Decoding India’s New Model BIT (IV)
India’s new model BIT contains binding obligations on investors concerning their conduct in the host state. The mandatory obligations on investors and home state were completely missing in the existing model as well as previously concluded BITs by India. This is a new approach adopted by India to address the balance of rights and responsibilities of investors because Indian BITs usually do not impose obligations on the part of foreign investors or the home state.
The new model states that the provisions on investors’ obligations have been introduced to ensure responsible business conduct by investors besides enhancing the contribution of investments to “inclusive growth and sustainable development of the host state.”
The inclusion of investor obligations is very significant because these provisions are in addition to Article 1.2 which states that that an enterprise must be “constituted, organized and operated in compliance with the laws of the host state.” It is worth noting that the compliance with investors’ obligations is mandatory and any breach of these obligations may invite regulatory or legal action by the host country.
Article 9 specifically deals with obligations against corruption. It clearly states that investors should not offer, promise or give bribes to public servants in the host state as an inducement or reward for doing or forbearing to do any official act. It specifies that unless otherwise allowed by law, investors should not engage firms to lobby on their behalf. It further bars investors from making illegal contributions to political parties and candidates for public office. However, the text does not contain any reference to anti-corruption guidelines issued by UN and other international institutions.
Article 10 requires investors to comply with host country laws to disclose information regarding their activities, financial situation, performance, related party transactions, ownership, and governance structures. If required, investors will have to disclose sources and channels of funds by submitting “documentary evidence establishing the legitimacy of such funds.” It also provides a list of information on operational matters which should be developed by investors, even if not required by the laws of the host state.
Article 11 makes it mandatory for investors to comply with the tax rules of the host state.
Article 12 calls for compliance with laws of the host state. It provides a list of laws to be complied by investors which include laws related to: payment of wages and minimum wages, employment of contract labour, prohibition on child labour, environment protection and conservation of natural resources, human rights, consumer protection and fair competition.
Further, it states that investors “should recognize the rights, traditions and customs of indigenous people of the Host State and carry out their operations with respect and regard for such rights, traditions and customs.”
Despite these positive features, the new model makes no reference for establishing a mechanism to address complaints of misconduct by investors. Such a mechanism is highly desirable from the perspective of citizens and communities adversely affected by an investment project (owned or controlled by foreign investors) to file complaints and seek redressal of their grievances.
Lastly, India has also introduced obligations on the home state in the new model BIT. Article 13.1 allows legal actions against investors in their home states for their misconduct which results in significant, damage, personal injuries and loss of life in the host state. The text explicitly mentions that the home state is obliged to ensure that its laws enable efforts to pursue legal actions against investors in their domestic courts.
Investor-State Dispute Settlement: Exhaustion of Local Remedies
The investor-state dispute settlement system was created fifty years ago to give protection to foreign investors against arbitrary behaviour of host states. However, in practice, this system displays structural deficiencies as numerous cases have been filed against a wide range of policy measures (related to health and safety, environment and taxation) that may have an adverse impact on a foreign investment. The growing number of arbitration cases has brought the ISDS system under the spotlight.
India’s new model BIT contains investor-state dispute settlement provisions which allow investors to initiate international arbitration with states over treaty breaches. However, access to investor-state dispute settlement mechanism has been made conditional on the exhaustion of local remedies. In other words, the investor will have to first approach the relevant domestic courts or administrative bodies of the host state for the resolution of an investment dispute. If no satisfactory resolution is reached after exhausting all local remedies or if the investor can prove that continued pursuit of domestic relief would be futile because of non-availability of domestic legal remedies or undue delays, the investor can commence international arbitration under the Treaty by issuing a notice to the host state. The investor will have to submit a claim within one year from the date of measure in question.
This is an entirely new approach adopted by the Indian government to plug loopholes embedded in the current ISDS system of country’s BITs which provide recourse to both international arbitration and domestic courts. The India-UAE BIT (2013) is the only exception which contains the so-called “fork-in-the-road” clause under which an investor can choose to pursue a claim either in domestic courts of the host country or international arbitration. The choice of any of these two options shall be final.
The new model provides a mandatory ‘cooling off’ period of one year during which both parties would engage in consultations to resolve the dispute. If the dispute cannot be resolved through consultations within this time period, the investor can submit a claim to international arbitration under the Treaty with the following conditions:
- The investor will have to issue a notice of arbitration to the host country at least 90 days before submitting a claim to international arbitration. This condition is important as there are multiple instances where investors did not give the host country any notice at all or very short notice of its claim before commencing arbitration.
- The investor will have to initiate international arbitration within three years from the date of measure in question or within 18 months from the conclusion of domestic proceedings.
- No claim shall proceed unless the State Parties have given consent for the submission of the claim to arbitration.
- No parallel dispute settlement proceedings would be pursued by the investor.
Further, limits on the jurisdiction of arbitral tribunals have been introduced. For instance, a tribunal cannot re-examine any legal issue settled by judicial authority of the host state. Nor can it review the merits of a decision made by a judicial authority. These provisions have been incorporated to avoid the challenging of judicial pronouncements (à la 2G telecom scam) and the conduct of Indian courts before an arbitral tribunal.
Interestingly, the new model also allows the State Parties to initiate a counterclaim against the investor for a breach of obligations related to corruption, disclosures and taxation matters before an arbitral tribunal. The host state can seek monetary compensation or enforcement action from foreign investors for breach of such obligations.
Unfortunately, there is no mention of an appeal mechanism under which the decisions taken by the arbitral tribunals can be subject to review through an appellate mechanism. Recently, the EU has proposed such mechanism in its ongoing discussions on ISDS under the Transatlantic Trade and Investment Partnership (TTIP) and some developing countries are also exploring this provision in their future BITs.
In addition, the Indian government should have incorporated the “loser pays” principle in the new model text in order to discourage frivolous claims brought by investors under the ISDS system. It is also desirable to introduce strict disclosure norms on third party funding to enhance ethical standards, as third party funding is increasingly becoming a norm in international investment arbitration.
This is the fourth in a series of five articles that will analyze the new model text for Indian bilateral investment treaty.
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