MOVEMENT OF NATURAL PERSONS UNDER THE GATS IN COMPUTER AND
RELATED SERVICES
Navigating the Way Forward:
An analysis of the Investor State Dispute Settlement Framework
and the recent developments in India's Investment Arbitration
Regime TABLE OF CONTENTS
S NO.
CONTENTSPAGE NO.
1.Research Methodology and Scope of the Study
4
2.
Introduction: background to Indian International Investment
Agreement Regime
6
3.
Indias Experience With International Investment Arbitration
9
4.
Indias Response To ISDS Claims Threats To Its Policy Space16
5.Analyzing The Changes In The New Model Bit Draft
21
6.
Conclusion
25
7.
Bibliography26
RESEARCH METHODOLOGY
This is a desk and library based research. The main domain of my
paper takes the form of a literature review and analysis. Many
commentators have written on the subject, and therefore, it will
require an analysis of the available literature to come up with my
own conclusion. Both primary and secondary sources have been
explored and as to the current debate on the topic of the new Model
BIT draft of 2015, reference has been made to available internet
sources and newspaper articles.
Model BIT of 1993, the new Model BIT draft of 2015 and a few of
the BITs concluded by India with other countries have been explored
as primary sources. Relevant books, scholarly articles and working
papers have also been examined as secondary sources with the view
to assess changes in Indian ISDS framework. SCOPE OF THE STUDYThe
present study is restricted to the Indian investment arbitration
framework which includes 86 BITs concluded by India and also the
old Model BIT of 1993 and new Model BIT draft of 2015 which was
released recently by the Government of India for public
comments.
The paper begins by giving an overview of Indias International
Investment Agreement Regime. Then it looks into the key features of
Indias 1993 Model BIPA. The next chapter examines various BIT
claims that have been brought against India and discusses the White
Industries arbitration. The next chapter proceeds to examine Indias
response to ISDS threats to its policy space. In this chapter, the
new Model BIT draft is analyzed from the ISDS context. The last
chapter then critically analyses and comments on the changes
brought about in the new Model BIT draft. I. INTRODUCTION:
BACKGROUND TO INDIAN INTERNATIONAL INVESTMENT AGREEMENT
REGIMEBilateral investment treaties (BITs) are often between two
countries aimed at protecting investments made by investors from
either country in the territory of the other. BITs protect
investments by imposing conditions on the regulatory behavior of
the host state, which prevents undue interference with the rights
of the foreign investor. These conditions include restrictions on
the host states power to expropriate the investment; imposition of
obligations on the host state to treat foreign investment fairly
and equitably and not to discriminate against foreign investment;
allowing for repatriation of profits subject to conditions to which
the two countries agree; and, most importantly, allowing individual
investors to bring cases against host state if the latters
sovereign regulatory measures are inconsistent with the BIT. This
procedure is known as the investor-state dispute settlement system
(ISDS) often referred to as investment treaty arbitration (ITA).
Thus, to put it differently, ISDS is a legal instrument in BITs, or
BIT-like bilateral and international agreements such as the Energy
Charter Treaty, that grants investors the right to call for
arbitration in the event they believe that a government has
violated such an agreement. A. History and evolution of Indian BIT
regime
It was in mid-90s that the BITs were initiated by the Government
of India. India refers to such BITs as Bilateral Investment
Promotion and Protection Agreements (BIPAs). The pretext was to
offer favorable conditions and treaty based protection to the
foreign investors and investments. Conventionally, every BIPA
defines what constitutes an investment and, accordingly, the sets
forth certain minimum protections to be accorded by the host state
to an investment made in accordance with the BIPA concerned.
India entered into its first BIPA with the United Kingdom on 14
March 1994. Since then India has signed BIPAs with 83 countries, of
which 72 agreements have already come into force. Additionally,
Indias comprehensive economic partnership agreements (CEPAs) with
Japan and South Korea and its comprehensive economic co-operation
agreements (CECAs) with Malaysia and Singapore include investment
chapters that are similar to BIT agreements. India is also
negotiating a BIT with Canada. Moreover, India started negotiating
a BIT with the United States in 2009.
Although these BIPAs were based on an OECD model text of 1991,
an overview of these BITs will make it clear that each BIT is
different from the other since the negotiating strategy varies from
country to country, and in some cases, provisions allow for
unintended treaty shopping, however; these differences are not
major and most of the BITs share common features. These common
features are in the nature of specific rights. Such standard
protections which the host state provides to an investment under a
BIT 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 favored nation
(MFN) treatment. The basic premise is that the government will not
put the investors and their investments to risks which are either
unreasonable or inappropriate. BITs have become essential tools in
managing foreign investment risks because they provide safeguards
to foreign investments and typically enable foreign investors to
remove investment disputes from the jurisdiction of local courts of
the host state.
