Between the Lines | Supreme Court: (i) The merits of the arbitral award are not open to review by the enforcement court, which lies within the domain of the seat courts (ii) The period of limitation for filing a petition for enforcement of a foreign award is three years

The Hon’ble Supreme Court of India (“SC”) has in its judgment dated September 16, 2020 (“Judgment”) in the matter of Government of India v. Vedanta Limited and Others [Civil Appeal No. 3185 of 2020], held that the period of limitation for filing a petition for enforcement of a foreign award under Sections 47 and 49 of the Arbitration and Conciliation Act, 1996 (“1996 Act”), would be governed by Article 137 of the Limitation Act, 1963 (“Limitation Act”) which prescribes a period of three years from when the right to apply accrues. The SC also held that the enforcement court exercising jurisdiction under Section 48 of the 1996 Act, cannot refuse enforcement by taking a different interpretation of the terms of the contract.

Facts

The civil appeal had been filed by the Government of India (“Appellant”) to challenge the judgment and order dated February 19, 2020 passed by the Delhi High Court (“DHC”), wherein the application under Section 48 of the 1996 Act filed by the Appellant had been dismissed; while the applications filed under Section 47 read with Section 49 of the 1996 Act for the enforcement of the foreign award, and Section 5 of the Limitation Act, for condonation of delay in filing the execution petition by the respondents, were allowed.

In 1993, the Appellant floated a global competitive tender to invite bids for the purposes of exploring and developing the petroleum resources in the Ravva Gas and Oil Fields (“Ravva Field”). Pursuant thereto, Videocon International Limited and Command Petroleum Holdings NV, submitted their bid to develop the Ravva Field. The contract for this petroleum development was to be given on a production sharing basis through a Production Sharing Contract (“PSC”), which was for a period of 25 years, executed on October 28, 1994, between the Appellant and the following parties:

(a) Command Petroleum (India) Pvt. Ltd. (later renamed as Cairn Energy India Pvt. Ltd);
(b) Ravva Oil (Singapore) Pty. Ltd;
(c) Videocon Industries Limited; and
(d) Oil and Natural Gas Corporation Limited (“ONGC”).

Parties (a),(b) and (c) are collectively referred to as the “Respondents”. The development and exploration of the Ravva Field was to be conducted in terms of the ‘Ravva development plan’ which, inter alia, contemplated the drilling of 19 oil and 2 gas wells in the Ravva Field. The dispute emanated from Article 15 of the PSC which provides for recoverability of base development costs, incurred by the Respondents for the development of Ravva Field.

On 18.08.2008, the disputes were referred to arbitration under Article 34 of the PSC. The tribunal held that the Respondents were entitled to recover USD 278,871,668 from the ‘cost petroleum towards development costs’ incurred by the Respondents for the period 2000-01 to 2008-09. Consequently, on 15.04.2011, the Appellant challenged the award under Section 37 of the Malaysian Arbitration Act, 2005 before the Malaysian High Court, on grounds of dealing with a dispute not falling under the terms of submission to arbitration, conflict with public policy and excess jurisdiction. The Malaysian High Court by order dated 30.08.2012 rejected the challenge to the award holding that the requirements of Sections 37(1)(a)(iv) and (v) and Section 37(1)(b)(ii) of the Malaysian Act have not been met. Aggrieved by this, the Appellant preferred an Appeal before the Malaysian Court of Appeal, which was dismissed by order dated 27.06.2014, holding that the tribunal had given effect to the agreement between the parties under the terms of the PSC and there was no determination by the tribunal which was outside the submissions of the parties. An application for leave to appeal filed by the Appellant before the Malaysian Federal Court was rejected by order dated 17.05.2016.

