Is the New York Convention Applicable for the Enforcement of Investment Arbitration Awards in India?

Author: Samarth Khanna*

Abstract

Usually, investment arbitration awards are passed, recognized and enforced under the aegis of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (‘ICSID Convention’). India not being a signatory to the ICSID Convention, international arbitration awards in India can only be recognized and enforced through the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘New York Convention’). The enforcement mechanism of the New York Convention in India has been enshrined under Part II Chapter I of the Indian Arbitration and Conciliation Act, 1996 (‘ACA’). However, the recognition and enforcement of investment arbitral awards in India faces a crisis, one  fuelled and perpetuated by conflicting judicial opinions and a lack of legislative will.

The Delhi High Court (‘DHC’) recently ruled that the Investor-State Dispute Settlement Regime (‘ISDS Regime’) falls outside the scope of the ACA since such disputes cannot be considered as commercial under the laws of India. This Judgement severely impacts India’s approach to investment treaty arbitrations and shakes the conscience of the Indian arbitration regime. The DHC judgment is based on erroneous analysis and suffers from flawed conclusions. Therefore, this blog analyses the judgement in light of the Commercial Relationship Reservation, the Indian legal position, and contextualizes it in light of international norms.

Introduction

India ratified the New York Convention in July 1960 and it came into effect in India in October 1960. Apart from Article V, enforcement of an arbitration award under the New York Convention may be made subject to two limiting declarations,[1] both of which have been made by India.[2] For the purposes of this blog however, we are concerned only with the second declaration, under which a signatory State may limit the application of the convention “only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such declaration” (‘Commercial Relationship Reservation’). This Commercial Relationship Reservation has been made by approximately one-third of the contracting States to the New York Convention.[3] This reservation was inserted because at that time when the convention was being drafted, it was opined by some scholars that certain civil law countries, which distinguish between commercial and non-commercial transactions, would not adhere to the Convention.[4]

Indian judiciary has had multiple occasions to analyze investment treaty arbitrations.[5]  In Union of India v. Vodafone Group Plc & Anr. (‘Vodafone Case’), the Union of India petitioned the court seeking an anti-arbitration injunction before the DHC. The suit sought to prevent Vodafone from pursuing an arbitration under the UK-India BIT since, a parallel arbitration initiated by its Dutch holding company under the Netherlands-India BIT was already pending.

In dismissing the said petition , the DHC held that international arbitrations can only be recognized in India through the New York Convention. Furthermore, India has made the Commercial Relationship Reservation therefore, only such international arbitrations that are of a commercial character under the laws of India can be recognized. The court reasoned that since the root of investment arbitration disputes is public international law, obligations of States and administrative law, they are fundamentally different from commercial disputes and can therefore not be governed by the ACA.[6] This reasoning given by the DHC was probably an effort to justify its holding that the ISDS Regime would be ‘non-commercial’ in nature. The DHC followed the same reasoning in another judgment passed recently.[7]

Although, the aforementioned judgements were in respect of anti-arbitration suits, they still have a significant impact on investment treaty arbitral awards brought for recognition and enforcement to India.

In effect, these two judgements have rung the death knell for any enforcement action in respect of an investment treaty arbitration award brought to India as they have practically ruled out the applicability of the enforcement mechanism contained in Part II of the ACA to such awards. Therefore, in order to understand the fallacies of these Judgements, it is relevant to analyse the Commercial Relationship Reservation, as well as the meaning attached to the term ‘commercial’ for the purposes of the New York Convention.

What Does the Term ‘Commercial’ Mean for the Purposes of the New York Convention?

For the most part, the application of the Commercial Relationship Reservation has been uncontroversial. Even though the New York Convention does not define the term ‘commercial many countries have, in their domestic legislations, adopted a definition of commercial that is consistent with the goals of the New York Convention.[8] However, in India, neither the ACA nor its predecessor, the Foreign Awards (Recognition and Enforcement) Act, 1961 (‘FAA’) define the meaning of the term commercial. The DHC too, in the aforementioned cases, while arriving at its conclusion, did not attempt to define the term ‘commercial.’ Therefore, under this section we examine various sources of law, both domestic and international, to import the meaning of the term ‘commercial’, and to formulate an opinion on whether courts should interpret the term liberally or in a restrictive manner.

