The Corporate & Commercial Law Society Blog, HNLU

Tag: Arbitration

  • Robinhood: A Case Study against Mandatory Consumer Dispute Arbitration

    Robinhood: A Case Study against Mandatory Consumer Dispute Arbitration

    BY PRATEEK, GRADUATE FROM ARMY INSTITUTE OF LAW, MOHALI

    Introduction

    Arbitration has seen a meteoric rise in adoption in the United States of America (“The USA”). This can primarily be attributed to the arbitration friendly approach taken by the courts while interpreting statutes like the Federal Arbitration Act, 1925. A manifestation of this became the arbitration friendly approach taken towards arbitrability of disputes. Consumer dispute arbitrability is a glaring example of this. While Indian courts have taken a cautious approach towards consumer dispute arbitrability, ruling against the mandatory enforcement of pre-dispute arbitration agreements, courts in the USA have allowed mandatory enforcement of pre-dispute arbitration agreements. This case study of arbitral proceedings against Robinhood provides an analysis into the problematic aspects of mandatory consumer dispute arbitration.

    Background

    Robinhood Market is a trading platform founded in the USA in the year 2013. The platform is primarily populated by day traders and retail investors consisting of primarily small portfolios of shares and options trading.

    Retail investors identified that stocks like AMC and GameStop were being betted against by some Wall Street Hedge Funds. Against such backdrop, the community aimed at pumping the stock to sky-rocket its price till they achieve a short-squeeze through buying and holding shares. This caused a frenzy of online memes, sounding calls for retail investors to cause a short-squeeze, and earned these stocks the designation of “meme stocks”. Robinhood saw massive trading volumes since the retail investors were primarily driving this surge. This allegedly caused a major liquidity crisis for the platform creating an inability for Robinhood to meet collateral requirements for trades with National Securities Clearing Corporation (‘NSCC’), their clearing house. Due to this, Robinhood restricted trading on these “meme stocks”, causing substantial losses to customers.

    The FINRA Way of Arbitration

    Alleging damages due to missed-opportunity for making profits through trading said “meme stocks”, caused by Robinhood’s trading restrictions, a few users decided to raise their claims against the platform. Claims were raised through disputes governed by Section 38 of the Robinhood Consumer Agreement , which contains a pre-dispute arbitration clause whereby all disputes between parties to the agreement are to be mandatorily submitted for arbitration before Financial Industry Regulatory Authority (‘FINRA‘) Dispute Resolution in the State of California.

    In January 2022, Jose Batista, a retail investor aggrieved by Robinhood’s actions, was awarded approximately $30,000 through the FINRA Dispute Resolution Mechanism. While this award is seen as a victory for the average retail investors, the mechanism through with the award was won creates a barrier that systematically isolates the approach to remedy for every consumer. Robinhood’s actions caused losses to multiple customers but due to arbitration being the mandate, the dispute cannot be resolved through any form of class action. This barrier is further solidified through the FINRA Code of Arbitration Procedure for Consumer Disputes, under which Rule 12204 posits that class action claims cannot be arbitrated under the code.

    American Position on Consumer Dispute Arbitration

    In the USA, arbitration is primarily governed at the federal level by the Federal Arbitration Act, 1925 (“The FAA”). Under this statute, once the mandatory arbitration clause is established, the court is required to refer the dispute to arbitration. This mechanism has been radically interpreted by the Supreme Court in Moses H. Cone Memorial Hospital v Mercury Construction Corp., where the court mandated a presumption in favour of arbitration when faced by an arbitration agreement. The doctrine of unconscionability does provide respite to parties in cases where the contract is clearly tarnished by unfair terms, and deficient or imbalanced bargaining powers between parties. But this test has been held in Zapatha v Dairy Mart Inc., to be applicable only on a case-to-case basis since the court posited that no all-purpose definition of unconscionability was possible. Further, the already limited grounds for escaping mandatory arbitration, restricted to prima facie unconscionability, fraud, misrepresentation, coercion, incompetence, and illegality of consideration being established through a bare reading of the agreement, were held to be subject to the doctrine of separability in the case of Prima Paint Corp. v. Flood & Conklin Mfg. Co.. Application of the doctrine of separability meant that tainted sections of an arbitration agreement could be excluded, to allow a consistent and legally binding reading of the mandatory arbitration agreement, as long as the agreement was not entirely vitiated or defeated by such exclusions. Consequently, all claims of fraud and unconscionability are also to be adjudicated upon by the arbitral tribunal. 

    Exceptionalism of arbitration forms the centrepiece of judicial jurisprudence on the subject in America. This overriding prioritization is manifested through the sections under the FAA, and with the case of Southland Corp. v. Keating, the Supreme Court ruled that the FAA pre-empts all state laws on the subject. Consequently, statutes like the Mont. Code Ann. § 27-5-114 (1993) providing safeguards to protect consumer interests, were struck down by the court while holding the law restrictive of arbitration. This exceptionalism is especially mind-boggling as the prohibitively expensive nature of arbitration and its deterrent effect on a consumer’s ability to bring disputes to court has been noted by courts. While exorbitant and incapacitating cost of arbitration was acknowledged as grounds for escaping arbitration, in Green Tree Financial Corp.-Ala. .v Randolph, the Supreme Court held that the burden to prove the prohibitive nature of costs was on the consumer who is seeking to escape mandatory arbitration. 

    With respect to class action arbitration, in cases where the agreement is silent on the issue, the Supreme Court in Green Tree Financial Corp. v. Bazzle delegated the task of determining the issue to arbitral tribunals. Through subsequent decisions, this power was significantly curtailed. In the case of AT&T Mobility L.L.C. v. Concepcion, the Supreme Court held that the FAA pre-empts the use of unconscionability as means to allow class action consumer arbitration. The court further expressed displeasure against the concept of class action arbitration itself. 

    Shortcomings of Consumer Dispute Arbitration Praxis from an Indian Perspective

    The Robinhood case study can provide interesting insights from an Indian standpoint into the following possible ramifications of a liberal approach towards consumer dispute arbitrability:

    A. Lack of Precedent Value:

    Some arbitration agreements, like in the Robinhood case, may not require a reasoned order. In any case, even if a reasoned order made, this cannot be used as precedent in arbitral proceedings by other aggrieved consumers under the same issue. This is primarily due to mandatory confidentiality requirements and further lack of precedential value of awards. This may create deterrence for smaller claims being raised. Since facts are usually similar in consumer disputes arising out of unfair business practices, creation of precedence defeats the impediment created by class action waivers. This is due to the creation of certainty in outcome.

    B. Prohibitive Cost:

    The public policy argument against arbitration is premised on the comparative inferiority of arbitration in comparison to court adjudication. On this subject, in Vidya Drolia v Durga Trading Corp. The Supreme Court of India reiterated the observation made in Union of India v. Singh Builders Syndicate, stating that arbitration is expensive for parties in comparison to judicial adjudication.

    This prohibitive cost creates a virtual barrier against consumer arbitration. Consumer disputes largely involve smaller claims, and recognition of this fact is evident from the regime of costs under the Consumer Protection Act, 2019. This issue is magnified under consumer disputes where the claimant is usually an individual consumer who may not anticipate the grant of compensation to extents that would justify the risk of undertaking expensive arbitration proceedings. 

    C. Unequal Bargaining Powers in Standard Form B2C Agreements:

    Indian courts have observed limited acceptance of the doctrine of unconscionability as grounds for nullifying agreements under public policy. In these cases, the doctrine of unconscionability was based on unequal bargaining power. Similar inequality is observed in standard form B2C contracts, especially in a country like India. This inequality is exasperated by widespread digital illiteracy and a lack of legal awareness. Thus, there is scope for applying the principles of unconscionability in India under public policy for denying enforcement of mandatory arbitration agreements. 

    D. Express and Implied Class Action Waivers:

    Since arbitration attains legitimacy through party autonomy, any breach in privity of contract would compromise such autonomy and consequently, the whole process of arbitration. This structural barrier can be avoided if Business to consumer agreement (‘B2C‘) agreements allow for class action lawsuits, but businesses lack the incentive to allow such provisions. Due to the inequality in bargaining power regarding standard form B2C agreements, class action waivers become a part and parcel to protect business interests.

    Class action becomes an essential tool for vulnerable parties to attain equality in bargaining power while seeking redressal of disputes. While in cases of victories, the overall compensation may not be as high as individual claims due to their division amongst a large class, the risk value being low rationalises the trade-off. This is because raising disputes is itself expensive, and class-actions allow division of costs. Such metrics are particularly relevant for arbitration, while is an uncertain and expensive process. 

    The Way Forward

    While class-actions may provide some respite to consumers from above-mentioned issues, business incentive to include class-action waivers in standard form contracts is very high. Further, lack of precedent on legality of these waivers in India makes this argument moot for now.

    Interestingly, the pro tem solution to this issue is possible through elimination of the incentives that businesses have for undertaking consumer arbitration. In Manchester City Football Club Ltd v Football Association Premier League Ltd., an English court published a confidential arbitral award in the name of public policy. Such publication of awards impacting a larger class of people under the direction of courts may be useful for arbitral tribunals engaged in similar disputes against the same unfair business practice. While arbitral awards are not binding precedents, persuasive value can surely be derived. This is especially true since the award in such cases is granted higher legitimacy due to recognition of public interest by the court. Eliminating reduced publicity of claims is a disincentive for businesses to promote expensive arbitration with consumers since the biggest ace up their sleeves is rendered useless.

  • Asymmetric Jurisdiction Clause: A note on determining transnational jurisdictional dispute 

    Asymmetric Jurisdiction Clause: A note on determining transnational jurisdictional dispute 

    By Manan Mondal, An SLS, HYDERABAD law graduate

    In general a jurisdiction clause dictates the forum where parties want their disputes arising under the terms of the agreement to be determined before a Competent Court with necessary jurisdiction. However, with present day drafters of finance agreements containing a limited jurisdiction clause, termed asymmetric jurisdiction clause, have created an unnecessary stir in determining the competent jurisdiction. The present analysis sheds some light towards deciphering the jurisdictional turmoil.

    What is Asymmetric jurisdiction?

    Herein parties decide the jurisdiction of the Court or Courts to adjudicate the dispute, allowing one party, usually the lender, to sue the other party, generally the borrower, in any Court of law but preventing the borrower from proceeding in any Court except the one with exclusive jurisdiction.

    For instance, through the terms of the contractual arrangement, in an Asymmetric Jurisdiction Clause between X and Y, Y has limited authority over particular designated jurisdiction named A, while X has jurisdiction to sue in any Court under such a clause. Hence, the terms of an Asymmetric Jurisdiction can also be understood as an exclusive choice of Court or devolving a choice of jurisdiction upon a particular Court, as opposed to the essential factors followed in our domestic Civil Procedure Code, 1908.

