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Increasing litigation under Bilateral Investment Treaties – should the Government be worried?
Vivek Vashi and Kanika Sharma comment on whether the government should be worried about increasing litigation under Bilateral Investment Treaties.
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Introduction
Post the recent decision of White Industries, the Indian Government has been threatened with several notices under diverse existing Bilateral Investment Treaties (BITs). Since January this year, several international companies have threatened to invoke disputes under their respective BITs against the Indian Government for reneging on international obligations. This rising list is indicative of global investors losing confidence in the Government’s ability to discharge treaty obligations, and has reportedly led the Government to consider whether investor-state arbitration clauses should be excluded from the country’s future bilateral investment treaties.
BITs are agreements between two countries for reciprocal facilitation, promotion and protection of investments in each other's territories by companies based in either country. India has entered into more than 80 BITs globally. Such treaties enable private companies to file cases against governments, thereby subjecting countries to the risk of litigation by corporations from another country which is a signatory to the agreement.
White industries case
The recent decision is the White Industries case has given rise to the urgent need for re-examination of the Government’s treaty obligations in the existing BITs.
In 2002, White Industries, an an Australian mining company, obtained an arbitral award in its favour in respect of certain contractual disputes with Coal India Ltd., an Indian public sector company. Consequently, White Industries sought enforcement of the award before the Delhi High Court. Simultaneously, Coal India approached the Calcutta High Court to have the award set aside, against which White Industries filed a petition contesting that Court’s jurisdiction to entertain the application. The Calcutta High Court ruled that the Indian courts had the jurisdiction to consider the application, against which White Industries preferred an appeal before the Supreme Court. This Appeal is still pending determination.
Fed up with the delay in the enforcement of the award, White Industries, in 2010, commenced arbitration proceedings against the Government of India under the Australia-India BIT. The proceedings were initiated on the ground that the inordinate delay by Indian courts to enforce the arbitration award violated the provisions of fair and equitable treatment (FET), expropriation and Most Favoured Nation (MFN) treatment in the Australia-India BIT.
In November 2011, the arbitral tribunal found the Indian Government guilty of violating the Australia-India BIT. Although the tribunal held that the Indian Government had not violated the provisions on FET, it ruled that the MFN provisions of India-Australia BIT had been violated. Consequently, White Industries was awarded over 4 million Australian dollars, with 8% interest p.a. from March 24, 1998 till payment.
The tribunal held that the delay by Indian courts to deal with White Industries’ jurisdictional claim in over nine years violated India’s obligation to provide White Industries with an "effective means of asserting claims and enforcing rights." This is in spite the fact that the India-Australia BIT does not contain any "effective means" obligation therein. The tribunal stated that White Industries could borrow the ‘effective means’ provision present in the India-Kuwait BIT by relying on the MFN provision of the India-Australia BIT. The Government of India’s argument that relying on the “effective means” provision in the India-Kuwait treaty will "fundamentally subvert the carefully negotiated balance of the BIT", was, therefore, overruled by the tribunal. Instead the tribunal held that borrowing beneficial substantive provisions from a third-party treaty would not subvert the negotiated balance of the BIT, but, rather, would help achieve the result intended by the incorporation of the MFN provision.
Most favoured nation provision
The MFN clause enables parties to piggyback on more favourable provisions from BITS entered into with third parties. As has been set out above, White Industries relied upon the MFN clause in the Australia-India BIT in order to borrow the "effective means" provision in the India-Kuwait treaty.
Further, an important implication of the ruling in White Industries is that inordinate delays in Indian court proceedings could potentially violate India’s BIT obligations, not due to the violation of ‘denial of justice,’ but due to a violation of the ‘effective means’ standard, which requires a lower threshold than ‘denial of justice.’ By way of the MNF provision, a nation can be held guilty of violating the ‘effective means’ standard even when the concerned BIT does not contain such a provision. Pertinently, the standard to determine effective means of asserting claims and enforcing rights is an objective standard, which has to be measured and determined in accordance with International Law. Therefore, the defence that relative delays exist in a particular jurisdiction would effectively not hold water.
In light of the ruling in the White Industries case, it is imperative that the Indian Government reviews the MFN provisions in existing BITs, which are often unrestrained and do not contain adequate exceptions. It is this clause that enabled White Industries to indulge in “treaty shopping” and arrive at a result that the Indian Government did not foresee. MFN clauses are often fluid, opening the doors to a plethora of litigation at the instance of every disgruntled investor, who, illustratively, may claim violation of the ‘effective means’ standard or even denial of justice. The result is that any investor may, instead of pursuing commercial remedies, initiate proceedings under BITS for any alleged denial of justice.
