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a) The dispute is not arbitrable under the laws of India, since it involves a matter of public fiscal policy;

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  • Post Date 2018-11-10T07:17:12+00:00
  • Post Category Research Paper Queries

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a) The dispute is not arbitrable under the laws of India, since it involves a matter of public fiscal policy;

International Commercial Arbitration
LAW-7007B

Assignment:

Financier Paris SARL (FP), a French company, had been in discussions with several global
suppliers of outsourcing (or offshoring) of financial services support functions in order to reduce
local costs and improve its profitability. Executives from FP had travelled to the US to meet with
various providers and, following several meetings and in-depth negotiations with senior
management, 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 the
financial services industry. FP entered into a Business Process Outsourcing Agreement with
Global Solutions India Pvt Ltd. (GSI), a wholly owned subsidiary of Global, whose employees
would be carrying out the outsourced activities in India. Although FP had wanted Global to be
party to the Outsourcing Agreement, Global’s CEO had responded that this was not “standard” in
the 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, in
addition 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 is
beyond 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, by
written notice of election to GSI, refer such disputes to the courts of arbitration in London under the
English Arbitration Act, to be decided by three arbitrators, each party to nominate an arbitrator
within 14 days of notice from the other, and the two to appoint the third. To ensure its neutrality, the
arbitration will be conducted under the UNCITRAL Model Law Rules of International Commercial
Arbitration 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 the
offshoring market that, as Global had followed aggressive tax planning advice and structured its
operations so as to minimise its global tax liability, the US IRS was reviewing the nature of Global’s
operations and tax treatment. In fact, there had been an internationally co-ordinated fiscal review
and 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 fiscal
review, the Indian fiscal authorities had concluded that Global had entered into abusive tax
planning arrangements by virtue of its treatment of profits arising from its local operations, and
GSI’s outsourcing activities had been suspended unless and until it settled a substantial local tax
liability. Global had informed its overseas subsidiaries that it would be strongly contesting the
findings (although this could take several months) and that no subsidiary was authorised to pay
any tax claim locally. In light of these facts, GSI had no option other than to cease performing its
services under the Outsourcing Agreement.
After sending this e-mail, GSI’s offices are closed on the instructions of the Indian fiscal authorities
and no further outsourcing activities are carried out, leaving FP having to find an alternative
provider of offshore services on short notice. The replacement provider (aware of FP’s
predicament), agrees to step in immediately, but charges three times more than GSI for the same
service level.

In October 2016, FP issued a notice of breach to GSI, and invoked the arbitration clause. It
nominated Sir Humphrey Mullis, a leading solicitor specialising in the arbitration of disputes
involving outsourcing arrangements, as its arbitrator. In its statement of claim, FP requested
Global 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 a
response 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 fiscal
policy;
b) The arbitral clause is invalid as it is vague, imprecise, and/or incapable of being performed
and in any event it does not apply to this case as the claim has not arisen under the contract
but by virtue of the external actions of the Indian fiscal authorities; and
c) 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 to
the UNCITRAL Model Law Rules to mean that the arbitration should follow the UNCITRAL
Arbitration Rules 2010 and assumed charge as sole arbitrator. He also concluded that, under
general principles of international law, it is clear that Global was legally responsible for the closure
of GSI’s operations in India, and he can therefore treat Global as party to the Outsourcing
Agreement.

Sir Humphrey issued notices of hearings to PF, GSI and Global. Global ignored all
communications and took no part in the proceedings. GSI attended the preliminary hearing in
early January 2017 and requested that Sir Humphrey issue an award on jurisdiction so that it could
be challenged in the courts. However, Sir Humphrey declined, saying that he was under no duty to
do so and was overheard by GSI’s lawyer saying: “These Indians have a very distorted view of
how international arbitration operates”.
In February 2017, Sir Humphrey gave notice to all parties of his intention to continue with the
arbitration. GSI refused to take further part in the arbitration, and Sir Humphrey conducted the
arbitration ex parte. He appointed an expert in Indian law without consulting the parties, and met
privately with the expert. Sir Humphrey concluded that Indian law was in all relevant respects to
the 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 and
inconvenience to FP;

(iii) Under the law of Delaware and international principles of construction GSI and
Global are jointly and severally responsible and must compensate FP.
Sir Humphrey accordingly awarded punitive damages of Euro 500 million in favour of FP. The
award also provided for interest to accrue on the award amount at the rate of 10% per annum from
the 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. Your
advice should include an assessment of the likelihood that they will successfully challenge and/or
prevent enforcement and what steps they must take and when. You should not confine yourself to
the objections raised by GSI before the arbitrator, and should discuss other grounds which GSI
and 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 at
the start of the arbitration which listed his previous involvement in arbitrations, it did not reveal that
he 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 office
of a major international law firm for 15 years up until last year (although this was easily
ascertainable from searching the internet) and that, just prior to issuing the award, Sir Mullis` old
law firm had reported on its website the finalisation of the sale of a substantial business of FP`s
parent company worth USD 575 million, with the assistance of three partners in the Vancouver
office of the law firm.

You may assume that the agreement contains no other clauses pertinent to this problem. You may
also assume that GSI’s assets are concentrated in India, Hong Kong and France, and that Global
has assets in many jurisdictions, but principally in America, France, Russia and India.

Price: £ 159

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