Arbitration Law Archives

THE CONUNDRUM OF RECALLING AN ARBITRAL TRIBUNAL POST-TERMINATION

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[By Arjit Mishra] The author is a student at the Hidayatullah National Law University, Raipur. INTRODUCTION On 12th October 2022, the Delhi HC in Vag Educational Services v. Aakash Educational Services opined that an arbitral tribunal cannot recall the proceedings if its mandate has been terminated under S. 32 of the Arbitration & Conciliation Act, 1996 (hereinafter ‘The Act’). However, it is to be noted that in various judgements the Supreme Court has held that if an arbitral proceeding is terminated under S. 25 of the Act, the terminated proceedings can be recalled. In this blog, I’d provide the existing jurisprudence regarding the possibility of recalling an arbitral proceeding and the flaws present in the same. VAG EDUCATIONAL SERVICES V. AAKASH EDUCATIONAL SERVICES: WEIGHING PRECEDENT OVER RATIONALE In this case, on 21st Sept 2019, the arbitral tribunal terminated its mandate as the respondent, as claimant, withdrew from the arbitral proceeding. However, an affidavit was filed by the respondent-claimant asserting that the Counsel had unintentionally withdrawn from the arbitral proceedings, as her instructions, from her Senior Counsel, were to withdraw another arbitral proceeding pending before the same arbitral tribunal. This affidavit was duly accepted by the tribunal and in its order dated 18th January 2020, it restored the arbitral proceedings. The impugned order was challenged before the Delhi HC under Article 227 of the Indian Constitution. With regards to the maintainability of the petition, the respondent, while placing reliance on SBP & Co. v. Patel Engineering Ltd. and Anr. & Bhaven Construction v. Executive Engineer Sardar Sarovar Narmada Nigam, asserted that the Court cannot adjudicate on an interlocutory order passed by the arbitral tribunal. The Court negatived this contention by opining that the current case’s circumstances are unique from those in the respondent’s cited cases. In the current case, the Court must decide whether an arbitral tribunal that has declared the arbitration proceedings to be discontinued may later consider a request to rescind that order and restore the arbitration. Withrespect to the question that whether an arbitral proceeding can be recalled post-termination, the Court remarked that a tribunal’s mandate is considered as terminated if the claimant withdraws its claimant. under S. 32(3) of the Act, 1996. This provision is only subject to S. 33 and S. 34(4). When a party asks an arbitral tribunal to fix a specific category of errors or when the parties ask the arbitral tribunal to interpret a particular clause or section of the award that it has delivered, Section 33 is applicable. According to Section 34(4), the arbitral tribunal has the authority to eliminate any grounds that the court that hears a challenge to the arbitral decision under Section 34 might use to overturn the award it has issued. Notably, neither the exigency mentioned under S. 33 nor the condition provided under S. 34 applied to the present case. Hence, the arbitral tribunal became functus officio and didn’t have any power to pass any kind of order after the termination of its mandate. POWER TO RECALL PROCEEDINGS UNDER S. 25: ‘JUDICIALLY’ CREATED DISTINCTION WITH S. 32 It was observed above that if an arbitral tribunal’s mandate is terminated under S. 32 of the Act, 1996, no order of recalling the proceedings could be passed. Interestingly, this position of law doesn’t apply to the termination of an arbitral proceeding under S. 25 of the Act, 1996. In compliance with section 25 of the Act, the arbitrator has the authority to end an arbitration if the claimant fails to submit his statement of claim in conformity with S. 23(1) without demonstrating good cause. The Supreme Court noted in the case of SREI Infrastructure Finance Limited v. Tuff Drilling Private Limited that the situation described in Section 32 of the Act will only occur if the proceeding is not terminated under Section 25(a) of the Act and continues to be adjudicated. Since Section 25 of the Arbitration Act does not include the phrase “mandate of the arbitral tribunal shall terminate” it must be interpreted in the context of Section 32 of the Arbitration Act. Therefore, an order to recall the arbitration proceedings may be issued if the claimant can provide adequate justification. The SC later heard an appeal against a termination order given in accordance with Section 32 of the Act in Sai Babu v. M/S Clariya Steels Private Limited. The Supreme Court decided that no recall request would be encased in cases provided by Section 32(3) of the Arbitration Act due to the difference crafted in the SREI case between both the mandate terminating under Section 32 and the proceedings that came to an end under Section 25 of the Arbitration Act. FUNDAMENTAL FLAWS PRESENT IN THE JURISPRUDENCE The Arbitration Act, of 1996 provides the arbitral tribunal certain exemplary powers to allow it to carry out its functions smoothly and with minimum court intervention. However, the striking difference drawn between termination orders passed under S. 25 & S. 32 of the Act poses a roadblock to allowing the arbitral tribunal to decide on its conduct, particularly regarding its ‘mandate’. It is observed that the Courts have had an unwarranted rigid approach by not allowing recall of an arbitral proceeding if its mandate is terminated under S. 32 of the Act. The stated ‘rigid’ approach prevents the arbitral tribunal to recall its proceeding if there exist genuine and satisfactory reasons for doing the same. Even in the Vag Educational case, the Court ignored the bonafide mistake made by the Counsel of signing the wrong withdrawal sheet and proceeded to hold, in consonance with precedents, that the arbitral tribunal proceeding can’t be recalled. It also caused unjustified harm to the party because of its Counsel’s unintentional mistake. Furthermore, Section 32(2)(c) of the Act provides that if the arbitral tribunal believes that the continuation of proceedings has become unnecessary and impossible, it can terminate its proceeding.. This provision construed with the ‘rigid’ approach upheld by courts makes the tribunal’s power rampant as it will have no sort of accountability for the reasons it provides for

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The Arbitrability Of Antitrust Related Issues And The Competition Act, 2002

