Indian Government launches international research project on the impact of Bilateral Investment Treaties on investment flows from/to the country

India entered into its first bilateral investment treaty (BIT), with the United Kingdom, in 1994, as part of a strategy to attract inbound foreign direct investment (FDI).  Having begun to open its economy in the 1990s, India today is a major investment destination.  The Modi government has been keen to attract further investment, including with its “Make in India” campaign.

However, in recent years, a variety of events has led to India being the recipient of a large number of claims by investors under BITs. By 2016, India was one of the most frequently-named respondent states in BIT proceedings.  Following its first loss in a BIT arbitration in 2011 (the White Industries case, discussed here.  Note: India has recently won its first BIT case, discussed here), the stance of the Indian government towards BIT protections for inbound investors appeared to harden, leading it to send notices in 2016 to terminate BITs with 58 countries, including 22 EU countries (discussed here).  This followed its publication of a new 2015 Model BIT (discussed here).  For the remaining BITs not cancelled in 2016/2017 (seemingly because they were within their initial terms), India has circulated a proposed joint interpretative statement to the counterparties to these BITs seeking to align the ongoing treaties with its 2015 Model BIT.

There are no known instances of states agreeing to a new treaty based on India’s 2015 Model BIT, although it was reported last year that the Indian government had approved a joint interpretative note to apply to India’s BIT with Bangladesh

In the meantime, the Indian government, through the Centre for Trade and Investment Law (CTIL), a think-tank established in 2016 by the Ministry of Commerce and Industry, in collaboration with Dr. Rishab Gupta, Partner, of Shardul Amarchand Mangaldas & Co., has instituted a survey on experiences and attitudes towards BIT protections, and their importance to FDI flows into and out of India.  This outbound element is an important aspect of the analysis as Indian businesses are increasingly involved in FDI outside India, and may wish to take advantage of BIT protections over their investments.

A link to the survey can be found below, which we understand will remain active until the end of October 2018. The survey contains 10-12 questions which vary depending on the initial answers regarding the location and type of entity responding.

http://survey.sogosurvey.com/r/r1ocQs

The outcome of the questionnaire together with the rest of the study results are scheduled to be publicly released by the end of 2018. All stakeholders with experience of or insight into the BIT regime applicable to India are encouraged to participate.

For further information, please contact Nicholas Peacock, Head of the India Disputes Practice, or your usual Herbert Smith Freehills contact.

Nicholas Peacock
Nicholas Peacock
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China-related investment arbitrations: three recent developments

The last two months have delivered three notable developments in China-related investment arbitrations.  In addition to the third known claim to be lodged at ICSID against the People's Republic of China (PRC), two recent and potentially inconsistent decisions in claims by PRC investors have raised questions as to the scope of protection under PRC bilateral investment treaties (BITs).

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Recent developments in India-related international arbitration

Herbert Smith Freehills has issued the latest edition of its Indian international arbitration e-bulletin. In this issue we will consider Indian court decisions, including the arbitrability of allegations of fraud and non-arbitrability of trust disputes by the Supreme Court. We have also considered various decisions in which the Delhi High court shows restraint in relation to interfering with offshore arbitrations, while also making decisions that demonstrate the observance of formalities by the court which could be construed as not pro-arbitration, including refusing to enforce an arbitration clause in an unsigned agreement. In other news, we consider the rise of institutional arbitration in India and India-related bilateral investment treaty news. Further, we discuss the imminent launch of a new edition of our Guide on India-Related Contracts Dispute Resolution.

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Live audio webinar: Protecting your investments from political risk in a volatile world – 21 June 2017 – 1.00pm UK time

In this webinar, we will offer a disputes perspective on how to protect your investments from political risk in the current economic and political climate. Disputes lawyers are often brought on board when things have already gone wrong, tasked with limiting the fallout, managing a crisis or resolving a dispute formally or informally. However, we know what can go wrong and can therefore offer insight into what might have been done at the outset to reduce the chance of a dispute arising in the first place. We know what we need to build a solid claim and what would or could have made our client’s position in any dispute stronger.