    Now, this liberty of choosing any Court to refer the dispute by the party with broader jurisdiction casts a few fundamental questions, i.e., whether such a Court will be stricto sensu ‘any Court’ or a Court of ‘Competent Jurisdiction’? And whether there exist any judicial opinion to determine the competence of a ‘Court’ in a transnational dispute?

    Generally, a non-symmetric jurisdiction draws its sustenance from two primary legislation of the European Union- the Brussels Regulation (Recast) and the 2005 Hague Convention. However, following the Brexit, the Brussels regulation is no longer a valid authority post-December 2020 in the United Kingdom. Parties are constrained to find shelter under the 2005 Hague (Choice of Court Agreement), making it difficult for them to navigate through turbulent jurisdictional waters.

    The Dissonance between Exclusive jurisdiction and Asymmetric jurisdiction

    The Hague Convention relates to an ‘exclusive’ choice of Court arrangement under article 3(a). This exclusivity must be mutual, and a clause stipulating the parties to either sue in a limited jurisdiction or in any other Court will not be an exclusive choice of court, since it designates more than one Court as the venue for dispute resolution. However, different types of arrangements are still valid in determining the suitable jurisdiction, and the 2005 Hague Convention does not protest such domestic legislations towards determining of Court’s adjudicatory authority. Therefore, ‘Exclusive Jurisdiction’ is when the Court of one contracting party is designated to decide the dispute to the exclusion of other jurisdictions, provided the transaction is international. An asymmetrical clause makes this choice of Court a contractual agreement, with the chosen forum applying its laws and procedures, even if the proceedings are running concurrently in another jurisdiction. And the party resisting the choice of agreement needs to establish exceptional circumstances to save itself from this jurisdictional bargain.

    In the English case of Commerzbank AG v Liquimar Tankers Management Inc, (‘Commerzbank AG‘) the issue before the Hon’ble High Court was whether the asymmetric jurisdiction clause is akin to the exclusive jurisdiction clause within the Brussels Regulation (Recast). As per article 31(2) of the Brussels 1 Recast, the jurisdiction agreement confers exclusive jurisdiction on the Courts of an EU member state; but this notion is true when any EU member state has been granted a limited jurisdiction, as in the instant case. Furthermore, Etihad Airways PJSC v Flother [2020] confirmed that the agreements conferring jurisdiction on the Courts of member states through an asymmetric clause would be akin to an exclusive jurisdiction clause. Thus, dictums flowing through article 31(2) of the Brussels 1 Recast will render concurrent judicial processes in other destinations redundant, an absurdity under the 2005 Hague Convention.

    Hence, according to Justice Cranston in Commerzbank AG, the asymmetric jurisdiction is akin to the exclusive jurisdiction clause, and the parties can sue only in the agreed or designated Court, deriving the ratio from Mauritius Commercial Bank Ltd v. Hestia Holdings Ltd ], where it is rightly held the party with the broader jurisdiction can sue in any Court with ‘competent jurisdiction’ the term ‘any Court’ symbolizes a Court with the necessary authority to hear the same.

    Conferring Jurisdiction in Asymmetric Clauses

    An asymmetric choice of court agreements, where only limited freedom to determine the courts having jurisdiction is allowed, should be respected. The jurisdiction of any alternative court depends on whether that Court has personal or subject matter jurisdiction.

    In the seminal decision of Apple Sales International v eBizcuss: Cass. 1ere Civ, (‘Apple Case‘), a dispute between companies incorporated in France and   Ireland, respectively, arose. They entered into an agreement containing an asymmetric clause and agreed that disputes would be decided by the Courts of the Republic of Ireland. However, the clause also allowed the Irish company to resolve disputes before the Court of counterparty’s registered office or in ‘any country’ where it suffered loss caused by the counterparty. The Irish entity then argued that the French Commercial Court did not have the necessary jurisdiction vide the asymmetric clause, and Courts in Ireland had the sole jurisdiction. Under these circumstances, following the afore-established rule of jurisdiction and competency, Ireland must have had broader jurisdiction. In contrast, the French entity had limited jurisdiction over Courts in the Republic of Ireland.

    However, the French Supreme Court took a different stance on the issue of asymmetric jurisdiction in X v Banque Privée Edmond de Rothschild. It observed that the asymmetric clause would be upheld provided there is no unilateral jurisdiction clause, failing the core purpose of the clause. In the Apple Case, it was not open to the entities with the benefit clause to choose jurisdiction in any country; the flexibility of selecting jurisdiction is limited to the registered office or where any loss was caused, and the other party has suffered. The French Supreme Court made it clear that asymmetric clauses are to be avoided that allow a single party to apply to any jurisdiction of its choosing unless other possible forums with competent jurisdiction can be objectively determined and applied.

    These French dictums might appear contrary to the notable English decisions in the Commerzbank AG and the Hestia Holdings case. Still, we can establish a faint connection that the flexibility of wider jurisdiction in the hands of one party is not an infinite ray of jurisdiction. It bends before the need of necessary subject matter to such unimpeded jurisdiction.

    Conclusion

    Let’s take an illustration wherein X is conferred the wider jurisdiction to unilaterally approach any Court through the asymmetric clause and Y to the limited jurisdiction A. Whether in such circumstances, it is fair for the transnational parties in an agreement to choose any Court, destination B, which is outside the knowledge of Y? And would the decision by the Courts of such country B have any bearing on the parties? It is a visible hurdle in these limited jurisdiction clauses.

    In the case of Dr Jesse Mashate vs Yoweri Museveni Kaguta , theEnglish Court has tried to answer this riddle. In this case, an overseas party was subjected to the jurisdiction of the English Courts, and necessary summons was served. However, the overseas party failed to submit the necessary defence or any document intended to protect; consequently, the Court issued a default judgment under the English Civil Procedure Rules.

    The Court of Appeal construed that before involving a party to the jurisdiction of the English Courts, i.e., destination B, the party A, with flexible jurisdiction, must explain why such Court has an authority over the dispute and the party be subjected to such jurisdiction. Otherwise, an overseas party must not be vexed with proceedings lacking substance, who bear no other allegiance to the English Courts’ jurisdiction must not be vexatiously subjected to service upon them of process issued out of English courts. Therefore, an applicant to serve out of the jurisdiction must explain the reason behind conferring jurisdiction and how the overseas party is subjected to the exorbitant jurisdiction of that unilaterally chosen Court.

    Hence, the term ‘any Court’ and ‘competent jurisdiction’ are intertwined in financial agreements containing asymmetric clauses. The asymmetric clause is not an agreement to confer jurisdiction where none would otherwise exist; rather it limits the power of one party to approach a certain court, and expands for the another to ‘any Court’. It preserves the right to sue in any court which would reserve itself as competent by establishing a link with the subject matter; otherwise, an infinite ray of broad jurisdiction will be unnecessarily exorbitant on the parties to the agreement.

  • The Spain-Colombia BIT and What it Holds for the Future of Dispute Resolution

    The Spain-Colombia BIT and What it Holds for the Future of Dispute Resolution

    by Abhay Raj and Ajay Raj, third-year and fourth-year students at Jindal Global Law School and Symbiosis Law School PUNE, respectively.

    On 16 September 2021, the Kingdom of Spain’s Prime Minister, Pedro Sánchez and Republic of Colombia’s President, Iván Duque Márquez singed the ‘promotion and reciprocal protection of investments’ (the ‘BIT’). This has been done with a view to provide legitimate rights to both the parties, to achieve the objective of public interest, and to ultimately secure reciprocal protection for their investments. With that, the BIT aims to ensure more independent, impartial, transparent, and coherent arbitration procedures for dispute resolution. While the BIT is not in the public domain yet, however, once in force, it will replace the 2005 Colombia Spain BIT. Owing to a review process that lasted for more than three years (began in December 2017), there are certainly high expectations with the new Colombia-Spain BIT, including inter alia, substantive protections and procedural rights.

    Over the past few years, Spain and Colombia, two of the largest economies in the world, have undertaken notable reforms in the regime of international investment agreements and its framework. Including but not limited to Colombia’s revamping its Model BIT and Spain focusing on European Union’s investment protection policy. While Spain’s reform has largely been motivated by its experience in investor-State arbitration, Colombia’s reform directly emanates from its inactivity in investor-State arbitration before the year 2006. Common to both is the reform to modernise their investments with a focus on managing their exposure to investor claims. The reforms undertaken by both countries has led to the signing of the BIT.

    Spain’s Outlook

    The Colombia-Spain BIT fits into the narrative of being symbolic and following a systematic reform. The decision to modernise and renegotiate the 2005 BIT appears to follow the coeval discussions in the investment arbitration regime, including the conventional investor-state dispute settlement (‘ISDS’) system, Organisation for Economic Co-operation and Development (‘OECD’), and post-Treaty of Lisbon and European Union framework which authorised the European Commission for negotiating international investment agreements (‘IIAs’) with non-European Union states (regulation 1219/2012). Thus, the Spain government had to obtain authorization from the European Commission, before carrying out the negotiations with Columbia, ensuring a focus on EU objectives and policies.  

    The new BIT, 2021, assists in aligning Spain’s interest in investment commitments governing bilateral relations, with the European Union objectives and principles and European Union’s investment protection policy. These objectives and principles are broader policy considerations, for instance, promotion of democracy, human rights, sustainable development, fundamental freedoms, rule of law, standard of treatment, FET clause, and other features (briefly discussed in the latter part of the article). Despite Spain’s inactivity and non-participation in the realm of international investment, it has been one of the most competitive and attractive markets in the European Union. This is demonstrated by the fact of Spain’s being the third-largest in the investment market in the EU and thirteenth recipient of foreign investments in the world. The 2021 BIT is significant because of the fact that Spain signed a BIT after more than 10 years, and its far-reaching mandate maybe its advent into the area of international investment.

    Colombia’s Outlook

    The Republic of Colombia, following 2006, has been mindful of signing and negotiating BIT’s with different States. Colombia till the year 2006, only signed two BIT’s with Peru (1994), and Spain (2005). Following that, it signed more than fourteen BITs. With that, the Republic of Colombia felt the need to renegotiate the existing BIT of 2005 with Spain to follow the trend after 2006 and the Colombia BIT Model, 2017.

