Do New-Age International Investment Agreements Introduce a Method to the Madness of State Counterclaims in Investment Arbitration?

Vishesh Sharma* and Vishakha Choudhary**

Uniform jurisprudence concerning state counterclaims in investment arbitration remains elusive. Ordinarily, the conditions for their presentation are twofold[1]: parties should have consented to arbitration of counterclaims, and the counterclaims should be connected to the primary claim. However, tribunals have oscillated between strict application[2] of these criteria, to extreme dilution based on liberal interpretations of International Investment Agreements (“IIAs”). Notably, in the recent David Aven[3]award, the jurisprudence on counterclaims took a novel direction – disregarding the traditional ‘close connection’ test, the Tribunal permitted counterclaims simply by noting obligations incumbent upon investors pursuant to the CAFTA-DR.

These winds of change signal a departure from an already shaky trend. To induce certainty in investment protection regimes, the new generation of IIAs should take a decidedly clear approach to counterclaims. In this light, the present inquiry seeks to analyse recent policy response to arbitral awards on counterclaims, and the harmony between extant case law and provisions of these model IIAs. Finally, it offers suggestions for simultaneously achieving judicial efficacy and preventing abuse of the investor-state dispute settlement (ISDS) mechanism vis-à-vis counterclaims.

Arbitrating Counterclaims: Ambiguous Judicial Response to Ambiguous IIAs

IIAs fail to explicitly allow or restrict the arbitration of counterclaims. Accordingly, their jurisdiction and admissibility in investment disputes remain contentious. These issues are largely decided through recourse to treaty interpretation.

With respect to jurisdiction, tribunals primarily assess whether the IIA evinces parties’ consent to submit counterclaims to arbitration. Early tribunals such as Saluka[4]and Paushok[5]found such consent implicit in broad dispute resolution clauses of their respective applicable IIAs, since these clauses did not restrict the scope of arbitrable ‘investment disputes’. More recent decisions in Metal-Tech[6]and Urbaser[7] derived the requisite consent from the neutral phrasing of dispute resolution clauses, which did not limit standing for initiating claims to investors. Conversely, jurisdiction over counterclaims was denied in Rusoro Mining[8], as the IIA in question restricted investment disputes to disputes arising from breaches of the treaty by the host state. Pertinently, in 2011, two controversial and corresponding views with respect to jurisdiction over counterclaims emerged in the form of the Goetz[9]award and the Roussalis dissenting opinion[10] (Prof. Michael Reisman). They conclude that by consenting to arbitration rules (ICSID) permitting Respondents to submit counterclaims, contracting parties to IIAs implicitly agree to arbitration of counterclaims.

The question of admissibility of counterclaims has also seen polarising positions emerge. While the Saluka[11] and Paushok[12] duo emphasised the need for a strict legal connection (“operational unity” and “common origin”) between claims and counterclaims to render the latter admissible, recent decisions have considerably relaxed this requirement. The Goetz[13] Tribunal admitted counterclaims ‘related to’ the subject matter of the claims. The Urbaser[14] Tribunal, in admitting counterclaims, considered that the counterclaims were ‘based on’ the disputed investment rights and ‘related to’ breach of commitments on which investment rights were conditioned. Both these conclusions were founded on the wide notion of ‘investment disputes’ in the IIAs. However, the David Aven[15]award, delivered on 18 September 2018, takes a decidedly novel approach. Despite the limited standing in Article 10.16 CAFTA-DR, allowing only investors to submit ‘investment disputes’, the Tribunal assumed jurisdiction over counterclaims. In its opinion, by imposing obligations upon investors, contracting parties had implicitly consented to arbitration of state counterclaims. Surprisingly, it did not even attempt to ascertain admissibility according to the ‘legal connection’ test, emphasizing the Respondent state’s unconditional right to agitate breaches of environmental obligations by the investor, committed in the course of exercising investment rights.

How does the next generation of IIAs fare?

Incontrovertibly, the fragmentation of judicial discourse on counterclaims stems from the lack of precision in IIAs. The past few years have seen substantial overhauls in investment regimes across nations. Unfortunately, these do not substantially tackle existing ambiguities with respect to counterclaims.

Indian Model BIT, 2016

After terminating its existing BITs, the Indian Government is attempting to renegotiate them according to the 2016 Model BIT. India’s erstwhile BITs were based on the 2003 Model, which did not expressly address counterclaims. Its broad dispute resolution clause (“Any dispute…in relation to an investment”) could potentially have been used to assume jurisdiction over them. Perhaps, however, the scope of admissible counterclaims would be limited, owing to the absence of any obligations imposed upon investors.

The 2016 Model BIT makes marginal improvements over the existing regime. Chapter III compels investors to “comply with all laws regulations, administrative guidelines and policies” of the host state. It additionally demands compliance with taxation laws, corporate social responsibility, and seeks to prevent corruption. However, the dispute resolution clause in Article 13.2 restricts tribunals’ jurisdiction to disputes arising from breaches of the host-state’s obligations. Further, standing to bring claims under Articles 15 and 16 of the Model BIT is limited to investors. By applying the Rusoro reasoning, tribunals could deny jurisdiction over state counterclaims.

