In an attempt to redraft 83 archaic > Bilateral Investment Treaties (BIT), the Law Commission of India (LCI) in its 260th report on the Draft Model Indian Bilateral Treaty (Model Draft) has walked the tightrope and tried its best to maintain the balance between the rights of the investors and the rights of the state.
A BIT is a treaty between two countries that sets out to provide certain basic protections to the investors of one state investing in another. For instance, most such treaties provide investors a guarantee of “fair and equitable treatment” — the clause, to draw an analogy from constitutional law, is broadly akin to the right of equality and protection against arbitrary state action.
Anirudh Krishnan Other protections include: rights against “expropriation”, both direct and indirect, of an investors’ investment; and a Most Favoured Nation (MFN) provision, which guarantees an investor a treatment not less favourable than a treatment afforded to any other investor claiming rights under any other BIT.
The White Industries Case It was only in end-2011 that India faced its first adverse arbitral award arising out of a BIT in the White Industries case. White Industries, an Australian entity, succeeded in obtaining a foreign arbitral award against Coal India Ltd. White Industries had initiated proceedings for enforcement of this award before Indian courts and for about 10 years, the said proceedings did not progress. White Industries argued that it had been denied “effective means” of enforcing its rights in relation to its investment, a protection incorporated into the India-Australia BIT by virtue of an MFN clause it contained. The arbitral tribunal accepted the plea and India was forced to pay a huge price for the delays caused by its judicial system.
The award opened a Pandora’s Box and since then 17 investors have issued notices of arbitration against India. These include Vodafone, which was at the receiving end of a retrospective tax amendment annulling a Supreme Court decision in favour of Vodafone, and Telenor, whose investment in India was in 2G licences that stood cancelled pursuant to a Supreme Court order.
All of a sudden, the Indian government was staring at an enormous liability arising out of these causes of action. As a reaction to the White Industries case and the various subsequent notices of arbitration, the government published a Draft Model proposing to renegotiate the BITs it had already entered into in line with the draft.
The Model Draft, no doubt, protected the interests of the government; however, it defeated the very purpose of entering into a BIT — that is, to provide some level of cushioning to foreign investors — by drastically narrowing down the protection for investors by, inter alia, a) providing an extremely narrow definition of investment b) deleting the MFN clause c) providing for the exhaustion of remedies on the one hand and for the decision of the court to be binding on the arbitral tribunal on the other and finally d) by providing for a number of exceptional self-judging state actions, which would not be within the purview of challenge before an arbitral tribunal set up pursuant to the dispute resolutions contained in the BIT. It was, therefore, necessary for a new draft, which would find the right balance between the rights of the government and the rights of the investors. For this reason, the LCI set up a sub-committee to submit a report. The LCI’s endeavour has been to ensure that the interests of India are taken care of while providing an internationally recognised basic minimum protection for investors.
First, the LCI recommends a modification from a highly narrow ‘enterprise-based definition’ of investment to a broader and universally accepted ‘asset-based definition’. An enterprise-based definition would mean that a > foreign investor who did not set up an enterprise in India to carry on business would have absolutely no protection. Second, the LCI reiterates the stand adopted in the Model Draft that the MFN must not be incorporated since India might chose to provide differential benefits to trading partners based on the extent of incoming investment from a country.
Third, the LCI encourages the incorporation of a “denial of benefits” clause, wherein an investor is denied the benefits of a treaty should it be involved in corrupt practices or should it act contrary to the laws of the country.
Fourth, the LCI suggests amendments to certain provisions of the dispute resolution mechanism contained in the Model Draft. The Model Draft precluded an arbitral tribunal from reviewing “any legal issue which has been finally settled by any judicial authority of the home state”.
Concurrently, there existed a provision, which made it mandatory for the investor to first approach the local courts and exhaust its local remedies. It is hard to contemplate too many scenarios where an investor would comply with the latter provision and yet overcome the jurisdictional bar imposed by the former provision. To make the mechanism workable, the LCI has suggested omitting the jurisdiction bar.
Fifth, the Model Draft contained general exceptions with a long list of permissible objectives such as public health, environment, public order, public morals, improving working conditions, ensuring the integrity and stability of the financial system, banks and financial institutions etc., and it provided that any measures which the state considered to be in furtherance of the above objectives would not be subject to scrutiny before an arbitral tribunal.
While having a set of exceptions is internationally recognised and is in furtherance of sovereignty, the provision in the Model Draft provided the state with the authority to self-judge, that is, to determine if a measure would fall within the exception and not be subject to a challenge. The LCI has suggested that the said provision be re-drafted so as to not be self-judging. It is to be seen if India is successful in renegotiating the existing BITs. It is pertinent to point out that the recommendations may not be of universal application — that is, investor-favourable rights and state obligations must be modified based on whether India’s position vis-à-vis a negotiating country is that of a capital exporting country or a capital importing country. All that the LCI report does is to set out certain basic minimum internationally recognised criteria that India must keep in mind in order to appear reasonable to international investors and yet ensure that the White Industries saga is not repeated. That said, these negotiations would only be prospective and India will have to face the numerous proceedings that have been initiated by investors already.
( Anirudh Krishnan, advocate in the Madras High Court, was a member of the sub-committee of the Law Commission that drafted the report mentioned here. E-mail: anirudh@aklawchambers.com )
