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May 14, 20217 min read

Intricacies of Enforcement of International Arbitral Award concerning Cairn Energy Dispute

Updated: Oct 15

Shreya Ahuja and Yasha Goyal*

Abstract

Enforcement of arbitral awards has always been a challenge under the Indian regime. Foreign awards are enforceable under part II of the Arbitration and Conciliation Act, 1996. With progress in arbitration and various amendments, foreign companies are inclined towards investing in India. Although, there have been multiple cases of lacunae in enforcement. One such case is the investment arbitral award, wherein the parties even after getting the award face difficulty in enforcing it. In this article, we discuss the Cairn energy case. The enforcement of the award for this entity is subject to resistance on the ground of technicalities under Indian law and the ground of public policy. The catch is the definition of ‘public policy’ is not restricted and hence it is upon the discretion of Indian courts to determine.

Introduction

India has come a long way and is now recognized as an arbitration pro-nation. However, certain actions of the nation still ensure that India is the last choice when it comes to investment arbitration. In the recent decision of the Cairn energy arbitration dispute, the British Giant won an arbitral award against India on retrospective taxation imposed by India. The Cairn Energy v. UOI.,[1] dispute is pertaining to the applicability of retrospective taxation. India imposed the tax liability on Cairn Energy and they challenged the same as a breach of the Bilateral Investment Treaty (“BIT”). The Permanent Court of Arbitration (“PCA”) ruled that the retrospective demand of tax was in contravention of the Bilateral Investment Treaty signed between UK-India containing a provision of ‘Fair & Equitable’ treatment (“FET”).[2] The FET clause is interpreted according to the treaty. However, by the general notion of international law, FET means a state has to respect and protect the property of other nation-states.[3] In this regard, India argued tax avoidance by Cairn violated the legality provisions of municipal laws in India. However, the PCA decided in favor of Cairn stating the International Customary Law prevails over the municipal laws of the host state and routinely under-investment tribunals such trivial acts do not violate legality provisions of host state municipal laws.[4]

In the present case, despite, the award made by the tribunal there still is room for uncertainty in the enforcement of the award in the host state.

Legislative constraints to enforcement

The challenges to enforcement likely to be faced by this investment arbitral award in India are:

Firstly, India is not a signatory to the International Centre for Settlement of the Investment Disputes (“ICSID”) that offers a confident mechanism of dispute resolution among the signatories for enforcement of an award. India being a non-signatory implies that it does not have the obligation to recognize the BIT arbitral award.

Secondly, to enforce a foreign award under the Arbitration & Conciliation Act, 1996 (“the Act”) the award is not directly deemed a ‘decree’ of court ready to be enforced. It is first scrutinized by the court as per provisions of sections 44 and 48 of the Act. Only after meeting the requirement, a foreign award is considered as a decree liable to be imposed. Under section 44 an award has to be ‘commercial’ and arising out of a reciprocating territory of the Geneva Convention or New York Convention[5].

Thirdly, apart from fulfilling the requirement under section 44A Civil Procedure Code, 1908 (“CPC”) of a ‘foreign judgment’ it has to specify requirements under section 13 of CPC. Such judgment has to be pronounced by ‘court’ and a BIT award fulfills neither of the criteria of ‘award’ and pronouncement by the ‘court’. Further, the BIT award cannot be treated as a ‘foreign award’ under section 44A of the CPC.

Judicial interpretation on ‘commerciality’ of investment arbitration

Also, the applicability of the Act on the BIT awards is questionable as per the Indian Judiciary. As section 44 of Part II of the Act defines foreign awards, the Delhi High Court in the matter of UOI Vs. Vodafone Plc.,[6] wherein the GOI pleaded for a restrain of investment arbitration. The court observed Investment Arbitration is different from commercial disputes. The commercial disputes arose from the contractual liability while the Investment Arbitration is the issue revolving around the public international law. The BIT is signed between two nations to fulfill their mutual obligations wherein if one of the parties breaches such treaty the other party can invoke BIT clause against it.

Although, the BIT provided an agreement between a private investor and host state yet there is no established ‘commercial’ relationship between the two as per the Delhi High Court.[7]

Hence, the Investment arbitration is not the same as the commercial dispute that is within the scope of the Act.

However, the International position does not accede to the above position. The investment treaty arbitration is treated as “commercial” arbitration under the New York Convention. Article 27.5 of the 2016 Model BIT states that the claim under BIT shall be considered to arise out of a commercial relationship for Article I of the New York Convention.