[By Aniket Panchal & Mehar Kaur Arora] The authors are students at the Gujarat National Law University. Introduction: setting the tone The arbitrability of competition law disputes has always been a hot potato. In this regard, arbitrability can be defined as ‘the ability of a dispute to constitute the subject matter of the arbitration.[i] That said, there is no denying the fact that the Competition Law and Arbitration lie at two opposite poles since arbitration is a consensual mode of private dispute resolution, unlike the competition law which seeks to set the seal on fair competition in the market and promote public interest as a whole. Although it may seem that both the subjects are diametrically opposite to each other, greater heights could be reached if a middle ground is struck by the Competition Law regime in India. With the lack of alternative to the Competition Act 2002 (hereinafter, “the Act”) rather than approaching the domestic courts and the limited powers vested in the Competition Commission of India (hereinafter, “CCI”), there is a pressing need for the door to be opened towards arbitration of certain anti-competitive conducts by dominant entities. In this article, the authors will venture into this not-so-explored terrain. In doing so, the authors will also make a mention of other countries with robust competition law regimes such as the United States and the European Union and their approach towards the same. A sneak peek into the approach adopted by the United States and European Union Last year, in the United States, arbitration was employed over a competition law dispute. In a historic win, the US Department of Justice Antitrust Division (hereinafter, “DOJ”) got a favourable order over a product market definition in a matter involving the merger of Aluminum firms, namely Aleris and Novelis. While Aleris and Novelis contended that the relevant product market should be broader so as to include sheet ABS (hereinafter, “ABS”) as well, the DOJ maintained that the relevant product market should be restricted only to aluminium ABS. In this case, it was alleged that the acquisition, if effectuated, would combine two out of four North American producers of aluminium ABS which would lead to sky-scraping concentration (as much as 60%) of total production capacity in the hands of Novelis. After a ten-day-long arbitration, the arbitrator issued a ruling in favour of the US Antitrust Division and found that aluminium ABS constitutes a relevant product market. Interestingly, it is also the first time the antitrust division used its authority to resolve a competition law related matter under the Administrative Dispute Resolution Act (1996). In fact, the Department of Justice marvelled at this development as a “flexible and efficient” arbitration mechanism. In this case, the proposed acquisition of Aleris by Novelis was challenged by the DOJ. Following this ruling, realizing the potential of arbitration in effectively resolving competition law disputes, Attorney General Delharim marvelled “this first-of-its-kind arbitration proved to be an effective procedure for the streamlined adjudication of a dispositive issue in a merger challenge. As demonstrated in this case, arbitration has the potential to be a powerful dispute resolution tool in the right circumstances …”. As for the European Union, there is a ballooning consensus on the full arbitrability of competition law disputes arising out of Article 101 and 102 of the Treaty on the Functioning of the European Union (hereinafter, “TFEU”). However, all the competition law matters which are made arbitrable, are subject to judicial review. While the arbitrability of these disputes arising out of these articles may not require much deliberation, there is a divided opinion on the issues arising out of other provisions such as Articles 106-108 as well as a matter arising under secondary legislation (For instance, the EU Merger Control Regulation).[ii] With regards to the approach adopted by the European Union, it is observable that the position of the United States is somewhat different than that of the EU. This is primarily attributable to the relationship between European Courts or Tribunals and European Competition Law for merger enforcement. To contextualize the same, in the United States a tribunal is always involved in the enforcement of Antitrust, whereas in the EU the competition commission can neither refer antitrust cases to enforcement bodies nor an arbitral tribunal. In a way, the inability of referring antitrust cases to an arbitral tribunal is in line with the objectives of the EU which is entirely opposed to referring cases to enforcement bodies. Is India averse to the confluence of arbitration and competition law? The Indian jurisprudence has taken shape miles away from the approaches adopted by these countries having robust competition law regimes. For starters, the Act that governs India’s competitive landscape has an overriding effect on the other statutes (Section 60), thereby imposing a bar on the jurisdiction of the civil court for adjudication of disputes that are to be dealt with by the CCI (Section 61). Therefore, an alternative mechanism for adjudication of competition disputes has not been prescribed under the Act. In India, the arbitrability of competition law disputes was addressed in the case of Union of India v. Competition Commission of India for the first time in 2012. The Ministry of Railways (Opposite Party) argument was that the mere existence of an arbitration agreement between the parties precludes the CCI from interfering, rendering the case non-maintainable. However, rejecting this argument, the Delhi High Court categorically stated that all disputes brought before the CCI were distinct from contractual duties dealt with by an arbitral tribunal, and the Act, 2002 supersedes all other legislation. It is so since the arbitration tribunals may tend to overlook the nitty-gritty involved in the process of adjudication of disputes of abuse of dominance since it lacks the expertise, mandate and ability to conduct an investigation. Concretizing the ratio, the Bombay High Court, in the case of Central warehousing corporation v. Frontpint Automotive Pvt. Ltd observed that Section 5 of the Arbitration and Conciliation Act is not to be read in isolation of Section 2(3) of

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Insolvency or Arbitration: A Fight Between Special Statutes

