The foreign act of state doctrine in English arbitration proceedings

In Reliance Industries v Union of India [2018] EWHC 822 Reliance Industries Limited and BG Exploration and Production India Limited (the “Claimants”) challenged awards made in favour of the Union of India (the “Government”) under the Arbitration Act 1996 (the “AA 1996”). The English High Court (the “Court”) had the opportunity to consider the issue of the applicability of the foreign act of state doctrine to English seated arbitration proceedings.

Factual background

In December 1994, the Government and the Claimants entered into two Production Sharing Contracts (the “PSCs”), whereby the Government granted the Claimants exclusive rights to exploit petroleum resources off the west coast of India. In practice, all gas and oil produced were sold to two Government nominees, GAIL India Ltd ("GAIL") and Indian Oil Corporation ("IOC"). The PSCs were governed by Indian law save that the (London seated) arbitration agreement in each PSC was expressly governed by English law.

In 2008 and 2010, the Government issued two notices to GAIL and IOC pursuant to an Office Memorandum (the “OM”) issued by the Ministry of Petroleum and Natural Gas. The notices directed the Government nominees to withhold payments to the Claimants.

The Claimants commenced arbitration proceedings in December 2010 to resolve a number of matters under the PSCs including the aforementioned withholding of payments. This issue gave rise to the debate over the act of state doctrine. In that regard, the Tribunal had found that it had no jurisdiction to determine whether the OM permitted the government to expropriate the Claimants’ contractual rights. The Claimants challenged this finding under section 67 AA 1996 which (in an English seated arbitration) permits a challenge to the tribunal’s award on its jurisdiction.

The foreign act of state doctrine

In English law, the foreign act of state doctrine, broadly speaking, amounts to a proposition that the courts of the United Kingdom will not readily adjudicate upon the lawfulness or validity of sovereign acts of foreign state. This includes a rule that the validity or effect of a foreign state’s legislation, or executive acts, will not be questioned insofar as they relate to property situated within its territory. In Reliance, the first question for the court was whether the Claimants’ arguments fell within the basic scope of the doctrine. The Claimants had argued, first that there was no constitutional power to make an order with the effect that the Government claimed for the OM (the “Validity Argument”). Second that the scope of the OM did not encompass the issuing of the notices in question (the “Applicability Argument”).

The Court held that the Validity Argument squarely engaged the foreign act of state doctrine. It considered that its applicability to the Applicability Argument was less clear - as assessing the scope of foreign legislation would, of course, not generally engage the act of state doctrine. Ultimately, however, the court regarded the Applicability Argument as a challenge to the validity and effect of executive acts of the Government in relation to the property within its own territory.

The arbitrability of an act of state

The next question for the court was whether, even if the withholding issue were non-justiciable in an English court, it should nevertheless be arbitrable in an English seated arbitration. The Claimants argued that an arbitral tribunal was not an organ of the state and therefore its determination of the relevant issue would not involve one sovereign state calling into question the conduct of another.

The Court rejected this argument and held that the foreign act of state doctrine applied in English seated arbitrations as it applied in litigation before an English court. In particular, its applicability did not depend upon an arbitral tribunal being an organ of a state. The doctrine formed part of a general principle of English private international law which recognised sovereignty of nations. Arbitration tribunals were therefore required to give effect to the doctrine when applying English private international law principles.

Waiver and submission to arbitration in the context of the act of state doctrine

As alternative grounds of challenge, the Claimants sought to argue that the Government waived any objection on the act of state basis by agreeing to arbitration in a commercial contract or that the Government had lost the right to object to the Tribunal having jurisdiction by failing to object timeously.

The Court rejected the first argument on the basis that the mere fact of an agreement to submit contractual disputes to arbitration did not amount to a waiver of the Government’s right to object to Tribunal’s determination of act of state issues. The Court, however, did appear to later accept as an obiter comment, that the foreign act of state doctrine was in principle capable of being waived if the parties so agreed.

In relation to the second ground of challenge, the Court also found that the Government had not lost its right to object: it raised the jurisdictional challenge promptly after it became aware of the issue in relation to the OM when the parties exchanged written submissions on 17 October 2014.

Conclusion

This judgment has provided clarity on the applicability of the doctrine of foreign act of state in arbitration proceedings. Whilst the clarification is helpful, the outcome in the case may seem hard on the Claimants – whose Indian law contractual rights were effectively overridden by the legislative acts in question.

This does not mean, however, that, generally speaking, parties entering into contracts with states would suffer the same fate. For example, there are measures which such parties frequently consider at the contracting stage (to cater for the possibility of such state actions) which would help mitigate the risks of a unilateral change in law. These do not question the effect or validity of the laws of the state. Contracting under a “neutral” law (i.e. other than the state’s own domestic law), the use of “economic equilibrium” clauses/indemnities, and the structuring of transactions to obtain BIT protection against expropriation are examples of such measures. The type of waiver of act of state mooted by the judge may be a further point to give thought to in the context of a contract providing for English arbitration, although the value (and negotiability) of pursuing such an option would need to be weighed against the fact that its efficacy is uncertain (as the judge’s comments are obiter) and the fact that more conventional protections (noted above) could be pursued in any event.

Akshay Sewlikar would like to thank Irene Ding for her assistance in preparing this article.