    The investment agreement between Colombia and Spain is symbolic from Colombia’s standpoint. Firstly, it is the first agreement that was renegotiated after Colombia’s Model BIT, 2017. The Model BIT, 2017 itself came after Colombia’s experience with the investor disputes (including, Glencore International AG and CI Prodeco SA v Republic of Colombia, ICSID Case No ARB/16/6; Ame ́rica Mo ́vil SAB de CV v Republic of Colombia, ICSID Case No ARB(AF)/16/5;  Eco Oro Minerals Corp v Republic of Colombia, ICSID Case No ARB/16/41; Gas Natural SDG and Gas; and in total 13 such cases) concerning old BIT’s (Model BIT-2003, 2006, 2009, 2011).

    Secondly, the Colombia-Spain BIT has followed the Colombian Constitutional Court’s judgement (available here), which conditioned on issuance of a joint interpretative note of the provisions entailed in the BIT. According to the Colombian Constitution, the Court’s must assert whether the international treaties signed (and before ratification) are constitutionally valid or not. As such, if the Constitutional Court rules that the treaty’s clauses are unconstitutional, it is unfit to enter such treaty into force.

    Features

    The changes introduced by the renegotiated Colombia-Spain BIT precisely include: (i) Replacing the conventional Investor-State Dispute Settlement with the Multilateral Investment Courts once the treaty comes into force and replaces the 2005 BIT; (ii) Explicitly stating the non-consideration of holding companies as investors, i.e., explicitly excluding companies that merely hold financial interest; (iii) Excluding the fulfilment of the commitments assumed by the Contracting Parties in commercial and economic integration projects and implying that most-favoured-nation treatment cannot be reached into other treaties; and (iv) Miscellaneous changes (reviewing of the Standard of Treatment, the Fair and Equitable Treatment standard, Denial of Benefits clause, and inclusion of Transparency Rules of the United Nations Commission for International Trade Law (‘UNCITRAL’)).

    • Multilateral Investment Courts

    As a BIT that is signed at an hour when the world is calling reforms in the Investor-State dispute settlement, (for instance, India; Bolivia; Ecuador; Venezuela; Pakistan have refrained from ICSID Convention), the Interpretative Declaration has catalysed Multilateral Investment Court (‘MIC’) and replaced the conventional ISDS system. The proposal of MIC which began with the UNCITRAL Working Group III suggestion (by the European Union and to which Spain is a member state) has come into play with the recent BIT. Such a Court would adjudicate upon claims brought under IIAs, which the member States have decided in assigning the authority. Both of the bodies shall be staffed by decided adjudicators and would be paid on a permanent basis by the member states, with a secretariat to support them.

    Such a negotiation is correlated with the EU’s efforts in calling for a global level reform in the ISDS system. As also evident in the 2019 Final Dutch Model BIT, the EU is taking steps against replacing the conventional system with a permanent investment court arbitration tribunal; for instance, the EU council provided the European Commission for establishing a MIC under the auspices of UNCITRAL.

    The renegotiation has been placed ensuring independent, coherent, impartial, predictable, and transparent arbitration procedures. However, the BIT could have worked on bringing reforms to the conventional ISDS system. For instance, the new BIT could have provided explicit provisions regarding the advisory centre, third-party participation, claims on public money, and third-party funding (as suggested in the UNCITRAL Working Group III session). The BIT could have drawn a fine balance between the conventional ISDS and State’s exposure, by incorporating several exclusions/reservations with respect to the applicability of the system.

    Notwithstanding that, as also discussed in the blog piece by Andreea Nica, the MIC can effectively cater to the concerns regarding duration and cost of the proceedings, appointment of arbitrators, arbitral decisions’ predictability and consistency, and regarding diversity, independence and transparency. Adoption of MIC, thus, acts as a catalyst in providing a better arbitration regime for both the countries (since it mitigates the above mentioned flaws in ISDS system). With that, being a permanent first instance tribunal, MIC would provide for effective enforcement of the decisions in the BIT. Because of the far-reaching implications of the BIT protection standards, MIC would help in an effective process that works transparently and with highly qualified arbitrators. Spain and Colombia being active protectors of the key legal principles of the international investment law, will definitely be able to uphold the principles through the reforms in the BIT, in particular, the ISDS system.

    • Non-Consideration of Holding Companies as Investors

    The BIT concluded for the first time, the non-consideration of holding companies as investors in Articles 1, 2, and 3. This is reflected by the Interpretive Declaration’s view that “the concept of investor explicitly excludes companies that merely hold financial interests”, which is in contrast with the previous IIAs which did not have such a provision for holding companies. Such a view was observed in the Colombia’s Model BIT, 2017, that the investment shall include a closed list of assets, in place of an exemplary list.

    • MFN Treatment

    The most favoured nation treatment has been subject to controversies in investor-state arbitration. However, both Colombia-Spain BIT, 2005 (Article 3) and Colombia Spain 2021 contain the clause of most-favoured-nation (MFN). The Interpretative Declaration clears the exclusion of MFN clause to the extent of the treatments that are derived from the fulfilment of the commitments assumed by the Contracting Parties in commercial projects. This in turn creates a level-playing field for all the foreign investors by prohibiting the host states in discriminating between investors from different countries, and as such, the investors won’t be able to indulge in treaty-shopping. The same was observed in many of the Brazilians BIT’s, for instance, with Chile, Colombia, and Mexico, wherein it stated ‘excluded from the scope of the MFN clause the benefits deriving from regional economic integration’.[i]  

    Comparing it with Colombia’s Model BIT, 2017 in which, the MFN provision was specifically designed to avoid the usage of standards of protection to ‘import’ procedural and substantial provisions from other IIAs.[ii] The model BIT provided for the MFN standard to be invoked only in cases where measures such as administrative acts, or judicial decisions violate the provision of equal treatment of the foreign investors that are a competitor.

    • Miscellaneous changes

    At present, the Interpretative Declaration shall assist us in, little if any understanding, of its stand on the clauses such as the FET clause, Denial of Benefit clause, UNCITRAL rules, and standard of treatment clause.  f the above-mentioned clauses.

    1. The Fair and Equitable Treatment

    The present BIT has thoroughly revised the Fair and Equitable Treatment (‘FET’) standard to minimise the interpretative margins of the Courts. FET clause will thus, act as a catalyser in encouraging investments in the host state by the investors; by not only protecting the investors rights, but also the autonomy of the states. The changes in the BIT vis-à-vis FET standard has followed the recommendations made by the United Nations Conference of Trade and Development (UNCTAD) and the EU investment protection agreement’s approach.

    2. UNCITRAL Rules

    For the first time in history, Spain has agreed to include the Transparency Rules of the United Nations Commission for International Trade Law (UNCITRAL rules) in an attempt to advance its emphasis on independence and impartiality of the members of the Tribunal and the transparency of the procedure. 

    3. Standard of Treatment

    The contents in the BIT, 2021, regarding the standard of treatment has been reviewed in an attempt to circumscribe the tribunal’s margin of interpretation and promote correct interpretation in investor-state disputes. The other mandate is to mitigate the exposure in consideration of the ambiguous wording. It is ideal attempt to clarify the wide spectrum in treaty standards, and simultaneously, it also acts as a catalysers for promoting investment (because of the explicit mention of the provision). With that, it also helps in regulating the autonomy of the States (because of the revision of treatment standard).

    Conclusion

    Although the full text of the BIT is not in the public domain yet, only the Interpretative Declaration, the New BIT definitely includes certain symbolic changes. The new BIT, 2021 is a fresh expression of the speedily shifting landscape in the investment arbitration, and reflects the significant changes since the 2000s. The renegotiated Colombia-Spain BIT addresses a number of conceptual and semantic difficulties that have emanated from the 2005 BIT or that have emerged after the difficulties in the conventional ISDS system. Therefore, the renegotiated Colombia-Spain BIT is anticipated to cater to the interpretative uncertainties that are left to the realms of Courts and mitigate both Spain’s and Colombia’s exposure to non-meritorious claims. When the investor-state dispute settlement system is going through a paradigm shift, the Spain-Colombia BIT, 2021, definitely makes hay while the sun shines, in an attempt to protect investor rights, sovereign prerogatives and public interest.

    [i] Henrique Choer Moraes, Pedro Mendonça Cavalcante, The Brazil-India Investment Co-operation and Facilitation Treaty: Giving Concrete Meaning to the ‘Right to Regulate’ in Investment Treaty Making, ICSID Review – Foreign Investment Law Journal, 2021; siab013, https://doi.org/10.1093/icsidreview/siab013.

    [ii] Kabir AN Duggal, Daniel F García Clavijo, Samuel Trujillo, María C Rincón, Colombia’s 2017 Model IIA: Something Old, Something New, Something Borrowed, ICSID Review – Foreign Investment Law Journal, 34(1), 224–240 (2019), https://doi.org/10.1093/icsidreview/siz004.

  • Bar of Limitation on Arbitral Proceedings under the MSMED Act

    Bar of Limitation on Arbitral Proceedings under the MSMED Act

    By sudipta choudhury and arnav singh, fourth-year students at nalsar, hyderabad

    Introduction

    The applicability of the Limitation Act, 1963 (‘Limitation Act’) to certain statutes has been a contentious issue in India. One aspect of this issue was recently settled by the Supreme Court in the case of M/s. Silpi Industries etc v. Kerala State Road Transport Corporation &Anr. (2021) where the Court addressed the applicability of the law of limitation on arbitration proceedings initiated under section 18(3) of the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act’). In holding that the Limitation Act would be applicable to the said arbitral proceedings, the Court upheld and endorsed the reasoning of the Kerala High Court in this regard, dismissing the appeal against it. This article aims to analyse the judgment and unpack its implications.

    Legal Issue

    The Court in the present case was faced with a two-fold question. Firstly, whether the Indian Limitation Act would be applicable to arbitration proceedings under section 18(3) of the MSMED Act, and secondly, whether it would be possible to maintain a counter-claim in such arbitration proceedings. This article deals with the first issue and attempts to break it down in the context of precedents surrounding it. 

    The Apex Court’s Findings


    On the question of applicability of the law of limitation to arbitration proceedings initiated under the MSMED Act, the Court noted that a perusal of the provisions of the MSMED Act indicates that in the event of a dispute arising out of a sale agreement between parties, the same shall be referred to the MSME Facilitation Council under sections 17 and 18 of the MSMED Act which lay down the ‘recovery mechanism’. Once such reference is made, it was noted that the MSME Facilitation Council is conferred with the power to initiate arbitration or conciliation or refer the matter to any other alternative dispute resolution body or institution, under sections 18(2) and (3) of the MSMED Act. In any case, the Apex Court observed that such an arbitration or conciliation arising out of the MSMED Act shall be governed by the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), as though initiated in accordance with an arbitration agreement between the parties, under section 7(1) of the Arbitration Act, or in case of conciliation, it would be applicable as though initiated under part III of the Arbitration Act.

