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Thursday, July 29, 2021

Can India invoke state sovereignty to prevent seizure of assets abroad in Cairn Energy case?

State immunity can be invoked to resist the seizure of sovereign assets, but not commercial properties. Besides, fighting the case will consume an enormous amount of resources and attract bad press

Written by Prabhash Ranjan |
Updated: July 18, 2021 11:27:33 am
A Cairn Energy worker inside one of the company's plants (File photo)

The news of a French court authorising Cairn Energy to attach Indian assets in France sent shock waves in New Delhi. Cairn Energy has been attempting to seize Indian assets in several jurisdictions to recover $1.7 billion due from India. Last year, an arbitration tribunal under the India-United Kingdom bilateral investment treaty (BIT) indicted India for breaching its obligations by imposing taxes retrospectively on Cairn. The investors of Devas Multimedia have also moved a federal court in the US to seize assets of Air India to recover compensation awarded by an arbitration tribunal.

It’s a terrible advertisement for India at a time when it wishes to project itself as a prime destination for foreign investment. This episode puts India in the league of countries like Pakistan, Congo, Venezuela, Russia and Argentina, who have been part of attachment proceedings overseas due to their failure to comply with international arbitral awards.

Some suggest that India can invoke state immunity to stop the appropriation of its assets abroad. State immunity is a well-recognised doctrine in international law which safeguards a state and its property against the jurisdiction of another country’s domestic courts. This covers immunity from both jurisdiction and execution. Despite the universal acceptance of this doctrine, there is no international legal instrument in force administering its implementation in municipal legal systems of different countries. Attempts are underway to create binding international law on the application of the rules of state immunity such as the United Nations Convention on Jurisdictional Immunities of States and Their Property (UNSCI). However, this convention is yet to be ratified by 30 countries — the minimum number required to bring it in force, as per Article 30(1) of UNSCI. India has signed the convention, but not ratified it.

The absence of an international legal instrument results in countries dealing with questions of immunity through national legislations and domestic judicial practices. While some common law jurisdictions like the US and the UK have legislations codifying state immunity, in many civil law countries, the judiciary squarely deals with issues of state immunity. Certain jurisdictions are perceived as favourable over others when it comes to the execution of investment treaty arbitration awards. This encourages “forum shopping”, where foreign investors approach countries where the possibility of executing the award is higher.

Over the years, the doctrine of state immunity has progressed from absolute immunity (immunity from any foreign proceedings unless the state gives its consent) to restrictive immunity (immunity only for the sovereign functions of the state). By and large, most prominent jurisdictions follow the concept of restrictive immunity. In the context of the execution of the investment treaty arbitration awards, it implies that state property that serves sovereign functions — such as property of the diplomatic missions, central bank assets, etc. — cannot be attached.

However, properties serving commercial functions are available for seizure. The International Court of Justice in the Jurisdictional Immunities of the State (Germany v. Italy: Greece intervening) recognised the exception for commercial assets. But, in practice, it is not always easy to draw an exact line dividing the two types of property.

In the case of India, the most popular commercial property that foreign investors would target for attachment are the global assets of India’s public sector undertakings such as Air India. To attach the assets of these PSUs, it would have to be shown that these companies are nothing but the “alter ego” of the Indian state.

If India wishes to brazen it out against these corporations, it needs to carefully study the laws on state immunity in different jurisdictions where attachment proceedings are likely to come up. State immunity can be invoked to resist the seizure of sovereign assets, but not commercial properties. Besides, fighting cases will consume an enormous amount of time, money, and resources, in addition to attracting bad press internationally. A better option would be to admit that amending the tax law retrospectively was a mistake and comply with the international ruling, putting an end to this international embarrassment.

This column first appeared in the print edition on July 17, 2021 under the title ‘Misstep on Cairn’. The writer is senior assistant professor, Faculty of Legal Studies, South Asian University.

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