In this webinar our panel will explore what we mean by “political risk” before looking at ways that risk can be mitigated. The topics our speakers will explore include:

  • Looking beyond the transaction: protecting your future position whilst negotiating
  • Contractual protections
  • Investment structuring to benefit from investment treaties
  • Political risk insurance: coverage, wordings and maximising policy response
  • Steps to protect yourself when an investment turns sour

Finally, we will talk through some practical points which can really aid a client’s position if and when a dispute does arise.

Speakers:

Andrew Cannon, Partner, International Arbitration, Paris

Sarah McNally,  Partner, Insurance Disputes, London

Iain Maxwell, Of Counsel, International Arbitration, London

To register for this event please click here.

Andrew Cannon
Andrew Cannon
Partner
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Sarah McNally
Sarah McNally
Partner
+44 20 7466 2872
Iain Maxwell
Iain Maxwell
Of Counsel
+44 20 7466 2646

 

 

 

ICSID issues first award involving China as Respondent, finding in host state’s favour

In an award dated 9 March 2017, the Tribunal in an ICSID arbitration between Korean investor Ansung Housing Co., Ltd and China dismissed all claims as time-barred. The Claimant's attempt to circumvent the limitation period by relying on the most favoured nation (MFN) clause did not succeed. The Tribunal came to this conclusion at an early stage of the proceeding, "with relative ease and despatch".

This is the first ICSID arbitration to involve China as the respondent state that has proceeded to a substantive hearing and resulted in an award.

See our previous blog on the case here

Click here for a copy of the Award.

Read more


 

Background

The dispute related to the Claimant’s investment in a golf course and condominium development project in Jiangsu Province, China. On 12 December 2006, Ansung entered into an Investment Agreement with the local government, relating to a two-phase development of an 18-hole golf course and related facilities. In the course of 2007, Ansung observed a competing golf course nearby under construction and felt reluctance from the local government to grant Ansung the land necessary for the second phase of its development. Various rounds of communications took place between 2008 and 2011, but Ansung was not granted the land required for phase two, despite phase one having been completed. By mid-2011, it became clear that the local government would not honour its obligations under the Investment Agreement and Ansung would not be able to repay its loan without sufficient returns from its investments. In October 2011, Ansung was forced to dispose of all its assets at a significant loss, in order to avoid further losses.  On 17 December 2011, Ansung entered into a share transfer agreement for the purpose of the disposal, which was completed on 19 December 2011.

The dispute was submitted to ICSID under the Agreement between the Government of the Republic of Korea and the Government of the People’s Republic of China on the Promotion and Protection of Investments that entered into force on December 1, 2007 (BIT) and the ICSID Convention. Ansung submitted the Request for Arbitration electronically on 7 October 2014 and physically on 8 October 2014. The Secretary-General of ICSID registered the Request on 4 November 2014.

Limitation period

China filed an objection under Rule 41(5) of the ICSID Arbitration Rules, asserting that the Claimant’s claim was "manifestly without legal merit". Article 9(7) of the BIT bars an investor from making a claim if more than three years have elapsed from the date on which "the investor first acquired, or should have first acquired, knowledge that the investor had incurred loss or damage". China submitted, with authority, that the starting point for the purpose of limitation period is when the investor has knowledge of the fact of loss, not knowledge of the quantum of such loss. Ansung necessarily knew that it had incurred loss prior to the disposal of its investment in October 2011. The completion date of the transfer, when the quantum crystallised, is irrelevant. Ansung's claim was not registered by ICSID until 4 November 2014. China therefore argued that Ansung submitted the arbitration more than three years after it first acquired knowledge that it had incurred loss or damage, rendering the claim time-barred under Article 9(7) of the BIT.