Conversely, Article 13.4 allows tribunals to take into account corrupt activities of investors in deciding whether their claim is tenable. Following the reasoning of the decision in David Aven, this may be viewed as an affirmative obligation upon investors not to engage in corrupt practices, which could constitute the legal basis of a counterclaim. Further, both the Oxus[16]and Gavazzi[17]awards disregard words in dispute resolution clauses limiting the standing to ‘bring a claim’– while these provisions would undoubtedly exclude ‘free-standing claims’ by host states, they would not necessarily preclude the host state from raising a ‘closely connected’ counterclaim in defence. Thus, the future interpretation and impact of Articles 15 and 16 on arbitration of counterclaims is unclear.

Hence, India’s attempt to revolutionise its investment protection framework has not resolved any lingering confusion with respect to arbitration of counterclaims. In fact, the seemingly contradictory duties of tribunals under Articles 13.2 and 13.4 might aggravate this conundrum.

Netherlands Model BIT, 2018

The preamble of the Netherlands Model BIT sets its tone, seeking to balance investment protection with legitimate policy objectives such as public health, safety, and environment protection. In furtherance of the same, the Model BIT allows host states to demand environmental protection, compliance with labour standards, and respect for human rights from investors (Articles 2, 6, and 7), under both domestic laws (Article 7.1) and internationally recognised standards (Article 7.2). However, the Model BIT narrowly envisages disputes to be those concerning ‘loss or damage to the investor or its investment(s)’ and grants the right to submit disputes to ‘investors’ (Articles 16 and 18).

Given the prevailing uncertainty about the impact of such ‘limited standing’ clauses, as discussed in the foregoing sections, Articles 16 and 18 do not oust a tribunal’s jurisdiction over counterclaims conclusively. In fact, the extensive obligations for investors prescribed in Articles 6 and 7 make a finding in favour of jurisdiction and admissibility of counterclaims equally likely. To add to this turmoil, Article 23 of the Model BIT allows tribunals to take international human rights standards into account while determining compensation due to investors – providing an additional window of opportunity for state counterclaims seeking set-off of damages.

The US-Mexico-Canada Agreement, 2018

Intended to replace the NAFTA, Chapter 14 of the USMCA governs investment relations. Vide Articles 14.16 and 14.17, the Agreement allows contracting parties to adopt measures concerning environmental, health, safety, or other regulatory objectives. Yet, it fails to address the arbitrability of potential breaches by investors under these clauses. While the right of submission of a ‘claim’ under Annex D of the Chapter is granted solely to the Claimant, the Agreement does not explicitly restrict the Respondent from agitating an ‘investment dispute’ in any provision.

Moreover, in Article 14.D.7, the Agreement prohibits respondents from asserting counterclaims based on indemnification or compensation available to an investor pursuant to an insurance or guarantee contract. Since parties have expressly chosen to exclude certain counterclaims from the domain of arbitrable investment disputes, a contrario, other counterclaims may well be considered admissible before tribunals.

Notably, none of these BITs address the test of admissibility of counterclaims, leaving it to the discretion of tribunals. These tribunals could choose from a variety of options, namely the Saluka reasoning (strict factual and legal connection), the Urbraser reasoning (strict factual connection, diluted legal connection test) or the recent David Aven reasoning (counterclaims based on any state right or investor obligations).

Conclusion

The foregoing discussion confirms the continued uncertainty with respect to questions of jurisdiction and admissibility of counterclaims. Primarily, this necessitates redesigning future IIAs to expressly define the contours of admissible counterclaims, specify jurisdictional requirements, and eliminate seemingly contradictory provisions on tribunals’ powers. Additionally, given the increasing investor obligations envisaged under IIAs, these treaties should either expressly address their arbitrability, or specify the appropriate forum for disputes arising from these obligations. The provisions of the 2015 Draft Indian BIT, surprisingly abandoned in the 2016 Model, achieved this effectively. It not only prescribed detailed obligations for investors in Articles 9 to 12, but also granted an explicit right to the host state to institute counterclaims on these grounds under Article 14.11 – thereby preventing any ambiguity.

Until changes of this nature are implemented in IIAs, the optimum solution would be for tribunals to assume jurisdiction of counterclaims when the definition of ‘investment disputes’ under a IIA is broad. If lack of locus standi to initiate arbitration is equated to the lack of standing to submit counterclaims once the arbitration has commenced, the efficacy of ISDS would be seriously jeopardized by the threat of contradictory decisions. Moreover, while admissible counterclaims should bear a manifest factual connection with the primary claims, a strict legal connection must not be demanded. So long as the IIA recognizes the host state’s right to take measures binding investors (for the protection of environment, human rights, et al), factually related counterclaims on these subject matters should be held to be closely connected. This approach ensures that arbitration continues to be a ‘one-stop-shop’ for adjudication of related disputes, and is not mired with fragmented decisions-making.

