Papers and Planes

A TROVE OF FILE NOTES, accessed by The Caravan, detailing communication between the defence ministry and the law ministry, reveals new specifics of how the government ignored serious and repeated objections by its own officials during the review and finalisation of the Rafale deal, at great cost to Indian interests. The notes show that the National Security Advisor, Ajit Doval, was a key member of the Indian negotiating team in discussions with French representatives where many of these objections were effectively dismissed—even as the NSA had no legal sanction to be part of such a negotiating team. The government concealed Doval’s involvement from the Supreme Court when it listed the members of the negotiating team in an affidavit submitted to the court on 10 October 2018. The National Security Advisor is not among the negotiators identified.

The Cabinet Committee on Security—the ultimate authority on defence acquisition, headed by Prime Minister Narendra Modi—approved the Rafale deal in its final form on 24 August 2016. India and France formalised the deal under what was termed an “inter-governmental agreement,” signed on 23 September 2016. Yet, as the notes state, the agreement omits basic terms expected of a government-to-government procurement deal—specifically, provisions to hold the foreign government liable for any breach of the agreement, and to resolve any disputes at the government-to-government level. The notes show that the Indian government went ahead with the Rafale deal, which requires it to pay a reported €7.87 billion for 36 fighter jets, without any financial security or legally enforceable guarantee for delivery from either the French government or the jets’ manufacturer, Dassault Aviation.

MODI FIRST ANNOUNCED that India would purchase 36 Rafale jets from Dassault while on an official visit to Paris, in April 2015. The following month, the Defence Acquisition Council, headed by the defence minister—Manohar Parrikar at the time—agreed to let purchase proceedings go forward.

Indian and French negotiating teams agreed on an initial draft of the deal. The draft was put before the Defence Acquisition Council, and was discussed between 28 August and 1 September 2015.

The main negotiated document was a draft inter-governmental agreement, which stated that the French government undertakes to supply India with 36 Rafales and attendant systems and services. But Article 4 of the draft agreement also stated that the French government was to transfer its obligations onto Dassault under a separate agreement termed a “convention.” The convention would perform the same manouevre with MBDA, the missile supplier in the Rafale deal. The French government would enter into the convention with the supplier companies, without making India a party to it.

This meant the Indian government was to have no knowledge of its contents, and so would remain ignorant of what hold the French government had over the companies to ensure delivery. In effect, in case of a breach of contract, the French government could deny responsibility, and India would have no direct way to hold the companies to account. As a sop, the French side offered to give the Indian government a “letter of comfort” promising to see the deal through, as well as letters from the companies outlining their respective commitments. These were all to be merely letters of assurance rather than binding contracts. The letter from the French government would be signed by the country’s prime minister, but not by its president, even though the latter is France’s top executive.

Other provisions in the draft deal concerned the mechanism for resolving disputes. Differences were to be settled under international arbitration rules, and the seat of arbitration was to be outside India, in Geneva. In the event of a breach of contract, India agreed to pursue legal action against the errant supplier companies, not the French government. If India were awarded any damages, it was to first exhaust all options for recovering the money from the supplier before bringing any claim to the French government.

None of this was in India’s interest. First, it meant that the French government could not be held liable in Indian courts or under Indian law. Second, it further diluted the French government’s obligations to its Indian counterpart under the “inter-governmental” deal. If India wanted to hold an errant company accountable, it could only hope to do so via the French government, and even then only through arbitration. The companies’ opaque liability gave India little ability to enforce arbitration on them, and even if it did recovering any claim against a foreign company via international arbitration could be difficult. For instance, the Indian government has claimed that Vodafone owes it unpaid taxes, but has been frustrated in its pursuit of the money by many years of wrangling over international arbitration.

The draft deal also placed unusual limits on the French side’s liability for certain kinds of damages. Further, the deal had no provision for a sovereign guarantee—a security deposit from a sovereign government on behalf of a third party, forfeitable in case of default—though these are common in defence purchases. Meanwhile, the Indian government was to pay massive sums to the suppliers in advance of deliveries. This, again, put India at a great disadvantage.

The Defence Acquisition Council, following required procedure, forwarded the draft deal to the law ministry for legal vetting.

The law ministry issued two separate responses. The first, titled Note 228, was dated 9 December 2015. It was authored and signed by TK Malik, a deputy legal advisor, and was marked for the attention of TN Tiwari, an additional secretary; but it did not have Tiwari’s signature, or the signature of any other official above Malik in rank.

The note stated that the proposal for the convention would not entirely absolve the French government of its obligations towards India. It held that the draft deal had adequate provisions for dispute resolution “not only at Industrial supplier level but also at French government level,” and approved of most other provisions in the draft deal as well. But the note observed that the French side had not provided for any sovereign guarantee, and pointed out that the standard contract document included in the Defence Procurement Procedure 2013—the iteration of India’s acquisition rules that governs the Rafale deal—included financial guarantees.