    In addition to this, in the case of Andhra Pradesh Power Coordination Committee & Ors. v. LancoKondapalli Power Ltd. & Ors. (‘AP Power’).  the Supreme Court held that the arbitration proceedings conducted under the MSMED Act fall within the scope of the Limitation Act. The reasoning of the Court in the aforementioned case is in consonance with a plain reading of section 43 of the Arbitration Act which lays down that the Limitation Act shall apply to arbitrations, in the same manner as it applies to court proceedings. With due regard to this, the Court in the present case opined that section 43 shall survive in its operation and applicability to arbitration proceedings within the MSMED Act and accordingly, the Limitation Act will apply. Thus, the assailed judgment of the Kerala High Court was upheld, insofar as it placed reliance on the Apex Court’s reasoning in AP Power, and interpreted the impugned provisions of the three Acts to hold that the Limitation Act would be applicable to the proceedings initiated under the MSMED Act.

    Analysis

    It is important to note that despite the MSMED Act is silent about the applicability of limitations on disputes referred to MSME Facilitation Councils, the Court’s reasoning is largely hinged upon the arbitration proceedings being governed by the Arbitration Act, and thus, being subject to the operation of the Limitation Act. However, it is also pertinent to not be remiss of the fact that section 2(4) of the Arbitration Act bars the application of the Limitation Act under section 43 to proceedings initiated under an enactment. The MSMED Act, being one such enactment, gives way to a plethora of questions and confusion. The question of applicability of the Limitation Act to the arbitration proceedings under the MSMED Act has thus been mired in ambiguities that have been addressed by the Courts in a catena of decisions.

    A perusal of the initial judgments in the area shows that the Courts were faced with the question of applicability and the prevalent argument was that there were two remedies under the MSMED Act: one, before the MSME Facilitation Council and another, before a civil court. Thus, for the sake of consistency in proceedings, it was argued that if the Limitation Act is applicable in court proceedings, it shall also apply to disputes before the MSME Facilitation Councils.

    This came up before the Bombay High Court squarely in the case of Delton Electricals v. Maharashtra State Electricity Board, along with the question of section 2(4) of the Limitation Act explicitly excluding arbitration proceedings arising out of an Act from its ambit. On the first question, the Court took note of the availability of two separate trajectories under the MSMED Act, and observed that if one resolution mechanism before the civil court is subjected to the Limitation Act, while another resolution mechanism before the MSME Facilitation Council is not, it will lead to an “incongruous situation.” On the question of express exclusion of statutory arbitration, the High Court noted that the provisions of the Arbitration Act are made applicable to arbitral proceedings arising out of the MSMED Act, and no specific exception is made therein for section 43 of the Arbitration Act which lays down that the Limitation Act shall be applicable to arbitrations in the same manner as it applies to court proceedings. Thus, it was held that the provisions of the Limitation Act would be applicable to arbitrations under section 18(3) of the MSMED Act, in the same manner as they would apply to arbitrations arising out of an arbitration agreement between parties under section 7(1) of the Arbitration Act.

    Further, in AP Power, the Apex Court dealt with a dispute arising out of the Electricity Act, 2003, which provides for statutory arbitration before the Electricity Commission. The issue that arose before the Court was whether, in the absence of a limitation provision in the Electricity Act, the same had to be presumed in order to ensure uniformity with arbitral or civil court proceedings. This was so because otherwise the parties concerned stood a chance of getting enriched in a manner, not contemplated in the pursuance of an ordinary suit, due to the operation of the bar of limitation. Further, the Court noted that no right was vested through the Electricity Act that could permit claims otherwise barred by limitation. Therefore, such a claim will not survive because it is not recoverable as an ordinary suit owing to being time-barred. The Court, placing reliance on the object and the intent of the Electricity Act, further observed that “not only because it appears to be more just but also because unlike Labour laws and Industrial Disputes Act, the Electricity Act has no peculiar philosophy or inherent underlying reasons requiring adherence to a contrary view” (para 29)

    Thus, a primary view of the Court’s reasoning points to its inclination to examine the legislative intent behind an Act, in addition to the rights it seeks to confer, and the “philosophy” it follows, indicating a purposive and well-rounded interpretation of the enactment.

    In consonance with the Court’s rationale in AP Power, it is submitted that the legislative intent and the philosophy of the MSMED Act should also be taken into account while considering whether it should be subjected to the Limitation Act. A perusal of the MSMED Act’s Statement and Objects reveals that it is aimed at the expeditious resolution of disputes and legislative intervention is intended to secure an efficacious remedy for timely payment. Thus, the MSMED Act should be interpreted in a manner which allows it to facilitate timely payment to suppliers. The author submits that instead of recognising new rights which are not expressly conferred by the statute, the MSMED Act should be interpreted in a manner which allows the facilitation of timely payment to suppliers. This is in consonance with the principle that disallows claims from ordinary suits on account of being time barred, unless it is explicitly allowed in the statute. 

    Thus, it is submitted that the present case, in so far as it addresses the first issue, correctly applies the rationale laid down in the AP Power, and places due reliance on the legislative intent behind the MSMED Act, effectively bringing its objects to full fruition by ensuring that there is uniformity in the adjudication proceedings across civil courts and arbitration tribunals. It has done so by engaging in a purposive reading of the statute that allows the applicability of the Limitation Act to arbitration proceedings arising out of the MSMED Act.

    Conclusion

    The Supreme Court has laid the matter to rest by discerning the scope of the Limitation Act vis-à-vis arbitration proceedings under the MSMED Act. It has ensured that claims under MSMED Act would be subject to limitation, like any other commercial claim, while also effectuating the legislative intent of the MSMED Act, which is aimed at providing a speedy redressal of disputes. Although a welcome development, the matter remains to be a subject for debate as the question of the extent of applicability of the Arbitration Act, especially in the event of clashes with the MSMED Act, remains ambiguous. For instance, section 18(5) of the MSMED Act lays down that every reference shall be decided within 90 days, in contrast with the Arbitration Act, which stipulates the time period for passing an award as twelve months from the date of completion of pleadings under section 23(4).

    However, the Court’s reasoning in subjecting the proceedings to the bar of limitation is in consonance with the larger intent of the MSMED Act, and fits with the scheme of other civil and arbitral proceedings. Thus, it largely remains successful in settling the dispute and interpreting the provisions involved.

  • Analysis of NN Global Mercantile Pvt. Ltd. v Indo Unique Flame Ltd. vis-à-vis Doctrine of Separability

    Analysis of NN Global Mercantile Pvt. Ltd. v Indo Unique Flame Ltd. vis-à-vis Doctrine of Separability

    By Anurag Mohan Bhatnagar and Amiya Krishna Upadhyay, third-year students at NLUO, Orissa.

    Introduction

    In the case of NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. (‘NN Global’), a division bench of the Apex Court recently pronounced that an arbitration agreement would not be deemed ineffective just because stamp duty on a commercial transaction was not paid. It would be safe to see the pronouncement as a source of impetus towards creating an impartial process of arbitration in India. It pronounced that the view has become obsolete, and has to be done away with. With the onset of the particular judgment, Indian legislation has now come in similar lines with a lot of jurisdictions in the world of arbitration.

    To comprehend the legal issue at hand, the article intends to evaluate (a) the coherence of the Stamp Act 1899 (‘the Act’) vis-à-vis the doctrine of separability; (b) application of the doctrine of separability; (c) cross-jurisdictional analysis with the legislations of the USA, the UK and Singapore; and lastly, (d) conclude with suggestions on the basis of the discussion on the aforementioned elements.

    Factual Matrix of the Case

    The case raises pertinent issues with regards to the future of arbitration proceedings in India, and the importance of getting the arbitration agreement stamped as per the relevant Act. Indo Unique was a company put in for a grant for work of washing of coal to the Karnataka Power Corporation Ltd. (‘KPCL’) in an open tender, which, later awarded the Work Order to Indo Unique. Later, Indo Unique furnished Bank Guarantees in favor of KPCL. Subsequently, Indo Unique entered into a sub-contract with Global Mercantile for the process of transportation. As per the contract, Global Mercantile also furnished a bank guarantee in favor of Indo Unique to secure the stocks. Later, KPCL invoked the bank guarantee furnished by Indo Unique owing to certain disputes between the two, due to which, Indo Unique also invoked the bank guarantee furnished by Global Mercantile under the sub-contract.  

    Stamp Act- Coherent with Doctrine of Separability?

    Anyone with legal authority is required by Section 33 of the Act, “to scrutinize the instrument in front of them and determine whether it is properly stamped; if it is not, the relevant authority may appropriate the instrument and command the parties to bill the adequate stamp duty with the added penalty of five or ten times the amount of the inadequate portion”. Under Section 35 of the Act, “an unstamped instrument cannot be used as evidence or acted upon”. Section 40 of the Act entails the procedure for instruments which have been impounded. It is necessary for the instrument to be endorsed within one month of the date of impounding as per Section 42(1) of the Act. Section 42(2) states that a document that has been lawfully stamped is admissible as evidence and can be acted upon. However, the Apex Court, in SMS Tea Estates Pvt. Ltd. v M/s Chandmari Tea Co. Pvt. Ltd. (‘SMS Tea’) failed to consider Section 3 read with Schedule I of the Act which states that only an arbitration award needs to be stamped and not an arbitration agreement. The court misinterpreted the basis behind the fiction of separability and erroneously linked the arbitration agreement to that of the fundamental substantive contract.

    Finally, the court took a shift in its approach in N.N Global. The Apex Court concluded that there should be no legal hinderance in the enforcement of an arbitration agreement. This hinderance can be considered as the “outstanding payment of stamp duty” on the substantial contract. This is the reason for which the Court held that the arbitration agreement is not included as a stamp duty-chargeable instrument under the Maharashtra Stamp Act 1958.

    Inconsistent and Indeterminate Approach Finally Settled?

    The doctrine of separability was pronounced in the case of Heyman v Darwins Ltd. by the House of Lords. It held that, “an arbitration agreement is collateral to the substantial stipulations to the contract”. The application of the theory of separability of an arbitration agreement from the fundamental substantive contract into which it is incorporated presents severe issues. The Apex Court examined the rationale on an agreement of arbitration in an unstamped contract in SMS Tea.  Due to the lack of stamp duty payment, the arbitration agreement would remain void until the contract was seized and the tax and penalty were paid.

