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.”

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 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]