Maria Kielmas unravels the story behind the Dabhol saga.

A decision of a US arbitration tribunal sitting in Washington, DC to order a binding award of $28.57m each to General Electric (GE) and Bechtel Corp for claims they brought against their political risk insurer, the US government agency, Overseas Private Investment Corp (OPIC), in respect of the Dabhol power plant in India, is reverberating around the political risk insurance market. Not only does it put under further scrutiny the political nature of contracts between foreign investors and host governments, but has prompted interpretations among lawyers that political risk insurers may find themselves obliged to pay claims for risks not specifically covered under the original policies."This decision seems to mean that, even if the policy expressly provides otherwise, unanticipated risks often will be allocated to the insurer," said Frederick Jenney, a partner at Washington, DC-based law firm Morrison & Foerster.The award against OPIC means that the US agency will exercise its rights under an investment agreement with the Indian government, and claim back the compensation from India. Indian politicians and commentators continuously claimed that the dispute was of a commercial nature, as well as due to the questionable business dealing, of the project's principal partner, the now bankrupt Enron Corp.The Dabhol power plant project is a saga going back over a decade. In mid-1992, a consortium of US companies, GE, Bechtel and Enron, signed a memorandum of understanding with the then Indian government led by the Congress party, for the construction of a $2.9bn liquefied natural gas (LNG) import terminal and a combined cycle power generation plant to be located near Mumbai in the western Indian state of Maharashtra. This was to have been the largest-ever foreign direct investment in Indian history. Legislation enabling foreign direct investment in the electricity sector, up to then entirely under the control of the Indian government, had failed to attract sufficient investor interest, sp government officials negotiated a contract directly with the consortium members, eventually known as the Dabhol Power Co (DPC). The final contract and PPA were signed in late 1993.The project consisted of two phases: the first to construct the power generation plant which could run on fuel oil as well as LNG; and the second for a re-gasification facility. This would enable LNG to be converted into a useable fuel. The sole buyer for the electricity generated was the Maharashtra State Electricity Board (MSEB), a state government entity. The DPC and the MSEB concluded a long-term power purchase agreement (PPA), guaranteeing the consortium security for payment of loans and other expenses associated with the investment. It also provided for disputes to be settled under international arbitration. The consortium reached an agreement with the government of Maharashtra under which the latter would pay for any power for which the MSEB failed to pay, and further guarantees with the Indian central government.

Election victoryHowever, the election in March 1995 of a Hindu nationalist-led coalition as the government of Maharashtra state changed the political atmosphere. Indian opposition parties had been campaigning on an anti-Enron platform for almost a year. The principal grievances against the project were the, in their view, uncommon speed at which the original contract and the PPA had been signed, and that the cost of the project would be too high for both Maharashtra state and the country. Enron had been looking for a long-term relationship with India in the hope that the country would be an import market for LNG from the Middle East, in which the US company would make substantial earnings both as a marketing intermediary and a buyer. Nevertheless, as early as 1993 the World Bank had concluded that such LNG imports would come at too high a cost to the state of Maharashtra, and that the Dabhol project itself was not economically viable. The World Bank declined to finance the project.The new Maharashtra government set up a committee to review the project, which advised that it be cancelled. The Maharashtra state government acted on this advice and filed a suit against DPC in late 1995 to void all agreements, and alleging fraud and misrepresentation. But the consortium successfully co-opted the then Clinton administration in Washington, and later the Bush administration, to pressure the Indian government on its behalf.

Can't pay, won't payLegal challenges by Indian groups were dismissed periodically until December 2001 when the state of Maharashtra halted payments to DPC for electricity purchases. The MSEB claimed to be short of funds and did not pay the full amount due but offered a smaller amount. The DPC returned the MSEB's cheque. MSEB claimed it suggested the dispute be resolved through the mechanisms detailed in the PPA. But DPC rejected this and called upon counter-guarantees for payments from both the Maharashtra state and federal Indian governments. The two governments did not accept DPC's claims and so the latter initially terminated the PPA. However, OPIC refused to approve a final termination of the PPA on the grounds that the consortium members should participate in an auction to sell the project's assets to Indian buyers. GE and Bechtel affirmed their willingness to co-operate in this procedure, although they had serious reservations about it, but Enron refused. As a result, OPIC threatened Enron with a denial of its expropriation claim. But OPIC's decision not to approve a final termination of the PPA halted a possible opportunity for GE and Bechtel to sell their stake in the Dabhol project to the Maharashtra government and thus recoup some of their capital investment.The Dabhol consortium filed claims against the MSEB for failure to pay for power purchases over the lifetime of the project, as well as other claims against the state and federal governments. In March 2002, the Bombay High Court ruled that it had jurisdiction over the dispute and this denied the investors any route to international arbitration as set out in the original agreements. The consortium only appealed this ruling to the Indian Supreme Court in April 2003. A further six international arbitration disputes involving the Dabhol project are underway.

