Remodeling India’s Investment Treaty Regime (III)

By Kavaljit Singh | Commentary | November 9, 2016

On the interpretation of the standard for fair and equitable treatment, India’s joint interpretative statement clarifies that the concept of FET “does not require treatment in addition to or beyond that what is required by the customary international law minimum standard of treatment of aliens, and does not create additional substantive rights.” The minimum standard of treatment of aliens is a norm of customary international law which provides a minimum set of principles for states to respect while dealing with foreign nationals and their property.

The JIS points out that a measure shall constitute a violation through customary international law minimum standard of treatment only in case of:

  • Denial of justice in any judicial or administrative proceedings;
  • fundamental breach of due process; or
  • targeted discrimination on manifestly unjustified grounds, such as gender, race or religious beliefs; or
  • manifestly abusive treatment, such as coercion, duress and harassment.

The statement further clarifies that the FET standard does not require compensation for following measures taken for the pursuit of public policy objectives:

  • protection or improvement of natural resources and the environment;
  • protection or improvement of human, animal or plant life or health;
  • protection or improvement of human capital, conditions of work and human rights;
  • protection or improvement of economic conditions and the integrity of the financial system;
  • implementation of fiscal policy measures, including taxation.

The JIS defines “measures” as new laws and regulations, amendments to existing laws and regulations and changes in interpretation and application of existing laws and regulations.  According to the JIS, the law of the Contracting Party means “the law that a domestic court or tribunal of proper jurisdiction would apply in the same case.”

On the issue of full protection and security to investors, the statement specifies that “the obligation to provide full protection and security extends only to the physical security of the investor and to its investments and does not impose any other obligation whatsoever.”

Effective Means of Asserting Claims and Enforcing Rights: The note on interpreting “effective means” obligation explains that normal delays in judicial or administrative proceedings do not violate this obligation. Further, it points out that a breach of this obligation will only occur if the investor has exhausted all the available domestic remedies.

In the Indian context, these explanations are very important as the White Industries Australia Ltd. vs India arbitral award (2011) ruled that White Industries was denied “effective means of asserting claims and enforcing rights” with respect to its investments in India. The award held India liable for damages over enforcement delay of an ICC award between White Industries and Coal India (a state-owned entity) by the Indian courts.

Umbrella Clauses: On obligations related to umbrella clauses, the JIS clarifies that any written contract between a Contracting Party and an investor does not include acts by governmental, administrative or judicial authority and therefore an investor should pursue relief remedies available as per the dispute resolution procedures mentioned in the underlying contract. The JIS states that an investor can only pursue dispute resolution under BIT “in the absence of the contractually specified procedure, or if no procedure is specified, in the absence of the normal local judiciary remedy.”

National Treatment and Most-Favored Nation Clauses: The JIS declares that the MFN obligation is not intended to alter the Treaty’s substantiate content by allowing import of provisions found in other treaties. It further points out that the MFN obligation will not apply to the mechanism for settlement of investment disputes.

On national treatment obligation, the statement calls for a comparison between investors and investments that are in “like circumstances” and thereby requiring a case-by-case examination of all factors including the sectors, operations of investors, legal and regulatory regime, and actual and potential effects of the investments on third persons, local community and national environment.

Expropriation: After differentiating direct and indirect expropriation, the text states that a measure having an effect equivalent to nationalization or expropriation requires a case-by-case, fact-based inquiry, considering various factors including whether:

  • the measure resulted in total or near total and permanent destruction of the value of the investment;
  • the measure deprived the investor of its rights of management and control over its investment; and
  • there is an appropriation of the investment by a Contracting Party which results in transfer of the investment to that Contracting Party.

Furthermore, it clearly spells out that legislative, executive, regulatory, administrative or judicial measures or actions taken by a Contracting Party for the pursuit of public policy objectives shall not constitute expropriation. The public policy objectives listed under this section are the same as listed above for FET obligations.

Essential Security Interests: The statement clarifies that measures taken by Contracting Party for protection of essential security interests shall not be open to review by any arbitral tribunal.

Investor-State Dispute Settlement: In order to establish the existence of a dispute under ISDS, the joint interpretative statement puts the burden on the investor to demonstrate whether it has suffered actual and non-speculative damages as a direct consequence of breach of treaty obligations. It further states that “nothing in this Agreement shall be interpreted to constitute a waiver or limitation of any rights or defenses of either of the Contracting Parties under international law, including rights to regulate within their respective borders, and abilities to invoke defenses, force majeure and sovereign immunity.”

Finally, the joint interpretative statement points out that any interpretation of a BIT, jointly agreed to and issued by the Contracting Parties, shall be binding on arbitral tribunals.

At the time of writing, the response of 25 countries – which were approached by India to sign the JIS for clarifying ambiguities in the existing treaty texts – is not yet publicly known.