    Following the 2015 Amendment, the Apex Court revisited the issue of stamp duty and arbitration agreements under Section 11 of the Arbitration and Conciliation Act (‘Arb. Act’) in Garware Wall Ropers Ltd v Coastal Marine Constructions (‘Garware Ropers’).  When a court determines that a contract is unstamped as a result of an application under Section 11 of the Arb. Act, the Stamp Act requires the court to impound the contract and ensure that stamp duty and penalty are paid until the agreement as a whole, can be acted on. The phrase “in a contract” of Section 7(2) of the Arb. Act was provided due weightage while analysing the fundamental meaning of an arbitration agreement in the Garware Ropers case. As a result, the arbitration clause in such a contract is incompatible with separation. This particular stand was upheld in Dharmaratnakara Rai v M/s Bhaskar Raju and was also affirmed in Vidya Drolia v Durga Trading Corporation, by a division bench.

    However, the Apex Court in NN Global reverted from their previous stand and overruled the judgment in the previous cases. On the aspect of separability, it held that “an arbitration agreement is separate and different from the underlying commercial contract”. It is a contract that specifies the method for resolving disputes and can stand alone from the substantive contract. The Court further observed that non-payment under the Act was a corrigible fault; therefore, arbitration could not be postponed until stamp duty was paid. Thus, the court adopted a harmonious construction between the provisions of the Act and the enforcement of arbitration agreements. Hence, it held that, failure to pay a stamp duty on the commercial substantive contract would not make the arbitration agreement included therein null or unenforceable.

    Cross-Jurisdictional Analysis

    One of the abstract and practical cornerstones of domestic and international arbitration is the doctrine of separability. Article 16(1) of the United Nations Commission on International Trade Law (‘UNCITRAL Model Law’) recognizes the doctrine of separability and provides that “an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause”. Despite its limited scope, this regulation is followed by several jurisdictions. Most of the countries which have ratified the New York Convention, have accepted the idea of separability.

    In English law, Section 7 of the Arbitration Act 1996 (‘AA 1996’) enshrines the idea of separability. The theory of separability, according to English courts, “is solely intended to give legal force to the parties’ choice to settle disputes through arbitration rather than to separate the arbitration agreement from the underlying contract for all purposes”. This approach by the courts could be called partial separability in layman terms. The Supreme Court of USA recognized the concept of separability in the case of Prima Paint Corp v Flood & Conklin Mfg. Co.case.

    In the context of Singaporean arbitration, the Singapore High Court, in the case of BNA v BNB held that doctrine of separability is a “tool of arbitration law that treats an arbitration agreement as distinct from the substantive contract containing it”. In the case at hand, the High Court held that “the doctrine of separability could be used to save an arbitration agreement even where the purported defect was inherent to the arbitration agreement itself”. All in all, the judgment propounded in the NN Global case has now made the Indian arbitration regime consistent with UNCITRAL Model Law, New York Convention, and both the English as well as Singaporean jurisdictions, as far as the doctrine of separability is concerned.

    Conclusion

    The stand of various High Courts has been varied as far as the doctrine of separability is concerned. Needless to say, the Apex Court’s decision in NN Global will be welcomed by arbitration practitioners in India. As far as the foreign jurisdictions are concerned, the ruling will now be consistent with the New York Convention countries and the legislation in Singapore. The judgment in the case of NN Global has to be applied widely and practically. With the help of this ruling, the judiciary has resolved the dilemma that had been lingering owing to prior instances, and the court’s decision may be safely regarded as a stand that will benefit arbitration procedures in India.

  • The Mitsui & Co. Challenge: Time to Rethink the Retrospective Tax Amendment?

    The Mitsui & Co. Challenge: Time to Rethink the Retrospective Tax Amendment?

    By Aarushi Srivastava and Ridhi Gupta, second-year students at RGNUL, Patiala

    INTRODUCTION

    After Cairn and Vodafone, the latest instance of a company initiating investment arbitration proceedings against a hefty amount demanded under India’s infamous retrospective taxation regime, is Earlyguard Ltd., a British subsidiary of the Japanese behemoth, Mitsui & Co. The 2,400-Crore tax is being charged over a transaction that took place in 2007, consisting of the sale of Earlyguard’s shares of Finsider International Co., a UK domiciled company which had a 51% stake in Sesa Goa. Earlyguard treated the capital gain properly and in accordance with taxation rules prevalent then, but despite that, the company was served with a tax notice. Thereafter, it initiated arbitration proceedings, before the Permanent Court of Arbitration, under the India-UK Bilateral Investment Treaty.

    Previously, Vodafone, as well as Cairn, have won arbitration cases against retrospective taxation by India and its violation of bilateral investment treaties in international tribunals. However, instead of honouring the arbitration awards of INR 75 Crore and INR 8842 crore respectively, the Indian Government(hereafter Government) has challenged both these awards. In the case of Cairn, the Government stated that it never agreed to arbitrate the dispute, despite it sending a judge to the tribunal. While in Vodafone’s case, the Government has filed an appeal before the Singapore appeals court, stating that it has the sovereign right to taxation and no private individual can decide on it.

    RETROSPECTIVE TAX AMENDMENT

    The origin of the retrospective tax can be traced back to 2007, when Vodafone was taxed by Indian tax authorities. In the case of Vodafone International Holdings B.V. v. Union of India & Anr., the Supreme Court ruled in favour of the telecom company by stating that, “tax laws must be strictly construed and the provision of income tax must not be expanded to impose tax on any exchange that was otherwise untaxable.” It was to override this judgement that the then Government introduced the Finance Bill, 2012 to amend the Income Tax Act, 1961 with retrospective effect, returning the onus of payment to Vodafone.

    1. Fair and Equitable Treatment in Investment Treaties

    Article 1(a) of the Draft Convention on Protection of Foreign Property has influenced various countries to incorporate the principles of fairness in international dealings. The meaning and substance of fair and equitable treatment (“FET”) has been laid down in various arbitral awards such as Biwater Gauff Ltd. v. United Republic of Tanzania and Rumeli Telekom AS v. Republic of Kazakhstan. The following concepts have emerged under the scope of FET :

    • Prohibition of manifest arbitrariness in decision making, that is measures taken purely on the basis of prejudice or bias without a legitimate purpose or rational explanation;
    • Prohibition of denial of justice and disregard to the fundamental principles of due process;
    • Prohibition of targeted discrimination on manifestly wrongful grounds of gender, religion, race or religious belief.;
    • Prohibition of abusive treatment of investors, including coercion, duress and harassment; and
    • Protection of investors’ legitimate expectations arising from a government’s representation and balancing the same with host State’s right to regulate in public interest.

    The introduction of the retrospective tax amendment was a direct violation of the FET under international law. Firstly, the Government had no rational reason to introduce the amendment, other than the motive to reverse the Supreme Court judgment. Secondly, the due process of law was disregarded as all the dealings were based on the India-UK Bilateral Treaty, which is silent on taxation, except in cases where already an international or domestic legislation provides for the tax. Thirdly, the investors, at the time of making the dealings with India in all the cases, Vodafone (2007), Cairn (2006-07) and Mitsui (2007) could not legitimately expect the Government to enforce a tax on these dealings after a period of 5-6 years, as there was no such representation or intention shown by the Government.

    Expropriation means the act of nationalising or taking away money or property, especially for public use without payment to the owner, or through illegal measures. Expropriation could be direct, where an investment is nationalised or directly expropriated, or indirect, through state interference without effect on legal title. Under International law the property or assets of an ‘alien’, i.e., a person from another state must not be expropriated, without adequate compensation. The India- UK Bilateral Treaty states under Article 5(1) that the investments of an investor shall not be expropriated except for a public purpose regulating economic activity on a non-discriminatory basis and equitable compensation. However, in all the aforementioned dealings, the Government enforced the tax regime neither for a public purpose to regulate economic activities nor for the purpose of equitable compensation, and thus, the retrospective tax is a direct violation of the ‘very law’ i.e. the treaty governing all these dealings.

    There have been cases where Tribunals have considered tax measures as indirect expropriation. In the EnCana v. Ecuador, the Tribunal held that, from the perspective of expropriation taxation is in a special category, only if a tax law is punitive, extraordinary or arbitrary, issues of indirect expropriation would be raised. It was held that, in the absence of a specific commitment from the host state, the foreign investor has neither right nor any legitimate expectation that the tax will not change perhaps to its disadvantage, during the period of investment. Further, the Tribunal in Feldman v. Mexico held that a tax measure may amount to expropriation, where the investor had an acquired right with regard to which the tax authorities behaved arbitrarily through a sufficiently restrictive nature.

    The act of the Government of enforcing retrospective taxes on its investors was, thus, not only against the FET but also an act of expropriation. To begin, the amendment was introduced arbitrarily without any consultation with the investors or regard to the India-UK Treaty. Further, the investors had no legitimate expectation that the tax regime would change to their disadvantage and that the tax authorities would function in such a restrictive nature.

    POSSIBLE NEGATIVE OUTCOMES

    When the amendment was introduced in 2012, the then-opposition party, BJP, raised its voice against it and criticized the government. However, years after coming into power, there have  been no attempts from its side to remove the amendment. Instead, tax notices have been sent to companies, their assets have been seized, and the taxation regime has been defended in the arbitration proceedings. This shows the unwillingness of the present Government to discontinue with the tax amendment of 2012.

    However, the Government’s disregard to the arbitral awards will not prevent investors to fight tooth and nail to enforce these awards. Cairn Energy, for instance, is leaving no stone unturned to monetize the award. The company has successfully got the award registered in countries like the US, the UK, France, the Netherlands and Singapore, in order to further the process of enforcing the award against overseas Indian assets. This would mean that Cairn can seize Indian assets in these countries, if India fails to pay the amount. The company can enforce the award in over 160 countries that have signed and ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Cairn has also filed a lawsuit in New York to declare Air India, the national carrier, as an alter ego of the Indian Government. If Cairn does get successful in enforcing the award, this will set precedent for other companies facing the same issue of retrospective taxation. This might lead the country having to lose a significant number of its overseas assets in the future. As a result of which, India’s investment environment can be perceived in a negative light, having a toll over its future investment dealings.

    Since the amendment was introduced, there has been zero revenue collection under it, rather it has resulted in substantial amount of losses in foreign direct investment (FDI) and foreign institutional investors (FII). The FII’s invest huge amounts of money in India that provides a great boost to the economy.  The investors, while investing in a country take close notice of the existing legal framework and then decide on investment. A consistent legal environment is not ‘much’ that the investors expect a country to give, as it is a part of minimum standard of protection of foreign investments under customary international law. However, with all these initiations against India’s retrospective tax regime and yet no reconsideration by the Government, the investors would not legitimately expect a consistent scenario of taxes in India, and they may fear any future amendments that could again impair their rights.

