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.

Advertisements

GMR, Maldives and International Law

I’ve been following the recent turn of events involving India’s GMR Group and the Republic of Maldives closely. The events raise very interesting issues relating to diplomatic protection, dispute settlement, and the international regulation of cross-border investment. These developments warrant closer scrutiny considering the growing public resentment against bilateral investment treaties (BITs) in India, following an adverse award by the Tribunal in White Industries v. India, with many calling for India’s renegotiation of, if not withdrawal from, these treaties and the investment arbitration mechanism.

The story…

To recall briefly, in 2010, the GMR Male International Airport Pvt. Ltd. (GMIAL) — a consortium of the Indian GMR Group (77%) and the Malaysia Airports Holding Berhad (23%) — was awarded a concession contract by the Maldivian government to build and operate the Ibrahim Nasser International Airport in Male for a period of 25 years. The contract, valued by some at over USD 500 million, is said to represent the single largest inflow of foreign investment in Maldivian history. GMIAL claims that it won the contract through an internationally competitive bidding process conducted by the World Bank’s International Finance Corporation. For Maldives, the contract was approved and signed in 2010 by the government of President Mohamed Nasheed. As we all know, however, earlier this year, President Nasheed was ousted in what he alleged was a military coup, and a new government came to power. Reportedly, GMIAL’s concession contract was questioned by the new government soon after it gained power. Most recently, on 27 November 2012, the Maldivian Government issued a notice to GMIAL asking it to hand over the control and operation of the Male airport to the government by 7 December 2012, claiming that the concession contract was void. The Maldivian government has also stated at several instances that it will pay compensation to GMIAL (without giving any further details).

Meanwhile, an arbitration proceeding was commenced in July 2012. I have been unable to get more details on this, but presumably this was done pursuant to an arbitration clause in the concession contract (and not an investment treaty), with GMIAL commencing the proceedings against the Maldivian government following the problems it faced once the new government came to power in February 2012 (feel free to correct me on this, of course). To make matters more interesting, on 3 December 2012, the High Court of Singapore granted injunctive relief to GMIAL against the Maldivian government’s notice of 27 November, restraining it from “interfer[ing] with the rights of the Investor (GMR-MAHB consortium) under the concession agreement.” Following this injunction, however, the Maldivian government stuck to its position, stating that its decision was “non-reversible and non-negotiable” and that the that Singaporean “judge was incorrect in interpreting the law as, where compensation is adequate, an injunction cannot be issued and a court cannot issue such an injunction against a sovereign state.” Maldives has appealed the order before the Supreme Court of Singapore, with reports suggesting that the appeal has been allowed. As things stand right now, it seems like the Maldivian government will go ahead and take control of the Male airport from GMIAL on 7 December. At the risk of sounding too human, let me only note that there must naturally be a lot of worried foreign faces in Male right now. Reports also indicate that GMIAL had not obtained political risk insurance for its investment.

Enter the Government of India…

Once the Maldivian government issued its notice of 27 November, the Indian government took notice of GMIAL’s case. In its initial response, the Indian government noted that the Maldivian government’s action “sends a very negative signal to foreign investors and the international community” and that it would continue to be seized of the matter. Subsequently, following a call by the Indian industrial association ASSOCHAM to exercise diplomatic protection, reports indicate that the Indian government has suspended the disbursement of foreign aid for Maldives. Following the injunction granted by the High Court of Singapore, the Maldivian foreign minister also spoke to his Indian counterpart. In its latest press release, the Indian Ministry of foreign affairs has stated that Maldives should follow the rule of law and that it “expected that no arbitrary and coercive measures should be taken pending the outcome of the legal process underway. Resort to any such actions would inevitably have adverse consequences for relations between India and the Maldives.” Meanwhile, GMR has stated that it is committed to exploring all remedies available to it, including the option of going to the International Court of Justice (!).

So, what options for GMIAL now?

Right now, GMIAL is already part of a contractual arbitration proceeding against the government of Maldives. The arbitration is being controlled by the courts of Singapore — presumably the primary jurisdiction. If there is no misconduct on part of GMIAL (the IFC’s involvement certainly is very interesting, and rather redeeming), the arbitration might still lead to a NYC award enforceable somewhere.

