An Indian company goes treaty shopping…

Amidst reports of yet another investment treaty arbitration against India over the cancellation of 2G licenses by the Indian supreme court (ToIIE), the ICSID has registered an arbitration that may well represent the first time an Indian TNC has gone treaty shopping.

According to its website, on 27 September 2013, the ICSID registered an arbitration proceeding initiated by Spentex Netherlands, B.V., against the Republic of Uzbekistan (ICSID Case No. ARB/13/26). A quick Google search reveals that the Claimant in this case, Spentex Netherlands, B.V., is actually a subsidiary of Spentex Industries Ltd., a textile company registered and incorporated in New Delhi and managed by Indian nationals. The 2012-13 Annual Report of Spentex Industries Ltd. provides some insight on the relationship between the Indian parent and the Dutch and Uzbek subsidiaries. Note 42 of the Financial Statement states that:

The Company [Spentex Industries Ltd.] has an investment of Rs. 56,10,11,339 [approx. USD 89,83,362] and Rs. 93,23,779 [USD 1,49,301] in its subsidiary Spentex Netherlands B. V. (SNBV) and its step down subsidiary Spentex Tashkent Toytepa LLC (STTL) respectively. Further it has Rs. 7,00,12,404 as export receivable from STTL and advances of Rs. 9,50,70,902 in SNBV as on March 31, 2013.

The ICSID website does not yet give any further details about the arbitration, except that its subject matter relates to the “Textile Industry.” Spentex India’s statements provide some insight on the details of the dispute. Spentex India describes its version of the developments in Uzbekistan in a press release (apparently) dated 31 May 2012:

An Indian investor SIl (Spentex) through its project company STTL invested and commenced its business in Uzbekistan in right earnest and made investment vide Investment Agreement dated 26th September 2006 entered between the Government of Uzbekistan and Spentex (investor). However, in the midst of term of the Investment Agreement certain changes in legal provisions, economic and business conditions and policies were adversely changed by the authorities in Uzbekistan. These changes being contrary to the provisions of Investment Agreement jeopardized the legal stability of its project company and its business became completely unviable. Spentex made many representations to Uzbek authorities and its financers for rectifying the situation but the same went unheard and ultimately project company was forced to shut down all its factories in Uzbekistan and bankruptcy was thrust upon it. Harassment by tax authorities and prosecutors was another reason which never allowed STTL to function normally as arbitrary penalties were imposed and pressure from the prosecutor was a common feature

The arbitration proceeding also finds a mention in Spentex India’s 2012-13 Annual Report:

During the period of investment Government of Uzbekistan changed certain laws and policies by breaching the investment agreement and rendered operation of STTL unviable. Since treaties entered between the Governments of India and Uzbekistan and the Investment agreement entered between Govt. of Uzbekistan and STTL were breached, company has issued notice claiming in excess of USD 100 Mn. towards protection of investment and payment of dues & compensation for the losses suffered by the company.

Interestingly, although the above quote from the Annual Report refers to the the bilateral investment treaty (BIT) between India and Uzbekistan being breached, the claimant in the arbitration proceeding is the Dutch subsidiary of Spentex India, suggesting that the claimant has sought protection under the Netherlands-Uzbekistan BIT. This is not unusual, as transnational corporations investing in foreign countries often structure their investments through a subsidiary in The Netherlands in order to avail the benefits of the vast network of Dutch BITs. The IISD, in a critical piece, notes that Dutch BITs “invite[] ‘treaty shopping,’ – i.e. routing investments through third countries to acquire the protection of investment treaties that investors would not, otherwise, have in their home state jurisdiction.” Even though the merits of the practice continue to be debated, there is no general international legal rule prohibiting investors from structuring their investments in a manner that allows them to avail of the greater protection available under certain treaties.

This development is interesting because it, once again, shows the blurring of the traditional capital-importing/capital-exporting dichotomy in discussions on investment treaties and investment arbitration. While investment treaties and investment arbitration may initially have emerged in a world where capital exporting countries primarily sought to protect their investors operating in capital importing countries, the scenario today does not allow for such a clear distinction to be easily drawn as traditional capital exporting countries gradually find themselves fending off claims by foreign investors. This, for example, is reflected in the evolution of the United States BIT program, which was focused mainly at investment protection abroad in its early days. In recent times, however, as the flow of investments into the United States has increased, its BITs have evolved to take into account not just the need for protecting investments abroad, but also the impact of such treaties and claims by foreign investors on the domestic regulatory space available to the government.

