Shivangi Chandra | University of Mumbai Law Academy | 15th August 2020
Introduction
Investment arbitration is a mechanism in a free trade agreement or investment treaty that provides foreign investors, with a right to access international tribunal to resolve investment disputes with the host state. A massive escalation in attracting foreign direct investments (FDI) has led to a significant increase in International Investment Agreements (IIA’s) at bilateral and regional levels. Consent to investment arbitration is most commonly given by host States in International Investment Agreements (IIA’s), including Bilateral Investment Treaties (BIT’s) as well as Free Trade Agreements (FTA’s) and multilateral agreements.
Within IIAs, specific procedures have been put in place with respect to the settlement of disputes between private parties and the host country arising from investment. The vast majority of BITs, as well as some regional agreements and other instruments, contain provisions on investor-state dispute settlement. The usual approach to investor-State disputes in IIAs is to specify that the parties to a dispute must seek an amicably negotiated settlement. If amicable negotiations fail to resolve a dispute, international arbitration is usually the next step – either on an ad hoc or an institutional basis.[i]
The sense of security provided through Investor-State dispute settlement provisions in IIA’s has acted as a catalyst in creating a favourable investment climate for foreign investors into the host countries. This holds prominent importance in developing countries where the investors get a guarantee to not be overly regulated by the host country and avoid wide gamut of judicial procedures in such a country. Nevertheless, there have been fears about frivolous or vexatious claims that could inhibit legitimate regulatory action by Governments, as well as concerns about balancing national and international methods of dispute settlement.[ii]Furthermore, the relatively nebulous language of treaty provisions and the increasing complexity of IIAs can make the result of arbitration less expectable.
Investor-state provisions have existed in the trading world since the 1960s, the applicability of these provisions to constitute arbitration proceedings have been relatively new. Since 1987 – when the first investor-State dispute based on bilateral investment treaties (BITs) was recorded under the arbitral proceedings of the International Centre for Settlement of Investment Disputes (ICSID).[iii] At least 61 Governments – 37 of them in the developing world, 14 in developed countries and 10 in South-East Europe and the Commonwealth of Independent States – have faced investment treaty arbitration.[iv]
Although the aim is of a hassle-free settlement of a dispute between the investor and the state it is not free of ambiguities. These major drawbacks have stimulated out of the limited meaning of certain provisions of IIA’s, for example, the meaning of ‘Fair and Equitable’ provisions stands unclear while different interpretation of the same yields different results.
What is a BIT?
Bilateral Investment Treaties (BITs) are treaties between two countries aimed at protecting investments made by investors of both countries.[v] BITs protect investments by imposing conditions on the regulatory behaviour of the host state and thus, prevent undue interference with the rights of the foreign investor.[vi] These treaties safeguard the interest of the investors by providing regulations of treatment, right to establishment and redressal of disputes if they arise by submitting to negotiations and arbitrations rather than to the host country’s judicial body. There has been a steady increase in the number of BITs across the world—from 500 in 1990s to more than 3,324 by the end of 2016.[vii] The consequence of which has been an increase in investor-state disputes in international investment laws where wide arrays of over regularised laws specifically for investors by host countries have been challenged by investors as potential breaches of BIT’s.
Indian BIT: a brief history.
The origin of Indian BIT dates back to the year 1990s when as a part of its liberalization scheme adopted in 1991 India entered into first BIT with the United Kingdom in 1994. The next model of BIT was drafted on the very template of 1994 in the year 2003. The 2003 model attracted a lot of backlash soon after the first publically known arbitral award was issued against India in the case of White Industries v. India.[viii] The lack of attention of the government on the provisions of its BIT was critically commented upon by academicians, reporters, international investors and research scholars from 2003 up till 2011. This resulted in a series of development that took place; there was an increased involvement in ISDS on the Indian footing with a plethora of cases slapped against India soon after its first arbitral award. There was a demand in India to revisit its BIT and frequent discussions in the Parliament.[ix]
The major development relates to internal debate with the Indian government on BIT. The Ministry of Commerce’s discussion paper “International Investment Agreements between India and Other Countries,”[x] prepared in 2011 was greatly inspired by the work of the United Nations Conference on Trade and Development (UNCTAD) on BITs.[xi] The paper recognised that “when developing countries enter into BITs, a balance between investors’ rights and domestic policy must be ensured.”[xii] This paper was then subjected to review from the year 2012 which finally led to the adoption of Model BIT in 2016.
