rules of Arbitration, 1976179 and Article 47 of the ICSID Convention180 both provide for the grant of interim measures. The question of provisional remedies has come before several investment tribunals and the International Court of Justice, and a consistent standard is evident across cases. The Respondent in Plama Consortium Limited v. Republic of Bulgaria181 proposed certain guidelines for the grant of provisional remedies, which were adopted by the tribunal. The relevant guidelines were: (a) an ICSID tribunal's authority to recommend provisional measures is limited to that which is necessary to preserve the right of a party. (c) A requesting party must demonstrate prima facie that it has the specified right. (e) The right to no aggravation of the dispute refers to preserving the efficacy of a final award on the basis of the claims presented. (f) Provisional measures are indicated to protect the substantive rights in dispute, not to enforce them. (g) A provisional measure must be necessary for the protection of the right in dispute. (h) Where any potential harm to a right is compensable, provisional measures are not indicated.

179

Article 26 of the Rules states: 1. At the request of either party, the arbitral tribunal may take any interim measures it deems necessary in respect of the subject-matter of the dispute, including measures for the conservation of the goods forming the subject-matter in dispute, such as ordering their deposit with a third person or the sale of perishable goods. 2. Such interim measures may be established in the form of an interim award. The arbitral tribunal shall be entitled to require security for the costs of such measures. 3. A request for interim measures addressed by any party to a judicial authority shall not be deemed incompatible with the agreement to arbitrate, or as a waiver of that agreement.
180

Article 47 of the 1965 Convention states: Except as the parties otherwise agree, the Tribunal may, if it considers that the circumstances so require, recommend any provisional measures which should be taken to preserve the respective rights of either party.
181

Plama Consortium Limited v. Republic of Bulgaria ICSID Case No. ARB/03/24 (Interim Relief) 12.

45

Indeed, most courts have adopted a similar approach, with the major dispute concerning the application of these legal standards to the facts of the case.182 In this case, both parties may dispute the presence of a prima facie case, aggravation of the dispute and other requirements. However, a major stumbling block is contained in the question of compensable harm. Tribunals have demonstrated,183 and rightly so, a reluctance to grant provisional relief especially one injuncting state action in essentially sovereign matters if the relief claimed is compensable in monetary terms. Here, the collection of taxes by India if found to be in violation of the terms of BIT would quite naturally be compensable by a monetary sum under the full reparation standard incorporated in the International Law Commission Articles on State Responsibility. 184 Indeed, this may include compensation for additional loss, over and above the value of the tax. However, in any case, it would seem that the collection of taxes is not an instance where potential damage is not compensable. In fact, in Greece v. Turkey,185 the International Court of Justice noted that the possibility of such a prejudice to rights in issue before the Court does not, by itself, suffice to justify recourse to its exceptional power under Article 41 of the Statute to indicate interim measures of protection, requiring further proof of irreparable prejudice which cannot be compensated by a monetary award. Moreover, tribunals have been apprehensive in relation to enjoining state action in core sovereign activities. As noted in SGS Socit Gnrale de Surveillance SA v. Pakistan: A Tribunal cannot enjoin a State from conducting the normal processes of criminal, administrative and civil justice within its own territory. We cannot, therefore, purport to restrain the ordinary exercise of these processes.186 Thus, it would seem unlikely that the tribunal will be persuaded to grant provisional remedies in this case. B. FINAL REMEDIES Remedies available in investment arbitration are varied; though for myriad reasons, tribunals have largely awarded only pecuniary remedies as opposed to non-pecuniary awards incorporating the principle of restitutio in integrum.

182

Case Concerning Passage Through the Great Belt (Finland v. Denmark) (Provisional Measures) ICJ Reports 12 (1991); United States Diplomatic and Consular Staff in Tehran ICJ Reports 19 (1979); Frontier Dispute ICJ Reports 8 (1986).
183

Case Concerning Passage Through the Great Belt (Finland v. Denmark) (Provisional Measures) ICJ Reports 12 (1991) 31; Plama Consortium Limited v. Republic of Bulgaria ICSID Case No. ARB/03/24 (Interim Relief) 12(h).
184

Article 31 of the International Law Commissions Articles on State Responsibility provides that [t]he responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act. Indeed, this may include compensation or restitution in kind.
185 186

Aegean Sea Continental Shelf Case (Greece v. Turkey) (Provisional Measures) ICJ Reports 3 (1976) 32.

SGS Socit Gnrale de Surveillance S.A. v. Islamic Republic of Pakistan (Procedural Order No. 2) ICSID Case No. ARB/01/13.

46

Given that Vodafones primary relief would be to recover the taxable amount, it may fashion its relief in monetary terms. Here, the question of valuation becomes relevant. However, before proceeding to those aspects, we will briefly discuss the possibility of non-pecuniary remedies in a possible arbitration. 1. NON-PECUNIARY REMEDIES Vodafone may request the tribunal to enjoin India from collecting taxes under the modified tax regime, rather than requesting compensation for the taxation. The latter course would allow India to collect taxes, though imposing an obligation to compensate Vodafone for the taxation. Indeed, the distinction between the two approaches may seem illusory for Vodafone from a practical standpoint, as it will retain or alternatively, recover the monetary amount in either case. However, from a symbolic point of view and indeed, to render the retrospective amendment null, the distinction may bear some relevance. To begin with, the ICSID Convention does not regulate substantive matters. Rather, Article 48 only prescribes that [t]he award shall deal with every question submitted to the Tribunal. However, Article 54 limits the enforcement of awards in the following manner: Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State. It is possible to argue that Article 54 limits the power of Tribunals to grant non-pecuniary remedies. A textual reading is not dispositive of that claim.187 In fact, the travaux preperatoires militate against such a restrictive reading. As Schreuer notes, [t]he deliberations during the drafting of the Convention show clearly that the restriction in Article 54 to pecuniary obligations was based on doubts concerning the feasibility of an enforcement of non-pecuniary obligations and not on a desire to prohibit tribunals from imposing such obligations. The drafts of the Convention did not contain the restriction to pecuniary obligations.188 The drafting history of the Convention supports this claim. The Chairman of the Drafting Committee, Aron Broches, clarified that despite the restriction in Article 54(1), tribunals were not enjoined from ordering the host state to perform or refrain from certain acts.189 However, without a treaty-based obligation to enforce such an award, the apprehension of ICSID Tribunals is clear notwithstanding their authority to grant such an award.190

187 188 189

Schreuer, Non-Pecuniary Remedies in ICSID Arbitration 20(4) ARBITRATION INTERNATIONAL 325 (2004). Schreuer, Non-Pecuniary Remedies in ICSID Arbitration 20(4) ARBITRATION INTERNATIONAL 325-6 (2004).

Broches, Awards Rendered Pursuant to the ICSID Convention: Binding Force, Finality, Recognition, Enforcement, Execution 2 ICSID REV-FILJ 287, 303-10 (1987).
190

For a general understanding, see Molinuevo, Legal Remedies in International Economic Disputes in MOLINUEVO (ED.), PROTECTING INVESTMENT IN SERVICES: INVESTOR-STATE ARBITRATION VERSUS WTO DISPUTE SETTLEMENT 221, 222-5 (2011).

47

In fact, Schreuer concludes:The fact that in the cases so far published, ICSID tribunals have nearly always framed the obligations imposed by their awards in pecuniary terms is not due to a belief that they lack the power to proceed otherwise. Rather, the cases involved situations in which the investment relationship had broken down and the claimants have preferred to frame their demands in monetary terms, or, that the performance of a non-pecuniary award is rendered impossible or impracticable.191 Here, the framework of the International Law Commissions Articles on State Responsibility192 is clear that restitution in kind is the primary remedy, which may be substituted by monetary compensation only in limited terms. It is useful here to quote the relevant articles: Article 34. Forms of reparation Full reparation for the injury caused by the internationally wrongful act shall take the form of restitution, compensation and satisfaction, either singly or in combination, in accordance with the provisions of this chapter. Article 35. Restitution A State responsible for an internationally wrongful act is under an obligation to make restitution, that is, to re-establish the situation which existed before the wrongful act was committed, provided and to the extent that restitution: (a) is not materially impossible; (b) does not involve a burden out of all proportion to the benefit deriving from restitution instead of compensation. Article 36. Compensation 1. The State responsible for an internationally wrongful act is under an obligation to compensate for the damage caused thereby, insofar as such damage is not made good by restitution. 2. The compensation shall cover any financially assessable damage including loss of profits insofar as it is established. However, arbitral practice demonstrates that non-pecuniary awards are rare, either because investors frame their remedy in terms of monetary compensation (thus precluding the issue), or the exceptions to Article 35 are engaged.193 The case of CMS Gas Transmission Company v. Argentina194 is a good example. There, the Tribunal accepted the primacy of restitution in international law. However, it noted, [i]n a situation such as that characterizing this dispute and the complex issues associated with the crisis in Argentina, it would be utterly unrealistic for the Tribunal to order the
191 192 193

Schreuer, Non-Pecuniary Remedies in ICSID Arbitration 20(4) ARBITRATION INTERNATIONAL 331 (2004). International Law Commission, Articles on State Responsibility 2(2) Y.B. INTL. L. COM. 40 (2001).

