Tracing the History and Impact of ISDS on the Model BIT

During the recent visit of Brazilian President, Jair Bolsonaro, to India, Brazil and India inked the investment cooperation and facilitation treaty  (Photo Credits: PRAKASH SINGH/AFP)

Abhileen Chaturvedi, Economic Law Partners (ELP)

The Investor State Dispute Settlement Mechanism (ISDS) has seen a fair number of disputes in the infrastructure sector and there is good reason for it. As certain governments may not be able to commit public finances for large scale infra projects, public private partnerships (PPP) are entered into, through which private financing is driven in such projects. In course of execution of these projects, invariably disputes arise out of policy decisions taken by the government, revision in concessions promised to a private party, changes in the government itself, or changes in the expected return on investment.

A developing nation itself, the Government of India (GOI) too has been at the receiving end of similar disputes. While most of the disputes against GOI arising out of PPPs, are resolved before an independent arbitral tribunal or domestic courts, some of these disputes have become the subject of treaty claims against the GOI, in the past as well as in recent years. Provided below are certain instances where ISDS was opted for by foreign investors in the infra structure against GOI, which primarily germinate out of changes in government policies, revision of concessions promised or a change in government.

The Dabhol Power Project (2003-04)

Incorporated in 1992, the Dabhol Power Company (DPC), a company based in Maharashtra, was set up to manage and operate the Dabhol Power Plant. DPC was incorporated after Enron had approached the Government of Maharashtra with the idea of building a gas powered plant, where the LNG would have been imported from Qatar for 20 years and Government of Maharashtra would have then bought the power produced for the same number of years. The investments for setting up the power plant was drawn through Bechtel, Enron and other entities (shareholders in the DPC), and several other banks through credit facilities.

In the year 1995, when the power plant was still under construction, there was a change in the ruling government of the state. . Post the new government taking over, there were widespread protests around the site of the power plant which eventually led to rioting, compelling the law enforcement agencies to use force. Human Rights Watch and Amnesty International alleged human-rights violations and blamed Enron for being complicit. Eventually, the Government of Maharashtra directed that the project be halted on account of environmental hazards, lack of transparency and exemplified costs.

The first treaty claim against GOI was initiated in the year 2003 by Bechtel (India-Mauritius BIT), alleging expropriation of its investments as a result of reversal in the energy policy of the local government on account of political change in the Government. This was the first claim in what became a series of claims under the same issue, where several banks initiated claims against the GOI in the year 2004, for GOI’s alleged failure to protect the investor’s loans in the Dabhol power plant, the default of which resulted in significant losses to the claimant’s financing of the failed project. These arbitrations were invoked under BITs which GOI had executed with Mauritius, Netherlands, France, Austria, Switzerland and the UK and

Outcome: These arbitrations were subsequently settled in the year 2010.

Haldia Port (2014)

Louis Drefyus Armateurs SAS – a shareholder in a joint venture with ABG Infralogistics,.The joint venture was incorporated for the modernization of berths at the Haldia port in West Bengal.

Louis Drefyus Armateurs had invoked arbitration proceedings, under the India – France BIT, for its claims arising out of a series of measures by the government that allegedly prevented the effective implementation of the joint venture. It was further alleged that the government failed to provide protection and security to the project, and to obey court orders concerning the removal of equipment from the port.

Outcome: The matter was decided in favour of the GOI.

Anrak Aluminum (2016)

Anrak Aluminum Limited was a company incorporated in the State of Andhra Pradesh for setting up an alumina and aluminum refinery. Ras-Al-Khaimah Investment Authority (RAKIA) was an investor in Anrak which was promised bauxite by the Andhra Pradesh Mineral Development Corporation (APDMC) for the proposed smelting unit. On account of public agitation in the areas where mining was to be carried out, the APDMC cancelled the supply agreement by with ANRAK, based on a government order issued by Government of Andhra Pradesh.

RAKIA invoked arbitration against the GOI under the India – UAE BIT, raising claims for alleged non-fulfillment and subsequent cancellation of the bauxite concession.

Outcome: The arbitration proceedings are currently pending.

Nissan (2017)

In the year 2017, Nissan initiated arbitration proceedings against the GOI under the India-Japan Economic Partnership Agreement of 2011 on account of non payment of incentives promised by the Government of Tamil Nadu. The state government in the year 2008 had promised certain tax rebates to Nissan for building a manufacturing unit in that state.