Nonetheless, recent trends in arbitral awards and investment treaty drafting indicate that there is no perceivable end to various equivocal interpretations. The debate on counterclaims is bound to continue.


* Vishesh Sharma is a B.B.A., LL.B. (Hons.) Student at Gujarat National Law University, India

** Vishakha Choudhary is an LL.M. Candidate at Europa-Institut, Saarland University, Germany.

[1] Metal-Tech Ltd. v. Uzebekistan, ICSID Case No. ARB/10/3, ¶407.

[2] Saluka v. The Czech Republic, UNCITRAL, ¶76.

[3] David Aven v. Costa Rica, ICSID Case No. UNCT/15/3, ¶738-739.

[4] Saluka Investments BV v. Czech Republic, UNCITRAL, ¶39.

[5] Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. The Government of Mongolia, UNCITRAL, ¶689-694.

[6] Metal-Tech Ltd. v. Uzebekistan, ICSID Case No. ARB/10/3, ¶408-410.

[7] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, ¶1143.

[8] Rusoro Mining Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/12/5, ¶623-627.

[9] Antoine Goetz et consorts v. République du Burundi, ICSID Case No. ARB/95/3, ¶278.

[10] Spyridon Roussalis v. Romania, ICSID Case No. ARB/06/1, Declaration.

[11] Saluka Investments BV v. Czech Republic, UNCITRAL, ¶76.

[12] Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. The Government of Mongolia, UNCITRAL, ¶695.

[13] Antoine Goetz et consorts v. République du Burundi, ICSID Case No. ARB/95/3, ¶285.

[14] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, ¶1151.

[15] David Aven v. Costa Rica, ICSID Case No. UNCT/15/3, ¶734-739.

[16] Oxus Gold v. Republic of Afghanistan, UNCITRAL, ¶948.

[17] Marco Gavazzi and Stefano Gavazzi v. Romania, ICSID Case No. ARB/12/25, ¶152-154.

The Pre-Establishment National Treatment Obligation: How Common Is It?

Vrinda Vinayak*

Introduction

The national treatment obligation in international investment agreements (IIAs) is a double-edged sword – while it may attract foreign investment by guaranteeing equal access to and treatment in the domestic market, it has the potential to limit autonomy and sovereignty of nations in formulating domestic policy, and opens these measures up to challenge before arbitral tribunals. In this light, one of the most important aspects of the national treatment obligation is whether it applies only when investments have been admitted into the host country according to the latter’s rules and regulations (post-establishment obligation), or also before or during the admission stage (pre-establishment obligation).

Exclusively post-establishment obligations allow host states to retain autonomy over the kind and quantum of investment it wants to permit. An obligation to offer pre-establishment national treatment limits the ability of the host state to impose government approval requirements or sectoral caps for foreign direct investment (FDI). There is also a restriction on favourable treatment being granted to infant industries, imposition of performance requirements on foreign entities, requirements of mandatory partnership with local firms as a condition for establishment etc. Owing to these factors, pre-establishment obligations have traditionally been seen only in a small minority of agreements. However, this trend seems all set to change.

Pre-establishment obligations can be incorporated in IIAs in a variety of ways. They can either be embodied expressly in the national treatment clause, or gathered from the definitions of ‘investor’ and ‘investment’. IIAs containing broad, asset-based definitions of ‘investment’ (without reference to the asset having already been admitted in accordance with national law) and defining ‘investor’ as someone who “seeks to make, is making or has made an investment” or that “attempts to make, is making, or has made an investment” usually offer pre-establishment protections.

Treaty Practice – United States and Canada

The United States (US) and Canada have been at the forefront of the pre-establishment national treatment obligation. Early examples of some relevant bilateral investment treaties (BITs) include the US – Jordan BIT (1997)[1] and the Canada – Latvia BIT (1995)[2]. The model BITs of the US (2004 and 2012) and Canada (2004) were also the first models to feature such an obligation. The most prominent example of a provision embodying the pre-establishment national treatment obligation is Article 1102 of the North American Free Trade Agreement (NAFTA) (1992)[3], which reads: “1. Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments…” (clause 2 speaks of treatment accorded to ‘investments’ very similarly). ‘Investor’ is defined in terms of an entity that “seeks to make, is making or has made an investment”, and the agreement contains an asset-based definition of ‘investment’.[4] The NAFTA’s national treatment obligations have also been incorporated in the newly concluded Agreement between the US, Mexico and Canada (USMCA) (2018)[5], but ‘investor’ is now defined in terms of an entity that “attempts to make, is making, or has made an investment”, with a clarification as to the meaning of “attempts to make”.[6]

The IIAs concluded by the US and Canada with emerging economies display a varying practice – while the Canada – China BIT (2012)[7] does not include pre-establishment national treatment, the Rwanda – US BIT (2008)[8], the Canada – Senegal BIT (2014)[9] and the Canada – Mongolia BIT (2016)[10] contain such obligations worded similarly to the NAFTA. The practice of emerging economies will be examined in more detail below.

