India has been viewed as a growing market and a promising business location for many multinationals. An essential plan of this development route is maintaining a healthy and conducive environment for dispute resolution including arbitration.
The arbitral award dated December 21, 2020 rendered by the Permanent Court of Arbitration (PCA) in the case of Cairn Energy Plc. and Cairn UK Holdings Limited v. The Republic of India, along with the ward dated September 25, 2020 rendered in the arbitration between Vodafone International Holdings BV and the Government of India, have set the tone for other possible future decisions.
As reports suggest, the Government of India has challenged the award passed in the Vodafone arbitration in Singapore and the award passed in the Cairn arbitration in The Hague.
In this article, we attempt to discuss the events that gave rise to Cairn Energy invoking arbitration under the India-UK Bilateral Investment Treaty (BIT), explain the strategy adopted by Cairn Energy to execute the award passed by the PCA, and also shred some light on probable future complications that could be faced by the government in the event Cairn Energy’s execution strategy sails through.
Summary of the Transaction
Cairn India Holdings Limited (CIHL), a “non-Indian” corporation, was founded in Jersey in 2006 as a wholly owned subsidiary of Cairn UK Holdings Limited (CUHL), a UK-based company. CUHL transferred to CIHL, shares of 9 of its subsidiaries, all of which were involved in the oil and gas sector in India.
Cairn India Limited (CIL) was established in India in August 2006 as a wholly owned subsidiary of CUHL. Under Cairn’s internal group reorganisation, CUHL sold shares of CIHL to CIL, an “Indian” company, in October of 2006. Subsequently, in December of 2006, CIL offered up 30% of its stock in an IPO in the Indian markets. The resultant effect of this divestment was that CUHL became richer by approximately ₹6101 crores.
In 2012, India brought in an amendment to the Income Tax Act, 1961 mandating retrospective tax demands over deals going back to 1962 in which shares of “non-Indian” companies were transferred to an “Indian” holding company. By virtue of this amendment, the transaction executed between CIHL and CIL by CUHL came under the scanner.
It is around the same time that the Supreme Court had rendered its decision in the case of Vodafone International Holdings BV v. Union of India & Anr, ruling against the retrospective reading of the law by tax officials. However, Parliament introduced this legislation to circumvent the decision of the apex court.
Though quite late, this whiff of money being pocketed by CUHL reached the eyes, nose and ears of the Income Tax Department in January 2014. The Department initiated proceedings against CUHL under Section 147 and 148 of the Act, 1961, which provides for re-assessment in cases where income has escaped assessment, and passed an order against CUHL imposing a preliminary assessment of ₹10,247 crore as tax liability.
CUHL appealed against this imposition of tax before the Income Tax Appellate Tribunal (ITAT) Delhi and the Delhi High Court. Simultaneously, in 2015, Cairn Energy invoked the BIT to commence international arbitration proceedings against the government, stating that the retrospective taxation was in breach of the BIT which obligated India to treat investment from UK in a “fair and equitable manner.”
The PCA pronounced its award on December 21, 2020, holding that India was in breach of according guarantee of “fair and equitable treatment” to Cairn Energy, which resultantly caused them substantial loss. The operative portion of the award is reproduced herein for ready reference:
“2032. For the foregoing reasons, the Tribunal:
1. Declares that it has jurisdiction over the Claimant’s claims and that the Claimant’s claims are admissible;
2. Declares that the Respondent has failed to uphold its obligations under the UK-India BIT and international law, and in particular, that it has failed to accord the Claimants’ investments fair and equitable treatment in violation of Article 3(2) of the Treaty; and finds it unnecessary to make any declaration on other issues for which the Claimants request relief under paragraph 2(a), (c) and (d) of the Claimants’ Updated Request for Relief;
3. Orders the Respondent to compensate the Claimants for the total harm suffered by the Claimants as a result of its breaches of the Treaty, in the following amounts...”
Reports suggest that the PCA ordered the government to pay $1.2 billion (₹8000 crore approx.), plus interest and costs, to compensate Cairn.
