Another Arbitration under the Indus Water Treaty 1960 betweeen India and Pakistan?

India has been planning to build a barrage across the mouth of the Wular Lake for almost three decades. The chief aim of the project has been to regulate the water storage and to maintain a proper depth in the Lake. This, according to news reports, would aid tourism and navigation across the Lake. The work on the project seems to have commenced in 1984. Pakistan seems to have objected to the project in 1986 resulting in suspension of works in 1987. Although India re-commenced work on the Lake, the work was stopped again in 2007 when Pakistan imposed suspension as a pre-condition for discussions on the project. Both countries have held about eight rounds of negotiations but nothing concrete has so far fructified. Pakistan's apprehension has been that the project is a storage project thereby bringing the Indus Water Treaty into play. River Jhelum, it may be noted, feeds the water to Wular Lake.Pakistan apprehends that the project would disrupt the canal projects of Pakistan.  India's contention is two-fold: (1) Indus Water Treaty permits building structures for "non-consumptive use of navigation"; (2) the project is beneficial to Pakistan as there would be adequate water supply during the lean winter period.

India has been sharing technical details of the project but news reports suggest that India is frustrated over the response or the lack of it from Pakistan on the project. Therefore, India seems to have conveyed the message to Pakistan that it would go for arbitration in the project considering the prolonged delay in both countries arriving at a consensus. It may be noted that Pakistan had stated that the issue had to be resolved through a neutral expert or through arbitration in 1986.

Some news reports on the topic are listed below:

• Tulbul: India may seek arbitration
• International Arbitration to Resolve Tulbul Dispute: India
• India, Pakistan resume talks on Tulbul project
• Tulbul project: India-Pak talks today
• Tulbul project: India to provide more data to Pakistan

Arbitrability of Criminal Matters

The Supreme Court has reiterated a generally well-established principle that criminal matters cannot be arbitrated. In the case of State of Orissa v. Ujjal kumar Burdhan, a Two Judge Bench of the Supreme Court consisting of DK Jain & Anil R . Dave has held that "the existence of an arbitration agreement cannot take the criminal acts out of the jurisdiction of the Courts of law." The case related to the quashing of investigation by the State Government's Vigilance Department in respect of allegations of irregularities by a Rice Mill owned by ujjal Kumar Burdhan. The High Court of Orissa had quashed the investigation in exercise of its powers under Section 482 of the Code of Criminal Procedure, 1973 (CrPC). Section 482 reads:

"Nothing in this Code shall be deemed to limit or affect the inherent powers of the High Court to make such orders as may be necessary to give effect to any order this Code, or to prevent abuse of the process of any Court or otherwise to secure the ends of justice."

The Supreme Court disagreed with the High Court that the circumstances considered by the High Court warranted the exercise of its jurisdiction under Section 482 of the CrPC. One of the reasons for the High Court to quash the investigation was the existence of an arbitration agreement with the Government. The Supreme Court disagreed with the High Court and held that the existence of an arbitration clause would not prevent prosection if a prima facie case of an act constituting a criminal offence is made out. The court relied on a decision of a two judge Bench of the Supreme Court in S.W. Palanitkar and Ors. v. State of Bihar and Anr. MANU/SC/0672/2001 : (2002) 1 SCC 241.

Save on Post Award Interest in Section 34 Proceedings: Deposit the Award Amount in Court

According to a latest decision of the Supreme Court, a party can challenge the award under Section 34 of the Arbitration and Conciliation Act, 1996 (1996 Act) and at the same time save on the post-award interest in case the challenge proceedings ultimately fail by depositing the award amount in the court.

In HP Housing & Urban Development Authority v. Ranjit Singh Rana, a two judge Bench consisting of RMLodha & HLGokhale, JJ, has held that where the award amount is deposited in the court, the applicant is not liable to pay post-award interest from the date of depositing the amount in the court. The facts in brief are that an award in an arbitration between the parties was challenged and the applicant deposited the award amount in the court. On dismissal of the application for setting aside, the court held that the respondent in the petition under Section 34 was entiteld to post-award interest at 18% per annum as per Section 31(7)(b) of the 1996 Act. Section 31(7)(b) reads: 

"A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of 18 per centum per annum from the date of the award to the date of payment."

