India found in breach of BIT with Germany by UNCITRAL tribunal in respect of agreement for lease of electromagnetic spectrum
Deutsche Telekom AG v. the Republic of India, PCA Case No. 2014-10
An UNCITRAL tribunal dismissed India’s preliminary objections and found it in breach of the FET standard in the India–Germany BIT in a PCA-administered arbitration initiated by Deutsche Telekom AG (DT). The interim award on liability was rendered on December 13, 2017.
Background and claims
An agreement for the lease of S-band electromagnetic spectrum on two satellites (Agreement) was concluded on January 28, 2005 between Devas Multimedia Private Limited (Devas) and the Indian state-owned company Antrix Corporation Limited (Antrix). Between 2008 and 2009, DT’s wholly owned Singaporean subsidiary Deutsche Telekom Asia Pte Ltd (DT Asia) acquired roughly USD 97 million worth of shares in Devas, reaching a shareholding of 19.62 per cent.
Around April 2004, discussions had commenced within various Indian government agencies—including the Ministry of Defence, the Indian Space Research Organisation (ISRO) and Department of Space (DOS)—on reserving S-band electromagnetic spectrum for military and strategic use. At a press conference in February 2011, the DOS and the ISRO announced the decision to terminate the Agreement. On February 16, 2011, the DOS secretary issued a note recommending the termination of the Agreement to the Cabinet Committee on Security (CCS), the highest decision-making authority. One day later, based on this note, the CCS decided that “in light of the policy of not providing orbit slot in S Band to Antrix for commercial activities, the Agreement . . . shall be annulled forthwith” (CCS Decision).
In the arbitration, initiated on September 2, 2013, DT argued that India illegally repudiated the Agreement for commercial reasons and political considerations arising out of certain other corruption allegations against Indian space authorities. According to DT, India’s conduct breached the BIT standards on expropriation and FET.
India, in turn, argued that it instructed Antrix to terminate the Agreement for reasons linked to the country’s essential security interests, and that certain threshold issues precluded DT from asserting its claims in the arbitration: (1) the BIT does not cover indirect investments and indirect investors; (2) it does not protect pre-investments; and (3) it contains an “essential security interests” clause.
The tribunal considered this issue through two questions: (1) whether the BIT required the home state national to hold the relevant assets directly, and (2) whether the home state national who did not directly own the assets affected by the contested measures could claim for BIT breaches.
The tribunal found no requirement of direct ownership in the definition of “investment” in the BIT. The provision requires that the relevant asset be “invested” but did not specify that it must be invested directly. In the absence of any qualifying language in the BIT as to the indirect or direct nature of investments, the tribunal interpreted the terms “investment” and “invested” according to VCLT Article 31(1), taking into account the ordinary meaning, context, and object and purpose of the treaty. It also relied on Guaracachi v. Bolivia and Siemens v. Argentina, which held that an unqualified definition of “investment” would include indirect investments through the acquisition of shares.
The tribunal also looked into the definition of “investor.” For a home state national or company to be considered an investor, first, it must have “effected” or be “effecting” an investment and, second, such investment must be in the territory of the host state. The tribunal relied on CEMEX v. Venezuela to state that investment tribunals have consistently refused to read into the reference to the territory of the host state a requirement for direct ownership of the assets constituting the investment.
India’s submission that the definition of “investment” grants direct shareholders the standing to bring an expropriation claim, with the result that indirect shareholders would lack such standing, was also not supported by the language of the BIT, according to the tribunal. The arbitrators pointed out that DT did not present itself as the beneficiary of protections owed to its subsidiaries; it was instead claiming for the reflective loss that it itself suffered due to India’s alleged breaches of the BIT. Therefore, the tribunal concluded that the BIT could not be read to restrict the shareholder’s right to claim on its own behalf.
India submitted that DT’s activities in India remained at a pre-investment stage, since DT had not obtained the necessary governmental approvals, including the crucial Wireless Planning and Coordination (WPC) licence, and that the shares in Devas are not a relevant investment, since India neither expropriated them nor otherwise prevented the shareholders from managing the company.