Outcome: The arbitration proceedings remain pending.

KOWEPO (2018)

In the year 2018, South Korea’s state owned company, Korea Western Power Company (KOWEPO) initiated arbitration proceedings under the India-Korea Comprehensive Economic Partnership Agreement.

KOWEPO owns 40% in Pioneer Gas Power Limited (PGPL) which operates a gas powered power plant in the Government of Maharashtra. PGPL was promised certain gas concessions by the state government which allegedly remained unfulfilled. As the fuel supply agreement allegedly remained unfulfilled, KOWEPO claims that the same has led to losses and has thus sought compensation from the GOI under the mechanism prescribed under the India-Korea CEPA.

White Industries

While the above mentioned arbitrations in the infrastructure sector have been the subject of much debate and deliberations, another treaty arbitration, White Industries v. India, was indeed a watershed moment for India’s tryst with the ISDS.

In these arbitration proceedings, a decision was rendered against the GOI, which held that judicial delays amounted to violation of ‘minimum standard of treatment’. Interestingly enough while this arbitration was invoked under the India – Australia BIT, the MFN clause in this BIT allowed the investor to invoke the ‘minimum standard of treatment’ from the India-Kuwait BIT.

After the White Industries issue, there has been spate of treaty arbitrations against India which arise out of government measures undertaken in the telecom and energy sectors, retrospective changes made in tax laws and revision or non-compliance by the government of certain promised concessions.

The Model India BIT (2016)

It was perhaps the series of treaty claims that Government of India received which led it to rethink its existing bilateral treaty obligations. Consequently, the GOI announced its decision of terminating its existing BITs and adopted the 2016 Model India BIT (Model BIT). The Model BIT endeavored to provide appropriate protection to foreign investors in India while also protecting Indian investors in foreign countries.

Though the GOI clearly highlighted its apprehension of the BIT arbitration regimes, it did not adopt the extreme step out of opting out of the system, something which countries like South Africa, Poland and certain other countries did.

GOI also adopted a two-pronged approach with respect to its existing BITs. GOI served notices of termination to some countries and to the others, served notices calling upon them to issue joint interpretative statements (JIS) to clarify ambiguities in treaty texts so as to avoid expansive interpretations by arbitration tribunals.

Given the importance which the Model BIT will hold for foreign investments in the infrastructure sector, the next section details key terms  of the Model BIT.

Key Terms of the Model BIT

Definition of Investment

The definition of ‘Investment’ in the Model BIT has moved away from a broad asset-based definition of investment to an enterprise-based definition where an enterprise is taken together with its assets.

“Article 1.4 of the Indian Model BIT provides:

‘Investment’ means an enterprise constituted, organised and operated in good faith by an investor in accordance with the law of the party in whose territory the investment is made, taken together with the assets of the enterprise, has the characteristics of an investment such as the commitment of capital or other resources, certain duration, the expectation of gain or profit, the assumption of risk and a significance for the development of the party in whose territory the investment is made. An enterprise may possess the following assets:

(a) shares, stocks and other forms of equity instruments of the enterprise or in another enterprise;

(b) a debt instrument or security of another enterprise;

(c) a loan to another enterprise

(i) where the enterprise is an affiliate of the investor, or

(ii) where the original maturity of the loan is at least three years;

Therefore, only an enterprise that is legally constituted in India can bring a BIT claim. By doing away with an ‘asset’ based approach, the Model BIT aims to narrow the scope of protection to an investment thereby further limiting the possibility of invocation of a treaty claim against India.

However, Article 1.4 provides a non-exhaustive list of assets that an enterprise may possess. Perhaps inspired by the interpretation given to ‘investment’ under Salini v. Morocco, the Model BIT states that an ‘investment’ must have a commitment of capital and other resources, a certain duration, the expectation of gain or profit, the assumption of risk and significance for the development of the country where the investment is made. It may however be noted that the test in Salini vs Morocco has itself been watered down in several other arbitration awards. In LESI vs Algeria, the tribunal held that it is difficult to ascertain whether an investment has contributed to the economic development of a state. To provide an ICSID perspective, the tribunal in Quiborax v. Bolivia, held that that “investment”, as used in Article 25 of the ICSID Convention, has its own definition and criteria separate from a BIT definition.