(a) UNCITRAL Model Law:

The second footnote to Article 1 of the UNCITRAL Model Law purports to give a broad and wide interpretation to the term ‘commercial’ so as to increase its scope and application. The non-exhaustive list of transactions mentioned therein also includes “investment”.[9]

The Supreme Court of India has on many occasions fallen back on the UNCITRAL Model Law for the purposes of the interpretation of the ACA.[10] In one case before it, the court held that: “…provisions of the Arbitration and Conciliation Act, 1996 should be interpreted keeping in mind the [UNCITRAL] Model Law as the concept[s] under the present Act [have] undergone a complete change.”[11] Similarly, in RM Investment & Trading Co Pvt Ltd (India) v. Boeing Company,[12] while interpreting the term ‘Commercial Relationship’ under the FAA, the Supreme Court held that: “While construing the expression ‘Commercial Relationship’ in Section 2 of the Act [the FAA], aid can also be taken from the Model Law prepared by UNCITRAL…” [13]

(b) Indian Judicial Precedents:

The courts in India have sought to give the term ‘commercial’ a broad and liberal meaning. The Gujarat High Court in Union of India v. Owner & Parties Interested in Motor Vessel M/V. Hoegh Orchid, Bhavnagar and Ors.,[14] construed the term as being of the “largest import” encompassing “all the business and trade transactions in any of their forms.”[15]

The Supreme Court of India in RM Investment, held that the term ‘commercial’ should receive a liberal construction to encompass the activities which are integral to international trade today.[16]

Furthermore, in Harendra H Mehta & Ors. vs Mukesh H. Mehta & Ors.,[17] the court held that: “…broad and not restricted construction should be given to the word “commercial” appearing in Section 2 of the [FAA]… “This Court [has] said that the word “commercial” under Section 2 of the Foreign Awards Act should be liberally construed.”[18]

(c) Foreign Judicial Precedents:

In practice and in the interest of consistency, domestic courts in many other contracting States to the New York Convention that have made the Commercial Relationship Reservation, have held that the term ‘commercial’ be interpreted broadly in light of the purposes of the Convention.[19]  Courts in several jurisdictions, such as the US[20] and Canada[21] (both countries having made the Commercial Relationship Reservation), have also held that investment arbitration awards are commercial for all intents and purposes. The Canadian example is also of great importance since like in India, the international commercial arbitration statute applicable in that case was also based on the UNCITRAL Model Law.[22] A US court while interpreting the term ‘Commercial Relationship’ has held that its concept is broad, noting that its purpose is only “to exclude matrimonial and other domestic relations awards, political awards, and the like”.[23]

(d) International Investment Agreements:

Several international investment agreements have also sought to eliminate any doubt in respect of the treatment of the term ‘commercial’ by way of including express provision(s) to the effect that an award made under the ISDS Regime, is to be considered as commercial for all intents and purposes for enforcement under the New York Convention.[24]

The Indian Model BIT released in 2016 also supports the contention that investment treaty awards ought to be considered as ‘commercial’ for the purposes of enforcement of the New York Convention by expressly providing that: “A claim that is submitted to arbitration under this article shall be considered to arise out of a Commercial Relationship or transaction for purposes of Article I of the New York Convention.”[25]

(e) Opinions of Jurists:

Can awards rendered under the ISDS regime be deemed to be ‘commercial’ for the purposes of the New York Convention? Many Jurists agree that the overall nature of the ISDS Regime would satisfy the requirement of qualifying as commercial for the purposes of the Commercial Relationship Reservation.[26]

It is noteworthy to mention here that the American Law Institute’s restatement of the U.S. Law of International Commercial and Investor-State Arbitration in respect of non-ICSID arbitrations states that: “These arbitrations are subject to the usual ground rules of international commercial arbitration, i.e., subject to the arbitration law of the arbitral seat, as well as to the New York and Panama Conventions, as the case may be”.[27]

Therefore, it has been a consistent point of view that, considering the purpose of the New York Convention, courts should interpret the concept of commerciality, broadly.[28]

Analysis

In my view, the two judgements of the DHC holding that the ISDS Regime falls outside the scope of the ACA are wrong and contrary to law.