During the pendency of the application for leave to appeal, the Respondents filed a petition for enforcement under Section 47 read with Section 49 of the 1996 Act before the DHC, along with an application for condonation of delay. The Appellant filed an application under Section 48 of the 1996 Act before the DHC, inter-alia, on the grounds that the enforcement petition was filed beyond the period of limitation; the enforcement of the award was contrary to the public policy of India, and contained decisions on matters beyond the scope of the submission to arbitration. The DHC rejected the petition under Section 48 of the 1996 Act filed by the Appellant, but allowed the application for condonation of delay filed by the Respondents, and directed the enforcement of the award. Consequently, the Appellant approached the SC.

Issues
(i) Whether the petition for enforcement of the foreign award was barred by limitation.
(ii) Whether the foreign award is in conflict with the public policy of India.

Arguments

Contentions raised by the Appellant:

On Issue (i): It was submitted that the DHC erroneously held that an application for enforcement of an arbitral award would be governed by the limitation period of 12 years under Article 136 of Limitation Act, by citing Bank of Baroda v Kotak Mahindra Bank [2020 SCC OnLine SC 324], wherein it was held that a foreign award could not be treated to be a decree of a civil court. It was submitted that, since there is no specific provision in the Limitation Act for enforcement of foreign awards, it would necessarily fall under the residuary provision, that is, Article 137 of the Limitation Act, and that the right to apply would accrue from the date of making the award. The award was passed on 18.01.2011, and the petition for enforcement / execution was filed by the Respondents on 14.10.2014. The petition was barred by 268 days beyond the period of limitation. It was submitted that the reasoning of the DHC is contrary to the 1996 Act, since it has ignored the provision under Section 49 of the 1996 Act to ensure that the foreign award is enforceable. A foreign award has no legal sanctity, until an affirmative decision is obtained under Section 48 of the 1996 Act. It was submitted that the foreign award does not transform into a decree of a civil court in India and that the foreign award does not lose its character as an arbitral award. It is only presumed to be a decree of the court for the purposes of execution.

On Issue (ii): It was submitted that the foreign award is in conflict with the public policy of India, as expounded by SC in Renusagar Power Company Limited v. General Electric Company [1994 Supp (1) SCC 644], wherein it was held that public policy of India, in the context of foreign awards, would be: (a) fundamental policy of Indian law; (b) the interests of India; and (c) justice or morality. It was submitted that there was an inherent character of national and public interest in the implementation of the PSC, and the natural gas was held in the sovereign trust of the people of India and that the petroleum produced would continue to remain with the nation, since the natural gas is a resource which is within the purview of Article 297 of the Constitution of India.

Contentions raised by the Respondents:

On Issue (i): The Respondents on the other hand, contended that they had a period of 12 years to seek enforcement of the award, specifically till 17.01.2023. They further contended that under Section 49 of the 1996 Act, the foreign award becomes a decree of an Indian court after the objections to the award are adjudicated by the enforcement court. Article 136 of the Limitation Act prescribes a period of 12 years from the date of the decree of the civil court, which would be the appropriate provision for execution of a foreign award. It was contended that if Article 137 of the Limitation Act is held to be applicable for the enforcement of foreign awards, the limitation period would commence from “when the right to apply accrues”, which does not necessarily mean the date of the award. It was further contended that the period of limitation would commence from the date when the award attained finality at the seat of arbitration.

It was also submitted that there was uncertainty in the law, as the Madras High Court had held limitation for enforcement of a foreign award to be 12 years, while the Bombay High Court treated this as 3 years, and hence, there was sufficient ground to condone the delay.

On Issue (ii): It was contended that the tribunal had correctly interpreted Article 15.5(c)(xi) of the PSC to hold that it was not an undertaking given by the Respondents to drill 21 wells, even though only 14 were required. It was submitted that the issue of interpretation of the PSC, and a review of the merits of the award, could not be raised under Section 48 of the 1996 Act. It was submitted that the Appellants cannot invite the court to take a “second look” at the award by seeking a review on merits. Reliance was placed on Explanation 2 of Section 48(2) of the 1996 Act, which clarifies that “the test as to whether there is a contravention with the fundamental policy of Indian law, shall not entail a review on the merits of the dispute”.