Treaty Practice – European Union

The European Union (EU) has recently become open to extending national treatment to the pre-establishment phase, as demonstrated by the EU – Montenegro Stabilisation and Association Agreement (2007), which provides for establishment of companies pursuant to the national treatment standard[11]. The EU’s agreements with Georgia[12], Moldova[13] and Ukraine[14] concluded in 2014 also admit pre-establishment national treatment. The most prominent manifestation of this trend is the newly concluded EU – Canada Comprehensive Economic and Trade Agreement (CETA) (2016)[15], Article 8.6 of which reads: “1. Each Party shall accord to an investor of the other Party and to a covered investment, treatment no less favourable than the treatment it accords, in like situations to its own investors and to their investments with respect to the establishment, acquisition, expansion, conduct, operation, management, maintenance, use, enjoyment and sale or disposal of their investments in its territory…

Similarly, Article 8.8(1) of the EU – Japan Economic Partnership Agreement (2018)[16] states particularly in the context of establishment that, “each Party shall accord to entrepreneurs of the other Party and to covered enterprises treatment no less favourable than that it accords, in like situations, to its own entrepreneurs and to their enterprises, with respect to establishment in its territory,” where “entrepreneur of a Party” means a “natural or juridical person of a Party that seeks to establish, is establishing or has established an enterprise…in the territory of the other Party.

Treaty Practice – Emerging Markets

It is interesting to examine the trend in emerging market states. Initially, most IIAs entered into by such states did not contain pre-establishment national treatment obligations. A typical formulation of such an exclusively post-establishment obligation is seen in the Indonesia – Turkey BIT (1997), which stated that “each party shall, in conformity with its laws and regulations, accord to these investments, once established, treatment no less favourable than that accorded in similar situations to investments of its investors or to investments of investors of any third country, whichever is most favourable.[17] Language facilitating only post-establishment obligations is also seen in the Korea – Qatar BIT (1999)[18], and the South Africa – Turkey BIT (2000)[19].

While the practice of emerging market states is still varied, pre-establishment obligations are becoming more frequent than before. One of the earlier examples of this trend is the BIT concluded by Korea with Japan in 2002[20] which defines investor broadly, provides a wide, asset-based definition of investment, and includes ‘establishment’ within the fold of the national treatment obligation. Around the same time, the ASEAN Comprehensive Investment Treaty (CIT) (2009)[21] also provided pre-establishment national treatment to its members, under the ‘mutual national treatment’ model.

In the next decade, regional agreements such as the Pacific Alliance Additional Protocol (PAAP) (2014) between Chile, Colombia, Mexico and Peru[22], and the ASEAN – India Investment Agreement (2014)[23] also provided such treatment. The Economic Partnership Agreement (EPA) concluded by Mongolia with Japan in 2015 states that:  “Each party shall in its area, accord to investors of the other party and to their investments treatment no less favourable than the treatment it accords in like circumstances to its own investors and to their investments with respect to investment activities,”[24] where ‘investment activities’ is defined as “establishment, acquisition, expansion, operation, management, maintenance, use, enjoyment and sale or disposal of an investment[25] – this formulation very clearly includes pre-establishment obligations. The terms ‘investor’ and ‘investment’ are also defined broadly.[26]

There are several recent examples of emerging market IIAs encompassing pre-establishment obligations. A case in point is the China – Hong Kong Closer Economic Partnership Arrangement (CEPA) Investment Agreement (2017), which defines ‘investor’ broadly as, “one side, or a natural person or an enterprise of one side, that seeks to make, is making or has made a covered investment,[27] and contains a national treatment obligation phrased very similarly to the NAFTA[28]. Another example is the Central America – Korea Free Trade Agreement (FTA) (2018) between Costa Rica, El Salvador, Nicaragua, Panama and Korea, which also extends national treatment to the pre-establishment phase[29] and incorporates an obligation phrased like the NAFTA.

On the other hand, some emerging economies still prefer to limit their national treatment obligation only to the post-establishment phase, exercising full investment control. Brazil is a prime example of this – for the longest time, it attracted investment without IIAs, and has only recently started entering into Cooperation and Facilitation Investment Agreements (CFIAs), which may explain its cautious and relatively more protectionist approach. The Brazil – Suriname CFIA (2018)[30] contains a national treatment obligation worded similarly to the NAFTA. However, an ‘investor’ must already have “made an investment”, and an ‘investment’ must be “established or acquired in accordance with the laws and regulations of the other Party”, thereby seemingly excluding pre-establishment national treatment obligations and allowing domestic law to discriminate. This is also clarified by Article 14(a) which clearly states that all investments must conform to domestic law in matters including establishment. Brazil’s CFIA with Ethiopia (2018) also contains an explicit admissions clause, stating that investments of investors of each party shall be admitted in accordance with domestic law,[31] and does not include ‘establishment’ in its national treatment clause[32]. Admissions clauses have been a common trend among countries wishing to retain autonomy over enacting domestic legislation stipulating specific criteria to admit foreign investment. Examples of older IIAs containing such clauses are the Ethiopia – Russia BIT (2000)[33] and the Bahrain – Thailand BIT (2002)[34]. More recently, the South Africa – Zimbabwe BIT (2009)[35] and the Rwanda – UAE BIT (2017)[36] have also adopted such clauses.