Execution strategy of Cairn Energy
On one hand, it is learnt that the award has been challenged by the government, which believes that the dispute is fundamentally about “tax” and not about “investment”. Needless to mention, the government is vociferously contesting the award, since failure to do the same will undoubtedly set a very important (bad and difficult for the government; whereas good for multinationals) precedent in future cases.
On the other hand, leaving no stone unturned, Cairn Energy has been constantly applying pressure on the government since the start of 2021, to adhere to the award. Turning words into action, they have reportedly proceeded to file execution applications for enforcement of the award in various countries like USA, UK, Canada, Singapore, Mauritius, France and the Netherlands.
Cairn Energy asserts that Indian assets like Air India are to be recognised as “alter egos” of India and that they should be held jointly and severally responsible for India’s debts. A lawsuit filed before the US District Court on similar lines, if allowed, would entitle Cairn Energy to seek the attachment of assets of Air India in the US to recover the amount due as per the arbitral award.
Considering that the government has to fight it out on foreign soil (more specifically the United States after filing of an execution application), we deem it fit to explain the position of “alter ego” in the United States. In the case of MCI Telecommunications v. O’Brien Marketing, a US Court held that alter ego required three elements to be proved:
"(1) Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practices in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; and
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest and unjust act in contravention of plaintiff's legal rights; and
(3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of."
Given that the principle of alter ego can be invoked in the US only after all the above three grounds are fulfilled, we feel there is ample space for the government to play around and curl out some arguments opposing the application of this principle.
Interestingly, while the execution application filed in the US was the talk of the town, to the government’s shock, Cairn Energy recently obtained an attachment order from a French Court, wherein 20 properties of the government are attached to the tune of 20 million Euros. A government official recently confirmed that such an order was indeed passed.
From the aforesaid scheme of things, we feel that the government stands on a weaker footing in terms of opposing the award before the Court in The Hague, but stands a good chance of defending against attachment of India-owned properties under the principle of “alter ego”. Having said this, the recent decision of the French Court will help Cairn Energy put a foot in the door in all other countries where execution applications are filed or are going to be filed.
A wise thing for the government to do would be to file caveats in all the countries where they foresee Cairn Energy filing execution applications. By doing so, at the least, the government will be in a position to oppose attachment of properties, instead of getting into the rigmarole of filing applications either for vacation of attachment or filing appeal against attachment orders.
As much as the government defends its actions, the fact of the matter remains that there is an award passed against it to the tune to $1.2 billion plus interest and costs, which as on date, is not stayed. Hence, Cairn Energy is well within its rights to seek enforcement of the said award.
Taking a cue from Cairn Energy, Devas Multimedia has also shown its inclination to approach a Court in New York for execution of an award passed in its favour, and is also seeking attachment of the assets of Air India, relying on the principle of “alter ego”.
In wake of the foregoing, we strongly believe that it is the perfect time for government to settle with Cairn Energy. Rather, to rephrase, the government HAS to settle. The reasons for the same are:
(i) If India-owned assets start getting attached worldwide, getting the same released is an strenuous job;
(ii) Once any court in any country has passed an order for attachment, it is going to be fairly easy for Cairn Energy to place reliance on that judgment/order and press for similar reliefs in another country;
(iii) Contesting the award along with execution applications spread out across the globe at the same time seems a little far-fetched and difficult;
(iv) Considering that other companies have started following the route adopted by Cairn Energy, sooner rather than later, the government will be seen fighting several companies In multiple jurisdictions;
(v) The government will not intend to join the rather infamous group of countries such as Pakistan and Afghanistan whose assets have been attached in foreign countries;
(vi) With the speed at which Cairn Energy is approaching courts across the globe and also getting favourable orders, it might be too late in the day for the government to enter into a golden handshake.
Reports suggest that Cairn Energy has reached out to the government for an amicable settlement, and same is reciprocated by the government. If this is true, we feel that without any further delay, a settlement should be worked out, saving the government from facing the brunt on a larger scale and losing out on future economic opportunities with multinational corporations.
Munjaal M Bhatt is an Advocate at the Gujarat High Court. Shivayana Balodia is a law graduate of Jindal Global Law School.
Disclaimer: The views and opinions expressed in this article are those of the authors' and do not necessarily reflect the views of Bar & Bench.