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International Commercial ArbitrationLAW-7007B
Financier Paris SARL (FP), a French company, had been in discussions with several globalsuppliers of outsourcing (or offshoring) of financial services support functions in order to reducelocal costs and improve its profitability. Executives from FP had travelled to the US to meet withvarious providers and, following several meetings and in-depth negotiations with seniormanagement, eventually decided to accept the services offered by Global Solutions Inc., (Global),a US corporation established under the laws of Delaware and a world leader in offshoring in thefinancial services industry. FP entered into a Business Process Outsourcing Agreement withGlobal Solutions India Pvt Ltd. (GSI), a wholly owned subsidiary of Global, whose employeeswould be carrying out the outsourced activities in India. Although FP had wanted Global to beparty to the Outsourcing Agreement, Global’s CEO had responded that this was not “standard” inthe industry but that Global would always give full support to its subsidiary.The Outsourcing Agreement provided for all payments to be made locally in Indian rupees and, inaddition to standard commercial terms, contained the following clauses:"10. Force Majeure
Neither party will be liable for loss caused by an event of force majeure if the event isbeyond the control of the party claiming exemption from liability, after exercising best efforts.
11. Governing Law
This agreement will be governed in every respect by the laws of India.
12. Dispute Resolution
All disputes under this Agreement shall be referred to the courts of India save that FP may, bywritten notice of election to GSI, refer such disputes to the courts of arbitration in London under theEnglish Arbitration Act, to be decided by three arbitrators, each party to nominate an arbitratorwithin 14 days of notice from the other, and the two to appoint the third. To ensure its neutrality, thearbitration will be conducted under the UNCITRAL Model Law Rules of International CommercialArbitration 2010. There shall be no appeal from the decision of the Tribunal."There were no tax indemnities.The arrangements worked well for about a year, although there were some rumours in theoffshoring market that, as Global had followed aggressive tax planning advice and structured itsoperations so as to minimise its global tax liability, the US IRS was reviewing the nature of Global’soperations and tax treatment. In fact, there had been an internationally co-ordinated fiscal reviewand Global had been in discussions for some months with the co-ordinators.In July 2016, FP received notification by e-mail from GSI that, following the international fiscalreview, the Indian fiscal authorities had concluded that Global had entered into abusive taxplanning arrangements by virtue of its treatment of profits arising from its local operations, andGSI’s outsourcing activities had been suspended unless and until it settled a substantial local taxliability. Global had informed its overseas subsidiaries that it would be strongly contesting thefindings (although this could take several months) and that no subsidiary was authorised to payany tax claim locally. In light of these facts, GSI had no option other than to cease performing itsservices under the Outsourcing Agreement.After sending this e-mail, GSI’s offices are closed on the instructions of the Indian fiscal authoritiesand no further outsourcing activities are carried out, leaving FP having to find an alternativeprovider of offshore services on short notice. The replacement provider (aware of FP’spredicament), agrees to step in immediately, but charges three times more than GSI for the sameservice level.
In October 2016, FP issued a notice of breach to GSI, and invoked the arbitration clause. Itnominated Sir Humphrey Mullis, a leading solicitor specialising in the arbitration of disputesinvolving outsourcing arrangements, as its arbitrator. In its statement of claim, FP requestedGlobal to be “joined” in the proceedings and for a declaration of breach by both GSI and Global,and "substantial monetary compensation". GSI refused to nominate an arbitrator and filed aresponse denying arbitral jurisdiction on the following grounds:a) The dispute is not arbitrable under the laws of India, since it involves a matter of public fiscalpolicy;b) The arbitral clause is invalid as it is vague, imprecise, and/or incapable of being performedand in any event it does not apply to this case as the claim has not arisen under the contractbut by virtue of the external actions of the Indian fiscal authorities; andc) Global was not party to the Outsourcing Agreement and, therefore, not liable thereunder.Sir Humphrey rejected the preliminary objections raised by GSI. He interpreted the reference tothe UNCITRAL Model Law Rules to mean that the arbitration should follow the UNCITRALArbitration Rules 2010 and assumed charge as sole arbitrator. He also concluded that, undergeneral principles of international law, it is clear that Global was legally responsible for the closureof GSI’s operations in India, and he can therefore treat Global as party to the OutsourcingAgreement.
Sir Humphrey issued notices of hearings to PF, GSI and Global. Global ignored allcommunications and took no part in the proceedings. GSI attended the preliminary hearing inearly January 2017 and requested that Sir Humphrey issue an award on jurisdiction so that it couldbe challenged in the courts. However, Sir Humphrey declined, saying that he was under no duty todo so and was overheard by GSI’s lawyer saying: “These Indians have a very distorted view ofhow international arbitration operates”.In February 2017, Sir Humphrey gave notice to all parties of his intention to continue with thearbitration. GSI refused to take further part in the arbitration, and Sir Humphrey conducted thearbitration ex parte. He appointed an expert in Indian law without consulting the parties, and metprivately with the expert. Sir Humphrey concluded that Indian law was in all relevant respects tothe case the same as English law and issued a final award holding that:
(i) Under English law, the force majeure clause is inapplicable;
(ii) A breach has clearly occurred, causing significant loss, additional expense andinconvenience to FP;
(iii) Under the law of Delaware and international principles of construction GSI andGlobal are jointly and severally responsible and must compensate FP.Sir Humphrey accordingly awarded punitive damages of Euro 500 million in favour of FP. Theaward also provided for interest to accrue on the award amount at the rate of 10% per annum fromthe date of breach to the date of actual payment.GSI and Global now seek your advice on how to prevent the enforcement of this award. Youradvice should include an assessment of the likelihood that they will successfully challenge and/orprevent enforcement and what steps they must take and when. You should not confine yourself tothe objections raised by GSI before the arbitrator, and should discuss other grounds which GSIand Global may be able to raise at this stage.
In particular, you are told that although Sir Mullis had provided a copy of his CV to both parties atthe start of the arbitration which listed his previous involvement in arbitrations, it did not reveal thathe is a non-executive director on the board of a Norwegian pension fund that holds a 5%shareholding in Global. Neither did the CV indicate that he had been a partner in the London officeof a major international law firm for 15 years up until last year (although this was easilyascertainable from searching the internet) and that, just prior to issuing the award, Sir Mullis` oldlaw firm had reported on its website the finalisation of the sale of a substantial business of FP`sparent company worth USD 575 million, with the assistance of three partners in the Vancouveroffice of the law firm.
You may assume that the agreement contains no other clauses pertinent to this problem. You mayalso assume that GSI’s assets are concentrated in India, Hong Kong and France, and that Globalhas assets in many jurisdictions, but principally in America, France, Russia and India.