India’s 2016 Model BIT also clarifies through the definitions of ‘investor’, ‘investment’ and ‘enterprise’, coupled with non-inclusion of ‘establishment’ in its national treatment obligation, that such obligations are excluded at the pre-establishment stage. Uniquely, the model in Article 2.2 also states that: “…nothing in this Treaty shall extend to any Pre-investment activity related to establishment, acquisition or expansion of any Enterprise or Investment, or to any Law or Measure related to such Pre-investment activities, including terms and conditions under such Law or Measure which continue to apply post-investment to the management, conduct, operation, sale or other disposition of such Investments.

Restrictions on the Pre-Establishment Obligation

It is but natural that IIAs offering pre-establishment protections also contain restrictions on such a broad obligation, over and above general exceptions. Many IIAs of this kind contain ‘negative lists’ of sectors to which the obligation does not apply, such as those involving national interest or security, like telecommunication, transport, defence etc. The NAFTA, EU – Canada CETA, China – Hong Kong CEPA, Japan – Mongolia EPA, PAAP, ASEAN CIT, Central America – Korea FTA etc. are all found to contain such lists. There may also be a narrower approach, that of a ‘positive list’ enumerating sectors wherein national treatment will be granted, such as in the India – Singapore Comprehensive Economic Cooperation Agreement (CECA) (2005)[37]. Most IIAs analysed above also contain provisions making the national treatment obligation inapplicable to existing non-conforming measures and reasonable amendments thereto, while prohibiting the enactment of new discriminatory measures. Article 9 of the China – Hong Kong CEPA, Article 8.15(1) of the EU – Canada CETA and Article 9.13(1) of the Central America – Korea FTA are good examples of such provisions.

Another measure to restrict a broad interpretation of the pre-establishment obligation is to define the meaning of “seeks to make…an investment” or “attempts to make…an investment” in the definition of ‘investor’. Footnote 12 of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) (2018) clearly states that, “For greater certainty, the Parties understand that, for the purposes of the definitions of “investor of a non-Party” and “investor of a Party”, an investor “attempts to make” an investment when that investor has taken concrete action or actions to make an investment, such as channelling resources or capital in order to set up a business, or applying for a permit or licence.[38] Footnote 14 of the Central America – Korea FTA also contains such an understanding.

Explanations ‘for greater certainty’ have also been added in several agreements to explain ‘like circumstances’, so as not to allow arbitral tribunals too broad a discretion. For example, the USMCA in Article 14.4(4) states that, “For greater certainty, whether treatment is accorded in “like circumstances” under this Article depends on the totality of the circumstances, including whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives.” Article 3(4) of the ASEAN-India provides detailed guidance in this regard by clarifying that, “A determination of whether investments or investors are in “like circumstances” should be made, based upon an objective assessment of all circumstances on a case-by-case basis, including, inter alia: (a) the sector the investor is in; (b) the location of the investment; (c) the aim of the measure concerned; and (d) the regulatory process generally applied in relation to the measure concerned. The examination shall not be limited to or biased towards anyone factor.

Further, in response to jurisprudence that discriminatory intent is not a requirement for a finding of violation of national treatment, IIAs offering pre-establishment national treatment in the future may consider including such a requirement in the treaty itself. India’s 2016 Model BIT, despite not offering pre-establishment national treatment, clarifies the need for discriminatory intent in the following words: “A breach of Article 4.1 will only occur if the challenged Measure constitutes intentional and unlawful discrimination against the Investment on the basis of nationality,” and similar wording may be adopted in the future by countries offering a pre-establishment protection. Furthermore, for countries that have chosen not to afford pre-establishment national treatment, it may be beneficial to clarify that such treatment cannot be imported from other IIAs either. The Brazil – Colombia CFIA (2015) in Article 5(3) adopts this method.

Adopting a more extreme measure, some countries are also seeking to renegotiate treaties which had earlier offered pre-establishment guarantees, to retain autonomy over regulation of foreign investment. An example of a domestic measure which would ordinarily violate pre-establishment national treatment obligations is India’s foreign direct investment (FDI) policy, which mandates government approval for foreign entities seeking to invest in certain sectors in India. Moreover, the percentage of foreign investment allowed in these sectors is also limited. These restrictions placed on foreign entities in the pre-establishment phase accords them less favourable treatment than that afforded to domestic entities. India had previously adopted two distinct approaches while concluding IIAs – first, to undertake only post-establishment obligations, which was seen in a majority of agreements, and second, to undertake pre-establishment obligations but either only in certain agreed sectors (the ‘positive list’ approach was adopted in India’s IIAs with Singapore[39]) or by excluding certain sectors from the purview of pre-establishment national treatment (the ‘negative list’ approach was adopted in the IIA with Japan[40] and Korea[41]). Since the FDI policy is a pre-establishment regulatory procedure pertaining to sectors other than those agreed upon, or concerning those expressly excluded, India believed its FDI policy to be in compliance with its obligations under all international agreements. However, in its 2016 model BIT, India has specifically clarified its intent to undertake only post-establishment obligations henceforth, and is renegotiating its investment agreements according to this model.