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[By Injila Khan and Utkarsh Mishra] Injila is a student at the Institute of Law, Nirma University, Ahmedabad and Utkarsh is a student at Symbiosis Law School, Noida. The Insolvency and Bankruptcy Code 2016 was enacted to structure and amend laws relating to the reorganization of financial assets and insolvency resolutions relating to corporate persons. Part II of the code deals with Insolvency Resolution and Liquidation for Corporate Persons and accordingly financial creditors, operational creditors, and corporate debtors can initiate Corporate Insolvency Resolution Process.[i]On the other hand, the Arbitration and Conciliation Act, 1996 governs the procedure related to both domestic as well as international arbitration along with their relevant enforcement. However, recently, there has been an ample number of cases where a financial dispute between parties often overlooked arbitration and lead to the process of insolvency of the company that owned the money in the first place. This leads to the failure of the concept of an alternative dispute resolution mechanism as a whole. Moreover, insolvency proceedings create numerous problems for the company who might not be out of funds but simply disputes the existence or quantification of a financial obligation created on the basis of a contractual arrangement. This further leads to insolvency being used as a pressure tactic to strong-arm the debtor organization into unfair payments. Ascertainment of the Term “Debt” under IBC Section 7(5) of IBC states that to initiate Insolvency Proceedings by the Financial Creditor there has to be a judicial determination by the Adjudicating Authority (AA) as to whether there was a ‘default’ by the Financial Debtor. As soon as the AA is satisfied that default has occurred it should accept the application for initiation of CIRP. This was effectively reiterated by the NCLT in the case of Innoventive Industries Limited v. ICICI Bank[ii]which states that claim of default by the financial creditor must be followed by ascertainment of existence of default by the AA. Thus, to start insolvency, the only criteria is debt. Wider Interpretation of the term “financial debt” Sec. 3(12) of IBC defines ‘default’ as non-payment of debt either totally or in part. In the case of SGM Webtech Pvt Ltd. v. Boulevard Projects Pvt Ltd[iii]it was held by the AA that even Fully Converted Debentures (FCCD) are unequivocally treated as a Financial Debt under Sec. 5(8) of IBC and for this reason, FCCDs were considered as financial debt. Also, Sec. 5(8) of IBC mandates debt to be disbursed against the consideration for the time value of money and since interest on debentures increases, therefore, it subscribes to the concept of the time value of money. Therefore, non-payment of any outstanding FCDs will qualify as non-payment of a debt and will be counted as a Default. Thus, debt obligations created by Financial securities are also being considered as financial debt and hence, a chance to invoke insolvency. Arbitration and Section 7 of IBC Disputes falling under Section 7 of the IBC belong to the class of litigations which are deemed non-arbitral.[iv]Therefore even if the agreements entered into by the parties contained an arbitration clause, they hold no relevance as soon as the dispute falls under Section 7 of the Code and there is any debt owed, in part or whole. The Supreme Courtin the case of Booz Allen & Hamilton v. SBI Home Finance Ltd[v]held that “generally and traditionally all disputes relating to ‘rights in personam’ are considered to be amenable to arbitration and all disputes relating to ‘rights in rem’ are required to be adjudicated by courts and tribunals”.Since the applications filed under Sec. 7 of IBC are matters relating to ‘right in rem’,[vi]therefore they are inherently incapable of being arbitrated. The Courts took a similar view in the case of Haryana Telecom v. Sterile Industries[vii]where an application under Sec. 8 of Arbitration and Conciliation Act was not allowed in oppression and management cases under the Companies Act because it was a matter relating to ‘right in rem’. Therefore, it is sufficiently clear that the non-arbitrability of the class of disputes falling under section 7 of IBC makes the application liable to be rejected. Furthermore, in the Booz Allen case[viii], it was specifically listed by the SC that “if the subject matter of a suit involved Insolvency and Winding up matters, then such cases were non-arbitral in totality.” Therefore, any dispute that falls out of the private fora of the two parties and causes a breach even unintentionally shall make arbitration impossible as it classifies as a matter related to right in rem. The current stand of the case-law-based jurisprudence is sufficient to point towards an unstructured and unclear way of classifying a matter into the class of “right in rem” as there is no interpretation of the terms conclusively. The floodgates for divertive tactics in order to prevent arbitration comes from the fact that litigation is generally favourable to the party whose strategy is to prolong the dispute and the courts and tribunals having a huge backlog facilitates the same (A. Ayyasamy v. A. Paramasivam)[ix]. In the Booz Allen case[x], the court opened the floodgates to interpretational litigation when they stated that the subordinate rights related to personam that have arisen from a right in rem can be arbitrated. This comment over the flexibility of the right in rem vis a vis right in personam bifurcation has caused a lot of litigation since the court has to conduct a case-to-case evaluation of the dispute in question. Different interpretations by different High Courts and Supreme Court judges having to distinguish cases has made the questioning of the arbitrability of a dispute a favourable strategy to prevent payment of dues or as a pressure tactic against companies. Furthermore, the application of cases that interpreted the Arbitration Act 1940 such as Natraj Studios (P) Ltd. v. Navrang Studios[xi] has created further ambiguity since the 1996 A & C Act has a remarkable difference from the preceding statute and thus, precedents being used that have adjudicated the 1940 Act has also created huge jurisprudential inconsistencies. Furthermore, IBC and the Arbitration Act are

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Supreme Court on Arbitrability of Insolvency Law Disputes: The Case of Indus Biotech

