With Cairn Energy dragging Air India assets to the legal battle with India on the retrospective tax issue, legal experts indicate that India is the least favourite in winning the legal war with the company and the option before the country is to go for an out-of-court settlement or to win the appeal filed against the order.
The battle between the government of India and Cairn Energy in the retrospective tax issue has taken a fresh twist last week with the latter filing a lawsuit in the Southern District of New York, seeking to make Air India liable for the judgement that was awarded to Cairn. The move to sue Air India is to enforce a $1.2 billion arbitration award that it won against India in a tax dispute case.
According to legal experts, the only legal option before India is to succeed in the appeal filed in Hague, although the chances are very less.
Where India is standing legally?
In December, a Permanent Court of Arbitration at The Hague had ruled that the Indian government should pay damages worth $1.2 billion to the company and a case of retrospective tax was wrongly applied on Cairn. The court had ruled that the claim by the Indian government was “in breach of the guarantee of fair and equitable treatment”. Later, India opted to appeal against the judgement.
Since the arbitration process kicked off, the UK-based company was looking for Indian assets abroad for enforcing the award. This included Air India, oil and gas assets, cash held by state-run banks abroad and also Indian ships.
The award was given based on an investment treaty arbitration administered by the Permeant Court of Arbitration (PCA) with a finding of unfair and unequal treatment, expropriation by the government of India by way of retrospective tax legislation. “Cairn Energy has every right to enforce the award globally against the assets of GoI, as per the New York Convention on Recognition and Enforcement of Foreign Awards. Air India being a state-owned company, would be treated as an asset of the government of India,” said S Ravi Shankar, senior partner, Law Senate, a New Delhi-based arbitration firm.
Shankar added that if the Court attaches Air India’s assets situated in the US, they may auction them and pay the proceeds to Cairn. “The only legal option is to succeed in the appeal filed, although the chances are very less,” he said.
Although the GoI has challenged the arbitration award in The Hague, it is pending, and there is no direction barring Cairn from enforcing the award. “On the face of it, the lawsuit does not seem to be misconceived, although, as I understand, the carrier hasn’t received any notice to date. This lawsuit has global repercussions for the GoI as this may trigger multiple enforcement actions around the world against assets of the government of India. The case could serve as a means for Cairn to seize Air India aircraft that land on US soil and other assets,” said Mohit Goel, Partner, Sim And San.
Is there precedence?
Earlier this year, a Malaysian court allowed the seizure of a Pakistan International Airlines Boeing 777 aircraft that landed in Kuala Lumpur after Dublin-based AerCap had filed suit in a British court over unpaid dues. The jet was released nearly two weeks later after the two sides reached an amicable settlement. In 2019, a Jet Airways aircraft was seized by Worldwide Flight Services (WFS) in Schiphol over unpaid fees.
Similarly, in 2019, the battle between ConocoPhillips and Venezuela too had grabbed headlines. ConocoPhillips had approached the US courts to seize Venezuelan state oil company PDVSA's assets to collect $2 billion compensation it had won in an arbitration against Venezuela’s 2007 takeover of its assets. PDVSA had to pay the full amount later ConocoPhillips.
Based on previous experiences, experts indicate that the Cairn Energy arbitration has a strong legal standing. “A combined reading of the New York Convention, the existing UK-India Bilateral Investment Treaty, and international law clarifies that the arbitral award has a solid legal standing. The issue of enforcement of the said award seems to be dicey. It could result in a setback in its disinvestment process as the government of India had recently invited financial bids,” said Krusch Antony, Partner – Arbitration, King Stubb & Kasiva.