India loses White Industries BIT Arbitration

UPDATE (13 February 2012): We now have access to the full text of the arbitral award: White Industries v. India Arbitral Award (Click to download; PDF ~ 5 MBs)

According to various reports (Indian Express, IAReporter), an arbitral tribunal constituted under the Australia-India bilateral investment treaty (BIT) has held India to be in breach of its obligations under the BIT and international law to an Australian mining company –White Industries. We haven’t discussed this dispute before, except in passing, however, this arbitration proceeding has been quite high profile, generating a lot of interest in the Indian news media and press (Times of India). A detailed background of the facts is available through an earlier IAReporter report. Very briefly, here are the essential details:

The treaty claim by White Industries Australia Ltd., an Australian mining company, was filed against the Government of India [in 2010 presumably] following complaints by the company that the Indian courts have failed to enforce a foreign arbitration award obtained in 2002 in a dispute between White Industries and its Indian joint-venture partner, Coal India Ltd., an Indian state-owned entity.
The Australian firm entered into a joint-venture agreement in 1989 for the development of a major coal mine in Eastern India. At the time, the mine represented the largest investment by Australia in India.
In 1999, White took its JV partner, Coal India Ltd. to arbitration under the International Chamber of Commerce (ICC) rules provided by their agreement.


[T]he Australian firm obtained a favourable arbitral award in May of 2002 and turned to the Delhi High Court in September of that year in an effort to enforce that award.
For its part, Coal India Ltd. responded by lodging its own bid before a different Indian Court, the Calcutta High Court, to have the award set aside. White Industries objected to these efforts, and filed a petition contesting that Court’s jurisdiction to entertain a set-aside request.
On May 17, 2003, a Judge of the Calcutta High Court ruled that the Court had jurisdiction over the set-aside proceedings. Following an appeal by White Industries, a panel of the same Court ruled the following year that the Indian courts could consider a setting-aside of the ICC award. The May 7, 2004 judgment did not rule on the merits of the set-aside application.
That judgment is currently on appeal before the Indian Supreme Court.

Badrinath Srinivasan, over at the Practical Academic blog, provides more details, obtained under the Right to Information Act from Coal India, on the original ICC arbitration between White Industries and Coal India.

Presumably, White Industries, tired by the delay in the Indian court proceedings (its been 7 years since the matter has been pending before the Supreme Court), decided to file a claim under the Australia-India BIT in 2010. The arbitration was held under the UNCITRAL Rules (recall that India is not a party to the ICSID Convention), with hearings taking place in September 2011 at Maxwell Chambers in Singapore. The three member tribunal hearing the claim consisted of: of Charles N. Brower (claimant’s nominee), Christopher Lau (India’s nominee), and J. William Rowley (tribunal chair). On the details of the party’s legal representation and the proceedings, IAReporter notes:

White Industries is understood to be represented by the law firm Mallesons in the treaty claim. On its website, the firm indicates that it is handling a claim under the Australia-India BIT. A Partner with the firm cited confidentiality obligations, when asked for comment. Meanwhile, Luthra, an Indian law firm, is representing White in the domestic Indian proceedings.
The Government of India is understood to have engaged the services of Toby Landau QC, a London-based barrister and arbitrator.

The Tribunal rendered its award in November 2011, merely two months after the oral hearing:

In a unanimous November 2011 arbitral award, a three-member tribunal ruled that White Industries Australia Ltd. was denied “effective means” of asserting claims and enforcing rights with respect to its investment in India. The award has not yet been published.

According to IAReporter, in reaching its conclusion, the tribunal held that a “commercial arbitration award can be an integral component of a broader foreign investment”. The result seems to be similar to the Saipem arbitration involving Bangladesh (although, in my opinion, the tribunal in Saipem did not conclusively answer the question of whether an arbitral award, in itself, constitutes an investment that can be expropriated by national courts by denying enforcement. Andrew Newcombe, over at the Kluwer Arbitration Blog, seems to agree on this). Also relevant here may be the award in GEA v. Ukraine (concerning a claim arising out of non-recognition and non-enforcement of a prior ICC award by Ukranian courts) where the tribunal held that the held that the relevant arbitral award did not constitute a protected investment under the Germany-Ukraine BIT or the ICSID Convention.