Scope of ‘public policy’ as a ground of opposition

The Indian position at the arbitral proceedings was that the Cairn Energy transaction was not according to the Indian Municipal Laws. The transactions were structured to be tax-avoidant and in violation of the applicable law and regulation.[8] The above contention will also be raised when the same matter reaches for enforcement before courts in India. As any award against the laws of the country can fall under the ground of public policy under sections 34 and 48 of the Act. In this regard, the Supreme Court in Renusagar Power Electric Company v. General Electric Company.,[9] laid down the grounds on which the foreign Arbitral award could be refused on the ground of public policy. The said criteria form a part of public policy:

1. Fundamental Policy of the Indian Law or;

2. The interests of India or;

3. Justice or morality

The court observed violation of public policy is not only limited to a contravention of law but it has to be something more than that.[10] In the particular case Foreign Exchange Regulation Act, (“FERA”),1974, was enacted in the national economic interest which was violated. The court also observed that awards passed in disregard to the superior court shall also be construed as a violation of the public policy of India.

Further also in the case of Cruz City 1 Mauritius Holdings v. Unitech Limited.,[11] the court observed violation of fundamental policy shall be such affecting the uncompromising core values of the nation. The policy shall form an understructure to the values and principles governing the nation.

Similarly, in the Cairn energy, there is a violation of the Indian tax laws and therefore it is a matter of national importance as any decision against it would also question the sovereignty of India on the matters of taxation. Hence, the arbitral award could be a challenge on the grounds of ‘public policy’. Section 48 and section 34 of the Act states that the enforcement of the foreign arbitration can be refused if the enforcement of such an award is contrary to the public policy of India.[12]

A wide interpretation of public policy has been criticized by the international community. The change brought by the 2015 amendment act has narrowed the scope of ‘public policy’. Explanation 2 of section 34(2) restricted courts to interfere with the arbitral awards on the ground of public policy by dwelling into the merits of the case. Further, in Vijay Karia v. Prysmian Cavi E Sistemi SRL and Ors.,[13] it is discussed that mere violation of the Indian law would not render the award unenforceable.[14] The violation shall be such that affects the integral values and principles of Indian laws.

Hence, the ground to challenge the enforcement based on public policy has been narrowed down significantly. This would pave way for Cairn energy to enforce its award in India.

Conclusion

However, one of the major problems that Cairn Energy would face for enforcing the award is the applicability of the Arbitration and Conciliation Act. As only ‘commercial’ arbitration is dealt with by the act. The parties would have to prove that their matter is ‘commercial’ in nature. Further, even after the application of the arbitration and conciliation act the enforcement can be challenged on the grounds of public policy as India in the arbitration proceedings at the first instance had stated that the transactions of the cairn energy are against the Indian Municipal law. Consequently, India has challenged the award in appeal in the Netherlands based on a violation of its sovereignty. Meanwhile, Cairn Energy has registered in 12 other nations where assets of India are located for enforcement of the award in such other nations.

Alternatively, the pro-arbitration approach of the courts in current years might prove to be in favor of Cairn Energy. A swift dispute resolution mechanism and protection of investors is the top priority of investors before entering a host state. At this juncture, a developing nation is in more need of such investments and increases its foreign reserve. Therefore, such intricacies in the enforcement of awards and discretion with the grounds of refusal on public policy are matters which hinder the process of growth. The resistance and hurdles placed by India therefore will one day backfire with lesser opportunities for growth and international relations.

 

* The authors are fourth-year B.A.LL.B students at Institute of Law, Nirma University.

[2] Duane Morris LLP,Cairn Energy v India: A lesson in BIT rights and enforcement, Lexology (Feb 11, 2021). https://www.lexology.com/library/detail.aspx?g=5fc468b6-42cc-4ce6-8392-03d44419a063

[3] OECD, Fair and Equitable Treatment Standard in International Investment Law(2004).

[5] Arbitration & Conciliation Act,1996 § 47-48 (2020).

[6]Union of India v. Vodafone Group PLC United Kingdom & Anr, C.S. (S) 383 / 2017, High Court of Delhi.

[7] Id.

[8] Supra note, 4.

[9] Renusagar Power Electric Company v. General Electric Company, AIR 1994 SC 860.

[10] Id.

[11] Cruz City Mauritius Holdings vs. Unitech Limited, 2017 239 DLT 649

[12] Arbitration & Conciliation Act,1996 § 34-48 (2020).

[13] Vijay Karia v. Prysmian Cavi E Sistemi Srl, 2020 SCC OnLine SC 177.

[14] Id.

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