Lexology | 19 January 2016
India’s new BIT and arbitration law send mixed signals to foreign investors
by Jonathan T. Stoel and Michael Jacobson
On December 28, 2015, the Government of India released the text for its revised model Bilateral Investment Treaty (BIT). In this release, the Government of India also announced that the Department of Economic Affairs will be leading all negotiations on BITs and investment chapters of trade agreements to ensure continuity between trade and investment issues.
One recent trend in global investment treaty policy is that the major world economies have carved out divergent approaches to investment treaty-making. The United States’ approach in the 2012 United States Model BIT is generally reflected in the text of the Trans-Pacific Partnership (TPP) investment chapter. The European Union’s proposal in the Trans-Atlantic Trade and Investment (TTIP) investment chapter negotiations takes its own approach by suggesting an international investment court to replace investor-State arbitration, among a number of additional innovations. Though negotiating with similar treaty-making partners as the United States, China’s approach has yielded different treaty terms than the recently-released TPP text; this can be seen in China’s recently-concluded agreements with Canada and Australia. On the other hand, Brazil and South Africa have avoided ratification of BITs in recent years.
India’s new model BIT text follows the trend of divergent approaches to investment treaty-making by focusing on a more defensive-minded strategy than in its prior treaties. This shift likely stems from the 2011 White Industries Australia Limited v. The Republic of India award against India and two tax-related cases brought against India in 2014 by Vodafone and Nokia. Some examples of India’s more defensive-minded approach can be seen in the following provisions of the new model BIT:
There is no explicit reference made to the Fair & Equitable Treatment standard, which is the most commonly invoked standard of protection in investment treaty disputes. Instead, the model BIT protects against “measures which constitute a violation of customary international law” through a closed list which includes: denial of justice, fundamental breach of due process, targeted discrimination, and manifestly abusive treatment. An investor may not bring investor-State arbitration until it had exhausted local remedies, or until five years have passed in pursuit of the exhaustion of local remedies. The definition of “investment” incorporates a test akin to the Salini factors which have been applied by some investment treaty tribunals. Further, the model BIT text requires that a qualifying investment have certain fundamental characteristics. Additionally, a number of types of investment are explicitly excluded from the definition of a qualifying investment, including portfolio investments. The BIT protections apply to measures taken by national, state, and union territory governments, but do not apply to local governments. The BIT’s protections do not apply to tax laws or measures taken to enforce tax obligations. The text explicitly excludes treaty protection for pre-investment activities related to the establishment, acquisition, or expansion of any investment. The BIT contains a broad denial of benefits clause, excluding the benefits of the BIT provided to investments or investors (1) owned or controlled, directly or indirectly, by persons of that State or a non-Party and (2) that have been established or restructured with the primary purpose of gaining access to the BIT’s dispute mechanisms. The model BIT includes General Exceptions, such as those contained in GATT Article XX related to public morals and public order, health, compliance with laws and regulations, the environment, and cultural preservation.
Several of the model BIT’s clauses are more investor-friendly than those in the previous draft issued in March 2015. For example, the prior draft requires investors to hold majority-ownership or control to qualify for protection and allows for India, or its treaty partner, to bring counter-claims against investors.
In addition, India’s new arbitration law entered into force on December 31, 2015. This new law, which applies only to future cases absent the disputing parties’ agreement, seeks to attract more investment to India and facilitates more efficient and effective dispute settlement in India.
The new model BIT and arbitration law send mixed signals to foreign investors in India. The model BIT would narrow certain treaty-based protections, while the new arbitration law aims to make India a more desirable location for foreign investment. Thus, multinational companies will need to reassess their understanding of India’s risk profile. At the same time, the new model BIT is just that – a model – and it remains to be seen how India’s future investment treaties will be negotiated.