Law PractitionersLaw StudentsPublicationsCAN CAIRN FLY? DISCOURSE LEADING TO ASSET REALIZATION PROCEEDINGS IN CAIRN VS. INDIA INVESTMENT TREATY ARBITRATION AWARD BEFORE US DISTRICT COURT

July 8, 20210
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KEYWORDS/ABBREVIATIONS

ITA- Investment Treaty Arbitration, ISDS- Investor State Dispute Settlement, IIL- International Investment Law, BIT- Bilateral Investment Treaty, SOEs- State-Owned Enterprises, UK- United Kingdom, CIL- Cairn India Limited, UNCITRAL- United Nations Commission on International Trade Law

INTRODUCTION

One of the first questions posed to their counsel by clients considering arbitration for alleged violations of international obligations against sovereign State is whether and how such award-creditors in Investment Treaty Arbitration (‘ITA’) and Investor-State Dispute Settlement (‘ISDS’) would be able to successfully carry out execution proceedings. This execution proceedings would all likely be against sovereign assets. It is in this light that issues of sovereign immunity in investment arbitration poses a unique set of challenges for award-creditors, which by in large, remains muddled in age-old doctrinal study of State immunity, which varies by legislations in different jurisdictions and granting of certain ‘exceptions’ to assets considered to be ipso facto deemed performing sovereign functions such as- central bank, central bank funds, State’s wholly owned-subsidiary etc., This aspect of sovereign immunity can be structurally differentiated between ‘absolutist’ approach (i.e. acta jure imperii) and ‘restrictive’ approach (i.e. acta jure gestionis). Wherein sovereign immunity is only granted to the latter.

In order to realize the pecuniary value of an International Arbitral Award, the claimants as such Cairn Energy PLC (‘Investor’) cannot be left remediless. Therefore, in such cases, post-arbitration court proceedings are the most critical. “Realization of an award is dependent on either voluntary compliance by the state (non-est in terms of the present dispute) or going through the process of any challenge available to an award on grounds available to the state, in much the same way that it would have been available to any other party aggrieved by an Arbitral Award.”

As India chose to fall under the bracket of voluntary compliance to an International Arbitration Award issued against it in the case of “White Industries Australia”. However, with many years passed by and with the changing trend of the Government of India, in both mass exodus of currently active bilateral investment treaties/termination of BITs and the recent and frequent exercise of the appellate mechanism of an International Arbitration, it is very much evident that India, slowly but gradually is moving towards recognizing “deference by international adjudicators in states decision making powers.”

BRIEF FACTS OF THE DISPUTE- ‘CAIRN v. INDIA

An Arbitral Tribunal was constituted to hear an UNCITRAL Rules claim brought by an investor incorporated in United Kingdom namely ‘Cairn Energy PLC’ against the Government of India (‘GOI/State’). This Arbitration started in the year 2015 pursuant to an International Arbitration clause/ISDS found under the UK-India Bilateral Investment Treaty (‘BIT’). The present dispute between the parties had arisen upon the issuance of a draft tax re-assessment from Indian income tax department. The aforesaid re-assessment purported to levy a retroactive tax on a Cairn subsidiary in respect of fiscal year 2006/2007 in the amount of 1.6 billion dollars plus any applicable interest and penalties. The premises of the Investor claims arise from the fact that the Indian tax authorities insisted that the tax is owned on capital gains earned by Cairn on the initial public offering of its subsidiary Cairn India Limited (‘CIL’) in 2007. Therefore, Cairn, before the arbitral tribunal maintained that no such tax should be assess on this sale, which it categorizes as a “group reorganization,” which is not subject to Indian taxation.