In addition to this contractual arbitration proceeding, it has also been suggested that GMR should take the dispute to the ICJ. This obviously is not possible (since only States can seize the ICJ), but it is still important to see if India can exercise diplomatic protection and espouse GMR’s claim. Once India has domestically taken a decision to go to the ICJ, there are two ways to proceed: to submit the dispute to the Court by a special agreement, or to invoke the Court’s compulsory jurisdiction under Article 36(2) of the ICJ Statute. The problem with the latter is that the Maldives has not submitted a declaration accepting the Court’s compulsory jurisdiction under Article 36(2) of the ICJ Statute. India has a declaration, thus symbolically accepting the Court’s compulsory jurisdiction, but the acceptance is made practically worthless by a massive list of 12 reservations, thus giving away with one hand, what it took with the other. Therefore, unless Maldives accepts the Court’s jurisdiction and India does away with its reservation,  the only way out is for India and Maldives to seize the Court through a Special Agreement. Obviously, that would require a lot of convincing and diplomatic rigmarole, but it will be interesting to see how this develops.

Until now we’ve looked at the private (contractual) dispute settlement proceeding underway and the unlikeliness of a public dispute settlement proceeding at the ICJ. I am sure that there is at least a theoretical possibility of going to the domestic courts in Maldives. I do not know  enough about the courts there to comment on their independence, which I have to presume because of my ignorance. That’s the domestic public (court) option then. Of course, we are only talking of options here for finding jurisdiction. Whether GMIAL eventually succeeds in any of these proceedings will depend upon the specific facts of the case (e.g., GMIALs conduct), the terms of the concession contract and the applicable law.

But, what about investment arbitration?

Apart from all these options, there could have also been an option for GMR/GMIAL to commence a legal dispute under an investment treaty between India and the Maldives. I say “could” because, to my knowledge, there is no bilateral investment treaty between India and the Maldives. Further, I do not know of a trade agreement (including the SAFTA) between the two that includes an investment chapter. Without an investment treaty in place, the option of a treaty based arbitration does not exist. Having said that, it is still an option worth reflecting on. If nothing else, then only to think about India’s BIT program. This is particularly relevant given India’s first (and only public) loss in the White Industries arbitration under the India-Australia BIT. Post White Industries there has been a growing opposition in India against BITs and investment arbitration (some extreme voices, and some milder caveats). But, the discussion until now has been rather reactionary, operating in the shadows of White Industry. This turn of events involving the Maldives offers another perspective to inform the discussion, i.e. the utility of investment treaties in protecting outward FDI from India.

The first obvious question is: why doesn’t India have a BIT in place with the Maldives? As I set out to find an answer to this question, I proceeded on the assumption that the Indian BIT program was designed mainly to attract inward FDI, rather than protect outward FDI. My cursory empirical research, however, suggests otherwise. For example, of the top 15 destinations for outward Indian FDI, India does not have a BIT currently in force with only three states (US, UAE and Singapore), in addition to the Channel Islands and the British Virgin Islands (but I suppose India’s BIT with UK applies to these territories). The situation is similar for other developing countries, with India having a BIT with many of the states favored by Indian investors in Africa and Asia. Whatever the original intentions then, the design of India’s BIT program is not aimed at attracting FDI alone. Maldives  just happened to be one unlucky place? Maybe. Anyway, the point here is that any good BIT program for a growing economy should not only be designed for attracting inward FDI, but should account for outward FDI from that economy. India’s BIT program, at least on paper, appears to meet this standard since India has concluded investment treaties with several top destinations for outward FDI from India.

Will the Indian investor please stand up?

Another important insight to be gained from the Maldives story relates to the role of the industry in shaping India’s BIT program. Thus far, the participants in the discussion on Indian BITs have included the occasional academic, the disgruntled domestic lawyer (paywalled), the principled international lawyer (also paywalled), and a rather passive Indian government. There are good reasons for taking into account the perspective of an actual beneficiary of the BIT program, i.e. the Indian investor. Otherwise, any eventual policy risks becoming ultimately ineffective and irrelevant. Indian investors and companies can begin by forming a forum for discussing issues relating to international protection of investments. They could carry out a periodic survey of the most popular destinations for outward FDI from India, and make responsive suggestions to the government’s BIT program with specific countries. Individual investors concerned about the investment climate in countries with no BITs could ask the Indian government, through this channel, to try and negotiate one. To my knowledge, no such forum currently exists, with only commerce chambers like ASSOCHAM and FICCI making reactionary comments in specific cases. With growing outward FDI by Indian firms, a systemic analysis of the benefits of investment treaties for protection of outward Indian FDI by all stakeholders involved would certainly be helpful.