Molinuevo, Legal Remedies in International Economic Disputes in MOLINUEVO (ED.), PROTECTING INVESTMENT IN SERVICES: INVESTOR-STATE ARBITRATION VERSUS WTO DISPUTE SETTLEMENT 221, 223-4 (2011).
194

CMS Gas Transmission Company v. Argentine Republic ICSID Case No. ARB/01/8.

48

Respondent to turn back to the regulatory framework existing before the emergency measures.195 Whilst no emergency exists in this case, it would not be out of the ordinary for the tribunal to recognize that non-imposition of the tax would lead to a disruption of the legal regime of the host state, and involve an undue burden on the host state; an impractical remedy. At another level, tribunals are apprehensive about their inability to enforce an award incorporating restitution rather than compensation within the jurisdiction of the host state; a factor that no doubt contributes to the general reluctance to incorporate non-pecuniary awards. It would be likely that the tribunal in this arbitration will reflect these concerns, and award a non-pecuniary remedy even if such a claim is made by Vodafone.

2. VALUATION OF PECUNIARY REMEDIES It is largely incontrovertible in view of consistent tribunal practice that a wrong committed by one state against another gives rise to a right to compensation for the economic harm sustained. 196 This general principle is recorded in the International Law Commissions Articles on State Responsibility as well. Article 28 notes that [t]he international responsibility of a State which is entailed by an internationally wrongful act in accordance with the provisions of Part One involves legal consequences as set out in this Part. Article 31 further establishes the legal consequences in their most general presentation [t]he responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act. In the case of a positive finding of expropriation, well-developed arbitral jurisprudence indicates the availability of several means of calculating compensation using the prompt, adequate and effective standard.197 Indeed, tribunals have utilized based on the evidence of parties as to loss incurred several means of calculating compensation including the liquidation value, replacement value, book value and discounted cash flow. A comprehensive understanding of these methods may be found in the sources cited herein. In the case a positive finding of any substantive violation of the treaty other than expropriation, the decision in CMS offers guidance on the question of valuation:198 faced with a situation where, absent expropriation under Article IV, the Treaty offers no guidance as to the appropriate measure of damages or compensation relating to fair and equitable treatment and
195 196

CMS Gas Transmission Company v. Argentine Republic ICSID Case No. ARB/01/8 406.

SD Myers Inc. v. Government of Canada (First Partial Award) (UNCITRAL) 2001 311-2; also see MTD Equity Sdn Bhd & Anor v. Republic of Chile (2005) 44 ILM 91, 127.
197

For a broad overview, see MCLACHLAN, SHORE & WEIGNER, INTERNATIONAL INVESTMENT ARBITRATION: SUBSTANTIVE PRINCIPLES (2008) 9.04-77.
198

CMS Gas Transmission Company v. Argentine Republic ICSID Case No. ARB/01/8 409.

49

other breaches of the standards laid down in the cumulative nature of the breaches discussed here is best dealt with by resorting to the standard of fair market value. Indeed, the standard of fair market value is not set in stone. Usually used in reference to expropriatory breaches, this method finds use elsewhere only when the effect of the breach is similar to an expropriation. As the Tribunal in Feldman explained, [i]t is obvious that in earlier cases, which as here involved nonexpropriation violations of Chapter 11, the tribunals exercised considerable discretion in fashioning what they believed to be reasonable approaches to damages consistent with the requirements of NAFTA.199 Whilst valuation would largely depend on the heads of damage enumerated by Vodafone, it would be likely that Vodafone will request payment of the tax amount. This would no doubt constitute injury within the meaning of Articles 34 and 36; however, further consequential loss may be claimed by Vodafone (to be subsumed under the full reparation standard) based on commercial factors and opportunities lost to it (if at all) by reason of such taxation. Here, we will not attempt to predict the possible damage that may be claimed, but rather, briefly provide the legal regime regulating the grant of compensation. The decision in SD Myers is a useful starting point. Operating under the NAFTA regime, the tribunal referred to the general prescription contained in Article 1135 that an investor may submit to arbitration a claim that. . . the enterprise has incurred loss or damage by reason of, or arising out of, that breach. Thus, the Tribunal went on to assess the compensation payable to SDMI on the basis of the economic harm that SDMI legally can establish ,200 also accepting Canadas submissions on the requirement of a sufficient causal link.201 This approach was further explained in the Second Partial Award on Damages. The Tribunal concerned itself with the loss of opportunity incurred by the Claimant on account of the breach. The window of opportunity, as the Tribunal put it, determines Claimants potential to earn an income stream 202 and forms the basis for compensation. This approach also lends support to the well-accepted approach in investment arbitration, and indeed, public international law generally, that compensation for material losses includes both the loss suffered (damnum emergens) and the loss of profits (lucrum cessans).203 The test remains one of causation, and has been explained by tribunals in numerous formulations. Bemhard Graefrath notes that the basis for any decision of whether damage may be regarded as the consequence of

199

Feldman v. United Mexican States (Award) 7 ICSID Rep 341, 366 (2002) 197; Azurix Corp. v. Argentine Republic ICSID Case No. ARB/01/12 421.
200 201 202 203

SD Myers Inc. v. Government of Canada (First Partial Award) (UNCITRAL, 2001) 317. SD Myers Inc. v. Government of Canada (First Partial Award) (UNCITRAL, 2001) 116. SD Myers Inc. v. Government of Canada (Second Partial Award) (UNCITRAL 2002) 98.

AGIP S.p.A v. Peoples Democratic Republic of Congo ICSID Case No. ARB/77/1 98; for a comprehensive understanding, see LIPINSKY & WILLIAMS, DAMAGES IN INTERNATIONAL INVESTMENT LAW 107-8 (2008).

50

the violation of a law is uninterrupted and surveyable causality.204 However, in order to ensure a limitation on the amount of damages a sentiment agreed upon in cases of international delicts, or in Prof. Graefraths words in order to avoid growing to infinity, compensation is usually recoverable by reference to proximate cause, adequate causality, ordinary course of events, the cause must not be too remote or speculative, or alternatively, there must be a sufficiently direct causal relationship.205 Accordingly, any additional compensation claimed by Vodafone for loss arising out a breach of the BIT must conform to these standards.

204

Bernhard, Responsibility and Damages Caused: Relationship between Responsibility and Damages 185 RECUEIL DES COURS 9, 95 (1984).
205

Ibid., 95-6.