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[By Akshita Totla] Akshita is a 4th year law student at the Institute of Law, Nirma University. Recently, the Supreme Court in Indus Biotech Private Limited v Kotak India Venture (26 March, 2021) (Indus Biotech),[i] elaborately discussed the arbitrability of the insolvency law disputes in India. The SC in this case categorically held that post the admission of petition under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), the dispute would be non-arbitrable. In this article, the author examines the position of law in India and other major jurisdictions on arbitrability of insolvency matters and concludes by providing possible alternatives to the approach adopted by the SC. Factual Background A dispute arose between Kotak and Indus Biotech in relation to the valuation of Optionally Convertible Redeemable Preference Shares (OCPRS) while they were being converted into equity shares. On account of failure of Indus Biotech in redeeming OCRPS within the stipulated time, Kotak triggered the IBC by filing an application for initiation of Corporate Insolvency Resolution Process (CIRP). Before the admission of CIRP application, Indus Biotech filed an application under section 8 of the Arbitration and Conciliation Act, 1996 (Arbitration Act), contending that section 7 IBC petition is not maintainable by virtue of the arbitration clause contained in the agreement. NCLT, Mumbai in 2020 allowed an insolvency dispute to be settled by arbitration by dismissing section 7, IBC application filed by Kotak observing that there is no default. In this backdrop, a Special Leave Petition was filed before the SC. The SC observed that where an application seeking reference to arbitration is filed during pendency of section 7, IBC petition, the adjudicating authority needs to first decide upon the maintainability of CIRP application. And upon admission of section 7 IBC petition, any application under section 8 of the Arbitration Act would thereafter be not maintainable. IBC Proceedings are in rem after CIRP application is admitted The insolvency proceedings are proceedings in rem i.e., having effect on the world at large.[ii] The SC in Booz Allen,[iii] categorically held that insolvency matters are non-arbitrable. To provide more clarity on this issue, the SC in Indus Biotech divided the proceedings into two stages- pre-admission and post-admission stage. In the pre-admission stage, the insolvency proceedings remain in personam. While post the admission of CIRP application, the proceedings become in rem. The SC while referring to Vidya Drolia v Durga Trading Corporation,[iv] noted that on admission of Section 7, IBC petition, third party rights are created in all the creditors, and the proceedings will have erga omnes effect. Thus, it is only upon admission that the matter would become non-arbitrable. In pre-admission stage wherein, the petition is filed by a financial creditor, the NCLT is only required to ascertain the existence of default. The Corporate Debtor (CD) cannot either contend that the petition is used as a tool to bypass arbitration proceedings or there is a dispute regarding the debt amount. This highlights a lacuna in the current framework which disallows CDs to raise bona fide disputes. In circumstances like that of present case, where the dispute was regarding the interpretation of a contractual clause, arbitration can be used as mechanism for quantifying debt. This would rather provide more clarity on the amount of financial debt. Foreign Jurisprudence In the UK, insolvency proceeding does not bar a party to proceed with arbitration. This position was established in Fulham Football Club Ltd v Richards (2011),[v] where the court of appeal ruled in the favor of arbitrability of shareholder unfair prejudice claim. The court of appeal also observed that arbitrability of insolvency law disputes would depend on the whether the dispute involves third party rights or not. For instance, disputes relating to a) order for the payment of debts owed by the insolvent company; b) determination of assets of the estate; or c) determination of schedule of claims, would affect the third-party creditors and would not be arbitrable. Recently, in Riverrock Securities Limited v International Bank of St. Petersburg (2020),[vi] the English High Court held that avoidance claims brought under the Russian insolvency law were contractual in nature and are hence, arbitrable. The court also noted that “the presumption that an arbitration agreement should not extend to claims which only arise on a company’s insolvency” would not arise in English Insolvency cases. This judgment demonstrates the pro-arbitration approach of the English courts, even in cases involving foreign insolvency law. The courts of the United States, emphasize on the policy favoring commercial arbitration than the domestic notions of arbitrability as stated by Justice Blackman in Mitsubishi Motors Corp. v Soler Chrysler-Plymouth Inc. (1985),[vii] In the U.S., the arbitrability depends on whether the matter involves “core” or non-core” issues of insolvency. “Core” bankruptcy proceeding matters are considered non-arbitrable. These proceedings involve determination of rights created by federal bankruptcy law which could only arise in bankruptcy proceedings or a proceeding that could not have existed outside of bankruptcy. On the other hand, in “non-core” matters the court has to compel arbitration. In In re Electric Machinery Enterprises, Inc. (2007),[viii] the eleventh circuit while ordering arbitration held that dispute regarding contractual claim for the money owed was not a “core” proceeding. Furthermore, even if it was a “core” proceeding, there was no evidence indicating that the arbitration proceedings would have conflicted with the object of the Bankruptcy Code. The above-mentioned judgments suggest that the courts of both UK and US have tried to bring coherence in laws and maintain an approach that is consistent with the legislative policy of their respective arbitration laws. The way forward: Is Reconciliation between the IBC and the Arbitration Act Possible? The legislative intent behind the Arbitration Act is to develop arbitration friendly environment in the country. While the IBC aims to rescue corporate debtor within a specified limit by balancing the interest of all the stakeholders involved. Now, the issue here is whether overriding effect of IBC over an arbitration clause based on the consent of the parties, violates the principle of party

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Unwrapping the Conundrum: The Vodafone-India Tax Saga