At the time of signing them, BITs were generally hailed as a
means to increase foreign investor confidence during the
liberalization of Indias economy. Though it is difficult to
calculate the benefits of BITs, it is generally presumed that it
invariably results in increased investments inflows, increased
employment, and encourages transfer of technology and modern
management skills.
B. The controversial Investor State Dispute Settlement
provision
The most controversial aspects of IIAs, including BIPAs, are the
Investor State Dispute Settlement (ISDS) provisions that allow
investors to subject host foreign governments to international
arbitration if they believe that they have been subject to
expropriation or discriminatory treatment in that country, among
other grounds. However; it is also the most important factor that
makes BIT very important in the eyes of investors since under a BIT
an investor can directly initiate arbitral proceeding against a
State without approaching its own government. Therefore,
Investor-state dispute settlement is one of the key features of the
BITs worldwide and Indian BIPAs are no exception. In Indian BITs,
the investors have an option of approaching ICSID or initiating
arbitration under the UNCITRAL rules. However, it is an important
concern that India is not party to the ICSID convention. Though
there is a possibility of having arbitration under the Additional
Facility Rules of ICSID, it still remains different from a typical
ICSID arbitration and a party will nevertheless have to enforce the
award under the New York Convention.
The ISDS mechanism was originally designed to depoliticize
investment disputes and allow foreign investors a fair hearing
before an independent, neutral and qualified tribunal. However,
controversies around ISDS have gained momentum more recently with
the mechanism being widely criticized as unethical, unfair,
undemocratic, unsustainable and even unconstitutional, giving undue
power and benefit to multinational corporations (MNCs) over host
governments and public policy, thereby placing profit before people
and the environment. Some of the serious concerns that have been
raised about the ISDS mechanism include lack of legitimacy and
transparency; contradictions between arbitral decisions;
difficulties in correcting erroneous arbitral decisions; questions
about the independence and impartiality of the arbitrators; and
costs and time of arbitral procedures.
Over the past few years, India has been involved in a number of
disputes with foreign investors pertaining to its obligations under
these BIPAs. In the light of these claims against the government,
the Department for Industrial Policy and Promotion called for a
review of all BITs signed by India and recently published a draft
Model Text for the Indian Bilateral Investment Treaty (Model BIT)
to revise Indias model bilateral investment treaty of 1993 and to
serve as a framework for the renegotiation of Indias over 80
bilateral investment treaties (BITs). Against this background, this
paper attempts to understand Indias investment regime, particularly
from the dispute settlement perspective. It begins by giving an
overview of Indias ISDS framework in its BITs and then proceeds to
analyze investment disputes that have been initiated against India
over last few years, with a particular focus on White Industries
case. The paper also looks into the impact these disputes have had
on Indias ISDS framework and critically examines changes that India
is trying to bring about in its Model BIT. 2. INDIAS EXPERIENCE
WITH INTERNATIONAL INVESTMENT ARBITRATIONAlthough India has been
entering into BITs since 1994, it did not face disputes from
investors till 2011. Indias real tryst with International
Investment Arbitration came in November 2011 with the first
published investment treaty award against India in White Industries
Australia Limited v. The Republic of India. Following White
Industries case as many as seventeen 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 Government of India.
A. White Industries Case
In 2011, India lost a BIT dispute to an Australian company in
White Industries v. Republic of India. This case involved
challenging judicial delays in enforcing an international
commercial arbitration award as a violation of the India-Australia
BIT. White Industries had obtained an arbitral award, under the
arbitration rules of the International Chamber of Commerce (ICC),
in its favor in a contractual dispute with Coal India, an Indian
public sector company, and sought enforcement of the award before
the Delhi High Court in India. Simultaneously, Coal India
approached the Calcutta High Court to have the award set aside, and
the court granted the request. White Industries appealed to the
Supreme Court in 2004 and the final decision is still pending.
After the appeal to the Supreme Court remained pending for a period
of seven years (that is, nine years after the ICC award), White
Industries initiated a BIT arbitration against India in 201099
under the India-Australia BIT. They claimed, inter alia, that the
delay on the part of the Indian courts to enforce the ICC award
amounted to a violation of the fair and equitable treatment
standard on account of two factors: (1) a denial of justice, and
(2) a breach of White Industries legitimate expectation that India
would adhere to the New York Conventions standards on enforcement
of foreign arbitral awards.101 Relying on the Most Favored Nation
(MFN) clause in the India-Australia BIT, White Industries also
claimed that it was entitled to effective means of asserting claims
and enforcing rights, a guarantee found in the India-Kuwait BIT,
and that the conduct of the Indian courts had breached that
standard. White Industries also alleged that the delay on the part
of the Indian courts amounted to an expropriation of its rights
under the award.
