As the Vedanta case shows, government refusing to accept arbitration orders is the new challenge for DoingBusiness
Vedanta’s main businesses include zinc, aluminum and oil and gas, all of which have been hit by a slump in demand due to the coronavirus pandemic.
If unpaid dues—of both the government and PSUs, at the Centre and the states—running into lakhs of crore rupees was the big problem that India Inc faced while dealing with the government, apart from the miles of red tape, getting the government to honour even arbitration court verdicts (sometimes even those of regular courts) is proving to be an equally big challenge.
The latest in this sad saga is a $476-mn arbitration award that Vedanta and Videocon have just won in the Supreme Court (SC) pertaining to the Ravva oil and gas fields that they had jointly developed in the 2000s. The government and the private contractors had a dispute over how much of the costs could be recovered by the contractors and, after the dispute went into arbitration in Malaysia, the private firms won.
The government, however, refused to accept the award and challenged it on the grounds that it was violative of ‘public policy’—this is the most common ground for challenging arbitration awards. Last week, however, SC rejected the government’s arguments; how long it will take for Vodafone-Videocon to get back their money now remains to be seen.
What makes this especially worrying is that the original award was given way back in January 2011! Challenging global awards has become so much of a habit that even in the case of Tata-DoCoMo, where the government was not even a party, it challenged the award, on the grounds of ‘public policy’; it is complicated, but the Tatas were happy to have lost the case as this allowed them to make the payment to DoCoMo to honour a contractual commitment.
Though the numbers are much higher, there is a similar case of cost-recovery involving Reliance Industries and the Panna Mukta Tapti fields it was working on; Reliance won the award in 2016, the government challenged it and the case is still in court. And, in the Reliance-ONGC case where the government had asked for $1.6-bn in damages—Reliance denied the government charges that it had been ‘stealing’ natural gas from ONGC—the arbitration court gave a verdict in favour of Reliance; that was in 2018 but, predictably, the government has challenged this in court.
The Antrix-Devas case is quite similar. In that case, Isro’s arm Antrix was to build two satellites for Devas Multimedia, with 70 MHz of spectrum thrown in; with the CAG enquiring into the matter, and the reverberations of the 2G case still strong, the government cancelled the contract.
Devas went in for arbitration and won a $672-mn award. How this case will play out in the court—the government challenged the award—is not clear but, six months ago, SC asked Devas whether it would be willing to waive off the interest component of the money owed to it; that suggests the government may lose this challenge as well.
Fortunately for companies, the courts are increasingly—though not always—batting for honouring arbitration awards. In the Tata-DoCoMo case, when the government argued that making the payment would violate the Fema law, the judge said that if that were the case, the Tatas could pay the Fema penalties as well, but the award would be honoured.
And Hindustan Construction Company (HCC) won a big battle—but not the war—when, last year, SC struck down an unfair amendment to the Arbitration Act. Under the arbitration law, no automatic stays were to be granted in future for any case where the proceedings started after October 2015; parties challenging the award could still get a stay, but the courts would decide on the merits of each case. But Section 87 that was inserted later allowed an automatic stay on all cases before October 2015, and that ensured HCC couldn’t get paid even though it had won in arbitration.
The road ahead for HCC still remains a long one since, while the SC ruling meant the National Highways Authority of India (NHAI) couldn’t get an automatic stay on the arbitration cases it had lost, HCC would have to approach each high court where NHAI got a stay and ask for it to be vacated.
India’s tortuous legal system is the main reason why most global firms working here have arbitration clauses in their agreements; indeed, the reason why the government came up with arbitration laws—it even put in place fairly strict rules to prevent the awards from being challenged—was to ensure that firms were able to settle their disputes quickly. Yet, as we are seeing, the government almost habitually challenges all awards, and this ensures that the delays continue.
Another favourite tactic is to delay the appointment of arbitrators and, in the case of Vodafone and Cairn, to even argue that the cases could not be arbitrated under the bilateral investment treaties. In the Nafed vs Swiss firm Alimenta, while SC ruled in favour of the government—which had argued ‘public policy’ again!—earlier this year, keep in mind the award was given in Alimenta’s favour way back in 1989!
So if a Vodafone or a Cairn finally win their cases, there is no guarantee the government will not challenge them again on the grounds of ‘public policy’. If the courts uphold the challenge—or allow it to be delayed for years—this will be a double whammy for the firms. Keep in mind the infamous retrospective tax was brought in by then finance minister Pranab Mukherjee after SC had ruled in favour of Vodafone in the tax matter.
In the ITC case too, after SC had ruled in its favouring the Rs 803-crore excise duty case, the government passed an ordinance that changed the tax law; ITC then approached the government for a settlement and, as part of this, while ITC didn’t have to pay the government Rs 453 crore, the government got to keep the Rs 350-crore that ITC had already paid in the case. The government refusing to honour arbitration and court cases, it appears, is an old tradition.