Decoding India’s New Model BIT (II)

By Kavaljit Singh | Commentary | June 8, 2015

The new model BIT has completely excluded Most Favoured Nation (MFN) obligation and has considerably narrowed down the scope and content of national treatment (NT) and FET clauses. Besides, vague provisions have been clearly defined and additional qualifications have been incorporated to avoid their expansive interpretations by arbitral tribunals. In the recent past, arbitral tribunals have interpreted vague obligations (such as FET) in totally conflicting ways thereby creating more confusion than clarity. These amendments are intended to preserve the policy space of host states to pursue developmental and other objectives that may be difficult to reconcile with the framework of investment treaty obligations. The new model BIT only covers obligations in the post-establishment phase of an investment.

In contrast, the 1993 model BIT contained broad and substantive obligations on host states with very few exceptions. It required the host state to treat the foreign investors from the home state no less favourably than it treats domestic investors (National Treatment obligation). It requires host state to treat the investor of the home state no less favourably than it treats investors from any third state (Most Favoured Nation obligation). The 1993 model also contained provisions to provide fair and equitable treatment (FET) to investments made by foreign investors; give compensation in case the assets of foreign investors are expropriated; and allow free transfer of funds in and out of host country.

National Treatment “in Like Circumstances”

The new model BIT provides national treatment (NT) to foreign investors. However, the qualifying terms “in like circumstances” and exceptions have been explicitly inserted to narrow the scope of NT principle.

Of late, the concept of “like circumstances” or “like situations” is increasingly being used in bilateral investment treaties. This small textual addition calls for comparison of the treatment afforded to similarly situated investors. In addition, it acknowledges legitimate reasons behind governmental measures to differentiate among investors and investments on account of the dissimilar circumstances.

The insertion of “like circumstances” in NT obligation may help India to mitigate some of the impacts of its application. Nevertheless, the determination of “like circumstances” is not going to be an easy task as these terms can be interpreted too broadly or narrowly by arbitral tribunals. Regrettably, the new model treaty does not describe the criteria which should be used to determine likeness. Thus, it will be at the discretion of the arbitral tribunals to determine likeness.

Further, the new model clarifies that a breach of NT obligation will only occur if the “challenged measure constitute intentional and illegitimate discrimination against the investment on the basis of nationality.”

In addition, national treatment obligation will only be applicable on measures taken by the central government. The laws and policy measures of state governments and local bodies will be completely exempted from NT obligation under the new model BIT. In the Indian context, this exception is very important to overcome the actual difficulties in implementing NT obligation at the state and local levels. It is well-known that many Indian states treat even domestic investors differently (based on caste, gender and place of residence) in order to meet social, economic and developmental policy objectives. For instance, states like Chattisgarh and Himachal Pradesh offer special advantages – in the form of capital investment subsidy and concessions – only to their local residents and therefore it is unrealistic to expect from such states to implement national treatment obligation.

Furthermore, the new model text clarifies that extension of financial assistance or measures taken by government to favour its investors and their investments in pursuit of legitimate public purpose shall not be considered as a violation of NT commitments.

No MFN Provision

The new model BIT has excluded the MFN treatment provision. This represents a significant improvement over the 1993 model BIT, even though investment chapters of India-Singapore (2006) and India-South Korea (2009) free trade agreements do not contain this provision.

Of late, many governments are getting increasingly concerned over the frequent use of MFN obligation by investors to bypass the investment protection provisions listed under those investors’ BITs (basic treaty). By virtue of the MFN clause in a BIT, a foreign investor can “import” more favorable protection provisions contained in other BITs signed by the host state and use them to bring claims before arbitral tribunals. Hence, the MFN clause creates a de facto multilateralization of investment protection measures.

There are numerous recent instances where foreign investors have frequently invoked broader provisions in other treaties through an MFN clause. They have successfully used the MFN clause to import substantive protection clauses from other BITs on a wide range of matters, ranging from fair and equitable treatment to “umbrella clauses” to “effective means of asserting claims and enforcing rights” to dispute settlement procedures.

