Current Status Of Investor – State Arbitration In India

Written By: Gaurav Yashas

Introduction

Investor-State Arbitration (ISA) as we all know has been portrayed as an unfavourable outcome in “bilateral investment treaties” (BIT), and states have gone so far as to terminate their BITs in order to avoid such unfavourable outcomes of BITs. ISA refers to the process of resolution of disputes between foreign investors and host states. India’s rendezvous with BITs begun in the year 1994, and thereafter ended in the year 2011 after the award in “White Industries Australia Ltd. v. Republic of India”. These dissolved treaties have been pursued to be supplemented by a new generation of BITs to be concluded in 2015 on the basis of a new Model Indian BIT which replaced the existing Bilateral Investment Promotion Agreement (2003) This article in this regard proposes various approaches towards dealing with possible lawsuits arising from the “sunset clauses” of the Bilateral Investment Treaties which have now been terminated. This article will further enquire into the options available to ensure continued consumer rights in the absence of BITs, with the goal of encouraging international investment.

Indian Perspective

When we talk about the Indian Standpoint, the first ever ISA, India had been a part of was related to Dabhol Power Company (DPC) v. Government of India which was a joint venture of three MNCs from America. The case was first filed in the year 2003, wherein the Dabhol Power Project which was supposed to help build a power station in the state of Maharashtra by signing a PPA (Power Purchase Agreement) with MSEB (Maharashtra. State Electricity Board). However, the suit initiated when the contract was later cancelled by the MSEB owing to the irregularities, opposition and the high costs which could have been incurred. Furthering which, the majority shareholder of the three companies claimed the insurance cover for loss of investment in the project from the Overseas Private Investment Corporation, United States of America. Thereafter, the US lodged “International Inter-State Arbitration” against India under the provisions of the “U.S. India Investment Incentive Agreement” in an attempt to reclaim the amounts paid out. After multiple rounds of lawsuits, commercial, investor-State, and State-to-State arbitration, the Indian government reportedly reached an agreement in 2005. According to a case study[1]on the Dabhol Power Project, GoI, through its judiciary thwarted the International Arbitration Panel from continuing and also failed to devote money to address the problems posed by the failure of the Project.

ISA needs to be elaborated as a layman might not be aware of the shorts forms?

Aftermath of White Industry – Is India still Coping up with the Challenges?

After the case of White Industries, the Indian ISA perspective took a substantial shift and it acknowledged the possible consequences of ISA based on the old model BITs which eventually resulted in the termination of the then existing BITs and it tried to negotiated new BITs with a new model. It reviewed the “Institutionalism of Arbitration Mechanism in India” wherein the steps which were taken by India are as follows:

1. BITs based on New Models- Many of the India’s BITs contained a gamut of ambiguous provision which could lead to open interpretations in furtherance of which India moved out of 53 BITs to better address the issue of Investor State Arbitration. Thereafter, a fresh start of BITs happened and India adopted a model BIT in the year 2015 which “balances the investor’s rights and obligations and is likely to reduce the possibility of broad interpretations in the context of any investment disputes under the treaty”. The primary reasons of these steps could also be attributed to granting protection to foreign investor and to reducing the discretion of the tribunals over the treaty interpretation.
2. New Format of ISA-In the latest BITs signed by India, detailed provisions on ISA have been enunciated and as also could be seen from, the BIT signed with “Belarus” in September 2018 which contained specific clauses including “the exhaustion of domestic remedies for a period of five years (i.e. a strict time period during which disputes could be filed) and the operation of mediation, bargaining, or other third party proceedings for a period of six months before seeking investor-State arbitration.”
   Analogous treaty provision can also be seen in the “Indian-Taipei Association”, Taipei Economic and Cultural Centre, though the time frames for completing pre-arbitration proceedings differ in both the BITs, however the provisions are accompanied by comprehensive provisions on “confidentiality, arbitrator qualification, conflict of interest law, and the option of submitting joint interpretations”. The ISA clauses in the current Model BIT and the most recent BITs signed by India is deemed to be favourable to the host State, which might not be a desirable outcome given the end goal of a balance of powers between the investor and the host State.
3. Preference to “State-to-State Arbitration” over “Investor-State Arbitration”- The “India-Brazil Investment Cooperation and Facilitation Treaty, 2020” took a step ahead than what was possible in the Model Indian BIT of 2015 by eliminating the ISA altogether. Under the provisions of this treaty, only State to State arbitration are a mode of dispute resolution and ISA is eliminated throughout, which is also coupled with the mandate and power of such tribunal also being highly restricted. The could possibly be attributed to two key factors i.e.,
   1. First, the Brazilian Cooperation and Facilitation Investment Agreements, which had been signed prior to this India-Brazil ICFT, also contained State-to-State arbitration as the sole mode of third-party dispute resolution. This has also been explained in an official release by the Brazilian government.
   2. Second, the inclusion of a “tiered dispute resolution model with State-to-State arbitration” as the final tier as an alternative to ISA, had been suggested by the HLC in its report. This may have been an attempt by the Government to adopt that suggestion. 

