In this era of interlinked economies and globalisation, any one incident, whether financial or otherwise, affects the fortunes of most countries which are wired to the global economy. The collapse of Lehman Brothers constantly reminds us of this global reality. Similarly, any one adverse decision, whether under any policy or law, by any government, triggers the fears of the international community including investors and host governments of these investors. To alleviate fears of such adverse decision-making, the global community, through various international and bilateral treaties, has established rules to protect capital which flows from one geography to other.
One such bilateral treaty protection provided to global investors is through bilateral investment treaties (BITs). India refers to such BITs as Bilateral Investment Promotion and Protection Agreements (BIPAs). Conventionally, every BIPA defines what constitutes an “investment” and, accordingly, the host state undertakes to provide certain minimum protections to an investment made in accordance with the BIPA concerned. Certain standard protections which the host state provides to an investment under a BIPA are:
• no expropriation without compensation;
• fair and equitable treatment (FET);
• full protection and security;
• no arbitrary or discriminatory measures impairing the investment;
• free transfer of funds related to investment; and
• national and most favoured nation (MFN) treatment.
India concluded its first BIPA with the United Kingdom on 14 March 1994. Since then India has signed BIPAs with 82 countries, of which 72 agreements have already come into force. The primary purpose of the Government of India (GoI) in signing these BIPAs was to attract foreign investment into India in tune with the policy of opening up the economy in the 1990s.
Over the past year or so, however, India has been involved in a number of disputes with foreign investors pertaining to its obligations under these BIPAs. As many as 17 companies or individuals, including Germany's Deutsche Telekom, Netherlands-based Vodafone International Holdings BV, Sistema, Children's Investment Fund and TCI Cyprus Holdings have served notices of intent under different BIPAs, challenging various court rulings and policy measures initiated by the GoI. India is not the only state that finds itself facing this problem. The latest UNCTAD report on trends in investment disputes says that last year saw 58 claims filed against various states, including Australia and Germany. This brings the total number of known treaty based cases to 518. The more worrying trend, which lends credence to the calls for reform, is that roughly 66 per cent of these claims were against developing or transition economies. With as many as seven investors reportedly filing claims against India in 2012, it ranks second only to Venezuela’s nine.
India’s problem with BIPAs could be said to have started with the decision of the tribunal constituted under the India–Australia BIPA (BIPA Tribunal) in the case of White Industries Australia Limited v India.
In 2002, White Industries, an Australian mining company, obtained a favourable arbitral award on certain contractual claims from an arbitral tribunal constituted under the agreements entered into between White Industries and Coal India Ltd. On 6 September 2002, Coal India applied to the Calcutta High Court to have said award set aside on the basis of 30 claimed grounds. White Industries filed a petition opposing the Calcutta High Court’s jurisdiction to entertain the application. The Calcutta High Court ruled that the Indian courts had the jurisdiction to consider the application. White Industries appealed this decision to the Supreme Court of India on 31 July 2004. This appeal is still pending determination.
Concurrently, on 11 September 2002, White Industries applied to the High Court at New Delhi to have said award enforced. The matter dragged on for a long period of time before the Delhi High Court finally stayed the enforcement proceedings on 9 March 2006 pending the disposal of proceedings before the Calcutta High Court. White Industries did not appeal this decision by the Delhi High Court. The BIPA tribunal held that the delay by Indian courts to deal with White Industries’ jurisdictional claim in over nine years violated India’s obligation to provide White Industries with an "effective means of asserting claims and enforcing rights". The BIPA tribunal further stated that White Industries could borrow the “effective means” provision present in the India–Kuwait BIPA by relying on the MFN provision of the India–Australia BIPA. The GoI’s argument, that relying on the “effective means” provision in the India–Kuwait treaty will fundamentally subvert the carefully negotiated balance of the BIT, was therefore overruled by the BIPA tribunal. Instead, the BIPA tribunal held that borrowing beneficial substantive provisions from a third-party treaty would not subvert the negotiated balance of the BIT, but, rather, would help achieve the result intended by the incorporation of the MFN provision.
This decision brought to the fore an anomaly in BIPAs entered into by India by pointing to the fact that MFN clauses in these agreements are often worded in a liberal and unrestrained manner enabling investors to rely on more favourable provisions contained in BITs entered with third party countries. As has been discussed above, White Industries relied upon the MFN clause in the Australia–India BIPA in order to borrow the ’effective means” provision in the India–Kuwait treaty. By way of the MFN provision, a state can be held guilty of violating the “effective means” standard even when the concerned BIT does not contain such a provision. The BIPA tribunal observed that the “effective means” standard is lex specialis and a distinct and potentially less demanding test in comparison to the “denial of justice” in customary international law, and that the standard requires both that the host state establishes a proper system of laws and institutions, and that those systems work efficiently in any given case. Therefore, to the extent that the host State's courts experience regular and extensive delays, this may be evidence of a systemic problem with the court system, which would also constitute a breach of the effective means standard. This decision therefore has far-reaching consequences for India, which is looked upon by the international community as a country whose judiciary is known for court congestion and an enormous backlog of cases.