Two issuesAccording to Professor Thomas Wälde, Jean Monnet Chair, Centre for Energy, Petroleum and Mineral Law at Dundee University, Scotland, the present case between Bechtel and GE against OPIC depends on two issues:

  • a finding that actions of government entities in India such as central and state governments, the MSEB, Indian courts and publicly-owned financial institutions, constitute an expropriation as defined in OPIC contracts of insurance; and
  • the interpretation of a contract clause according to which payment of compensation was only due in case of non-compliance with an award by the contractually set-up international arbitration in London.
  • The American Arbitration Association (AAA) tribunal In Washington, DC, which consisted of three US judges, noted in its findings that: "...from its inception to the present day, the project has been a political lightning rod. Its existence has been defined by the push and pull of Indian politics. The expropriatory events described above were the sole and direct consequence of political decisions and competing political forces within Maharashtra and India...."But the issue as to whether a breach of contract by the Indian state agencies constitutes an expropriation remains. The tribunal noted in its findings that OPIC refused to approve the Dabhol's consortium's request to issue a final termination notice so that it (OPIC) would avoid paying an expropriation claim under its policies.

    Breach of contractCharles Berry, chairman of London broker Berry, Palmer & Lyle, explained that expropriation is currently not the point of dispute between investors and governments involving infrastructure and energy projects. "If you have a contract with a government you need to have a breach of contract cover. Pretending it is a form of expropriation is not the best way to tackle it." Mr Berry added that in these cases it is best to include breach of contract and forced abandonment of operations to the covered political risk. "We need to stop treating these as a form of expropriation and treat them in their own right," he said.But the tribunal's findings also questioned what precisely OPIC did cover in its political risk insurance policy for Dabhol. "...the only risk OPIC assumed under the policies was the risk of non-payment of an arbitral award confirmed by an Indian court of last resort..." the tribunal found. The tribunal did not publish the precise wordings of this cover. But the insured, DPC, was not aware of this and no discussion between the parties to the insurance had taken place. Yet the tribunal found in favour of the insured.In Frederick Jenney's view this demonstrates the unintended consequences of underwriting decisions. "OPIC's board granted OPIC's officers the broad power typically seen in any board resolutions, so they could structure coverage as they saw fit. The arbitrators turned this discretion on its head, and found that the power to write broad coverage must mean that OPIC had to write broad coverage." So from an insurer's point of view it may be better to write no coverage than to write coverage that strikes arbitrators as written too narrowly.

    Who bears the risk?However, Thomas Wälde believes that the tribunal had to face the question of which party - OPIC or the claimants (i.e. GE and Bechtel) - had to bear the unforeseen risk that the Indian authorities, including courts, would intervene in the contract. "The insured had no control over the process. They were taken by surprise by bad faith actions of the Indian government agencies in breaching and making impractical the exercise of arbitration procedure. They were also prevented by OPIC from exercising their option to sell the project to the Maharashtra state government. The arbitrators must have found that the claimants could not be made to bear the risk of OPIC's own, self-interested conduct which aimed to protect OPIC's interest, but kept the insured from exercising their option against the Indian state of Maharashtra when and if it was possible to do so," Mr Wälde said.As far as the now well documented scandals around Enron's operations are concerned, and to which the tribunal did not refer, Mr Wälde said: "Whatever one may think about Enron and the way it conducted its business, and whatever political controversy may have arisen in India, there is no doubt that the Indian governments co-operated in ensuring that valid contracts were not complied with."But Mr Jenney does not believe there is a case here for any ambiguity. "The arbitrators ignored 500 years of contract law in finding that 'uncertainty' of the parties was the same thing as ambiguity in a contract, and allowed reinterpretation of the policy." The limiting language in the (OPIC) contract was crystal clear, but the arbitrators danced around that fact by focussing on what the parties might have meant," Mr Jenney said. The tribunal's award is binding, leaving OPIC to recoup its losses from the Indian government. After the award GE and Bechtel filed an arbitration action against the government of India to recover their investment. According to the companies, this total claim could be about $600m. Lenders to the project are also seeking compensation and a sale of the plant to recoup their own losses. And no one is quite sure of what will happen with the Enron stake. The Dabhol saga has still some time to run and reinvent political risk insurance on the way.By Maria KielmasMaria Kielmas is a freelance journalist and consultant.