    CONCLUSION

    India was ranked 63rd in the Ease of Doing Business Rankings, 2020 which is indeed a development for India, however, due to the hasty 2012 amendment, the country has been attracting negative attention lately. Not only is the retrospective law against the FET and way of expropriation but also, it can act as a major discouragement for investors globally, who would have otherwise been interested in making investments in India. With two major judgements against the Government, its high time for the Government to look back and revise its arbitrary amendment. It is ironical, that though the present Government has always promoted international trade and business, it has failed to address this major hindrance to international dealings. The retrospective tax amendment should be done away with, in order to regain the trust of the investors and ensure a secure environment for investments in India.

  • Future Retail v. Amazon: Time to Strike Out Emergency Arbitration in India

    Future Retail v. Amazon: Time to Strike Out Emergency Arbitration in India

    By Swikruti Nayak and Vaishnavi Bansal, third-years students at NLU, Jodhpur

    Introduction

    The single bench decision of Future Retail Ltd. v. Amazon.com Investment LLC passed by the Delhi High Court on 21st December, 2020 has resulted in a lot of turbulence and furore in the legal community for the future of emergency arbitration (“EA”) in India. This judgement sets the tone for increasing the ease of doing business in India and making it more arbitration friendly. The court  upheld the validity of an emergency arbitrator’s order of interim relief in the favour of Amazon. However, this matter is yet to be resolved. On appeal, a division bench of the Delhi High Court passed an interim order against the validity of EA which was upheld in the said judgement. Subsequently, Amazon filed a special leave petition to the Supreme Court, contending that the Delhi High Court neither had the jurisdiction to entertain Future Group’s appeal against Amazon nor can it pass any interim order that acts against the SIAC’s emergency arbitrator order, as the same is valid under Indian law.

    The concept of Emergency Arbitration

    EA, as a process, is based on the importance of obtaining interim relief for the parties which is key to protect and preserve the relationship of parties involved in a dispute, before a final relief is secured. The concept of emergency arbitration finds its origins in the Pre-arbitral Referee Rules of the International Chamber of Commerce (“ICC”) in 1990, however, it was rarely used by the parties.[i] In the Asia-Pacific region, the Singapore International Arbitration Centre (“SIAC”) was the first to introduce provisions regarding EA in 2010, to obtain emergency interim relief before an Arbitral Tribunal is constituted. Essentially, EA enables parties to obtain urgent relief and not spend a considerable amount of time, awaiting the appointment of an arbitral tribunal. This will also enable parties to exercise confidentiality even while seeking interim relief, which is not possible in court system.

    The concept of EA is based on two legal maxims, fumusboniiuris and periculum in mora, which mean that there is a reasonable possibility that the requesting party will succeed on merits and if the measure is not granted immediately, the loss cannot be compensated through damages. The specific details of the procedure may vary in different jurisdictions, but the two common procedures for obtaining a relief in emergency arbitration is, filing of the proof of service of the application to an emergency arbitrator upon opposite parties and payment of the fee decided according to the centre, where the arbitration will be carried out.

    Future Retail v. Amazon: A Shift in the Judicial Trend

    The dispute arose between parties in the present case, Future Retail and Amazon, because of non-compliance with the provision in the Shareholders Agreement, that prohibited Future Retail from selling its assets to some enlisted entities. In the agreement, the parties had chosen the Arbitration Rules of SIAC as the law of the conduct of arbitration making it to be the curial law for their arbitration agreement. Since SIAC rules provide for the appointment of an emergency arbitrator, the parties chose to go for EA. The issue for consideration before the court was whether the emergency arbitrator provision under the SIAC Rules is contrary to the mandatory provisions of the Arbitration and Conciliation Act 1996 (“the Act”), thereby examining the validity of emergency arbitration conducted between the parties.

    The court in its discussion relied heavily on the Supreme Court case NTPC v. Singer which deals with the situation of parties choosing a different curial law and proper law. It came to the conclusion that SIAC rules which is the curial law of arbitration agreement will apply to the extent they are not contrary to the public policy of India or against the mandatory requirement of the Act. Thereafter, the court used the bedrock of the arbitration law i.e. party autonomy to hold that since the rules are chosen by express consent of the parties, the court would not unnecessarily interfere with the award. Rule 30 of the SIAC Rules provide that the parties are also entitled to plead before the judicial authority for the interim relief, thus it is also not taking away the substantive right of the parties to reach the courts for interim relief. Moreover, there is nothing in the Act to invalidate the whole process of EA, merely because it is not strictly falling under the definition of section 2(1)(d). The court also clarified the applicability of section 9 along with section 27, 37(1)(a), 37(2) of the Act in the judgment. It said that applicability of these sections may be derogated with the agreement in International Commercial Arbitration and there is no inconsistency between SIAC Rules and Part 1 of the Act. The court defended it relying on the phrase “even if the place of arbitration is outside India” in proviso section 2(2), making it obvious that the exception is also valid for international commercial arbitrations. Hence, the court upheld the validity of the emergency arbitrator’s order of interim relief.

    However, this was not the first instance where the courts were faced with the question of enforceability of the EA in India. In 2016, Raffles Design International India Pvt. Ltd. &Anr. v. Educomp Professional Education Ltd. and Ors.was decided by the Delhi HC wherein the court upheld the maintainability of application for interim measures under section 9 after an emergency award was obtained from a foreign seated arbitral tribunal. The court held that section 9 cannot be used to enforce emergency awards but can be used by the parties to file interim relief. This judgment, however, fails to take note of the Bombay HC judgment of HSBC PI Holdings (Mauritius) Ltd. v. Avitel Post Studioz Ltd. &Ors. which was the first case to recognise the concept of EA in India. In this case, the emergency arbitrator in SIAC had passed two interim awards and the court had also granted interim relief to the party. The judgement of the HC was affirmed by the SC in 2020.

    Ashwani Minda and Anr v. U-Shin Ltd. and Anr, a Delhi HC judgement of 2019, laid the foundation to enable the bold stance of the court in Future Retail. The court recognised the concept of EA, however, dismissed the application for interim relief as the emergency arbitrator had declined the same.  The Japan Commercial Arbitration Association (“JCAA”) Rules governing the conduct of the arbitration, which provides for emergency arbitration to obtain relief before an arbitral tribunal is constituted. The arbitration agreement did not contain a provision for obtaining relief from domestic courts. The enforceability of emergency awards was not clearly discussed, however, the court held that once EA is invoked, interim relief cannot be sought from domestic courts. According to the court, the emergency arbitrator passed a very detailed and reasoned order and hence it did not interfere with it.

    Hurdles Lying Ahead

    It is quite evident that the judicial trend in India is gradually changing from circumventing discussions on the status of EA to discussing relevant issues related to the validity of EA. However, the concept of EA is far more complex, involving separate and specific procedures that need to be answered before India adopts an authoritative status of EA. As under section 2(1)(d) of the Act, an emergency arbitrator has not been recognised as an ‘arbitral tribunal’- his position and statutory benefits are not clear. Concurrent jurisdiction also presents a major issue since for obtaining interim relief, parties will be free to approach both the courts as well as the emergency arbitrator. The status of EA proceedings needs to be clarified, for instance, whether under section 8 which provides a judicial authority with the power to refer the parties to arbitration in the presence of an arbitration agreement, is applicable to an EA agreement or not. The scope of interference by court under EA as in full arbitral proceedings under section 34 also needs to be laid down. Moreover, an arbitral tribunal may continue proceedings ex-parte under section 25(3) of the Act and grant an award on the basis of the evidence before it, however, the same is not clear in case of an emergency arbitrator. Emergency arbitral awards apart from above are also susceptible to various enforcement issues in different jurisdictions as it is  more of a voluntary practice between parties. Moreover, it is mostly agreed upon, because of the consequences of refusing an EA order on the full arbitral tribunal process. There is no mention of the procedures like EA in Model law on which India’s arbitration law is based, which further strikes on its enforceability and acceptance in India.

    Conclusion

    The concept of EA holds a promising future worldwide as, besides Singapore, countries such as Hong Kong, Netherlands and Bolivia have amended their rules to include provisions regarding an emergency arbitrator. The Stockholm Chamber of Commerce (SCC), the London Court of International Arbitration(LCIA), the International Centre for Dispute Resolution of the American Arbitration Association(ICDR/AAA) and the International Chamber of Commerce(ICC) have also inserted provisions specifically dealing with emergency arbitration. In the USA, there is no specific provision regarding an emergency arbitrator, but national courts have generally tended to favour their validity.

    The decision of the Delhi HC in Future Retail v. Amazon revived a much-needed discussion on the status of EA in India. In the light of the principle of party autonomy, parties are free to choose the curial law of arbitration which can have specific provisions for approaching an emergency arbitrator to obtain interim relief. The same does not restrict a party to approach the domestic courts under section 9 of the Act. There is nothing contained in the Act which invalidates the whole process of EA and makes the emergency arbitrator’s order unenforceable. Although, the decision paves the way for facilitating a more business-friendly economy in India and reaffirms the true essence of arbitration i.e. party autonomy, it left the door wide open for interpreting what exact position an emergency arbitrator holds and the technicalities of EA.

    [i] Suraj Sajnani, ‘Emergency Arbitration in Asia: Threshold for Grant and Enforcement of Emergency Relief’ in Arbitration: The International Journal of Arbitration, Mediation and Dispute Management (Brekoulakis ed., 2020).

  • Desolated Future Of Investments In India- Disregarding The Vodafone Verdict

    Desolated Future Of Investments In India- Disregarding The Vodafone Verdict

    By Shobhit Shulka, second-year student at MNLU, Mumbai

    India is an attractive destination for foreign investment. However, given the hitherto arbitration regime in the country and uncertainty in smooth enforcement of awards in India, foreign companies are becoming more skeptical about investing in India. Even at a time when the judiciary has been more supportive of arbitration, the government has continued to be incredulous of the practice. The issue has  been further aggravated recently by the Solicitor General of India when he refused to accept the award given by the Permanent Seat of Arbitration in the case of Vodafone International Holdings BV v. The Republic of India (‘Vodafone Judgment’). This post briefly discusses the judicial trend on this issue and analyses the consequences of this orientation by the government towards arbitration.

