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ARBITRATION AWARD MAY ALTER DABHOL DEBATE
Mark Kantor
In early September of this year, a 3-person arbitration tribunal chaired by retired U.S. Federal Judge Charles Renfrew issued its final arbitration award requiring the U.S. Overseas Private Investment Corporation (OPIC) to pay $57,140,000 under political risk insurance to subsidiaries of General Electric Company (GE) and Bechtel Enterprises Holdings, Inc. (Bechtel) for expropriation of the $3 billion Dabhol power project in India. That award may fundamentally recast the negotiating leverage of the various parties to that long-running dispute.
The panel held that the Government of India (GOI), the Maharashtra State Electricity Board (MESB) and the Indian State Government of Maharashtra (GOM) had violated the power purchase agreement, their guarantees and the state support agreements for the Dabhol project "for political reasons and without any legal justification." The arbitration was conducted under the auspices of the American Arbitration Association's International Centre for Dispute Resolution.
Prior to the issuance of this arbitration award, resolution of the numerous on-going Dabhol legal disputes had been stalled. This arbitration, however, sidestepped a morass of anti-arbitration injunctions issued by Indian courts, because none of the parties in the OPIC-GE/Bechtel proceedings was subject to Indian court jurisdiction. There are five other international arbitration proceedings pending, four involving the Dabhol project company and Maharashtra State entities and one involving Dabhol and the GOI. Each of these proceedings has been blocked by injunctions issued by the Indian courts. Moreover, there is an ongoing dispute in the Indian courts as to whether the Board of Directors of the project company is properly constituted, with Maharashtra seeking a court order that would de facto prevent the Board from taking the corporate actions necessary to pursue those arbitrations. Another Indian court order placed the assets of Dabhol, including most obviously the power plant itself, in court-supervised receivership following the Enron bankruptcy filing. The result of the award, though, is to create a $57 million obligation of the Government, immediately due to OPIC, and free from Indian court interference. This claim stands in addition to approximately $138 million outstanding under a project finance loan from OPIC to the Dabhol project, which is itself supported by the Government of India counter-guarantee of the Maharashtra state obligations under the power purchase agreement.
The GE/Bechtel claims were based upon classic arguments of creeping expropriation and central government responsibility under informational law for the conduct of its subdivisions, agencies and instrumentalities. Among the many actions for which the Indian Government was held responsible were:
- the MESB's failure to make payments under the power purchase agreement;
- the MESB's purported rescission of the power purchase agreement;
- the GOM's refusal to honor its guarantee of the power purchase agreement;
- the GOM's refusal to honor its obligation under certain support agreements for the project;
- the orders of the Maharashtra Electricity Regulatory Commission asserting jurisdiction over the project at the request of MESB, enjoining international arbitration and blocking implementation of the escrow arrangements under the project documents;
- the efforts by the MESB to block Dabhol's Board of Directors from exercising corporate authority;
- the various Indian court orders preventing enforcement of the project company's rights under the project documents, most particularly the right to international arbitration;
- the conduct of the government-controlled Indian financial institutions (IFI's), as project lenders, in preventing Dabhol from terminating the power purchase agreement;
- the appointment by an Indian court of a receiver for Dabhol's assets at the request of the IFI's;
- and, ultimately, the refusal of the Government of India to honor claims under its counter-guarantee of the obligations of Maharashtra with respect to the power purchase agreement.
GE and Bechtel made their claims under equity political risk insurance policies originally issued by OPIC in 1995, up to the coverage ceilings in those policies. GE and Bechtel each hold 10% of the equity of the Dabhol Power Company. The largest project sponsor, now-bankrupt Enron Corp. holds 65%. The GOM was entitled to 30% of the project's equity, following renegotiations in 1995. However, as a result of the failure to honor subsequent capital calls, the GOM's equity stake in the project has been substantially diluted since that time.
The impact of this award will significantly alter the legal and practical leverage of OPIC, the project sponsors and the international lenders in their years-old battle with the Indian political authorities and the IFI's over the course of the Dabhol project. Most importantly, OPIC's right to reimbursement of its $57 million payment is enforceable under international law. In 1997, India and the U.S. entered into an Investment Incentive Agreement for the purpose of encouraging support by OPIC of U.S. investment in India. The Investment Incentive Agreement addresses, among other matters, Investment Insurance issued by OPIC covering "loss of investment, in whole not in part, in a project due to expropriation or confiscation by action of the Government of India." Under Article 3 of that Agreement:
"(b) If the Issuer [OPIC] makes a payment to any person or entity, as Issuer of Investment Insurance or an investment guaranty in connection with any Investment Support, the Government of India shall recognize in connection with any dispute contemplated under the provisions of Article 6(c) hereof [State-to-State arbitration] the transfer to the Issuer in connection with such payment of the right to exercise the rights and assert the claims of such person or entity.
(c) With respect to any interests transferred to the Issuer or any interests to which the Issuer succeeds under this Article, the Issuer shall assert no greater rights than those of the person or entity from when such interests were received, without prejudice to any other rights that the two parties may have in their sovereign capacities."
These bilateral treaty provisions codify as an international law obligation the well-recognized insurance law doctrine of subrogation, under which an insurer succeeds to the claims of its insured upon honoring a claim under the insurance policy. The right of an insurer to assert subrogation rights also exists under customary international law and the domestic law of England (the law chosen as applicable to certain of the Dabhol project agreements) and the domestic law of India.