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[By Urja Dhapre and Chetan Saxena] The authors are students at the Institute of Law Nirma University. Introduction In an attempt to draw things to a close, the Permanent Court of Arbitration [PCA] has passed an award against India’s Income Tax Department, upholding Vodafone International Holding BV’s [VIH] claims to not pay the tax liability for a whopping $2.2 billion. The award holds the Indian Tax Department to be in violation of Article 4(1) of the Bilateral Investment Treaty [BIT] between India and the Netherland which elucidates the principle of fair and equitable treatment to the investors. VIH’s saga of a tax dispute in India dates back to the year 2007 wherein a tax liability was imposed on VIH by India’s Tax Department alleging VIH to have concluded its acquisition with Caymanian-based CGP Investments from Hutchison Telecommunications International Ltd [HTIL] based in Hong Kong as a colorable device to ultimately get a controlling interest in Hutchison Essar Ltd [HEL], an Indian company whose control was held by CGP Investments. While the Bombay High Court [BHC] ruled in favor of the tax department, the Supreme Court [SC] overturned the BHC’s judgment by clarifying that the transaction in contention was not related to the transfer of an asset but rather the transfer of a share. VIH’s resort to International arbitration rests on the grounds of a retrospective amendment in the Income Tax Act, 1961 [IT Act]by the government in 2012, such that it overturned the Supreme Court of India’s [SC] judgment, making VIH labile for tax dues. Offshore Indirect Transfers and their Taxation Aspects Offshore indirect transfers [‘OITs’] like the one of VIH-Hutch, are one such category of transactions that are viewed to have built to abuse the tax regulations of a country, such that the ownership and effective control of an asset is transferred without replacing its legal owner. The underlying asset does not change hands, so there is formally no capital gain directly realized. However, gains are made out of such underlying assets even though the primary ownership remains the same. The chargeability of such gains is thus contested due to its uncertainty in interpreting OITs and their taxation with no standard regulations set across the globe. In June 2020, the Platform for Collaboration on Tax [PCT] came up with a report concluding that location countries shall have the right tax OIT’s. However, an important deliberation was of the inclusion of specific provisions taxing the OIT’s. While the report transcripts the view that OITs shall be taxable where the underlying asset lies, it refrains from the applicability of such taxes retrospectively. The Retrospective Amendment and its Validity The amendment brought forward by the Government of India overturning the decision of the SC disrupts the entire affixed jurisprudence of tax statutes in India. The aspect of retrospectively amending tax clauses for the sole purposes of overturning the judgment has been questioned and its condemnation has been widely unveiled through a catena of judgments. In the case CIT v. NGC Networks (India) Pvt. Ltd., BHC applied the principle of lex non cogit ad impossibilia (the law does not compel a man to do what he cannot possibly perform) with respect to the contested retrospective amendment of Explanation 6 to Section 9(1)(vi) of the IT Act. Moreover, the Indian Tax Authority [ITAT] in the case of Cairn India Ltd &Ors. v. Government of India (post the Vodafone ruling) had held that the assessee cannot be burdened with the levy of interest where it could not have visualized its tax liability at the time of the transaction, and tacitly lent credence to the view that the indirect transfer provisions were new and did not previously exist. The approach of the SC with respect to retrospective amendments is also very unambiguous. In the case of Commissioner of IT, New Delhi v. Vatika Township Private Ltd the court observed that taxing principles should be construed in their strict interpretation, and ordinarily, a statute should not be held to have a retrospective effect. Anything contrary breaches the principles of natural justice along with it being violative of the right to carry trade under Article 19(1)(g) of the Constitution of India. Another bench of the SC, held on similar lines, clarifying “the Legislature cannot set at naught the judgments which have been pronounced by amending the law, not for the purpose of making corrections or removing anomalies but to bring in new provisions which did not exist earlier.” Principle of Fair and Equitable Treatment and Offshore Indirect Transfer The principle of fair and equitable treatment [FET] is one of the most accustomed provisions often found in Bilateral Investment Treaties [BITs], casting an obligation on the host countries to provide foreign investors with a fair and equitable treatment. A lot of discussion has evolved to interpret the minimum standard of the FETs as to whether it is a self-contained standard, referring to general International Law which has to be interpreted in each case by the arbitrators or it should be linked to customary international minimum standard. To resist a blurred and ambiguous situation, the tribunals have analyzed five categories of elements to be encompassed to interpret this principle: Obligation of vigilance and protection, Due process including non-denial of justice and lack of arbitrariness, Transparency, Good faith – which could include transparency and lack of arbitrariness and Autonomous fairness elements. Analyzing the tribunal’s decision to be against the fair and equitable principle accorded in Article 4(1) of the India-Netherlands BIT, the authors attempt to study in the light of international jurisprudence the approach that tribunals have undertaken in similar cases. One such remarkable case is of the Occidental Exploration and Production Company [OEPC] initiating arbitral proceedings against Ecuador for violating the FET provision of their BIT. The Tribunal interpreted the FET standard to require the “stability of legal and business framework” to be met with the transaction. It concluded that the framework, under which the investment had been made and operated, was altered to a crucial extent by amending its

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Need For Multilateral Framework In Investment Arbitration For Dispute Resolution

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[By Sourav Verma and Sunil Singh] The authors are students at the Hidayatullah National Law University, Raipur. Introduction In the last two decades of the 20th century, due to globalization as well as liberalization, there has been an increase in the free-flow of foreign investments, especially in developing countries. Due to this, great changes have taken place in the foreign investment regime, mainly in the form of Bilateral and Multilateral Investment Treaties. These treaties have had a significant impact on aspects such as national sovereignty, federalism, and public policy decisions that relate to the health and environment of the host countries. With the tremendous rise in the number of BITs and MITs, there is also an increase in the amount of investment treaty arbitration. However, concerns have arisen with respect to inconsistent arbitral awards, lack of transparency, parallel arbitration proceedings, impartiality and diversity in the appointment of arbitrators, and delay in the award making process[i]. In the past two decades, there have been some inconsistent awards delivered by tribunals in Investment treaty arbitration, which in turn have faced criticism from academicians, sovereigns, investors. However, while absolute consistency in any legal system is not possible, at least a minimum level of consistency is necessary in any legal system to attain certainty. This article specifically focuses on the SGS arbitrations[ii] and Lauder arbitrations involving similar facts and circumstances in which tribunals reached contradictory conclusions, which attracted a great deal of public attention. SGS Arbitrations The SGS arbitrations involved two arbitration proceedings, (i) between SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan (‘SGS v. Pakistan’) and (ii) SGS Société Générale de Surveillance S.A. v. Republic of the Philippines (‘SGS v. Philippines’), in which tribunals came to different conclusions regarding the interpretation of the umbrella clause which is also known as “observance of undertaking” involving almost similar facts. SGS v. Pakistan was the first investment treaty arbitration in which the tribunal considered the meaning of an umbrella clause. SGS, by relying on Article 11 of the Switzerland-Pakistan BIT, claimed that it was the duty of “every state to observe all the obligations that it should enter in relation to foreign investments”.[iii] The tribunal in that case held that the claimant failed to provide evidence “that the parties to the BIT intended that umbrella clause transmute a contractual breach to the level of a treaty breach. The tribunal on the basis of lack of evidence rejected the broad interpretation and denied the claimant’s claim. Only after the gap of five months, SGS sued the Republic of Philippines and the factual matrix of the SGS v. Philippines was almost similar to that of SGS v. Pakistan. Despite this similarity, the tribunal reached a different result which is the opposite of the previous decision through a different analysis. Article X(2) of the Switzerland-Philippines BIT provided that every Sovereign “shall observe all the obligations undertaken with regard to investments in its territory by the investors of other Sovereigns. By relying on the article X (2), the tribunal observed that it was the “duty of every Sovereign to observe all the obligations it has accepted or will, in future, accept with investments under the purview of the BITs”. The tribunal concluded that due to the umbrella clause, “Philippines breached the binding and contractual commitments that it has presumed under the BIT, with regard to the specific foreign investments. The Philippines award is diametrically opposite to the Pakistan award. While the decision of the tribunal in SGS V. Pakistan is based on a narrow interpretation of the treaty, the tribunal in SGS v. Philippines concluded its decision on rather a broad interpretation. Therefore, it is undeniable that one of the decision is based on an incorrect interpretation of the treaty, that leads to confusing all the stakeholders regarding the correct implementation of the umbrella clause. The Lauder Arbitrations Lauder v. Czech Republic and CME v Czech Republic are two arbitral proceedings that were initiated against the Czech Republic for the violations of Czech Republic-USA BIT and Netherlands-Czech Republic BIT respectively. Both the tribunals reached very conflicting, and therefore opposite conclusions in relation to each other, even though the underlying facts were the same. The Lauder tribunal held that the Czech Republic engaged in discriminatory and arbitrary treatment of investments. Further, the tribunal noted that there was neither expropriation nor violation of either the duty to provide fair and equitable treatment (FET) or the obligation to provide full security and protection. Finally, the tribunal concluded that the Czech Republic had not breached its obligations under the investment treaty and therefore owed no damages to Lauder. Only after a gap of ten days, the CME tribunal reached a conclusion that was the exact opposite of the Lauder tribunal. The CME Tribunal held that the Czech Republic had not fulfilled its obligations related to fair and equitable treatment, full security and protection of investments, obligation to treat investments in conformity with principles of international law, and obligations not to impair investments by unreasonable or discriminatory measures. The tribunal awarded CME damages worth US $269,814,000. Later, Czech Republic moved Sweden’s Svea Court of Appeal to vacate the award of the CME tribunal. The Svea Court of Appeal refused to set aside the award opining that it had very narrow review power and only in exceptional circumstances could an award be set aside[iv]. The Svea Court of Appeal accepted the existence of parallel proceedings by the Lauder tribunal in London but refused to interfere on the ground that it had no jurisdiction and also refused to apply res judicata or lis pendens because the two awards involved different parties under different BITs entered between different Sovereigns. The contradictory decisions rendered in the Lauder cases result in undermining the legitimacy of investment arbitration, particularly where disputes related to public policy, environmental and human rights, and public health are at stake. Analysis Various academic literature, practitioners, etc. of this discipline have already discussed numerous approaches to resolve this issue of inconsistency. A common

