Rafale Deal: An Uncomfortable Letter and Agreement

Defence Minister Nirmala Sitharaman in response to a question in the Rajya Sabha on February 4, stated that, “In the 36 Rafale IGA [Inter Governmental-Agreement], the French Government has provided a ‘Letter of Comfort’ signed by the French Prime Minister. The provision in the IGA alongwith Letter of Comfort provide adequate safeguards to the Government of India.” She further stated that, “Any dispute in the execution of the IGA will be settled through the Bilateral High Level Group established by the Government of India and Government of French Republic. Any dispute not settled by this group shall be settled by arbitration in accordance with UNCITRAL [United Nations Commission on International Trade Law] arbitration rules.”

The critics of the Rafale deal have pointed out that the ‘Letter of Comfort’ is a hollow substitute for a sovereign guarantee from the French Government. Sudhansu Mohanty, who was the former head of the Ministry of Defence’s finances, told the Economic Times, “A sovereign guarantee is given by a sovereign government to another sovereign government, guaranteeing enforcement of the terms and conditions of the contract signed under their auspices. A ‘letter of comfort’ is definitely not on par with a sovereign guarantee. Loosely, it can be said to be a ‘letter of intent’, as is often used in international contracts. Maybe, morally binding but not legally binding and enforceable.”

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This would imply that the only legally binding document in the hands of the Government of India with regards to the Rafale deal is the Inter-Governmental Agreement. The problem with this agreement is that the Defence Minister refuses to divulge the contents of the deal by taking cover behind a 2008 security agreement between India and France. This agreement concerned protects classified information and material in the field of defence. In July 2018, after a showdown in the Lok Sabha over the pricing details, the French foreign ministry spokesperson issued a statement confirming that the 2008 agreement would apply to the September 2016 IGA on Rafale.

In the portion where the Defence Minister referred to dispute resolution, it appears that there is a two-step process. The first stage involves negotiation through a Bilateral High Level Group established by the Governments of India and France. The second stage would result in an international arbitration under the UNCITRAL. Under the Defence Procurement Procedure 2013 (DPP), procurements via contracts with private vendors require the seat of arbitration to be in India, and the proceedings to be in accordance with the Indian Arbitration and Conciliation Act, 1996. IGAs under the DPP tend to be more flexible in this respect.

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Under the DPP, the procedure for IGAs is laid down in paragraphs 71 and 72. Paragraph 71 lays down the circumstances under which procurement can take place under an IGA. Paragraph 72 lays down that under instances where the quantity to be procured is very large, or it would require product support over a long period of time, IGA may be required. Thus, “Such an Inter-Governmental Agreement is expected to safeguard the interests of the Govt. of India and should also provide for assistance of the foreign Govt. in case the contract(s) runs into an unforeseen problem.”

This general guideline tends to be a bit vague, perhaps to take into consideration that not many governments would be willing to stick their necks out for private defence equipment manufacturers. However, as Sudhansu Mohanty pointed out in The Wire, at the time when the original request for proposal (RFP) was issued, due to the size of the prospective purchase, India held the advantage. In 2015, before negotiations for the IGA had even been thought about, Prime Minister Modi announced that the Rafale aircraft would be procured through this mode. Thus, in one swoop India forfeited its bargaining advantage allowing the French Government to limit the extent of its own liability while India takes all the risk. Considering that the IGA – which is the only legal document – is being kept secret, this would certainly make for interesting arbitration proceedings under the UNCITRAL.