BRIEF FACTS LEADING TO FILING OF AIR INDIA ASSET SEIZURE BEFORE THE US DISTRICT COURTS

In reliance to the above-mentioned arbitral dispute between the parties, the Investor had successfully brought forth its claim of $1.2 billion dollars against the GOI. The pecuniary value of $1.2 billion dollars was won by the Investor in a tax dispute against GOI at the seat of arbitration, the Hague, Netherlands, adjudicated by three member UNCITRAL Arbitral tribunal. Pursuant to the observance of the Investor, the international decretal amount became due from GOI to the Investor. The Investor, now in reliance to the UNCITRAL Rules for execution and enforcement of international arbitral award i.e., the New York Convention 2005, has filed a lawsuit before the US District Court for the Southern District of New York, seeking to make Air India i.e., a wholly public and a Government of India owned enterprise, liable to be attached and seized by the US District Court authorities in order for the Investor to release its pecuniary value of $1.2 billion dollars (plus interest and penalties) which was awarded to it by a three member investment treaty tribunal vis-à-vis GOI breaching its international obligation under BIT with a UK Investor Cairn Energy PLC.

Under the presence of few national and international media articles on the subject matter, it has also come to light of the author that the lawsuit filed by the Investor before the US District Court argued that the Air India carrier as a state-owned company/state owned enterprise is “legally indistinct from the state itself” and therefore, it is nearly serving as an extended arm as well as alter ego of the State i.e., Government of India. The Investor also argued that “the nominal distinction between India and Air India is illusionary and serve only to aid India in improperly shielding its assets from creditors like Cairn.”

THE ROLE OF STATE-OWNED ENTERPRISES (SOEs) IN INTERNATIONAL INVESTMENT LAW

One author described State-owned enterprises (SOEs) as;

‘State-owned enterprises (SOEs) can generally be understood to include business enterprises ‘in which the state has significant control, through full, majority, or significant minority ownership’ and are often involved in the infrastructure and utilities.’

The general roadblock which comes in regard to SOEs in ITA is whether, for the purpose of determining there standing in ITAs, what is its legal status, and should their activities be at all times, be attributable to its State or not? Should the activities of such SOEs be not exempt from the purview of any sought of immunity (‘jurisdiction as well as execution’) in international law when they are acting purely on acta jure gestionis basis, rather than acta jure imperii?

PRECEDENTS UNDER INTERNATIONAL INVESTMENT LAW VIS-À-VIS RIGHTS AND LIABILITIES OF STATE-OWNED ENTERPRISES (SOEs)

The practice of investment tribunals has followed the principle of State responsibility and attribution of States organs. In the case of MCI Power v Ecuador, the tribunal looked to a combination of the institutional structure, the composition and the function when determining that a public sector agency was a State organ. Similarly in the case of CMS v Argentina,  the tribunal in so far as the international liability of Argentina under the treaty was concerned, held all the three organs of State i.e. executive, legislature and the judiciary to be equally responsible for the wrongful conduct attributable to its State.

Also, in number of countries, trade and policy issues, foreign investment etc., matters are not supposedly directly handled by the State but indirectly by the State through its organs, such as- SOEs. These SOEs are formed for the very purpose of dealing with foreign investors (or with all investors). The reason for their establishment is specialization and efficiency. However, in principle, SOEs are separate, and their acts are not attributable to its State except, when such SOEs have been formed for the intent of evasion and fraud conduct. This evasion and fraud conduct were established by a tribunal in case of CSOB v The Slovak Republic, by piercing the SOEs corporate veil.

In this respect, two noted scholars of International Investment Law Professor Dr. Kaj Hober and Dr. Joel Dahlquist Cullborg (lecturers at author’s alma mater Uppsala University, Sweden) rightly noted that the ISDS universe is not shielded from the trend towards nationalism and protectionism currently sweeping many parts of the world.

CONCLUSION

Cairn’s move, in going after the state-owned carrier, Air India can potentially jeopardize India’s attempts to divest the state-owned carrier. The Government officials in December 2020 had also briefed the media that it had received multiple Expression of Interests (‘EOI’) after it moved to privatize the loss-making state entity. However, the Government of India has already filed an appeal against the arbitration award. In spite of the aforesaid, it is a well-recognized principle of the international arbitration law that the rights under execution and enforcement of an arbitral award by an Investor/Claimant continues to exist until being the ‘owner/award-creditor of international arbitral award’, which was also upheld vide an amendment to the Arbitration & Conciliation Act, 1996 (‘Act’) in 2015 vis-à-vis ‘non grant of automatic stay under Section 34 of the Act upon filing of an appeal or set-aside proceedings against an Arbitration Award.’ Therefore, subsequently upon filing of an appeal by GOI at the seat of arbitration, Cairn since January 2021 had already began taking steps to identify Indian assets overseas against which it could enforce the Award including bank accounts, aircraft and even ships. Moreover, Cairn also started registering its claim against India in Courts in the United States, Britain, Netherlands and Canada. Resultantly, as was also reported by Reuters that the Government of India has already started directing its State-run banks to withdraw funds from their foreign currency accounts abroad, fearing Cairn might sue to seize the funds.

