Naman Lohiya
“No Party shall subject investments made by investors of the other Party to measures which constitute a violation of customary international law through:
- Denial of justice in any judicial or administrative proceedings; or
- fundamental breach of due process; or
- targeted discrimination on manifestly unjustified grounds, such as gender, race or religious belief; or
- manifestly abusive treatment, such as coercion, duress and harassment.”
India, akin to other developing countries, entered into several bilateral investment treaties (“BIT”) in 1990s. By the virtue of being a developing country and in quest of economic progress, the terms of her BITs were largely investor friendly. While they were feasible and supportive for foreign investors and incentivised them to invest in India; at the same time they were considered detrimental to India. India was soon at the receiving end of initiation of 24 various arbitration proceedings against her. It may be noted that most of these investors belonged to more economically developed nations than India. On the other hand, merely 5 disputes were initiated wherein India was the home state of the investor. In terms of arbitration proceedings, India was evidently not the advantaged party.
The growing number of disputes lead to what may be described as a radical departure from India’s existing practices.[1] It set the base for the Indian Model BIT of 2016. India accordingly sought to terminate its various existing BITs however unlike other countries, she once again intended to sign new treaties on renewed terms prescribed in its Model BIT.
Selling the sizzle, India’s deviation from its investor-friendly tilting approach towards what she deems a balanced position, is novel and unprecedented in multiple ways. India continues to appear and portray itself as an investor friendly state, while at the same time the formulation of its BITs provisions does not seem to precisely corroborate the same. The Model BIT reinforces India’s position as an equal and not a disadvantaged party in broadly two ways. First, the home state is visibly less prone to face proceedings against itself before an arbitral tribunal owing to more stringent thresholds, greater state autonomy and higher burden on the investor to exhaust remedies before initiation of dispute. Second, there has been a noticeable attempt to give greater certainty to the terms of the BIT, seeking to prevent unforeseeable arbitral interpretations which may more often be detrimental to the respondent state.
The two broad features may be evinced through the ‘Treatment of Investments’ clause in the Model BIT. The provision is not only precise in terms of drafting, but is also the result of adoption of a novel approach. The clause although unexampled, seems similar to the Fair and Equitable Treatment (“FET”) standard owing to embodiment of similar principles within it (and circumstantially deriving it from the Report of the Law Commission of India). Considered to be the most frequently invoked provision[2], the FET standard is incorporated in treaties roughly within the confines of three ways. First, an autonomous unqualified self-standing standard; second, qualified by customary international law[3] or third, either autonomous or qualified by international law along with additional substantive content for additional clarity. The Indian Model BIT roughly appears to fall within the boundaries of the third formulation.
The provision, by a noticeable omission to refer to FET standard and being qualified by customary international law, hints towards India’s attempt at not allowing the the standard to merely exist as one that serves the purpose of filling gaps left by other standards. Moreover, the qualification and subsequent laying of specific substantive content also appears to set precise high thresholds to prevent White Industries-like situations. The standard also takes a narrow view of full protection and security, limiting it to only physical security and implicitly excluding any legal protection.
Besides the aforementioned, the provision stipulates its breach only on four grounds:
- Denial of Justice in any judicial or administrative proceedings
- Fundamental breach of due process
Despite trying to ensure greater creditworthiness and portraying itself to be a business-friendly state, India’s governmental administration and judicial courts are plagued with inefficiency. Apart from being affected domestically by red-tapism and enormous backlog of cases, foreign investors have also apparently been aggrieved by such practices. Purely in terms of investor-state disputes, India has never been held liable for denial of justice. Although India was strictly not held liable for denial of justice in White Industries despite a claim being raised, the Tribunal noted that in light of the Indian Supreme Court’s inability to deal with White Industries’ claim for over nine years amounts to deprivation of effective means of asserting and enforcing rights. Moreover, India could potentially be subjected to the aforementioned claims in a plethora of pending disputes such as Vodafone, Devas, Naumchenko and Vedanta[4] amongst others.
Mere reliance on the substantive principles suggests that the Model BIT adopts the usual investor friendly formulation. However, in a subsequent sub-clause, it requires the Tribunal to consider as a mitigating factor whether investor sought remedy in domestic courts. Such consideration may implicitly put additional duty on the investor and provide the host state with a tenable shield. The foregoing duty satisfied, the ball would fall within the Court of the tribunal to subjectively interpret the provisions as they deem fit, similar to India’s previous experiences.
- Targeted discrimination on manifestly unjustified grounds, such as gender, race or religious belief
- Manifestly abusive treatment, such as coercion, duress and harassment
“Manifesta probatione non indigent: Things manifest do not require proof”
-7 Coke, 40.
The two principles currently take their shape after being carved out (and possibly toned down) from a rather high standard to prove breach which may possibly be deemed unfair in itself. This previous post recognised the sky-high bar that an investor is supposed to meet to claim a remedy. The Law Commission of India also noted the same, owing to the usage of words such as ‘outrageous’, ‘egregious’ and ‘manifestly abusive’. While the former two terms were dropped, the later was reserved for two principles.
The scope of the FET provision has been narrowed down and in so far as the threshold is concerned, the terms are ambiguous. In any case, the formulation accounts for higher levels of legal certainty, as opposed to the previous treaties. In terms of the previous experiences, India has not been subjected to these contentions raised by investors and seems unlikely to be raised owing to India’s economic and political stability in this context. ‘Manifest’ grounds or treatment may require the investors to display glaring evidence of violation of rights, which may not conclusively be determined if not for grant of leeway by the tribunal.
Conclusion
The ‘Treatment of Investments’ clause in the Indian Model BIT appears to be based on the Canada-European Union Trade Agreement, but only obtrusively restricted. Notwithstanding the effort to lay down precise standards which may aid both the investor and the host state in regulating their conduct, it nevertheless has the capacity of opening the Pandora’s box. Usage of qualifying words such as ‘fundamental breach’, ‘targeted discrimination’, ‘manifestly unjustified grounds’ and ‘manifestly abusive treatment’ may require choosing between the text of the treaty or principles of equity. Essentially, the treaty insinuates that only grave breaches which are unmistakably apparent must be considered and not the lesser wrongs by the host state. Hence, an investor may only claim remedy on exceptional (and limited) grounds for significant and not trivial breaches. An uncommon and unusual distinction between degrees of breaches is sought to be made.
Significantly, the clause impliedly excludes other key components of fair and equitable treatment standard such as good faith, transparency and legitimate expectations. India accordingly seems to abandon such principles which are open to judicial interpretation and often bend in favour of foreign investors as evinced in an array of decisions.
While not appearing to be the best bet for the investors, the Indian Model BIT regardless seems to be a ray of hope for developing states who have lost more than they have gained out of this process. What is left to be seen is whether developed states would be willing to negotiate with India on such terms and if the text in its current form tilts towards state control merely on paper or also in practice.
[1] Manu Thadikkaran, Model Text for the Indian Bilateral Investment Treaty: An Analysis, NUJS Law Review, Vol. 8(1-2) (2015)
[2] Rudolph Dolzer and Christoph Schreuer, Principles of International Investment Law 119 (2008).
[3] Reference to International Law and International Minimum Standards may also be included within this category.
[4] Cairn India Limited, a subsidiary of Vedanta Resources plc received a notice to pay tax and interest on the basis of retrospective application of a tax legislation. It is similar in terms of domestic legislative basis as the Vodafone dispute. Therefore the claims may largely be of similar character.