Conclusion

It can be concluded safely that while countries continue to enter into treaties offering only post-establishment national treatment protection, the trend reflected in many recently concluded IIAs is towards inclusion of pre as well as post-establishment obligations. This trend could in part be attributed to intense liberalisation and globalisation. Countries and regions such as the US, Canada and the EU choosing to adopt pre-establishment protections is unsurprising, given that these developed economies do not fear competition from counterparties to their IIAs. Further, while emerging market economies were initially almost exclusively offering only post-establishment national treatment to protect their domestic economies, pre-establishment protections are now being offered among parties whose economic power is more equal.

There are political factors at play here as well. At the pre-establishment stage, there is strong impetus to the host state to strengthen the economy by attracting foreign investment. However, the same motivation to uphold national treatment may not remain in the post-establishment stage, when the investor has already invested large amounts of capital and other factors of production, and is unlikely to exit easily.[42] Political parties have more to gain from favouring domestic investors, which secures votes for them. In light of this, it will be interesting to see whether countries uphold the obligation with equal commitment in both phases.


*Vrinda Vinayak, Student, 5th Year, B.A. LL.B. (Hons.), National Law University, Delhi (India)


[1] Treaty Between the Government of the United States of America and the Government of the Hashemite Kingdom of Jordan Concerning the Encouragement and Reciprocal Protection of Investment, art. II.1, Jul. 2, 1997.

[2] Agreement Between the Government of Canada and the Government of the Republic of Latvia for the Promotion and Protection of Investments, art. II.3, Apr. 26, 1995.

[3] North American Free Trade Agreement between the United States, Canada and Mexico, Dec. 17, 1992.

[4] Id., art. 1139.

[5] Agreement between the United States of America, the United Mexican States, and Canada, art. 14.4, Nov. 30, 2018.

[6] Id., art. 14.1 read with footnote 3.

[7] Agreement Between the Government of Canada and the Government of the People’s Republic of China for the Promotion and Reciprocal Protection of Investments, art. 6, Sept. 09, 2012.

[8] Treaty between the Government of the United States of America and the Government of the Republic of Rwanda Concerning the Encouragement and Reciprocal Protection of Investment, art. 3, Feb. 19, 2008.

[9] Agreement Between Canada and the Federal Republic of Senegal for the Promotion and Protection of Investments, art. 4, Nov. 27, 2014.

[10] Agreement Between Canada and Mongolia for the Promotion and Protection of Investments, art. 4, Sept. 08, 2016.

[11] Council and Commission Decision on the conclusion of the Stabilisation and Association Agreement between the European Communities and their Member States, of the one part, and the Republic of Montenegro, of the other part, art. 53, March 29 2010.

[12] Association Agreement between the European Union and the European Atomic Energy Community and their Member States, of the one part, and Georgia, of the other part, art.79, June 27, 2014.

[13] Association Agreement between the European Union and the European Atomic Energy Community and their Member States, of the one part, and the Republic of Moldova, of the other part, art. 205, June 27, 2014.

[14] Association Agreement between the European Union and its Member States, of the one part, and Ukraine, of the other part, art. 88, June 27, 2014.

[15] Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union (and its member states) of the other part, Oct. 30, 2016.

[16] Agreement between the European Union and Japan for an Economic Partnership, July 17, 2018.

[17] Agreement Between the Government of the Republic of Turkey and the Government of the Republic of Indonesia Concerning the Promotion and Protection of Investments, art. II(2), Feb. 25, 1997.

[18] Agreement Between the Government of the Republic of Korea and the Government of the State of Qatar for the Promotion and Protection of Investments, art. 3(2), Apr. 16, 1999.

[19] Agreement Between the Republic of Turkey and the Republic of South Africa Concerning the Reciprocal Promotion and Protection of Investments, art. II(3), June 23, 2000.

[20] Agreement between the Government of the Republic of Korea and the Government of Japan for the Liberalisation, Promotion and Protection of Investment, art. 2(1), Mar. 22, 2002.

[21] ASEAN Comprehensive Investment Agreement, art. 5, Feb. 26, 2009.

[22] Additional Protocol to the Framework Agreement of the Pacific Alliance, art. 10.4, Feb. 10, 2014.

[23] Agreement on Investment Under the Framework Agreement on Comprehensive Economic Cooperation Between the Association of Southeast Asian Nations and the Republic of India, art. 3, Oct. 8, 2003.