Given the fact that the actual meaning of the relevant characteristics remains undefined and open for interpretation, the Model BIT may indeed lead to conflicting interpretations by future arbitral tribunals.

The MFN 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. In BIT arbitrations however, foreign investors have often used the MFN provision of the primary BIT (under which the dispute between investor and state arises) successfully to borrow a favorable substantive provision granted by the host state under another BIT. Investors have also relied upon the MFN provision in the primary BIT to borrow beneficial provisions from another BIT, to overcome procedural requirements, to claim treaty breaches by borrowing substantive provisions from another BIT and on certain instances, have even attempted to borrow ‘umbrella’ clauses to bring a commercial  arbitration under the ambit of a BIT arbitration.

The exclusion of the MFN clause can be seen as a direct reaction to the ruling against the government in White Industries. The exclusion of MFN is to prevent such cases of ‘treaty shopping’, whereby foreign investors take advantage of provisions in other BITs by ‘borrowing’ them through the MFN clause.

However, GOI could have adopted an MFN clause with certain qualifications. For instance, the EU-Canada CETA, in order to limit the scope of the MFN provision so as to obliviate the situation of beneficial treaty shopping, specifically excludes ‘procedures for the resolution of investment disputes between investors and states provided for in other international investment treaties’ and further provides that ‘substantive obligations in other international investment treaties and other trade agreements do not in themselves constitute ‘treatment’ and thus cannot give rise to a breach of this Article [MFN]’ unless a host state has adopted or maintained measures pursuant to those obligations.

GOI could have followed the above approach (recommended by the Law Commission of India report too) and not do away with the MFN provision completely, which indeed exposes foreign investors to discriminatory treatment and substantially tilts the balance in favor of host state’s regulatory power.

Fair and Equitable Treatment

Fair and Equitable Treatment (FET) is one of the most important standards and has been the subject of much debate in various scholarly writings and awards. Numerous treaty claims show that FET has become a catchall provision capable of sanctioning many legislative, regulatory, and administrative actions of the host state. This interpretative outreach by tribunals, could perhaps be because of FET appearing in large number of BITs without much guidance about its normative content.

The Model BIT does not contain a FET provision. GOI perhaps decided not to include a provision on FET because arbitral tribunals often interpret this provision too broadly. The Model BIT contains a provision entitled ‘Treatment of Investments.’ Article 3.1 prohibits a country from subjecting foreign investments to measures that constitute a violation of customary international law through:

1) denial of justice, which covers both judicial and administrative proceedings; or,

2) fundamental breach of due process; or,

3) targeted discrimination on manifestly unjustified grounds such as gender, race or religious belief; or,

4) manifestly abusive treatment such as coercion, duress, and harassment.

This is clearly an attempt to provide distinct standards of treatment without making any reference to the FET provision. The said Article 3.1, is further distinct from the concept of minimum standard of treatment as evolved through the 1926 Neer award (Neer v. Mexico). The Model BIT thus attempts to restrict the applicability of a standard which has become even broader through arbitration awards in the past years.

Taxation

Article 2.4 (ii) of the Model BIT states that the treaty shall not apply to “any law or measure regarding taxation, including measures taken to enforce taxation obligations.” This article provides that if a particular regulatory measure is related to taxation in the host state (whether it made before or after the commencement of arbitral proceedings), an arbitral tribunal shall not be able to review such a decision.

Clearly, GOI has decided to keep taxation measures outside the purview of the Model BIT in response to the Vodafone and Cairn arbitrations, challenging India’s retrospective application of taxation law under different BITs.

Completely excluding taxation measures denotes that foreign investors shall not be able to challenge such measures under BITs under any circumstance. However, allowing host states to have the last word on whether a regulatory matter pertains to taxation or not might lead to regulatory abuse. As the tribunal in EnCana v Ecuador clearly recognized that states can abuse their power to tax by designing tax laws that are ‘extraordinary, punitive in amount or arbitrary’ which, in turn, could trigger a claim of indirect expropriation. The tribunal in Burlington v Ecuador recognized that taxation can be confiscatory, leading to indirect expropriation.

Invocation of arbitral proceedings under the Model BIT

Through the Model BIT, GOI has further qualified (subject to certain conditions) its consent to arbitration by mandating that a foreign investor should first exhaust local remedies at least for a period of 5  years before commencing international arbitration. The rule related to ‘exhaustion of local remedies’ is a longstanding rule of customary international law. However, the time period spent before local courts in having the disputes adjudicated differs in different BITs. Though some BITs expressly require exhaustion of local remedies, other BITs do not make any reference to it.