    In a unanimous decision, The Permanent Seat of Arbitration ruled on 25th September 2020 that the Indian income tax authorities had violated the guarantee of fair and equitable treatment under the Bilateral Investment Treaty (‘BIT’) signed with the Netherlands, by retrospectively amending the law to demand Rs. 22,000 crores from Vodafone.The judgement seemed to bring the infamous retrospective tax battle to a close, however, closure is still uncertain. After the declaration of the award, India as a state had two options: 1) To accept the award and close this long pending matter which would suit India’s contention of it being a better place to do business, with a tax-friendly regime for business incorporators and foreign investors. 2) Challenge the award at another international forum and not implement the award as decided by the arbitral tribunal. At this juncture, the government seems more inclined towards the second option, which was affirmed bythe Solicitor General’s comments. However, this might have a severe impact on India’s tax friendly regime and would disincentivise investors and businesses to invest in India, at a time when the deteriorating economic conditions are in desperate need of such investments.

    Background of the case

    In May 2007, Vodafone bought a 67% stake in Hutchinson Telecommunications (‘Hutchinson’)for an $ 11bn deal, this included the mobile business and other assets of Hutchinson in India. In September that year, the Indian Government raised a demand of about 8000 crores in capital gains and withholding tax from Vodafone saying the company should have deducted the tax at source before making a payment to Hutchinson. Vodafone moved the Bombay High Court which ruled against Vodafone. It then appealed against the order in the Supreme Court, which ruled Vodafone’s interpretation of the law as the correct one and ruled that it did not have to pay any taxes. In an ideal world, the matter would have ended then and there. However, that same year the then Finance Minister came with a proposal to amend section 9(1)(i) of the Income Tax Act and retrospectively tax such deals. The Bill passed the onus on Vodafone to pay the taxes. The Government circumvented the effect of the apex court’s judgment by resorting to retrospective legislation and created an unpredictable and unstable business environment. Vodafone then challenged the amendment under the India-UK BIT and the India-Netherlands BIT. The arbitral award was announced in Vodafone’s favour, finding the Indian government in violation of section 4(1)of the India-Netherlands BIT.A BIT is an agreement between two sovereign states for the protection of investors and businesses from one state to another. The government’s stand has been that tax matters do not come under the purview of BITs. The retrospective law allowed the indirect transfers of Indian capital assets even if the transfer was a sale. Thus, the argument from the government has been that they should challenge the award under the tax treaty because it questions the sovereign right of the government. This award negates India’s general position that tax disputes do not come under the ambit of investment treaties. The Indian Revenue department has thus raised objections over the arbitral award coming under the purview of the BIT and not under the tax treaty.

    Options that India has to challenge the infamous award

    India stands at a tricky crossroad here as challenging this award seems very unreasonable as the dispute has already been ruled against India by the Supreme Court and then the arbitration tribunal. However, the government’s contention here is that the award seems to challenge its sovereign right to tax and would impact other cases against the government.

    Vodafone too cannot enforce its victory and will have to approach Indian courts again, because India does not recognise any foreign court in a commercial dispute that questions the state’s sovereign right to intervene. The Apex Court in State of West Bengal v. Keshoram Industries held that if the terms of an arbitration treaty are inconsistent with India’s sovereign laws, a court will not give effect to such treaty. This has resulted in the lapsing of 70 BITs between foreign governments and India which has lapsed since 2016 and is not being renewed. India’s latest bilateral investment deals, such as the India Belarus BIT in 2018 and the India Brazil BIT in 2020, have largely omitted from their domain, measures relating to taxes or compliance of tax obligations. In the future, India may negotiate vigorously to integrate such exclusions into bilateral investment treaties.

    Uncertainty of investment regimes in India

    Unless new agreements have been negotiated between India and the related transaction states, new investments in India between foreign investors and the country will cease to gain BIT security. Current investments related to BITs with ‘sunset provision’,which means that the treaties may continue such as, the India Netherlands BIT that specifies, for investments made before the termination, substantial provisions may continue to extend for fifteen years after the termination.  Several of India’s other deals, such as those with the United Kingdom and Mauritius, have identical ‘sunset’ provisions.

    However, this uncertainty could affect India’s business with global powerhouses such as the European Union (‘EU’).Talks aimed at reaching a free trade agreement between the EU and India (which may include investor rights provisions) were started in 2007 but allegedly reached a deadlock in 2013.India, even after a request from EU officials, is hesitant so far to briefly expand its BITs with EU countries to fill the gap with any new agreements. The consequence of the termination of these bilateral agreements is not limited to investment into India but by India too. As westbound investment by Indians rises, Indian investors are increasingly looking at BITs to secure their investments and provide have a roadmap to seek any violations in host countries of the promised safeguards. India’s woes, however, are not limited to uncertainties in trading regimes. The dismissal of an international arbitral award may also have a detrimental effect on the future of investments in India.

    What this means for future investments in India

    New York Convention awards were enforced in India through the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’). Before this, India’s arbitration was afflicted by setbacks, lack of clarification on the grant of temporary relief, no finality on arbitral awards owing to court requests for setting aside, and a belief that arbitrators were not always unbiased and neutral. Though major cities in India may take several more years to become common international arbitration seats such as those in Singapore or Paris, India is becoming an arbitration-friendly jurisdiction.However, refusalto accept such awards by the government could have a severe impact on such ambitions.

    An international investment usually includes a trade arrangement (‘Investment Contract‘) between the foreign investor and the host state. Investment arrangements, either before domestic courts or regulatory tribunals or by international arbitration, allow for dispute settlement. Refusing to accept an international arbitration award will disincentivize the investors. Investors will start contemplating on investing in India as any dispute arises the government of such countries might not comply with the international order, putting the investors to losses. It creates a hindrance in the ease of doing business in such countries and thus discourages them to make any investments to indulge in any form of funding

    The way forward

    The Government has 90 days to file an appeal in Singapore, as the seat of the dispute was in Singapore. At a time when India is in desperate need of investments due to its deteriorating economic conditions, it seemed like it would accept the award and make India seem like a country where foreign investors have a remedy under International Law. However, quixotically enough the government is inclined to challenge the award further, with a slim chance of overturning the award. This could have a severe impact on investor confidence in India and could adversely affect foreign direct and indirect investments in India.

  • Arbitrability of Fraud Disputes in India: Discussing the Development Post-Ayyasamy

    Arbitrability of Fraud Disputes in India: Discussing the Development Post-Ayyasamy

    BY ABHINAV GUPTA, FIFTH YEAR STUDENT AT NLU, JODHPUR

    Introduction

    The issue of arbitrability of fraud disputes has consistently been a predicament faced by the Indian Courts. The ever-developing jurisprudence on this issue did not seem to settle the debate and surely did not reflect the pro-arbitration ideology that Indian Courts seek to portray. The Courts in a quest to bring certainty and settle the position of law have ignored certain important questions that still need to be answered. In this article, the author seeks to highlight the recent developments in the jurisprudence regarding the arbitrability of fraud disputes and analyze the change in Indian Court’s stance over the years.

    A brief overview of position till Ayyasamy

    The issue regarding arbitrability of a dispute arises because the Arbitration and Conciliation Act, 1996 [‘the Act’] does not explicitly provide for disputes that are arbitrable or non-arbitrable. In such a scenario, while referring a case to arbitration under section 8 of the Act, a court has to see whether a valid arbitration agreement exists and if the subject matter of dispute is arbitrable.

    The issue regarding arbitrability of fraud first arose in the case of Abdul Kadir v. Madhav Prabhakar Oak [‘Abdul Kadir’], where the court held that court will refuse to refer disputes to arbitration if there are serious allegations of fraud and the party charged with fraud desires that the matter be tried in court.

    By placing reliance on this judgment Supreme Court of India[‘SCI’] in N. Radhakrishnan v. M/S. Mastero Engineers [‘N. Radhakrishnan’] held that matters of serious allegations of fraud cannot be properly dealt by an arbitrator and hence, in the interest of justice only a court of law can decide such complex matters. The position in N. Radhakrishnan has been discussed in detail in the post here.

    Indian regime saw a paradigm shift in this position in the case of A. Ayyasamy v. A. Paramasivam [‘Ayyasamy’] where it was categorically laid down that simple allegations of fraud touching upon the internal affairs of the party inter se and having no implication in the public domain are arbitrable.

    Development post-Ayyasamy

    One of the first cases post Ayyasamy inculcating its reasoning was Ameet Lalchand Shah & Ors. v. Rishabh Enterprises & Ors., where the SCI declared that mere allegation of fraud by a party to obstruct arbitration would not render disputes inarbitrable. Court also observed that the arbitrator so appointed can examine the allegations related to fraud.

    Even though there was consistency in court’s approach that mere allegation of fraud did not make a matter inarbitrable, there still was uncertainty as to what can be considered as “serious offence”. SCI to some extent tried tackling this uncertainty by explaining the judgment of Ayyasamy by delineating a twin test in Rashid Raza v. Sadaf Akhtar [‘Rashid Raza’].

    1.  Does the plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or

    2. Whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.

    The most recent and significant development in this regard has been the case of Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd. [‘Avitel’]. In this case, HSBC and Avitel entered into a Shareholders Agreement. Avitel informed HSBC that they are in the advanced stage of finalizing a contract with BBC and was expected to generate huge revenues. Subsequently, HSBC discovered that there was no such contract and it was fabricated by Avitel in order to induce HSBC to invest. Due to this, HSBC invoked arbitration proceedings before the Singapore International Arbitration Chamber as per the dispute resolution clause.

    SCI while referring to Afcons Infrastructure v. Cherian Varkey and Booz Allen v. SBI Home Finance, observed that the statement “cases involving serious and specific allegation of fraud, fabrication of documents, forgery, impersonation, coercion etc.” have to be interpreted by applying the test laid down in Rashid Raza. It categorically laid down that same set of facts can lead to civil as well as criminal consequences and a matter will not cease to be arbitrable merely because criminal proceedings are pending in that matter. This is a significant deviation by the SCI from position in Ayyasamy which provided for a blanket bar on arbitrability by stating that if “serious allegations of fraud give rise to criminal office” then it is inarbitrable.

    SCI referred the matter for arbitration and stated that, the fraud does not have a “public flavour” and is not such that it would render the contract and the arbitration agreement null and void.  While discussing the issue at hand SCI also clarified that N. Radhakrishnan does not have precedential value while affirming the observation in Swiss Timing v. Organising Committee, which held N. Radhakrishnan to be per incuriam as it failed to consider essential precedents.

    Another judgment passed on the same day as Avitel was Deccan Paper Mills Co. Ltd. vs Regency Mahavir Properties [‘Deccan Paper Mills’], where the court relied on the observation in Avitel and held that if the matter has no “public overtone” and if a valid arbitration agreement exists, the court has to refer the dispute to arbitration.