[24] Article 10.3, Agreement Between Japan and Mongolia for an Economic Partnership, art. 10.3, Feb. 10, 2015.

[25] Id., art. 10.2(e).

[26] Id., arts. 1.2(k) & (l).

[27] Investment Agreement of the Mainland and Hong Kong Closer Economic Partnership Agreement, art. 2(2), June 26, 2017.

[28] Id., art. 5.

[29] Free Trade Agreement between the Republic of Korea and the Republics of Central America, art. 9.3, Feb. 21, 2018.

[30] Cooperation and Facilitation Investment Agreement between the Federative Republic of Brazil and the Republic of Suriname, art. 5 read with art. 3(1.3) and art.3(1.5), May 02, 2018.

[31] Agreement Between the Federativo Republic of Brazil and the Federal Democratic Republic of Ethiopia on Investment Cooperation and Facilitation, art. 3(4), art. 4(1), Apr. 11, 2018.

[32] Id., art. 5(1).

[33] Agreement between the Government of the Federal Democratic Republic of Ethiopia and the Government of the Russian Federation on the Promotion and Reciprocal Protection of Investments, art. 2(1), Feb. 10, 2000.

[34] Agreement between the Government of the Kingdom of Thailand and the Government of the Kingdom of Bahrain for the Promotion and Protection of Investments, art. 3(1), May 21, 2002.

[35] Agreement between the Government of the Republic of South Africa and the Government of the Republic of Zimbabwe for the Promotion and Reciprocal Protection of Investments, art. 2(1), Nov. 27, 2009.

[36] Agreement between the Republic of Rwanda and the United Arab Emirates on the Promotion and Reciprocal Protection of Investments, art. 3(1), Nov. 01, 2017.

[37] Comprehensive Economic Cooperation Agreement between India and Singapore, art. 6.3, Jun. 29, 2005.

[38] Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Mar. 08, 2018.

[39] Supra note 37.

[40] Economic Partnership Agreement between Japan and India, art. 90(2), Feb.16, 2011.

[41] Comprehensive Economic Partnership Agreement between India and the Republic of Korea, art. 10.8(2), Aug, 07, 2009.

[42] Jurgen Kurtz, The WTO and International Investment Law: Converging Systems 90 (2016).

The Treatment of Investments clause under the Indian Model BIT: Laden with greater certainty, restrictions and/or ambiguity?

Naman Lohiya

B.A. LL.B.(Hons.) Batch 2015-2020
Gujarat National Law University
Gandhinagar, Gujarat.

“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:

  1. Denial of Justice in any judicial or administrative proceedings
  2. 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.

  1. Targeted discrimination on manifestly unjustified grounds, such as gender, race or religious belief
  2. 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.

India’s Federalism and Investment Arbitration

by Sarthak Malhotra*

A key area of exposition both in Public International Law and Investment Arbitration is what constitutes an ‘act of state’. The Draft Articles on State Responsibility have been a ground-breaking work in codifying the rules of attribution of responsibility to the states. A related issue in this regard is the attribution of liability to a State in cases of breach of its treaty obligations by its political sub-divisions.

In many countries, numerous policy related issues are not handled by the Central Government. Instead, sub-divisions or states or local governments have been delegated the power to decide on numerous policy and operational issues. There is a federal form of governance in many countries like United States of America, India, Australia, Canada, Brazil albeit in different forms.

The implication of a federal form of government is that the political sub-divisions of a country exercise internal jurisdiction, both regulatory and otherwise, subject to the internal law. For instance, in India, the states reserve exclusive power in issues of inter alia public health and sanitation and taxes on lands and buildings. This means that a foreign investor may find itself pitted against a state government for reasons such as discrimination, expropriation and other such protections guaranteed to it under a BIT. Even though it is the Central Government which enters into treaty obligations and thus owes responsibility to the foreign investor, it may be possible that a state or a local government is in breach of the State’s obligation under the BITs. Could, in such a case, the Central Government be held responsible for the state government’s actions?

Article 25 of the ICSID Convention extends ICSID’s jurisdiction to legal disputes arising directly out of an investment between a Contracting State or any constituent subdivision or agency of a Contracting State designated to it by that State and a national of another Contracting State. Considering that ICSID’s jurisdiction is consent based, Article 25(3) mandates that the consent by a constituent subdivision or agency of a Contracting State shall require the approval of that State unless that State notifies that no such approval is required.

In Vivendi v. Argentina, Argentina relied on its federal system under its Constitution in arguing that the acts of officials of the Province of Tucumán could not be attributed to the federal government and, accordingly, the Tribunal lacked jurisdiction over the Claimant’s claims. Moreover, Argentina had not made any designation or filed any consent pursuant to abovementioned Article 25(3). The Tribunal rejected this contention and observed that under international law, and for purposes of jurisdiction of the Tribunal, it was well established that actions of a political subdivision of federal state are attributable to the central government and that it was clear that the internal constitutional structure of a country could not alter these obligations. The tribunal also took notice of the First report on State responsibility by Prof. James Crawford, the then Special Rapporteur on State Responsibility that referred to the “established principle”  of  the inability of a State federal in structure to “rely on the federal or decentralized character of its constitution to limit the scope of its international responsibilities.” This principle is also enshrined in Article 7 of Draft Articles of State Responsibility. In this regard, the Commentary to Draft articles states that international law does not permit a State to escape its international responsibilities by a mere process of internal subdivision.  (Paragraph No. 7, Commentary)  Therefore, Article 25(3) does not restrict the subject matter jurisdiction of the Tribunal; rather, it expands of the scope of ICSID arbitration ratione personae to include subdivisions and agencies of a Contracting State.

