8 February 2022

On 21 December 2021, the Hague Court of Appeal set aside the arbitral award rendered in the Cairn v. India arbitration because Cairn, the defending party, did not object to India's setting aside claim during setting aside proceedings, and without analysing the validity of the setting aside grounds raised by India. While this decision might be justified by procedural efficiency, it still raises several questions.

Facts and procedural steps

In the UNCITRAL award rendered in December 2020, the arbitral tribunal – seated in the Netherlands – had ordered India to pay around USD 1.2 billion in compensation for violating the India-UK BIT when retroactively applying a tax measure to Cairn.

Cairn filed for enforcement of this award before the Hague District Court, which was granted on 8 January 2021. However, only a couple of weeks later, India modified its tax regulations and agreed with Cairn that it would refund the taxes unduly paid if Cairn withdrew the various enforcement actions it had already initiated.

On 22 March 2021, India initiated setting aside proceedings before the Hague Court of Appeal. It claimed that the arbitration agreement was invalid (Article 1065(1)(a) DCCP) and that the award violated public policy (Article 1065(1)(e) DCCP).

The Hague Court of Appeal's lack of judgment

During the oral hearing, Cairn stated that considering India's modified tax rules regulations, it did not object to granting India's claim to set aside the arbitral award.

In its decision – published on 6 January 2022– the Hague Court of Appeal held that in view of Cairn's decision not to object to the setting aside application, "the court will quash the arbitral award without further investigation into the grounds advanced by India." It further declared the judgment provisionally enforceable and mentioned that under Article 1062(4) DCCP, the setting aside of the arbitral award automatically entailed the setting aside of the exequatur granted on 8 January 2021.

Besides mentioning that both parties agreed to the setting aside of the award, the Hague Court of Appeal did not review the validity of any of the grounds raised by India with its setting aside application.

Judgments must be substantiated under Dutch law

However, Dutch law clearly requires that a judgment must contain the grounds on which it is based, thereby resembling Article 6(1) of the European Convention on Human Rights (see ECtHR 16 August 2013, Application no. 35227/06 (Chorniy v. Ukraine), § 39). Such requirement is included in Article 5(1) of the Judicial Code (Wet op de Rechterlijke Organisatie) and can also be found in Articles 30 DCCP and 230(2)(e) DCCP and traced back to Article 121 of the Dutch Constitution (Nederlandse Grondwet). According to the Dutch Supreme Court (see e.g., Supreme Court 29 June 2001, NJ 2001/494-495 and Supreme Court 25 October 2002, NJ 2003/171 and Supreme Court 13 July 2007, NJ 2007/407 (only in Dutch)), one of the fundamental principles of due process is that every judgment is substantiated in such a manner that it provides sufficient insight into the underlying reasoning to make the decision verifiable and acceptable to the parties (and third parties, including the higher courts).

Surprisingly, the decision rendered by the Hague Court of Appeal on 21 December 2021 did not fully respect this basic rule of due process. Article 1065 DCCP is clear: an arbitral award can only be set aside if the claimant demonstrates that (a) there was no valid arbitration agreement, (b) the arbitral tribunal was not appointed according to the applicable rules, (c) the tribunal violated its mandate, (d) the award was not signed by the arbitrator(s) or lacks any reasoning whatsoever or (e) the award is contrary to public policy. The agreement of both parties to the setting aside of the award is not an additional ground permitting Dutch courts to set aside awards. However, the Hague Court of Appeal did not explain how its decision aligned with the aforesaid grounds for setting aside.

Justified by procedural efficiency?

One possible explanation pertains to procedural efficiency. Since the parties were unable to 'undo' the enforcement of the award already obtained on 8 January 2021, another way of rendering the arbitral award unenforceable was to have it set aside.

Courts are able to honour settlements between parties by recording it in an official court report (proces-verbaal) under Article 89 of the Dutch Code of Civil Procedure. Such mechanism is equivalent to an authentic deed, provides compelling evidence (dwingend bewijs) and can be executed according to Article 430(1) of the Dutch Code of Civil Procedure. By recording it in an official court report, the Hague Court of Appeal could have avoided rendering a decision without mentioning the grounds on which it is based. However, to be valid, the record must clearly articulate what the settlement entails. Thus, if the parties did not agree to having their settlement recorded and made public by the Hague Court of Appeal, the latter was thereby limited in its options to swiftly settle the dispute.

Another explanation for the Hague Court of Appeal's lack of legal reasoning might be that Dutch courts are not obliged to rule on fictitious disputes. This was held by the Dutch Supreme Court in a case where the parties agreed to the sale of various legal books and magazines under the condition subsequent that the Dutch government would decide on the placement of nuclear weapons on its territory, which contradicted the Dutch Constitution (see Supreme Court 27 June 1986, ECLI:NL:PHR:1986:AC9454, NJ 1987/354 (only in Dutch)). The point of dispute was whether the condition subsequent was fulfilled or not. The respondent submitted an extensive Statement of Defence, but the claimant left all of the respondent's arguments unaddressed. Accordingly, the Dutch Supreme Court inferred that the parties were trying to elicit a judgment from the court on a fictitious dispute and ruled that Dutch courts cannot be used for that purpose.

Considering Cairn's non-objection to the setting aside grounds raised by India, the court might have implicitly followed the same approach.

Final remarks

Although unusual, the Hague Court of Appeal's approach is understandable considering the factual circumstances of the case and the interests of the parties. However, one might wonder what the Dutch Supreme Court would do if it had to rule on the validity of the Hague Court of Appeal's decision.