Faced with several claims by foreign investors under different BITs, there has been widespread criticism of the Indian BIT program as being too “pro-investor.” The Indian government has gone back to the drawing board and is currently reviewing its BITs. Cornered by the many treaty claims it faces, the government may well see BITs and investment arbitration as liabilities that expose it to unnecessary international litigation. However, as the Spentex case well illustrates, Indian investors are also increasingly investing abroad. Given the reciprocal basis of BITs generally, if India dilutes the standards of substantive and procedural protection in its BITs in immediate response to the claims filed against it, this would also weaken the protection available to Indian investors abroad. Therefore, as India undertakes to review and rationalize its BIT program, it must strike a careful balance between its domestic regulatory interests, on the one hand, and the interests of the Indian investor abroad, on the other. In its attempt to shield itself from claims by foreign investors, India should not deprive its own investors the benefits and protection promised by BITs.

Hat-tip to Aditya Singh for the alert about the Spentex arbitration.

Repercussions of the 2G Judgment: A BIT Claim Against India?

Reacting to the Indian Supreme Court’s judgment in the 2G spectrum case, Sistema, a Russian company, has invoked its right under Article 9.1 of the bilateral investment treaty between the government of the Russian Federation and the Government of India by filing a notice of dispute against India. Sistema has a joint venture with India’s Shyam Group — SistemaShyam Teleservices , in which the Russian government also has a stake of 17.14%. (see reports in the Economic Times and LiveMint)

This is the official explanation from the Sistema website:

[Sistema] has today sent a formal notice to The Republic of India notifying it of a dispute under the Bilateral Investment Treaty (BIT) between the Government of the Russian Federation and the Government of the Republic of India arising from the decision of the Supreme Court of India issued on February 2, 2012 regarding the cancellation of 122 telecom licenses, including 21 licenses belonging to Sistema Shyam TeleServices Ltd (“SSTL”), in which Sistema owns a 56.68% share. Sistema believes that the cancellation of SSTL’s licenses following Sistema’s investment of billions of dollars into the Indian cellular sector is contrary to India’s obligations under the BIT, including obligations to provide investments with full protection and security and obligations not to expropriate investments.

The formal notice requests The Republic of India to settle the dispute relating to the revocation of SSTL’s 21 telecom licenses in an amicable way within six months.  If the dispute is not amicably resolved by August 28, 2012 Sistema reserves the right to commence proceedings against The Republic of India as provided in the BIT.

Hat-tip to Luke of IA Reporter.

The Enrica Lexie Incident and International Law: Some Preliminary Thoughts

I am sure all are aware of the recent turn of events involving the Italian ship M/V Enrica Lexie off the Indian coast of Kerala. In this post, I will try to present a reductionist perspective of the problem and comment upon the relative strengths of India and Italy’s arguments, the eventual goal being to parse through the technical details that have been sporadically filtering through the media and elucidate the the basic legal framework which can then be applied to the facts as and when they become clearer.

Already, the incident has created great interest amongst the Indian and Italian press and media. Other’s who have chipped in with their opinions include Meghnad Desai (comparing the Enrica Lexie incident to the one involving Indian children being taken into care by Norway, he asks: “[b]ut the two disputes do pose a paradox in justice. If we apply domestic law, the Italian naval personnel are to be tried in a Kerala court. But then are the children of the Bhattacharyas legitimately held by the Norwegian welfare agencies?”) and K. R. A. Narasiah (arguing “that Italy is wrong on sea law”).