It was submitted that the court at the seat of arbitration would have exclusive jurisdiction to annul or set aside a foreign award. The seat court, while deciding the public policy challenge, would decide the same in accordance with its own domestic public policy. Even though the substantive law of the contract was Indian law, it would not be applicable for deciding the challenge to the issue of excess of jurisdiction.

Observations of the Supreme Court

On Issue (i): The SC observed that there have been divergent views taken by High Courts with respect to the period of limitation for filing a petition for enforcement of a foreign award under the 1996 Act. Therefore, to condone the delay and settle the law on this issue, the court looked into a number of conflicting precedents. The SC observed that the intent of the legislature, to omit the reference to “foreign decrees” under Article 136 of the Limitation Act, was to confine Article 136 to the decrees of a civil court in India. The application for execution of a foreign decree would be an application not covered under any other article of the Limitation Act, and accordingly, would be covered by Article 137 of the Limitation Act.

The SC observed that the issue of limitation for enforcement of foreign awards, being procedural in nature, is subject to the lex fori, that is, the law of the forum (State) where the foreign award is sought to be enforced. Section 36 of the 1996 Act creates a statutory fiction for the limited purpose of enforcement of a ‘domestic award’ as a decree of the court, even though it is otherwise an award in an arbitral proceeding. It was observed that the arbitral tribunal cannot be considered to be a ‘court’, and the arbitral proceedings are not civil proceedings. The deeming fiction is restricted to treat the award as a decree of the court for the purposes of execution, even though it is, as a matter of fact, only an award in an arbitral proceeding. A legal fiction is to be limited to the purpose for which it was created, and it would not be legitimate to travel beyond the scope of that purpose, and read into the provision. By a legal fiction, Section 49 of the 1996 Act provides that a foreign award, after it is granted recognition and enforcement under Section 48 of the 1996 Act, would be deemed to be a decree of “that Court” for the limited purpose of enforcement.

Article 136 of the Limitation Act would not be applicable for the enforcement / execution of a foreign award, since it is not a decree of a civil court in India.

With respect to condonation of delay, the SC observed that, the bar contained in Section 5 of the Limitation Act, which excludes an application filed under any of the provisions of Order XXI of the Code of Civil Procedure, 1908, would not be applicable to a substantive petition filed under Sections 47 and 49 of the 1996 Act, and, accordingly, an application under Section 5 of the Limitation Act for condonation of delay can be filed in the instant case. Keeping in view the facts of the present case, the SC observed that the petition for enforcement of the foreign award was filed within the period of limitation prescribed by Article 137 of the Limitation Act, and in any event, there are also sufficient grounds to condone the delay, if any, in filing the enforcement / execution petition under Sections 47 and 49 of the 1996 Act, on account of lack of clarity with respect to the period of limitation for enforcement of a foreign award.

On Issue (ii): The SC observed that the enforcement court cannot set aside a foreign award, even if the conditions under Section 48 of the 1996 Act are made out. The power to set aside a foreign award vests only with the court at the seat of arbitration, since the supervisory or primary jurisdiction is exercised by the curial courts at the seat of arbitration. The interpretation of the terms of the PSC lies within the domain of the tribunal. It was not open for the Appellant to impeach the award on merits before the enforcement court. The enforcement court may “refuse” enforcement of a foreign award, if the conditions contained in Section 48 of the 1996 Act are made out. The courts before which the foreign award is brought for recognition and enforcement would exercise “secondary” or “enforcement” jurisdiction over the award, to determine the recognition and enforceability of the award in that jurisdiction.

It was held that the enforcement court is not to correct the errors in the award under Section 48 of the 1996 Act, or undertake a review on the merits of the award, but is conferred with the limited power to “refuse” enforcement, if the grounds are made out.

