Delhi HC Dismisses Centre’s Plea Against Vodafone’s “Abuse Of Process” In Initiating UK Arbitration [Read Judgment]

In a major decision, the Delhi High Court on Monday dismissed the Centre’s plea against telecom giant Vodafone initiating two tax arbitrations – one under the India-Netherlands Bilateral Investment Protection Agreement (BIPA) and other under the India-UK BIPA – over a retrospective tax liability imposed on the company for its Rs.11,000-crore acquisition of Hutchison Telecom.

Justice Manmohan dismissed the Centre’s plea against the company’s move which it had termed “abuse of process”.

While deciding the Centre’s plea, the court also concluded that it cannot be said as an absolute proposition of law that the moment there is an investment treaty arbitration between a private investor and the state, national courts are divested of their jurisdiction but added that the national courts have to exercise great self-restraint in passing any order.

On apprehension of Union of India that it will be vexed twice over in respect of identical claim or that there is a possibility of conflicting awards by two different tribunals, the Vodafone was held bound by its offer of January 9, 2018, that if the Union of India gives its consent, it would apply straightaway to the UK treaty tribunal to consolidate the two proceedings.

The dispute pertains to the Rs.11,000-crore tax liability imposed on Vodafone by the Centre on the ground that the telecom major had failed to deduct TDS under the Income Tax Act. In 2012, the Supreme Court quashed this demand raised by the government. The Centre later amended the IT laws retrospectively and reinstated the tax liability, which had reached Rs.20,000 crore, including interest and penalties.

In April 2012, Vodafone issued a notice of dispute to Union of India under the India-Netherlands BIPA.

In June 2015, it issued a second notice of dispute to the Centre under the India-United Kingdom BIPA.

The Centre, in its petition, claimed that Vodafone Group Plc and Vodafone Consolidated Holdings Ltd, after realizing that their chances in the arbitration proceedings under the India-Netherlands BIPA were bleak, issued a notice of arbitration to Union of India under the India-United Kingdom BIPA.

It had contended that the UK entities and the Netherlands entity were in the same vertical corporate chain (all under the control of the Vodafone Group) and they complained of the same measures and the disputes notified to India as well as relief sought were identical in both the arbitrations and the two arbitrations were a clear abuse of process.

Appearing for Vodafone, senior advocate Harish Salve relied on provisions of Vienna Convention on Law of Treaties to contend that domestic law was not a defence to non-performance of the obligations under a treaty.

He also contended, though unsuccessfully, that the National Courts of India inherently lacked the jurisdiction to entertain any dispute arising out of a Treaty between two sovereign countries.

“…the entire scheme of the BIPA is contractual and it is clear that Union of India consented to the international investment arbitration under principles of international law as the method of dispute resolution under the BIPA. Further, with the acceptance of Defendants undertaking/offer to consolidate, the likelihood that the tribunal would make an order that would afford Defendants double relief or impose a double jeopardy on the Plaintiff-Union of India or pass conflicting awards is remote,” the court concluded. 

While dismissing Centre’s plea, Justice Manmohan made some important conclusions as under:

• To conclude, investment treaty arbitration between a private investor and the host State, which results by following the treaty route is not itself a treaty, but is sui generis and recognized as such all over the world. It has its roots in public international law, obligations of States and administrative law. As a species of arbitrations, it is of recent origin and its jurisprudence cannot be said to be settled or written in stone; far from it. Investment Treaty jurisprudence is still a work in progress.


• However, there is some disquiet over the spectrum of nations both developed and developing as to the spiralling consequences of investment awards and its impact on sovereign functions, as reflected in the speech Mr. Justice Sundaresh Menon, Chief of Justice of Singapore on International Arbitration : The Coming of New Age for Asia (and Elsewhere).


• It also cannot be said as an absolute proposition of law that the moment there is an investment treaty arbitration between a private investor and the State, national courts are divested of their jurisdiction. The Court of Appeal in England in Republic of Ecuador (supra) rejected the argument that the courts have no jurisdiction to interpret or apply unincorporated international treaties between an investor and a host State. Consequently, in the opinion of this court, there is no legal bar over the subject matter of the suit.


• Further, Investment Arbitration disputes are fundamentally different from commercial disputes as the cause of action (whether contractual or not) is grounded on State guarantees and assurances (and are not commercial in nature).


• As the present case is not a commercial arbitration, the Act, 1996 shall not apply. This court is of the view that in a situation where the Act, 1996 does not apply, its inherent powers are not circumscribed by anything contained in the Act and the ratio in McDonald will not apply. Even in commercial arbitration, the jurisprudence of minimum intervention is relatively of recent vintage. It has its roots in Article 5 of the Model Law of 1985 which then took fifteen to twenty years to gain traction and general acceptance in the body of nations.


• Notwithstanding, this limited intervention role, it is not unknown for courts to issue anti arbitration injunction under their inherent power, especially when neither the seat of arbitration nor the curial law has been agreed upon. In Excalibur Ventures LLC, the court held that where the foreign arbitration was oppressive or unconscionable, the court may exercise its power to grant an injunction. In fact, the said judgment cites seven cases which have upheld the court’s jurisdiction to restrain foreign seated arbitrations.


• Of course, it is a matter of practice that national courts will exercise great self-restraint and grant injunction only if there are very compelling circumstances and the court has been approached in good faith and there is no alternative efficacious remedy available. Such a restrictive approach and jurisdiction is in consonance with any international obligation, India may have under VCLT or any other treaty.