A second response, Note 229, was dated 11 December, just two days after Malik’s earlier note. It was authored and signed by Tiwari, and also had the signature of his superior officer, the law secretary. Malik also added his signature to the document.

The note objected to all the provisions for transferring the French government’s obligations to the supplier companies, and to much else. In order to “enforce the right of arbitration in case of material breach by industrial suppliers,” Note 229 recommended that the “Indian party should be a signatory or a confirming party with the Convention document.” Only in case India could not be made a party to the convention, the note added, the government should insist on a “joint and several liability” clause in both the inter-government agreement and the convention. Such clauses stipulate that a contract between two parties is not affected by a third party’s contract with either of them. In the Rafale deal, adding them to both the agreement and the convention would strengthen India’s ability to hold the French government liable for seeing the deal through.

The note stated that the deal’s terms for dispute resolution and recovery of damages appeared “procedurally onerous and tilted against the interest of Indian party,” and insisted that the stipulated seat of arbitration be within India. It also objected to putting any limits on French liability, and insisted that the supplier companies be made liable directly to the Indian government and not to a third party—in this case, the French government. The note stated that “there must be no such limitation in case of the industrial supplier’s gross negligence or willful misconduct,” and that “the industrial supplier’s liability to the Indian party may in no case be limited to less than the total payments expected to be made under the supply protocols.”

Note 229, like Note 228 before it, also called for provisions for a sovereign guarantee, particularly since the Rafale deal called for “huge payouts of procurement price before actual delivery of equipments and services to Indian party.” Both notes left it to the defence ministry to decide how best to address their contents.

THE DEFENCE ACQUISITION COUNCIL, meeting on 11 January 2016, noted the responses of the law ministry without objection. It informed the Indian negotiating team, or INT, about the issues flagged, leaving it to wrangle over them with the French side. The Indian team was officially led by the deputy chief of air staff, Rakesh Kumar Singh Bhadauria. He took charge of the INT less than a fortnight earlier, on 1 January 2016, when he replaced the previous deputy chief of air staff, Shyam Bihari. (As reported earlier by The Caravan, Bhadauria, as the head of the INT, opposed an initial determination of the benchmark price for the Rafale deal at €5.2 billion. The figure was eventually revised upwards by over €2.5 billion.)

Doval surfaces in the proceedings at this point. Note 18, a retrospective document issued by the defence ministry in August, noted that “after the receipt of legal advice, discussions have taken place during the meetings of INT on these issues, in the meetings of MoD and also in the meeting of NSA and Member Secretary, INT, with the French side in Paris.” French negotiators met their Indian counterparts, including Doval, in Paris on 12 and 13 January.

The Defence Procurement Procedure 2013 defines the composition of negotiation teams for procurement deals. The procedure does not list the National Security Advisor as a sanctioned negotiator. A former official in the defence ministry told me that these negotiation teams are required to be extremely closed and secretive, and may not allow any unauthorised individuals access to their discussions with foreign representatives.

Note 18 records that, at the Paris meetings, “the French side was requested to incorporate a clause on ‘Joint and several responsibility.’” But the law ministry had suggested pursuing joint and several liability as a course of last resort. Its preferred option was to have India be a signatory to the convention, in order to make the companies liable to the Indian government, and so allow the government to enforce arbitration against them. The note has no record of this option being pursued.

French negotiators agreed to add a joint and several liability clause in the inter-government agreement, but only provided assurances, without binding commitment, that a similar clause would also be added to the convention. The Indian negotiators did not even get to see the contents of the proposed convention. The note states, “Indian side have desired during negotiations that the content of Convention should be made known to the Indian side to ascertain what hold the French government has over the Industrial supplier for the execution of the Supply Protocols and what are its legal ramifications to us. However, French side has not shared the language of Convention with the Indian side.” Worse, the Indian side allowed this while “the French side had stated the Convention is not a contract.”

The negotiators also agreed to have Geneva as the seat of arbitration, and to have any proceedings there governed by the international UNCITRAL Arbitration Rules. There was no modification to the provision that the Indian government would first pursue damages payments from supplier companies rather than the French government, and no provision for any bank security or sovereign guarantee.

On 13 January, the Indian and French negotiators signed a “joint document” of the draft inter-governmental agreement. Coincidentally, the French president, François Hollande, was scheduled to arrive in Delhi in less than two weeks, on an invitation from Modi. He was the guest of honour at that year’s Republic Day celebrations, on 26 January.

Both sides met several more times in the months that followed, but there was no shift from the joint document. For instance, the notes indicate that the defence secretary suggested that the provision requiring India to first approach private suppliers for sums awarded in arbitration be replaced by one that said “the French party undertakes to make the payment of theses sums to the Indian party.” The French side did not agree to this.

Note 12, issued by the defence ministry on 22 August, observed that the joint document signed in Doval’s presence scuttled any chance India had of further redress of the law ministry’s concerns. The note stated that, after the meetings in mid January, both sides “acknowledged that the text of IGA has been finalized except the financial aspects.”

