ANALYSIS: India invites comments on draft model investment treaty; text offers radical departure, and calls to mind Norway’s past efforts at revision
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IAReporter | 24 March 2015

ANALYSIS: India invites comments on draft model investment treaty; text offers radical departure, and calls to mind Norway’s past efforts at revision

Reprinted with permission of InvestmentArbitrationReporter.com.

By Luke Eric Peterson

Following a lengthy inter-ministry process, the Government of India has released for public comment a new draft model investment treaty negotiating template.

The agreement, which can be viewed here, is open for public comment until April 10, 2015.

In the interests of time — and bearing in mind the likely coming flood of commentaries from academics, law firms and others — IAReporter won’t offer a detailed summary here. Instead, we’ll highlight a few of the most noteworthy changes below, and offer a bit of context.

As readers will recall, India have faced a number of BIT claims in recent years, and our latest update on developments in those cases can be read here.

Fair and Equitable Treatment and MFN are out; outrageous or egregious conduct is focus

One of the most striking features of the draft model is its jettisoning of the fair and equitable treatment standard in favor of a standard — egregious or outrageous behaviour — that hearkens back to legal touchstones of an earlier era.

Thus, the core standard of treatment in the draft model offers protection against:

- denial of justice under customary international law;
- un-remedied and egregious violations of due process; or
- manifestly abusive treatment involving continuous, unjustified and outrageous coercion or harassment.

The draft does not offer a most-favoured nation (MFN) clause. Moreover, the national treatment clause focuses on intentional, nationality-based discrimination.

The treaty’s expropriation clause flatly excludes non-discriminatory regulatory actions in pursuit of "legitimate public welfare objectives such as public health, safety and environment"; in contrast with some North American treaties, there is no caveat that such measures will rarely be an expropriation. (We’ve written recently about one case that could test the scope of that "rare" exception in the Central American Free Trade Agreement.)

The draft text also incorporates a series of more general exceptions and security exceptions to the treaty. Notably, taxation — a subject that has spawned some recent claims against India — is to be carved out of the treaty.

An interpretive lode-star is also set out in the draft-text, one dictating that the treaty "shall be interpreted in the context of the high level of deference that international law accords to States with regard to their development and implementation of domestic policies."

Compensation can be mitigated by a host of factors

Of particular interest, the expropriation clause proposes that compensation shall reflect the fair market value of the expropriated investment, "as reduced after application of relevant Mitigating Factors". Such factors are enumerated in a subsequent and lengthy article (Art. 5.7), and include insurance payouts received from other sources; conduct of the investor that contributed to its damage; harm to local communities or the environment; and a sizable list of other considerations.

Moral damages and other forms of relief are expressly eschewed as remedies available to investors, and under no circumstances may a tribunal shift the date of valuation away from the day immediately before the expropriation occurred.

Investor-state arbitration conditioned on exhaustion of remedies; potential beneficiaries of protection are whittled down

Unlike the existing Indian treaty practice, the new draft calls for would-be claimants to exhaust all judicial and administrative remedies relating to the measure prior to initiating international arbitration. The current text does leave some wiggle-room for futility arguments if there is no viable avenue for relief or scope for such relief in a "reasonable period of time".

The draft also narrows who is eligible to benefit from the treaty’s protections and its investor-state mechanism. A number of India’s existing treaties — including a popular BIT with Mauritius that spawned one of India’s first BIT cases more than a decade ago — tend to be loosely drafted so as to cover entities that are incorporated in the putative home state without needing to meet more stringent tests.

The new draft model alters this status quo by insisting that protected (corporate) investors demonstrate deeper ties to the claimed home territory. The draft also seeks to narrow (significantly) the types of investments protected by the treaty, with control or majority-ownership of an enterprise now proposed as the baseline.

UNCITRAL is default, with additional ethics and transparency provisions; International Court of Justice judges still play appointing role

When claimants do go to arbitration, the draft text proposes UNCITRAL-based arbitration as the default — with the important overlay of purpose-built transparency and arbitrator-ethics provisions. Other modes of arbitration are available if the disputing parties agree to them in writing before the commencement of arbitration.

The draft treaty’s arbitrator ethics requirements are more detailed than the core requirement (under the UNCITRAL rules) for arbitrators to be impartial and independent. At first glance, the ethics rules are reminiscent of those seen in certain EU-negotiated trade agreements and applicable to trade dispute settlement (such as the EU-Korea Free Trade Agreement) insofar as they expressly encompass an arbitrator’s broader financial, personal, business and professional relationships.

India’s draft model text does give more than a half-dozen examples (Art 14.6(x)) of circumstances that would give rise to justifiable doubts as to an arbitrator’s independence or impartiality or freedom from conflicts of interest, including that the "arbitrator has publicly advocated a fixed position" on an issue at stake in the arbitration.

As is the case under many existing Indian treaties — and is somewhat of a departure from many other countries’ practice — the judges of the International Court of Justice would continue to play the important "appointing authority" functions of making default arbitrator appointments (for e.g. if a party does not meet time-deadlines or a chair cannot be agreed upon) and also resolving arbitrator challenges.

Treaty’s protections hinge on investor’s compliance with a host of obligations

One of the features of the treaty that requires more considered appreciation is the inclusion of several lengthy articles enumerating investor obligations, including in relation to anti-corruption, disclosure of information, and compliance with host state law (including human rights, conservation, consumer protection, labour, etc.)

Not only must investors comply with these obligations in order to "benefit from the provisions of this Treaty", the investor-state dispute mechanism also opens a pathway for the host state to bring counter-claims to enforce the investor obligations. In contrast to the monetary-only remedies available to investors for breach of the investor protections, a breach of the investor obligations can occasion monetary damages, declaratory relief or enforcement actions.

Draft is a radical departure, not an incremental series of changes

Overall, the draft model text goes well beyond the incremental reforms seen in the investment treaty programs of countries like Canada and the United States, and offers a radical departure from past agreements - Indian or otherwise.

The most apt comparator may be the 2008 draft model investment treaty released by the government of Norway, which, at that time, was a radical leap forward in treaty-making terms. (The Norway agreement proposed sweeping transparency; stringent requirements for qualifying as a protected investor; curbs on the substantive protections; and a (qualified) requirement for claimants to exhaust domestic remedies before arbitration.)

Of course, the Norway draft model treaty never made it from drawing-board to reality, as the project was shelved amidst an avalanche of public comments and disagreements as to what the final text should look like.

Thus, it will be interesting to monitor how India’s draft model runs the inevitable gantlet of public input, including from those who see no legitimate role whatsoever for investment treaties or investor-state arbitration, and from investor-protection advocates who may criticize a roll-back of substantive protection or a substantial narrowing of the pathway to international arbitration.

While proponents and opponents clash, prospective arbitrators may be more intrigued by this new model. In addition to offering myriad new variations on substantive protections, all in need of interpretation, the draft also empower arbitrators to resolve a potentially vast new range of legal disputes focused on investor compliance with the (sweeping) obligations imposed under the treaty.

Investment Arbitration Reporter is a specialized news publication tracking developments in the area of international investment law and policy.