Investing in alternative dispute settlement
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India is facing an arbitration claim following the government’s decision to cancel bauxite-mining approvals in Vishakhapatnam

Madhyam | 3 July 2017

Investing in alternative dispute settlement

By Shalini Bhutani

Shalini Bhutani is a legal researcher and policy analyst based in Delhi.

State governments in India are pre-occupied with creating a favourable environment for attracting investment. But before opening doors to investors, they ought to be equally engrossed with preparing themselves for situations when investors, whether Indian or foreign, raise disputes. The dispute settlement mechanism being pushed in free trade agreements (FTAs) and bilateral investment treaties (BITs) is a marked shift from traditional adjudication processes.

Governments at the Centre and in the States must urgently invest in building their own capacity to handle the new generation of international investment arbitration.

World Bank Support

International financial institutions (IFIs) play a role in advocating a certain kind of dispute settlement in favour of investors. The World Bank itself hosts an International Centre for Settlement of Investment Disputes (ICSID) in Washington, D.C.[1] This is the venue for investor-state arbitration. The Centre only takes up cases where one of the parties is a government or government agency, and where the said government is a contracting party of ICSID. This is the preferred mode of dispute settlement for transnational corporations, allowing them to bypass domestic courts. As of April 2016, 153 countries are members of ICSID. India is not a party to ICSID; just as many other developing countries denounce the Centre.[2] Yet ICSID-centred arbitration is being encouraged as the new global norm in FTAs/BITs.

The World Bank conducts capacity building workshops for investment promotion agencies of the states in India, as was recently held in Andhra Pradesh.[3] But dispute settlement is not one of the aspects on which capacity of state officials is built.

The Bank in 2016 ranked Andhra Pradesh (AP), along with the bifurcated Telangana, amongst the top ten states for ‘Ease of Doing Business’.[4] One of the criteria to assess this is the capacity and commitment of the state government to enforce contracts entered into with investors. Ironically, a decision taken by the state government of AP to cancel mining approvals led to the affected foreign investor to raise a dispute against it for failing to fulfill the contract.

The Mining Dispute in Andhra Pradesh

An Emirati investor initiated a claim against India in the form of an international arbitration suit. This is one amongst the four filed against the Government of India through 2016 (see Table below). The arbitration claim is by one of the Emirates of UAE, through the Ras-Al-Khaimah Investment Authority (RAKIA) by invoking the dispute provisions in an India-UAE BIT of 2013.

The case arose from the GoAP’s April 2016 decision to cancel bauxite-mining approvals in Vishakhapatnam, for supply to AnRAK – the aluminium company that RAKIA invested in. RAKIA therefore impleaded the Government of Andhra Pradesh (GoAP) as a key party in the dispute. The others who were sent notice include the Prime Minister’s Office in India and three ministries of the Central Government, namely those handling mines, external affairs and environment. GoAP was also confronted with court cases filed by RAKIA before the High Court of AP in April and July 2016. Thereafter, RAKIA sent an arbitration notice on December 2016 seeking USD 44.71 million.

Being ranked the leading investment destination in the country does not mean that the Andhra Pradesh government has leadership qualities to handle investor disputes. An Inter-Ministerial Group chaired by the Secretary (Mines) with representatives from both the Central Government and GoAP has had to be set up to deal with the matter.[5]

Table: Investor Arbitration Suits against India (2016)

Year Company Status Reference BIT Amount claimed by investor (USD)
2016 Vedanta Pending India-UK (1994) 3 billion
2016 Strategic Infrasol Pending India-UAE (2013) Data not available
2016 Ras Al-Khaimah Investment Authority Pending India-UAE (2013) 44.71 million
2016 Astro & South Asia Entertainment Pending India-UK (1994) & India-Mauritius (1998) Data not available

Source: Compiled by the author from data on UNCTAD’s Investment Dispute Settlement Navigator site.

Policy Decisions

Executive decisions by the Centre to pursue a certain investment policy, whether through a stand-alone BIT or through a chapter or provision on investor protection within FTAs, may be constitutionally challenged for lack of consultation with states.

There are a host of subjects on the State List in the Constitution of India, which get covered in such FTAs/BITs. For example, in the proposed RCEP text, the chapter on investor protection covers investment in non-services industries (manufacturing, mining, quarrying, fisheries, forestry and agriculture). Agriculture is a state subject under the Constitution of India. Likewise, ‘regulation of mines and mineral development’ is on the State List; though it has been made subject to the control of the Union. Regardless of the federal distribution, both the Centre and the States must be able to retain regulatory control in sectors under their jurisdiction. This includes having the sovereign space to decide what kind of dispute settlement process to use with investors in that sector.

Arbitration Alternatives

The investment dispute in Andhra Pradesh comes shortly after the Government of India undertook a review of the country’s BITs. In 2015 the Union Cabinet approved a new model BIT for India to follow when negotiating a BIT with another country. Therein too are provisions for dispute settlement in its Chapter IV. It expressly states that in contracts with investors

(a)ny dispute arising under such contract or agreement shall only be resolved in accordance with the dispute settlement procedure specified in such contract or agreement and if no such procedure is specified, the applicable Law of the Host State.Such disputes shall not be brought before a tribunal under Article 14 or Article 15 of this Treaty under any circumstance.

- Article 2.6(vi)

The provisions of Article 14 of the model text also insist on exhaustion of local remedies (such as going through all the available judicial and administrative bodies in the host country) and imposition of certain conditions before the investor can approach an arbitration tribunal. There is also no mention of ICSID in the model text. India must stay as close to its model BIT on this issue.

India’s Finance Minister has also argued for an alternative arbitration system for BRICS countries.[6] Twelve States in the Union of South American Nations (UNASUR) have also been developing a regional arbitration centre as an alternative to ICSID.[7] Just as India, they have too been facing several investor arbitration suits with adverse outcomes.

RCEP Resurrection

The Regional Comprehensive Economic Partnership (RCEP) is currently being negotiated between sixteen countries in the Asia Pacific region. There is a chapter on investment being discussed for inclusion in the final text of this ‘mega regional’ FTA. However, the proposed provisions for dispute settlement are a concern. In July 2015, some RCEP Participating Countries agreed to have investor-state dispute settlement (ISDS) provisions in the RCEP’s investment chapter. India’s proposal based on a Draft Investment Text of October 2015 does not detail out its position on such a dispute settlement mechanism.[8]

The next round of RCEP talks are scheduled in Hyderabad from 17-28 July 2017. Given the pending investor dispute in Andhra Pradesh, the state government must rightfully ask to know what is in RCEP text on this matter as of date. Urgently any problematic ISDS provision in RCEP and the potential loss of domestic policy space from such a provision must be resisted. The right to regulate must remain over and above investor rights.

Endnotes

[1] https://icsid.worldbank.org/en/

[2] Bolivia, Ecuador (both in 2009) and Venezuela (in 2012) have withdrawn from ICSID.

[3] http://apedb.gov.in/news-winning-fdi-a-capacity-building-workshop-for-indian-states.html

[4] DIPP Assessment 2016 as per the World Bank Index https://www.apindustries.gov.in/APIndus/UserInterface/SingleWindowServicesApplication/Public/EODB.aspx

[5] https://www.italaw.com/sites/default/files/case-documents/italaw8083_0.pdf

[6] https://swarajyamag.com/world/india-pursues-a-new-investment-arbitration-regime-to-protect-itself

[7] http://kluwerarbitrationblog.com/2016/05/27/unasur/

[8] http://www.bilaterals.org/IMG/pdf/rcep-draft-investment-text-india.pdf

source: Madhyam