Flame Out: Why Devas & Cairn Are suing Air India to enforce an Arbitration Award against India.

And yet relation appears, a small relation expanding like the shade of a cloud on sand, a shape on the side of a hill.

- Wallace Stevens,

"Connoisseur of Chaos"

Air India has suffered yet another 'Catastrophic Engine Failure' right when The Maharaja was already running on fumes. There is no end in sight for the troubles of the cash-strapped national carrier already hit hard by the COVID Pandemic. The Devas and Cairn suit will only be adding to its worries.

I will be going off on a tangent here so please bear with me.

The title of this article "Flame Out" refers to an event in an aircraft when the Turbine Jet Engine shuts down due to the extinction of flame in the combustion chamber. We can draw an analogy between a Jet engine flame-out and Air India's current legal quagmire. A flameout can occur due to fuel starvation, compressor stall, foreign object damage, and mechanical failure. The erstwhile Maharaja of the Indian Skies has already been devoid of cash infusion which is vital in the day-to-day running of an airline much akin to fuel starvation in a Jet engine. While its current predicament of Devas & Cairn sucker-punching the airline with fresh litigation in New York can only be classed as foreign-object damage due to their unexpected nature. Although most modern airliners are designed to be flown with only one engine, airlines are not. Having lost both its metaphorical engines, the Airline is surely hurtling towards certain doom.

To understand the suits against Air India by Cairn and Devas, we have to delve deeper into their underlying disputes with the Government of India.

CAIRN - INDIA DISPUTE

An International Arbitration Tribunal ruled in favor of Cairn Energy a while back. The Tribunals ruled that India’s retrospective tax demand breached the U.K- India bilateral Investment protection treaty. It held that India’s tax claim was not valid and asked the Government to repay the funds, along with interest.

This ruling was India’s second loss in an International Arbitration after it changed a law in 2012 enabling it to retrospectively tax companies for mergers & acquisitions going as far back as 1962. An International Arbitration Tribunal ruled in favor of Vodafone against India’s retrospective tax claim of 2.7 Billion Dollars. The tribunal held that the claim was in breach of fair treatment under the Bilateral Investment Protection Pact between India and the Netherlands.

DEVAS - ANTRIX STORY

As the old saying goes "all bad things come in three". The third loss to India came when Devas Multimedia, seeking to recover $1.2 Billion from India, won an International Arbitration. The International Tribunal awarded $111 Million to Devas in 2020. Devas also won $562.5 Million from a separate proceeding at the International Chamber of Commerce. India has not paid either of these awards.

CRYSTALLEX INTERNATIONAL CORP - VENEZUELA

A similar lawsuit was brought by Crystallex International Corporation, a Toronto-based Canadian gold mining and exploration company PDV Holding Inc. a wholly-owned subsidiary of PDVSA (Petroleos de Venezuela, S.A.) which was owned by the Bolivarian Republic of Venezuela and its US-based asset, CITGO Petroleum Corporation. Crystallex was seeking compensation for Venezuela's 2011 takeover of its gold mining operations near Las Cristinas and has won a $1.4 billion arbitration award in 2016 which has remained unpaid. A US Federal court ruled in favor of Crystallex and allowed the seizure of shares to satisfy the award. Venezuela went into an appeal to the US Supreme Court but it was rejected. This will serve as a precedent for both Cairn & Devas cases.

AIR INDIA

"All of this has happened before, and it will all happen again."

James M. Barrie

This iconic line said in the opening sequence of the 1953 Peter Pan movie by the narrator holds in the Indian case. Just like the Venezuelan government's reluctance to pay the money, the Indian government has also taken the same approach. Cairn India has filed a case in the Southern District of New York to deem Air India as "the alter ego of India" and has asked that it should be held jointly and severally responsible for India's debts, including from any judgment resulting from recognition of the Award.

Similar to the Cairn suit, its petition filed in New York Devas has also relied upon the same 'Doctrine of Veil Piercing' and has called Air India an "alter ego" of the Indian State. Devas have said that Air India can be held liable for the sovereign debt of India. In this petition, Devas has asked for Air India to pay the amount or forfeit its U.S. property including airplanes, cargo handling equipment, artwork, etc.

All this is happening at a very inopportune time for Air India as it is on the block for sale. The value that any potential buyer is willing to pay for the national carrier is not based on its outdated fleet of aging and fuel-inefficient aircraft but on its network. Air India flies to 31 countries across 5 continents a total of 102 destinations comprising of 57 domestic and 45 international ones. It also has codeshare agreements with 21 international airlines and is also the largest international carrier out of India with around 18.6% market share. The buying process is usually long drawn in transactions of this size especially in a sale where the government is the seller. No buyer will be willing to buy Air India if there will be a constant looming threat of its aircraft and foreign assets being seized outside India for enforcement of foreign arbitral awards against India.

In conclusion, unlike the titular character of Peter Pan (a boy who can fly and never grows up), The Indian government should grow up so to speak and take a responsible decision to pay up what is due and settle all three Arbitration cases immediately, preventing further embarrassment in the International community.