Recent decisions and actions of Indian courts and governmental agencies have raised concerns among foreign investors in India. News reports suggest that certain foreign investors intend to step outside the recourse afforded by the executive, legislative or judicial organs of the Indian state, and may instead seek recourse to bilateral investment treaties (BITs) entered into by the government of India (GoI).
The GoI has entered into BITs with over 70 countries, providing for the promotion and protection of investments by investors of one country, made in the territory of the other. The dispute resolution provisions in certain BITs provide for an investor, being a national of one party to a BIT, to initiate arbitration against the government of the other country if that government fails to fulfil its obligations under the BIT. Such provisions may provide for arbitration in accordance with the rules of the International Centre for Settlement of Investment Disputes (ICSID), which was established under a convention that also provides for a mechanism for enforcement of ICSID awards.
India is not a signatory to the ICSID convention. BITs to which the GoI is a party and which contemplate arbitration as a dispute resolution mechanism provide for ad hoc arbitrations under the rules of an arbitration institution (BIT arbitrations). These arbitrations can be held in India, or, as is more likely, in a neutral venue in a third country.
If a foreign investor obtains an award in a BIT arbitration (BIT award), the GoI may voluntarily comply with the terms of the award. If the GoI fails to comply, the investor will look to enforce the award against the assets of the GoI.
Arbitration Act and challenges
Part II of the Arbitration and Conciliation Act, 1996 (Arbitration Act), provides for the enforcement of foreign arbitral awards made in any territory, the government of which is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), and which has been notified as a “reciprocating territory” by the GoI, provided that the award relates to disputes arising out of “legal relationships, whether contractual or not”, and that such relationships are considered as “commercial” under Indian law.
It may be argued that a BIT, being a treaty between two states, is not an arbitration agreement between an investor and a state under the Arbitration Act, and further, that it does not relate to a specific commercial relationship. However, a BIT could be considered as a commercial agreement on the basis that the signatory states obtain foreign investment in consideration for compliance with certain obligations. Further, both the New York Convention and Part II of the Arbitration Act apply to commercial disputes irrespective of whether they arise from “contractual” relationships.
The grounds for resisting the enforcement of any foreign award sought to be enforced in an Indian court in Part II of the Arbitration Act are consistent with the grounds recognized in the New York Convention. Accordingly, if an investor decided to approach an Indian court under Part II to enforce a BIT award (since the principal assets of the GoI would be located in India), these grounds would be available to the GoI.
Further, pursuant to the decisions of the Supreme Court in the cases of Bhatia International v Bulk Trading and recently in Venture Global Engineering v Satyam Computer Services, it is arguable that BIT awards could be challenged before an Indian court (even where the venue of arbitration was outside India) and set aside on grounds in section 34 of Part I of the Arbitration Act, including on grounds of being contrary to the “public policy” of India. The scope of the term “public policy” as a ground for setting aside or declining the enforcement of foreign arbitral awards has been the subject of many, and on occasion, conflicting, judicial pronouncements in India. While it is possible to exclude the application of Part I of the Arbitration Act, Indian BITs typically do not exclude Part I.
Finally, if an investor chooses to enforce a BIT award against assets of the GoI held outside India, the GoI may seek to challenge the proceedings as a violation of India’s sovereignty, to the extent permitted by applicable law in the enforcing jurisdiction.
The GoI could seek to resist enforcement of such awards outside India on the basis of forum non conveniens, i.e. the existence of an adequate alternative forum for the proceedings, although this ground may not be appropriate to an enforcement proceeding.
In general, arbitration awards against governments are usually honoured voluntarily. If the GoI fails to comply with such an award, the enforcement options available to a foreign investor and the view of Indian courts on the enforcement of foreign awards, generally, will be relevant.
Neha Goyal and Simran Dhir are associates at S&R Associates, a law firm based in New Delhi and Mumbai. They can be contacted at email@example.com and firstname.lastname@example.org.
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