On appeal, the Supreme Court reversed the decision of the lower court. The Supreme Court construed the expression "date of payment" to include even deposit of the amount in the court, which was only "a payment to the credit of the decree-holder". Thus, it held: 

"The word 'payment' may have different meaning in different context but in the context of Section 37(1)(b); it means extinguishment of liability arising under the award. It signifies satisfaction of the award. The deposit of the award amount into the Court is nothing but a payment to the credit of the decree-holder. In this view, once the award amount was deposited by the appellants before the High Court on [] May 24, 2001, the liability of post-award interest from May 24, 2001 ceased."

The judgement can be accessed from here.

Part III: Comments on the Award in White Industries Investment Arbitration against India

In the last post in this blog on the above topic, we had discussed the stand of White Industries Australia Ltd. (WIAL) on the issue as to whether it was an "Investor" and whether it made an "Investment" under the India-Australia BIT (pdf). In this post, we summarize India’s stand on the same:

1. WIAL is not an investor as per the BIT. "Investment" as defined in the BIT must be given an ordinary meaning having regard to the object and purpose of the term. In this regard, Article 31(1) of the Vienna Convention on the Law of Treaties provides:

"A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose."

2. Zachary Douglas has summarized the applicable legal test for investment in "International Law on Investment Claims" (p. 161) which is:

"Rule 22: The legal materialization of an investment is the acquisition of a bundle of rights in property that has the characteristics of one or more of the categories of an investment defined by the applicable investment treaty where such property is situated in the territory of the host State or is recognised by the rules of the host State’s private international law to be situated in the host State or is created by the municipal law of the host State."

"Rule 23: The economic materialisation of an investment requires the commitment of resources to the economy of the host State by the claimant entailing the assumption of risk in expectation of a commercial return."

3. WIAL does not even meet any of the categories of the Salini test (see sl. no. 4& 5, previous post).

4. The contract concerned was merely a commercial contract and the rights of WIAL are merely contractual rights. The rights are in the nature of rights in personem and are not rights in rem. In Malaysian Salvors v. Malaysia, it was held by the tribunal:

"while the contract did provide some benefits to Malaysia, they did not make a sufficient contribution to Malaysia’s economic development to qualify as an ‘investment’ for the purposes of Art. 1(a) of the BIT."

For the purposes of the BIT, the right should be a right in rem. Even by affording an ordinary meaning to "investment", the right must be a right in rem. As opined by Zachary Douglas:

"Of all the investment categories considered… it is a ‘claim to money’ or ‘right of future income’ which generates the most controversy in practice. There is clearly a significant degree of overlap between each of these rights and an analysis of them must grapple with an additional problem of distinguishing between rights in rem capable of constituing an investment pursuant to Rule 22 and simply contractual rights that are not. The problem is the subject of a separate Rule 24 and much of the discussion accompanying it is directly relevant to the investment category under consideration. Investment securities confer a right in rem to a ‘claim for money’ and therefore are capable of being a ‘invesmtnet’ pursuant to Rule 22. The category of ‘rights to money or future income’ tends to feature in BITs where there is no separte rerference to investment securities, such as the Germany Model BIT. Insofar as the category under consideration is introduced in the Germany Model BIT as an ‘asset’, it would seem to follow that there must be a proprietary foundation for any alleged investment in the form of ‘claim to money or future income."

Thus, neither the rights under the contract concerned nor the rights under the bank guarantee, which are not rights in rem, have any "proprietary foundation". Retd. Justice Srikrishna, expert witness had confirmed that as a matter of Indian Law (which was the applicable law in the relevant contract between Coal India Limited and WIAL), the rights under the contract were mere rights in personem and not rights in rem.

5. WIAL’s rights under the bank guarantees were merely a sub-set of rights under the contract. Further, as WIAL admitted, the bank guarantees were not independent investment but were rights forming part and parcel of the contract. The bank guarantees, which guaranteed performance, did not afford any substantive rights to WIAL. WIAL’s complaint was that the bank guarantees were improperly retained by CIL. WIAL now seeks refund of the amounts drawn down by India in the bank guarantee which had expired after seven days from the date of invocation by India of the bank guarantee. The bank guarantees in any case were furnished by a bank to CIL and not to WIAL. In Joy Mining Machinery v. Egypt (pdf), a claim relating to performance guarantees was made under the Egypt- UK BIT. The tribunal had held that the contract was merely an ordinary sales contract and not "investment" and that guarantees did not amount to investment.