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IX. ISSUES CONCERNING ENFORCEMENT

Once the arbitral tribunal has given a final award, it would be essential to consider the mechanisms available to Vodafone to enforce that award. This section makes two key assumptions first, that the arbitral tribunal has given an award in Vodafones favour and; secondly, that the Indian Government has refused to comply with this award voluntarily. The second assumption is a crucial one. Till date, there are only five instances of governments refusing to comply with investment awards.206 In most cases, the investor and the State have reached a settlement.207 Indeed, refusal to comply may send a wrong message to investors and can be detrimental to incoming foreign direct investment for the host state.208 Finally, it needs to be clarified at the outset that enforcement may not depend only on legal factors. While locating the assets of the host state (i.e. India) in other nations is a purely strategic exercise, state immunity, as discussed later, is shrouded with political and diplomatic considerations. In fact, as one commentator pertinently notes, [e]ven where attachment of State assets located in the forum state is legally possible, the political consequences to the friendly relations of the forum-foreign state may discourage the forum States support for such enforcement.209 We will focus on the legal aspects of enforcement in this section, though one must remain mindful of the political background in which our opinion operates. Enforcement is a broad term used here which may conflate three distinct steps in compliance with an arbitral award in national courts recognition, enforcement and execution. Recognition of an award is a preliminary step to
206

These cases will be discussed below in greater detail. See Baldwin, Kantor et. al., Limits to Enforcement of ICSID Awards 23 JOURNAL OF INTERNATIONAL ARBITRATION 1 (2006). Recently, Argentina has indicated a strong intention to contend the enforcement of several ICSID awards surrounding the financial crises and subsequent nationalization in the State. See also Goodman, Uncharted Waters: Financial Crisis and Enforcement of ICSID Awards in Argentina 28 UNIVERSITY OF PENNSYLVANIA JOURNAL OF INTERNATIONAL ECONOMIC LAW 449 (2007).
207

Alexandrov, Enforcement of ICSID Awards: Article 53 and 54 of the ICSID Convention in BINDER ET. AL. (EDS.), INTERNATIONAL INVESTMENT LAW FOR THE 21ST CENTURY 322, 329-330 (2009).
208

The economic analysis of non-compliance with investment arbitral awards is done in Brockbank, The Sovereign Immunity Circle: An Economic Analysis of Nelson v. Saudia Arabia and the Foreign Sovereign Immunities Act 2 GEORGE MASON LAW REVIEW 1, 18 (1994) (Advocates of increased national court intervention in the review of arbitral awards also fail to take account of the significant costs associated with the failure of enforcement and execution. Refusal to enforce and execute BIT awards destabilizes the expectations of investors on which the BIT system of capital flows is premised. The state government, in a sovereign act, cedes some of its discretion in exchange for increased investment, with the understanding that the resulting capital flow will enable it to more effectively pursue its policies. Whether BITs function because of their signaling effects or because of the actual protection they provide is ultimately largely irrelevant to investors' expectations, as under either paradigm a destabilization in those expectations will lead to the failure of the BIT regime efficiently to move capital across national borders. State action that impedes the enforcement of BIT awards is likely to lead to increased costs, risk of loss, uncertainty, and lack of remedies when conducting international business, which will result in overseas capital flow reaching sub-optimal levels. This ultimately will harm capital-importing states, reducing the resources that are available to them by diminishing the flow of investment into the country.)
209

Sinclair, Law of Sovereign Immunity: Recent Developments 167 RECUEIL DES COURS 113, 219 (1980).

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the enforcement of the award and also confirms it as res judicata. Enforcement of the award confirms the award and is deemed to be a decree of the court. Execution is the attachment of the property to satisfy the award. 210 This section discusses three main issues first, applicability of the New York Convention on the Recognition and Enforcement of Arbitral Awards [New York Convention] and its implications; secondly, the state immunity defences available to India in national courts of different countries; and thirdly, the applicability of the Indian Arbitration and Conciliation Act, 1996 and its implications. A. APPLICABILITY OF THE NEW YORK CONVENTION India has not ratified the Convention on the Settlement of Investment Disputes between States and nationals of other States, 1965. Consequently, in accordance with Article 9(3)(b) and Article 9(3)(c) of the India-Netherlands BIT, the dispute will be referred to the Additional Facility of ICSID or an ad-hoc tribunal following the UNCITRAL Arbitration Rules.211 Both sets of rules, instead of providing a default seat of arbitration, allow the arbitral tribunal to select a seat of arbitration.212 The awards, so rendered, will be subject to enforcement under the New York Convention. Unlike the ICISD Convention, the New York Convention was designed to permit the enforcement of arbitral awards between private parties as well as between private parties and state. Admittedly, the Convention does not explicitly allude to investor-state awards. It is the opinion of one commentator that the New York Convention was not intended to deal with state contracts and disputes arising from them keeping in mind the period of absolute sovereign immunity that it was drafted in. 213 However, subsequently, arbitral awards against states have been recognised under the New York Convention.214 Recent writings have supported the view.215 Thus, it would seem that the award would be enforceable under the New York Convention.
210

Bjorklund, State Immunity and the Enforcement of Investor-State Arbitral Awards in BINDER ET. AL. (EDS.) INTERNATIONAL INVESTMENT LAW FOR THE 21ST CENTURY 302, 305-306 (2009). In fact, the French and the Spanish versions of the text of the ICSID convention do not make a distinction between enforcement and execution in Articles 54(1), 54(2) and 54(3) of the ICSID convention. Professor Schreur suggests that, applying Article 33(4) of the Vienna Convention on the Law of Treaties, it should be inferred that there is no distinction. Thus, the issues are dealt together even in national courts decisions.
211

Article 9(3)(b) of the BIT states: if both parties to the dispute so agree, under the additional Facility Rules for the Administration of Conciliation, Arbitration and Fact-Finding Proceedings; or; Article 9(3)(c), states further: if the course of action at (a) and (b) above is not followed then the dispute shall be referred to an ad hoc arbitral tribunal by either party to the dispute in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law, 1976 if the investor so agrees.
212

Article 18, UNCITRAL Arbitration Rules; Article 20, Arbitration (Additional Facility) Rules, 2006. Significantly, under Article 19 of the Additional Facility Rules, this choice of forum is restricted to state parties of the New York Convention.
213 214

SORNARAJAH, THE SETTLEMENT OF FOREIGN INVESTMENT DISPUTES 308 (2000).

In Sedelmayer v. Russia, the award was rendered by an ad-hoc tribunal constituted under the 1989 German-Soviet BIT. Subsequently, in 1998, the German Superior Court of Justice found the award enforceable under the New York Convention; Liamco v. Libya [recognized by the Swiss Courts].

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Significantly, the enforcement mechanism under the New York Convention is different from the ICSID Convention. Article V of the New York Convention excludes the double exequatur of recognition and enforcement in two separate judicial hearings. 216 More importantly, unlike Article 55 of the ICSID convention which expressly recognises state immunity as defence,217 there is no comparable provision in the New York Convention. Yet, it cannot be argued that state immunity cannot be claimed as a defence under the New York Convention. There are two ways in which the defences of state immunity are read into the Convention. 218 First, unlike the ICSID convention, Article V(2)(b) of the New York Convention recognises the exception of public policy. Indeed, the basic justification for recognising state immunity is public policy for reasons of international comity et al. Secondly, Article III of the New York Convention provides for States to recognise and enforce awards in accordance with the laws on force of that State. Accordingly, municipal immunity laws have been treated as preliminary matters of procedure which claimants seeking to execute awards must overcome.219

Illustration: The arbitral tribunal, once constituted in accordance with the Additional Facility Rules or the UNCITRAL rules, chooses London as the place of Arbitration. Section 9 of the State Immunities Act, 1978 will construe Article 9 of the NetherlandsIndia BIT as a waiver by India of its sovereign immunity. Consequently, the English Courts will have supervisory jurisdiction over the arbitration and the English Arbitration Act will apply subject to the provisions in the relevant institutional rules.

215

Bjorklund, State Immunity and the Enforcement of Investor-State Arbitral Awards in BINDER ET. AL. (EDS.) INTERNATIONAL INVESTMENT LAW FOR THE 21ST CENTURY 302, 303 (2009); VAN DEN BERG, THE NEW YORK ARBITRATION CONVENTION OF 1958: TOWARDS A UNIFORM JUDICIAL INTERPRETATION 277-282 (1981).
216 217

REDFERN AND HUNTER ON INTERNATIONAL ARBITRATION 646-647 (2009).

Article 55, ICSID Convention: Nothing in Article 54 shall be construed as derogating from the law in force in any Contracting State relating to immunity of that State or of any foreign State from execution.
218

O'Brien, The Validity of the Foreign Sovereign Immunity Defense in Suits Under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 7 FORDHAM INTERNATIONAL LAW JOURNAL 321 (1983).
219

Fox, State Immunity and the New York Convention in GAILLARD ET AL (EDS.), ENFORCEMENT OF ARBITRATION AGREEMENTS AND INTERNATIONAL ARBITRAL AWARDS 829, 836-837 (2008); SORNARAJAH, THE SETTLEMENT OF FOREIGN INVESTMENT DISPUTES 304-305, 308-309 (2000); Bjorklund, State Immunity and the Enforcement of Investor-State Arbitral Awards in BINDER ET. ST AL. (EDS.), INTERNATIONAL INVESTMENT LAW FOR THE 21 CENTURY 302, 303 (2009).