Increasing litigation under BITs
Post the decision in White Industries, a plethora of litigation under various BITs seems to be on the horizon.
Among others, Vodafone Plc has served a notice against the Government by invoking the BIT between India and Netherlands pursuant to the Finance Minister’s statement in the recent budget speech that the Government would amend the income tax law to make all indirect transfers involving underlying assets in India liable to tax with retrospective effect. Notwithstanding the issue of whether the Indo-Netherland treaty can be invoked in this case (given the fact that the transaction had taken place in Cayman islands and further given that the issue is purely a taxation, and hence, a sovereign issue), one cannot deny that this presents a good opportunity for the Government to revisit all its BITs to prevent other such claims in the future.
Vodafone's threat to take the battle with the Government overseas is the latest in a series of similar threats. Prior to Vodafone, two other foreign companies served the Government with notices under BITs between India and Russia and Singapore, respectively, as a counterblast to the recent Supreme Court judgment of February 2, 2012 in the infamous 2-G scam, revoking 122 2G licences issued since 2008 amid allegations of fraud over their allocation.
On February 28, 2012, Russian conglomerate Sistema, which has a joint venture with Shyam in mobile firm Sistema Shyam, sent a formal notice to the Government threatening international arbitration proceedings under BITs if the Government fails to settle the dispute related to revocation of its 21 telecom licences in an amicable way within six months. Sistema has invoked its right to protect its investments under Article 9.1 of the BIT signed between the Governments of Russia and India on December 23, 1994.
Similarly, Norway's Telenor has also sought compensation for all investments, guarantees and damages if the Government fails to sort out issues related to its licences’ cancellation in the next six months. The Scandinavian telecom company has invoked the bilateral pact, the India-Singapore Comprehensive Economic Cooperation Agreement, to protect its investments in India.
Additionally, the Children’s Investment Fund has initiated legal action against the Indian Government under the provisions of two bilateral investment treaties, between India and the United Kingdom in 1994, and India and Cyprus in 2002, in relation to its investment in Coal India Ltd. The UK-based hedge fund, a shareholder in Coal India Ltd., claims that the Indian Government’s management of Coal India Ltd. is violative of its right to “fair and equitable treatment” under India’s bilateral investment treaties with Britain and Cyprus, locations from which it has invested in the company.
Before 2012, the last time India was embroiled in an international investment dispute was with Enron, wherein the Power Purchase Agreement signed by the Maharashtra State Electricity Board with the Dabhol Power Company (mostly owned by a consortium led by Enron and including GE and Bechtel) had to be repudiated by the Government. The Dabhol Power Company and the international sponsors of the project GE and Bechtel filed cases against the government of India through their affiliates in Mauritius. Ultimately, the cases were settled out of court with an estimated compensation of around $1 billion. But 2012 seems to be opening the floodgates to potential litigation emanating from various BITs entered into with the Indian Government.
Need to revisit existing BITs
The decision in the White Industries case has far-reaching consequences, both for the executive and the judiciary. It seems that India has been entering into BITs without fully understanding their implications. The belief that Indian BITs adequately balance investment protection with the Government’s ability to exercise sovereign powers has effectively been negated in light of White Industries.
In the light of this sudden upsurge in claims under various BITs, it would be worth the Government’s while to revisit some of the standards contained in its BITs and develop a coherent policy on investment protection. While the Government is reportedly in the process of examining various BITs to identify clauses that may lead to potential disputes, a more thorough and concrete analysis, including consideration of the possibility (albeit problematic) of re-negotiation of existing pacts, would serve the Government well.
Further, it will be useful to pursue a greater balance between investor rights, investor responsibilities, and regulatory interests of host governments. Otherwise, BITs may prove to be a growing menace resulting in private investors invoking the dispute resolutions mechanisms therein to challenge every alleged deprivation of their rights. Legislative measures such as having enforcement of International Arbitration awards only capable of challenge before the Supreme Court; and over ruling the application of Bhatia International and Sukanya Holdings, will probably help to dilute much of the impact on the BITs.
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| VIVEK VASHI is the mainstay of the litigation team at Bharucha & Partners where KANIKA SHARMA is an associate. |
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