The tribunal, after examining prior investment arbitration
jurisprudence, concluded that the ICC award represented a
crystallization of White Industries rights under a contract and
hence could be characterized as part of White Industries original
investment in India. The tribunal dismissed White Industries claim
of a legitimate expectation about Indian courts not entertaining an
application to set aside a foreign award, noting that entertaining
an application to set aside a foreign award was a regular practice
in the Indian legal system, one of which White Industries should
have been aware. The tribunal also dismissed White Industries claim
of legitimate expectation that an award would be enforced without
delay, citing the Report of the Law Commission of India on delays
in the Indian judicial system. The tribunal also dismissed White
Industries allegation of denial of justice after examining all the
factors, including Indias assertion that the Indian judiciary was
overextended due to its large population. In this regard, the
tribunal held that while the delays were unsatisfactory, they did
not meet the high standards required for establishing a claim of
denial of justice. After agreeing with White Industries that it was
entitled to effective means of asserting claims and enforcing
rights at par with Kuwaiti investors by virtue of the MFN clause in
the India-Australia BIT, the tribunal held that the conduct of
Indian courts, manifested in the inordinate delay in enforcing the
arbitral award, had failed to meet this standard. In determining
the content of the effective means standard, the tribunal relied
heavily on Chevron Texaco v. Ecuador. Additionally, the tribunal
rejected White Industries claim of expropriation, noting that the
award had not yet been taken or set aside.
This award is significant on two levels for investors in India.
First, it opens up another route for investors outside of the
Indian courts. If investors face many years' delay in enforcing
arbitral awards, they may pursue the Government of India directly.
Of course, in order to do this the investors would need to have
access to a similar BIT as the Australia-India BIT, or the
Kuwait-India BIT. Secondly, the award puts additional pressure on
the Government of India to reform the court system in order to make
enforcement of arbitration awards in India more effective.
B. The Dabhol Case
In this case, Enron had made an investment in India through its
Dutch subsidiary to build, own and operate a power plant in India
in order to sell power in India thereafter. The Government of
Maharashtra thereafter tried to terminate the project claiming that
non-competitive bidding procedure was used and Enron invoked
arbitration under the India-Dutch BIT. India. While India paid a
significant sum and settled this dispute one investor successfully
received an award by invoking the BIT arbitration clause against
the Maharashtra State Electricity Board.
C. The Rise of ISDS Cases against IndiaSince the White
Industries case, a series of investor claims have been emerging
against the Government of India, with many foreign investors
threatening to sue under different provisions of various Indian
BITs: i. Different foreign telecommunication companies have issued
many of these ITA notices due to the cancellation of their licenses
by the Indian Supreme Court. This relates to the grant of Unified
Access Service License (UAS) with second-generation (2G) spectrum
to telecommunication companies, of both Indian and foreign origin,
by the Department of Telecommunication of the Indian Government.
The government employed a first-come first-served policy, rather
than an auction, for the allocation of these licenses. A writ
petition was filed in the Supreme Court of India, however, arguing
that the granting of licenses following the first-come-first-served
policy was arbitrary and unconstitutional. The Supreme Court agreed
with the petitioners and held that [t]here is a fundamental flaw in
the first-come-first-served-policy because it allows people with
access to the power-corridor to benefit over those who do not have
such access. The Court held that the 2G licenses granted by the
Indian government were arbitrary and unconstitutional, and hence
all the licenses were illegal. As a result, the Supreme Court
quashed each of the 122 2G licenses granted on or after January 20,
2008, by the Department of Telecommunication. Arguably, the
cancellation of these telecommunication licenses will adversely
affect the investments of many foreign companies who claim that
they invested in India based on the issuance of these licenses and
after getting all the due approvals and clearances from the Indian
state. For example, according to the Norwegian company, Telenor,
one of the companies whose licenses have been cancelled, it bought
these licenses from an Indian company, Unitech, and it played no
role either in the policy of allocating licenses or in the
license-awarding process. Thus, Telenors argument is that its
investment should not be jeopardized by the arbitrariness of the
Indian state.
Subsequent to the cancellation of the 2G licenses, Telenor
issued an ITA notice to India alleging that cancellation of its
licenses by the Supreme Court violates the investment chapter of
the India-Singapore FTA. Sistema, a Russian firm, whose twenty-one
licenses were also among the 122 licenses that the Supreme Court
cancelled, has also served a notice to India to commence the ITA
proceedings under the India-Russia BIT. In the notice, Sistema
argued that cancellation of its licenses following the investment
of billions of dollars in the Indian telecommunication sector is
contrary to Indias obligations under the India-Russia BIT,
including obligations like the non-expropriation of investments and
the provision of full protection and security for the investment.
