A Cautionary Tale for Arbitration Drafting and Enforcement: Insights from the Deutsche Telekomv. India Enforcement Battle
A recent case in the United States Court of Appeals raises a point which should concern all those drafting or interpreting the scope of arbitration clauses and considering enforcement options.
The facts were relatively straightforward. Through a subsidiary in Singapore, Deutsche Telekom AG (“DT”) had invested around USD 100 million for a 20 per cent stake in an Indian company called Devas Multimedia Private Limited (“Devas”) which provided satellite-based telecommunications. Devas had an agreement in 2005 with a company wholly owned by the Indian government called Antrix Corporation Limited (“Antrix”) to lease a portion of the electromagnetic spectrum on two satellites that Antrix would launch into space. Devas would then provide multimedia services throughout India. In 2011, however, the Indian government changed its mind about the use of that part of the spectrum and Antrix cancelled the lease.
DT was determined to seek compensation for the loss of its investment and so invoked the terms of a bilateral investment treaty between India and Germany. That treaty provided (in short) that investors from either country were entitled to be treated fairly and to arbitration of investment disputes under the well-known UNCITRAL rules.
DT therefore began arbitration in Switzerland under the relevant treaty. India disputed the claim at every turn. India objected that the dispute was not arbitrable because (a) DT was not a covered investor because its investment in Devas occurred through a Singapore-based entity and (b) Devas’s activities in India were not covered investments, but rather pre-investment activities. Both these arguments failed before the panel and subsequently before the Courts of Switzerland, Germany and Singapore.
DT then sought recognition of the award in the United States. At first instance, the Court rejected India’s arguments and confirmed the award.
On appeal, however, the Court of Appeals ruled that the first instance Court had not considered the issues correctly and sent the case back to the first instance Court for further consideration.
While it rejected arguments about sovereign immunity and forum non conveniens (which could not succeed in circumstances where the foreign government concerned had agreed to arbitrate), the Court of Appeals noted there was a distinction between jurisdictional arguments and merits arguments. In the United States, an objection challenging the existence of an arbitration agreement counts as a jurisdictional defence but an objection that the dispute falls outside the scope of an arbitration agreement is treated as a merits defence under the New York Convention.
The key issue, which was (for the reasons already given above) a merits rather than a jurisdictional argument, was the arbitrators’ authority to decide the scope of their own jurisdiction, often called the competence-competence.
DT pointed to the fact that the relevant treaty incorporated (in particular) UNCITRAL Arbitration Rules art. 21.1 (1976): the “arbitral tribunal shall have the power to rule on objections that it has no jurisdiction.” The United States Court of Appeals has twice ruled that this was sufficient to establish the arbitrators’ conclusive authority in that matter and so DT must have been confident in its position.
Unfortunately, however, the Court of Appeals considered that the approach taken by the first instance Court was wrong. Arbitration is a matter of contract and therefore of contractual interpretation, in which context always matters.
The Court of Appeals was swayed by the fact that in both India and Germany, courts always have the power to review the question of the jurisdiction of arbitrators even if the arbitrators have ruled on the issue themselves. That was the legal context in which the parties would understand the incorporated rule, which (on a narrow reading) simply gave arbitrators the power to deal with objections to their jurisdiction and did not preclude courts from considering the issue or expressing a different view.
Principles of both Indian and German law on confirmation of awards were also expressly stated in the treaty. The treaty required that any award “shall be enforced in accordance with national laws of the [state] where the investment has been made.” The Court of Appeals noted: “Here, that country was India, and its law sharply distinguishes between authorizing arbitrators to consider arbitrability on the front end and foreclosing courts from doing so on the back end.”
The Court of Appeals therefore concluded that the first instance Court would have to consider afresh whether the claim made by DT was in fact within the scope of the arbitration provisions of the treaty.
This case is a salutary reminder to practitioners of a number of important considerations.
First, arbitration agreements (even ones supplied ready-made by treaty and international rules) are contracts which will be interpreted like other contracts. The legal backdrop in the parties’ “home” jurisdictions is important and must be considered.
Second, careful consideration must always be given at the outset to the practicalities of enforcement through state Courts in a jurisdiction which may not even appear relevant at first.
This case concerned enforcement in the United States of an award made in Switzerland as the result of an investment by a Singapore-based subsidiary of a German company in an Indian company.
Simon Winter, Partner