Rafale twist: Why did France refuse to give India a sovereign guarantee?

Documents reveal how two core conditions of a government-to-government contract were diluted in the run-up to purchasing 36 Rafale jets

The Narendra Modi government has consistently claimed that the Rafale aircraft deal was between two governments – India and France – and therefore there was hardly any possibility of India’s interests being compromised in any way.

However, government documents accessed by The Wire reveal the Ministry of Law and Justice had opined that the “core elements of Government-to-Government (G-to-G) character” of the Rafale deal were not acceptable to France and consequently had to be diluted and waived in the final inter-governmental agreement (IGA) signed between the two governments in September 2016.

So what were the two core G-to-G elements that France did not accept? The law ministry gave a clear view to the Ministry of Defence that in G-to-G contracts, “the responsibility for the supply of equipment and related industrial services and performance of the entire contract remains with the foreign government”.

The second condition cited by the law ministry was that “the dispute resolution mechanism remained at Government-to-Government level only”.

However, in the course of negotiating the IGA, certain sensitive issues arose whereby the French government sought to transfer its own direct responsibilities and obligations to the industrial supplier – in this case Dassault Aviation.

For instance, in the event of a future breach of contract or any other dispute, France insisted India would have to enter arbitration proceedings with the equipment-supplying company, Dassault. Consequently, the French government shied away from providing a direct sovereign guarantee for the performance of the contract. The law ministry saw a direct sovereign guarantee from France as core to the G-to-G character of the deal to purchase 36 Rafale fighter aircraft. This sovereign guarantee was, however, not forthcoming.

The law ministry, though, managed to have one fresh clause introduced in the IGA which mentioned “joint and several responsibility” of the French government and the industrial supplier.

But this too fell way short of its advice that the French government take direct responsibility for its future obligations on the performance of the contract by providing a sovereign guarantee.

The French government eventually agreed to provide a letter of comfort which, in legal terms, is much weaker than a sovereign guarantee.

The defence ministry’s main concern was whether the proposed international arbitration in Geneva under the rules of UNCITRAL (United Nations Commission on International Trade Laws) was legally tenable because there was no direct contract between the government of India and the French supplier Dassault.

After all, the Modi government has also been publicly asserting it has no direct dealings with Dassault and its agreement is only with the French government. Consequently, the defence ministry also raised the question of whether the “government to government character of the procurement is maintained by incorporating the provision of arbitration with the French industrial suppliers?”

The law ministry replied to the defence ministry’s query by clearly stating that the Indian government’s direct arbitration with the French industrial suppliers, in this case Dassault, was not tenable since India was not a “signatory or confirming party to the Convention”.

“Indian side have desired during negotiations that the content of the Convention should be made known to the Indian side to ascertain what hold the French government has over the Industrial Suppliers for the execution of supply protocols and what are its legal ramifications to us. However, the French side has not shared the language of the Convention with Indian side,” the law ministry noted.

Finally, the defence ministry under Manohar Parrikar agreed with the law ministry advice with regard to retaining the core elements of the G-to-G agreement which essentially involved France taking direct responsibility for the performance of the contract with a sovereign guarantee and India avoiding any direct dealing through any future arbitration with Dassault in the event of a dispute.

However, this was not acceptable to France. In the end, the defence minister simply stated that any decision on the waiver of these core elements must be taken at the level of the Cabinet Committee on Securities (CCS). The waiver on these two aspects was finally granted in a CCS meeting held on August 24, 2016.

The final inter-governmental agreement between India and France was signed on September 23, 2016. Published in arrangement with The Wire.