Khaitan Holdings Mauritius Limited (KHML), another foreign investor
whose twenty-one licenses were cancelled by the Supreme Court,
issued an arbitration notice to the Union of India challenging the
cancellation of its telecommunication licenses.
ii. Vodafone Plc, a UK-based company and the worlds largest
telephone service provider, has sent a notice invoking the
provisions of India-Netherlands BIPA through its Dutch subsidiary
Vodafone International Holdings BV, against the retrospective
application3 of capital gains tax included in the Finance Act,
2012. The proposal in the Finance Act, 2012 is aimed at plugging a
loophole in the Income Tax Act, 1962, which, according to the
government, allowed Vodafone to avoid its tax liability arising
from the acquisition of Indian telecom company Hutchison Essar in
2007 merely because the transaction took place in the Cayman
Islands. Since the takeover deal was carried out from a tax haven,
Vodafone did not have to pay the capital gains tax of $2.2 billion,
which it would have had to pay if the deal was conducted in India.
The justification used by the Government of India has been that
although the deal was concluded in a foreign territory, the assets
involved in the deal were located in the territory of India. In
response to the move of the Government of India, Vodafone has
argued that the tax liability that the firm would incur as a result
would violate a number of provisions of the India-Netherlands BIPA
including fair and equitable treatment, full protection and
security and indirect expropriation of investment.
iii. Deutsche Telecom (DT) has filed notice of arbitration
against India under the Germany-India BIT whereas three separate
Mauritius investors have filed claims under the India-Mauritius
BIT, being aggrieved from the cancellation of its contract with the
marketing arm of Indian space agency; Antrix Corporation Limited
for leasing capacity on satellite based electromagnetic spectrum
for providing multimedia services to Indian consumers.
iv. In March 2012, the Childrens 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. They alleged
that Coal Indias sale of assets to private companies at
below-market price, on the directive of the Government, has caused
a huge loss to the Coal India and in effect, to the companys share
value. This claim is unprecedented as CIF is a minority shareholder
essentially suing Coal India for greater dividends. CIF has since
sold almost 20% of their shareholding in Coal India.
v. The latest in line to put India in the BIT arbitration
spotlight is South Koreas threat to invoke arbitration under the
BIT for adversely impacting the Samsung Electronic investments,
pursuant to a Supreme Court order directing its chairman, Len
Kun-Hee to appear before a Ghaziabad trial court in a $1.4 million
cheating case filed against him by JCE consultancy. The Centre is
concerned over the Supreme Courts order as it is bound to adversely
impact the business and investment climate in the country.
From the perspective of the Indian authorities, these
developments give rise to concerns on the following counts:
i. Bilateral investment agreements are based on a
country-specific strategic give-and take. This intent is undermined
by MFN provisions which allow for treaty-shopping.
ii. Perceived imbalance between host country judicial
sovereignty, regulatory space, public interest, sovereign policy
goals, investor responsibilities and level playing field between
domestic and foreign investors on the one hand and investor rights
based on internationally driven investor protection on the
other.
The proposed arbitration cases would also test Indian
Government's stance that BIPA does not provide for compensation for
the loss of foreign direct investment (FDI) due to Supreme Court's
(SC's) judgments on policy and regulatory issues. This stance has
been taken in the cases relating to SC verdict on 2G scam that led
to cancellation of over hundred mobile phone licenses owned by
joint ventures. It is not merely the provisions of BITs but also
their interpretation by arbitration bodies which are being seen as
a problem by India. If such decisions curb the sovereign power of
the nation under fair and equitable treatment clauses, leaving
little or no scope for governmental decision making and regulation
in public interest, it believes that BITs can end up restricting
all prospective powers of sovereign states. According to legal
experts, the real challenge posed by BIPA commitments does not stem
from the investor-state dispute settlement provision, but from the
broad substantive protections covered in the treaty, which do not
balance investor protection with Indias right to regulate.
Therefore, India realized that it needs to focus on renegotiating
such provisions and narrowing the scope as per its developmental
priorities.
Therefore, this has made it necessary for the Indian government
to consider a broad review of its BIT strategy to remedy existing
imbalances, including through:
i. Re-negotiation of BIPAs
ii. Clarifications on broad, open-ended provisions like creating
favorable conditions for investors, fair and equitable treatment,
free transfer of capital etc.
iii. Incorporation of domestic policy objectives and suitable
exception clauses.
4. INDIAS RESPONSE TO ISDS CLAIMS THREATS TO ITS POLICY
SPACESince the White Industries decision and the series of
potential investor claims against India, there have been increased
calls for a critical review or renegotiation of Indias investment
treaties. Moreover, a review of existing Indian investment treaties
has been deemed imperative in light of Indias deepening integration
with the global economy and increasing number of new trade and
investment agreements, such as the India-EU FTA and a BIT with the
Unites States. India, therefore, decided to revisit its BIT
practice and develop a new model BIT. Indian Government very
recently put the draft text of Indias new model BIT in the public
domain for comments. i. Changes in the Model Draft affecting ISDS
framework First, the new model BIT adopts an enterprise based
definition of investment. Thus, only enterprises constituted in
India that have real and substantial business operations in India
can bring BIT claims. This means that entire foreign portfolio
investment is outside the ambit of the BIT no matter how
significant this investment might be for the Indian economy.