In the absence of an express definition of the term ‘commercial’ in the legal text, the court should have interpreted the term ‘commercial’ in line with the UNCITRAL Model Law, as many courts, including the Supreme Court of India have. The pronouncements of the Supreme Court of India leave no room for any doubt that any activity which is intended to facilitate international trade and promotion thereof, shall be understood as falling within the ambit of the term ‘commercial’.[29] The primary goal of any investment treaty, is indeed to encourage foreign direct investment by providing an additional safeguard to a foreign investor’s commercial interests and the promotion of international trade.[30] Astonishingly, the DHC not only failed to take into consideration the UNCITRAL Model Law, but also faltered in so far as its application of law laid down by the Supreme Court of India is concerned. It would not be surprising, if the Supreme Court were to, on appeal, set aside the two Judgements of the DHC for being contrary to law.

The phrase ‘Commercial Relationship’ in Article I(3) of the New York Convention was used to create a contradistinction with matrimonial or family or cultural or social or political relationship.[31] That is to say that disputes covering matrimonial or family or cultural or social or political issues, and an award ruling on these subjects, would not be recognized or enforced under the Convention. Therefore, any dispute falling outside such relationships should be considered as being of a commercial nature. If nothing else, investment relationships, by their inherent characteristic, ought to be considered as commercial since the ISDS Regime has all the earmarks of being commercial in nature.

In any event, it is highly unlikely that the drafters of the New York Convention had such a narrow and restricted meaning of the term ‘commercial’ in mind when they drafted Article I(3).[32]

The Indian Model BIT is also clear on how investment arbitration awards are to be treated. This clearly eschews the intention of the executive branch of the State to include investment treaty arbitrations as being ‘commercial relationship(s)’ within the framework of the New York Convention.

Furthermore, as we have seen above, many international investment agreements also appear to include investments within the meaning of the term commercial signifying a growing international consensus on treating investment relationships as ‘commercial relationships.’

Therefore, there is absolutely no reason to treat ISDS awards as those falling outside the scope of the New York Convention on account of the Commercial Relationship Reservation. It would seem fallacious to interpret a contradiction between ISDS awards and Commercial Relationship Reservation under the New York Convention.

Conclusion

In passing the impugned decisions, the DHC finds itself in the company of very few national courts to have interpreted the Commercial Relationship Reservation in a narrow and restrictive manner. Therefore, it is of utmost importance that the Supreme Court of India be abreast with such developments, and must with immediate effect, clarify the Indian Judiciary’s stand on such a crucial and central aspect of investment arbitration. It is noteworthy to mention here that part of the blame in respect of this chaos and confusion also falls on the Legislature in India because, since it has never sought to clarify the statutory position. Therefore, such back and forth by the Courts coupled with a lack of political will, further adds to the commotion, and does little to assure a foreign investor of the uniformity of laws and applicability of the New York Convention. The confusion surrounding enforcement of ISDS awards and failure of the State to address such core issues are major impediments in India’s journey to becoming a major investment and arbitration hub.

* Samarth Khanna is an LLM Candidate at Columbia Law School. Prior to joining Columbia, Samarth was a litigator at the Supreme Court of India. He has also worked with Professor Kabir Duggal as his Research Assistant and also serves as the LLM Representative on the board of the Columbia International Arbitration Association.

[1] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Jun. 6, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38 [hereinafter: New York Convention], art. I(3).

[2] See https://www.newyorkconvention.org/countries (last visited Oct. 24, 2021).

[3] Albert Jan van den Berg, Appeal Mechanism for ISDS Awards: Interaction with the New York and ICSID Conventions, 34 ICSID Rev. – Foreign Inv. L. J. 156, 183 (2019).

[4] Michael Pryles, Reservations Available to Member States: The Reciprocal and Commercial Reservations, in Enforcement of Arbitration Agreements and International Arbitral Awards – The New York Convention in Practice 161, 178 (Gaillard & Pietroeds eds., 2008).

