Saturday, May 2, 2015

Investor-State Dispute Settlement In India

[The following guest post is contributed by Aakarsh Narula, who is a lawyer and currently working as a Legislative Assistant to a Member of Parliament from Hyderabad]


The 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID Convention”), for the first time, created an international forum for resolution of disputes between investors and States through the inclusion of arbitration clauses in State contracts. Despite India not having signed or ratified this convention, it has, since 1994, when India signed its first Bilateral Investment Promotion and Protection Agreement (“BIPA”) with United Kingdom, concluded BIPAs with 83 countries. Out of these, 72 treaties have been enforced, and India is in the process of negotiating BIPAs with 25 more countries.

BIPAs (or Bilateral Investment Agreements or BITs) are agreements between two sovereign countries, which contain reciprocal legal assurances regarding the protection of investments made by investors of one country in the other. One of such assurances accorded is the obligation of the State to submit itself to arbitration in case the state machinery contravenes any of the provisions of the BIT. Therefore, as per the Model Text of BIPA drafted by the Indian Ministry of Finance, an aggrieved investor is permitted to initiate arbitral proceedings against the State if the State has failed to provide a fair and equitable treatment to the investment, has expropriated or nationalized the investment of the investor in the State, or has accorded treatment to the investor, which is less favourable than what would have been accorded to an investor of any third state. Under the model treaty, an investor has the option to initiate arbitration in accordance with the Arbitrational Rules of the United Nations Commission on International Trade Law (“UNCITRAL”), 1976, or under the Additional Facility Rules of the International Centre for Settlement of Investment Disputes (“ICSID”). In either case, the award can be enforced in India only under the New York Convention, and is therefore, vulnerable to judicial scrutiny under the Arbitration and Conciliation Act, 1996.

India faces its first adverse award - White Industries v. Republic of India

The only time that India had to face an adverse award under its investment treaty obligations was in November 2011 in the case of White Industries v. Republic of India (“White”). In this UNCITRAL arbitration, White Industries Australia Limited (“White Industries”), a company incorporated in accordance with laws of Australia initiated arbitration proceedings against Republic of India under the Bilateral Investment Promotion and Protection Agreement with Australia (“India – Australia BIT”) for alleged wrongdoings of Coal India Limited (“Coal India”) and the failure of the Indian state in according fair and equitable treatment to its investment, fulfilling the legitimate expectation of the investor and providing the investor with effective means of asserting its claim and enforcing its rights.

While interpreting the Most Favoured Nation Clause (“MFN Clause”) in the India – Australian BIT, the Tribunal imported Article 4(5) of the Agreement Between the Republic of India and the State of Kuwait for the Encouragement and Reciprocal Protection of Investments (“India – Kuwait BIT”) in favour of White Industries. Clause 4(5) of the India-Kuwait BIT put India under a legal obligation to provide the investors with “effective means of asserting claims and enforcing rights” with regard to their investment. An MFN clause in the BIT automatically imports all favourable assurances envisaged under all bilateral treaties previously signed between India and other countries. Such importation, as also contended by India in the said proceedings, makes country-specific negotiations futile.

Even though the Tribunal refused to make the Government of India liable for the alleged wrongdoings of Coal India, it held that the Indian judicial system’s inability to deal with White Industries’ jurisdictional claim in over nine years and the Supreme Court’s inability to hear White Industries’ appeal for over five years amounted to a breach of India’s obligation to provide the investor with “effective means of asserting claims and enforcing rights”.

Since the award in White has been delivered, several investors have resorted to, or have threatened to initiate investment arbitration against India. The Union Government has reportedly received notices from seventeen companies for initiating or threatening arbitration from foreign companies.

How the Indian judiciary responded – The Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armatures SAS

In a case where an Indian court was, for the first time, called upon to examine the provisions of an investment treaty and grant an anti-arbitration injunction against an Investment Arbitration, the Calcutta High Court on September 29, 2014 refused to stay proceedings against the Republic of India.[1]

In October 2009, Kolkata Port Trust (“KPT”) awarded a contract for operation and maintenance of Haldia Dock Complex of the Kolkata Port Trust (“Project”) to Haldia Bulk Terminals Private Limited (“HBT”), a fully owned subsidiary of ALBA Asia Private Limited (“ALBA”). ALBA is a joint venture company incorporated under the laws of India through collaboration between a French Company, Louis Dreyfus Armatures SAS (“LDA”) and ABG Ports Limited.

During the pendency of a domestic arbitration between HBT and KPT, the Government of West Bengal and KPT, on November 11, 2013, received a notice from the French Company, LDA, invoking arbitration under Article 9 of the BIT between the Government of India and the Government of Republic of France executed in 1997. It was claimed by LDA that since the inception of the Project, India, State of West Bengal, KPT and a number of other authorities had deliberately tried to impede the implementation of the Project, overstaff the Project and financially crippled the investment, as a result of which, the Contract was rendered redundant and HBT was left with no choice but to terminate its contract with KPT. Aggrieved by the proceedings, KPT filed an anti-arbitration injunction before the Calcutta High Court to restraint LDA from proceeding with the Investment Arbitration against KPT.

The High Court, after emphasizing the jurisdiction vested on the Indian courts to interfere in foreign-seated arbitrations in exceptional circumstances under Section 5 and Section 45 of the Arbitration Act, held that a civil court would not do so unless such proceedings cause a demonstrable injustice to a party. On that touchstone, the Court found the investment arbitration proceedings against KPT to be oppressive due to the existent domestic proceedings between the parties. The Court, however, allowed the investment arbitration to continue against India.

Interestingly, this judgment, for the first time drew a parallel between BITs and domestic legislation and recognized that like the domestic laws, BITs provide substantive rights and guarantees to investors, which could be validly invoked against the host country. Even though a decision of a single judge, it is for the first time that an Indian court has attempted to elevate the contractual rights of parties to the level of treaty rights.

The judgment may be perceived as an initial respite to the foreign investors who doubted whether Investment Arbitration might be able to survive judicial scrutiny. However, the doubts may only be settled once a larger bench of the High Court or the Supreme Court gets an opportunity to consider an investment award against issues like sovereignty and public policy in a proceeding initiated under the relevant sections of the Act to set aside an award. 

- Aakarsh Narula

[1] The Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armatures, 2014 SCC Online Cal 17695


vswami said...

WRT the concluding para, because of the inherent and intricate cross-border/ extra territorial implications, with far reaching consequences, most probably most issues faced with or foreseen could not , for obvious reasons, be expected to be finally resolved and disputes settled by the domestic courts or arbitration; without recourse to international court of arbitration. Moreover, going by limited knowledge, resolution might prove formidable , well nigh inconclusive, is in the major area of dispute concerning ‘taxation’ ; that is, because of certain special provisions heard to exist (to double check) in the related treaties adverse to foreign investors. In short, broadly speaking, the convention, though brought in as a pragmatic solution for inevitable criticalities, may not work the way as envisaged; that too without devising and plugging in necessary curatives and supplying effective palliatives.

At best, as viewed , the subject is a fertile field for theoreticians to keep researching on.

vswami said...

Here is some input useful for suggested research on the subject >
Google search
"Resolving Settlement of international investment and trade ..."