In another world…

I should conclude by presenting the scenario had an investment treaty been in force between India and the Maldives. For the investor (GMR/GMIAL), this would have provided another forum for lodging its claim against the Maldives, and having it adjudicated in a timely manner according to international standards for investment protection. For the Indian government, an investment treaty and an investor-state dispute settlement mechanism would have avoided the process of exercising diplomatic protection. It could have merely pointed GMR in the direction of the treaty, and could have avoided engaging in “gunboat diplomacy” by issuing threats of canceling foreign aid. In other words, a BIT could have depolitcized the international dispute. I should point out that the benefits of BITs and investment arbitration for India and Indian investors do not suggest that such a treaty would have been prejudicial to Maldives. A range of defenses would have been available to the Maldives, including many based on GMR/GMIAL’s misconduct (if any). As examples, I would only cite the cases of Fraport and Malicorp, both involving airport concession contracts which were terminated by the host State. In both treaty arbitration proceedings, the claims of the investors were rejected on grounds relating to investor misconduct (the Fraport award was subsequently annulled, but for different reasons). So, in another world, at another time, everyone could have lived happily ever after (almost)!

Update (7 December 2012): As my friend Manu Sanan points out, India actually does have an investment treaty with Singapore in the form of an investment chapter in the India-Singapore Comprehensive Economic Cooperation Agreement. Thus, India does not have an investment treaty with only two out of the top 15 destinations for outward Indian FDI.

Back from Break, with a Summer Update!

Apologies for the extended summer break (not for the lack of thoughts or developments, though).

Let’s begin with a recap of what’s been happening for India at the international stage over the summer:

The ICJ and Justice Bhandari’s election:

1. Justice Bhandari was finally sworn-in as a judge of the International Court of Justice on 19 June 2012 (right before the Diallo judgment was read). For those interested, here’s a photo of Justice Bhandari being sworn in, and a video of him making the (rather short) solemn declaration (the oath).

2. On the debate surrounding Justice Bhandari’s nomination (see this for some background), two main criticisms have been leveled against Justice Bhandari’s nomination by India for the ICJ. The first, as reflected here, argues that as a national judge with little or no real experience in international law, Justice Bhandari’s nomination by the Indian national group of the PCA reflected absurd decision making. From an international legal perspective, the underlying assumption of this view is thus: “a judge may be well-versed with domestic legal traditions, but one assumes that a Judge at the International Court of Justice, the principal judicial organ of the United Nations, responsible for adjudicating on questions of international law (Article 38), would possess knowledge of international law!” The second criticism, as argued by Arghya Sengupta in an OpEd in The Hindu, takes issue with the nomination of Justice Bhandari, a sitting Supreme Court Judge, by the government of India on grounds of undermining the independence of the Supreme Court Judge (Justice Bhandari). As much as I understand, and perhaps even agree with, some of the sentiments behind these arguments, I still disagree with several individual arguments inherent in these criticisms, especially in light of the rather inchoate state of the international legal profession in India. However, I’d save my thoughts on this for later.

3. I’ve blogged about a right to Information application seeking information on Justice Bhandari’s nomination earlier. In response, the Ministry of External Affairs denied some information on Justice Bhandari’s nomination on the ground that the RTI Act allows withholding information related to strategic interests of the country, and besides it would also affect canvassing for Justice Bhandari. Now, the Central Information Commission has asked the MEA to provide the requested information. Interestingly, the CIC has also asked for the Indian national group of the PCA to answer some of the queries (could an argument be made here that the national group is not a “public authority” for the purposes of the RTI Act?).

Moving on to the Enrica Lexie incident (covered previously here and here):

There’s been considerable discussion on the international legal aspects of the incident.

1. Duncan Hollis, over on Opinio Juris, takes a look at the incident through the prism of the SS Lotus case decided by the PCIJ.

2. A debate in The Hindu captures the essential position and arguments both for and against the jurisdiction of Indian courts over the Italian marines. Samir Saran and Samya Chatterjee argue that the Indian courts do not have jurisdiction. Prabir Purkayastha and Rishabh Bailey, referring to Article 97 of the UNCLOS and the SS Lotus judgment, argue that Indian courts “also” have jurisdiction over the incident (as opposed to exclusive jurisdiction of Italy). Finally, Samir Saran disputes the above interpretation of Article 97 and also makes a very interesting argument based on the Indian Merchant Shipping Act.