Further, for an enterprise to have real and substantial business
operations in India (Art 1.9) it should engage a substantial number
of employees a phrase that is not defined. Consequently, foreign
corporations, even if constituted in India, who only have a few
hundred employees, will be denied treaty protection notwithstanding
the fact that this investment may have made substantial
contribution such as bringing new technology. Investment is also
restrictively defined and explicitly excludes interests in
government issued debt, court judgments or arbitral awards, and
holding companies or investment companies (Arts 1.6-1.8). Second,
the new model BIT does not contain the MFN provision, which is a
core non-discrimination principle in international economic
relations. Perhaps, to stop treaty shopping by foreign investors.
However, the objective to disallow treaty shopping can be achieved
by restricting MFNs applicability to actual cases of discrimination
in application of domestic measures.
Third, the model BIT provides an exhaustive general exceptions
clause that allows host state to deviate from the obligation of
protecting foreign investment in order to meet other compelling
public policy objectives such as public health. While the inclusion
of such general exception clause is a good step, the model BIT has
made this provision self-judging, which is quite bizarre. Thus,
arbitral tribunal will not be able to undertake full review of any
such regulatory measure, which could result in misuse of this
provision by host state.
It limits acts of Government that may be impugned only to acts
of Central and State Governments (Art 1.3), and excluding any
claims based on measures by local bodies (Art 16.3). Even the
protection of National Treatment is stated not to apply to laws or
measures of regional or local government (Art 4.3).
It explicitly excludes from the scope of the Model BIT any
taxation measure (Art 2.6(iv)), as well as services supplied in the
exercise of governmental authority which [are] supplied neither on
a commercial basis nor in competition with one or more service
suppliers (Art 2.6(iii)), which presumably includes a national
court system. Also excluded are any disputes under investment
agreements entered directly between the Investor and the Host
State; claims under those agreements may not be brought as breaches
of the Model BIT (i.e. excluding umbrella claims).
The Standard of Treatment qualifying investments can expect to
receive is limited to protection from (i) Denial of justice under
customary international law, (ii) Un-remedied and egregious
violations of due process, and (iii) Manifestly abusive treatment
involving continuous, unjustified and outrageous coercion or
harassment (Art 3.1). The Model BIT avoids the more traditional and
general protections of fair and equitable treatment and full
protection and security found in many other BITs.
National treatment protection is afforded such that Investors
are to be treated no less favorably than domestic investments in
like circumstances; thus intentional and unlawful discrimination is
prohibited on the basis of nationality (Arts 4.1-4.2), although
this does not apply to acts of regional or local government (Art
4.3), or to any exercise of discretion regarding whether and how to
enforce, or not enforce, a particular law against a foreign or
domestic investor (Art 4.4).
Expropriation is prohibited save for reasons of public purpose
and where that expropriation is in accordance with the law, and
payment of adequate compensation is made (Art 5.1). The Model BIT
sets out in some detail what may amount to expropriation, and how
any tribunal should assess appropriate compensation and take
account of mitigating factors in its calculation.
Express obligations on Investors are set out in the Model BIT
regarding corruption (Art 9), disclosures and maintenance of
records (Art 10), payment of taxes (Art 11) and compliance with the
law of the Host State (Art 12). All such obligations are conditions
precedent to claiming benefit under the Model BIT (Art 9), and
investors are required to demonstrate compliance with the
provisions in any Notice of Dispute served under the ISDS
provisions (Art 14.3(iii)).
B. Changes in the ISDS provisions
Significant features of the ISDS provisions of the Model BIT
include:- The new model retains the ISDS but it requires an
investor to exhaust all local remedies (judicial and
administrative) before initiating international arbitration. In
other words, an investor will have to first submit its claim before
the domestic courts in the host country. Article 14.3 of the Draft
talks about Exhaustion of local remedies which must be commenced
within 1 year of the date the Investor knew, or should have known,
of the Measure in question and knowledge of the damage to the
Investment. It is worth noting that the current draft does permit
the abandonment of local remedies where to continue to pursue them
would be futile (such as where no domestic remedies are available,
or there is no reasonable possibility of a remedy within a
reasonable period of time).
A detailed Notice of Dispute to be served within 18 months of
the conclusion or abandonment of domestic proceedings, or 3 years
from the claim arising (Arts 14.3(iii) & 14.4), followed by a 1
year cooling-off period during which the parties must use their
best efforts to try to resolve the dispute amicably through
meaningful consultation, negotiation or continued pursuit of any
available domestic remedies or solutions (Art 14.3(iv)).
90 days before submitting any claim to arbitration, the Investor
must serve a detailed Notice of Arbitration including an
identification of the specific breaches of the treaty protections
alleged, and a calculation of the amount of damages claimed as a
result (Art 14.4(i)(B)).