6. WIAL’s reliance on Saipem v. Bangladesh for the contention that its rights under an arbitral award constituted "investment" is incorrect. In Saipem v. Bangladesh, it was held:

"The Tribunal agrees… that the rights arising out of the ICC Award arise only directly from the investment. Indeed, the opposite view would mean that the Award itself does not constitute an investment under Article 25(1) of the ICSID Convention, which the Tribunal is not prepared to accept."

Further, in GEA Group AG v. Ukraine (para 161-162) (pdf), it was held that the ICC Award therein was not an "investment" under the Germany-Ukraine BIT.  The award is in any case not an asset invested in India. As stated by Doughlas, in respect of an award, there is no additional commitment to the resources of the host State and there is no assumption of risk in expectation of commercial return.

The decision of the tribunal on the above would form the subject matter of the next post on this topic.

Delhi High Court Imposes Costs on Overenthusiastic Arbitrator

Rajesh Batra v. Ranbir Singh Ahlawat 2011(4) Arb LR 371 (Delhi) is one of hundreds of cases decided by the High Courts every year on arbitration. Normally, such a case wouldn't find its place here unless there is a significant issue it touches upon. Rajesh Batra is one such case. It deals with the important issue of immunity of the arbitrator for his acts in the arbitration proceedings.

Rajesh Batra (Batra) filed an application under Section 34 of the Arbitration and Conciliation Act, 1996 (Act) challenging the validity of the arbitral award  passed by the sole arbitrator, Shri Deepak Arora, advocate. Batra and Ranbir Singh Ahlawat (Ranbir) had entered into a collaboration agreement which provided for resolution of disputes through arbitration by reference to a "mutually appointed arbitrator". Disputes arose between the parties. Ranbir appointed Shri Deepak Arora, advocate as arbitrator but no mutual consent was given to that arbitrator by Batra. The sole arbitrator issued notice to both parties and required them to appear before him without seeking Batra's consent. Batra challenged the jurisdiction of the arbitrator which was rejected by the arbitrator on the ground that there was implied consent for appointment in the absence of prior objection from Batra for the appointment.

Vipin Singhi, J set aside the award on the ground that the arbitrator did not have jurisdiction in the absence of consent and observed: 

"The present is a shocking case where the arbitrator assumed jurisdiction without even caring to see that the parties had not appointed him mutually as required by the agreement.. Despite being put to notice that his appointment itself is without authority and jurisdiction, the arbitrator brazenly proceeded to conduct the proceedings..." 

The Judge held, after hearing Ranbir and the arbitrator, that condoning such a conduct would give rise to "sharp practices" and imposed costs of Rs. 10,000 each on Ranbir and the arbitrator.

There is no staturory provision in India on liability of arbitrators for acts done in the course of arbitration. This judgement is not to be taken as laying down that an arbitrator would be held liable for costs if the award is patently illegal. After ONGC v. SAW Pipes (2003), the term "patent illegality" has been construed widely by the Indian courts and an award which is patently illegal is against public policy of India. This judgement, however, lays down the important point that where a party has not consented to arbitration by an arbitrator when the arbitration agreement provides so, putting such party to "unnecessary harassment on account of the completely unjustified and illegal conduct of [passing an arbitral award against it by] the... learned arbitrator" would lead to liability on the arbitrator for costs. This judgement, it is submitted, is in line with the best international practices in holding arbitrators liable for mala fide acts.  See, for example Article 16 of the UNCITRAL Arbitration Rules, 2010 which provides:

"Save for intentional wrongdoing, the parties waive, to the fullest extent permitted under the applicable law, any claim against the arbitrators, the appointing authority and any person appointed by the arbitral tribunal based on any act or omission in connection with the arbitration."

Article 29(1) of the English Arbitration Act, 1996 provides:"

"An arbitrator is not liable for anything done or omitted in the discharge or purported discharge of his functions as arbitrator unless the act or omission is shown to have been in bad faith."

The judgement does not state whether the applicant prayed for imposition of costs on the sole arbitrator. It appears that the applicant did not pray for such a relief. Hence, the question arises whether imposition of costs was on account of an implied contractual right to raise claims against an arbitrator in case of "unjustified and illegal conduct" of the arbitrator or on account of the power of the court to impose costs suo motu. Perhaps, the court could have gone deeply into the question of arbitrator immunity, considering the importantance of the issue. The judgement can be accessed from here.