Indian Model Bilateral Investment Treaty
05 August 2016
Recent press reports suggest that India may be looking to terminate or renegotiate at least 47 existing international investment agreements (IIAs), including those with the UK, France, Switzerland, Germany, Spain, Mauritius and Australia. This follows the unveiling of India’s new Model BIT in January 2016 (Model BIT), which is expected to serve as the base text for India’s negotiation of new and replacement IIAs.
While the final form of any new treaties will depend on the outcome of discussions with the counterparty, this update seeks to provide an overview of the Model BIT to the extent that it is likely to represent India’s opening position in such negotiations.
The most notable features of the Model BIT are: the more prescriptive definition of a qualifying "investment", the limited substantive protections accorded to investors, the obligation to exhaust local remedies for a minimum period of five years and transparency obligations on the host State. Each of these will be discussed briefly below.
Definition of Investment
The Model BIT adopts an enterprise-based approach instead of an asset-based approach to defining "investment" in Article 1.4; and adopts the criteria laid down in the landmark case of Salini Costruttori S.p.A. and Italstrade S.p.A v. Morocco as the characteristics that an enterprise must possess in order for it to qualify as an investment: "the commitment of capital or other resources, certain duration, the expectation of gain or profit, the assumption of risk and a significance of development". In recent years, tribunals have distanced themselves from the requirement that an investment contribute to "development" not least because of the difficulty of making such a determination. At the same time, certain assets, including portfolio investments, debt securities issued by the government and intangible rights such as brand value and goodwill are explicitly excluded from the definition of investment. The Model BIT therefore strives to limit protection to the more traditional classes of investments such as in infrastructure projects and the like.
Article 1.4 also stipulates that investments must be "constituted, organised and operated in good faith" in contrast to the more common reference to compliance with local laws at the establishment phase. While the intention is no doubt a laudable one, the requirement of good faith gives rise to uncertainty, not least because it extends to the operation of the investment as well. It remains to be seen whether this provision will be given a more precise content in treaty negotiations.
Substantive treaty protections
The substantive treatment protections accorded to investors under the Model BIT are significantly weaker than in India’s current IIAs.
Article 3.1 seeks to replace the autonomous fair and equitable treatment (FET) standard with the customary international law standard of protection. While there is a longstanding debate about the practical differences in content of these standards (if any), the Model BIT seeks to further limit the violation of customary international law to cases of denial of justice, fundamental breach of due process, targeted discrimination on manifestly unjustified grounds and manifestly abusive treatment, such as coercion, duress and harassment. Notably, investors’ legitimate expectations - which are widely viewed as a core feature of the FET standard - are not specifically protected. Again, therefore, the Model BIT, seeks to limit investors’ protection to the more traditional breaches of customary international law and guard against its more expansive interpretation by omitting a reference to the FET standard and by prescribing the types of conduct that may violate customary international law.
Investors’ substantive protections are further curtailed by the absence of the most favoured nation clause (MFN) and an umbrella provision, which are frequently used by investors to expand the scope of protection accorded under a treaty by importing protections from third treaties and contracts respectively. An MFN clause guarantees treatment no less favourable than that afforded to investors from third countries in like circumstances (including substantive protections under the host State's other investment treaties with third States), while an umbrella provision effectively brings contractual undertakings of the State vis-à-vis the investor within the umbrella of the BIT protection. The one further guarantee that the Model BIT has retained is that of treatment no less favourable than that afforded to domestic investors in like circumstances, or what is commonly called the national treatment standard in Article 4. However, interestingly, and presumably in acknowledgement of India’s federal structure, Article 4.2 states that with respect to a sub-national government (such as a state level government), "treatment accorded by a Party" in like circumstances means the treatment accorded by that sub-national government to other investors and investments within its area. In other words, it prevents an investor from alleging a breach of the national treatment standard in respect of a measure imposed by state A in India (e.g. Maharashtra) on the basis that another Indian state, state B (e.g. Gujarat), accords domestic investors within its jurisdiction better treatment. There will only be a breach of national treatment obligations under Article 4.2 if state A (i.e. Maharashtra) itself has treated domestic investors in like circumstances more favourably.
Exhaustion of Local Remedies
Article 15.2 states that an investor must pursue local remedies for a period of at least five years before it may bring a claim under the Model BIT, unless the investor can demonstrate that there are "no available domestic legal remedies capable of reasonably providing any relief in respect of the same measure". Requirements to first exhaust local remedies are relatively rare and to extend this for a period of five years is, to our knowledge, unprecedented in BIT practice. Given that Indian Courts are known for delays and backlog, such a requirement will trouble investors (and capital exporting States) and be viewed as uncommercial. In fact, in the first publically known treaty award against India, White Industries Australia Ltd v. India, the tribunal held India liable for having deprived White Industries of an "effective means of asserting claims and enforcing rights" due to the Indian courts’ nine-year delay in resolving set-aside and enforcement proceedings in relation to a commercial award in White Industries’ favour. Whilst there has been a recent slate of reforms aimed at alleviating the problem of backlog such as the amendments to the Indian Arbitration Act, and the setting up of Commercial Courts, it remains to be seen how effective these measures will be in practice. India’s counterparties in negotiations are therefore likely to push back on this clause. If it is adopted, tribunals may be sympathetic when it comes to construction of what is meant by "capable of reasonably providing any relief" and in light of the potentially draconian result of a strict interpretation.
Transparency of laws and regulations
As a progressive step, Article 10.1 ushers in transparency by providing that the host State should ensure that all the laws, regulations, procedures and administrative rulings of general application regarding matters covered in the Model BIT are published or are available for interested persons to get acquainted with them. Indeed, Article 10.2 asks that host States provide interested persons (and the other Party) a reasonable opportunity to comment on such proposed measures. The suggestion that investors should be consulted on laws and regulations that may affect them is indeed a welcome one.
There is an emerging trend of investment treaty cases which have denied investors protection under investment treaties when there has been bribery or corruption on the basis that it is contrary to international public policy. For instance, the tribunal in the case of Hamester GmbH v. Republic of Ghana, stated that an "investment will not be protected if it has been created in violation of national or international principles of good faith; by way of corruption, fraud, or deceitful conduct; or if its creation itself constitutes a misuse of the system of international investment protection under the ICSID Convention." Article 13.4 of the Model BIT attempts to codify this trend. It states that "[a]n investor may not submit a claim to arbitration under this Chapter if the investment has been made through fraudulent misrepresentation, concealment, corruption, money laundering or conduct amounting to an abuse of process or similar illegal mechanisms." How much this adds to the typical BIT requirement that an investment be made "in accordance with law" is open to question but it should not pose significant cause for concern for a bona fide investor.
While the Model BIT introduces a number of progressive provisions (e.g. Article 10 on transparency and Article 13.4 which deals with investments made through corruption), it severely limits the standard of protection afforded to investors as compared to India’s existing IIAs and introduces a requirement of exhaustion of local remedies that sits uneasily with the length of time proceedings in Indian courts can take. It of course remains to be seen which of these new features find a place in India’s new or renegotiated IIAs and anecdotal evidence suggests that a number of India’s counterparties are likely to resist many of the proposed changes. To the extent that the Model BIT text is adopted between India and certain States, it is to be expected that investors in important projects will seek to negotiate a bespoke investment agreement rather than rely on the limited protections contained in the Model BIT and / or restructure their investment through a third State in order to gain the protection of a more favourable BIT which India has not successfully renegotiated.