Union of India v. Vodafone Group PLC United Kingdom: Case Comment

by Ayush K. Singh and Vanshika Sharma

Introduction

On May 7, 2018, the Hon’ble High Court of Delhi issued a landmark judgement in dismissing the suit filed by the Union of India (“Plaintiff”) and refused to hinder second international arbitration initiated by Vodafone Plc. against the plaintiff under the India-United Kingdom Bilateral Investment Protection Agreement (BIPA/BIT) in 2017. The Delhi High Court ruled that multiple claims under different BITs did not per se give rise to abuse of process and the arbitral tribunal was competent to decide the matter.

Factual Background

In 2007, 67% of stakes of Hutchison Whampoa was bought by Vodafone. The stakes included the cellular services and other possessions of Hutchinson in India. In the Month of September the very same year the Income Tax Department raised the demand of Rs. 7,990 Crores with respect to the profit arising from the capital holdings.

The demand notice was further challenged in the Bombay High Court by Vodafone Group, however the judgement came in favour of the Income Tax Department. Dismayed by the judgment of Bombay High Court, Vodafone made an appeal before Hon’ble Supreme Court of India wherein the matter was decided in the favour of Vodafone Group and opined that appellant is not obligated to pay taxes for the gains in stake purchase deal.

In 2012, the Parliament of India came up with an amendment in the Finance Act which had a significant impact on the powers of Income Tax Department and having retrospective applicability. Due to its retrospective effect, the amendment authorized Income Tax Department to demand tax even for stake purchase deals.

As a result of this amendment, the Vodafone Group served a notice of arbitration for the settlement of dispute related to the fiscal policies of India by invoking clause 9 of the Bilateral Investment Treaty which was signed between India and Netherlands. In reply the Union of India contended that the dispute related to taxation is not covered under BIPA and hence the notice of dispute is baseless. Following the contentions raised by the UOI, on April 17, 2014 the Vodafone Group again served a notice of arbitration stating that the objections raised could be adjudicated by the tribunal established by the India-Netherlands BIPA.

On June 15, 2015 Vodafone Group again served the notice of arbitration but this time under a different BIPA which was under the India-UK BIPA. Under the same India-UK BIPA a second notice was served to the Union of India in January, 2017. The UOI after being served several notices declared the second notice invalid and approached High Court of Delhi to put Injunction and restrict the Vodafone Group from initiating arbitration under India-UK BIPA.

Issues

The present case had been heard on the following issues:-

1. On the issue of arbitration the discussion was on whether the courts have jurisdiction on the present dispute and if there is a lack of jurisdiction in the BIT Arbitrations.
2. What is the approach to treaty obligations and the interpretation of international treaties was dealt.
3. The law governing the matters of BIT Arbitrations was ascertained from amongst either the private international law or other system of law including the domestic laws.
4. Filing of multiple claims with similar contentions was an abuse of process and courts had power to restrain the BIT arbitrations.
5. Whether the consolidation of arbitral proceedings was an option for settlement to the abuse of process by Vodafone.
6. The injunction order dated August 22, 2017 is vitiated on the ground of suppression.

Grounds

The Plaintiff had sought anti-arbitration injunction from the Delhi High Court broadly on the following two grounds:

1. Abuse of Process: It was contended by Mr. Sanjay Jain, the learned senior counsel representing the Plaintiff, that the second arbitration application aimed to multiply the arbitration proceedings and augments the chances of success for the defendants. Moreover, the Plaintiff contended that the defendant issued a notice under the India-UK BIPA after 18 months since they were acquainted with the jurisdiction objection, which acted as a tool to procure an additional opportunity for pursuing the claim.
2. Jurisdiction: The learned senior counsel for the Plaintiff submitted that the domestic Courts are required to exercise its jurisdiction in accordance with the applicable domestic laws. In the case of World Sport Group (Mauritius) Limited v. MSM Satellite (Singapore) Pte Limited,^[1] the Hon’ble Court opined that the domestic courts in India are competent to try all suits of civil nature except for suits of which cognizance is either expressly or impliedly barred.[2] It was also specified that the present Court has jurisdiction to prevent the abuse of process and hence cannot refrain from it. Further, Article 21 of UNCITRAL Rules was taken into consideration, which did not stipulate negative formulation of the kompetenz kompetenz principle that put a bar on a competent Court from exercising its jurisdiction to prevent the abuse of process.