To a large extent, India has removed the MFN obligation in the wake of the first investment arbitration award (White Industries Australia Limited v. Republic of India) rendered against it. In July 2010, the White Industries Australia Limited (WIAL) had invoked arbitration against the Indian government under the India-Australia BIT and argued that the judicial delays over the enforcement of its ICC award amounted to a denial of justice in violation of several provisions of the treaty. It specifically argued that India had failed to provide WIAL with “effective means of asserting claims and enforcing rights.” But the India-Australia BIT (1999) does not contain “effective means of asserting claims and enforcing rights” standard or any other obligation dealing with delays in court process. However, this treaty contains the MFN clause which allowed WIAL to import a favourable provision under Article 4 (5) of the India-Kuwait BIT which obliges India to provide “effective means of asserting claims and enforcing rights with respect to investment.” By relying on the MFN clause, WIAL was successful in seeking similar level of protection which Kuwaiti investors are given in India.

No Umbrella and Stabilization Clauses

Another notable exclusion is the so-called “umbrella clause.” Commonly found in investment treaties, umbrella clauses are usually broadly written to provide additional protection to investors. An umbrella clause guarantees compliance with contractual obligations. Under an umbrella clause, a violation of an investment contract between the host state and an investor can be considered as a violation of the BIT. In other words, it can convert a contract claim into a treaty claim. Because of its catch-all nature, umbrella clause has become very controversial in recent years.

In addition, India’s new model BIT does not contain any stabilization clauses which prohibit the host state to unilaterally change the laws and regulations related to an investment project. There are three types of stabilization clauses commonly used in investor-state contracts: “freezing clauses” that “freeze” the laws of the host state applicable on the investment project; “equilibrium clauses” that deal with the financial loss due to changes in law; and “hybrid clauses” which are a combination of freezing and equilibrium clauses.

An Alternative Approach to FET Obligation

Most international investment treaties contain an obligation that the host country would accord “fair and equitable treatment.” There is a growing trend to include FET standard in investment treaties, even in the case of South-South BITs. In the case of India, the FET obligation can be found in almost all investment agreements except the investment chapter of India-Singapore FTA.

Although the concept of fair and equitable treatment of foreign investments can be traced back to the Havana Charter (1948), yet there is still a lack of clarity on the exact meaning of phrase “fair and equitable treatment.” The FET standard usually covers governmental measures and actions that fall outside the scope of other provisions. Due to its undefined and ‘catch-all’ nature, the FET standard has become a favorite among the investor community while tribunals have followed varying interpretations of this standard based on their understanding of fairness and equity. A majority of successful claims in investor-state arbitrations have been centered on the alleged violations of FET standard by the host country.

Since the inclusion of FET standard can leave considerable scope for its wide application and conflicting interpretations, India’s new model treaty makes no mention of this standard in the text. Rather it has adopted an alternative approach to address some of the core components of FET standard such as denial of justice. Article 3 of the new model stipulates:

Each Party shall not subject investment of investors of the other party to measures which constitute:

(i)                 Denial of justice under customary international law;

(ii)               Un-remedied and egregious violations of due process; or

(iii)             Manifestly abusive treatment involving continuous, unjustified and outrageous coercion or harassment.

The Indian government believes that by inserting narrowly defined obligations (such as denial of justice and violation of due process) and adjectives (such as egregious, unjustified and outrageous), problems of wider interpretations by tribunals can be resolved. Besides, it places a higher evidential burden on investors to prove a violation of BIT obligation.

It is noteworthy that the new model BIT explicitly links denial of justice to customary international law which results from a general and consistent practice of states. This is intended to restrict its scope to minimum international standard required by customary international law. The minimum standard of treatment is usually viewed as a “floor” below which treatment of foreign investors must not fall.

In the past, several countries attempted to limit the FET standard by linking it to the customary international law. But the outcomes were not satisfactory as some tribunals adopted the autonomous approach and interpreted the FET standard more broadly than the customary international law.

This is the second in a series of five articles that will analyze the new model text for Indian bilateral investment treaty.

Image courtesy of 123rf.com