MUMBAI SILICON VALLEY BANGALOR E SINGAPORE MUMBAI BKC NEW DELHI MUNICH N E W Y ORK Bilateral Investment Treaty Arbitration and India With special focus on India Model BIT, 2016 February 2018 © Copyright 2018 Nishith Desai Associates www.nishithdesai.com Bilateral Investment Treaty Arbitration and India With special focus on India Model BIT, 2016 February 2018 [email protected] © Nishith Desai Associates 2018 Bilateral Investment Treaty Arbitration and India With special focus on India Model BIT, 2016 Contents 1. EXECUTIVE SUMMARY 01 2. ADVENT OF BITS – WORLD & INDIA 04 3. PRINCIPLES OF INTERPRETATION 06 4. INDIA : 1994 - 2016 07 I. Dabhol Power Project, 1990’s 07 II. White Industries, 2002 - 2011 08 III. Post White Industries, 2011 - 2016 08 5. INDIA MODEL BIT, 2016: OVERVIEW 09 6. APPLICABILITY 10 I. Principles 10 II. Applicability of the 2016 India Model BIT 11 7. JURISDICTION AND ADMISSIBILITY 14 I. Preamble 14 II. Investment 15 III. Investor 18 8. MERITS 21 I. Expropriation / Taking of Property 21 II. “Treatment of Investments” 25 9. TREATY EXCEPTIONS 36 10. OTHER IMPORTANT CLAUSES/ISSUES 39 I. Attribution of acts of state entities to states 39 II. Treaty versus Contract Claims 39 III. Umbrella Clauses 40 IV. Denial of Benefits clause 41 V. Survival clauses 42 © Nishith Desai Associates 2018 Bilateral Investment Treaty Arbitration and India With special focus on India Model BIT, 2016 11. INVESTOR-STATE DISPUTE RESOLUTION 43 I. Overview 43 II. Settlement of Disputes under the 2016 India Model BIT 44 III. Scope 44 IV. Conditions precedent for submission of claim to arbitration 46 V. Exhaustion of Local Remedies 46 VI. Submission within a year of acquiring knowledge of measure and loss 47 VII. Dispute before National Courts or Judicial Authorities 47 VIII. Notice of Dispute & Amicable Means of Resolution 48 IX. Notice of Arbitration 48 12. CONCLUSION 50 APPENDIX - CASES RELATING TO INTERNATIONAL INVESTMENT ARBITRATION IN INDIA 52 © Nishith Desai Associates 2018 Bilateral Investment Treaty Arbitration and India With special focus on India Model BIT, 2016 1. Executive Summary International investment rule-making takes The language of treaty provisions is a key factor place at the bilateral, regional, inter-regional in case outcomes - underlining the importance and multilateral levels. Policy-makers, of balanced and careful treaty drafting. Clauses negotiators, the civil society and other are inserted by parties to stipulate a definite set stakeholders are required to be well informed of obligations towards the other party. Since about foreign direct investment, international the terms of agreements are bound to vary, the investment agreements (IIAs) and their impact community of interests is bound to be broader on the economy of the states involved. and more diversified. In the last few decades, Bilateral Investment Nonetheless, most BITs have a recognizable look Treaties (“BITs”)1 have become an integral part - starting from titles, such as: ‘Treaty between of international investment relations. Their [one contracting party] and [the other contracting existence has a great impact in influencing party] concerning the encouragement and reciprocal formulation of international public policy. protection of investment.’ . Generally, the content of a BIT follows a pattern. At the outset, The 1990’s witnessed a surge of BITs between a preamble expresses the object and purpose developed and developing nations. Since of the BIT. Post the preamble, a BIT generally then, there has been an exponential growth incorporates a definition clause that outlines in their number. In 2000, the United Nations the scope and ambit of the BIT by defining an Conference on Trade and Development ‘investor’ and ‘investment’ – the key qualifiers (UNCTAD) noted that BITs are the most of protection under the BIT. These definitions important instruments for protection give way to standards of protection and of foreign investment.2 treatment of foreign investments - addressing While BITs are generally titled as agreements for standards such as fair and equitable treatment, promotion and protection of investments, and full protection and security, national treatment, contain provisions on ‘protection’ of investment, and most-favored nation treatment. they seldom contain provisions relating to Provisions dealing with state measures such as ‘promotion’ of investment. Even if incorporated, nationalization, expropriation or other similar such provisions are effectively non-binding in measures, their permissibility under specific nature. Nevertheless, it is assumed that circumstances, and compensation for losses a formal offer of protection to foreign investors incurred by foreign investors form a core part through a BIT will encourage and promote of BITs and usually follow the standards of cross-border investments. While the efficacy protection. Most BITs additionally regulate of this assumption is debatable, it is predicted cross-border transfer of funds in connection that increased foreign investment is crucial for with foreign investment. developing countries which aim to use foreign direct investment and BITs as tools to enhance their economic development. 