3. Meanwhile, and perhaps more importantly, Judge Gopinath of the Kerala High Court has rendered (a reasonably well crafted) judgment in the writ petition filed by the Italian marines arguing that Indian courts do not have jurisdiction. The Court ruled that the Indian courts can exercise jurisdiction over the Italian marines under the Indian Penal Code and the Code of Criminal Procedure as they were within India’s contiguous/exclusive economic zone. It addressed a number of other important matters such as the sovereign immunity of the marines (held no sovereign immunity), the “compatibility” of several national laws (including the SUA Act) with the UNCLOS (held are “compatible”), and the relevance of past precedence (the Raymund Genacio case — differentiated on facts). Particularly interesting is the Court’s interpretation of the UNCLOS. For example, in defining valid exercise of sovereign authority by India in the territorial-, contiguous-, and exclusive economic zones under the UNCLOS, it notes:

To hold that a coastal state has no right whatsoever to protect its nationals exercising their legitimate rights inside the coastal state’s CZ/EEZ, would be nothing but a total travesty of justice and an outrageous affront to the nation’s sovereignty. Such a view would mean that any day, any passing-by ship can simply shoot and kill, at its will, fishermen engaged in earning their livelihood; and then get away with its act on the ground that it happened beyond the territorial waters of the coastal state. Such a view will not merely be a bad precedent, but a grossly unjust one, and will go against all settled principles of law. (para. 33)

At the WTO:

1. On 25 June, the DSB established a Panel with standard terms of reference in the poultry dispute between the US (complainant) and India (DS430: India — Measures Concerning the Importation of Agricultural Products).

2. According to news reports, the US has threatened to challenge India’s compulsory license for Nexavar at the WTO. This comes after reports that India’s commerce minister had defended the WTO consistency of the license.

Bilateral Investment Treaties/Arbitration:

1. The Sistema dispute appears to be moving forward, with the six-month notice period nearing its end and the selection of a legal team by India. Several names have been suggested, including Mr. Rodman Bundy, Prof. Donald McRae and Senior Advocate A K Ganguli.

2. Several NGO’s have written a letter to Prime Minister Manmohan Singh expressing concern over the ongoing US-India BIT negotiations. Their main attack appears to be against investor-state dispute settlement provisions.

3. In Nepal, a breakaway faction of the Unified Communist Party of Nepal (Maoist) has said that it will work towards scrapping of the recently concluded BIT with India.

4. The latest on the Vodafone BIT dispute is that it is moving forward with India not agreeing to Vodafone’s demands. Reports suggest that Prime Minister Singh would soon take a decision on Vodafone’s plea “seeking an undertaking that the [retrospective] amendment would not apply to it.”

And, finally, here’s the quote of the summer by none other than India’s (“underachieving“) Prime Minister:

“there are no international solutions to India’s problems”

– Prime Minister Manmohan Singh, returning from his trip to Los Cabos for the G20 and Rio.

A Freudian slip now, Mr Singh? : )

Vodafone BIT Dispute: India’s Initial Response

In response to Vodafone filing a notice of dispute against India under the India-Netherlands BIT, here is India’s initial response as per a news report:

Referring to the recent threat of Vodafone to invoke bilateral investment treaty with the Netherlands on the tax issue, the official said the arbitration clause in the BIPA (Bilateral Investment Protection Agreement) cannot apply in Vodafone-Hutchison deal as it was signed in Cayman islands.

“The deal happened in Cayman islands and they are invoking India-Netherlands BIPA,” the finance ministry official said, adding “while in the Supreme Court Vodafone said that the deal happened outside India, under BIPA it is saying it has made substantial investment in India.”

Under the BIT, an “investment” for the purposes of jurisdiction of the arbitral tribunal exists if there an  “asset invested in accordance with the national laws and regulations of the Contracting Party in the territory of which the investment is made….” Article 1(a) also provides the usual inclusive listing of what constitutes “investment” for the purposes of the BIT.

Vodafone Initiates BIT Dispute Against India

As per a press release by Vodafone, on 17 April 2012, Vodafone’s Dutch subsidiary, Vodafone International Holdings BV, served a notice of dispute against the Indian government initiating the dispute settlement process under the India-Netherlands bilateral investment treaty (WSJ; FT; The Hindu suggesting that the Indian government had not received the notice as of 17 April).

