The Indian Model BIT: A Critical Analysis

Introduction

In a scenario where COVID-19 has massively damaged the World Economy, the revival of the economy will be a major challenge for the states. Where India was once the fastest growing economy, it has constantly seen its downfall in Kearney’sFDI confidence index in which it slipped down to four positions to 15th rank from earlier 11th rank in 2018, Foreign Investment becomes a major topic to think and work upon. Foreign Investment has always been a major reason for the advancement of an economy and keeping in mind this fact India has recently come up with its revised model of BIT.

This paper deliberates on a critical analysis of the Indian Model BIT and asserts certain objectives to be achieved. Firstly, the paper essentially analyses the India model BIT keeping in mind the general principles of International Investment law. Secondly, this paper compares the Indian Model BIT with other model BIT’s of different economies of the globe like US, Canada and UK &thus clearing the position of the Indian Model BIT in the international sphere. Thirdly, the paper focuses on the future of foreign investments in India especially when the government is bringing up policies like Make in India. Fourthly, the paper critically analyses the major issues like lack of uniformity, the dominance of powerful states, and lack of proper redressal authority which are arising in the arena of International Investment Law. Lastly, the paper deals with some suggestion like the establishment of Global Investment Court, acceptance of a uniform International Investment treaty.

Bilateral Investment Treaty

Foreign investment has always been an important factor for the economic growth, a source of foreign currency income, a stimulator of the local economy, and a source of foreign skills, information and know-how.[1] It can be in various forms like committing capital resources abroad either directly or through portfolio investment and by licensing the use of technology, etc. Since this investment involves foreign investors, special protection is to be given to attract more foreign investors in order to boost the economy with the investment made by them. However, at the same time, the interest of the host state is also to be protected, as the foreign investors cannot be allowed to exploit the resources of the host state in lieu of their investment.[2]

The concept of protection of investment has evolved from the concept of Bilateral investment treaties (or, BITs) are international agreements establishing the terms and conditions for private investment by nationals and companies of one state in another state.[3] These are treaties which are meant to protect the rights of both the investors and the host state.[4] Generally, the BIT’s are concluded between Developed and Developing countries based on the assumption that BITs are premised on the assumption that they promote investment from an investor from investor countries to investor-receiving countries.[5] Most important, it allows individual investors to bring cases against host states if the latter’s sovereign regulatory measures are not consistent with the BIT, for monetary compensation. This is known as investor-state dispute settlement (ISDS).[6]

A substantial increase in the number of BITs across the world- from 500 in the 1990s to more than 3,324 by the end of 2016 has been observed.[7]  With an increase in the number of BIT’s, a significant increase in investor-state disputes in international investment law[8] has also been observed pertaining to matters related to its environmental policy[9], regulatory issues related to supply of drinking water[10], monetary policy[11], laws and policies related to taxation[12], and regulations related to health[13] have been challenged by foreign investors as potential breaches of BITs.

India after its loss in the case White Industries v India[14] where White Industries was an Australian Investor and it brought a suit against India under the India-Australia BIT has also joined those countries contesting BITs and ISDS. The argument in the case revolved around the point that India had failed to provide ‘effective means’ of asserting their claims and enforcing rights, however, the tribunal held that though the Indian- Australian BIT did not have any such ‘effective means’ clause however by virtue of the Most Favored clause[15], Australia could use the ‘effective means’ clause which was there in the Indian-Kuwait BIT which contained the said clause.[16] India was directed to pay to White Industries Australia Limited the amount of A$ 4,085,180 (payable under the Award), together with interest and cost of litigation.[17] Other than the White Industries case India has almost fourteen known pending proceedings of claims against itself,[18] due to which the need of a new model BIT was felt. For instance, questions have been raised about balancing investment protection with India’s regulatory power, compelling India to re-think its BIT,[19] and hence India decided to come up with its new model BIT.[20]

The Indian Model BIT: A Comparative Analysis

India signed the first BIT with the United Kingdom (UK) in 1994. Since 1994 India has signed BITs with 84 countries.[21] The Indian BIT model was approved by the Cabinet in December 2015. This adoption was preceded by the circulation of the draft version of the Model BIT in March 2015, for comments. The draft Model BIT attracted considerable attention, including a full report from the Law Commission of India.[22]

1. Definition of Investment

The BIT definition of ‘investment’ plays an important role in determining the scope of rights and obligations under the treaty and the establishment of the ISDS tribunal jurisdiction. The new Indian model BIT has adopted an ‘enterprise-based’ definition rather than its previous ‘asset-based’ definition. Therefore, only an enterprise that is legally constituted in India can bring a BIT claim. Moving away from an asset-based approach to an enterprise-based approach aims at narrowing the scope of investments to be protected and thus seeks to reduce the number of BIT claims that can be brought against India.[23] First, the definition of investment requires that an enterprise must meet the requirement of ‘certain duration’ to qualify as foreign investment, however the duration has not been specified. Also the definition of investment mentions ‘significance for the development’ of the host state as one of the criteria to qualify as foreign investment, however no procedure or method of identifying an investment as significant for development is specified.[24]

The US model BIT has the broad asset-based definition[25], it rather includes investment on an enterprise and also does not have any such clause like the Indian model BIT of unspecified time limit to be termed as an investment and also clauses like the investment should be ‘significant for the development’. Similarly, the Canada Model BIT and UK model BIT[26] has the broad asset-based definition of the investment.

