India's proposed challenge to the Vodafone BIT award and Parliament as an author of an internationally wrongful act

From a political economy point of view, the decision to challenge the Vodafone award will set a wrong precedent before the international investment community.

As widely reported, India is planning to challenge the ruling given by an investment treaty arbitration (ITA) tribunal, constituted under the India-Netherlands bilateral investment treaty (BIT), in the infamous case involving Vodafone and India.

This case, as we know, arose after the Indian Parliament amended the Income Tax Act retrospectively, thus overruling the decision of the Supreme Court. Vodafone challenged this amendment before an ITA tribunal under the India-Netherlands BIT. The tribunal ruled that India has violated its BIT obligations.

Solicitor General (SG) Tushar Mehta is of the view that India should challenge the Vodafone award for the following reason:

"The question of law — the power of an arbitral tribunal to virtually and substantially declare a parliamentary legislation of a competent Parliament of a sovereign nation to be non est and unenforceable — itself is an issue which needs to be challenged. I therefore, opine that the Union of India must challenge the said award and must file all available proceedings to challenge the award and/or to protect the interest of Union of India.”

I do not know if the SG has offered other reasons too, but the above-mentioned reason is flawed. In simple terms, it appears that the SG is of the view that an ITA tribunal cannot rule that a law enacted by the Indian Parliament – a competent body of a sovereign nation - violates India’s international law obligations because any such ruling will make the law unenforceable in India.

To understand why this position is wrong, it is important to reiterate some elementary points. First, an ITA tribunal owes its existence to a BIT i.e. a treaty, and it functions under the larger corpus of public international law. The function of the ITA tribunal is to judge the action of the State by applying international law i.e. the BIT. Second, if the ITA tribunal concludes that the country has indeed violated the BIT, it will ask the violating country to award damages to the foreign investor. However, the tribunal will not order the host State to remove the law that violates the BIT.

This understanding of international law takes us to the important issue of whether the actions of the Indian Parliament can be attributed to the Indian State. The general rule in international law is that conduct attributable to a State extends to the organs of the government, or of those who have acted under the direction, instigation, or control of those organs (‘agents’ of the state). Article 4(1) of the International Law Commission (ILC) Articles on State responsibility reads as follows:

"The conduct of any State organ shall be considered an act of that State under international law, whether the organ exercises legislative, executive, judicial or any other functions, whatever position it holds in the organization of the State, and whatever its character as an organ of the Central Government or of a territorial unit of the State."

The ILC thereby brings legislative organs within the purview of those organs, the conduct of which can result in the violation of a State’s international obligations. This codifies a broadly recognized principle of customary law. According to the ILC’s commentary, the reference to “State” in Article 4 “extends to organs of government of whatever kind or classification, exercising whatever functions, and at whatever level in the hierarchy, including those at provincial or even local level. No distinction is made for this purpose between legislative, executive or judicial organs.”

This clearly shows that the actions of the Parliament are very much a part of the actions of the State, and hence the Parliament of India can also be the author of an internationally wrongful act. The fact that the Parliament of India is a competent body of a sovereign nation, as pointed out by the SG, is irrelevant in this regard.

The International Court of Justice (ICJ) has confirmed this interpretation. In a case known as Difference Relating to Immunity from Legal Process of a Special Rapporteur of the Commission on Human Rights, it stated that according to a well-established rule of international law, the conduct of any organ of a State must be regarded as an act of that State. Furthermore, it held that this rule is of a customary character.

Likewise, the Permanent Court of International Justice (PCIJ) also said in a case known as Certain German Interests in Polish Upper Silesia (Merits) that from an international law standpoint, “municipal laws ... express the will and constitute the activities of States, in the same manner as do legal decisions or administrative measures”.

In international investment law specifically, there are numerous cases where ITA tribunals have adjudicated upon laws enacted by sovereign bodies, such as Parliament, as constituting a violation of its investment treaty obligations. For instance, in a case known as Novenergia II v, Spain, a foreign investor challenged Spanish legislation before an ITA tribunal as a violation of the Energy Charter Treaty. Likewise, in another case, JKX Oil v. Ukraine, a foreign investor challenged certain alleged discriminatory measures adopted by Ukraine including a Ukrainian legislation.

Thus, it is amply clear that an ITA tribunal has full powers to adjudicate upon a law enacted by a competent Parliament of a sovereign nation and examine whether such law breaches the country’s international law obligations or not. This surely cannot be a ground to challenge the Vodafone arbitral award as opined by the SG. Legally speaking, the award can be challenged in the courts of Singapore - which was the seat of arbitration - on whether the ITA tribunal exceeded its jurisdiction, among other grounds.

But from a political economy point of view, the decision to challenge the Vodafone award will set a wrong precedent before the international investment community. Overwhelmingly, there is a consensus in India, that amending the law retrospectively was a classic case of abuse of public power, especially because it was done to overrule the decision of the Supreme Court and to target a particular company. The law could have been amended prospectively.

By deciding to challenge the decision of the international tribunal, the government is still not willing to accept the mistake. Challenging the award might appease our pseudo-nationalistic proclivities, fuelling a false sense of bravado, but does nothing to buttress India’s image as a liberal democracy governed by rule of law.

The author is a Senior Assistant Professor of Law at the South Asian University.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect those of Bar & Bench.

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