Vodafone’s Complaint:

The notice of dispute is not publicly available. As per the Vodafone press release, however:

The dispute arises from the retrospective tax legislation proposed by the Indian government which, if enacted, would have serious consequences for a wide range of Indian and international businesses, as well as direct and negative consequences for Vodafone. The proposed legislation would also countermand the verdict of the Indian Supreme Court in January 2012, which ruled that Vodafone had no liability to account for withholding tax on its acquisition of indirect interests in Hutchison Essar Limited in 2007.

Vodafone believes that the retrospective tax proposals amount to a denial of justice and a breach of the Indian government’s obligations under the BIT to accord fair and equitable treatment to investors.

The Dispute Settlement Process under the India-Netherlands BIT:

Whatever the political and domestic ramifications of the dispute in India, the dispute settlement process under international investment law has now been triggered. Specifically, Article 9 of the India-Netherlands BIT provides that by notifying the host-state of its “intentions”, the investor can trigger the dispute settlement mechanism under the BIT. Once such a notice is served (as has been by Vodafone), the treaty provides for a 3 month period of negotiations for the amicable settlement of the dispute. If negotiations fail to resolve the dispute within 3 months, conciliation may be resorted to if both parties so agree. Otherwise, or in case the conciliation proceedings are terminated at any stage, arbitration proceedings are initiated under Article 9(3) of the BIT, being in all likelihood, an UNCITRAL arbitration before an ad hoc arbitral tribunal.

On the alternatives to arbitration generally:

For what its worth, Vodafone’s official press release is quite aggressively worded. As I’ve noted above, the treaty text makes an explicit reference to the first 3 months as a period for negotiations for the amicable settlement of the dispute (Article 9(1)). In fact, as per Article 9(1), the “intention” behind the first notice of dispute should be to negotiate an amicable settlement.  According to Vodafone, however, this notice “is the first step required prior to the commencement of international arbitration under the Bilateral Investment Treaty”. The fact that Vodafone sees this notice not as a sign of engaging in negotiations, but only as a precursor to the arbitration suggests an eagerness on part of Vodafone to resort to arbitration, and a disinterest in settling amicably.

On how this relates to the larger issue of the space for less-adversarial means of dispute settlement under BITs, I refer you to this recent UNCTAD study on the alternatives to arbitration as a means for the settlement of investor-state dispute settlement provision. (In particular, see Prof. Michael Reisman’s remarks on p.22, and the commentary by Lisa Bingham on p.33).

To pique your curiosity, here’s a quote from Prof. Reisman’s piece:

Ironically, what international lawyers proudly point to as a significant systemic progression, the ADR community seems to view as a problem. ADR proponents appear to believe that there is too much third-party dispute resolution [investment arbitration] in the field of international investment. In point of fact, there is actually very little, and much of it is already being disposed of through informal settlement. The above-stated number 318, which seems enormous in comparison to other international judicial or arbitral instances (for example the dockets of the Permanent Court of International Justice, the International Court of Justice, and the Permanent Court of Arbitration) must be put into context. The gross amount of foreign direct investment is very large, indeed greater than the volume of world trade. There are approximately 80,000 multinational enterprises, which are by definition foreign direct investors. These entities have some 100,000 affiliates. If these 180,000 potential claimants are factored by the number of BITs, bearing in mind that many of these entities are multiple foreign direct investors and that not every foreign direct investor is a multinational enterprise, then the number of actual disputes going to arbitration seems to be a miniscule fraction of the universe of foreign direct investment.

Presidential Reference to Cover BIT Disputes

Meanwhile, in the presedential reference filed before the Supreme Court of India it appears that the government has sought the “the Supreme Court’s direction on how to deal with foreign investors who have invoked bilateral treaties to protect their investment in 2G licences.”

Weekly Update: Investment Arbitration, BRICS, WTO, Tulbul and More….