The Plaintiff also contended that permitting the defendant’s claim would be contrary to the principle of good faith and the doctrine of election which was recognized by both the domestic as well as the international law. He also submitted that India-UK BIPA was unnecessary and premature at this stage.

He prayed the Court to exercise its inherent jurisdiction to prevent the abuse of process and grant an anti-arbitration injunction and restrain the Defendants from continuing with Arbitration proceedings as done by Calcutta High Court in The Board of Trustees of the port of Kolkata v. Louis Dreyfus Armatures SAS.^[3]

The Defence taken by the Vodafone Group^[4] was limited to 4 justifications. Firstly, Vodafone Group argued that this Court^[5] lacks jurisdiction to entertain disputes arising out of a treaty between two sovereign nations nor did they have the Jurisdiction Ratione Personae (i.e. over the Defendants). Secondly, It was submitted that Domestic laws were not a defence to non-performance of obligations under a treaty, reliance was taken upon by the Articles 26 and 27 of the Vienna Convention on the Law of Treaties.^[6] Thirdly, It was submitted that in circumstances where the domestic law overlaps with the obligations under a treaty and the domestic law involved the action of National Courts, the Actions themselves could be considered as a violation of the Treaty.^[7] Fourthly, it was emphasized that the Union of India had elected to seek relief from India- Netherlands BIPA^[8] tribunal, but without awaiting its orders and without seeking its leave, moved the present court for the same relief on the same grounds such a conduct would disentitle Union of India to relief by the way of interim injunction under the principles of Indian National Law.

It was offered by the Defendants to consolidate two arbitration and with the consent of parties, both arbitrations could be consolidated before the same tribunal.

Judgement

The Hon’ble High Court of Delhi recognised the international principle of kompetenz kompetenz i.e. powers of arbitral tribunal to rule on its own jurisdiction, and its limited power to intervene in BIT arbitrations. The present suit was dismissed with liberty to the Plaintiff-Union of India to raise the issue of abuse of process before India-UK BIPA which will decide the issue on its own merit.

The Tribunal while deciding the said issue took into account the Defendants’ undertaking to this court that if the Plaintiff-Union of India gives its consent, it would agree to consolidation of the two BIPA Arbitration proceedings before the India-UK BIPA Tribunal. Accordingly, the ex-parte interim order dated 22nd August, 2017 stands vacated. There was no order as to costs.

Critical Analysis of the Judgment

1. The Hon’ble Delhi High Court took note of the statements made in India-United Kingdom BIPA arbitration notice by the Defendants in regard to the extensive investments made in India for business expansion and remarked that the cause of action arose partly within the jurisdiction and defendants by the action of investment have purposefully availed of Indian jurisdiction, will be considered as working for gain within the jurisdiction of India. Considering the test of residence in the present case where a corporation is incorporated under the laws of another state, it will be satisfied by applying the principles of “single economic entity”^[9] and accordingly the 3 entities, i.e. Defendant 1, 2 and VIHBV as well as its Indian subsidiary are one single economic entity. This Court has jurisdiction over the subject matter of the dispute because the courts of equity exercise jurisdiction in personam.^[10]
2. The court highlighted the fundamental difference between investment arbitration disputes and commercial disputes wherein investment arbitration dispute is grounded on guarantees and assurance of the state and are neither commercial in nature. The investment arbitration derives its root from the public international law. Indian approach towards treaty obligations was also highlighted through article 51(c)^[11]  of the Constitution of India which contends state responsibility to foster respect for international law and treaty obligations. It is pertinent to mention that even when India is not a part to an International Treaty or convention, International Laws which are not contrary to domestic laws are followed by the courts in this country. This observation is not only relevant for interpretation of India-United Kingdom BIPA to which India is a signatory but also VCLT^[12] to which India is not a signatory. The rationale behind bilateral investment treaty is to provide protection to a private investor from expropriation by the Foreign State. The said conclusion was in consonance to the VCLT, since domestic law cannot be a defence for or non performance of the obligations under a treaty.^[13]  Conclusively, there was no inherent bar or lack of jurisdiction in the court to deal with BIPA arbitrations.
3. As per the Court’s reasoning in the present case, a Domestic Court would not exercise the jurisdiction where subject matter in the dispute is governed by an investment treaty having its own mechanism unless there are some compelling circumstances and the court has been approached in good faith and there is no effective alternative remedy available.
4. The Hon’ble Court stated that the entire scheme of BIPA is contractual and it is conspicuous from the contentions that the Union of India consented to the international investment arbitration under the principles of international law as a method of dispute resolution under BIPA. Furthermore, the defendant’s offer to consolidate the proceedings would ensure that no relief is granted twice. The Court also mentioned the Plaintiff’s contention that the order would entitle the defendants a double relief or impose double jeopardy on Plaintiff or pass conflicting orders is remote.
5. The Court highlighted that principle of kompetenz kompetenz^[14]  is explicitly engrafted in India-UK BIPA which is generally accepted and authorizes the arbitral tribunal the power to investigate its own jurisdiction. The Court is of the view that without waiting for the reward being rendered by India-Netherlands BIPA Tribunal, the Plaintiff cannot approach the National Court on the same grounds.

