Sethi said investor-State arbitration and ordinary contractual arbitration treated states differently. Investor-State arbitration was asymmetric by design, while ordinary arbitration allowed state entities to bring claims and counterclaims against private contractors.
However, a state-owned entity could obtain an award against a thinly capitalised special purpose vehicle whose only meaningful asset was the project itself, he pointed out. If the contractor became insolvent, the award obtained by the state entity could be reduced to an unsecured claim under the waterfall mechanism of the Insolvency and Bankruptcy Code.
Sethi added that government entities sometimes wanted to settle disputes but were deterred by the possibility of audit or vigilance scrutiny. Consequently, challenges and appeals against awards were filed almost instinctively.
“Challenges and appeals are filed almost as an instinct, a reflexive action, which then creates problems for the State,” he said.
He added that while private investors were primarily concerned about securing a neutral forum, the bigger problem for states was recovering money after obtaining an award.