Here are some of the major international legal developments of relevance to India and South Asia for the week ending 31 March 2012:

Investment Arbitration

  • Vodafone may file a claim against India under the India-Netherlands BIT for the capital gains tax sought to be retrospectively imposed by India against it: Indian Express, Independent, DNA, Wall Street Journal (paywalled).
  • Norwegian telecom operator Telenor, faced with the prospect of its Indian joint venture losing 22 2G mobile licences due to the Supreme Court judgment in the 2G case, has filed a notice of dispute  against India under the India-Singapore BIT seeking damages to the tune of USD 14 billion: Economic Times. [With a notice of dispute already filed by the Russian company Sistema against India, this makes it two investment treaty disputes arising out of the Supreme Court’s 2G judgment]

WTO Disputes

  • India is preparing to file a dispute against the US at the WTO over the visa fee charged by the latter for Indian software companies. The claim: “discrimination” against the Indian software companies which are being asked to pay higher H1B and L1 visa fee for their employees than the American firms for bringing more number of skilled immigrants to their country at lesser costs:  Economic Times.
  • The US called upon India to accede to the government procurement agreement — a plurilateral WTO agreement.
  • The US and EU have come out against the local content requirements in India’s Jawaharlal Nehru Solar Mission, which requires requires solar mission investors to use Indian manufactured solar modules and source 30 percent of their inputs from India: Hindustan Times. The Indian government is already reported to be preparing its strategy in case a dispute is filed at the WTO.

International River Water Disputes

EU Emissions Scheme

  • The Indian government has confirmed that it will be directing Indian airlines not to participate in the EU’s controversial aviation emissions rule. (Recall that China has already boycotted the EU scheme, as well): ICTSD.

India-Pakistan Trade

UN Special Rapporteur on AFSPA in Kashmir

  • After a visit to Kashmir, rhe UN Special Rapporteur on extrajudicial, summary or arbitrary executions stated that the Indian Armed Forces (Special Powers) Act has become a symbol of “excessive state power” and has “no role to play in a democracy”: NDTV, Hindustan Times. The official press release can be found here.

BRICS

  • The past week saw the leaders from Brazil, Russia, India, China and South Africa assemble in Delhi for the fourth BRICS Summit. The theme of the summit was “BRICS Partnership for Global Stability, Security and Prosperity”.
  • The countries were called upon to support a common developing country candidate as the successor of DG Lamy.
  • In addition, the heads of state of the BRICS countries signed two agreements supporting trade in local currencies between them. The two agreements are: (i) the Master Agreement on Extending Credit Facility in Local Currencies; and, (ii) the BRICS Multilateral Letter of Credit Confirmation Facility Agreement. More details can be found in a MEA document here.
  • In culmination of the summit, the BRICS countries issued the “Delhi Declaration“. Here are some excerpts from the Declaration:
  • On the Doha Round at the WTO:

16. We will continue our efforts for the successful conclusion of the Doha Round, based on the progress made and in keeping with its mandate. Towards this end, we will explore outcomes in specific areas where progress is possible while preserving the centrality of development and within the overall framework of the single undertaking. We do not support plurilateral initiatives that go against the fundamental principles of transparency, inclusiveness and multilateralism. We believe that such initiatives not only distract members from striving for a collective outcome but also fail to address the development deficit inherited from previous negotiating rounds. Once the ratification process is completed, Russia intends to participate in an active and constructive manner for a balanced outcome of the Doha Round that will help strengthen and develop the multilateral trade system.

  • On Syria:

21. We express our deep concern at the current situation in Syria and call for an immediate end to all violence and violations of human rights in that country. Global interests would best be served by dealing with the crisis through peaceful means that encourage broad national dialogues that reflect the legitimate aspirations of all sections of Syrian society and respect Syrian independence, territorial integrity and sovereignty. Our objective is to facilitate a Syrian-led inclusive political process, and we welcome the joint efforts of the United Nations and the Arab League to this end. We encourage the Syrian government and all sections of Syrian society to demonstrate the political will to initiate such a process, which alone can create a new environment for peace. We welcome the appointment of Mr. Kofi Annan as the Joint Special Envoy on the Syrian crisis and the progress made so far, and support him in continuing to play a constructive role in bringing about the political resolution of the crisis.

  • On Iran:

22. The situation concerning Iran cannot be allowed to escalate into conflict, the disastrous consequences of which will be in no one’s interest. Iran has a crucial role to play for the peaceful development and prosperity of a region of high political and economic relevance, and we look to it to play its part as a responsible member of the global community. We are concerned about the situation that is emerging around Iran’s nuclear issue. We recognize Iran’s right to peaceful uses of nuclear energy consistent with its international obligations, and support resolution of the issues involved through political and diplomatic means and dialogue between the parties concerned, including between the IAEA and Iran and in accordance with the provisions of the relevant UN Security Council Resolutions.