It is pertinent to note that, with respect to the submission of the Respondents that the amended Section 48 of the 1996 Act would be applicable to the present case; or alternately, that the amendments effected in Section 48 of the 1996 Act would have retrospective effect, the SC observed that the amendment to Section 48 of the 1996 Act had introduced for the first time, a specific criteria, which states that, the test as to whether there is a contravention with the fundamental policy of Indian law, shall not entail a review on the merits of the dispute. Accordingly, it must be considered to be prospective, irrespective of the usage of the phrase “for the removal of doubts”. Hence, the amendments to Section 48 of the 1996 Act were not applicable in the instant case.

Lastly, while considering the issue whether the award was in conflict with the public policy of India, and contrary to the basic notions of justice, the SC referred to various precedents to highlight the well-settled position in law with respect to the finality of awards in international commercial arbitrations, and the limits of judicial intervention on the grounds of public policy of the enforcement State. The SC observed that the Appellant firstly, had not established a case of violation of procedural due process in the conduct of the arbitral proceedings and secondly, the Appellant had not proved as to how the award is in conflict with the basic notions of justice, or in violation of the substantive public policy of India.

Decision of the Supreme Court

The SC held that the period of limitation for filing a petition for enforcement of a foreign award under Sections 47 and 49 of the 1996 Act, would be governed by Article 137and not Article 136 of the Limitation Act. Accordingly, it will be three years from when the right to apply accrues.

Further, the Malaysian Courts being the seat courts were justified in applying the Malaysian Act to the public policy challenge raised by the Government of India. The enforcement court would not review the correctness of the judgment of the seat courts, while deciding the challenge to the award. The enforcement court exercising jurisdiction under Section 48, cannot refuse enforcement by taking a different interpretation of the terms of the contract. Section 48 of the 1996 Act does not provide a de facto appeal on the merits of the award. However, if the award was found to be violative of the public policy of India, it would not be enforced by the Indian courts. The SC concluded that the award was not contrary to the fundamental policy of Indian law, or in conflict with the notions of justice, as discussed hereinabove. Accordingly, the award dated 18.01.2011 passed by the tribunal was held to be enforceable in accordance with the provisions of Sections 47 and 49 of the 1996 Act and the civil appeal was dismissed.

Vaish Associates Advocates View:

The judgement has put to rest the conflict regarding applicability of Article 136 or Article 137 of the Limitation Act in case of a petition for enforcement of a foreign award. The SC has clarified that foreign awards fall within the residuary provision, that is, under Article 137 of the Limitation Act. Therefore, the court has prescribed a definite period of 3 years from the time the “right to apply accrues.”

The SC has also captured the fundamental essence of arbitration, that is, party autonomy, wherein the parties may decide the governing laws and have the freedom to submit to the curial laws of their choice. The SC has laid straight the legal matrix for the application of the governing law that determines the substantive rights and obligations of the parties in the underlying commercial contract, and the curial law of the arbitration is determined by the seat of arbitration, as in the instant case, the laws of Malaysia. The SC has reiterated even more firmly that the secondary court which are the enforcement courts in India, do not have the jurisdiction to delve into the questions of law, merits or jurisprudence of the basis of the foreign award. Their primary role is only to adhere squarely to the provisions of Section 48 of the 1996 Act. By passing this judgement, the SC has furnished muchawaited clarity on multiple issues as regards the enforceability of foreign awards.

For more information please write to Mr. Bomi Daruwala at [email protected]

Between the Lines | The Permanent Court of Arbitration, Hague: The Indian Government’s imposition of tax liability along with interest and penalty on Vodafone, pursuant to a retrospective amendment made in the Income-tax Act, 1961, was in violation of the bilateral investment treaty signed between India and Netherlands

The Permanent Court of Arbitration, Hague (“PCA”) has in its award released on September 25, 2020 (“Award”) in the matter of Vodafone International Holdings BV v. The Republic of India [PCA Case No. 2016 – 35] held that, the Indian Government’s imposition of tax liability along with interest and penalty on Vodafone International Holdings BV, Netherlands (“Vodafone”), pursuant to a retrospective amendment in the Income-tax Act, 1961 (“IT Act”), notwithstanding the Supreme Court judgement in favour of Vodafone, was in violation of Article 4(1) of the Bilateral Investment Promotion and Protection Agreement between India and Netherlands (“India-Netherlands BIPA”) signed in 1995.