2. Most Favored Nation Clause

The Most Favored Nation (MFN) provision in BIT aims to create a level-playing field for all foreign investors by prohibiting the host state from discriminating against investors from different countries.[27] Basically, the clause is there to ensure that the relevant parties treat each other at least in ways they would treat third benefits.[28] Because of the White Industries Case[29], India made it stand clear that the MFN clause disturbs the various strategic, diplomatic, and political reasons behind negotiating bilateral treaties.[30] It is because of this that India has completely excluded the MFN clause in its new Model BIT, however, this act clearly exposes the foreign investors to face discrimination at the hands of the host state and hence is not an Investor-Friendly step.

However, the Canada Model BIT contains the Most Favored Nation clause[31] as per which no discrimination will be done amongst the investing states and equal treatment must be done amongst all the investing state, a similar clause is there in the UK Model BIT along with the National Treatment clause according to which discrimination will not be done between nationals of that country and foreign Investors.[32]

3. Investor Dispute Settlement

Investor dispute Settlement is an important characteristic of any BIT. The decision of an arbitral tribunal under ISDS against a Host State gives rise to an international obligation on the latter, which cannot be avoided on the basis of any domestic law or procedure.[33] The main aim of this clause is to protect the investors from indulging into dispute resolution in an alien legal system.

In the 2016 Model BIT, India has qualified its consent to ISDS by requiring that a foreign investor should first exhaust local remedies at least for a period of five years before commencing international arbitration.[34] As per this clause the investor has to rely on the local remedies till a period of five years and in cases where it takes the dispute to arbitration, India can claim that the ‘exhaustion of local remedies’ is not fulfilled in such situation, the arbitral tribunal would be precluded from reviewing the decision of the local court on the reasonableness of time[35], and in the case where the investor claims that there are no local remedies available in the dispute, the burden to prove the same lies on the investor.[36] This step has been done to reduce the number of dispute in the arbitration tribunal against India, ultimately it is not an investor-friendly step rather it would discourage investment keeping in mind the slow pace of judicial process in India.[37]

The Canadian Model BIT provides a clear procedure of directly going for arbitration within a time period of three years from the date on which the investor first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the investor has incurred loss or damage.[38] Similarly, as per the UK model BIT, the dispute can go to the arbitration tribunal after a period of three months when the dispute cannot be solved through the pursuit of local remedies.[39]

The Dire Need To Review

In 2015, India replaced the investor-centric 2003 Model BIT with a State-centric model. To avert further damage, India terminated BITs with 58 countries in 2017.[40] However the point of concern being that only two countries have concluded the discussion on BIT i.e. Brazil and Cambodia, however the BIT is still in its discussion stage with San Marino, Hong Kong, Israel, Mauritius, and Oman.[41] The treaty fails to create the required balance between the investor and the host state and in a situation where the world economy is facing a huge downfall; a treaty like the Indian Model might fail to attract the much needed foreign investments. The treaty shields the Government of India, however, while doing so it creates a dis-balance in ensuring freedom to investors on various fronts, for instance, tax measures are exempt from the scope,[42] further India can now adopt a range of public policy measures that could adversely impact investor capital.  Despite the fact that the burden to prove that the measures were necessary and non-discriminatory, it would be prudent to impose additional limits to check the exercise of regulatory powers. The White Industries acted as a wake-up call for India to revive its BIT and Investment regulations however it can be said that the present Model BIT has gone way too far, the treaty rather than focusing on an investment centric model gives more importance to the states and thus cannot be considered as ‘investor-friendly’ treaty, while there has been a trend of indulging into ADR methods for resolution of disputes, the BIT provides for the unfavourable ‘exhaustion of local remedies clause’ as per which  a foreign investor has to exhaust the court remedies for five years[43], followed by negotiation for a period of nine months to initiate arbitration.  Due to the shift from a broad  ‘asset’ based definition to the narrow enterprise-based definition, the burden to qualify as an investor under the BIT is quite high as the conditions to be treated as an enterprise are highly vague as has already been argued above. Additionally, due to the White Industries Case, the Most-Favored Nation (MFN) clause and the ‘fair and equitable treatment’ clause have not been included in the Model BIT, the fact that these clauses act as an assurance for equitable treatment of investors cannot be denied and hence it can be said that this is one of the major shortcomings of the new model BIT.

