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Investor and (host) state protection - India proposes a new model for BIT

By Subhashree

Investor State Dispute Settlement (ISDS) mechanism which allows a foreign investor to sue sovereign states claiming compensation for loss of investment has been in focus for a number of reasons ranging from enormity of compensation awarded , use of multiple forums and almost endless litigation in enforcement of award to genuineness of claims and against regulatory laws . India has ratified over 70 such investment protection agreements (including the investment chapters in CEPA, CECA) and has recently faced claims based on taxation and failure to provide proper investment climate and so on. On the international front, the ISDS has been a much debated provision in the Trans Pacific Partnership (TPP) as well as EU-US Trade Promotion Agreement. It is in this background that India has proposed the new model for Bilateral Investment Treaty (BIT) agreements. This article seeks to highlight provisions which are new, may be unique and perhaps herald a change in the way investment should be attracted /protected without compromising on sustainable growth.

Though every BIT is supposed to be unique, the terms of the existing BITs are broadly similar. Some of the most interesting and important changes in the language of the existing BITs vis-à-vis the model BIT and the provisions are as follows:

Model provision Existing terms Issue sought to be addressed
Preamble uses the words - 'Reaffirming the right of Parties to regulate Investments... including the right to change the conditions applicable to such Investments' Mostly seek to enhance cooperation and proper protection of investments. The preamble has often been interpreted to enhance the scope of protection to the investor and interpret investor protection in preference to any other objective a host state may put forth.
Article 1.1 describes enterprise as one having real and substantial business operations in the host state besides having carried out all operations according to applicable domestic law. Generally reference is only to the entity being incorporated/ constituted in the respective states. A claim like Philip Morris suing as an entity in Hong Kong to take advantage of the provisions of Australia- Hong Kong treaty might be rendered impossible by the new provision.
Article 1.6 - Investment means an enterprise which also complies with articles relating to anti-bribery, applicable taxation and domestic laws. Investment has been defined extensively to include a host of things including immovable property, intellectual property and upto expectation of profit (India-Japan CEPA) Clarifying the scope of protection to avoid vague, non-exhaustive definition.
Article 2.3 envisages right of parties to modify the treaty and also undertake periodic review Usually no express provisions exist for modification and review
Article 3 deals with standard of treatment which shall not be denial of justice, unremedied egregious violations of due process or manifestly abusive. National treatment is denied only if there is intentional and unlawful discrimination on the basis of nationality. Most treaties call for fair and equitable treatment along with national treatment and MFN provisions. The MFN clause is frequently used to import more favourable terms from other treaties and terms 'fair and equitable' have worked more often than not against host states [Siemens v Argentina]
Specific exclusion to laws of regional or local governments and exercises of discretion on when to enforce a law from breaching national treatment requirements. This is not a commonly seen provision. This can be important in a federal set up and in the context of recent Bilcon decision involving provincial and federal regulations.
Article 5 on expropriation excludes action of state in commercial capacity from the ambit of the treaty as also action to protect public welfare, health, safety and environment. More recent treaties like India Japan CEPA devote some provisions to protection of environment though there is not much emphasis on public health. Criticism levelled against the treaties restricting the policy space for governments.
Introduction of concept of mitigating factors like conduct of investor contributing to the damage, relevant considerations need to balance public interest and damage to local community, etc., to decide the quantum of compensation payable. Provisions relating to calculation of damages are negligible. The grant of award in an arbitrary fashion with the host state bearing costs of pollution in addition to paying compensation, interest and litigation costs.
Article 8 on obligations of the investor to act in a responsible manner. Also Article 12 requires the investor to respect rights and customs of local communities, adhere to fair competition and conservation of natural resources and so on. Some treaties require the investor to comply with applicable local laws but this has not been very effective. For instance the oil major which was held to have violated the law was still considered to have been subject to unfair treatment by the state [Occidental]. Lack of specific obligation cast on investors except vague terms on respecting domestic laws or any discussion on information and reporting requirements in treaties.
Article 8 on disclosures call for maintenance of records by the investor for 10 years (period in which treaty is in force) and further 3 years in case of a dispute after the termination of arbitration. Such provisions are not usually part of treaties or envisage only protection of confidential information or providing relevant information.
Article 14 provides for lodging of a counterclaim by the host state. Also the tribunal may award costs if the investor brings a claim to obtain money, property or any other thing of value or threatens to do so. This provision is not usually present in treaties. Seeks to address the concern that treaties tend to favour investors who can threaten use of ISDS to force the host state to accede to their claims.
Specific requirement to exhaust local remedies in Article 14. Also the investor has to establish that 'continued pursuit of domestic relief would be futile' before he can seek arbitration. This is not present in many treaties or is not adhered to. [India-UK BIT] Ensuring proper procedure and requiring investor to submit to the judicial process in the host state. This can counter the argument that foreign investors are treated more than equal and also bring cost savings for the host state.
There is a limitation period of 3 years 'from the date on which the Investor or Investment first acquired, or should have first acquired, knowledge of the Measure in question and knowledge that the Investment, or the Investor with respect to its Investment, had incurred loss or damage as a result' to institute a claim. Also no more than 18 months should have elapsed after the conclusion of domestic proceedings or their abandonment. Exhaustion of local remedies and limitation are provided in some of the more recent treaties like India-Japan CEPA.
The claim by the investor shall be with respect to 'actual and non-speculative damages as a direct and foreseeable result of such breach by the Respondent Party'. Claims generally relate to expropriation with adequate compensation, other damages, etc. The use of actual damages is in consonance with definition of a 'measure' being one which directly applies on the investment. Also loss of goodwill, reputation, etc., are not covered.
At all times, the investor shall bear the burden of proving the breach of obligations by the host state. Usually absent in treaty texts
A separate chapter devoted to general exceptions and state exceptions which reiterates certain protections for the host state. Generally exceptions are carved out for critical balance of payments positions, war and emergencies.
Article 24 provides that the treaty shall remain in force for a duration of 10 years and that protection for investments made prior to termination for upto 5 years after date of termination. Different treaties provide for different periods. Brings uniformity in duration as opposed to current treaties with varying protection periods.