Following the decision in the White Industries case, India has been threatened with a number of investment arbitration proceedings by various investors. In 2012, for instance, Vodafone International Holdings BV filed a notice of dispute under the India–Netherlands BIPA, claiming that the GoI’s decision to enact the Indian Finance Bill 2012 would be a violation of the FET standard, the reason being that the amendment sought to retroactively tax the 2007 share-purchase transaction between Hutchison Telecommunications International Ltd and Vodafone despite the Supreme Court ruling in favour of Vodafone on this issue. Similarly, the Supreme Court’s February 2012 judgment in the much-publicised 2G Spectrum case has been the cause of the majority of arbitration notices served on India by foreign investors. Telenor, Sistema, Loop Telecom and Axiata Group of Malaysia have all filed notices of dispute under applicable BIPAs alleging that the cancellation of 122 2G spectrum telecom licences by the Supreme Court undermined the licence allocation process and was a form of indirect expropriation of their investments, violating the FET standard under the BIPAs. The Children’s Investment Fund (CIF) filed a notice of dispute in a letter addressed to the Minister of Finance, invoking both the India–UK BIT and the India–Cyprus BIT in response to the “seriously impaired business activities and operations of the company” by virtue of their investment in Coal India.
Press articles in the country’s leading news dailies suggest that this sudden upsurge in claims under various BIPAs has prompted the GoI to conduct a review of its existing investment arbitration regime. Based on such review, it has created a permanent working group of secretaries of key ministries that will remain in place until all of India's 82 BIPAs are renegotiated. We understand that the working group has reportedly come up with a draft of a new model BIPA, which will stipulate that a foreign investor will not be able to challenge the legality of an unfavourable verdict from the Supreme Court. Further, the investor would have to mandatorily exhaust remedies under local laws before seeking international arbitration under a BIPA. In the White Industries case, White Industries was awarded A$ 4,085, 180 with 8 per cent interest per annum from 24 March 1998 until 27 July 2010 and continuing at a rate of A$895.38 per day from 27 July 2010 until the date of payment. The huge financial stakes involved in international investment arbitrations justify the GoI wanting to protect its regulatory interests under BIPAs more effectively.
Excess interference of courts with respect to interim measures, the tiresome pace of deciding disputes and above all the uncertainty associated with the enforcement of an arbitral award are always key deterrents for investors who wish to invest into India. The GoI’s stand of renegotiating BIPAs is likely to aggravate the investors’ concerns further.
Accordingly, we believe India can retain and even boost investor sentiment by ratifying the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the Convention). The Convention is a multilateral treaty formulated by the World Bank to create an impartial international forum for the resolution of legal disputes between foreign investors and states through conciliation or arbitration procedures. The ICSID Convention has established the International Centre for the Settlement of Investment Disputes (ICSID) in Washington, DC, to administer these disputes. The Convention came into force in 1996 and has been ratified by 158 countries as of 20 May 2013. The ICSID system has several built-in advantages. For instance, ICSID tribunals have the power to provide interim measures unless the parties agree otherwise as provided under Article 47 of the Convention. Under Article 54 of the Convention, all ICSID contracting member states, whether or not they are parties to a given dispute, are required to recognise and enforce ICSID arbitral awards as if they were a final judgment of a court in that state. The ICSID system does not allow parties to seek annulment of an award before a national court. The only remedies available to a party under the Convention are restricted to:
• a request for interpretation under Article 50;
• a request for revision based on a newly discovered decisive fact under Article 51; and
• a request for annulment by the host state under Article 52.
Under Article 52 of the Convention, annulment proceedings take place before an ad hoc committee which considers five grounds of annulment, namely:
• improper constitution of tribunal;
• manifest excess of tribunal's powers;
• corruption on the part of a tribunal member;
• serious departure from a fundamental rule of procedure; and
• failure to state the reasons on which the award is based.
The stated five grounds for annulment are narrower than the grounds for refusing recognition or enforcement of an award under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). It has been a common practice for states to invoke Article V (2) (b) of the New York Convention to refuse recognition and enforcement of foreign arbitral awards on the ground that their enforcement would be contrary to public policy. The Convention, however, has no such provision.
In recent years, several Indian corporations have made, or have expressed intent to make, sizeable investments abroad. Currently, claims by Indian investors against foreign states or claims by foreign investors against India can only be pursued through the ICSID Additional Facility rules, the UNCITRAL rules or other ad hoc arbitration mechanisms. In all these cases, the awards are subject to national laws on the recognition of foreign arbitral awards so there always remains uncertainty over their enforcement. The Convention is likely to take care of this concern by ensuring reciprocal protection for Indian investors.
In view of the above, we are of the opinion that in the process of rethinking the stance on investor–state dispute settlement, Indian decision makers will have to strike a fine balance between the exercise of powers of sovereign authority and investor protection, so as to make India a long-term and safe foreign investment destination.