Of course, whether an ICC arbitral award constitutes an “investment” for the purposes of the BIT is an important question for, if the answer is yes, the non-enforcement and non-recognition of this award, in violation of the relevant international norms, can amount to expropriation by the state, thus providing a cause of action under the BIT. In this sense, these BIT tribunals can be seen as assessing the lawfulness of the actions of the national courts in enforcing and recognizing foreign arbitration awards. This comes close to the idea of an international court for the enforecement of arbitral awards, as proposed by, amongst others, Judges Howard Holtzmann and Stephen Schwebel. On the desirability of treaty tribunals taking up this role, a key question is obviously that of state consent for such function by the tribunals. Indeed, express state consent on this issue remains absent (hence the absence of an international court as proposed above), and it might not help the legitimacy of investment treaty arbitration if tribunals adopt such an “appellate” function over national courts in the absence of such consent. Of course, that’s quite a classical view of the problem. The transnationalists, obviously, might not see the absence of express state consent as a problem at all.

Another related issue is that of claims for the denial of justice under BITs. I shall save my thoughts on that for a later post.

As a practical matter, India’s loss can certainly help explain the recent reports indicating that India will not include investor-state arbitration clauses in its future bilateral investment agreements. On another note, the award in White industries also serves as a reminder of the need for smoothening out the creases in Indian arbitration law, a process that might already be underway as evidenced by the reconsideration of the law laid down in Bhatia International by a constitution bench of the Supreme Court of India.

P.S. Since the arbitration was held under the UNCITRAL Rules, the award has not been made public. In case it is, I will obviously post the link here.

P.P.S. A special thanks to Luke Eric Peterson of IAReporter for allowing free access to the reports on this dispute.

India and Foreign Investment: Recent Developments 1

Poor governance and lack of transparency obstacles to FDI in India; government decides to shun investment treaty arbitration 

In a recent report on India as a direct foreign investment destination, Ernst & Young notes that

“[t]he fundamentals that make India attractive to investors remain intact, [h]owever, our respondents continue to cite inadequate infrastructure and a lack of governance and transparency as major obstacles to investment.”

As noted in the report, this is reflected in the fact that whereas FDI into India rose by 13 percent in 2011, business confidence has declined over the past year as a result of slowing economic growth, corruption and policy paralysis. “Robust domestic demand, cost competitiveness and a cheap, ever-growing labour force” are cited as India’s major attractions for foreign investors. However, concerns about red-tapism, the sluggish pace of justice delivery, corruption and institutional inefficiencies remain as live and real as ever.

In light of this report and these facts, provisions in investment treaties and omnibus trade agreements granting a private right of action against the Indian state to foreign investors might be seen as a possible solution to the problem. This is because, by holding sovereign host states to “internationally accepted” standards of investment protection and security, these treaties and the arbitration process might inspire greater confidence, and thus could provide a way to overcome problems of accountability and transparency.

The Indian government, however, does not seem to think along these lines. A recent report in The Mint notes that the Indian Department of Industrial Promotion and Policy (DIPP) has decided to exclude investor-state arbitration clauses from the country’s future bilateral investment treaties. The report quotes a DIPP official:

“This is now the view worldwide that the state should not get drawn into private disputes,… That’s why we are cautioning to be more careful.”

From the report, it seems that the decision was inspired, in particular, by the recent chain of events involving Philip Morris Asia’s claim against Australia, in response to the plain packaging legislation for cigarettes in Australia. The PM-Australia plain-packaging arbitration is the latest poster-child for the detractors of the investment treaty arbitration system.  According to the Mint report, the concerns of the DIPP, however, do not seem to be shared by India’s finance ministry:

“With the growing clout of Indian companies investing in countries around the world, including the less stable countries in the African and South American regions, they need the protection of the local governments,” the finance ministry official said on condition of anonymity. “So, we are not in favour of reviewing this clause.”