MV Enrica Lexie off Kochi Source: Aijaz Rahi/Associated Press

Conflicting Factual Narratives

Although the exact factual circumstances still remain clouded, a broad overview of the conflicting narratives by India and Italy is perhaps still in order. India claims that the fishing boat, St. Antony, carrying 11 unarmed crew reported being fired upon at  2150 hrs, 2 or 3 nautical miles off the coast of Kollam in Kerala. Of the 11 fishermen, 9 were sleeping and the two awake were shot. In total, India claims that 20 shots were fired by the two Italian marines. Moreover, India claims that no warning shots were fired by the marines, who took the fishing boat to be a pirate vessel. Italy, on the other hand, claims that at 1600 hrs, while navigating 33 nautical miles off the Indian coast, a twelve meters boat with six armed men was spotted approaching the Italian tanker. It kept nearing even after the soldiers showed their guns at which point they opened fire in the air and in the water and the  boat turned away without any one being hit. Enrica Lexie immediately reported the incident to authorities in Rome. In addition, Italy also claims that the ship was tricked into coming to Cochin Port by a message from the Indian Coast Guard by reporting that they were holding a boat with arms on board, prospecting it could have been the one involved in the incident of the afternoon and inviting the Italian crew and marines to give their statements (see here, for example). For our purposes, I would only like to emphasize the different accounts of the position of the ship during the incident: Italy says that satellite data confirms that the ship was 33 nautical miles of the Indian coast, whereas India says it was 2-3 nautical miles off the Indian coast.

Current Situation

The situation, at the time of writing, is that the marines have been taken into custody by the local Indian police and have been sent to a 14 day judicial remand. A first information report has been filed against the Italian crew, and the Indian police have been on board the ship to gather evidence. The two marines have been charged with murder under the Indian Penal Code (IPC). Currently, the ship is docked in Kochi (apparently, parking space there seems quite expensive by even the most expensive car-park standards ~ 4 mil. INR). The Italians have reportedly also filed a habeas corpus petition before the Kerala High Court. Italian diplomats have been arriving in India on the clock, and have met the arrested marines. A senior Italian minister is expected to arrive in Delhi this week. Meanwhile, back in Italy, the authorities have started their own national investigations into the incident. Thus, the judicial processes have been set into motion in both countries, with India having a tangible advantage because of its custody of the marines.

Legal Disagreement

Getting into the legal issues, the disagreement between the two state seems to be centered around two issues: jurisdiction; and, diplomatic immunity. In this post, I hope to address the issue of jurisdiction, since the disagreement there concerns whether the Indian courts even have the power to try this case. This, therefore, is a preliminary issue that requires to be addressed first.

Jurisdiction under International Law

On the role and importance of jurisdiction (or the authority to decide on an issue) under international law of the seas, Natale Klien provides a concise explanation:

Law enforcement powers are essential to enable states to respond to maritime security threats. Although this point is simple enough in itself, the laws according states jurisdiction are complex because of the different rights and obligations recognized in the various maritime zones. The regulation of activities at sea is dependent on what authority states have in any given maritime area or over any particular vessel or installation or structure located at sea. The ability of a state to undertake law enforcement not only varies because of the different rights and duties existing in the different maritime zones, but also according to what particular threat to maritime security is being addressed. While there is a general interest in upholding order at sea, the accepted responses to achieve order have been countered by other interests, especially the importance of territorial integrity and the corollary of maintaining exclusive rights over vessels that are flagged to the state. This balancing act is constantly at stake in seeking to prevent and respond to maritime security threats. (Natalie Klein, Maritime Security and the Law of the Sea (OUP, 2011), p. 62)

She goes on to explain the nuanced picture of jurisdiction painted by International law: prescriptive jurisdiction refers to refers to the power to adopt legislation and other rules; and, enforcement jurisdiction refers to the power to give effect to those rules through police and/or judicial action. Moreover:

States are entitled to exercise jurisdiction on the basis of different connections that a particular activity might have with them. The bases of criminal jurisdiction most commonly recognized are territorial; nationality; passive personality; universal; and protective. Territorial jurisdiction entitles a state to regulate persons and activities within its territory. Nationality jurisdiction allows states to regulate the activities of persons who have the nationality of that state. On the basis of passive personality, a state may exercise criminal jurisdiction over a person who has committed offences that are harmful to nationals of that state. Universal jurisdiction refers to jurisdiction over particular activities that are considered so heinous (notably, piracy and war crimes) that all states may exercise jurisdiction over the perpetrators of those crimes irrespective of any other link a state may or (p. 63 ) may not have with the acts in question. Protective jurisdiction entitles states to exercise jurisdiction over activities considered prejudicial to the security of the state. As may be readily perceived, each of these bases of jurisdiction may be brought to bear in addressing maritime security threats, especially territorial, universal, and protective jurisdiction.