1. Bilateral Investment Treaties are agreements that protect in- vestments by investors of one state in the territory of another state. These treaties articulate substantive rules governing the host State’s treatment of the investment, and establish dispute resolution mechanisms applicable to alleged viola- tions of those rules, 41 Harv. Int. L. J.469, 469-470 (2000) 2. UNCTAD Bilateral Investment Treaties, 1959-1999 UNCTAD/ ITE/IIA/2 UN (2000) available at http://www.unctad.org/en/ docs/poiteiiad2.en.pdf © Nishith Desai Associates 2018 1 Provided upon request only One of the vital provisions in BITs is investor- Resultantly, reactions to BITs are now State dispute resolution clause. Such clauses changing, with some countries moving towards may envisage a matrix of fora and mechanisms denunciation. For instance, South Africa has – occasionally involving cooling off periods, derecognized all its BITs and has enacted negotiation, mediation, exhaustion of local a domestic legislation to govern potential remedies, and fork-in-the road provisions expropriation claims by foreign investors precluding exercise of one remedy over the other. against the South African government. Brazil However, majority of BITs involve international continues to remain a non-participant in the arbitration as the long-stop of dispute international investment treaty framework. resolution. International Centre for Settlement India signed her first BIT with United Kingdom of Investment Disputes (ICSID), the United in 1994, with the clear objective of attracting Nations Commission on International Trade Law and incentivizing foreign investment.3 (UNCITRAL) and the International Chamber India’s initial attitude towards IIAs remained of Commerce (ICC) are the common routes for unchanged until few years back. India’s first BIT international investment treaty arbitration. was based on a Model created by a developed In this regard, an investment treaty arbitration country - where emphasis lied on protection of differs from an international commercial foreign investment, rather than internationally arbitration. While the latter involves disputes recognized regulatory powers of the State.4 between private parties, the former envisages This excessively investor friendly regime disputes between a private individual / legal remained unchanged for nearly two decades. entity and a State. This adorns investor-State The India-UK BIT served as the base template disputes with the color of a private-public for India to negotiate further BITs. In fact, the international dispute. As a consequence, Indian Model BIT of 2003 contained close aspects of private international law and public semblance with the India-UK BIT.5 The regime international law merge to create a separate garnered scanty attention and until 2011, only body of international law, a lex specialis, which one arbitration was initiated against India is now recognized as international investment internationally. This was ultimately settled and treaty law. did not result in an international investment arbitration award.6 In the last decade, economies have become far more protectionist and regulation-centric. However, India’s approach to investment Sustainable development of the host State treaties started undergoing a sea-change after has begun to take fore amid capital-gaining the case of White Industries 7 in 2011. Several activities of foreign direct investors. With cases were filed against India between 2011 rising State regulation in diverse areas such as and 2016. As a result of the growing surge public health, environment, economic reforms of BIT claims, India unilaterally terminated and security amongst others, international investment treaty law is striving to balance 3. See Rashmi Banga, Impact of Government Policies and Invest- investor protection with State interests. ment Agreements on FDI Inflows, Indian Council for Research Further, the diminishing distinction between on International Economic Relations, Working Paper No. 116, 2003 traditionally capital-importing and capital- 4. Id at 9. exporting States has called for a re-look at BITs 5. KRISHAN, DEV. INDIA AND INTERNATIONAL INVEST- and investment protection standards. MENT LAW. IN INDIA AND INTERNATIONAL LAW, ed, Bi- mal Patel, 277, Martinus Nijhoff, 2008. [hereinafter KRISHAN, DEV. INDIA AND INTERNATIONAL INVESTMENT