A trust deficit

Govt must respect arbitral awards

The Supreme Court has succinctly articulated a key impediment to a vibrant investment climate in India: The Government of India’s consistent refusal to honour arbitral awards. The court was hearing a 22-year-old dispute in which the government was challenging an arbitral award — for a third time — in a production-sharing contract with a consortium to develop oil and gas fields in the Krishna-Godavari basin. The arbitration, which began in 2004, has had a tortuous journey through an arbitration panel award to Vedanta (then Cairn Energy) and Ravva Oil (Singapore) in Kuala Lumpur, unsuccessful appeals in the Malaysian courts, a $99 million demand from the government, a second round of litigation in Malaysia, rejection by the Delhi High Court in 2026, and finally, a Supreme Court appeal. The two-judge Bench of Justice J B Pardiwala and Justice Manmohan pointed to the Centre’s practice of contesting the enforcement of the arbitration award after decades of litigation. They pointed out “no one would trust the government” if it persisted with such practices. 

The issue of trust is intrinsic to international commerce. Yet the government’s maximalist legal approach or its penchant for leveraging its policymaking powers to elude contractual arbitration awards has become a sticking point in concluding bilateral investment treaties (BITs) or in India’s emergence as a credible arbitration centre. In 2012, for instance, the Manmohan Singh government passed a law taxing, with retrospective effect, overseas deals involving Indian corporations. The law triggered international arbitration for Vodafone’s acquisition of Hutchison’s share in Hutchison Essar and a corporate reorganisation for Cairn Energy in India, both of which the government lost but declined to honour. 

Then followed embarrassing developments as Cairn moved to seize Indian state assets in France and the United Kingdom to enforce the award, after which the retrospective tax law was scrapped in 2021. But the fact that the Narendra Modi government terminated most of the BITs in 2016, including with major trading partners, underlined New Delhi’s inherent intransigence to international arbitration. Since then, the replacement Model BIT introduced a five-year exhaustion clause of local remedies. The policy yielded BITs with a handful of mostly marginal countries. This encouraged the government to soften its approach. The 2024 BITs with the United Arab Emirates is reported to have reduced the local-remedy clause to three years and the one with Saudi Arabia had a two-year stipulation. Trading partners have sought a one-year clause, which New Delhi has not accepted so far. 

The government remains an energetic litigator against arbitral awards, accounting for more than 40 per cent of the challenges against those filed before the Delhi High Court between 2021 and 2024, according to a study. The government has admitted in Parliament that state-owned power and road corporations accounted for more than 60 per cent of the challenges. Given this record and the snail-paced functioning of the judicial system, it is no surprise that long-drawn efforts to establish India as a major arbitration hub have gone nowhere, despite legislative amendments to facilitate a faster enforcement of arbitral awards. Investors are likely to weigh these developments against the government’s persistent evasive proclivities. The Cairn-Ravva saga does not enhance confidence in the government as a business partner or predictable policymaker.