Foreign investors in India (through their local investments) regularly approach Indian courts and arbitral tribunals against breach of contracts claims,[1] government actions[2] or even energy or tender disputes.[3] An extra-territorial dispute resolution mechanism that has routinely been available to investors around the world is the Bilateral Investment Treaty (BIT). BITs are international treaties that govern the relationship of investments by individuals or business entities of one state in another state. They provide a commitment that the investment will not be interfered with except through due process of law, will be treated at par with a national investor’s local investment, that the investor will be afforded fair treatment and other such protections. Roughly about 2,500 BITs are in force in the world today. India is currently a signatory to 61 BITs, 52 of which are in force.[4]
After the recession in 2008, with the emergence of a protectionist approach towards local jobs and economies, countries have been terminating their BITs.[5] India followed suit, and in 2017, terminated about 58 BITs.[6] While there is no official record available of the 58 countries (including 22 European ones) to which termination notices were sent, some sources mention China, Italy, Switzerland, Turkey and other countries.[7] A number of these BITs do not have sunset clauses, i.e. a period during which even after termination, obligations persist. These terminations have created uncertainty regarding existing investments since no assured mechanism of recourse is available any longer to investors who set foot in India with the legitimate expectation of having their investment protected by the BIT mechanism.
What led India to suddenly terminate its BITs in 2017? The development was not as sudden as it seems. In 2012, India did not receive an award in its favour in the White Industries Australia Ltd. v. The Republic of India[8] case under the India-Australia BIT. In this case, the enforcement of an award that White Industries had received against Coal India in 2002, was delayed for over nine years which led the Australian company to claim breach against India for what it felt was intractable delay, leading to denial of effective means (which the Tribunal accepted) and a denial of natural justice (which the Tribunal rejected). White Industries invoked the India-Australia BIT in 2011 and taking advantage of the Most Favoured Nation (MFN) provision in it, took the benefit of a favourable provision in the India-Kuwait BIT[9], finally receiving an award in its favour in 2012.
This case has attracted criticism. Given the mammoth backlog in the Indian judiciary[10] at all levels, the delay is unsurprising. There were also some missteps by White Industries in its own process when motioning Indian courts which contributed to the delay.[11] Indian law’s position prior to 2012 also required changes.[12]
Judicial delays should not give a foreign investor grounds to invoke the BIT jurisdiction, especially in emerging markets, which do not have streamlined court processes. In this matter, White Industries was not treated any differently from other litigants.
But the damage was done. The decision provoked a slew of notices against India from foreign investors from different countries: several arbitrations are now under way.[13] This necessitated the release of a new Model BIT by India in 2015, where it wished to renegotiate its commitments in the future. The Model BIT had provisions which were much narrower than its previous versions. The MFN provision, which provides investors from one country no less favourable treatment than those from another, was done away with. This clause had hit India in the White Industries case since the award was based on India denying White Industries “effective means” of enforcement, an obligation under the India-Kuwait BIT that the Tribunal also applied under the India-Australia BIT on the basis of an MFN clause in the latter.
Other important provisions – the pre-establishment protections clause, for example, which permits the offering of protection, such as National Treatment (NT) of the investment even at its admission/establishment stage – were removed. The Fair and Equitable Treatment (FET) provision was diluted. In the future, the extent of protection under these various provisions will have to be renegotiated between India and the counter party. The dispute resolution mechanism in the BIT was also altered such that arbitration under the treaty could be invoked only after local remedies were exhausted for five years. Earlier provisions allowed investors easier means and a wider latitude to enforce BITs.
The termination as also the new model BIT will now be a precedent, or, at the very least, a starting point when India negotiates new BITs. Local and international media, foreign policy commentators and foreign law firms have found it protectionist. Soon after it was released, in February 2016, India released a Joint Interpretative Statement[14] (JIS), covering key clauses of its existing BITs with 25 countries. The clauses in this interpretation (and a fairly narrow reading thereof) included the definition of investor, investment, fair and equitable treatment, NT and MFN, expropriation, the dispute settlement provision and Denial of Benefits. The interpretation given to these clauses ensures that when there is a dispute, a narrow reading, as provided in the JIS, is given to a clause in question. India’s aim was to negotiate and sign the JIS with 25 countries so that the interpretation of these contentious clauses in the BITs are already determined and future disputes avoided.
In March 2017, hot on the heels of the JIS, India sent the aforesaid termination notices to 58 countries with which it had BITS.
Termination is a significant move in the foreign investment space, and it has not been sufficiently covered by the national, mainstream media. Officially too, there is complete opacity on the subject. But its impact on existing investments is far-reaching. Emerging markets like India are obliged to offer foreign investors a degree of certainty against expropriation and efficacious remedies through (non-local) dispute resolution systems. The claims in the cases of Vedanta-Cairn, Deutsche Telecom, Vodafone etc.,[15] many of which arose from issues such as the aftermath of the 2G spectrum scam and cancellation of licenses by the Supreme Court, did contribute to the environment of uncertainty.
India – and other developing countries – cannot afford to pay high-value awards against themselves. It is clear that these awards are often suffered as a result of inefficient internal systems, which require working on, and a lack of institutionalisation. Investors ought to know this when making investments in emerging markets such as India, and therefore, a claim on such grounds will be unfair since it does not amount to a denial of legitimate expectation.