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In conclusion, we believe that the New York Convention would be applicable to an award rendered by the tribunal in the present case. In the following section, we consider the scope of this state immunity defence available to India in different jurisdictions. It deals primarily with three issues whether the arbitration agreement constitutes a waiver of Indias state immunity? Whether such a waiver extends to immunity from execution also? And what are the kinds of property that can be attached in different jurisdictions. B. STATE IMMUNITY 1.
WAIVER OF IMMUNITY

In customary international law, a State enjoys immunity, in respect of itself and its property, from the jurisdiction of the courts of another State. 220 At the same time, this immunity is not absolute. One of the well-recognized exceptions to State immunity is consent to the jurisdiction of a Court.221 Accordingly, an agreement to submit a dispute to arbitration is also considered a waiver of the immunity by the state. 222 Further, it is settled that waiver by way of an arbitration agreement is irrevocable after a dispute has arisen. In other words, even if India refuses to participate in the arbitral proceedings, the dispute resolution clause would still be construed as a waiver of its immunity. However, the extent of waiver to be deduced from entry into an arbitration agreement may be variously interpreted according to its scope. If the arbitration is to be held in the forum state (or to apply forum State law) then waiver of immunity to the jurisdiction at least to the extent of the supervisory powers over arbitration of the forum court may be implied.223 The power of the Courts under the national legislations generally extends to the validity and interpretation of arbitration agreement, the arbitration procedure, and the confirmation or the settingaside of the award. For exercise of such jurisdiction, there needs to be a jurisdictional link between the national court and the arbitration proceedings i.e. only a national court in the seat of arbitration can exercise jurisdiction
220

See Higgins, Certain Unresolved Aspects of the Law of State Immunity 29 NETHERLANDS INTERNATIONAL LAW REVIEW 265 (1982); This definition has been codified in Article V of the UN Convention on the Jurisdictional Immunities of State and their Property, 2004 [ UN Convention]. However, the Convention has not come in to force as of July 25, 2012 as the required number of states have not yet ratified it. At the same time, most of the provisions of the convention have codified existing international law and will be relied on by us.
221

Greig, Forum State Jurisdiction and Sovereign Immunity under International Law Commissions Draft Articles 38 INTERNATIONAL & COMPARATIVE LAW QUARTERLY 243, 246-249 (1989); Sinclair, Law of Sovereign Immunity: Recent Developments 167 RECUEIL DES COURS 113.
222 223

Article 17, UN Convention.

Fox, THE LAW OF STATE IMMUNITY, 495-496 (2008); National Legislations: Sections 1605(a)(1), 1610(a)-(c), United States Foreign Sovereign Immunities Act; Section 9, UK State Immunity Act, 1978; Section 17, Australian Foreign States Immunities Act, 1985; Section 11, Singapore State Immunity Act, 1979.

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2. THE EXTENT OF SUCH WAIVER OF IMMUNITY The contentious issue will be the extent of this waiver by way of the arbitration agreement simply put; does this arbitration agreement also constitute a waiver from execution? In general, it is a well excepted doctrine that immunity from execution is distinct from the immunity from jurisdiction.224 Indeed, the International Court of Justice has held that [t]he rules of customary international law governing immunity from enforcement and those governing jurisdictional immunity (understood stricto sensu as the right of a State not to be the subject of judicial proceedings in the courts of another State) are distinct, and must be applied separately225 This is substantiated by consistent state practice.226 The only exception to the rule has been Switzerland which follows a unity approach to state immunity whereby if the Swiss Courts can exercise jurisdiction, they are allowed to execute the property of the State simultaneously. However, we feel this is inapposite for the present dispute as Swiss Law requires a specific connection with the dispute at hand.227 Here, there is no such connection. Having concluded that immunity from jurisdiction is distinct from immunity from execution, we must consider the next distinct question: whether the consent to arbitration constitutes the waiver of enforcement of the award. Where the state, like India, has committed itself to the UNCITRAL Rules or is a party to the New York Convention, both of which impose obligations to honour any arbitral award, a strong argument can be made for an implied waiver of immunity from execution as well. There has been considerable diversity of views on the point. The attempt of LIAMCO to enforce its arbitral award in different jurisdictions is evidence of this difference.228 In Sweden, the award was held to be enforceable as the consent to ICC jurisdiction was construed as an implicit waiver of immunity from execution as well.229 Similarly, in the United States, the Court came to the same conclusion.230 At the same time, the French court held that there was no waiver of immunity from execution by merely consenting to the ICC jurisdiction.231 The French Court of Cassation, in Creighton v Qatar, however, reversed this position and
224 225 226 227

Duff Development v. Kelantan Government [1924] AC 797; Yugoslavia v. SEEE [France] 65 ILR 47 (1970). Case Concerning Jurisdictional Immunities of State (Germany v. Italy) ICJ General List No. 143 113. Fox, THE LAW OF STATE IMMUNITY 602-603 (2008).

Lalive, Swiss Law and Practice in Relation to Measures of Execution Against the Property of a Foreign State 10 NETHERLANDS YEARBOOK OF INTERNATIONAL LAW 153 (1979); Kingdom of Greece v. Julius Bar (Swiss Federal tribunal) 23 ILR 195 (1960) (In order that a legal relationship to which a foreign State is a party may be considered to be connected with Swiss territory, it must either have its origin in Switzerland or fall to be performed in Switzerland, or the debtor must have at least taken certain steps which make Switzerland a place of performance.)
228 229 230 231

Libyan American Oil Company (LIAMCO) v. The Libyan Arab Republic 12 April 1977 (Ad-Hoc Tribunal). LIAMCO v. Libya (Swedish Court of Appeals) 62 ILR 225 (1980). LIAMCO v. Libya (Federal Court) 62 ILR 220 (1980). Procureur de la Republique v. LIAMCO (French Superior Court) 65 ILR 78.

56

interpreted submission to ICCs jurisdiction as a waiver of immunity. 232 The English Courts have held that an express waiver of immunity from execution is required to attach the property of the State.233 In the context of investment arbitration, there have been five reported cases of enforcement where the respondent State has sought to rely on state immunity defences.234 In Benvenuti & Bonfant v Congo,235 SOABI v Senegal,236 LETCO v Liberia237 and AIG Partners v Kazakhstan,238 an agreement to arbitrate in the concerned Bilateral Investment Treaty was held not to preclude the defence of state immunity. It should be noted that these arbitral awards were rendered under the ICSID Convention. As previously stated, Article 55 of the Convention expressly provides that the obligation to comply with, and enforce, the award is without prejudice to state immunity under international law. Thus, the only apposite precedent might be found in the case of Sedelmayer v Russia. The action was initiated by the claimant under the Soviet-German BIT. The award was given by an ad-hoc tribunal constituted under the Stockholm Chamber of Commerce. On hearing the enforcement petition, the German Federal Court, recognised the state immunity of Russia from attachment of its property.239 In light of such divergent authority, it seems necessary to analyse the relevant provisions of the institutional rules that the parties agreed to. In the previous paragraph, all the decisions were based on Rule 28(6) of the ICC Rules which states: [e]very Award shall be binding on the parties. By submitting the dispute to arbitration under these Rules, the parties undertake to carry out Award without delay and shall be deemed to have waived their right to any form of recourse insofar as such waiver can validly be made. [emphasis supplied] The relevant SCC rule in Sedelmayer was Article 40 which states that [a]n award shall be final and binding on the parties when rendered. By agreeing to arbitration under these Rules, the parties undertake to carry out any award without delay. In the present case, the relevant rule is either Article 52(4), ICSID Additional Facility Rules which states that [t]he award shall be final and binding on the parties. The parties waive any time limits for the rendering of the award which may be
232

Creighton Ltd. v. Government of Qatar, French Court of Cassation, 1 July 2000 cited from Gaillard, Commentary, 18 ARBITRATION INTERNATIONAL 247, 250 (2002).
233 234 235 236 237 238 239

Orascom Telecom Holding SAE v Republic of Chad & Ors. [2008] EWHC 1841 (Comm). THE OXFORD HANDBOOK ON INTERNATIONAL INVESTMENT LAW 1183 (SCHREUER ET AL EDS., 2008). Benvenuti and Bonfant v Congo, French Court of Cassation 1 ICSID Rep 373 (1993). SOABI v Senegal French Court of Cassation 2 ICSID Rep 341 (1994). LETCO v Liberia (US District Court of New York) 2 ICSID RevFILJ 188 (1987). AIG Capital Partners Inc v Kazakhstan (Queen's Bench Division) [2006] 1 WLR 1420.