As made clear by Article 3(c) of the Investment Incentive Agreement, however, OPIC's rights as subrogee will be no greater than the rights held by GE and Bechtel as sponsors of the Dabhol project. The Indian authorities have alleged since at least 2001 that the Dabhol project agreements are unenforceable by virtue of fraud, corruption, misrepresentations and illegality. Those allegations did not form a part of the OPIC-GE/Bechtel proceedings, and accordingly they have yet to be tested in an independent forum. If any of these allegations were to prove correct, then OPIC may be unable to obtain reimbursement of its insurance payments from the GOI. In such circumstances, OPIC would need to consider whether a right existed to recover the insurance proceeds from GE and Bechtel.
In addition to creating a direct financial claim against the GOI under international law, the OPIC-GE/Bechtel arbitration award will also influence other aspects of the Dabhol dispute. For example, the award will focus OPIC on the measures it is entitled to take as a direct lender to the project company, with about $138 million of principal still outstanding. Since the GOI indirectly supports that project loan by virtue of its counter-guarantee of Maharashtra's obligations under the Dabhol power purchase agreement, the arbitral panel's holding that an expropriation has occurred will undoubtedly have an impact on how OPIC conducts itself as lender. Other international lenders may also be influenced by the award, not least OPIC's sister U.S. government agency the Export-Import Bank of the United States (U.S. Eximbank). U.S. Eximbank also lent monies to the project, but in its case fully guaranteed by the IFI's. Whether the expropriation holding affects the financial relationship between U.S. Eximbank and the IFI's remains to be seen.
In addition to the Bechtel and GE claims, another political risk insurance claim still exists. Enron also filed a claim with OPIC under a political risk policy it too initially purchased from OPIC in 1995. The situation with respect to an Enron claim is substantially different, however, from the GE/Bechtel circumstances. As is well known, financial and accounting irregularities triggered the collapse and bankruptcy of Enron in late 2001. Under the application procedures for obtaining OPIC political risk insurance, an insured party is obligated to provide its own financial statements to OPIC and make representations regarding their accuracy and compliance with accounting principles. A material misrepresentation entitles OPIC to remedies, including termination of the rights of the insured under the OPIC policy. It remains to be seen whether a reorganized Enron would ever seek to aggressively enforce its claims under the OPIC policy.
Apart from debtor-creditor relations, the single largest impact of the award may prove to be the spotlight it focuses on the conduct of the Indian authorities by virtue of the expropriation holding. Various Indian court injunctions have held at bay other international arbitral tribunals from scrutinizing that conduct. However, because this dispute did not involve Indian parties, the OPIC-GC/Bechtel arbitration proceeded to a conclusion that cannot help India in its efforts to attract foreign investment, nor its efforts to attract further OPIC, U.S. Eximbank or other official U.S. economic support. Thus, this arbitration award may significantly alter the Indian Government's perception of the relative advantages and disadvantages of its current Dabhol strategy.
Article 6 of the Investment Incentive Agreement establishes a dispute resolution mechanism for disagreements between the U.S. and India with respect to OPIC claims to recovery from India. Under that Article, the two Governments are required to negotiate a possible resolution. If, after six months from the date a Government requests such negotiations, no resolution has been reached, then either Government may trigger the establishment of an ad hoc arbitral tribunal. If one of the Governments does not cooperate in the appointment of the arbitrators, the Secretary-General of the Permanent Court of Arbitration in The Hague is empowered to make the necessary appointments. The arbitrators are authorized to determine their own procedures and are required to base their decision on "the applicable principles and rules of international law." There is no public information yet available as to whether India or the United States has invoked these dispute resolution procedures.
Of course, legally binding arbitration may not be the most likely means of addressing OPIC's claim against the Government of India. Instead, Government-to-Government negotiations are the more probable process. OPIC recently pursued such negotiations to conclusion in connection with efforts to recover a $217 million political risk insurance payment on account of arbitration awards in favor of two Indonesian geothermal power projects caught in the Asian financial crisis, the Dieng and Patuha projects sponsored by Mid-American Holdings, Inc. (formerly CalEnergy Inc.). That negotiation demonstrates both the advantages and perils of using a diplomatic platform to resolve investment disputes, especially if the negotiations relate to a high-profile project at times of great economic and political upheaval.
Acting as subrogee of the claims of the project companies, OPIC demanded payment of the awards by Indonesia. Initially, the Indonesian Minister of Finance publicly rejected any prospect of paying the awards, but Indonesia softened its position under political pressure from the U.S. government. However, U.S. impatience rose as discussions between the two governments dragged on for months, and remarks of U.S. Ambassador Robert Gelbard quoted in the press created a stir in Jakarta that the United States was threatening to seize Indonesian assets: "There is always the possibility of declaring expropriation…. If we were to do this, it would result in a dramatic deterioration of the rupiah and would hurt Indonesia very much." While the "seizure" interpretation placed on these words by critics may seem strained to international lawyers, the uproar in Indonesia further complicated intergovernmental discussions.
The Indonesian and U.S. Governments finally reached agreement in mid-2001, with Indonesia agreeing to reimburse OPIC for the insurance payment on terms similar (but not identical) to the terms of its rescheduled sovereign Paris Club debts. However, those painful and often public negotiations have taken a toll on the Indonesian public perception of the U.S. Both India and the U.S. Government will undoubtedly seek to learn from the Indonesian negotiations, in the hope of avoiding any adverse impact on relations between the two countries.