While the tribunal agreed that the shares in Devas should not necessarily be viewed as an investment in isolation of the company’s activities, it considered that DT had contributed substantial financial resources to obtain its indirect shareholding in Devas and that those equity contributions were protected investments under BIT Article 1(b)(ii). The tribunal found that while Devas had not obtained the WPC licence, the BIT’s definition of “investment” could not be restricted to going concerns holding all the relevant authorizations to carry out their business.
Essential security interests
The tribunal first held that BIT Article 12, which contains the clause on essential security interests, must be interpreted on its own terms, without incorporating requirements from the customary international law state of necessity defence that were not present in the treaty text. It did not consider that Article 12 is limited to situations of “emergency,” or that the state must prove that a measure is the “only one” available, or that it must not have contributed to the situation of necessity.
Article 12 provides for the following conditions: (1) a Contracting Party must apply a prohibition or restriction, (2) for the protection of a state’s “essential security interests,” and (3) “to the extent necessary for” such protection.
The CCS Decision held that India would not be able to provide S-band electromagnetic spectrum to Antrix for commercial use and consequently determined that the Agreement needed to be annulled. Accordingly, on the first condition, the tribunal was of the view that the disputed measure was a prohibition and restriction.
The tribunal noted that while taking back the S-band from Antrix–Devas, there was no indication that the CCS allocated it to the military or otherwise earmarked that spectrum for security interests. It also noted that the mention of “strategic” and “societal” needs is recurrent in the majority of documents leading to the CCS Decision, and these needs are almost invariably presented together. While the so-called “strategic needs” expressed by the armed forces, as well as the national security interests expressed by internal security agencies, would meet the test for essential security interests, the tribunal concluded that no reasonable reading of BIT Article 12 could include the other “societal needs” such as train tracking, disaster management, tele-education, tele-health and rural communication, without distorting the natural meaning of the term “essential security interests.”
For a successful invocation of Article 12, the existence of a much more restricted range of interests must be shown, which India failed to do, according to the tribunal.
Violation of the FET standard; other claims dismissed
The tribunal found that the decision to annul the Agreement was arbitrary and unjustified, as it was manifestly not based on facts, but on conclusory allegations, and was the product of a flawed process. It concluded that the rush to seek an annulment of the Agreement following press reports of corruption, which triggered all the subsequent actions, was taken without any documentary evidence, sound justification or record. In addition, the tribunal concluded that the post-annulment facts corroborate the conclusion that there were no military needs that were irreconcilable with the Agreement.
Even if there were proof of any military and societal needs irreconcilable with the Agreement, the tribunal reasoned, it was incumbent on India to raise the issues it had identified in the Agreement with Devas or DT. The tribunal found that at no time after the conclusion that the Agreement needed to be annulled was arrived at did Devas or DT get the opportunity to explain, address or meet the concerns asserted. Consequently, it held that India’s conduct breached the FET standard in multiple respects.
With relation to the expropriation and full protection and security claims, the tribunal chose to dispense with addressing these claims, in the interest of judicial economy, as their resolution would not change the outcome of the dispute in terms of quantification of damages.
Decision and costs
The tribunal held that it had jurisdiction over the dispute and that India breached the FET standard under BIT Article 3(2). The tribunal will take the necessary steps for the continuation of the proceedings toward the quantum phase.
India challenged this interim award before the Swiss Federal Tribunal, the court of supervision of the arbitration, arguing that the tribunal did not have jurisdiction to hear the dispute, on the basis of the same three threshold objections raised before the tribunal. In a judgment dated December 11, 2018, the Federal Tribunal dismissed these arguments and rejected India’s application for the annulment of the award by a 3:2 majority.
Notes: The tribunal was composed of Gabrielle Kaufmann-Kohler (president, Swiss national), Daniel M. Price (claimant’s appointee, U.S. national) and Brigitte Stern (respondent’s appointee, French national). The award is available at https://www.italaw.com/cases/2275
Trishna Menon is an Associate at Clarus Law Associates, New Delhi, India.