Blane, Sovereign Immunity as a Bar to the Execution of International Arbitral Awards 41 NEW YORK UNIVERSITY JOURNAL OF INTERNATIONAL LAW & POLITICS 453 (2009).

57

provided for by the law of the country where the award is made; or Article 34(2) of the UNCITRAL rules which states that All awards shall be made in writing and shall be final and binding on the parties. The parties shall carry out all awards without delay. It is evident that the issue of diversion between the courts was the interpretation of the deemed waiver present in Rule 28(6) of the ICC Rules. However, such a clause is not present in the concerned institutional rules in the present case. On the contrary, these rules are substantially similar to the relevant SCC rule in Sedelmayer. Accordingly, we believe that the submission of the dispute to arbitration would not constitute a waiver of Indias state immunity from execution as well. 3. THE KINDS OF PROPERTY AVAILABLE FOR ATTACHMENT IN VARIOUS JURISDICTIONS If Indias submission to arbitration is not considered a waiver of immunity from execution, the municipal immunity laws relating to the attachment of state property would be applicable. This section surveys such national laws in countries which are considered as favourable states for enforcement of arbitral awards. As an important caveat, we note that this survey is not exhaustive. In fact, this section may be utilized only when the claimant has located an Indian asset in one of the below-mentioned jurisdictions. While in the field of jurisdictional immunity the nature of an act as iure imperii or iure gestionis is decisive, concerning immunity from execution it is prevailingly the purpose of the property against which enforcement measures are sought that determines whether or not immunity will be granted.240 Thus, property of the state can only be attached for enforcement if it is being used for commercial purposes. Here, proof of past and present use of that property for commercial purposes is required. Future use or intended use of the property for commercial purposes is not sufficient to exempt them from immunity. 241 The simple test to determine commercial purpose is if a private individual could also make use of property in the same way.242 Accordingly, in one of the enforcement petitions filed
240

Bouchez, The Nature and Scope of State Immunity from Jurisdiction and Execution 10 NETHERLANDS YEARBOOK OF INTERNATIONAL LAW 3, 25 (1979).
241

See Fox, THE LAW OF STATE IMMUNITY, 627-628 (2008) (the uniform state practice of most western states is traced to come to the conclusion).
242

See Blane, Sovereign Immunity as a Bar to the Execution of International Arbitral Awards 41 NEW YORK UNIVERSITY JOURNAL OF INTERNATIONAL LAW & POLITICS 453, 467 (2009). In LETCO v. Liberia, LETCO filed a suit seeking to execute the award against ship-owners located in the United States and agents of Liberia appointed to collect from such ship-owners tonnage fees, registration fees and other taxes due the government. Liberia successfully moved to vacate the execution against its property, because the fees and taxes, though collected by U.S. corporations and citizens who were under contract, constituted sovereign[,] not commercial assets under Liberian law. (emphasis supplied) Similarly, in Sedelmayer v. Russia, the claimant filed to execute against Lufthansa Airlines payments to Russia for overflights over Russian airspace. The Federal Court of Justice determined that the German courts had no international jurisdiction in execution proceedings against the Russian Federation concerning these overflight rights which were an extension of Russias territorial sovereignty.

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by the claimant in Sedelmayer v. Russia, a Soviet trade mission which was being leased to the city authorities was attached for execution of the award.243 At the same time, some kinds of property are generally regarded as immune as they are essential to state sovereignty. These have been illustrated in Article 21 of the UN Convention and include property for the performance of the functions of the diplomatic missions, property of a military character, property of a central bank, property forming part of cultural heritage et al.244 There has been considerable controversy on the status of mixed accounts and whether they should be accorded immunity. The problem of identification of the use of State funds is significant when funds are mixed in an account, particularly when, as is a frequent practice, the account is opened in the name of the diplomatic mission.245 The leading decision on the issue is the German Constitutional Courts decision in the Phillipine Embassy case.246 The court, after analysing Article 3 of the Vienna Convention on Diplomatic Relations and its travaux prparatoires, came to the conclusion that, as a general rule, diplomatic accounts cannot be attached for enforcement of awards. The House of Lords in Alcom v. Republic of Colombia 247 held that only a specific earmarking of funds in a diplomatic account for commercial purposes can rebut this presumption. This has been subsequently followed by Austrian, Dutch, Belgian, French and other European states.248 In conclusion, only that property of India which is used for commercial purposes can be attached for enforcement of the award. In so far as Indian diplomatic missions accounts are concerned, unless there is specific allocation of funds for commercial purposes, there would not be any attachment. 4. SPECIAL REQUIREMENTS IN SOME MUNICIPAL LAWS United States: For attachment of property, there needs to be a nexus between the property and the underlying claim.249 In the present case, there cannot be any Indian property being used for commercial purposes in the United
243

Russia Loses Soviet Trade Mission in Cologne, available at <http://www.kommersant.com/p656169/r_500/Russia_Loses_Soviet_Trade_Mission_in_Cologne/> (last accessed on July 22, 2012).
244

Article 21, UN Convention on Jurisdictional Immunities of State (2004); see Draft articles on Jurisdictional Immunities of States and Their Property, with commentaries, International Law Commission, UN Doc. A/46/10 28 onwards.
245 246 247 248

Fox, THE LAW OF STATE IMMUNITY 640 (2008). Phillippine Embassy Bank Account Case (Federal Republic of Germany Federal Constitutional Court) 65 ILR 146. Alcom v. Republic of Colombia [1984] AC 580.

Reinisch, European Court Practice Concerning State Immunity from Enforcement Measures 17 EUROPEAN JOURNAL OF INTERNATIONAL LAW 803, 830 (2006); Fox, THE LAW OF STATE IMMUNITY, 641-642 (2008).
249

Section 1610(a)(2) US FSIA permits execution measures if the property is or was used for the commercial activity upon which the claim is based.

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States which is in anyway related to Vodafones claims. Thus, Vodafone will find it difficult to enforce its award in the United States. France: France has an exequatur requirement.250 In other words, there are two distinct stages of proceedings. First, the award is recognised as final and binding. Then, in the second stage of the hearing, the property is attached and defence of state immunity would be considered. Additionally, there has not been a consistent judicial trend with regard to the nexus requirement in France.251 Tentatively, Indian assets in the United Kingdom or Netherlands (if they exist), should be preferred over other jurisdictions for enforcement of the award. The United Kingdom laws require no nexus between the property and the underlying claim.252 On the other hand, it has been a general practice for investors to approach the courts of their nationality for enforcement of awards. C. APPLICABILITY OF THE INDIAN ARBITRATION ACT, 1996 In the event that an award is given in the favour of Vodafone, it is crucial to consider the possible implications under the Indian Arbitration Act, 1996 [the Act]. In particular, Section 34 of the Act allows a party to file a petition before a competent court for setting aside the award of the arbitral tribunal.253 A comparable provision for foreign awards is present in Section 48 of the same Act. However, while Section 34 stipulates a right of the party to setaside the award, Section 48 is only applicable by way of objections to the enforcement of a foreign award in India under Section 47. Additionally, Section 34 is present in Part I of the Act whereas Section 48 is found in Part II of the Act. Thus, important issues which arise are whether the Indian government may file an application to set aside the award under S. 34 of the Act? Would an award in favour of Vodafone be set-aside under S. 34 on grounds of contravening public policy? If so, what would be the implications of an order, setting aside the award under S. 34, in other jurisdictions vis--vis enforcement of the award?

250 251

Benvenuti and Bonfant v Congo (French Court of Cassation) 1 ICSID Rep 373 (1993).

