INVESTOR STATE DISPUTE SETTLEMENT- THE QUEST FOR WORKABLE ROAD MAP


Authors: Zeel Gondaliya, Symbiosis Law School, Pune

Sakshi Sachan, KLE Society’s Law College, Banglore


Editor: Naman Joshi, University of Delhi, DU

The settlement of disputes between an investor and the country in which such investor is established for trade is of utmost importance regarding the protection of these investments, under International Investment Agreements (IIAs). The inclusion of provision for dispute settlement in an IIA has been included since the 1960s, and hence a majority of IIAs contain provisions on Investor–State Dispute Settlement (ISDS). The inclusion of ISDS provisions, when invoked, help the investor to enforce the standards of treatment and protection granted by the agreements.

ISDS cases have been filed for all kinds of situations including emergency laws put in place during a financial crisis, value-added taxes, measures on hazardous waste facilities, issues related to the intent to divest shareholdings of public enterprises to a foreign investor, and treatment at the hands of media regulators,fair and equitable treatment, non-discrimination, expropriation,etc

One leading case in this matter isVodafone International Holdings BV v. Government of India, where the Permanent Court of Arbitration located at Hague ruled in favour of Vodafone against the Government of India in an investment treaty arbitration dispute.

Facts of the case

In the year 2007, Vodafone International Holdings B.V. (VIH) acquired 67% shares in the Indian telecom company Hutchison Essar Limited (HEL) for $11, through an agreement between VIH, and the Hutchison Telecommunications International Limited (HTIL).


This transaction of transfer of share in HEL to VIH was considered as a transfer of capital asset, by the Indian Tax authorities and subsequently, and issued a notice to VIH demanding it to pay an amount of $2.2 Billion as capital gains tax. This tax demand was objected to by Vodafone on the basis that the transaction did not involve transfer of capital asset and that Indian tax authorities had no jurisdiction to levy taxes on a transaction between two non-Indian resident companies.


In 2010, VIH commenced proceedings in the Bombay High Court to challenge the tax demand, which decided that Vodafone was liable to pay the taxes as claimed by the income tax authorities. The Supreme Court in 2012, on appeal, reversed the Bombay HC judgment and held that the company was not liable to pay any tax.

The amendment of Section 9 and Section 12 of the Income Tax Act 1961 giving it retrospective effect, the authorities renewed the tax demand on Vodafone, at which point VIH resorted to the first investment treaty arbitration under the India-Netherlands BIT in 2012.


In 2014, after the amendment, Vodafone initiated United Nations Commission on International Trade Law (UNCITRAL) arbitration proceedings against India. Along with this, Vodafone initiated another UNCITRAL arbitration in respect of the amendment arguing that the imposition of tax through retrospective amendment, even when the Supreme Court of India had decided otherwise, amounts to a violation of fair and equitable treatment (FET) promised under Article 4.1 of India-Netherlands BIT.


India objected to the initiation of a Second Arbitration Proceeding applied to the Delhi High Court claiming abuse of due process by filing multiple proceedings for the similar relief and sought an anti-arbitration injunction against Vodafone from going any further in the second arbitration proceeding. India’s main contention was that the Second Arbitration filed by Vodafone in accordance with the India-UK Bilateral Investment Promotion and Protection Agreement (hereinafter BIPPA) was an abuse of process owing to the ongoing first arbitration. India claimed that owing to the aforementioned reasons, the Second Arbitration was null and void. India’s assertions included the contention that the sole reason for commencing a second arbitration proceeding was to consequently avoid the consequences of electing a remedy from the First arbitration.


This action of India was challenged by Vodafone on the ground that the jurisdiction of the Delhi High Court did not have a jurisdiction over this matter and also proposed consolidation of the two arbitration proceedings with the consent of the parties whereby both arbitrations could be conducted before the same tribunal. This proposal was however rejected by India. The Delhi High Court found that it did have jurisdiction over India’s application. It, however, declined to make a finding in respect of India’s abuse of process claim.

Jurisdiction Of The Matter

The primary contention of Vodafone parties was that Delhi High Court did not have personal, subject matter or inherent jurisdiction over the application of India. It provided distinct arguments to support its claim regarding all sorts of jurisdiction. Since the Court, in the end, came to a decision that Delhi High Court did have jurisdiction, each of the contention along with the explanation given by Court in rebuttal are discussed below.


1. For personal jurisdiction, the primary contention of Vodafone was that the application for injunction was an action in personam. Owing to the in personam action, the countries of residence would define the adequate jurisdiction for any application regarding injunction. While deciding this issue, the Court applied the ‘single economic entity’ test. The Court deduced that Vodafone Parties and Vodafone International were single economic entities and therefore the Court entertained personal jurisdiction over the Vodafone Parties.

2. For subject matter jurisdiction, Vodafone Parties pleaded that in situations where the dispute arises out of an alleged breach of treaty, national courts of the country do not have subject matter jurisdiction. The Court asserted that the Second Arbitration is competent to decide whether the Vodafone Parties made qualifying investment in India. However, the Court strongly affirmed that the National court had jurisdiction over the subject matter of the dispute. Vodafone Parties made a wilful investment in India, by holding economic interests and intent to carry out business in India. This justifies that the cause of action arose within the jurisdictional boundaries of the Court.

3. For the inherent jurisdiction, the main contention of Vodafone parties was based on the legal structure of the treaty signed by the sovereign countries. According to Vodafone Parties, the obligations of BIPPAs were not bound or subject to the Indian laws, and therefore any dispute arising out of the breach of such obligations cannot be inherently within the jurisdiction of Indian Courts.


The Court gave an explanation explaining its disagreement. Civil courts have a wide jurisdiction except to the extent which is explicitly excluded by any law. Since there is no ouster of jurisdiction of national courts w.r.t. BIPPAs, the Court exercising adequate jurisdiction. Moreover, there is no threshold bar on the Courts to hear the cases related to bilateral treaties. Although the Court held that it had jurisdiction, it clarified that recourse to the court should be limited in cases of BIPPA arbitrations.

The Arbitral Award in the BIPPA Arbitration

The arbitral award in the Vodafone case found the Indian Government to be in violation of the FET standard under the India-Netherland BIT’s Article 4(1). The Indian Government was not made liable to any pay compensation, however it has been asked to pay about Rs 40 crore as a partial compensation for the legal costs and to reimburse the revenue generated so far.


Now, India is signing its BITs based on the models having either highly restrictive ITA provisions or no ITA provisions at all. Since India does not seem to be entirely disengaged from foreign investment law, it will do well to 'internalise' foreign investment law and BITs as a matter of policy.


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