The Tribunal agreed that Ansung must have known, well before October 2011, that its golf course project had suffered loss. Indeed, as the Claimant itself repeatedly pleaded, the purpose of the October 2011 disposal was to "avoid further losses". The Tribunal did not agree with Ansung's attempt to characterise 17 December 2011 as the date on which time started running, as that was the time when Ansung crystallised its loss, not the first date on which it knew it was incurring loss. The Tribunal also held that the day on which the Request for Arbitration was submitted, i.e. 7 or 8 October 2014, was the date on which Ansung made its claim for the purposes of tolling the limitation period. The Tribunal rejected China's argument that the relevant date was the date on which ICSID registered the claim, as that date is out of the control of the Claimant.

Taking all of this into consideration, the Tribunal concluded that the three-year limitation period had elapsed, and the claim was therefore "manifestly without legal merit".

MFN Clause

In the alternative, Ansung argued, the MFN Clause in Article 3(3) of the BIT saved the claim from being time-barred. Ansung contended that Article 3(3), which allows investors to import substantive rights from other treaties, should be interpreted to include procedural protections and rights in relation to dispute settlement procedures. The investment and business activities under Article 3(3) include "expansion, operation, management, maintenance, use, enjoyment, and sale or disposal of investments" as well as admission of investment. Ansung submitted that most Chinese BITs do not have any limitation period provisions, and that it should therefore enjoy the more favourable protection in such BITs to be free from the restriction of the three-year limitation period.

The Tribunal held that, upon a plain reading, Article 3(3) of the BIT does not extend to a state's consent to arbitrate with investors. The Tribunal considered that the limitation period in Article 9(7) pertains to the state's consent to arbitration, as a matter of international law. The Tribunal also drew a comparison with Article 3(5) of the BIT, which specifically extends MFN protection to an investor's access to domestic courts of justice, administrative tribunals and authorities. In marked contrast, such express reference to international dispute resolution is "conspicuously absent" in Article 3(3) of the BIT.

Consequently, the Tribunal did not consider that Article 3(3) of the BIT assisted Ansung in preventing its claim from being time-barred.

Award

The Tribunal was able to determine that China had established its Rule 41(5) objection "clearly and obviously, with relative ease and despatch" and its determination proved not to be "difficult". Even accepting the facts as pleaded by the Claimant to be true, the Tribunal found the claim was time-barred under Article 9(7) of the BIT and not protected by operation of the MFN clause. As such, the Tribunal found the claim to be "manifestly without legal merit" under the ICSID Arbitration Rules, Rule 41(5).

Having found in China's favour, the Tribunal awarded China its share of the direct costs of the proceeding, in the amount of US$69,760.55, plus 75% of its legal fees and expenses, plus interest.

The Tribunal consisted of Prof Lucy Reed (President), Dr Michael Pryles and Prof Albert Jan van den Berg.

Comment

Whilst each investment arbitration claim is particular to its underlying BIT, the limitation language in Article 9(7) of the BIT is reflected in a number of other bilateral investment treaties, including other Chinese treaties. In this case, the Tribunal held that time starts running when the investor first knows of the fact of its loss, not the quantum of such loss. This decision serves as a reminder to involve legal advisors early in any potential investor-state dispute, not least for the purpose of preserving the claim against any applicable limitation period.

Ansung also raised the hotly-debated question of whether MFN clauses extend to the dispute settlement provisions in BITs. ICSID tribunals in previous cases have accepted that applicability of the MFN clauses to dispute settlement concerned procedural obstacles, such as the requirement to resort to domestic courts for 18 months before instituting arbitration (see e.g. Siemens v Argentina, cited by Ansung). In the current case, the Tribunal viewed the limitation period as part of the state's consent to arbitrate. The Tribunal also contrasted Article 3(3) of the BIT (silent on the issue of international dispute resolution) against Article 3(5) of the same treaty, which expressly states that the investor is entitled to MFN treatment in terms of domestic dispute resolution.