Reinisch, European Court Practice Concerning State Immunity from Enforcement Measures 17 EUROPEAN JOURNAL OF INTERNATIONAL LAW 803, 823 (2006): In both the Eurodif and the Sonatrach cases the Cour de Cassation upheld the requirement of a special connection between the state property seized and the activity underlying the claim. However, in a more recent decision of the Paris Court of Appeal, in the Creighton case, even the French courts seem to have relinquished such a nexus requirement.
252 253

Article 13(4) of the United Kingdom State Immunities Act, 1978.

Section 34, The Indian Arbitration Act, 1996 (Application for setting aside arbitral award: (1) Recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with Sub-section (2) and Subsection (3).)

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Here, it is necessary to note that the position of law, as discussed below, is under review by a constitutional bench of the Supreme Court of India in the case of BALCO v. Kaiser Aluminium Technical Services. Thus, the position of law may change till the time the arbitral tribunal gives an award. Additionally, it should also be noted that the analysis below, would be useful if Vodafone elects to enforce the arbitral awards in India under Section 47 of the Act. The defence of state immunity, discussed previously, cannot be claimed by the Indian Government in front of Indian Courts. Thus, the defences available to the Government would be restricted to Section 48 of the Act. Both Sections 34 and 48, in their relevant part, stipulate that the award must not be contrary to Indian public policy. While in Renusagar,254 the Court adopted a narrow definition of public policy, this was subsequently widened in Saw Pipes. 255 Finally, in Phulchand,256 this was extended definition was applied under Section 48 as well. In effect, public policy of India under Section 34 and 48 are equivalent. 1. JURISDICTION OF THE INDIAN COURTS UNDER SECTION 34 OF THE ACT Section 34 is present in Part I of the Act. S. 2(2) of the Act provides that Part I would apply where the place of arbitration is in India. Assuming that the ad-hoc tribunal elects a place of arbitration outside India; can Indian courts still exercise their powers given under Part I? A three-judge bench of the Indian Supreme Court had the occasion to consider this question in Bhatia International v. Bulk Trading.257 The Court held that while Part I mandatorily applies to all arbitrations conducted in India, Section 2(2) does not exclude its application to foreign arbitral proceedings. This was seen in contradistinction to the UNCITRAL Model Law where the relevant provision stipulated that the part would apply only when the arbitration took place in the territory of the State.258 Consequently, the Court did exercise jurisdiction in a Section 9 application for interim measures even when the seat of arbitration was Paris, France. Subsequently, the application of the principle was extended to Section 34 applications by the Supreme Court in the case of Venture Global v. Satyam Computers.259 Here, the Court allowed a Section 34 petition to be entertained even though the proper law of contract was Michigan Law and the seat of arbitration was London. The Court further reasoned that if, therefore, respondent No.1 was not prepared to enforce the Award in spite of this intimate and

254 255 256 257 258 259

Renusagar Power Co. Ltd. v. General Electric Co. AIR 1994 SC 860. ONGC v. Saw Pipes Ltd. AIR 2003 SC 2629. Phulchand Exports Ltd. v. OOO Patriot (2011) 10 SCC 300. Bhatia International v. Bulk Trading AIR 2002 SC 1432. Bhatia International v. Bulk Trading AIR 2002 SC 1432 27-8, 32. Venture Global Engineering v. Satyam Computer Services Ltd. AIR 2008 SC 1061.

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close nexus to India and its laws, the appellant herein would certainly not be deprived of the right to challenge the award in Indian Courts.260 In the present dispute, we believe that there is an intimate and close nexus to India the dispute has arisen due to the imposition of tax liability on Vodafone by the Indian Finance Act, 2012 on a transaction which was carried out, in part, in India; and Article 11 of the India-Netherlands BIT 261 would imply that the applicable law to the investment is Indian law. Thus, it is likely that the Indian Courts would assume jurisdiction under Section 34 of the Act. In fact, in the context of investment arbitration awards, the Calcutta High Court did set aside the arbitral award in White Industries Australia Limited v. Coal India Limited.262 The case is pending in appeal before the Supreme Court. In conclusion, we believe that the Indian Government may choose to apply for setting aside of the award under Section 34 of the Act. 2. THE PUBLIC POLICY OF INDIA S. 34(2)(b)(ii) of the Act empowers the Court to set aside an award if the arbitral award is in conflict with the public policy of India. The Supreme Courts interpretation of public policy under Section 34 in the case of ONGC v. Saw Pipes263 is considered authoritative. The Court held that public policy of India includes - (a) the fundamental policy of India; or (b) the interests of India; or (c) justice or morality; or (d) in addition, if it is patently illegal.264 The scope for argumentation here is broad. Indeed, any award in favour of Vodafone would presumably either be contrary to the provisions of the Finance Act, 2012, or defeat the purposes of the Act. It would be open to argue that the Finance Act is central to the economic interests of India. Pending the challenge of constitutionality of the same in the Calcutta High Court, the Act, and its amendment to the Income Tax Act, continues to be the law in force in India. Consequently, we believe that the Courts may hold that the award is contrary to public policy. Thus, it may be set aside under Section 34 of the Act or refused enforcement under Section 48.

260 261

Venture Global Engineering v. Satyam Computer Services Ltd. AIR 2008 SC 1061 21.

Article 11, India-Netherlands BIT states: All investments shall, subject to this Agreement, be governed by the laws in force in the territory of the Contracting Party in which such investments are made.
262 263 264

White Industries Australia Limited v. Coal India Limited 2004 (2) Cal LJ (Cal) 197. ONGC v. Saw Pipes Ltd. AIR 2003 SC 2629. Venture Global Engineering v. Satyam Computer Services Ltd. AIR 2008 SC 1061 19.

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3. EFFECT OF SETTING ASIDE BY INDIAN COURTS VIS--VIS ENFORCEMENT IN OTHER JURISDICTIONS Not every order setting aside an arbitral award precludes the enforcement of the award in other jurisdictions. Article V(1)(e) of the New York Convention provides that a Court may refuse enforcement if the award has been has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made. Article 36(1)(a)(v) of the UNCITRAL Model Law corresponds to Article V(1)(e) of the New York Convention. The official commentary to the Model Law interprets the phrase the country in which the award was made as the country of the seat of the arbitration.265 Indeed, this is consistent with the decisions of most national jurisdictions.266 The English Court of Appeals, in C v. D,267 held that a choice of seat for the arbitration must be a choice of forum for remedies seeking to attack the award. It relied on the observation in A v. B268 where the court compared an agreement as to the seat of arbitration to an exclusive jurisdiction clause. Article V(1)(e) also refers to the country under the law of which the award was made. It is settled that this refers to the curial law of arbitration.269 In most cases, the two alternatives would refer to the same law that of the place of arbitration. During the drafting of the New York Convention, it was opined that the alternatives referred to in Article V(1)(e) envisage the rare situation where the parties have elected a different seat of arbitration in the presence of an express clause indicating the curial law of arbitration.270 In effect, if the arbitral tribunal has chosen a seat of arbitration outside India, any court in India would not be considered as the competent authority to set aside the award. Consequently, in our view, a decision of an Indian court to set aside the award would not preclude enforcement in other jurisdictions.

265

Analytical Commentary on Draft Text of the Model Law On International Commercial Arbitration, UNCITRAL, U.N. Doc. A/CN.91264, 79 4 (1985).
266 267 268 269 270

BORN, INTERNATIONAL COMMERCIAL ARBITRATION 2368-2369 (2009). C v. D [2007] EWCA Civ 1282. A v. B [2007] 1 Lloyds Rep 237 111. International Standard Electric Corporation v. Bridas Sociedad Anonima Petrolera Industrial Y Comercial 745 F.supp.172.

Berg, THE NEW YORK ARBITRATION CONVENTION OF 1958: TOWARDS A UNIFORM JUDICIAL INTERPRETATION 350 (1981); Darwazeh, Article V(1)(e) in RECOGNITION AND ENFORCEMENT OF FOREIGN ARBITRAL AWARDS: A GLOBAL COMMENTARY ON THE NEW YORK CONVENTION 320 (2010).

