Enforcing awards in Investor-State disputes: The battle that decides the war?
Recent developments in the Devas-Antrix dispute are an apt reminder to international arbitration practitioners that emerging victorious with a tribunal award against a State entity, especially in today’s climate where successful enforcement is anything but a foregone conclusion, does not necessarily win you the war.
Without successful enforcement, the investor’s battle to obtain an award may be for nought, and the enforcement obstacles that States can erect give them leverage to settle claims at a substantial discount. It is therefore no wonder that States such as India are adopting a more defiant approach towards international awards that are made against them.
The Devas-Antrix dispute
In January 2005, Antrix, the commercial arm of State-owned Indian Space and Research Organisation (ISRO), agreed to build, launch, and operate two satellites which Devas intended to use to provide communication services throughout India. Six years later, Antrix pulled the plug, cancelling the deal on the grounds that the cancellation was a policy decision of the Central government acting in its sovereign capacity. This prompted Devas to commence several legal actions for wrongful termination, including initiating International Chamber of Commerce (ICC) arbitration proceedings in June 2011.
In addition to the initial ICC tribunal award concluding that Antrix wrongfully scrapped the deal and subsequently awarded Devas US$ 563 million plus interest, the Permanent Court of Arbitration at the Hague ruled against India itself for breaching its obligations under the Mauritius-India Bilateral Investment Treaty (BIT). Some of Devas’ foreign investors were Mauritian shareholders who successfully invoked the BIT to bring a claim against India for denying investors fair and equitable treatment as well as for unlawful expropriation.
However, after more than nine years since the start of proceedings, including multiple tribunal awards in favour of Devas, enforcement still eludes Devas. India has shown considerable tactical nous in resisting enforcement of the ICC award, deploying an array of legal actions to fend off what the government perceives to be an injustice. India’s most recent chess move occurred in January 2021, when Antrix applied for and managed to persuade India's National Company Law Tribunal (NCLT) to remove Devas’ board and appoint a “provisional liquidator” to take over the company’s management.
The provisional liquidator has certainly been busy, issuing an interim report in February concluding that Devas’ 2005 agreement with Antrix was “initiated by fraud, [and Devas] was incorporated with a view to obtain for itself the agreement and to enjoy the fruits of such fraud.”
Devas became concerned that Antrix may attempt to force through a settlement of the ICC award with the company while under management of the liquidator. These concerns may have been overestimated, especially since they came following a November 2020 hearing in a related case before the Supreme Court of India. Here, the Attorney General of India had made it clear that mediation with Devas is not possible due to discovery of a serious fraud in the entire transaction leading to the impugned dispute.
On March 23 this year, investors of Devas obtained a temporary restraining order from a United States court enjoining Devas (still under the control of the liquidator) from settling the dispute over payment of the ICC award. On March 29, however, the Court denied grant of temporary injunction in favour of Devas, holding,
"Intervenors have not sustained their burden to show a likelihood of irreparable harm in the absence of the injunctive relief they seek, and that international comity concerns counsel against a preliminary injunction.”
This back-and-forth battle for enforcement will surely continue and is indicative of both sides’ creative thinking and persistence, dramatically illustrating the fact that obtaining an award is only half the battle, and that, particularly in cases against State enterprises in sectors where the national interest is perceived to be engaged, enforcing an award may be a real challenge.
The Indian government’s approach to enforcement in this case aligns with other recent highly publicised investor-state claims, further confirming India’s commitment to defending its interests on an international level. In September 2020, India lost an arbitration instigated by Vodafone following the retroactive imposition of taxes, which was deemed a breach by India of its obligations under the relevant BIT. Later that same year, an arbitral award in the region of US$ 1.2 billion was obtained by Cairn Energy against India over the retrospective levy of taxes.
It is anticipated that India will challenge both awards on the basis that taxation is a sovereign right, showing the government’s resolve to resist what it perceives to be unjust arbitral awards and will aggressively defend the State’s interests in the process. India’s resilience may stem from the confidence it has gained as a global economic player and that it does not need to rely on foreign direct investment, as further exhibited in 2017, when India initiated the cancellation of more than 58 extant BITs. India’s new Model BIT has been drafted with the hard-learned lessons of these disputes in mind.
The execution of this policy appeared to many as detrimental to investor confidence and as an impediment to future foreign direct investment, and some may question this policy in light of the pressure on the Indian economy resulting from the COVID-19 outbreak last year. Then again, there are those that question whether there is any correlation between robust investor protection and foreign direct investment. This may embolden States where alleged breaches of international investment agreements have not automatically deterred foreign investors, enabling the State to dispute arbitral awards whilst safe in the knowledge that foreign investment is unlikely to diminish. Either way, it will be interesting to observe what India does next, whether it holds its resolve, and how its economic recovery unfolds.
Adversity breeds innovation
To pursue this strategy further, India would need to be creative and implement innovative legal solutions, and could borrow from (and perhaps improve upon) successful legal and tactical approaches employed by past practice of other States defending domestic interests in investor-state arbitration.
Following Argentina’s 2001 economic crisis, at least 44 treaty-based claims were brought against the country, mainly from utility operators whose unregulated utility tariffs were frozen as part of the emergency measures implemented to aid the country through its crisis. Having to deal with so many cases forced the State Attorney General to establish a dedicated legal team to deal exclusively with the cases, demonstrating the government’s proactiveness and willingness to tackle each claim head-on.
The State’s approach generally paid off, as a robust defence of the claims gave Argentina the opportunity to renegotiate contracts with the affected investors. In other cases, when renegotiations failed, the State defended itself and, on occasion, successfully convinced the tribunal that its conduct had been justified under the State of Necessity defence during that period.
Another defence that has been successfully deployed in previous investment disputes is relying on the fact that corruption by the investor facilitated the procurement of the investment. In one illustration, Kenya showed that a contract was obtained through the payment of a cash bribe to the nation’s former President, and the tribunal consequently dismissed the claim.
These examples demonstrate the value for a State in deploying the necessary time and resources to give itself a chance at fending off such investment arbitration claims, or at the very least presenting arguments that may persuade the investor of the advantages of an amicable settlement on mutually agreeable terms. Having a good grasp on the investment arbitration climate, combined with the recruitment of leading legal strategists in the field, will put a State in an advantageous position and offer the best chance to realise an innovative solution, both in the conduct of the initial tribunal proceedings and any eventual enforcement proceedings.
Many feel that the balance of power in investor-state agreements favours investors too heavily, as it can be perceived that: investors are granted too much protection; States are punished too harshly; and the domestic interests of the States are not given enough credence. However, as exemplified by the strategy recently adopted by India in the Devas-Antrix dispute, the State is not powerless and can either rely on various tried and tested legal measures to defend its interests, or it can prove more adventurous and implement innovative methods to successfully defeat claims or resist enforcement proceedings.
The author is an Associate at Zaiwalla & Co.
Corrigendum [May 17, 2021]: This article previously omitted the fact that the temporary injunction granted by the United States District Court was in effect till March 24, 2021 and that on March 29, the Court denied grant of temporary injunction. The error is regretted.