The DIPP, however, seems to be sticking to its stance, and even plans on renegotiating India’s BIT’s with a view to excluding the ISDS provisions from them.
What could the reasons for India’s policy decision be? In light of the Ernst & Young report, the decision certainly seems incongruous. However, could this be yet another sign of the growing dissatisfaction with the present state of the international investment law landscape? It certainly provides another reason for a fresh look at the ITA system. It does seem to reflect the growing perception that the cons of ITA system have come to outweigh its pros, and that states are obviously becoming more concerned about issues of regulatory autonomy and the limitations imposed by BITs and investment arbitration.
[This post is a part of the series “India and Foreign Investment: Law and Policy”, which aims at noting the latest developments in the area] 

International Law and the India-Australia Uranium Deal

Australia’s ruling Labour Party recently voted to allow the sale of Uranium to India. The decision was taken at the 46th national conference of the Party, with 206 votes for and185 against.

The Problem

However, even as we may be one step closer to the revocation of Australia’s Uranium sale ban, according to Don Rothwell of ANU, the sale of any Uranium by Australia to India would be inconsistent with Australia’s obligations under the South Pacific Nuclear Free Zone Treaty (“Rarotonga Treaty”; Wiki here; full text here). The Rarotonga Treaty aims at creating a nuclear-weapon-free-zone in the South Pacific. Here is a map identifying the states that have signed and ratified the Treaty:

                Parties to the Rarotonga Treaty

Although India is not a party to the Rarotonga Treaty, and therefore not bound by it, the Treaty imposes obligations upon Australia that restrict its ability to supply fissionable materials and equipments to other states. Specifically, Article of the Treaty titled “Peaceful Nuclear Activities” provides:

Each Party undertakes:

(a) not to provide source or special fissionable material, or equipment or material especially designed or prepared for the processing, use or production of special fissionable material for peaceful purposes to:

(i) any non-nuclear-weapon State unless subject to the safeguards required by Article III.1 of the NPT, or

(ii) any nuclear-weapon State unless subject to applicable safeguards agreements with the International Atomic Energy Agency (IAEA).

Any such provisions shall be in accordance with strict non-proliferation measures to provide assurance of exclusively peaceful non-explosive use;

(b) to support the continued effectiveness of the international non-proliferation system based on the NPT and the IAEA safeguards system.

For the purposes for Article 4, “nuclear-weapon states” are the five nuclear weapon states party to the Nuclear Non-Proliferation Treaty (NPT) (US, UK, Russia, France and China).

Applying the provision to the scenario at hand, Article 4 prohibits Australia from supplying Uranium to India, unless India agrees to the safeguards required by Article III.1 of the NPT. As readers may be aware, India did sign a safeguards agreement with the IAEA (yet to be ratified by India) as a part of the recently concluded and much controversial civil nuclear deal with the US. However, the key issue, as Rothwell notes, is the scope of the safeguards India has accepted. Specifically, the India safeguards agreement with the IAEA is based upon the IAEA’s “facility specific” safeguards (INFCERC 66 Rev. 2), with some India specific modifications. Under this “facility specific” agreement, India has only accepted safeguards on certain foreign-supplied reactors and facilities.

Article 4 of the Rarotonga Treaty, on the other hand, requires India to accept safeguards provided for in Article III.1 of the NPT in order for Australia to supply it Uranium. The safeguards agreement required of non-nuclear weapons state under Article III.1 of the NPT is a “comprehensive safeguards agreement” (a.k.a. “full scope safeguards”). The IAEA has issued a standardized form of such a comprehensive safeguards agreement (INFCIRC 153), with the basic obligation thereunder being:

to accept safeguards…on all source or special fissionable material…for the exclusive purpose of verifying that such material is not diverted to nuclear weapons or other nuclear explosive devices.