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CONCLUDING REMARKS
Whether the Vodafone case proceeds to arbitration will be determined by a host of political and legal factors. Will Vodafone reach a compromise with the Indian Government? Will the Calcutta High Court invalidate the retrospective amendment? This report, thus, is only a part of the story. Nonetheless, the possibility of international arbitration remains a crucial determinant in the final resolution of this dispute, and will also hopefully inform the actions of the Indian Government in the treatment of investors in the future. Through the preceding pages, we have attempted to highlight to legal contours of the possible arbitration. While our views as to the outcome of the claims remain tentative, and subject to additional argumentation, our primary purpose has been to clarify the legal norms applicable to this dispute. While we believe the questions of jurisdiction and admissibility are likely to be answered in the positive, the outcome on merits particularly relating to the nebulous standard of fair and equitable treatment contains lesser certainty. Our attempt here has been to discuss the practice of tribunals in the area of investment arbitration in order to infuse clarity in the debate and determine the nature of claims. Apart from operating as an academic exercise that may engage students, we hope this report contributes to a wider discussion in the legal fraternity and informs future actions. Equally, we would greatly appreciate any comments, criticisms and suggestions.

Raag Yadava | raag.yadava@gmail.com Shiva Santosh Yelamanchili | shivasantosh93@gmail.com Divyanshu Agrawal | divyanshu.agrawal.92@gmail.com Research Panel on International Investment Law and Policy Student Initiative to Promote Legal Awareness National Law School of India University, Bangalore nlsiu.sipla@gmail.com 15th August, 2012 Bangalore

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ANNEXURE 1
AGREEMENT BETWEEN THE REPUBLIC OF INDIA AND THE KINGDOM OF THE NETHERLANDS FOR THE PROMOTION AND PROTECTION OF INVESTMENTS

The Government of the Republic of India and the Government of the Kingdom of the Netherlands, (each hereinafter referred to as a Contracting Party) Desiring to strengthen the traditional ties of friendship between their countries, to extend and intensify the economic relations between them particularly with respect to investments by the investors of one Contracting Party in the territory of the other Contracting Party, Recognising that reciprocal protection of such investments under an agreement will subserve the aforesaid objective and will be conducive to the stimulation of individual business initiative and will increase prosperity in both States; Have agreed as follows: Article 1 Definitions For the purposes of this Agreement: (a) investments means every kind of asset invested in accordance with the national laws and regulations of the Contracting Party in the territory of which the investment is made and in particular, though not exclusively, includes: i. movable and immovable property as well as other property rights such as mortgages, leases, liens, or pledges; ii. rights derived from shares, bonds and other kinds of interest in companies; iii. rights to money or to any performance having value; iv. intellectual property rights, technical processes, goodwill and know how in accordance with the relevant laws of the respective parties; v. rights granted under law or under contract such as business concessions to search for and extract oil, natural gas and other minerals. (b) nationals means: i. in respect of India: persons deriving their status as Indian nationals from the law in force in India; ii. in respect of the Netherlands: natural persons having the nationality of the Netherlands;

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(c) companies means: i. in respect of India: corporations, firms and associations incorporated or constituted under the law in force in any part of India; ii. in respect of the Netherlands: legal persons constituted under the law of the Netherlands; (d) investors means: nationals or companies of a Contracting Party; (e) territory means: i. in respect of India: the territory of the Republic of India including its territorial waters and the airspace above it and other maritime zones including the Exclusive Economic Zone and continental shelf over which the Republic of India has sovereignty, sovereign rights or jurisdiction in accordance with its laws in force, the 1982 United Nations Convention on the Law of the Sea and public international law. ii. in respect of the Netherlands: the term territory includes the maritime areas adjacent to the coast of the State, to the extent to which the State exercises sovereign rights or jurisdiction in those areas according to international law. Article 2 Scope of the agreement This Agreement shall apply to any investment made by investors of either Contracting Party in the territory of the other Contracting Party including an indirect investment made through another company, wherever located, which is fully owned by such investors, whether made before or after the coming into force of this Agreement. Article 3 Promotion of investment Each Contracting Party shall encourage and promote favourable conditions for investors of the other Contracting Party to make investments in its territory in accordance with its laws and policy. The admission of such investment shall be subject to the laws and policies of the Contracting Party in whose territory the investment is made. Article 4 National treatment and most favoured nation treatment 1) Investments of investors of each Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party. 2) Each Contracting Party shall accord to such investments, including their operation, management, maintenance, use, enjoyment or disposal by such investors, treatment which shall not be less favourable than that accorded either to investments of its own investors or to investments of investors of any third State, whichever is more favourable to the investor concerned. 3) The provisions of paragraphs 1 and 2 in respect of the grant of most favoured nation treatment shall not apply to privileges which either Contracting Party accords to investors of third States on account of its membership of, or association with, a customs or economic union, a common market or a free trade area.

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4) The provisions of paragraphs 1 and 2 in respect of the grant of national treatment and most favoured nation treatment shall also not apply in respect of any international agreement or arrangement relating wholly or mainly to taxation or any domestic legislation or arrangements consequent to such legislation relating wholly or mainly to taxation. 5) Each Contracting Party shall observe any obligation it may have entered into with regard to investments of investors of the other Contracting Party. Provided that dispute resolution under Article 9 of this Agreement shall only be applicable in the absence of a normal, local, judicial remedy being available. Article 5 Expropriation 1) Investments of investors of either Contracting Party shall not be nationalised, expropriated or subjected to measures having effect equivalent to nationalisation or expropriation, hereinafter referred to as expropriation, in the territory of the other Contracting Party except in the public interest in accordance with law, on a nondiscriminatory basis and against compensation. Such compensation shall represent the genuine value of the investments effected, shall include interest at a normal market rate until the date of payment, shall be effectively realizable without undue delay, and shall be freely convertible and transferable. 2) The investor affected shall have a right to review, under the laws of the Contracting Party making the expropriation, by a judicial or other competent and independent authority of that Contracting Party, of its case, of the valuation of its investment, and of the payment of compensation, in accordance with the principles set out in paragraph (1). The Contracting Party making the expropriation shall make every endeavour to ensure that such review is carried out promptly. Article 6 Compensation for losses Investors of one Contracting Party whose investments in the territory of the other Contracting Party suffer losses owing to war or other armed conflict, a state of national emergency or civil disturbances shall be accorded by the latter Contracting Party treatment as regards compensation, restitution, indemnification or other forms of settlement, no less favourable than that which the latter Contracting Party accords to its own investors or investors of any third State. Any payments made under this Article shall be freely convertible and transferable. Article 7 Repatriation of investment and returns 1) Each Contracting Party shall assure to investors of the other Contracting Party, without delay and on a nondiscriminatory basis, the unrestricted transfer inter alia of: (a) Capital and additional capital amounts used to maintain or increase investments; (b) Net operating profits including dividends and interest; (c) Repayments of any loan, including interest thereon, relating to the investment; (d) Payment of royalties and service fees as far as it is related to the investment;

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(e) Proceeds of sale or liquidation of the investment; (f) The earnings of nationals of one Contracting Party or of any third State who work in connection with investments in the territory of the other Contracting Party. 2) Currency transfer under paragraph 1 shall be in a freely convertible currency. Such transfer shall be made at the prevailing market rate of exchange on the date of transfer. Article 8 Subrogation If the investments of an investor of one Contracting Party are insured against or otherwise guaranteed in respect of non-commercial risks under a system established by law, regulation or government contract, any subrogation of the insurer or re-insurer or Agency designated by the one Contracting Party to the rights of the said investor pursuant to the terms of such insurance or guarantee shall be recognised by the other Contracting Party. The subrogated right or claim shall not exceed the original rights or claims of such investor. Article 9 Investment disputes 1) Any dispute between an investor of one Contracting Party and the other Contracting Party in connection with an investment in the territory of the other Contracting Party shall, as far as possible, be settled amicably through negotiations between the parties to the dispute. The party intending to resolve such dispute through negotiations shall give notice to the other of its intentions. 2) If the dispute cannot be thus resolved as provided in paragraph (1) of this Article within three months from the date of notice given thereunder, then the dispute may be referred to conciliation in accordance with the United Nations Commission on International Trade Law Rules of Conciliation 1980, if both parties to the dispute so agree. 3) If either party to the dispute does not agree to conciliation within one month of the reference or where it is so referred but conciliation proceedings are terminated other than by the signing of a settlement agreement, or if no reference is made to international conciliation, the dispute may be referred to arbitration as follows: (a) if the Contracting Party of the investor and the other Contracting Party are both parties to the Convention on the Settlement of Investment Disputes between States and Nationals of other States, 1965 and both parties to the dispute consent in writing to submit the dispute to the International Centre for the Settlement of Investment Disputes, such a dispute shall be referred to the Centre; or (b) if both parties to the dispute so agree, under the Additional Facility for the Administration of Conciliation, Arbitration and Fact-Finding Proceedings; or (c) if the course of action at (a) and (b) above is not followed then the dispute shall be referred to an ad hoc arbitral tribunal by either party to the dispute in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law, 1976 if the investor so agrees. 4) In respect of arbitration proceedings under paragraph 3 (c) of this Article the following shall apply:

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i. The Arbitral Tribunal shall consist of three arbitrators. Each party shall select an arbitrator. The arbitrators shall be appointed within two months from the date when one of the parties to the dispute informs the other of its intention to submit the dispute to arbitration. The two arbitrators shall within two months from then appoint by mutual agreement a third arbitrator, the Chairman, who shall be a national of a third State. ii. If the necessary appointments are not made within the period specified in paragraph (4)(i), either party may, in the absence of any other agreement, request the President of the International Court of Justice to make the necessary appointments. iii. The arbitral award shall be made in accordance with the provisions of this Agreement. iv. The tribunal shall reach its decision by a majority of votes. v. The decision of the arbitral tribunal shall be final and binding and the parties shall abide by and comply with the terms of its award. vi. The arbitral tribunal shall state the basis of its decision and state reasons upon the request of either party. vii. Each party concerned shall bear the cost of its own arbitrator and its representation in the arbitral proceedings. The cost of the Chairman in discharging his arbitral function and the remaining costs of the tribunal shall be borne equally by the parties concerned. The tribunal may, however, in its decision direct that a higher proportion of costs shall be borne by one of the two parties, and this award shall be binding on both parties. Article 10 Disputes between the contracting parties 1) Disputes between the Contracting Parties concerning the interpretation or application of this Agreement should, if possible, be settled through negotiations. 2) If a dispute between the Contracting Parties cannot be settled, after six months it shall, upon the request of either Contracting Party, be submitted to arbitration. 3) The arbitral tribunal shall consist of three arbitrators. Within two months of receipt of the request for arbitration, each Contracting Party shall appoint one arbitrator and within two months from then the two arbitrators shall appoint a third arbitrator who shall be the Chairman of the tribunal. 4) If within the periods specified in paragraph (3) of this Article the necessary appointments have not been made, either Contracting Party may, in the absence of any other agreement, invite the President of the International Court of Justice to make such appointments. If the President is a national of either Contracting Party or if he is otherwise prevented from discharging the said function, the Vice-President shall be invited to make the necessary appointments. If the Vice-President is a national of either Contracting Party or if he too is prevented from discharging the said function, the Member of the International Court of Justice next in seniority who is not a national of either Contracting Party shall be invited to make the necessary appointments. 5) The arbitral tribunal shall reach its decision by a majority of votes. Such decision shall be final and binding on both Contracting Parties. Each Contracting Party shall bear the cost of its own member of the tribunal and of its representation in the arbitral proceedings and half the costs of the Chairman and the remaining costs. The tribunal may, however, in its decision direct that a higher proportion of costs shall be borne by one of the two Contracting Parties. The tribunal shall determine its own procedure and the rules of law to be applied.

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Article 11 Applicable laws All investment shall, subject to this Agreement, be governed by the laws in force in the territory of the Contracting Party in which such investments are made. Article 12 Prohibitions and restrictions The provisions of this Agreement shall not in any way limit the right of either Contracting Party to apply prohibitions or restrictions or take action in accordance with its laws applied in good faith, on a non discriminatory basis, and to the extent necessary for the protection of its essential security interests, or for the prevention of diseases and pests in animals or plants. Article 13 Application of other rules If the provisions of law of either Contracting Party or obligations under international law existing at present or established hereafter between the Contracting Parties in addition to the present Agreement contain rules, whether general or specific, entitling investments by investors of the other Contracting Party to a treatment more favourable than is provided for by the present Agreement, such rules shall to the extent that they are more favourable, prevail over the present Agreement. Article 14 Area of application As regards the Kingdom of the Netherlands, the present Agreement shall apply to the part of the Kingdom in Europe, the Netherlands Antilles and to Aruba, unless otherwise provided for under para 2 of Article 16 of this Agreement. Article 15 Entry into force This Agreement shall enter into force on the first day of the second month following the date on which the Contracting Parties have informed each other in writing that the procedures constitutionally required have been complied with. Article 16 Duration and termination 1) This Agreement shall remain in force for a period of ten years. Unless notice of termination has been given by

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either Contracting Party at least six months before the date of the expiry of its validity, the present Agreement shall be deemed to have been extended for periods of ten years at a time, each Contracting Party reserving the right to terminate the Agreement upon notice of at least six months before the date of expiry of the current period of validity. In respect of investments made before the date of the termination of the present Agreement the foregoing Articles shall continue to be effective for a further period of fifteen years from that date. 2) Subject to the period mentioned in paragraph 1 above either of the Contracting Parties shall be entitled to terminate the application of the present Agreement separately in respect of any of the parts of the Kingdom of the Netherlands. IN WITNESS WHEREOF, the undersigned, duly authorized thereto, have signed this Agreement. DONE in duplicate at ..... ..... on .....in the English, Hindi and Netherlands languages, the three texts being equally authentic. In case of difference of interpretation the English text shall prevail.

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ANNEXURE 2
OWNERSHIP AND HOLDING STRUCTURE OF THE VODAFONE GROUP, EXTRACTED FROM VODAFONE INTERNATIONAL HOLDINGS B.V. V. UNION OF INDIA & ANR., CIVIL APPEAL NO. 733 OF 2012, ARISING OUT OF S.L.P. (C) NO. 26529 OF 2010, AT PAGE 27 OF THE JUDGMENT

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ANNEXURE 3
PRESS RELEASE CONCERNING NOTICE OF DISPUTE SERVED BY VODAFONE INTERNATIONAL HOLDINGS B.V. TO THE INDIAN GOVERNMENT (Available at <http://www.vodafone.com/content/index/media/group_press_releases/2012/bit.html>, last accessed on 16th July, 2012) Vodafone Serves Notice Against Indian Government Under International Bilateral Investment Treaty 17 April 2012 Vodafone has today served the Indian government with a Notice of Dispute (Notice) regarding proposals in the Indian Finance Bill 2012 that violate the international legal protections granted to Vodafone and other international investors in India. The Notice, served by the groups Dutch subsidiary Vodafone International Holdings BV (VIHBV), is the first step required prior to the commencement of international arbitration under the Bilateral Investment Treaty (BIT) between India and the Netherlands. VIHBV is a company constituted under the laws of the Netherlands and therefore an investor as defined under Article 1(d) of the Treaty. The dispute arises from the retrospective tax legislation proposed by the Indian government which, if enacted, would have serious consequences for a wide range of Indian and international businesses, as well as direct and negative consequences for Vodafone. The proposed legislation would also countermand the verdict of the Indian Supreme Court in January 2012, which ruled that Vodafone had no liability to account for withholding tax on its acquisition of indirect interests in Hutchison Essar Limited in 2007. Under the BIT, the Indian government is obliged, amongst other things, to:

accord fair and equitable treatment to investors; provide full protection and security; not breach the legitimate expectations of investors in making investments; not deny justice or breach previously provided assurances; and not take steps to indirectly expropriate the investment.

Vodafone believes that the retrospective tax proposals amount to a denial of justice and a breach of the Indian governments obligations under the BIT to accord fair and equitable treatment to investors. The Indian governments retrospective tax proposals have also raised significant and widespread concern within India and internationally and have been criticised by businesses and industry bodies representing more than 250,000 companies across the US, Europe and Asia. Vodafone has asked the Indian government to abandon or suitably to amend the retrospective aspects of the proposed legislation as Vodafone would prefer to reach an amicable solution to this matter. However, if the Indian government is not willing to do so, Vodafone will take whatever steps are necessary to protect its shareholders interests, including commencing investment treaty arbitration proceedings under the BIT against the Indian government.

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NOTES

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