Since, Air India is the only Indian carrier that flies long-haul to flights to United States and Canada, it would be interesting to observe the future proceedings before the US District Courts on whether it allows such attachment and seizure of a state owned asset/SOEs of Government of India from being absolved from all its rights and obligations that it breached as being privy to an international investor vide an International Investment Treaty which has its own prospects and ramifications under International Investment Law, needless to mention, in spite of it being a ‘State.’

CITE THIS WORK

Legal Maxim (October 26, 2021) CAN CAIRN FLY? DISCOURSE LEADING TO ASSET REALIZATION PROCEEDINGS IN CAIRN VS. INDIA INVESTMENT TREATY ARBITRATION AWARD BEFORE US DISTRICT COURT. Retrieved from https://www.legalmaxim.in/can-cairn-fly-discourse-leading-to-asset-realization-proceedings-in-cairn-vs-india-investment-treaty-arbitration-award-before-us-district-court/.
CAN CAIRN FLY? DISCOURSE LEADING TO ASSET REALIZATION PROCEEDINGS IN CAIRN VS. INDIA INVESTMENT TREATY ARBITRATION AWARD BEFORE US DISTRICT COURT.” Legal Maxim – October 26, 2021, https://www.legalmaxim.in/can-cairn-fly-discourse-leading-to-asset-realization-proceedings-in-cairn-vs-india-investment-treaty-arbitration-award-before-us-district-court/
Legal Maxim July 8, 2021 CAN CAIRN FLY? DISCOURSE LEADING TO ASSET REALIZATION PROCEEDINGS IN CAIRN VS. INDIA INVESTMENT TREATY ARBITRATION AWARD BEFORE US DISTRICT COURT., viewed October 26, 2021,<https://www.legalmaxim.in/can-cairn-fly-discourse-leading-to-asset-realization-proceedings-in-cairn-vs-india-investment-treaty-arbitration-award-before-us-district-court/>
Legal Maxim – CAN CAIRN FLY? DISCOURSE LEADING TO ASSET REALIZATION PROCEEDINGS IN CAIRN VS. INDIA INVESTMENT TREATY ARBITRATION AWARD BEFORE US DISTRICT COURT. [Internet]. [Accessed October 26, 2021]. Available from: https://www.legalmaxim.in/can-cairn-fly-discourse-leading-to-asset-realization-proceedings-in-cairn-vs-india-investment-treaty-arbitration-award-before-us-district-court/
CAN CAIRN FLY? DISCOURSE LEADING TO ASSET REALIZATION PROCEEDINGS IN CAIRN VS. INDIA INVESTMENT TREATY ARBITRATION AWARD BEFORE US DISTRICT COURT.” Legal Maxim – Accessed October 26, 2021. https://www.legalmaxim.in/can-cairn-fly-discourse-leading-to-asset-realization-proceedings-in-cairn-vs-india-investment-treaty-arbitration-award-before-us-district-court/
CAN CAIRN FLY? DISCOURSE LEADING TO ASSET REALIZATION PROCEEDINGS IN CAIRN VS. INDIA INVESTMENT TREATY ARBITRATION AWARD BEFORE US DISTRICT COURT.” Legal Maxim [Online]. Available: https://www.legalmaxim.in/can-cairn-fly-discourse-leading-to-asset-realization-proceedings-in-cairn-vs-india-investment-treaty-arbitration-award-before-us-district-court/. [Accessed: October 26, 2021]
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