Making a mockery of arbitration

Ending "tax terrorism" was the BJP's promise in the 2014 election that brought Narendra Modi to power giving hope to the likes of the UK's Cairn Energy Plc. But the hopes have been belied

It’s close to two months now that an international arbitration tribunal ruled that India’s imposition of a tax liability on Vodafone was in breach of an investment treaty agreement between India and the Netherlands. The company had challenged before the arbitration tribunal the Indian government’s usage of a 2012 legislation to retrospectively tax deals like Vodafone’s $11-billion acquisition of a 67 per cent stake in the mobile phone business owned by Hutchison Whampoa in 2007.  

The government’s response has been predictable: On Tuesday, it sought more time from the Delhi High Court to decide whether it will challenge the ruling as the empowered committee of the cabinet is yet to meet on the issue. So nothing seems to have changed even after the series of assurances given by the late Arun Jaitley, who as the finance minister in the first term of the Modi government, had stated that the government would honour arbitration awards in cases where companies had challenged tax demands raised by the previous regime using the retrospective tax legislation.

The obvious response from the government should have been to just accept the Vodafone arbitration verdict and move on, specially when India’s own nominee on the tribunal, Rodrigo Oreamuno, also rejected New Delhi’s claim.

The case relates to Vodafone’s 2007 purchase of Hutch Essar Ltd. Isn’t 13 years enough time for a dispute resolution of this kind?  

If the government is dragging its feet in this case, the courts in India are not far behind either. And this relates to another dispute dating back to 2005. Earlier this month, the Supreme Court kept in abeyance the effect of an order by a US court, which had asked Antrix Corporation, the commercial arm of the Indian Space Research Organisation, to pay $1.2 billion in compensation to Bengaluru-based start-up Devas Multimedia for cancelling a satellite deal.

Antrix had initially refused to participate in the arbitration and obtained an injunction from the Supreme Court enjoining the arbitration. After one year, the Supreme Court lifted the injunction, allowing the arbitration to proceed. Devas has said three separate international tribunals and nine different arbitrators found the termination of the agreement wrongful, with one of the tribunals describing it as conduct “which shocks, or at least surprises, a sense of juridical propriety,” and another finding it to be a clear breach of good faith by India.

However, the Supreme Court’s decision to keep it in abeyance, prolonging the misery of Devas, is not surprising at all. Indian judiciary has been routinely interfering in arbitration awards, claiming public policy exceptions. This disregards the principle that courts should interfere only in rare cases and the concept of public policy should not be interpreted too broadly.

But that’s obviously not how the courts in India have seen it, leading companies to rush to them whenever an international arbitration ruling goes against them. The latest example of that was Future group moving the Delhi High Court within days of the Singapore arbitrator's interim order putting the sale of retail and wholesale business to Reliance Retail on hold. Amazon had gone to the arbitrator alleging that the over Rs 27,000-crore deal between Reliance and Future violates its contractual rights.

It’s no wonder that India continues to remain a laggard (at 163rd place among 190 countries) when it comes to enforcement of contracts. On an average, it takes four years to resolve a commercial dispute in India — as against 164 days in Singapore, the top-ranked nation, in terms of dispute resolution. In fact, India figures among the bottom five countries, in terms of time taken for enforcement of contracts.

In 2018, the Commercial Courts Act was brought in to expedite the trial of commercial disputes. However, the implementation has been shoddy, as the execution of decrees issued by commercial courts has been getting embroiled in protracted legal proceedings.

Ending “tax terrorism” was the Bharatiya Janata Party’s (BJP’s) promise in the 2014 election that brought Narendra Modi to power. In fact, the election manifesto attacked the Congress-led government for unleashing “tax terrorism and uncertainty,” which it argued, “not only creates anxiety among the business class and negatively impacts the investment climate, but also dents the image of the country.” That gave hope to the likes of the UK’s Cairn Energy Plc, which was fighting a case with Indian authorities for taxing purported capital gains. But the hopes have been belied. In February 2016, two years after the BJP government came to power, Cairn got a tax bill of $1.4 billion, including interest and penalties. The arbitration award in the case is expected soon, but going by Vodafone’s experience, Cairn may have to wait a long time to get justice even if the arbitral tribunal rules in its favour.

The empowered group of ministers, which is supposed to take a final view on the matter, would do well to remember that the delay in taking a stand on Vodafone is keeping concerns of many foreign investors alive. This huge damage to the country’s reputation as an investment destination should end — soon.