Analysis of major ambiguities in IIA’s with respect to Indian BIT
Investor/ investment definition.
The issue of how to read the definition of investment and who qualifies as an investor is a complex. The investor entitled to use investor-state dispute redressal mechanism depends on the very definition of what and who constitutes as an investment and an investor respectively. In Chapter 11 of NAFTA, an “investor” can initiate the claim on behalf of the “investment” (i.e. the company established in the host country) or on its own behalf as an injured investor.[xiii]
The BIT replicates a similar approach and the concept of ‘investment’ has a broad scope both in NAFTA and BIT’s. Usually, BIT’s operate based on an asset-based definition of investment which covers broad categories of forms of investment. Traditional treaties such as the FCN treaties defined the formula of ‘Investment’ to be ‘properties, rights and interests.’ The definition of investment and investor forms the backbone of applicability of BIT and jurisdiction under the BIT. BITs generally envisage one of the two approaches to defining ‘investment’ – asset-based or enterprise-based.[xiv]
The asset-based definition of investment includes every asset worth an economic value, acquired and established by a foreign investor as an investment. Whereas if we consider the enterprise-based definition of investment, only an investment that has been constituted and is operating as a legal entity with the real or substantive business within the host state qualifies as in ‘investment’ under the ambit of BIT and only such investment are guaranteed protection and security under BIT.
Under the 2016 Model BIT Article 1.3 defines an ‘enterprise’ as a legal entity constituted, organized and operated in accordance with the law of the Host State. Article 1.4 defines ‘investment’ as an enterprise constituted, organized and operated in ‘good faith’ in the Host State and ‘in compliance with the law’ of the Host State.[xv]
Additionally, the ICSID Convention also contains the term ‘Investment’ in Article 25. Although this term is not defined, parties to BITs referring disputes to ICSID have been required to fulfil a double-barrel test – to fulfil the definition of Investment under the relevant BIT but also satisfy the objective criteria of investment under the ICSID Convention.[xvi].
Treatment to Investment
The major expectations arising out of a bilateral investment agreement is that of ‘Fair and Equitable Treatment’ (FET) as well as ‘Protection and Security’. The foreign investors need an assurance that their investment into a foreign land will have fair and equitable treatment when compared to the host country’s enterprises. They enter into BIT’s to make sure that they have protection and security against civil unrest and illegal disturbances.
The standard of FET and protection and security are the most debated issue in arbitral disputes under investment agreements on the grounds of lack of meaning attached to these standards. The threshold for this standard was articulated in S.D. Myers v. Canada, where the tribunal held that a breach of the fair and equitable treatment standard, in Article 1105 of NAFTA, “occurs only when it is shown that an investor has been treated in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective”.[xvii] In Pope & Talbot, Inc. v. The Government of Canada, it was held that the standard applies to conduct that requires a failure of due process that surprises the observer, a standard that would be more “rigorous for evaluating what governments do to people and companies”[xviii]
The 2016 India Model BIT does not contain a FET clause, but rather a “treatment of investments” clause.[xix] It prohibits a country from subjecting foreign investments to measures that constitute a violation of customary international law. The reference to customary international law highlights India’s attempt to restrict the interpretation of the standard to minimum standard treatment without making express mention of the FET standard.[xx]
The India Model BIT provides that foreign investment and investors shall be accorded full protection and security.[xxi] Further, the Model provides that FPS is restricted to physical security for foreign investment and investors and does not extend to ‘any other obligation whatsoever’.[xxii] The clear definition provided by Indian Model of BIT 2016 is a clear attempt to curb out arbitral discretion on the standard of ‘Protection and Security’.