As noted above, the acts of a subdivision are attributable to the State in a treaty-based arbitration. Whether such acts are attributable to the State in a contract-based arbitration is debatable, given how a Central Government is not usually a signatory to a contract between the sub-division and the investor. (See Niko v. Bangladesh)

There are also numerous instances of NAFTA investment disputes involving local regulatory measures. In Metalclad v. Mexico, the tribunal presided by Professor Sir Elihu Lautherpacht made it clear that a State is internationally responsible for the acts of its organs and sub-national units. The Claimant was claiming violations of NAFTA Articles 1105 (“Minimum Standard of Treatment”) and 1110 (“Expropriation”) for the reason that the local municipal governments of SLP and Guadalcazar in Mexico denied a construction permit in an arbitrary and non-discriminatory manner.

Often termed as a quasi-federal constitution- a mixture of federal and unitary elements leaning more towards the latter, the Indian Constitution distributes power to legislate on different issues to both Central and state Governments. The Seventh Schedule to the Constitution lists down subjects on which the Central Government and the state Governments have the power to legislate on. The Concurrent list contains subject on which both levels of Government have concurrent jurisdiction. It is because of this distribution of legislative power that the states do not posses power to enter into treaties and agreements with foreign countries and their implementation. In this regard, Entry 14 of the Union List reads as follows: “14. Entering into treaties and agreements with foreign countries and implementing of treaties, agreements and conventions with foreign countries.”

Therefore, only the central government can enter into treaties and agreements such as Bilateral Investment Treaties with foreign countries. This may give rise to peculiar situation where a foreign investor is aggrieved by any policy/decision formulated by the state government, something in which, as per the constitutional design, the Central government would have had no role to play. The issue that then arises is whether a foreign investor could bring a claim against a state government’s actions? As discussed above, a government cannot escape responsibility in international law by hiding behind its internal federal structure.

Reference must also be made to Calcutta High Court’s judgment in Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armatures SAS (2014 SCC OnLine Cal 17695), the first decision by an Indian court on a case arising out of an investment treaty arbitration. The Respondent had initiated an investment treaty claim under the 1997 India-France BIT, naming the Republic of India, the State of West Bengal and the Port Trust as respondents. The Petitioner was seeking an anti-arbitration injunction against the Respondent, prohibiting it from proceeding with an investment treaty claim in which the Petitioner was identified as a respondent. The High Court ordered the Respondent to not continue with the proceedings against the Port.

One of the Port’s main contentions was that it did not have an arbitration agreement with the Respondent and therefore it could not be made a party to the BIT arbitration. The Court took note of Respondent’s Notice of Claim under the BIT, which referred to Port as an organ of the Union of India and stated that although the Union of India would be responsible for the acts of Port, it does not necessarily make Port a party to the arbitration agreement under BIT. In arriving on this conclusion the High Court relied on the ruling of the English Court of Appeal decision in City of London v. Sancheti ((2009) 1 LLR 117) in which the court refused to rule that the Corporation of London was a party to the arbitration agreement notwithstanding the fact that under certain circumstance the State may be responsible under international law for the acts of one of its local authorities, or may have to take steps to redress wrongs committed by one of its local authorities.

This judgment underlines the importance of how the courts perceive political sub-constituent units being made party to a treaty based arbitration. As noted by the High Court, although the Central Government would be responsible for its political sub-constituent units, such units cannot be made parties to a treaty based arbitration for the mere reason that there is no arbitration agreement under the BITs between an investor and such units. Moreover, making such units party to the arbitration agreement is wholly unnecessary since a Government would be responsible for their actions in international law.

While the old Model India BIT was silent on the liability for actions of the political sub-divisions or sub-governments, the provisions of India’s new Model BIT seem to reflect the international jurisprudence. Article 4 lays down the standard of national treatment and extends the obligation to the Sub-national Governments. Article 1.2 defines ‘Sub-national Governments’ as a State Government or a Union Territory administration but does not include local governments. Moreover, Article 2.4, states that the BIT will not apply to any measure undertaken by a local government. Therefore, measures undertaken by urban local bodies, municipal corporations, village level governments, or enterprises owned or controlled by either of them are not covered under the new BIT. In absence of any substantive new treaty negotiations, it remains to be seen whether this carve out would be acceptable to other countries.


* Sarthak Malhotra, B.Com./LL.B. (Hons.), Gujarat National Law University, India.