Customarily, BITs provide for an alternative dispute resolution mechanism, through which an aggrieved investor may seek damages from the host state in an arbitral tribunal sitting in a neutral venue.
Thu, 31 May 2012
It appears that the Government of India may soon be sued by foreign investors to the tune of billions of dollars under its various bilateral investment treaties. A bilateral investment treaty (BIT) is an agreement between two sovereign states that grants certain protections to investments made by one state – including private investments – in the other state, including fair and equitable treatment, and protection from expropriation.
Customarily, BITs provide for an alternative dispute resolution mechanism, through which an aggrieved investor may seek damages from the host state in an arbitral tribunal sitting in a neutral venue such as the International Centre for the Settlement of Investment Disputes (ICSID) rather than the courts of the host nation.
Until very recently, there was not a single published investment arbitration decision to which the Indian government was party – though there were nine unpublished claims. This changed in November 2011, when an arbitral tribunal held India liable, because of long-standing judicial delays experienced by a foreign investor.
But the damages in this case were only about $5 million, a relatively small sum when compared to the size of many other awards (for example, Exxon Mobil was recently awarded $907 million in a case against Venezuela). India, to date, appears to have fared better than most countries. This apparent quiet, however, has come to an abrupt end. Sistema, a Russian telecom company, delivered a notice of investment arbitration in February this year over the cancellation of its 2G licences held by its local group. Last month, Telenor ASA, the Norwegian telecom company claiming Dutch nationality through a subsidiary, threatened arbitration over the cancellation of its 2G licences held by its joint-venture company.
The Children’s Investment Fund, a UK hedge fund, threatened to initiate investment arbitration in April against India over its pricing policies for Coal India. And, just weeks ago, a Dutch subsidiary of Vodafone served a notice of dispute on the Indian government over proposed legislation that would result in the company owing nearly $3 billion in back taxes.
These possible international arbitrations against the government arise through the vast network of BITs to which India is a party. India has at least 72 BITs in force with countries such as the Netherlands, the United Kingdom, France, Germany and the Russian Federation. Possible bases for claims include expropriation of an investment without adequate compensation, unfair and inequitable treatment and denial of justice by Indian courts. These protections are not without limits, however, permitting sovereign states some degree of regulatory flexibility at the expense of investors, foreign and domestic alike. The question of where to draw this line is frequently at the heart of a dispute involving claims arising under a BIT.
Notwithstanding the protections afforded to foreign investors, BITs also place limitations upon a foreign investor seeking to bring a claim. Many BITs contain a ‘cooling off period’ clause, generally of six months, during which the parties must attempt to settle their dispute amicably through negotiations. Only after that period has lapsed, the dispute can be submitted for arbitration. Further, BITs do not protect against one-off commercial transactions.
Instead, they extend protection to investments such as mineral concessions and intellectual property. Many investment arbitration tribunals have declined jurisdiction on the ground that the dispute in question did not arise out of a qualified ‘investment’ as defined by a BIT, even though there might appear to be an investment in the common sense or economic understanding of the term.
Foreign investors are also limited by India not being party to the Convention on the Settlement of Investment Disputes between states and nationals of other states (ICSID Convention). State parties to the ICSID Convention are bound to recognise awards as if they were final judgments of their own highest courts. This can help streamline the process of recognition and enforcement of an arbitral award for a successful foreign investor.
Otherwise, a losing host state may refuse to recognise an arbitral award on the ground, for example, that it violates the public policy of the host state. Finally, some of the possible legal claims against India involve evolving areas of the law, such as a state’s freedom to amend its tax laws retroactively, if doing so is in the national interest, or to revoke licences that may have been improperly granted. From the perspective of a foreign investor, the success of these arguments cannot be taken for granted. In other words, even if India soon faces more investment arbitration claims, there is no certainty that all these claims will prevail.
News of the growing number of claims against the government coincides with unconfirmed reports that India is planning to exclude arbitration clauses from BITs currently under negotiation with the European Union, Australia, New Zealand and other countries. Its decision to do so could limit some future liability. However, BITs without an alternative dispute resolution mechanism may also deter foreign investors sensitive to the protections afforded to them by BITs because such protections would need to be enforced in Indian courts.
This is an important time for India in the light of these new and threatened claims under BITs. Foreign investors often use the statements and actions of government officials, while the cases are pending to support their claims against the government. Accordingly, Indian government officials would be wise to deal cautiously with these foreign investors during the resolution of these cases.
The author is a Singapore-based lawyer with Milbank, Tweed, Hadley & McCloy LLP.