The Dispute
The origins of this dispute lie in a separate, but similar case between Vodafone and the Indian Government, arising out of Vodafone's purchase of a majority share of a company,
The dispute eventually came before
The Government responded to this decision with the Finance Act 2012, which amended the Income Tax Act retroactively to comply with its interpretation. The Government then repeated its demand for taxes from Vodafone.
This retroactive change in law also caught
Bilateral Investment Treaties
Bilateral Investment Treaties (BITs) are agreements made between the governments of two countries or states to promote reciprocal foreign investment between those states. BITs typically require the signatory states to give fair and equitable treatment to foreign investors and make a commitment to ensuring that foreign investors are treated by each state the same as their own nationals.
International investments in foreign jurisdictions are very common -particularly so in the construction, engineering, energy and technology sectors. BITs have very broad application and usually cover most foreign investments as long as the investor has contracted with a foreign government (directly or indirectly). Although BITs tend to be written in broad and, consequently, somewhat opaque language, they are a valuable tool to supporting international trade and investment, particularly in jurisdictions where the rule of law is not clearly established.
Where a country fails to comply with the provisions affording protection to foreign investors, affected investors have a right to arbitrate directly against the defaulting state for breach of its obligations under international law. BIT arbitrations are not particularly common but where they do occur, they typically generate very significant arbitral awards.
The BIT between the
These types of clauses are fairly typical of BITs and do not apply exclusively to the agreement between the
The Arbitration
Cairn argued that the Indian Government's retroactive tax legislation violated the protection awarded to Cairn under the
Cairn's claim in fact mirrored a similar claim by Vodafone, alleging fundamentally similar breaches by the Indian Government, this time of
Both cases were heard by the
In Cairn's case the arbitral panel unanimously determined that the Indian Government had breached the terms of the
Enforcement
Where a BIT claim does arise, and where the state is found to have breached its obligations, foreign investors will understandably seek assurance that any claim for damages will in fact be satisfied.
At the time of writing, Cairn claims that it is awaiting payment of the damages awarded. It is unclear whether the Indian Government will pay those damages, or indeed whether Indian Courts will allow Cairn to enforce the judgment in
Cairn has already stated that it is looking to identify assets owned (directly or indirectly) by the Indian Government, in order to seize them. In practice, the most promising targets for such enforcement actions include aircraft; since Air India is a state-owned carrier, its assets will be a key target.
On paper, enforcing an arbitration against such assets is often not straightforward, as although aircraft locations and destinations are easily identified, the aircraft in question may be subject to complex leasing arrangements or third party ownership. However, the cost and adverse publicity associated with aircraft being detained at airports around the world due to unpaid debts is usually sufficient to dissuade governments from continuing to refuse payment, once those assets have been targeted.
The Future
BITs are commonplace but they are not completely ubiquitous, nor are they all identical. All international companies should ensure that they are aware of any protection offered by any relevant BITs, and should consider using these agreements to their advantage where unfair treatment of foreign investors arises. It may, for example, be prudent to structure deals in such a way as to ensure that the purchasing entity is based in a jurisdiction that has a relevant BIT in place.
BITs have been a bedrock for international trade for many years, but have recently come under increasing scrutiny. Recent events, including moves by some EU states to cancel intra-EU BITs without recognising the so-called 'sunset' clauses that protect existing investors in such circumstances, have eroded some of the confidence in the protections offered by BITs. If that erosion continues it is likely to continue to erode investor confidence and hamper international investment.
As for
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Mr
PA 19103-4196
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