Conclusion

The present ruling of the Delhi High Court is a welcome step for the International Investment Arbitration. Investment Treaty Arbitration between a private investor and the host state is not a treaty but a sui generis which is recognized all over the world. The same has its roots in public international law, obligations of state and administrative law. It is very clear from this case that international investment arbitration and international commercial arbitration are two opposite sides of the same coin. It was highlighted in the case that even though India is not a signatory to VCLT, the guiding principles of the same would be applicable to BIPA.

The Permanent Court of Arbitration held that the retrospective legislation brought by India was against the fair and equitable treatment guaranteed under BIPA and decided the case in favour of Vodafone. India has also challenged Vodafone Arbitration Award in Singapore tribunal on 21st December, 2020.

Inadvertently, the Delhi High Court came up with the landmark judgment which clearly expressed that there is no threshold bar or inherent lack of jurisdiction in the Courts to deal with BIPA Arbitrations. The judgment also marks the victory for the taxpayer as the right to legitimately plan its affairs is supported.

^[1] (2014) 11 SCC 639.

[2] Civil Procedure Code, 1908; Section 9

^[3] (2014) SCC OnLine Cal 17695.

^[4] Vodafone Group PLC (Defendant No. 1) and Vodafone Consolidated Holdings Pvt. Ltd. (Defendant No. 2)

^[5] High Court of Delhi

^[6] Vienna Convention on Law of Treaties, 1969, Art. 26 states Pacta sunt servanda  – “Every treaty in force is binding upon the parties to it and must be performed by them in good faith.” Art. 27 states Internal law and observance of treaties: “A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty. This rule is without prejudice to article 46.”

^[7] Responsibility of States for Internationally Wrongful Acts (ARSIWA), 2001, Article 3 states Characterization of an act of a State as Internationally wrongful: “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.” CHAPTER 2 Attribution of Conduct to a State, Article 4 states Conduct of organs of a State- “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.” (emphasis added).

^[8] Agreement between the Republic of India and the Kingdom of the Netherlands for the promotion and protection of investments, Article 10 states the terms in case of Disputes between the Contracting Parties.

^[9] Pankaj Aluminium Industries Pvt. Ltd. v. Bharat Aluminium Company Ltd., 2011 IV AD (Delhi) 212; Relied on DHN Food Distributors Ltd. v. London Borough of Tower Hamlets, [1976] 3 All ER 462 (Pg. 467).

^[10] Modi Entertainment Network v. W.S.G. Cricket Pte Ltd., (2003) 4 SCC 341.

^[11] Article 51(c) in The Constitution of India, 1949 states, Foster respect for international law and treaty obligations in the dealings of organised peoples with one another; and encourage settlement of international disputes by arbitration (PART IVA FUNDAMENTAL DUTIES).

^[12] Vienna Convention on the Law of Treaties, 1969.

^[13] Article  27. Internal Law and Observance of Treaties, Vienna Convention on the Law of Treaties, 1969.

^[14] Article 21 of UNCITRAL Arbitration Rules, 1976.