With coming up of Policies like Make in India aimed at boosting the foreign Investment, this Model Indian BIT might not aid in fulfilling the aim. The fact that there are various shortcomings in the BIT is highlighted by the fact that only two countries have concluded there a discussion on the BIT even after almost four years of its inception and is quite an indicator that the contents of the BIT require a review so that it can fulfil the aim of increasing foreign investment in the country and at the same time protecting the interest of both the investors and the host state.

Conclusion

India’s decision to adopt a new Model BIT aftermath the White Industries Case[44], with the aim that the host state’s right to regulate must be welcomed. After foreign investors sued India under different BITs, and the government realized that the contents of the earlier model BIT were vague and were overpowering the government’s power to regulate. However, the fact that India has adopted a new Model BIT that continues to give the right to foreign investors to challenge India’s regulatory measures under BIT shows India’s continuous engagement with the ISDS system unlike countries like South Africa and other Latin American countries.[45]

Also, International Investment Law still faces issues like lack of uniformity as often the contents of Model BIT varies from country to country, lack of proper redressal authority as it is often seen that the ISDS has not been able to state general principles to be followed in case of dispute and often a contradicting decision is given by the ISDS tribunal. Bringing uniformity is one way these issues can be addressed and this can be done by accepting of a uniform International Investment treaty to bring uniformity and also by setting a global investment court so that general principles can be laid down relating to international investment law in order to create certainty.

The scheme of the Indian Model BIT, thus, does not indicate a series of incremental reforms of India’s already existing practice but reflects a radical departure from the same.[46] There is an urgent need to revisit the contents of the Indian Model BIT in order to use it as a tool to attract foreign investors. It is perhaps evident from the fact that only one state has ratified the Indian Model BIT even after three years of its coming into existence and that it is not considered to be an ‘investor-friendly’ BIT. It is clear that many countries would negotiate on the terms of BIT and hence a better idea would be in redrafting the Model BIT in way that it is able to attract foreign investment in the country in order to help the economy to revive from the effect of this COVID-19 pandemic.

[1] Surya P Subedi., International Investment Law Reconciling Policy and Principle, (1st ed. Hart Publishing Ltd Oxford)

[2] Ranjan, Prabhash; Singh, Harsha Vardhana; James, Kevin; Singh, Ramandeep (2018). “India’s Model Bilateral Investment Treaty: Is India Too Risk Averse?” Brookings India IMPACT Series No. 082018. August 2018.

[3]Cornell Law School, Legal Information Institute,  https://www.law.cornell.edu/wex/bilateral_investment_treaty.

[4] R. Dolzer & C. Schreuer, Principles of International Investment Law (2012).

[5] J Tobin and S Rose-Ackerman, ‘Foreign Direct Investment and the Business Environment in Developing Countries: the Impact of Bilateral Investment Treaties’, William Davidson Institute Working Paper

No 587, June 2003.

[6] https://icsid.worldbank.org/en/Pages/about/default.aspx

[7] This includes 2957 stand-alone investment treaties and 367 Treaties with Investment Provisions (TIPs) or investment chapters in FTAs. See UNCTAD, World Investment Report – Investor Nationality: Policy Challenges 101 (2017) [hereinafter UNCTAD, World Investment Report 2017]

[8] UNCTAD, Investment Dispute Settlement Navigator, http://investmentpolicyhub.unctad.org/ISDS.

[9] Methanex Corporation v. United States of America, NAFTAUNCITRAL, Award, (Aug. 3, 2005).

[10] Biwater Gauff Ltd v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award, (Jul. 24, 2008).

[11] CMS Gas Transmission Co. v. Argentina, ICSID Case No. ARB/01/8, Award, (May 12, 2005)

[12] EnCana Corporation v. Republic of Ecuador, LCIA Case No. UN3481, Award, (Feb.3, 2006)

[13]Philip Morris Asia Ltd. v. The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility, (Dec. 17, 2015).

[14] White Industries Australia Limited v. Republic of India, UNCITRAL, Final Award (Nov. 30, 2011).

[15] Article 4(2) of the India-Australia BIT provides the MFN provision according to which, ‘a contracting party shall at all times treat investments in its territory on a basis no less favourable than that accorded to investments or investors of any third country

[16] Article 4(5) of the Indian-Kuwait BIT provides the ‘effective means’ clause according to which Each Contracting State shall in accordance with its applicable laws and regulations provide effective means of asserting claims and enforcing rights with respect to investments and ensure to investors of the other Contracting State the right of access to its courts of justice, administrative tribunals and agencies, and all other bodies exercising adjudicatory authority.

