Cairn Tax Case: What Indian Assets Can Cairn Go After In The U.S.?
The legal battle between the Indian government and Cairn Energy Plc is likely to play out in the United States after the company asked a district court to enforce the $1.2 billion award granted in its favour by an international arbitral tribunal. The dispute relates to the tax demand on Cairn UK Holdings Ltd. for alleged capital gains it made in the 2006 business reorganisation of its Indian holdings.
If a settlement isn’t arrived at and Cairn moves ahead with the proceedings before the U.S. court, the enforcement against the Indian government’s assets will be circumscribed by the Foreign Sovereign Immunities Act, experts told BloombergQuint.
Generally speaking, assets of a foreign sovereign in the United States are immune from execution under the FSI Act except as explicitly provided, Anthony Ullman, partner at Dentons U.S. LLP, pointed out.
So far, there have been only a few instances where courts in foreign jurisdictions have seized state assets to enforce a claim, Promod Nair, founding partner at Arista Law Chambers had told BloombergQuint in an interview earlier. For instance, he pointed out, an airplane owned by a Saudi Arabian prince was seized by a German Court in an enforcement proceeding.
Also read: Why India Lost To Cairn Energy: BQ Exclusive
What Does Cairn’s Petition Say ?
Cairn Energy PLC and Cairn U.K. Holdings Ltd., have filed a petition in the United States District Court Of Columbia for obtaining confirmation and recognition of the award by the Hague-based arbitration tribunal against India.
This is to recover losses caused by India’s “unfair and inequitable” treatment of their investments, the petition says.
Both Cairn entities have made the following arguments in support of their petition:
The arbitration tribunal unanimously granted an award in Cairn’s favour while dismissing the challenge by India.
The U.S. District Court has jurisdiction under the Federal Arbitration Act, which allows a party to initiate a civil action in the U.S. against a foreign state or its subdivision.
Award against India is enforceable for two reasons — first, the country waived its sovereign immunity by signing the New York Convention. Second, the award has become final and binding under the U.K. - India bilateral investment treaty.
The Cairn entities have requested the court to make a judgment for an amount equal to the damages and interest granted by the Hague Tribunal. Accordingly, it has asked for-
$984.2 million for net proceeds that Cairn U.K. could have received from the planned sale of shares in Cairn India Ltd., along with compound interest.
$240.6 million for withheld tax refund arising from the sale of shares in the Indian entity to Vedanta Ltd.
$7.9 million against withheld tax refunds arising from its transaction with Malaysia’s Petronas.
Enforcing The Award: Challenges
Cairn’s enforcement proceedings of the award against India will be governed by U.S. laws dealing with arbitration and attachment of assets. Such proceedings may also be subject to the rules of sovereign immunity under international law.
To be clear, the Foreign Sovereign Immunities Act deals with lawsuits against a foreign nation in U.S. courts and establishes certain limitations on grounds of state immunity.
The Act says that “property in the United States of a foreign state … used for a commercial activity in the country, shall not be immune from attachment in aid of execution, or from execution, upon a judgment entered by a court of the United States...”. In short, Indian government assets which are used for commercial activity may be attached by the U.S. courts to enforce the award.
This will be only if the judgment is based on an order confirming an arbitral award rendered against the foreign state, provided that attachment in aid of execution, or execution, would not be inconsistent with any provision in the arbitral agreement, Ullman explained.
Adam Lurie, head-dispute resolution practice at Linklaters LLP pointed out that Cairn could seek bank deposits or other assets located in the United States.
Assets against which an award can be enforced may include buildings owned by Air India, a ship belonging to a government company or moneys available with the State Bank of India, Nair pointed out by way of illustration. ‘As long as an investor is able to show that certain assets are controlled by the Indian state, its agencies or instrumentalities, they can be attached for enforcement purpose.’
But there are some assets that Cairn can’t go after. For instance, assets used for non-commercial governmental purposes like embassy buildings, Ullman opined.
Similarly, funds held by central banks are dealt with specifically in the FSI Act. Property of a foreign state is immune from attachment and execution if it belongs to a foreign central bank or monetary authority held for its own account, unless such bank or authority, or its parent foreign government, has explicitly waived its immunityAnthony Ullman, Partner, Denton US LLP
What Recourse Does The Indian Government Have?
The first step for India against any adverse order would be that it can oppose the confirmation of the award, can appeal any such confirmation in the court of appeals, and also oppose subsequent enforcement of any judgement against it, Lurie said.
However, the U.S. law provides very narrow ground to a court for refusing to enforce a foreign arbitral award.
A confirmation is being sought under the New York Convention and its implementing legislation in the present case, Ullman said. A U.S. court confirms an award falling under the Convention unless it finds one of the grounds for a refusal to enforce which is specified in the Convention itself, he said.
The grounds for refusing to enforce an award are limited. Possible defense that can be adopted includes an argument that the party against which enforcement of the award is sought was not given a notice of the proceeding or was otherwise unable to present its case.Anthony Ullman, Partner, Dentons US LLP
Other defenses include that the award dealt with a matter outside the scope of the arbitration agreement or that the enforcement of the award is contrary to the public policy of the country in which enforcement is being sought, Ullman added.
For now, the U.S. District Court has served a summons for civil action on the Indian government, directing it to file replies to Cairn’s plea within 60 days.
(Corrects an earlier version that misstated Dentons U.S. LLP partner Anthony Ullman’s last name.)