Cairn Energy’s investment arbitration proceedings against India recently demonstrated the importance of default arbitrator nomination procedures in international arbitration.

Cairn Energy’s dispute with India

In March 2015, Cairn UK Holdings Limited received a draft assessment order from Indian tax authorities, requiring payment equivalent to US$1.6 billion, plus any applicable interest and penalties, in respect of the 2006-2007 fiscal year.^[1]  The assessment was made under a 2012 law pursuant to which the Indian government has tried to tax transactions retrospectively,^[2] in this case due to a group reorganization that facilitated Cairn Indian Limited’s IPO Cairn Energy, the ultimate parent company of both Cairn UK Holdings Limited and Cairn India Limited, contests the assessment.

While other companies have sought to resolve similar issues before the national Indian courts, Cairn Energy commenced a claim under the UK-India Investment Promotion and Protection Treaty, arguing that India has expropriated Cairn Energy’s investments by attaching its shares in Cairn Indian Limited.^[3]  Cairn Energy filed its notice of dispute in March 2015 and appointed an arbitrator for a three-person tribunal in late May 2015.^[4]

Initially, the Indian government refused to participate in the arbitration proceedings and failed to appoint an arbitrator, arguing that there was no basis for the claim in the treaty.  This prevented the arbitration proceedings from going forward.  But the treaty specifies a default appointment procedure, allowing either party to request the President of the International Court of Justice (ICJ) to make appointments to the tribunal if a party fails to make a timely appointment.^[5]  Cairn Energy relied on this provision and applied to the President of the ICJ on September 22, 2015.  Only eight days later, India announced that it would appoint its arbitrator and participate in the proceedings.^[6]

Default nomination procedures: strategic choices in arbitration

Energy companies often operate in complex legal and commercial environments, where there may be an incentive for a counter-party to strategically delay or disrupt proceedings. As Cairn Energy’s recent experience shows, invoking default nomination procedures, where available, can help to prevent recalcitrant parties from derailing proceedings, in both investor-state and commercial arbitration.

In the investment treaty context, normally an investor making a claim must rely on the default appointment mechanisms in the applicable treaty, to the extent that any exist.  Still, some treaties allow the claimant to select the forum for bringing proceedings against the host state in the event of a dispute concerning an investment.  For instance, under the Energy Charter Treaty, the claimant has the option of submitting a dispute to ICSID, a tribunal under the UNCITRAL arbitration rules, or an Stockholm Chamber of Commerce (SCC) proceeding.^[7]  Each set of rules contains different default appointment procedures and, if an investor expects a host state government to try and frustrate the proceedings, it may select the arbitral rules that best couple strong institutional guidance and uncomplicated appointment procedures.

In the commercial arbitration context, parties should ensure that their arbitration agreements specify default nomination procedures.  The vast majority of institutional rules, including those most frequently used by energy companies, either allow or instruct the institution to appoint an arbitrator (or arbitrators) when one of the parties fails to make an appointment.  If choosing ad hoc arbitration, parties could use the UNCITRAL arbitration rules which, by default, permit a party to apply to the Secretary-General of the Permanent Court of Arbitration at the Hague if another party fails to nominate an arbitrator.  Parties should also understand the procedures in the jurisdiction that they agree to be the legal seat or place of arbitration, as certain national arbitration laws may offer strategic benefits to the party pursuing arbitration.^[8]  In any event, parties should ensure that courts in the seat have authority to appoint an arbitrator if the other side fails to do so.

_{[1] Indian Tax Dispute, Cairn Energy Press Release, March 10, 2015.}

_{[2] This law has been used in an attempt to collect retrospective taxes against other companies as well, such as Royal Dutch Shell and Vodaphone.  See Shell Wins India Tax Case, Reuters, Nov. 18, 2014, and Vodaphone Wins Tax Case in India, The Wall Street Journal, Oct. 8, 2015.}

_{[3] Indian Tax Dispute, Cairn Energy Press Release, March 10, 2015.}

_{[4] Cairn Energy Files Arbitration Notice in Indian Tax Dispute, Business Standard, March 12, 2015; Cairn Names Ex-Bulgarian Minister Arbitrator for Tax Dispute, NDTV, May 26, 2015.}

_{[5] UK-India Investment Promotion and Protection Treaty, Article 9(c)(ii).}

_{[6] Government Changes Tone on Cairn Tax Case, The Financial Express, Oct. 1, 2015.}

_{[7] Energy Charter Treaty (1994), Article 26(4).}

_{[8] For example, under Section 17(2) of the English Arbitration Act 1996, a participating party can appoint its party-appointed arbitrator as sole arbitrator if the party in default fails to make an appointment.}