The 5 years under the Model BIT are to be counted from the date when the foreign investor first acquired ‘knowledge of the measure in question and the resulting loss or damage to the investment” or when the investor should have first acquired such knowledge. The other critical element related to exhaustion of local remedies is that the foreign investor should submit the dispute to the local court within 1 year from the date on which the investor acquired the knowledge or should have acquired the knowledge about the measure. Pertinently, the period of limitation for filing commercial disputes before domestic courts is 3 years but the Model BIT has for reasons best known, reduced this to 1 year for a foreign investor.

The requirement to exhaust local remedies shall not be applicable “if the investor can demonstrate that there are no available domestic legal remedies capable of reasonably providing any relief in respect of the same measure”. The burden to show that there is no reasonably available relief falls on the foreign investor.

The Model BIT has another clarification attached to Article 15.1, which precludes the investors from claiming that they have complied with the exhaustion requirement on the basis that the claim under this treaty is by a different party or in respect of different cause of action. This is an important clarification as it is often found that different companies that are controlled by the same corporate group launch multiple proceedings against the state at multiple forums.

This clarification will prohibit companies from abusing their rights. Moreover, since cause of action in domestic forum is formulated in domestic law terms, which would be different from the cause of action formulated in treaty terms, it is relatively easier to show that the requirement of exhaustion has been complied with.

Further Additional Qualifications under the Model BIT

The Model BIT provides that the foreign investor, after exhausting all local remedies for five years, without reaching a satisfactory resolution, of a ‘notice of dispute’ to the host state. This ‘notice of dispute’ will be accompanied by another six months of attempts by the investor and the state to resolve the dispute through meaningful negotiation, consultation or other third party procedures.

In the event that there is no amicable settlement of the dispute, the investor can submit a claim to arbitration, subject to the following additional conditions:

  1. first, not more than 6 years have elapsed from the date on which the investor first acquired or should have acquired knowledge of the measure in question; and/or,
  2. second, not more than 12 months have elapsed from the conclusion of domestic proceedings;
  3. third, before submitting the claim to arbitration, a minimum of 90 days’ notice has to be given to host state;
  4. fourth, the investor must waive the ‘right to initiate or continue any proceedings’ under the domestic laws of the host state.

Therefore, given the above criteria, it will indeed take several years before an investor can actually bring a claim under the Model BIT, should the same be formalized with another country.

General Exceptions

The Model BIT also contains a separate chapter which provides further exceptions to bringing a treaty claim under the Model BIT. These include protection of public morals, maintenance of public order, protection of human, animal, or plant life or health, protection and conservation of the environment, ensuring compliance with domestic laws that are not inconsistent with the provisions of the treaty. The inclusion of these permissible objectives will provide opportunities to reconcile investment protection with the host state’s right to regulate.

Conclusion

In order to prevent the extent of the coronavirus pandemic, India has taken various regulatory steps. All these regulatory measures will disrupt supply chains, hinder with contractual rights, and restrain the property rights of foreign investors. When the dust settles, some apprehend that foreign investors may bring claims against India for these regulatory measures, claiming the breach of different BITs. Investors would rely upon the ISDS provisions in these BITs to bring these claims. Although India has unilaterally terminated several BITs, these treaties continue to bind the country due to the sunset clause for the investment made before the termination.

There is no doubt that India needs to leverage foreign capital to trigger its ambitious growth of being a USD 10 trillion dollar economy. Likewise, Indian investors are increasingly looking overseas to diversify their business, gain access to new markets, procure intellectual property and undertake research and development. BIT’s should now therefore, be increasingly a part of the India growth narrative. Assuring foreign investors of a stable business environment in which their interests will be protected is as critical as safeguarding Indian investors capital overseas.

India may have a fair share of treaty arbitrations invoked against it, and the Model BIT too may have its naysayers. However, the intention of equitable treatment on which the BIT system is rooted is not in doubt. India, may have to rethink certain protectionist measures in its Model BIT going forward and must take the middle path to meet both the investor and the State interests.


Abhileen Chaturvedi is an Associate Partner at Economic Laws Practice (ELP). He can be reached here.

Views are personal.


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