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A Tale Of Divergent Interpretations: Revisiting What Constitutes “International Commercial Arbitration”?

Leave a Comment / Arbitration Law / CBCL

[By Hitoishi Sarkar and Animesh Bordoloi] Hitoishi is a student at Gujarat National Law University and Animesh is an Assistant Lecturer at Jindal Global Law School. On 20th July 2020, the Rajasthan High Court in a rather interesting decision held that if the nationality of both the parties is Indian, then even a foreign seated arbitration will not qualify as an International Commercial Arbitration pursuant to Section 2(1)(f) of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’). The decision is significant as the court carved out a third type of arbitration which is foreign seated and enforceable as a foreign award while still not qualifying as an International Commercial Arbitration. In this post, we seek to analyze the dicey interpretation of the term “international commercial arbitration” by Indian courts while also contrasting the same with the UNCITRAL Model Law on International Commercial Arbitration. The latter part of this post deals with the implication of such a restrictive interpretation of the term from the standpoint of party autonomy. Factual Matrix An application under Section 9 of the Arbitration Act had been preferred by the applicant inter-alia praying that the respondent be restrained from invoking bank guarantee of rupees five crores, which it had furnished pursuant to the contract executed with the Respondent. The Respondent argued that the application was liable to be dismissed for want of jurisdiction, as the jurisdiction to hear the application under Section 9 of the Arbitration Act lies with the Principal Civil Court at Udaipur and not with the High Court. However, the applicant urged that considering the fact that the seat of arbitration was Singapore, the arbitration in question must be treated as an International Commercial Arbitration and as a necessary fall out of such finding, the application under Section 9 of the Arbitration Act be also held maintainable before the High Court and not before the Principal Civil Court. The Court held that an arbitration to be termed or treated as an International Commercial Arbitration, the agreement has to have at least one foreign party or a company whose nationality is other than that of India. The glaring discord with the Model Law Article 1(3) of the UNCITRAL Model Law on International Commercial Arbitration provides that an arbitration is “international” if the place of arbitration is situated outside the State in which the parties have their places of business. Thus, the central criterion relied upon by the Model Law is the internationality of dispute while defining an international arbitration. It is pertinent to note here that while drafting the Model Law, the Working Group also faced the same dilemma as divergent views were expressed as to whether “an arbitration should qualify as international if parties that have their places of business in the same State have chosen a seat outside their place of business.” However, the Working Group ruled in favor of party autonomy and thereby retained the aforementioned provision. Thus, the Rajasthan High Court’s decision in Barminco Indian Underground v.Hindustan Zinc Limited wherein it ruled that “if the nationality of both the parties is Indian, then even a foreign seated arbitration will not qualify as an International Commercial Arbitration” runs contrary to the approach of the Model Law and thereby is a step back from the standpoint of party autonomy. Analyzing the ambiguity surrounding the “Place of Business.” A relevant defense taken by the Petitioner in Barminco was that the Applicant is a part of the Barminco Group of companies with operations in Australia, Asia, and Africa. The rationale for such an argument was that section 2(1) (f) (iii) of the Arbitration Act construes an arbitration to be an “international arbitration” if the management or control of one of the parties is outside India. However, the Indian interpretation has pointed to an approach where even though a company is foreign-controlled if the place of incorporation in India, it is the latter that is used as the determining factor. Interestingly, the Law Commission in its 246th Report which had initially proposed to delete the word ‘company’ from section 2(1)(f) (iii) re-enforced the ‘place of incorporation’ principle for determining the residence of a company thereby also concurring with the position of law laid down by the Supreme Court in TDM Infrastructure Private Limited v. UE Development India Private Limited and thus missed an opportunity to further the case of party autonomy. Moreover, the international understanding of the issue has also been divergent. Unlike the Indian position which puts stress on ‘place of incorporation’, some jurisdictions focus on ‘place of business’, the interpretation of which has been left to the national legislations. While some countries such as Austria have adopted a more lenient approach by qualifying it as any location from which parties can independently participate in economic transactions, others such as Russia have adopted a narrower one. Irrespective of such varied interpretations, however, the primary debate boils down to where the Indian approach stands when compared to the Model Law, which is clear in its position that if one of the parties’ place of business is abroad, the arbitration ‘is’ international whereas Indian Courts have relied extensively on the “place of incorporation” principle while determining the nationality of parties pursuant to Section 2 of the Arbitration Act. International Commercial Arbitration: Decluttering the Indian understanding The Indian position on whether two Indian parties can choose a foreign seat for arbitration has caused much uncertainty. Although the judgments in Sasan Power Limited v. North American Coal Corporation India Pvt. Ltd. and subsequently in GMR Energy Limited v. Doosan Power Systems India, the High Courts inclined towards the position that it is permitted for Indian parties to choose a foreign seat. The Bombay High Court in Addhar Mercantile Private Limited v. Shree JagdambaAdrico Exports Pvt. relied on TDM Infrastructure to disregard the validity of arbitration clauses when two Indian parties had chosen a foreign seat. While High Courts do not have a binding precedent over other High Courts, such contradictory opinion reflects the need for the Supreme Court