A state must lawfully exercise prescriptive jurisdiction in order for the possible exercise of enforcement jurisdiction to arise.

(FN omitted, emphasis supplied).

Can Indian Courts Try the Accused Italian Marines?

With this brief excursion into the concept of jurisdiction under international law, let us now turn back to whether international law provides Indian courts the jurisdiction to try the Italian marines for their alleged shooting of Indian fishermen. For our purposes, the relevant treaty is the UN Convention on the Law of the Seas 1982 (UNCLOS), to which India and Italy are parties, and the relevant Indian legislation isThe Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act 1976.

The UNCLOS and the 1976 Act establish the following regime for the coastal state’s (here, India’s) jurisdiction:

Territorial Sea: breadth of of up to a limit not exceeding 12 nautical miles, measured from baselines determined in accordance with the UNCLOS. (Art. 3 UNCLOS) The sovereignty of a coastal State extends, beyond its land territory and internal waters and, in the case of an archipelagic State, its archipelagic waters, to an adjacent belt of sea, described as the territorial sea. (Art. 2 UNCLOS). For our purposes, the 1976 Indian Act in Section 3 provides that “[t]he sovereignty of India extends and has always extended to the territorial waters of India and to the seabed and subsoil underlying, and  the air space over such waters.” Thus, the Indian Penal Code, under which the marines are charged, is an exercise of prescriptive territorial jurisdiction. In other words, India can exercise both prescriptive and enforcement jurisdiction in the territorial sea on the issue of security (taking the killing of fishermen to be this issue).

Beyond the territorial sea lies the contiguous zone, extending not beyond 24 nautical miles from the baselines from which the breadth of the territorial sea is measured. (Art 33, UNCLOS) The 1976 Indian Act also defines the contiguous zone as such. This is an interesting region because it marks a divergence in the prescriptive jurisdiction under the UNCLOS and the 1976 Indian Act. Art. 33 of the UNCLOS provides in part that a coastal State may exercise the control necessary to: (a) prevent infringement of its customs, fiscal, immigration or sanitary laws and regulations within its territory or territorial sea; and, (b) punish infringement of the above laws and regulations committed within its territory or territorial sea. The 1976 Indian Act adds one more item to the list of areas coastal states can exercise their prescriptive jurisdiction in by legislating rules: the security of India (Art. 5(4) 1976 Act). This is not a conflict, for the UNCLOS only states that a coastal State “may” legislate to regulate the two areas, and the Indian Legislation goes beyond and adds one to the list. Moreover, there is considerable state practice in support of states exercise prescriptive jurisdiction for security matters in the contiguous zone (see table on p.14 here, and Alan Vaughan Lowe and R. R. Churchill On the Law of the Sea, pp.116-118 here).

Interestingly, under the 1976 Indian Act, unlike for territorial waters, India does not have complete sovereignty over contiguous zones. Instead, under Section 5(4), the Central Government may exercise such powers and take measures in or in relation to the contiguous zone as it may consider necessary with respect to: (a) the security of India; and (b) immigration, sanitation, customs and other fiscal matters. For example, one exercise of prescriptive jurisdiction in the contiguous zone is Section 2(28) of the Indian Customs Act, which defines “Indian customs waters” as the contiguous zone, within which Indian customs authorities have the power to arrest people (104), stop and inspect any ship (106), and open fire if a ship fails to stop (115(1)(c). Contrary to this, to my knowledge, the Parliament has not legislated on the subject of security in the contiguous zone. In this regard, the Indian Penal Code does not say anything about its extension over contiguous zone, whereas the Central Government has the explicit authority to extend its application over this region (Section 5(4)(b) 1976 Act). Thus, for the purposes of Indian courts criminal jurisdiction, this would mean the exercise of extraterritorial jurisdiction.