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.

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.

Nepal Sup. Ct. on India-Nepal BIT

As noted previously, the India-Nepal BIT had run into early trouble with a challenge being mounted against it before the Supreme Court of Nepal. As per the latest reports, the Supreme Court of Nepal issued an interim order in the case yesterday (28 November). Essentially, it seems the Court has stayed the “implementation” of Article 15 the BIT till the Agreement is ratified by the Nepalese legislature. Article 15, on the “Entry into Force” of the Agreement, reads:

This Agreement shall come into force on the date of exchange of diplomatic notes confirming that the legal requirements of the Contracting Parties have been fulfilled for the entry into force of this Agreement.

In effect, it seems that by staying the implementation of Article 15 the court stayed the exchange of diplomatic notes, till the BIT is not ratified by the Nepalese legislature, as required by the Constitution. An unofficial tranlsation of the operative paragraph of the Order reads:

The bench hereby orders the government not to implement the provision incorporated in Article 15 of the Agreement until it completes procedures as per the Article 156 of the Interim Constitution.

Article 156 of the Constitution, titled “Ratification of, Accession to, Acceptance of or Approval of Treaty or Agreements” provides that:

(1) The ratification of, accession to, acceptance of or approval of treaties or agreements to which the State of Nepal or the Government of Nepal is to become a party shall be as determined by the law.

(2) The laws to be made pursuant to clause (1) shall, inter alia, require that the ratification of, accession to, acceptance of or approval of treaty or agreements on the following subjects be done by a two-thirds majority of the total number of members of the Legislature-Parliament present in the House:-

(a) peace and friendship;

(b) security and strategic alliance;

(c) the boundaries of Nepal; and

(d) natural resources and the distribution of their uses.

The Court, however, refused to grant a stay against the implementation of the BIT as a whole, noting that:

“Issuing a stay order that asks the government authority to completely halt the implementation process of entire BIPPA is inappropriate from the point of view of balance of convenience,”  

 “The bench, however, hereby orders the government not to implement the provision incorporated in Article 15 of the Agreement until it completes procedures as per the Article 156 of the Interim Constitution.”

Importantly, the Court refused to draw the conclusion that the BIT undermined Nepal’s sovereignty, as had been claimed by the petitioner (see previous post). A news report notes:

The bench made it clear that the order shall exist till parliamentary process or a final decision in the case by the apex court and declined to stay the process of parliamentary approval, saying BIPPA was of utmost importance as it aimed to protect and promote bilateral investment and that a stay order would create adverse impact on the objectives of the agreement. “Parliament can examine whether any provision of the agreement contradicts the Interim Constitution as per Article 156, henceforth it would be wrong to draw a conclusion that the agreement undermined country’s sovereignty and integrity, as claimed by the writ petitioner,” reads the order. “It will be improper to raise doubts on legislative wisdom.”

The Court’s decision is quite unsurprising. In fact, it doesn’t really say anything that cannot be inferred from a logical reading of Article 15 of the BIT, which itself notes that diplomatic notes shall be exchanged only once the domestic legal requirements in each state have been met. For Nepal, this clearly means ratification by the legislature under Article 156 of the interim constitution. Basically, the Court seems only to have spelled out and related the requirements under Article 15 of the BIT and Article 156 of the interim constitution.

India-Nepal BIT

During the Nepalese Prime Minister’s recent state visit to India, Nepal’s Minister for Industries and India’s Minister of Finance signed a bilateral agreement for the promotion and protection of investments between the two countries (“Nepal-India BIT”/”BIT”/”BIPPA”).

Possible Motivations

The underlying objective behind the BIT seems to be the belief that the treaty would serve as a catalyst in boosting investment flows between the two countries. India’s motivations, however, may well have been influenced by the problems faced by Indian investors in the recent past. For example, Colgate-Palmolive India was forced to shut shop and sell its Nepalese subsidiary following harassement and extortion demands by rebels and Maoists. The company claimed that the local government officials in Nepal provided little support in response to its requests for greater security. In fact, a leaked US Embassy cable from Kathmandu notes that:

when he [the Colgate-Palmolive factory manager] told the local Chief District Officer (CDO) (the civil servant responsible for security in the district) that Colgate-Palmolive was considering closing the plant, the CDO responded, ‘Maybe you should.’