Other provisions seeking to restrict scope of protection

Article 1.7 excludes goodwill and similar intangible rights, pre-operational expenses, portfolio investments, etc., from the definition of assets. Article 1.11 defines measure as any form of legally binding action applying directly to an investment. Any activity pursuant to compliance with sectoral limitations relating to admission of investment is defined as investment activity excluded for purposes of claims. Government procurement and subsidies are excluded for purposes of claims as also disputes arising out of commercial contracts between a state and an investor shall be resolved in accordance with the contract and not as per the treaty. Taxation has been specifically excluded by Article 2.6. Despite the debate over use of compulsory licensing ((CL) as per the flexibilities in TRIPS agreement, CL is specifically excluded. Further revocation, limitation or creation of intellectual property rights, to the extent that such issuance, revocation, limitation or creation is consistent with the law of the host state will also not be within the purview of claims.

ISDS mechanism

Special provisions have been laid down for constitution of arbitral tribunals, qualification of arbitrators, ruling out conflict, conduct and transparency of proceedings. Various bodies like ICSID, ICC and UNCITRAL do not find a mention as appropriate forum. Also under various exceptions, specific defences are available to the host state as per Article 17 including war, emergency, critical public infrastructure, etc., and they may be asserted at any time during the proceedings. On diplomatic exchanges, the treaty envisages that if a disputing investor has commenced an investment dispute against a respondent host state the non-disputing party shall not give diplomatic protection, or bring an international claim, in respect of that investment dispute between one of its investors and the respondent host state, unless the respondent party has failed to abide by and comply with an award or the decisions of its courts and other applicable law regarding recognition and enforcement of foreign judgments and arbitral awards.

To conclude

Besides the provisions listed above the model BIT contains a number of do's and don'ts to enable investment protection which balances the interest of both parties. However if we look at the text of recent treaties, Canada-China FIPA or Canada-EU CETA it is doubtful if states will agree to radically change the tenor of investment protection agreements. For instance, the protection of intellectual property rights is among the most negotiated provision in recent ongoing exercises like TPP. Even with elaborate provision for conduct of the arbitral proceedings the host state may find it difficult to put forth its position strongly. Going by the experiences so far exclusion clauses have not been enough and a fair trial is far from reality. An important question is whether to have ISDS at all since Brazil has not ratified such agreements and the recent Australia-Japan FTA does not contain ISDS provisions and EU is engaged in a massive debate about its desirability. If the objective is to take into account experiences with earlier BITs, common criticisms and protect the host state, the model BIT does quite well.

[The author is Manager, Knowledge Management Team, Lakshmikumaran & Sridharan, New Delhi]

1.Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador, ICSID Case No. ARB/06/11
2.Chevron v. Ecuador refer Case 1:11-cv-00691-LAK-JCF Document 1874
3.ISDS against Argentina post financial crisis of 2001 refer UNCTAD IIA Issues note No.1 March 2011
4.Vattenfall AB and others v. Federal Republic of Germany (ICSID Case No. ARB/12/12
5.Occcidental - apportioning responsibility for damage - refer Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador, ICSID Case No. ARB/06/11