Arbitration before a 3 person tribunal under UNCITRAL Rules,
where the tribunal shall give special consideration to a seat in
the capital city of the Host State (Art 14.7).
A presumption of Transparency whereby the Respondent state shall
make available to the public the Notice of Arbitration, and all
pleadings, transcripts, orders and awards, save where specific
steps are required to protect confidential information (Art 14.8).
This presumption extends to holding hearings for argument and the
presentation of evidence in public (Art 14.8(ii)).
The model includes a provision at Art 14.11 allowing for the
state party to make a counterclaim against an Investor for breach
of Articles 9, 10, 11 or 12 (Corruption, Disclosure, Taxation and
compliance with Host State Laws). The question of tribunal
jurisdiction over state counterclaims under BITs has been a matter
of debate and disagreement in a number of treaty cases (such as in
Spyridon Roussalis v. Romania, Goetz v. Burundi and Al Warraq v
Indonesia) and it is interesting to see it being explicitly
addressed through drafting.
5. ANALYZING THE CHANGES IN THE NEW MODEL BIT DRAFTThe disputes
with foreign investors signal the emerging struggle between foreign
investors and sovereign states in the economic spaces, which are
looking constricted in the face of the uncertain economic
prospects. In the post-crisis world, governments have increasingly
been called upon to manage the economies, but their ability to
formulate policies has run contrary to the rights granted to
foreign investors. This has forced several governments in the
developed world, most notably the United States (US), to have a
relook at their bilateral investment treaties (BITs) and other
agreements guaranteeing investor rights. The latest UNCTAD report
on trends in investment disputes says that last year saw 58 claims
filed against various states, including Australia ad 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
Venezuelas nine.
A. Changes only symptomatic of the global trend
Against this context, some commentators argue that the changes
in the new Model BIT are only symptomatic of the larger global
backlash against Investment Treaty Arbitration. Australia, for
example, has stopped signing BITs, which have arbitration
provisions even though White Industries award was granted in favor
of an Australian investor. South Africa has also decided to review
its existing BITs with a view to terminating and possible
renegotiation on the basis of a new Model BIT. Further, Venezuela,
along with Ecuador and Bolivia, before it, have denounced the ICSID
Convention to stem the investment arbitration cases against it.
The subject of investor-state dispute settlement (ISDS) has
occupied the center stage in the expropriation discourse due to a
spate of recent developments across the globe. There are also
concerns about bias in ISDS cases in internationally arbitrated
disputes. Of the fifteen lawsuits filed against the US Government
under the ISDS clause in FTAs with various nations, the US has won
every time. This has, for example, led to concerns in South Korea
on two counts:
Infringement of national/judicial authority: By challenging
policies of host nations, US investors could distort public
policies.
Reverse discrimination against citizens of host nation: If
rulings go in the US investors favor, it would create an unfair
advantage for the investor over local firms by exempting the former
from certain policies.
This signaled the need for redefinition of major elements of
ISDS mechanism to factor in recent disputes that turned focus on
ambiguities or deficiencies in ISDS system as mentioned in the
bilateral or global investment protection agreements. UNCTAD, which
has analyzed arbitral interpretation processes involving
international investment agreements (IIAs), has also provided
valuable insights for balancing investor protection and
developmental imperatives. UNCTADs advice is summarized in the
following paragraphs:
Countries and negotiators are learning from their experiences
and new challenges lie ahead as the first generation of treaties
comes up for renewal and renegotiation. Specifically, given the
kinds of interpretations the scope and definition clauses have had
in recent years, concern has grown over the actual coverage of IIAs
and whether they are offering too wide a field of support for
investors and the various categories of investments that specific
treaties have been found to protect
Such concerns result in a changing environment for negotiators
and a change in negotiating objectives. In particular, it is now
open to discussion whether IIAs have become too one-sided in that
expansive interpretations of the scope of coverage and protection
offered by such agreements have led to fears that the host countrys
national policy space and right to regulate have been unduly
curtailed in ways that might adversely affect genuine development
policy objectives (UNCTAD 2003, chapters V and VI). In addition,
given the emphasis placed by host countries on investor and
investment promotion, it may be useful for protection to be more
targeted covering not all investments, but only investments that
can contribute to development
This entails two objectives in particular. First, IIAs should be
focused on investment that generates development benefits and,
secondly, that the stability and predictability of the legal
system, required by investors and their investments, is enhanced by
clear and focused rules.
All this background gives a strong and reasonable indication
that while preparing the model BIT, Indian negotiators were aware
of this global trend and knew that the host states sovereign
regulatory functions whether of the executive, legislature or
judiciary can fall under the ambit of BITs unless specifically
excluded. Therefore, an attempt has been made to strike a balance
between the costs and benefits of ISDS. Recent claims against India
had made it amply clear that the existing BITs could potentially
constrain Indias regulatory discretion in the future. The policy
makers also seem to have questioned the assumption that BITs help
attract overseas investors. Indeed the experiences of countries
such as Brazil and China show that neither Brazils failure to
ratify BITs nor the restrictive terms in Chinas investment treaties
have dissuaded foreign investors from entering the country.