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Cross-Border Insolvency and International Commercial Arbitration: The Need for Legislation

Leave a Comment / Arbitration Law, Insolvency Law / CBCL

[By Nidhi Thakur and Akshita Tiwary] The authors are students at Government Law College, Mumbai. Introduction The current Covid-19 pandemic has had an adverse impact on economies all over the world. The global financial crisis has resulted in recession, tightening of credit markets and a widespread lack of economic confidence. All of this has resulted in a substantial increase in insolvencies. Most commercial contracts include an arbitration clause that allows them to resort to arbitration in case of breaches. For parties participating in arbitral proceedings during or immediately after the pandemic, the potential insolvency of an award debtor will become a real concern. This interaction between national insolvency regimes and international commercial arbitration is an issue which has received relatively little attention. With several multinational companies declaring bankruptcy or insolvency, foreign creditors would be at a disadvantage when it comes to protecting their interests unless states endeavour to frame comprehensive laws on the subject. These laws can strengthen confidence in the international dispute resolution mechanism by paving the way for consistent procedures and predictable outcomes. In consonance with the same, this article aims to highlight the intersectionality and complexities arising out of parallel cross-border insolvency and international commercial arbitration proceedings, with a particular focus on the Indian stance. Intersectionality between International Commercial Arbitration and Cross-Border Insolvency “Arbitration and insolvency processes embody, to an extent, contrasting legal policies. On the one hand, arbitration embodies the principles of party autonomy and the decentralisation of private dispute resolution. On the other hand, the insolvency process is a collective statutory proceeding that involves the public centralisation of disputes so as to achieve economic efficiency and optimal returns for creditors.” The aforesaid was rightly upheld by the Singapore Court of Appeal in the case of Larsen Oil and Gas Pte Ltd v. Petroprod Ltd. International commercial arbitration is a transnational feature that seeks to resolve disputes arising out of commercial transactions conducted across national boundaries. On the other hand, insolvency is a mostly domestic proceeding which gets triggered when companies are no longer in a state to meet their financial obligations to creditors as debts become due. Cross-border insolvency occurs in a situation where the insolvent debtor has assets in more than one nation, or where some of the creditors belong to jurisdictions other than the one where the insolvency proceedings have been filed. The United Nations Commission on International Trade Law sought to create uniform model laws for both these areas. As a result, the UNCITRAL Model Laws on Cross-Border Insolvency and International Commercial Arbitration were formulated in 1997 and 1985, respectively. However, the organisation has failed to address the interrelationship between these model laws. International arbitration and insolvency regulation set in motion distinctive legal procedures, with each having its own distinct purpose, objective, and underlying policy. Therefore, intersectionality between both these areas of law poses a challenge for courts and arbitral tribunals. Certain judgements offer a unique opportunity to discuss the delicate interaction between arbitration and insolvency. In the case of Syska v. Vivendi, the English Court of Appeal upheld the decision of the LCIA arbitral tribunal that foreign insolvency proceedings should have no effect on pending arbitration proceedings, which are decided according to the law of the land where the lawsuit is pending. In this judgement, Lord Justice Longmore rightly said that to protect the legitimate expectations of people in business with regards to the certainty of transactions, lawsuits should come to an appropriate conclusion. The Swiss Supreme Court’s decision of 2009 in the Vivendi v. Elektrim dispute upheld the award of an arbitral tribunal seated in Switzerland, which declined to exercise jurisdiction over Elektrim after it had been declared insolvent in Poland. However, in 2012, the Supreme Court overturned this decision to declare that insolvency proceedings do not affect the arbitral tribunal’s jurisdiction. The rationale behind this was that the capacity to participate in an arbitral proceeding presupposes general ‘legal capacity,’ which bestows certain rights and obligations upon the company. These rights and obligations remain unaffected even when insolvency proceedings have been commenced according to domestic laws. Hence, insolvency proceedings would have no bearing on the arbitration agreement. This gives arbitrators in Switzerland a wide jurisdiction to decide disputes relating to insolvency cases as well, which includes claims made on behalf of the estate itself. This reasoning is a desirable one, given that it protects the interests of cross-border creditors who may find themselves left without any remedy when arbitration proceedings are subverted to domestic insolvency laws. Complexities arising due to Parallel Cross-Border Insolvency and International Commercial Arbitration Proceedings When considered unilaterally, both seem to have an established set of laws in place. However, an inter-jurisdiction parallel proceeding raises a multitude of issues. One difficulty might be the enforceability of an arbitration agreement made before the insolvency of one of the parties. A second might be whether and to what extent the insolvency matters or bankruptcy issues could be made the subject of the arbitration. A third could be whether a stay of the arbitral proceedings could be given when insolvency proceedings have commenced. A fourth relates to the enforceability or challenge of an arbitral award on substance pending or after insolvency. A fifth might be the role of the judiciary in controlling insolvency proceedings against the background of arbitral proceedings having been commenced. The list of different contextual settings and issues can go on.[1] This anomaly requires countries to develop their domestic legal framework, which can harmoniously resolve these issues. Unfortunately, many nations, including India, have not yet taken steps to rectify this lacuna. Given the context of the current pandemic, such measures need to be deliberated upon urgently. An Overview Of Key Indian Law Considerations The Arbitration and Conciliation Act, 1996, is the fundamental law governing arbitration in India and is widely based on the UNCITRAL Model Law on International Commercial Arbitration (1985). It was enacted to consolidate, define, and amend the law concerning domestic arbitration, international commercial arbitration, and the enforcement of foreign arbitral awards in India.