Drawing from the Colgate-Palmolive incident, on the general climate for foreign investment in Nepal, the cable goes on to conclude:

This is not the first time that a major high-profile foreign investor has been targeted by the Maoists. Extortion is commonplace, but many businesses choose to pay for “security.” Those who refuse to pay, like Coca-Cola and Colgate-Palmolive, complain that they receive inadequate support from the GON [Govt. of Nepal] in protecting their security and investment. During a period of economic and political instability and declining business activity in Nepal, this does not bode well for the future of foreign investment here.

In a region marred by security and stability concerns, considering India’s economic growth and physical proximity to Nepal, such fears may well have precipitated India’s desire for an investment agreement.

Is Nepal Warming up to the use of BITs?

Historically, Nepal has not been overly active in negotiating BITs with other states. It signed a BIT with France in 1983, followed by one with Germany in 1986, the United Kingdom in 1993, and Mauritius in 1999. This was followed by a lull, broken only by the signing of a BIT with Finland in 2009. The Nepal-India BIT makes it two treaties in less than three years. I am no expert on Nepal’s economic and trade policy and, as such, wonder if these recent BITs suggest that Nepal has come to see BITs as a means of attracting foreign investment, or, at the very least, improving its global image as a host state. Comments welcome.

Early Trouble for the BIT?

Meanwhile, the baby seems to have developed complications even before its birth (the BIT has only been signed, and not yet ratified, by the two countries). News reports indicate that a senior Nepalese lawyer, Balkrishna Neupane, has filed a writ at the Supreme Court of Nepal, challenging the the India-Nepal BIT. The gist of the challenge seems to be that the agreement is unequal and give undue benefits to India. Specifically, the report indicates that the challenge raises three issues:

While the agreement mentions the “air space” of India, it does not mention that of Nepal, which, Neupane argues, is incorrect as Nepal seems not to have taken into account its own air space while signing the agreement. The deal, the writ contends, has given India the right of uninterrupted use of Nepali air space while Nepal clearly does not have such rights.

Similarly, the petitioner mentions that the term “republic” has been obliterated from the accord unlike in the case of India. This, Neupane affirms, might have happened either because India has not been able to take note of the changes–republican set up in Nepal–or the Nepali side could not clarify it to India.

Neupane has taken serious exception to the provision in the BIPPA that would allow Indian companies to bring in their own workers and staff. This will not create additional job opportunities, as envisaged, for the Nepalis but will have an opposite effect.

The deal is against Labour Act, which doesn’t permit non-Nepalis to work, the writ argues. The petitioner has also challenged the compensatory provision in the agreement in case the Indian companies incur non-commercial losses.

Apparently, the hearings will commence on Wednesday (November 2, 2011).

At least one Nepalese author (Sapkota), however, suggests that the opposition to the BIT is based on “misinformation and faulty comprehension of the scope and depth of the agreement”, and is politically motivated. In his opinion:

While the private sector has openly welcomed BIPPA, selfish political leaders are politicizing it just to make themselves heard. For instance, former Prime Minister Jhalanath Khanal rebuked the government for signing BIPPA, which he thinks is not in our national interest. He seems to be so lost in the dirty political game that he forgot what was mentioned in Economic Survey 2009/10 published by the Ministry of Finance during his tenure as PM.
It stated that “a Bilateral Investment Promotion and Protection Agreement is signed with India to promote Indian Investment in Nepal, while preparation is being made to continue such agreements with other countries as well” (page 187). This shows how poor our leaders like Khanal are in understanding economic issues and also remembering what they officially endorsed while at the helm of power. Similarly, some influential leaders have been arguing that BIPPA is against the interest of our country and the workers. Their argument is that BIPPA will increase Indian dominance and erode rights of domestic workers.
These arguments are senseless, baseless and outright illogical. If BIPPA is against our national interest, why did we not hear loud outcry of this intensity when Nepal signed BIPPA with other countries? Importantly, the self-centered leaders opposing BIPPA should explain how exactly Nepal was dominated and workers’ rights eroded by signing such agreement with five countries before it was done with India. In our investment strapped economy, more investment is definitely a good thing and is in our national interest because it will lead to more jobs, revenue and potentially stimulate growth.

I will try to post an analysis of the BIT itself soon, but in the meanwhile would love to hear more on this from our Nepalese readers.

The text of the India-Nepal BIPPA is available here.