A. Background:

i. Transaction in dispute and the Income-tax Department’s contentions:

In 2007, Vodafone (incorporated in Netherlands) had acquired entire share capital of CGP Investments (Holdings) Ltd. (“CGP”) ( incorporated in Cayman I s lands ) f rom Hutchinson Telecommunication International Ltd. (“Hutch”) (incorporated in Cayman Islands). CGP had a controlling interest in Hutchinson Essar Ltd. (“HEL”), an Indian company and a prominent player in the Indian telecom sector. In essence, Vodafone International indirectly acquired controlling interest in HEL.

Prima facie, since the buyer and seller were non-residents and since the capital asset (share of CGP) was situated outside India, no tax liability could have arisen in India in relation to the income (capital gain)arising pursuant to the transaction.

The Indian Revenue, however, was of the view that since the above transaction resulted in extinguishment of certain rights of Hutch in HEL and, alternatively in indirect transfer of assets in India, capital gains chargeable to tax in India arose, and Vodafone was thus under an obligation to withhold tax at source while making the payment of the sale consideration, in terms of Section 195 of the IT Act.

ii. Vodafone’s writ petition before the Bombay High Court:

Vodafone filed a writ petition before the Hon’ble Bombay High Court (“BHC”) challenging the action of the Income-tax Department. However, the BHC ruled in favour of the Income-tax Department*1, against which Vodafone preferred an appeal to the Supreme Court of India (“SC”).

iii. Vodafone’s appeal before the Supreme Court:

The SC by its decision dated January 20, 2012 decided the matter in favour of Vodafone and held that offshore transaction of acquisition of shares was a bonafide, structured Foreign Direct Investment (“FDI”) in India which fell outside India’s Revenue’s territorial tax jurisdiction and hence was not taxable. Accordingly, it was held that Vodafone was not liable to withhold tax under Section 195 of the IT Act and the tax demand was quashed*2.

iv. Retrospective amendment to nullify the Supreme Court judgement:

To neutralize/ nullify the effect of the aforesaid judgement of the SC, the Indian Parliament, vide the Finance Act, 2012, made retrospective amendments to various provisions of the IT Act including Section 9(1)(i) of the IT Act, which in turn, empowered the Income-tax Department to tax such indirect transfers of shares, including the aforesaid transaction.

B. Vodafone’s resort to arbitration under the India-Netherlands BIPA:

Being aggrieved by the retrospective amendments to the IT Act, Vodafone served a notice of dispute to the Indian Government on April 07, 2012, and invoked the arbitration pursuant to the provisions of the India-Netherlands BIPA.

The India-Netherlands BIPA was signed on November 06, 1995, enforced on December 05, 1996 and terminated on 3 September 22, 2016*3. Its aim was to extend and intensify the economic relations, promotion and protection of crossborder investment of the companies, and reciprocal protection of investments along with fair and equitable treatment to be accorded to the investors of one contracting party in the territory of other. While the government was continuing to oppose the arbitration, Vodafone’s parent company, Vodafone Group Plc (United Kingdom) served another notice of dispute and notice of arbitration upon the Indian Government under the Bilateral Investment Promotion and Protection Agreement between India and United Kingdom (“India–United Kingdom BIPA”). The Vodafone group contended that it intends to obtain at least one route to an arbitral forum.

