It’s a dispute which has been inexplicably low profile, even though proceedings arising out of the disputes were filed before two high courts, and two rounds in the Supreme Court, where it languished for years before being tagged alongwith a pending matter before the Constitution Bench for consideration whether foreign awards can be set aside by Indian courts.
In 1989, White Industries (White) entered into various contracts with Coal India Limited (CIL) for supply of equipment and development of a coal mine for the Piparwar Project, which also included a funding package. The contract was subjected to Indian law and contained an arbitration clause providing for ICC arbitration, excluding the application of the Indian Arbitration Act, 1940, but not extending the non-applicability to any repeal, amendment or substitution thereof. The contract also did not provide for the seat of arbitration, which determines territorial jurisdiction of the Courts. In the meanwhile, the 1996 Arbitration Act (the Act) replaced the old law before the disputes arose. And for the want of this horse shoe nail – a carelessly drafted arbitration clause, the battle was a bitter one.
Both parties raised claims. CIL demanded a penalty based on poor quality products, White demanded the payment of its performance bonus. CIL encashed White’s bank performance bank guarantee (BG) in satisfaction of its demands and the matter was referred to Arbitration. The majority award (Award) upheld both White’s entitlement to its bonus, and right to recover of the BG amount. In a dissenting opinion, Justice Reddy, the Indian member of the Tribunal ruled in favour of CIL.
CIL approached the Calcutta High Court for setting aside the Award, while White sought its enforcement before the Delhi High Court.
When both parties received the notices taken out from two courts, the matter moved to the Supreme Court in a Transfer Petition filed by White. Initially, the Calcutta High Court proceedings were stayed by the Supreme Court, but at a later point the Supreme Court is believed to have indicated its inclination to dismiss White’s Petition.
White withdrew their petition and the parties were back to pursuing parallel proceedings in both High Courts. It was the Calcutta High Court which made the checkmate move in setting aside the Award. White’s appeal to the Calcutta High Court Division Bench was dismissed. White moved the Supreme Court, and the Division Bench hearing the matter referred it to a larger bench, recommending expeditious disposal. It was never to be taken up for hearing inspite of several attempts by their Counsel. The UNCITRAL Arbitration Award (UNCITRAL Award), consequent to White’s invocation of the dispute resolution provision in the Indo Australian BITs (bilateral investment treaties) records this.
The Coal India case is the first full scale BITs dispute India has been embroiled in. And unfortunately the Indian systems – Government and the courts cannot escape responsibility for permitting escalation of the situation in disregard of the obligations under the New York Convention.
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The benefit of BITS has been a hotly debated issue, particularly in the context of the Latin American experience. The definitions are carefully crafted and without going into the legal intricacies, involve innovative interpretations, in who can be classified as investor, what qualifies as an investment, and what acts constitute breach of terms and conditions of the BIT entitling the investor to the benefit of protection of investment.
The UNCITRAL Award in accepting White to qualify as an investor holds that the right to money claims including the BG encashment alongwith the overall right to conduct economic activity, was to be regarded as an “investment” based on earlier precedents. On this premise, the tribunal proceeded to determine whether the breaches of CIL warranted investment protection and whether CIL’s acts could be treated as that of the Indian Government.
The Tribunal proceeded to hold that White had failed to make out a case that the Government had “effective control” over Coal India’s actions. Even the delays in the judiciary though described as “regrettable”, were not treated as bad faith. But in arriving at its conclusive finding, the Tribunal has relied on Article 4(2) of the BIT to hold that Australia merited the “Most Favoured Nation” treatment, in this case that of India Kuwait BIT of 2001, which requires the host State to establish and maintain Effective Means Standards i.e. having a proper systems of laws and institutions that work effectively. Accordingly, the ICC Award was treated as protected investment, and the UNCITRAL award, other than directing that the amounts payable under the ICC Award should paid, awarded interest thereon @ 8%, and directed all Arbitrators’ fees and expenses to be paid by the Indian Government. Further, White has been reinstated to the position of status quo ante bellum for the purposes of enforcement of its rights. This is not the best time for India to deal with this development, particularly, when it is in the process of upgrading its old BITs and CEPAs and inking new ones. There are whispers in the corridors of power that India has taken a decision to drop arbitration procedures, in all future BITs and CEPAS or make it specific to the treaty in hand – no more MFNs and grandfather clauses.
Kumkum Sen is a partner at Bharucha & Partners Delhi Office and can be reached at kumkum.sen@bharucha.in