This is the first ICSID arbitration to involve China as the respondent state that has proceeded to a substantive hearing and resulted in an award. However, it is not unlikely that we will see more treaty arbitrations involving Asian states in future, as disputes begin to arise out of the numerous inbound and outbound Asia-related transactions that have taken place over the last decade, and going forward.

Laurence Shore
Laurence Shore
Partner
+1 917 542 7807
May Tai
May Tai
Partner
+852 2101 4031
Brenda Horrigan
Brenda Horrigan
Partner
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Jessica Fei
Jessica Fei
Partner
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Peter Chen
Peter Chen
Associate
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Mixed messages to investors as India quietly terminates bilateral investment treaties with 58 countries

The Government of India says it has sent notices to terminate bilateral investment treaties (BITs) with 58 countries, including 22 EU countries.  It has been reported that many of these BITs will cease to apply to new investments from as early as April 2017. The BIT between India and The Netherlands (which had been a common route for investment into India) has already been terminated from December 2016.  Termination of the BITs would also remove protection for new investments by Indian investors into the counterparty countries. For the remaining 25 of its BITs that have not completed their initial term, and so are not ripe for termination, India has circulated a proposed joint interpretative statement to the counterparties to these BITs seeking to align the ongoing treaties with its 2015 Model BIT.  While investments made before the termination of the 58 treaties may be protected for some years under the ‘sunset’ clauses in those BITs, India’s actions send mixed messages at a time when the Indian government is making renewed efforts to attract inbound investment with its ‘Make in India’ campaign, and when outbound investment by Indian companies continues to increase into both developed and developing economies.

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Urbaser v. Argentina and Burlington v. Ecuador: Investment arbitration is not over the counterclaims yet

Two recent decisions by tribunals have advanced the body of tribunal practice considering the issue of counterclaims by respondent states in investment treaty arbitration: Burlington Resources Inc. v. Ecuador, in which the tribunal awarded damages against the investor for breach of Ecuadorian environmental law in the performance of its investment, and Urbaser SA and Consorcio de Aguas Bilbao Bizkaia v. Argentina, in which the tribunal accepted jurisdiction to hear Argentina's counterclaim asserting that the investor had violated international human rights obligations. These decisions arise in the context of conceptual challenges to the pursuit of counterclaims in investment arbitration.

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New dispute resolution rules for foreign investors in South Africa

South Africa’s draft regulations for investor-state mediation require refinement to work effectively with international arbitration.

Interested parties have until 28 February 2017 to comment on draft Regulations on Mediation Rules (Regulations) published by South Africa’s Department of Trade and Industry (DTI) on 30 December 2016, under the Protection of Investment Act, 2015 (Act).

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India seeks to re-negotiate Bilateral Investment Treaties with over 47 countries

As we previously reported in April 2015 and January 2016, the Government of India ("GOI") published a draft Model Text for the Indian Bilateral Investment Treaty ("Model BIT") to serve as a framework for the renegotiation of India's bilateral investment treaties ("BITs") worldwide.  This appeared to be a response to the BIT claims that India has been faced with over the last few years, including the decision against India in the White Industries award of 2012, in which a tribunal hearing a claim under the India-Australia BIT held against the GOI by importing provisions found in the India-Kuwait BIT (reported here).

The GOI is now reported to have taken a further step, by making contact with counterparts in 47 countries to re-open negotiations of their BITs with India on the basis of the Model BIT. 

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Recent Developments in India-related international arbitration

Herbert Smith Freehills has issued the latest edition of its Indian international arbitration e-bulletin.

In this issue, we consider Indian court decisions on the arbitrability of fraud and the enforceability and execution of a foreign award against a “sick” Indian company.  We also provide updates on changes to India’s legislative framework for dispute resolution and on recent news about BIT and other treaty claims against India.

For further information, please contact Nicholas Peacock, Head of India Arbitration Practice, Alastair Henderson, Managing Partner-SE Asia, Donny Surtani, Senior Associate, or your usual Herbert Smith Freehills contact.

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