As such, it does seem that international law requires India, as a non-nuclear weapon state, to agree to comprehensive safeguards with the IAEA in case it wishes to source Uranium from Australia. A comprehensive safeguards agreement would require India to, amongst others, subject all its nuclear facilities (both civilian and military) to IAEA safeguards. Since the current India-IAEA safeguards agreement is facility specific, it appears that Article 4 prohibits Australia from supplying Uranium to India. If the deal does go forward, which looks quite likely in light of the recent vote, It will be interesting to hear the Gillard government’s position on this.

A way out?

The above analysis flows from a strict interpretation of Article 4 of the Rarotonga Treaty, which undoubtedly suggests that under the current situation the Treaty prohibits Australia from supplying Uranium to India. Joelien Pretorius of the University of Western Cape, in a recent analysis (paywalled) of the Pelindaba Treaty (establishing the African Nuclear Free Weapons Zone) and Africa-India nuclear cooperation, however, offers possible alternatives to the conclusion reached above.

Although Pretorius agrees that a strict interpretation of Article 9 of the Pelindaba Treaty leaves no doubt that African states party to the Treaty cannot supply Uranium to India under India’s present safeguards arrangement, she notes that a “minimalist” interpretation of the Pelindaba Treaty would legalize Uranium exports to India. Such minimalist interpretation relies upon the text of Annex II, paragraph 3 of the Treaty. Annex II concerns the safeguards that member states have to sign with the IAEA. Paragraph 3 reads:

For the purpose of this Treaty, the safeguards referred to in paragraph 1 above shall have as their purpose the verification of the non-diversion of nuclear material from peaceful nuclear activities to nuclear explosive devices or for purposes unknown.’

Based on this requirement, Pretorius argues:

If this restricted meaning of a safeguard agreement is extended to what is expected of recipient states, the India specific IAEA safeguard agreement arguably meets this requirement, as it establishes verification of non-diversion from India’s civil to military programmes.

Although Pretorius offers such an interpretation she does go on to add a cautious note that this would be a “disingenuous attempt to evade Article 9(c)’s explicit prohibition of uranium exports to states without comprehensive safeguards.”

Since the text of Annex II of the Pelindaba Treaty is very similar to the text of Annex 2 of the Rarotonga Treaty, such a minimalist interpretation may be also be possible under the Rarotonga Treaty. One point to note, however, is that the respective Annexes of both the treaties describe IAEA safeguards with respect to provisions other than the one which explicitly concerns the supply of Uranium to India. Thus, paragraph 1 of Annex II of the Pelindaba Treaty concerns “safeguards referred to in subparagraph (b) of the article 9”, whereas the provision applicable to Uranium supply to India is Article 9(c).  Similarly, Annex 2 of the Rarotonga Treaty concerns “safeguards referred to in Article 8”, whereas Article 4 is the relevant provision for the supply of Uranium to India.

Apart from such textual interpretation, Pretorius also offers a possible way out based on a contextual and teleological reading of the Pelindaba Treaty and notes:

In this respect, it could be argued that India–Africa civilian nuclear cooperation has the potential to promote the Pelindaba Treaty’s goal of reaping the economic benefits of nuclear energy for development.


[I]t it would be in the interest of African leaders to move beyond a romanticised notion of a common non-aligned identity with India, and develop a comprehensive understanding of the health, environmental and economic implications of increased uranium mining and exports to India, before they enter into agreements with India. If signatories to the Pelindaba Treaty see fit to evade the explicit prohibition on trade with non-nuclear weapon states (which India remains per the NPT definition) without an IAEA comprehensive safeguard agreement, the treaty’s emphasis on human security should, at least, be taken seriously.

This contextual reading of the Pelindaba Treaty is obviously treaty and region specific, however, a similar analysis under the Rarotonga Treaty could offer a starting point for justifying the supply of Uranium by Australia to India under the relevant rules of international law.


Text of the Rarotonga Treaty | Text of the Pelindaba treaty

[Note: This is an updated version of the post first published on December 3, 2011]