What balance then, may an emerging market aim for to protect against claims whilst ensuring confidence in businesses? This is the question the government will have to answer. It’s a toss-up between attracting more foreign investment versus refusing traditionally available protections through BITs. An extreme position on either side will not work. Terminating BITs quietly as a reaction to some awards (which came as a surprise to the community of lawyers, investors and policy makers) may not be the best show of faith to a foreign investor.
The model BIT has been widely written about by law and policy commentators as too risk-averse and at variance with India’s past approach to BITs, which allowed a wider set of protections on FET, NT, MFN and other clauses. A middle path may be to negotiate a BIT that offers reasonable protections, such as, keeping the fair and equitable standard intact while narrowing the National Treatment provision and doing away with MFN status since each BIT is negotiated on an individual basis while limiting the dispute resolution clause to certain kinds of disputes of identified state or executive actions etc. This will ensure a balance where, if a private forum such as a local court or commercial arbitral tribunal is available, a party may approach that forum while reserving purely investment-related disputes to BIT claims.
The United Arab Emirates alone has thus far agreed to renegotiate its BIT with India. How a BIT is negotiated will also determine the reciprocal promises India receives for its own investors in those countries. Indian companies have been expanding overseas for some years now, and many are already multinationals of substance. They will benefit from reciprocal protections and be able enforce their rights in respect of their investments made in those foreign countries with which India has signed BITs.
Shalaka Patil is a lawyer with an Indian law firm and her practice is in disputes. She writes on various law and policy issues.
This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.
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References
[1] See for example NTT Docomo v. Tata Sons Ltd. O.M.P.(EFA)(COMM.) 7/2016 & IAs 14897/2016, 2585/2017, <http://lobis.nic.in/ddir/dhc/SMD/judgement/28-04-2017/SMD28042017OMPENFCOMM72016.pdf>
[2] Rukhaiyar, Ashish, “Bombay High Court to Hear Writ Plea on MAT Issue on 6 May,” Livemint, May 01, 2015, 2019, <https://www.livemint.com/Politics/Jh9F8ydxfwCyqLNLt01M4I/Bombay-high-court-to-hear-writ-petition-on-MAT-issue-on-6-Ma.html>
[3] “Reliance Industries Wins International Award in Gas Row with Govt – Times of India,” The Times of India, August 01, 2018, <https://timesofindia.indiatimes.com/business/india-business/ril-wins-intl-award-in-gas-row-with-govt/articleshow/65221285.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst;> GMR Infrastructure v. National Highway Authority of India, W.P.(C) NO. 6792/2008, < https://indiankanoon.org/doc/57612743/?type=print>
[4] “Investment Treaty Arbitration,” Getting The Deal Through, November 2018, <https://gettingthedealthrough.com/area/60/investment-treaty-arbitration/>
[5] Surprisingly, it has been suggested in some pieces that the termination of BITs has not negatively affected foreign investment inflow, See: Public Citizen, “Termination of Bilateral Investment Treaties Has Not Negatively Affected Countries’ Foreign Direct Investment Inflows,” April 2018, <https://www.citizen.org/wp-content/uploads/pcgtw_fdi-inflows-from-bit-termination_0.pdf>
[6] Peacock, Nicholas, and Nihal Joseph, “Mixed Messages to Investors as India Quietly Terminates Bilateral Investment Treaties with 58 Countries,” Herbert Smith Freehills, March 16, 2017, <https://hsfnotes.com/arbitration/2017/03/16/mixed-messages-to-investors-as-india-quietly-terminates-bilateral-investment-treaties-with-58-countries/>
[7] Ibid at 4
[8] White Industries Australia Ltd. v. The Republic of India, Final Award, <https://www.italaw.com/sites/default/files/case-documents/ita0906.pdf>
[9] The favourable provision in question was the providing of “effective means” to an Investor which language existed in the India-Kuwait BIT but not in the India-Australia BIT. White Industries took advantage of the Most Favoured Nation clause in the India-Australia BIT to apply the denial of “effective means” standard to its own case.
[10] Law Commission of India, Arrears and Backlog: Creating Additional Judicial (wo)manpower, Report No. 245, July 2014, <http://lawcommissionofindia.nic.in/reports/report245.pdf<
[11] Kachwaha, Sumeet, “The White Industries Australia Limited – India BIT Award: A Critical Assessment,” The Journal of the London Court of International Arbitration 29, no. 2 (2013): 275-294. Accessed May 24, 2019, <http://www.kaplegal.com/upload/pdf/Kachwaha-article.pdf>
[12] The law eventually changed from 2012 onward. The cases of Bhatia International v Bulk Trading SA (2002) 4 SCC 105 and Venture Global v. Satyam Computer Services Ltd, (2008) 4 SCC 190 which impacted the White Industries enforcement process were prospectively overruled by the Supreme Court Bharat Aluminium v Kaiser Aluminium (2012) 9 SCC 552 on September 6, 2012.
[13] Singh, Kavaljit, and Burghard Ilge, “India Overhauls Its Investment Treaty Regime,” Financial Times, July 15, 2016, <https://www.ft.com/content/53bd355c-8203-34af-9c27-7bf990a447dc>
[14] India’s Consolidated Interpretative Statement, February 8, 2016, <http://indiainbusiness.nic.in/newdesign/upload/Consolidated_Interpretive-Statement.pdf>
[15] Vodafone v. India, UNCTIRAL, Notice of Arbitration (not public), (Apr. 17, 2014); Cairn Energy PLC v. India (UNCITRAL); Deutsche Telekom v. India, ICSID Additional Facility, Notice of Arbitration (not public) (Sept. 2, 2013)