[17] White Industries Australia Limited v. Republic of India, UNCITRAL, Final Award (Nov. 30, 2011).

[18] Gourab Banerji; GAR Investment Treaty Know-How, India. (Adwaita Sharma, George Pothan and Sriharsha Peechara), 2015

[19] Prabhash Ranjan, ‘India and Bilateral Investment Treaties – A Changing Landscape’, 2014, ICSID Review, pp 1-32.

[20]Model Text for the Indian Bilateral Investment Treaty 2016,   http://www.dea.gov.in/sites/default/files/ModelBIT_Annex_0.pdf

[21] Ranjan, Prabhash; Singh, Harsha Vardhana; James, Kevin; Singh, Ramandeep (2018). “India’s Model Bilateral Investment Treaty: Is India Too Risk Averse?” Brookings India IMPACT Series No. 082018. August 2018.

[22] Government of India, Law Commission of India, Report No 260, Analysis of the Draft Model Indian Bilateral Investment (August 2015).

[23] Mysore, Srikar & Aditya Vora. 2016. ‘Tussle for Policy Space in International Investment Norm Setting: The Search for a Middle Path?’, Jindal Global Law Review, 7(2): 135, 143.

[24] Garg and others, Continuity and Change (n 3) 84. On broad asset based definitions of foreign investment allowing for a large range of transactions to enjoy protection under the BIT see UNCTAD (2011), 9.

[25] Article 1 of US Model BIT,2012.

[26] Article 1(a) UK Model BIT.

[27] OECD, Most-Favoured-Nation Treatment in International Investment Law, OECD Working Papers on International Investment 2004/02, http://www.oecd.org/daf/inv/investment-policy/WP-2004_2.pdf

[28] Dolzer p 186.

[29] White Industries Australia Limited v. Republic of India, UNCITRAL, Final Award (Nov. 30, 2011).

[30] Statement by India at the World Investment Forum 2014, UNCTAD, http://unctad-worldinvestmentforum.org/wp-content/uploads/2014/10/ Mayaram.pdf (hereinafter ‘India’s 2014 Statement’) accessed 9 January 2018; Garg and others, Continuity and Change (n 3) 75-76.

[31] Article 4 of the Canada Model BIT, 2004.

[32] Article 3 National Treatment and Most-favoured-nation Provisions, UK Model BIT.

[33] Vienna Convention on the Law of Treaties, May 23, 1969, 1155 UNTS 331, Art. 27.

[34] Art 15.1 & 15.2, 2016 Indian Model BIT.

[35] Art. 13.5 (i) according to which limits on its jurisdiction of the tribunal is placed and it is it stated that it shall not have the jurisdiction to: (i) review the merits of a decision made by a judicial authority of the Parties.

[36] Ibid.

[37] Economic Survey (2017-18), Ease of Doing Business’s Next Frontier: Timely Justice http://mofapp.nic.in:8080/economicsurvey/pdf/131-144_Chapter_09_ENGLISH_Vol%2001_2017-18.pdf

[38] Art. 22 of the Canada Model BIT which deals with Claim by an Investor of a Party on Its Own Behalf.

[39] Art. 8 UK Model BIT.

[40] Herbert Smith Freehills, Mixed messages to investors as India quietly terminates bilateral investment treaties with 58 countries, https://hsfnotes.com/arbitration/2017/03/16/mixed-messages-to-investors-as-india-quietly-terminates-bilateral-investment-treaties-with-58-countries/

[41] Bilateral Investment Treaties (BITs)/Agreements/ Joint Interpretative Statements (JISs) signed subsequent to adoption of Model BIT text 2015 , Department of Economic Affairs,https://dea.gov.in/bipa?page=9

[42] Article 2.4 (ii) of the Indian Model BIT according to which the treaty does not apply to any law or measure regarding taxation, including measures taken to enforce taxation obligations.

[43] Art 15 Indian Model BIT.

[44] White Industries Australia Limited v. Republic of India, UNCITRAL, Final Award (Nov. 30, 2011).

[45] Ranjan, Prabhash; Singh, Harsha Vardhana; James, Kevin; Singh, Ramandeep (2018). “India’s Model Bilateral Investment Treaty: Is India Too Risk Averse?” Brookings India IMPACT Series No. 082018. August 2018.

[46] Manu Thadikkaran, MODEL TEXT FOR THE INDIAN BILATERAL INVESTMENT TREATY: AN ANALYSIS,


ABOUT THE AUTHORS

Arpit Lahoti

WhatsApp Image 2020-05-06 at 8.16.02 PM

Arpit Lahoti is a third-year law student at National Law University Nagpur.

Sherry Shukla

Sheery

Sherry Shukla is a second-year law student at National Law University Nagpur.

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