Therefore, India focused on renegotiating its investment treaty
provisions and narrowing the scope of its provisions according to
its developmental priorities.There are a number of significant
features in the Model BIT that appear to be reactions to the BIT
claims that India has been faced with over the last few years.
These include the White Industries award of 2012, the Vodafone
case. In this regard, and perhaps unsurprisingly, many parts of the
Model BIT appear to be framed as an attempt to limit protections
afforded to inbound investors into India, rather than ensuring the
protection of outbound Indian investors into overseas markets.
Several of the provisions appear to be squarely aimed at preventing
repeats of these previous claims; for example, the absence of an
MFN clause, and specific exclusions of claims based on taxation or
the provision of non-commercial services by the host state. On the
other hand, various portions of the lengthy draft, such as the
detailed provisions prescribing the contents of a Notice of Claim
and Notice of Arbitration under the Investor-State dispute
settlement (ISDS) provisions, and the provisions on arbitrator
independence and challenge, appear to be attempts to incorporate
aspects of the current debate around ISDS in the TPP (Trans-Pacific
Partnership) and TTIP (Transatlantic Trade and Investment
Partnership) as a template for more explicit treatment of such
matters in future BITs.
B. Risk of going overboardSome scholars argue that Indias new
model BIT, far from striking this critical balance, is a knee-jerk
reaction to foreign corporations suing India under BITs. Indias
guiding philosophy behind the new model BIT appears to be
completely immunizing her from BIT claims. One concedes that the
role of BITs in attracting foreign investment should not be
exaggerated. Nevertheless, BITs act as a signaling device to
foreign investors about congenial investment environment. This is
more so for a country like India, which is ranked abysmally low at
142, out of 189 economies, in the World Banks index of ease of
doing business. Also, it has been conveniently forgotten that the
same unworkable BIT will be relied by Indian companies to safeguard
their investment when subjected to arbitrary state action
overseas.
It would be nave to argue that BIPAs dont play any role in
influencing the flow of foreign investment. Leaving aside resource
rich countries such as Brazil or Venezuela - which will attract
foreign investment irrespective of whether they have investment
treaties or not - investors (of domestic or foreign origin) do look
for predictability of the regulatory environment that is ensured by
investment protection treaties. Besides, investment treaties
provide an extra layer of protection to foreign investors over and
above what is possible under the domestic legislative framework.
BIPAs also have sentimental effects on foreign investors, and dwell
on the overall investment climate that India can ignore at its own
peril given its dismal ranking (142 out of 189) on the ease of
doing business according to the World Bank. Indias image has
already taken a hit because of a series of tax disputes involving
MNCs, such as Vodafone and Nokia. The absence of investment
protection treaties would also imply that aggrieved Indian
businesses, many of which have substantial overseas presence, will
not be able to successfully challenge unfavorable regulatory
changes or seek international arbitration for damage.
CONCLUSION
While the reasoning behind the review of BIPA is well
understood, and their intention of safeguarding Indias interests to
ensure avoiding any undue liability is reasonable, the new Model
BIT draft undermines the fundamental purpose of the BIT to promote
and protect investments. ISDS is the essential element in any
investment agreement which grants foreign investors the right to
take legal action against the sovereign regulatory measures of the
host state. Although this may restrict the regulatory space
available to the States, the new radical changes to ISDS provisions
will most certainly have an adverse impact on Indias investment
climate, as well as place growing Indian investments abroad at
risk. The self-judging general exception clause and the local
remedies exhaustion clause seem to be the major problems in the new
Model BIT draft. Indian courts have gained the notoriety of having
a gigantic backlog of cases along with a complicated and
time-consuming court procedures. In this context, the new provision
mandating exhaustion of local remedies would act as a major
disincentive to foreign investors. BITs offer an important
protection to foreign investors, particularly by increasing their
confidence in uncertain global economic circumstances. In recent
years, several foreign investors have been struggling to establish
and grow in India, mainly owing to regulatory hurdles, poor
infrastructure, difficulties in land acquisition. Against this
background, the changes in ISDS clauses could further add to
foreign investors worries. Moreover, recent investment trends
suggest that India is fast becoming an exporter of capital and a
move to render ISDS clauses futile could jeopardize the interests
of Indian investment abroad, which has risen in recent years.
Reform is a gradual process, and the new Model BIT draft is merely
a first major step in the reformation of the entire system. Instead
of only depending on reforms in BITs, India should initiate
domestic policy changes such as strengthening the domestic
arbitration environment, boosting judicial proceedings and easing
procedures of issuing business visas or visa on arrival to attract
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TA \l "Prabhash Ranjan, Bilateral Investment Treaties and the
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(2014)" \s "Prabhash Ranjan, Bilateral Investment Treaties and the
Indian Judiciary, 46 George Washington International Law Review 4
(2014)" \c 8 [Hereinafter Ranjan 2014].