The Indian Government challenged the second notices of dispute and arbitration through a civil suit before the Hon’ble Delhi High Court on account of abuse of arbitral process. However, the Hon’ble Delhi High Court finally 4 dismissed the suit*4, basis the interpretations of the BIPAs and on consideration of Vodafone’s intention to consolidate the arbitrations thus negating the possibility of multiple proceedings.

Under the India-Netherlands BIPA, the investment dispute was referred to a three-member arbitral tribunal to resolve the dispute as per Article 9(3)(c) read with Article 9(4) of the India-Netherlands BIPA and in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law, 1976.

C. Order of the PCA in the arbitration proceedings under the India-Netherlands BIPA:

Reportedly*5, the PCA in its order dated September 25, 2020 held that the imposition of tax along with interest and penalties by the Indian Government, notwithstanding the Supreme Court judgement, was in breach of the guarantee of fair and equitable treatment laid down in Article 4(1) of the India-Netherlands BIPA.

The PCA noted that under the terms of India-Netherlands BIPA, it had jurisdiction to consider Vodafone’s claim for breach of the India-Netherlands BIPA. It also observed that any failure by the Indian Government to comply with the directive will engage India’s international responsibility.

Consequently, PCA ordered the Indian Government, inter alia, to reimburse to Vodafone a sum of approximately INR 850 million (£ 4.32 million).

If at all the complete order of the PCA is released in public domain, it would be interesting to note:

• On what reasoning did the PCA overcome the jurisdictional challenge raised by the Indian Government regarding inapplicability of Article 4(1) of the India-Netherlands BIPA on tax disputes (in view of the bar prescribed under Article 4(4) of the India-Netherlands BIPA)?
• How the term “fair and equitable” has been interpreted by the PCA to hold that the conduct of the Indian Government breached Article 4(1) of the India-Netherlands BIPA?
• In the decision paragraph of the order, the PCA has noted that the conduct of the Indian Government in respect of imposition of tax liability on Vodafone, notwithstanding the Supreme Court judgement, is in breach of Article 4(1)of the India-Netherlands BIPA. Whether a retrospective amendment in general, when it does not nullify any judgement of the Supreme Court, would also be treated as a breach of the guarantee of “fair and equitable” treatment?

D. Recourse available to the Indian Government

Vide press release dated September 25, 2020, the Central Board of Direct Taxes (“CBDT”) has stated that the Indian Government would be studying the award and thereafter, would take a decision on further course of action including legal remedies before appropriate fora. Few developments also suggest that the High Court of Delhi has also asked the Indian Government to inform whether it wants to abide by or challenge the arbitral award.

Vaish Associates Advocates View:

Although the award is not binding on third parties, it may have a persuasive value in similar arbitrations instituted or to be instituted by other assessees. If the decision of the Tribunal renders any findings on the legality of retrospective amendments qua the fair and equitable treatment clause in bilateral treaties, then it is to be seen whether the said conclusions can have far reaching impacts on other assessees.

Additionally, the power to levy taxes has been universally acknowledged as an essential attribute of sovereignty. However, imposing taxes retrospectively does deter and discourage investor sentiments and creates unforeseen liability for assessee. If the Indian Government decides to accept the award, it may probably encourage fresh investments and renewed trust into India, more so at a time when the global geopolitical relationship with China is undergoing a rapid and perhaps permanent transformation.

For more information please write to Mr. Bomi Daruwala at [email protected]

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*1 Vodafone International Holdings B.V. v. Union of India: (2010) 329 ITR 126 (Bombay)
*2 Vodafone International Holdings B.V. v. Union of India: (2012) 341 ITR 1 (SC)
*3 As per information available on the website of the Department of Economic Affairs, Ministry of Finance at https://www.dea.gov.in/bipa
*4 Union of India v. Vodafone Group Plc United Kingdom and Another: CS (OS) 383/2017 & I.A.No. 9460/2017
*5 As on date, the complete order of PCA in this case is not available in public domain. Only an extract comprising paragraph“XIV. Decision” has been reported by a media platform.