Exclusive Economic Zone: The EEZ concept is an innovation of the UNCLOS at the international level. It is reflected in the 1976 Indian Act, as well, and extends to 200 nautical miles from the appropriate baseline. Within the EEZ, states have the prescriptive jurisdiction to regulate exploitation of economic resources, scientific research, marine environment and artificial structures. This too, then would imply the exercise of extraterritorial jurisdiction by Indian courts.

This then establishes the importance of the exact location of the incident. For if the shooting took place 2-3 nautical miles from the coast, as India claims, it would be within the territorial waters, and therefore Indian courts could exercise their territorial jurisdiction under the IPC and Code of Criminal Procedure (Cr. PC). If, however, the incident occurred beyond 12 nautical miles from the baseline, take the 33 nautical miles which Italy claims for example, Indian courts would be exercising their extraterritorial jurisdiction under the IPC and the Cr. PC.

As noted in the quote from Klein above, extraterritorial jurisdiction may be exercised on several basis. Indian law, that is, the IPC and the Cr.PC, allows the exercise of extraterritorial jurisdiction on the basis of nationality. Thus, Section 4 of the IPC provides, in part:

Extension of Code to extra-territorial offences.–The provisions of this Code apply also to any offence committed by– (1) any citizen of India in any place without and beyond India; (2) any person on any ship or aircraft registered in India wherever it may be.

If the incident occurred beyond 12 nautical miles Indian courts can only have jurisdiction over offenses committed by a citizen of India, or a ship registered in India. Since, in the present case, the accused are marines of Italian nationality and the ship is also registered in Italy (contrary to what Meghnad Desai seems to think, see this), Indian courts do not have the extraterritorial jurisdiction to try the marines. This could be a basis for the Italian writ petition in the Kerala High Court. In fact, in a prior case (Raymund Gencianeo v.State of Kerala, 2004 Cri. LJ 2296), the Kerala High Court has held that:

Since the case of the prosecution is that the occurrence took place when the ship was 850 miles away from seashore, even if that 850 miles is taken as nautical miles or land miles, it is clear that the offence is alleged to have been committed by a foreign national in foreign vessel outside the territory of India. The Indian Courts have no jurisdiction to try an offence which is alleged to have been committed by a foreign national in a foreign vessel outside the territory of India and hence the proceedings in the case are liable to be quashed. (para. 6)

The facts in that particular case involved a Philippine national, who was a crewmember of a Japanese vessel, being prosecuted for the offence punishable under Section 307 of the IPC, alleging that he attempted to commit murder of the Captain and Chief Officer of the ship while he was on board the ship, 850 miles away from the Kochi coast. The accused was arrested on 29.11.2002 and placed in judicial custody. While the case against him was pending before the First Additional Assistant Sessions Judge, Ernakulam, he sought to quash the proceedings by contending that the courts in India have no jurisdiction to try the case since the allegation is that a foreign national committed the offence in a foreign vessel while the vessel was outside the territory of India.

Returning to the present, nobody is claiming that the ship was 850 miles off the coast of India. Nevertheless, this judgment does seem to suggest that Indian courts can only exercise criminal jurisdiction over foreign nationals on foreign ships if they are within the territorial waters of India (12 nautical miles).

In sum, the location of the shooting incident is of utmost importance. If it is not within 12 nautical miles, going by the above account, the trial court in Cochin may not have jurisdiction over the alleged offense. Of course, this is qualified by the presence of any government regulation extending the IPC over the EEZ — something which to my knowledge doesn’t exist.

Assessing Indian Reactions

While researching on the facts for this post I came across an interesting Indian reaction on the jurisdiction issue in The Hindu:

But India points to Section 4 of the Indian Penal Code, which says any crime committed against an Indian or on an Indian vessel, “wherever it may be,” can be tried in India.

“So there is extra-territorial application of both Indian and Italian laws. We understand that but as representatives of India, we will go by the legal process here. There are differences with Italy on the facts, procedure and processes, but we are willing to engage with them. If they so desire, we will provide consular access to the two marines detained by the Kerala police,” official sources said.