Rudolf Dolzer & Christoph Schreuer, PRINCIPLES OF
INTERNATIONAL INVESTMENT LAW 1314 (2d ed. 2012) TA \l "RUDOLF
DOLZER & CHRISTOPH SCHREUER, PRINCIPLES OF INTERNATIONAL
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"Roderick Abbott et al., Demystifying Investor-State Dispute
Settlement (ISDS), ECIPE OCCASIONAL PAPER, No. 5/2014, p.3,
available at:
http://www.ecipe.org/app/uploads/2014/12/OCC52014__1.pdf" \s
"Roderick Abbott et al., Demystifying Investor-State Dispute
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.
NDA, Bilateral Investment Treaties and India, available at:
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Id.
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TA \l "Souvik Ganguly and Shantanu Kanade, Revisting India's Stance
on Investor-State Dispute Settlement, available at:
http://indianlawyer250.com/features/article/223/revisiting-indias-stance-investorstate-dispute-settlement/"
\s "Souvik Ganguly and Shantanu Kanade, Revisting India's Stance on
Investor-State Dispute Settlement, available at:
http://indianlawyer250.com/features/article/223/revisiting-indias-stance-investorstate-dispute-settlement/"
\c 8 [Hereinafter Ganguly and Kanade]
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Id.
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TA \l "Gavin Pereira, India's Obligations under Bilateral
Investment Treaties (Part A): \Bilateral Inhibiting Treaty?\
Investigating the Challenges that Bilateral Investment Treaties
pose to the Compulsory Licensing of Pervasive Technology Patent
Pools, available at:
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\s "Gavin Pereira, India's Obligations under Bilateral Investment
Treaties (Part A): \"Bilateral Inhibiting Treaty?\" Investigating
the Challenges that Bilateral Investment Treaties pose to the
Compulsory Licensing of Pervasive Technology Patent Pools, avail"
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Id.
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Bloomberg Businessweek, available at: http: //www.
businessweek.com/
articles/2014-03-20/in-trade-talksits-countries-vs-dot-companies"
\s "Peter Coy et al., In Trade Talks, Its Countries vs Companies,
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businessweek.com/
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TA \l "S. Bhushan and Puneeth Nagaraj, Need to align BIT regime
with global reality, available at:
www.thehindu.com/business/companies/need-to-align-bilateral-investment-treaty-regime-with-global-reality/article4276916.ece"
\s "S. Bhushan and Puneeth Nagaraj, Need to align BIT regime with
global reality, available at:
www.thehindu.com/business/companies/need-to-align-bilateral-investment-treaty-regime-with-global-reality/article4276916.ece"
\c 8
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2015/04/02/indian-government-seeks-comments-on-a-proposed-draft-model-text-for-the-indian-bilateral-investment-treaty/
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\s "Nicholas Peacock et al., Indian Government seeks comments on a
proposed draft Model Text for the Indian Bilateral Investment
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"Agreement Between the Government of Australia and the Government
of the Republic of India on the Promotion and Protection of
Investments, Austl.-India, Feb. 6, 1999, 2116 U.N.T.S. 145" \s
"Agreement Between the Government of Australia and the Government
of the Republic of India on the Promotion and Protection of
Investments, Austl.-India, Feb. 6, 1999, 2116 U.N.T.S. 145" \c 3
[hereinafter Austl.-India BIT Agreement].
Ranjan, supra note 1.
Id.
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ita0151.pdf. TA \l "Chevron Corp. (U.S.) v. Ecuador, Case No.
2009-23, Partial Award on Merits (UNCITRAL 2010),
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Id.
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Singapore, Successful BIT claim against India for court delays,
Feb, 2012, available at:
https://www.ashurst.com/doc.aspx?id_Content=6897." \s "Ashurst
Singapore, Successful BIT claim against India for court delays,
Feb, 2012, available at:
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Id.
B. Choudhary & P. Kulkarni, Bilateral Investment Treaties:
Understanding New Threats to Development in a Comparative Regional
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www.policyinnovations.org/ideas/policy_library/dat TA \l "B.
Choudhary & P. Kulkarni, Bilateral Investment Treaties:
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Perspective, at 12, (2006), available at:
www.policyinnovations.org/ideas/policy_library/dat" \s "B.
Choudhary & P. Kulkarni, Bilateral Investment Treaties:
Understanding New Threats to Development in a Comparative Regional
Perspective, at 12, (2006), available at:
www.policyinnovations.org/ideas/policy_library/dat" \c 8 .
Capital India Power Mauritius I and Energy Enterprises
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India Power Mauritius I and Energy Enterprises (Mauritius) Company
v. India (Award, 27 Apr. 2005)." \s "Capital India Power Mauritius
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