    Analysis of the developments

    The observation in Ayyasamy and Rashid Raza that allegations of serious fraud are not fit to be decided in arbitration proceedings is problematic. The reasoning behind such observation by the court was that such a dispute requires collection and appreciation of evidence which can only be done by a civil court. This observation and reasoning is in complete disregard of section 27 of the Act. Section 27 of the Act allows the arbitral tribunal or a party to apply to the court for its assistance in taking of evidence and court can take evidence applying procedure as applicable in a proceeding before it. Moreover, even if party do not intend to take the assistance of courts, under section 19 of the Act, they are free to choose the rules of procedure. In such a scenario, parties can incorporate elaborate rules such as IBA Rules on Taking of Evidence for governing procedures related to evidence during arbitration proceedings.

    It is noteworthy that the SCI did not resort to such a reasoning in Avitel. In fact, the Court tried explaining the two tests laid down by Rashid Raza. The issue regarding Ayyasamy and Rashid Raza was that even when these cases changed the position of law from what was observed in N. Radhakrishnan, the usage of phrase “serious allegations of fraud” continued since the 1960s’ (see Abdul Kadir).The court, in these cases, failed to explain and remove the ambiguity surrounding cases that  can be categorized as ‘mere allegations of fraud simplicitor’ and cases that can be considered as ‘complex cases of fraud’.

    Avitel took a positive step towards explaining and narrowing the same. SCI referred to Rashid Raza to explain when the two tests can be considered satisfied. The first test is satisfied when the agreement or arbitration agreement could not have been entered into by the party if not for the fraud. The Court laid down the “public flavour” standard while explaining the second test. It observed that second test is satisfied when the allegations are made against the state or its instrumentalities and these allegations are questions arising in public domain rather than from a breach of contract.

    This kind of observation will also clear the uncertainty regarding the kind of merit-based analysis a court can conduct while determining the arbitrability of a dispute. Under Section 8 of the Act the court only has to analyze if a prima facie valid arbitration agreement exists and not enter into a merit-based analysis. The Court laying down a narrow test in Avitel seen in conjunction with the fact that in the 2015 amendment, legislature inserted the phrase “prima facie” in section 8 to reduce the judicial intervention, signifies a true movement towards the pro-arbitration approach.

    The aforementioned cases of Abdul Kadir, N. Radhakrishnan, and Ayyasamy show judiciary’s clear lack of confidence in capability of arbitral tribunals to handle complex matters with utmost care and caution. This may be due to the fact that India lacks an institutional arbitration setup. Where the objective of the 2015 amendment to the Act was to reduce judicial intervention, the 2019 amendment focused on the institutionalization of arbitration mechanism in India on recommendation of Justice Srikrishna Committee. Despite having some obvious concerns, this amendment is a positive step towards having qualified arbitrators and intuitional arbitration reinforcing the judiciary’s and international community’s trust in India as an arbitration hub.

    Conclusion

    Over the years, India has been criticized for being anti-arbitration and having unfettered judicial intervention in arbitration. In order to change this outlook, the 246th Law Commission Report suggested major changes in the Act in order to reduce judicial intervention and adopt a pro-arbitration approach. Avitel acts as a progressive precedent that would strengthen India’s position internationally and help it in achieving the status of an arbitration friendly jurisdiction. A change initiated by Ayyasamy having certain faults was molded appropriately by SCI in Avitel by narrowing the scope for judicial scrutiny. It remains to be seen whether upcoming cases on arbitrability of fraud apply the broader test laid down in Ayyasamy or a narrow test propounded in Avitel.

  • Anti-Arbitration Injunction Suits in India: A Nightmarish Scenario

    Anti-Arbitration Injunction Suits in India: A Nightmarish Scenario

    By Kabir Chaturvedi and Ridhima Bhardwaj, third-year students at RGNUL, Patiala

    On 12 August 2020, the Calcutta High Court – in the case of Balasore Alloys Limited v. Medima LLC (‘Balasore’) – ruled that “courts in India do have the power to grant anti-arbitration injunctions”, even against foreign seated arbitrations. This decision came just months after the Delhi High Court – in the case of Bina Modi and ors. v. Lalit Modi and Ors. (‘Bina Modi’) – stated that an anti-arbitral injunction suit is not maintainable. The law on anti-arbitration injunctions is already far from consistent but the handling of recent suits by the Indian Judiciary has been nightmarish. Analysing the two judgements, this article critiques the Balasore approach and advocates for the one adopted in Bina Modi. 

    Setting the Scene

    Justice Rajiv Sahai Endlaw in Bina Modi relied on Kvaerner Cementation India Limited v. Bajranglal Agarwal and Anr. in 2001 (‘Kvaerner’) given its precedential value and concluded that a civil court could not grant an anti-arbitration injunction. However, when Bina Modi – and subsequently Kvaerner – were raised before the Court in Balasore, Justice Shekhar B. Saraf placed an “overwhelming reliance” on the majority dictum in SBP & Co. v. Patel Engineering Limited in 2005 (‘SBP’) to rule that Indian Civil Courts could injunct arbitral proceedings. Through this reliance, he inferred that SBP had implicitly overruled Kvaerner and stated that Bina Modi is per incuriam because it ignored the decision in SBP. However, scrutiny of the facts and ratio decidendi of SBP indicate otherwise. 

    Addressing the Dichotomy between SBP and Kvaerner

    The matter before the Apex Court in Kvaerner was whether the court could act outside the purview of The Arbitration and Conciliation Act, 1996 (‘Act’) and grant a stay on arbitration proceedings. The court relied on a bare reading of section 16 of the act to conclude that a civil court does not have the jurisdiction to injunct an arbitral proceeding. Section 16(1) empowers the arbitral tribunal to rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement. 

    On the other hand, the seven-judge bench in SBP was summoned to decide the nature and scope of the exercise of power by the Chief Justice (or his designate) to refer parties to arbitration and appoint the arbitral tribunal, vested in them by sections 8 and 11 of the Act respectively. Subsequently, the bench also had to decide whether this power under sections 8 and 11 could be overridden by a tribunal’s power to decide its own jurisdiction under section 16. The potential overlap between the two was resolved when the bench established that such exercise of power was a judicial function and not an administrative function. The court held that “where the jurisdictional issues are decided under these Sections (8 or 11), Section 16 cannot be held to empower the arbitral tribunal to ignore the decision given by the judicial authority or the Chief Justice before the reference to it was made.”

    This limitation on the tribunal’s power exemplifies a hierarchy which is ensconced within the ecosystem of the Act – wherein the courts are placed on a higher rung. The judicial authorities’ power to review a decision of the tribunal regarding its jurisdiction under section 34 (recourse available to parties to apply for setting aside arbitral award) or section 37 (appealable orders) of the Act are further instances of the existence of this hierarchy within the Act, and were accentuated in SBP. These powers, however, fall under the purview of the Act. 

    An anti-arbitration injunction looks to essentially proscribe arbitration proceedings, and a civil court considering an objection to an anti-arbitration injunction suit which does not represent a substantive action on the basis of merits cannot be said to be exercising powers under sections 8 or 45 in the true sense. Therefore, when civil courts grant an anti-arbitration injunction, they exercise powers ordinarily conferred upon the tribunal under section 16, and operate outside the purview of the Act. The bench in SBP went on to unequivocally condemn any such court interference in arbitration proceedings outside the purview of the Act unless permitted by the Act itself, as it “is a complete code in itself”. 

    In a nutshell, the ratio in SBP was centred around the possible overlap and sharing of authority within the purview of the Act, while the Kvaerner judgment addressed the civil court’s jurisdiction to issue an anti-arbitral injunction outside the purview of the act. These two verdicts thus lay down rules in vastly different contexts and Kvaerner is evidently more relevant to the grant of anti-arbitral injunctions than SBP. Thus, it would be incorrect to assume that SBP implicitly overruled Kvaerner and civil courts can injunct arbitration proceedings. Therefore, the decision in Bina Modi cannot be invalidated by relying solely on SBP and should’ve been given precedential value in Balasore. 

    The Impracticality of Anti-Arbitral Injunctions 

    Apart from being legislatively flawed, the Balasore approach is also impractical. By mulling over an anti-arbitration injunction suit – and eventually not injuncting the arbitral proceedings – Justice Shekhar utilised judicial resources to deal with an issue an arbitral tribunal is competent to deal with under section 16 of the Act. Parties prefer arbitration to litigation because of its quick and efficient nature. When courts mull over anti-arbitration injunctions, it gives rise to prolonged judicial proceedings and interference at the initial stage itself. This creates uncertainty and adds to the costs to be borne by the parties to the dispute, making the whole process of arbitration tiresome, inefficient and expensive. Consequently, parties are discouraged to opt for India as a seat for arbitration. Further, there already exists a huge pendency of cases in India and instead of handling anti-arbitration injunction suits, it must adopt the practice of efficient utilisation of limited judicial resources to swiftly clear the backlog of the pending civil and criminal cases.

    Additionally, Justice Endlaw in Bina Modi cited section 41(h) of the Specific Relief Act, 1963 – which provides that an injunction cannot be granted when an equally efficacious relief can certainly be obtained by any other usual mode of proceeding – to conclude that anti-arbitration injunctions cannot be granted since the tribunal is empowered to offer efficacious relief under Section 16. Therefore, anti-arbitration injunctions amount to unnecessary judicial interference and are, as Gary B. Born puts it, “in most cases, deliberately obstructionist tactics, typically pursued in sympathetic local courts, aimed at disrupting the parties’ agreed arbitral mechanism.”[i] Judicial interference by Indian Courts is also one of the primary reasons why India is considered “non-friendly jurisdiction” for arbitration. India has adopted an aggressive pro-arbitration approach with the objective of making itself a hub of international arbitration, and the 2015 and 2019 Amendments to the Act are testament to the same. Therefore, granting anti-arbitral injunctions would conflict with our overarching objective of fueling the growth of international arbitrations in India.

    Conclusion

    Anti-Arbitration injunction suits in India have been a source of controversy since the decision in Kvaerner and many advocates for such injunctions can be found. However, injuncting an arbitral proceeding violates the basic tenets of arbitration. Misguided by malafide intentions of the parties, courts in India have fallen prey to unnecessarily interfering with – and perusal of – arbitration agreements, a task the tribunal is competent to carry out. Parties’ decision to arbitrate instead of litigate becomes redundant when Civil Courts take the matter into their own hands. Therefore, it is evident that Justice Shekhar’s approach in Balasore is not only legislatively flawed, but also impractical, and that the Bina Modi approach is the way forward.

    [i] Gary B. Born, International Commercial Arbitration (Kluwer Law Intl 2009).