National Treatment
One of the main expectations arising from an investment agreement is that foreign investors will not be subject to discriminatory treatment by the host country, including through legal, administrative or other decision-making. The principle of non-discrimination is usually formulated in a provision on national treatment that requires treatment “no less favourable” than that provided to domestic investors “in like circumstances”. [xxiii]
As observed in the Methanex case: “As to the question of whether a rule of customary international law prohibits a State, in the absence of a treaty obligation, from differentiating in its treatment of nationals and aliens, international law is clear. In the absence of a contrary rule of international law binding on the States parties, whether of conventional or customary origin, a State may differentiate in its treatment of nationals and aliens.”[xxiv]
The 2016 India Model BIT provides for national treatment. It provides that a Party shall not apply measures that accord less favourable treatment than that it accords, in like circumstances, to its own investors or to investments by such investors with respect to the management, conduct, operation, sale or other disposition of investments in its territory. However, the interpretation of ‘like circumstances’ does not carry blanket meaning and hugely based on case- to – case analysis.
Expropriation
The norm of Expropriation in international law is that foreign-owned property may not be expropriated or subject to a measure tantamount to expropriation, unless four conditions are met:
- the measure is for a public purpose;
- it is taken in accordance with applicable laws and due process;
- it is non-discriminatory; and
- Full compensation is paid.[xxv]
However, the majority of disputes in a BIT arise out of expropriation. BITs regulate the conditions and consequences of this right of expropriation. The very basic element of this right is establishing that the property to be taken constitutes an ‘Investment’ under BIT. This does not merely relate to tangible property. Expropriation can also cover intangible assets such as intellectual property, moveable assets such as shares, rights under contracts, arbitral awards.[xxvi]
Expropriation can be both direct and indirect. Direct expropriation means taking away of tangible or intangible property by the host state to transfer the ownership of the property to another person. Whereas, indirect expropriation relates to taking away of the property (tangible/intangible) without any effect on the title of the investment. The latter is more widespread.
The 2016 Indian Model BIT covers both direct[xxvii] and indirect[xxviii] expropriation. It provides that direct expropriation would constitute a formal transfer of title or outright seizure. Indirect expropriation would occur if measure(s) substantially or permanently deprives the investor of fundamental attributes of the property in its investment such as the right to use, enjoy and dispose of the investment without formal transfer of title or outright seizure.[xxix]
Conclusion
Through this article, we have tried to identify some of the issues concerning investor-state dispute settlement procedures with regards to Indian Model of BIT 2016. Chapter IV of the 2016 India Model BIT deals with Settlement of Disputes between an Investor and a Party’. This is the longest chapter on the settlement of disputes in any BIT so far and contains eighteen (18) articles.
Although the BIT in India has undergone several remarkable changes in interactions and altercations under various BITs, several proceedings have been initiated against India under BIT. 2016 Model of Indian Bit appears as a knee-jerk reaction from India to the spate of proceedings being initiated against it under several BITs. It is crystal clear that the 2016 India Model BIT has been understood to house several provisions that tilt the balance in favour of the host State and give rise to a protectionist model.
It is pertinent to point out that India has requested twenty-five of its BIT partner countries to issue joint interpretative statements to resolve, what India describes as ‘uncertainties and ambiguities that may arise regarding interpretation and application of the standards contained, in India’s BITs. If these joint interpretative statements are finalized, India expects that they would become an important element in the process of treaty interpretation. There is no information available as to how many countries have responded to this request except Bangladesh.[xxx]
[i] (UNCTAD, 2003a, 2003b)
[ii] (UNCTAD 1998, 2003a, 2003b)
[iii] Asian Agricultural Products Ltd. v. Republic of Sri Lanka, ICSID Case No. ARB/87/3, 27 June 1990
[iv] https://unctad.org/en/Docs/iteiit20054_en.pdf
[v] For a general discussion on BITs see R. DOLZER & C. SCHREUER, PRINCIPLES OF INTERNATIONAL INVESTMENT LAW (2012); A. NEWCOMBE & L. PARADELL, LAW AND PRACTICE OF INVESTMENT TREATIES 1-73 (2009); JESWALD SALACUSE, THE LAW OF INVESTMENT TREATIES (2015).