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Indus Biotech Private Limited v. Kotak India Venture Fund-I: Arbitration Of Insolvency Proceedings?

Leave a Comment / Arbitration Law, Insolvency Law / CBCL

[By Hitesh Nagpal] The author is a student at Maharashtra National Law University, Mumbai. In a recent decision, dated 9 June 2020, the National Company Law Tribunal(“NCLT”) Mumbai Bench in Indus Biotech Private Limited v. Kotak India Venture Fund-I, referred the financial creditor and the corporate debtor to arbitration while adjudicating a plea under section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). In this article, the author contends that the decision of the NCLT is erroneous on two grounds; firstly, the disputes pertaining to insolvency are not capable of being referred to arbitration and secondly, the provisions of the IBC prevail over the provisions of the Arbitration & Conciliation Act, 1996 (“Arbitration Act”). Factual Background In 2007, Kotak India Venture Fund-I (“Financial Creditor”) subscribed to equity shares and Optionally Convertible Redeemable Preference Shares (“OCRPS”) issued by Indus Biotech Private Limited (“Corporate Debtor”). In light of regulation 5(2) of the Securities and Exchange Board of India (Issue of Capital & Disclosure Requirements) Regulations 2018, the financial creditor opted to convert OCRPS into equity shares to make a Qualified Initial Public Offering (“QIPO”). During the QIPO process, a dispute arose between the parties pertaining to the calculation and conversion formula to be followed while converting OCRPS into equity shares and while the dispute was ongoing, the financial creditor invoked the provisions of the Share Subscription and Shareholders Agreement (“SSSA”) pertaining to the early redemption of OCRPS. When the corporate debtor failed to redeem the OCRPS within the prescribed timeline, the financial creditor filed an application under section 7 of the IBC to initiate the Corporate Insolvency Resolution Process (“CIRP”) against the corporate debtor alleging that there was a default of ₹367,07,50,000/-. Subsequently, the corporate debtor filed an application under section 8 of the Arbitration Act contending that the SSSA contains an arbitration clause and therefore, the application filed by the financial creditor shall be dismissed and the parties shall be referred to arbitration. Issue Will the provisions of the Arbitration Act prevail over the provisions of the IBC? NCLT’s Judgement By placing reliance on the decisions of the Supreme Court in Hindustan Petroleum Corporation Limited v Pinkcity Midway Petroleums and P Anand Gajapathi Raju & others v PVG Raju (dead) & others, it was observed that where an arbitration clause exists, the court has a mandatory duty to refer the parties to arbitration. Moreover, the NCLT pointed out that “the Corporate Debtor is a solvent, debt-free and profitable company. It will unnecessarily push an otherwise solvent, debt-free company into insolvency, which is not a very desirable result at this stage.” In light of this, the NCLT dismissed the application filed under section 7 of the IBC and referred the corporate debtor and the financial creditor to arbitration. Analysis Insolvency As A Subject Matter Is Not Arbitrable In the present case, there is no dispute pertaining to the arbitration agreement as there is a specific arbitration clause in the SSSA. The pertinent question in the present case is whether the dispute is capable of settlement through arbitration. Even though section 8 of the Arbitration Act compels the court to refer the parties to arbitration, there are certain exceptions to the application of this rule. The Arbitration Act does not include any provision excluding a certain class of disputes terming them ‘non arbitrable’ however, section 34 and section 48 of the Arbitration Act provide that an arbitral award will be set aside if the court finds that “the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.” In Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd., the Apex Court, while deciding the scope of section 8 of the Arbitration Act, held that: “Sub-section (1) of Section 8 provides that the judicial authority before whom an action is brought in a matter will refer the parties to arbitration the said matter in accordance with the arbitration agreement. This, however, postulates, in our opinion, that what can be referred to the arbitrator is only that dispute or matter which the arbitrator is competent or empowered to decide.” The application for initiating CIRP belongs to the category of dispute which is not capable of settlement by arbitration. As held in Pioneer Urban Land and Infrastructure Limited & another v Union of India, these are matters in rem, which the arbitrator has no power to reward. In the landmark case of Booz Allen and Hamilton Inc v SBI Home Finance Limited & others, the Supreme Court, while recognizing the mandatory duty imposed under section 8 of the Arbitration Act, stated that where the dispute is non arbitrable, the court should refuse to refer the parties to arbitration despite the fact that the parties have agreed upon arbitration as the forum for settlement of the dispute. In the aforementioned case, the Supreme Court explicitly stated that disputes pertaining to insolvency are not arbitrable even when there is an arbitration agreement between the parties. Therefore, the NCLT should have refused to refer the parties to arbitration as insolvency as a subject matter is not arbitrable. Overriding Effect Of IBC It is pertinent to note that the well-established principle of generalia specialibus non derogant i.e., special law prevails over general law, does not apply in the present case as both IBC and the Arbitration Act are special laws. In Engineering Enterprises v Principal Secretary, Irrigation Department, it was held that the Arbitration Act is “a special law, consolidating and amending the law relating to arbitration and matters connected therewith or incidental thereto.” Insofar as IBC is considered, section 238 clearly states that “The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.” In a plethora of cases such as Bhoruka Steel Ltd. vs. Fairgrowth Financial Services Ltd, it has been held that when there is a conflict between the provisions of two

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