Financial Express | 2012-06-29
Column : BIT of a problem
Deepak Raju, Anuradha RV
Investment treaty arbitration has been receiving increasing attention in India with notices invoking arbitration clauses under India’s investment agreements. Four companies (Sistema Financial Corporation, Telenor Asia, Capital Global and Kaif Investment) have issued notices to the government following the cancellations of the 2G licences. Vodafone has issued a notice following a budget proposal for a retrospective amendment of the Income Tax Act that would result in its liability to pay tax in relation to its acquisition of shares in Hutchison-Essar. The Children’s Investment Fund has also threatened to invoke arbitration against the Indian government for the losses it suffered as a shareholder in Coal India, following allegations relating to the coal ministry’s interference with coal pricing.
All these notices have arisen under various bilateral investment treaties (BITs) entered into by the government of India. Although India has been entering into BITs since 1994, it did not face disputes from investors till late last year. In November 2011, an arbitration panel awarded White Industries—an Australian company—a sum in excess of $84,000 against the government of India under the India-Australia BIT. White Industries successfully claimed that the delay on the part of Indian courts in enforcing an arbitral award obtained by it against Coal India amounted to a breach of the BIT.
BITs are international agreements between two sovereign states that create reciprocal commitments in respect of protection and treatment of investments by investors of one party in the territory of the other. The underlying premise for BITs is that they would result in a greater inflow of foreign investments. Some of the key rights provided to investors are national treatment, most favoured nation treatment, fair and equitable treatment, access to justice and protection of investments and legitimate expectations pertaining to such investments. The focus of the definition of ‘investment’ under BITs is often broad-based to include situations beyond when FDI has actually occurred. This allows, in some instances, for portfolio investments to be covered, and in others, a mere sales presence is sufficient. Additionally, India’s BITs, as with several other BITs worldwide, also provide for remedies for private investors of one party against the host country’s government, i.e. ‘investor-to-state dispute settlement’. This aspect of investment agreements has been one of the most controversial aspects of such agreements, and is also the provision under which the notices for arbitration have been issued against the government of India. Apart from BITs, investor-to-state dispute provisions have also been incorporated into India’s Comprehensive Economic Cooperation Agreements (CECAs) with Korea, Singapore, Japan and Malaysia.
Worldwide experience with BITs for most countries, especially developing countries, has been the impact that they have had on evolution of law and policy to regulate investments. In fact, the threat of litigation has led to what is sometimes referred to as the ‘regulatory freeze’. A number of investor-to-state disputes have involved regulatory developments in the areas of health or environmental law. Even developed countries have sometimes borne the brunt of this; for instance, Australia was threatened with litigation when it sought to bring out a change in its tobacco regulation based on health considerations. In fact, as of 2011, the government of Australia has decided not to incorporate provisions on investor-to-state dispute settlement in its BITs, to avoid situations such as the potential tobacco-related action.
For India, in view of the impending litigation, and the unfortunate experience with the White Industries dispute, there are two imperatives: (1) develop a clear strategy in respect of the arbitration notices that have been served; and (2) define a clear position for future BITs and CECAs, especially with regard to provisions on investor-to-state disputes.
It has been recently reported that the central government is setting up a committee headed by the Cabinet secretary to handle issues arising out of investments made under India’s BITs. This is a significant step towards instituting a unified channel to deal with such disputes and may also help towards India developing its litigation strategy and preparedness necessary to deal with BIT arbitration. This would require a careful assessment of the facts and circumstances of each of the cases under which notices have been served so far. A key question in relation to the 2G notices, for instance, would be whether the actions of the Indian government, or the decisions of the Supreme Court, amount to ‘expropriation’ of an investor’s rights. India’s defence so far reportedly seems to be based on the argument that since the 2G licence cancellations were not done by the government, but by the Supreme Court, they do not amount to BIT violations. Such an argument, however, may not succeed in view of established BIT jurisprudence that judicial actions are acts of state. In fact, even in the first BIT case against India—the White Industries case mentioned above—the award against the government of India was directed against a judicial act (rather, judicial inaction).
There are also news reports that seem to suggest the Department of Telecommunications is considering inserting a clause in the terms for the auction for the 2G spectrum that companies which win the auctioned spectrum under the new auction process would need to commit that they would not claim damages for cancelled licences under international treaties. Such a requirement could itself be seen to violate the BIT’s provisions since it impacts the right of legal recourse of the investor.
India’s approach, therefore, clearly needs further refinement. The facts in each of the cases—whether 2G or Vodafone or TCI—would need to be scrutinised carefully in order to build the legal defence as regards why the regulatory or judicial action in each of the cases did not amount to expropriation. This could include, for instance, an assessment of whether conditions of the licence were violated by the companies concerned, circumstances leading to cancellation, etc. There is a vast sea of jurisprudence under international investment law that provides propositions which could be used for building a strong defence. It would be important to use this to build sound arguments for the government.
An investment litigation strategy and investment negotiation strategy on BITs and investment is clearly the need of the hour. This is critical in order to ensure that the country is prepared for any disputes and does not face losses as it has in the case of White Industries.
The authors are partner and associate, respectively, at Clarus Law Associates, New Delhi