India’s Interests For The Regulation Of Protection Of The Investor

With the expiration of BITs, the status of investment promotion and investor security is currently void. To balance India’s right to control with the need for investor security, India must develop an alternate mechanism, re-engage with the mechanism, implement and improve policies to encourage investment, deter investor-State conflicts from arising and worsening, and handle investor-State dispute settlements more effectively. As a possible next step, the following methods are proposed.

1. Investor Protection Mechanism- It is suggested that a treaty based arbitration process is required for investors whose rights under BIT have been violated. The basis for such a system would be the Government’s obligation to adhere to certain security principles, which must be transparent and without doubt, as well as the use of arbitration as a trusted dispute settlement mechanism. The framework for putting these obligations into effect can be divided into two sections.

      (a) Central Government and Investor Agreement- Under this process, the government may issue sector-specific investment promotion regimes (schemes) that include government commitments to protect investment from foreign investors. These responsibilities can include particular risks, duties, and other terms that are consistent with the goals and priorities of both the participant and the state.

      (b) Arbitration and a Trusted Dispute Resolution- The introduction of the arbitration process would boost investor confidence in investment protection, as their interests would not be jeopardised despite the existing gap in investor-protection mechanisms.

2. Co-ordination between Central and State Governments- A BIT’s commitment apply to both the state and the central government. As a result, it is important that all levels of government and those who work with international investors understand the nature and ramifications of the commitments under the BITs, as well as the realistic effects of investment decisions. The State Coordination and Response System could be given the authority to directly discuss, conciliate, and mediate the conflict. Essentially, the acquisition of skills, experience, understanding, and operational resources will all play critical roles in the successful resolution of investment disputes.

Conclusion

In conclusion, as is evident from the new approaches which India is adopting, to get rid of the Investment-Treaty Arbitration still, India is very much open to ISA Claims since the county is still struggling with the sunset clauses within the Old BITs. Therefore, the best plan as of now would be to just be prepared for such claims and to develop a preventive plan or mechanism amongst the Central and the State Government which would in turn help foster the resolutions of the dispute before the claimant investors take the route of the treaty. Furthermore, the unresolved, “International Commercial Arbitrations” also have a bleak possibility of becoming an ITA.

In this furtherance, measures such as adhering to evolving principles of international commercial arbitration establishing arbitral institutions, and developing commercial dispute resolution methods in India would render the use of investment treaties obsolete which would help India achieve its aim of stopping investor-state arbitration. The new Commercial Courts Act, as well as the signing of the Singapore Convention, reaffirms India’s intention to protect and prioritise commercial interests. Due to the current gap between the goal of economic liberalism in foreign investment and the latest treaty-making policy, it would be important to see the effect on foreign direct investment inflows into India and on Indian investors invested abroad. Nonetheless, investor-state arbitration is here to remain as a result of India’s attempts to become a global arbitration centre.

[1]Enron’s Dabhol Power Project, INDIAN POWER SECTOR, available at http://indianpowersector.com/hom ssse/about/case-study.