[5] Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armatures SAS, (2014) SCC OnLine Cal 17695 (India); Union of India v. Vodafone Group Plc & Anr., Delhi High Court, CS(OS) 383/2017 (India) (hereinafter: ‘Vodafone Case’); Union of India v. Khaitan Holdings (Mauritius) Limited & Ors., Delhi High Court, CS (OS) 46/2019 (India) (hereinafter: Khaitan Case).

[6] Vodafone Case ¶ 91.

[7] Khaitan Case ¶ 29.

[8] Pryles, supra note 4, 178.

[9] United Nations Commission on International Trade Law (UNCITRAL), Model Law on International Commercial Arbitration, art. 1, G.A. Res. 40/72, U.N. Doc. A/RES/40/72 (Dec. 11, 1985), as amended by G.A. Res. 61/33, U.N. Doc. A/RES/61/33 (Dec. 18, 2006) [hereinafter: ‘UNCITRAL Model Law’].

[10] Sundaram Finance Ltd v. Nepc India Ltd, (1999) 2 SCC 479 (India) ¶ 9.

[11] M/s Gas Authority of India Ltd. v. M/s Keti Construction (I) Ltd, (2007) 5 SCC 38 (India) ¶ 21.

[12] RM Investment & Trading Co Pvt Ltd (India) v. Boeing Company, (1994) 4 SCC 541 (India) [hereinafter: ‘RM Investment].

[13] Id. ¶14.

[14] Union of India v. Owner & Parties Interested in Motor Vessel M/V. Hoegh Orchid, Bhavnagar and Ors., (1982) SCC Online Guj 57 (India).

[15] Id. at ¶ 6.

[16] RM Investment, supra note 12, at ¶12.

[17] Harendra H Mehta & Ors. v. Mukesh H. Mehta & Ors., (1999) 5 SCC 108 (India).

[18] Id. at ¶18.

[19] Dr. Bernd Ehle, Article I in Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 1958, Article-By-Article Commentary 25, 80 ¶ 184 (Wolff, ed. 2019).

[20] Republic of Argentina v. BG Group PLC, 134 U.S. 1198, 1204 (2014).

[21] United Mexican States v. Metalclad Corp., 2001 BCSC 664 (British Columbia Sup Ct 2001) (Canada) ¶ 44.

[22] Id. at ¶ 42.

[23] Island Territory of Curacao v. Solitron Devices, Inc., 356 F. Supp. 1, 9 (S.D.N.Y., 1973).

[24] Energy Charter Treaty [ECT] art. 26(5)(b), Dec. 17, 1994, 2080 UNTS 95; United States-Mexico-Canada Agreement [USMCA] art. 14-D-13(13), Jul. 1, 2020, see https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement; North American Free Trade Agreement [NAFTA], art. 1136(7), Dec. 17, 1992, 32 I.L.M. 289.

[25] Indian Model BIT, 2016, art. 27.5, available at https://dea.gov.in/sites/default/files/ModelBIT_Annex_0.pdf (last visited Oct. 25, 2021).

[26] Albert Jan van den Berg, supra note 3 at 183; Christoph Schreuer et al., The ICSID Convention: A Commentary 1122, ¶ 18 (2^nd edn., 2009); Pryles, supra note 4, at 183.

[27] Restatement of the U.S. Law of Int’l Com. and Inv.-State. Arb., ch. 5, intro. Note, topic B (Am. L. Inst., Proposed Final Draft 2019).

[28] ICCA’S Guide to the Interpretation of the 1958 New York Convention, A Handbook for Judges, Int’l Council for Com. Arb. 25 (2011); UNCITRAL Secretariat, Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, UNCITRAL, art. I, ¶ 85 (2016); Practitioner’s Handbook on International Commercial Arbitration, ¶ 21.74 (Frank-Bernd Weigand, & Antje Baumann, eds.) (2019).

[29] RM Investments, supra note 12; Harendra Mehta, supra note 17.

[30] ICCA Congress 2012 Opening Plenary Session, International Arbitration: The Coming of a New Age for Asia (and Elsewhere), Sundaresh Menon, ¶18, https://cdn.arbitration-icca.org/s3fs-public/document/media_document/ags_opening_speech_icca_congress_2012.pdf (last visited Oct. 19 2021).

[31] Solitron Devices, supra note 23.

[32] Pryles, supra note 4, at 180.