[vi] DOLZER & SCHREUER, supra note 1, at 13.
[vii] See UNCTAD, WORLD INVESTMENT REPORT – INVESTOR NATIONALITY: POLICY CHALLENGES 101 (2017).
[viii] White Industries Australia Limited v. Republic of India, UNCITRAL, Final Award (Nov. 30, 2011).
[ix] See Pinaki Misra, Lok Sabha Questions, Unstarred Question No. 5870 on Bilateral Investment Treaties, Parliament of India. A Member of Parliament, in May 2012. See also M S Reddy, Lok Sabha Questions, Unstarred Question No. 3926 on Bilateral Investment Pacts, Parliament of India.See also Bhola Singh, Lok Sabha Questions, Unstarred Question No. 4946 on Bilateral Investment Treaty, Parliament of India (16 December 2016).
[x] Ministry of Commerce, Government of India, International Investment Agreements between India and Other Countries.
[xi]This is evident from the fact that the paper quotes various UNCTAD reports multiple times to support different arguments. See for UNCTAD’s work on BITs http://unctad.org/en/pages/DIAE/International%20Investment%20Agreements%20(IIA)/International-Investment Agreements-(IIAs).aspx.
[xii] See supra note 25; supra note 26.
[xiii] (Articles 1116-1117).
[xiv] Berk Demirkol, The Notion of ‘Investment’ in International Investment Law (February 1, 2015). (2015) I Turkish Commercial Law Review 41.
[xv] Indian Model BIT 2016, Article 1.3 & 1.4
[xvi] CSOB v. Slovakia, Decision on Jurisdiction, 24 May 1999; MHS v. Malaysia, Award on Jurisdiction, 17 May 2007
[xvii] S.D. Myers Inc. v. Canada, op. cit., paragraph 263.
[xviii] Pope & Talbot, Inc. v. The Government of Canada, op. cit. Award on Damages, paragraph 64.
[xix] Indian Model BIT 2016, Article 3.1
[xx] . Ranjan and Pushkar, The 2016 Indian Model BIT at 23.
[xxi] Indian Model BIT 2016, Article 3.2
[xxii] Id., Article 3.2
[xxiii] UNCTAD, 1999c
[xxiv] 6. Methanex Corporation v. United States (Final Award of the Tribunal on Jurisdiction and Merits, 3 Aug. 2005) [Methanex] at Part IV – Chapter C, para. 25
[xxv] see Antoine Goetz v. Republic of Burundi, ICSID Case No. ARB/95/3, Award, 10 February 1999 (Belgium Luxembourg Economic Union/Burundi BIT).
[xxvi] Saipem v. Bangladesh
[xxvii] Indian Model BIT 2016 Article 5.3 a (i)
[xxviii] Indian Model BIT 2016 Article 5.3 a (ii)
[xxix]Seehttp://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Bilateral_Investment_Treaty_Arbitration_and_India-PRINT-2.pdf
[xxx] Jarrod Hepburn, Unable to Unilaterally Terminate a 2011 BIT, The Government of India Persuades Counter-Party to Agree Joint Interpretive Note to Clarify BIT’s Implications, IA REPORTER (Jul. 17, 2017) https://www.iareporter.com/articles/unable-tounilaterally-terminate-a-2011-bit-the-government-of-india-persuades counter-party-to-agreejoint-interpretive-note-to-clarify-bits-implications/
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