Note 18 detailed the defence ministry’s stance in the aftermath of the Paris meetings on “the French insistence on our accepting the ‘Letter of Comfort’ in lieu of bank/government guarantee.” The ministry did not push negotiators to take the matter up again, and instead placed it before the Cabinet Committee on Security for deliberation. In choosing to respond this way, the note stated, the defence minister had taken into consideration the views of the National Security Advisor, as well as of the minister for external affairs, Sushma Swaraj. This suggests that Doval and Swaraj asked Parrikar to not press for a sovereign guarantee.

Parrikar also considered, according to the note, the “special dispensation” given to Russia and the United States, which are allowed to forgo sovereign guarantees in their defence sales to India. However, this was not a valid comparison. Sudhanshu Mohanty, who served in the defence ministry as a financial adviser on the Rafale negotiations until his retirement in late May 2016, told me that procurement agreements with these two countries are categorically different from the “inter-governmental agreement” with France. Russia and the United States both have laws that route all defence export through official agencies, with the respective governments assuming liability, even if without sovereign guarantees. France does not follow this model.

THE LATEST ITERATION of the draft deal was put before the Defence Acquisition Council on 14 July. It forwarded the document for vetting by the law ministry, which authored a response dated 23 August. Notes 12 and 18 were sent from the defence ministry to the law ministry in the lead-up to its response.

Note 12, authored by an air commodore in the defence ministry, conceded to the positions in the existing draft. It stated that the law ministry’s earlier concerns over the French government’s transfer of rights and obligations to supplier companies had been “actioned.” In explanation, the note only mentioned that the French side had agreed to include of a joint and several liability clause in the inter-governmental agreement, and that India had been assured that a similar clause would be added to the convention as well. It overlooked the fact that the negotiators had failed to secure two of the changes to the liability provisions that the law ministry had insisted on in Note 229—the removal of the limitations on liability in case of a supplier’s negligence or misconduct, and the requirement that the supplier’s liability could not be lower than the total amount it was expected to be paid.

On the settlement of disputes, Note 12 stated that India should not insist on the payment of damages directly by the French government. It added that doing otherwise, “[w]ithout any tangible advantage to the Indian side … would reopen discussions on the mutually agreed IGA.” The note recorded that it was “the opinion of Air HQ (headquarter), for reasons cited above,” that the retention of the existing provisions should “be considered by Government/competent authority.”

Note 18, from the defence minsitry’s air wing—responsible for handling the air force—raised a thorny question for fresh consideration. The note stated that the law ministry had earlier not responded specifically on whether the government-to-government character of the deal was “affected by the provisions proposed by the French side.” It added that it was essential for the deal to retain this character so that the “legal and financial interests of government of India are adequately protected.”

This was a sensitive point. Right from the time of Modi’s first announcement in Paris, the Indian government’s public rational for the new Rafale deal had been that a government-to-government agreement would secure Indian interests better than the previous tender process could. Note 18 summarised the salient features of a government-to-government deal: that the responsibility to deliver the purchase “remains with the foreign government,” and that disputes are resolved “at government-to-government level only.” Note 229, the second of the law ministry’s earlier responses, had already pointed to how the draft agreement did not meet these criteria, and its suggested remedies had not been incorporated into the draft since.

Note 18 also recorded that when the draft deal was first brought to the Defence Acquisition Council, it had stated that it would only approve of the provisions “on transfer of rights and obligations … subject to legal vetting of the French proposal.”

The law ministry’s reply took no categorical position on whether the agreement was of a government-to-government nature. On the transfer of rights and obligation, and on the limitations on liability, it stated without clear backing that “the French side agreed on transfer of rights and obligations and liability as suggested by us in our earlier examination and the same has been incorporated in the revised draft.” But the reply made clear that two others contentious points remained outstanding, noting that the French side had not agreed to its recommendations “on the dispute resolution and guarantees.” On these, it handed responsibility to higher authorities, concluding that an “administrative decision at appropriate level may be taken.”

The Defence Acquisition Council took a similar position after it received the law ministry’s advice, and left the decision to the Cabinet Committee on Security. The committee, with Modi at the head, approved the deal in its existing form on 24 August, just a day after the law ministry stated its position. There was seemingly a great rush to finalise the deal despite official misgivings. The issue of Notes 12 and 18, the law ministry’s response and the committee’s approval all came within the space of a single week.

The evident hurry is underlined by the fact that the Cabinet Committee on Security signed off on the Rafale deal before one of its annexures had gone through the requisite vetting. The annexure stipulated that the deal would be covered under a mutual defence-cooperation treaty signed in 2006. A note from the defence ministry dated 20 September recorded that when the law ministry had earlier reviewed the draft deal, it had remained silent on this important component. The note gives no reason why this was so.

The legal ministry cleared the annexure, with no objections, on 21 September. The Indian and French defence ministers signed the Rafale deal at a public ceremony just two days later.