Officials also admitted that both countries were facing an issue of this kind for the first time. “We are trying to come to grips with, and see how to go about, it.”

They felt that whether or not the ship was in India’s exclusive economic zone (EEZ) shouldn’t be made an issue. “Italy and India have the same clauses pertaining to extra-territorial jurisdiction. The ship was over 5,000 km away from the Italian coast. Don’t make an issue out of the EEZ aspect.”

However, as we have seen above Section 4 of the IPC does not say that “any crime committed against an Indian or on an Indian vessel, “wherever it may be,” can be tried in India.” Instead, it says that crimes committed by Indian nationals, or by foreign nationals on vessels registered in India can be tried in India. Moreover, the last part of the above quote makes little sense. The fact that the incident occurred in the EEZ is of prime importance. Just because the ship was closer to India than Italy does not give India the jurisdiction to try the marines. Indeed, if the incident did occur in the EEZ, Indian courts may well not have the power to try the case.

What next?

Considering the worst case scenario for India, that the incident did occur beyond 12 nautical miles and outside India’s territorial waters. If India sticks to its stand to prosecute the marines under Indian law and in Indian courts (the Indian Defense Minister recently suggested this), Italy could possibly take up the matter on the International level, by submitting a dispute to the International Tribunal for the Law of the Sea, or some other international court or tribunal by consent.

If the matter does go to an international court, it may be useful to recall what the ITLOS has said on a similar issue in the past in the M/V ‘Saiga’ (No. 2) case:

 The ITLOS decision in M/V ‘Saiga’ (No 2) provides some indication that states may not seek to enforce laws that are not specifically related to coastal state rights in the EEZ. In that case, the M/V ‘Saiga’, an oil tanker sailing under the flag of Saint Vincent and the Grenadines, entered the EEZ of Guinea to supply fuel to three fishing vessels. Guinean customs patrol boats arrested the vessel outside of Guinea’s EEZ and subsequently detained the vessel and crew members. Guinea asserted that the arrest of the M/V ‘Saiga’ had been executed following a hot pursuit motivated by a violation of its customs laws in the contiguous zone and ‘customs radius’ of Guinea. Under Guinea’s Customs Code, the ‘customs radius’ extended 250 kilometres from its coast. Saint Vincent and the Grenadines maintained that Guinea was not entitled to extend its customs laws to the EEZ and that the Guinean action had interfered with the right to exercise the freedom of navigation as the supply of fuel oil fell within ‘other internationally lawful uses of the sea related to’ the freedom of navigation. The Tribunal determined that the application of customs laws to parts of the EEZ was contrary to UNCLOS. From this case, it seems that coastal states’ enforcement powers in the EEZ are therefore not likely to be recognized as lawful beyond those relating to the activities over which coastal states are specifically attributed jurisdiction or sovereign rights. (Klein, p. 89; FN omitted)

After all this legal analysis, if there’s any certainty, it is on the importance of the exact location where the Italian marines on board MV Enrica Lexie allegedly shot the Indian fishermen. Once that is ascertained, however, a definitive legal answer on whether Indian courts have the jurisdiction over the alleged crime can be given. All this, of course, if I am not overlooking an Indian legislation that extends the criminal jurisdiction of Indian courts beyond the 12 nautical miles — feel free to weigh in.

CPI(M) on India’s Treaty Ratification Process

Here is something interesting from the Communist Party of India’s (Marxist) draft political resolution that it has come out with after the loss in the Bengal elections:

The [CPI(M)] draft resolution says that approval of the parliament should be must before signing an international treaty. Currently, the Indian government can sign an international treaty under its executive powers. It was done when we signed the WTO treaty in 1995. Approval of the parliament was not taken. Subsequently the bills to amend patents and other laws were brought before parliament; and it was said that not amending the laws would be fatal because the WTO treaty had already been signed. The parliament was presented with a fait accompli and reduced to the position of subordination to the executive. It is necessary to take approval of the parliament to prevent such excesses on the part of the executive in future.

You can read an analysis of the whole resolution (which, unsurprisingly, is quite anti-globalization) in a Tehelka report by Bharat Jhunjhunwala here.