The Government of India (“GOI“) has recently published a draft “Model Text for the Indian Bilateral Investment Treaty” (“Model BIT“), which is understood to be intended to revise India’s model bilateral investment treaty of 1993 and to serve as a framework for the renegotiation of India’s over 80 bilateral investment treaties (“BITs“) which are currently in force. The GOI has asked for public comments on this Model BIT by 10 April 2015.
There are a number of significant features in the Model BIT that appear to be reactions to the BIT claims that India has been faced with over the last few years. These include the only concluded BIT case against India, namely the White Industries award of 2012 (discussed here), in which a BIT tribunal found against the GOI on the basis that delays in enforcing an international arbitration award through the Indian court system had amounted to a breach of its obligation to provide investors with an “effective means of asserting claims and enforcing rights” (which obligation had been imported into the relevant India-Australia BIT from the India-Kuwait BIT using the most favoured nation (“MFN“) provisions of the former). More recently, the GOI has faced several claims relating to retrospective changes to its tax legislation in 2012 (e.g. the Vodafone case).
In this regard, and perhaps unsurprisingly, many parts of the Model BIT appear to be framed as an attempt to limit protections afforded to inbound investors into India, rather than ensuring the protection of outbound Indian investors into overseas markets. Several of the provisions appear to be squarely aimed at preventing repeats of these previous claims; for example, the absence of an MFN clause, and specific exclusions of claims based on taxation or the provision of non-commercial services by the host state.
On the other hand, various portions of the lengthy draft, such as the detailed provisions prescribing the contents of a Notice of Claim and Notice of Arbitration under the Investor-State dispute settlement (“ISDS“) provisions, and the provisions on arbitrator independence and challenge, appear to be attempts to incorporate aspects of the current debate around ISDS in the TPP (“Trans-Pacific Partnership“) and TTIP (“Transatlantic Trade and Investment Partnership“) as a template for more explicit treatment of such matters in future BITs.
Interesting elements of the Model BIT proposed by the GOI include:-
- Limiting acts of “Government” that may be impugned only to acts of Central and State Governments (Art 1.3), and excluding any claims based on measures by local bodies (Art 16.3). Even the protection of “National Treatment” (see below) is stated not to apply to laws or measures of regional or local government (Art 4.3).
- A narrow definition of “Investor” to exclude entities which do not have real and substantial operations in the Home State (Art 1.9). “Investment” is also restrictively defined and explicitly excludes interests in government issued debt, court judgments or arbitral awards, and holding companies or investment companies (Arts 1.6-1.8).
- Explicitly excluding from the scope of the Model BIT “any taxation measure” (Art 2.6(iv)), as well as “services supplied in the exercise of governmental authority … which [are] supplied neither on a commercial basis nor in competition with one or more service suppliers” (Art 2.6(iii)), which presumably includes a national court system. Also excluded are any disputes under investment agreements entered directly between the Investor and the Host State; claims under those agreements may not be brought as breaches of the Model BIT (i.e. excluding “umbrella claims“).
- The “Standard of Treatment” qualifying investments can expect to receive is limited to protection from (i) “Denial of justice under customary international law“, (ii) “Un-remedied and egregious violations of due process“, and (iii) “Manifestly abusive treatment involving continuous, unjustified and outrageous coercion or harassment” (Art 3.1). The Model BIT avoids the more traditional and general protections of “fair and equitable treatment” and “full protection and security” found in many other BITs.
- “National treatment” protection is afforded such that Investors are to be treated no less favourably than domestic investments “in like circumstances“; thus “intentional and unlawful discrimination” is prohibited on the basis of nationality (Arts 4.1-4.2), although this does not apply to acts of regional or local government (Art 4.3), or to any exercise of “discretion” regarding whether and how to enforce, or not enforce, a particular law against a foreign or domestic investor (Art 4.4).
- “Expropriation” is prohibited save for “reasons of public purpose” and where that expropriation is in accordance with the law, and “payment of adequate compensation” is made (Art 5.1). The Model BIT sets out in some detail what may amount to expropriation, and how any tribunal should assess appropriate compensation and take account of mitigating factors in its calculation.
- Express obligations on Investors are set out in the Model BIT regarding corruption (Art 9), disclosures and maintenance of records (Art 10), payment of taxes (Art 11) and compliance with the law of the Host State (Art 12). All such obligations are conditions precedent to claiming benefit under the Model BIT (Art 9), and investors are required to “demonstrate compliance” with the provisions in any Notice of Dispute served under the ISDS provisions (Art 14.3(iii)).
Significant features of the ISDS provisions of the Model BIT include:-
- Exhaustion of local remedies which must be commenced within 1 year of the date the Investor knew, or should have known, of the Measure in question and knowledge of the damage to the Investment (Art 14.3). It is worth noting that the current draft does permit the abandonment of local remedies where to continue to pursue them would be futile (such as where no domestic remedies are available, or there is no reasonable possibility of a remedy within a “reasonable period of time”).
- A detailed Notice of Dispute to be served within 18 months of the “conclusion” or “abandonment” of domestic proceedings, or 3 years from the claim arising (Arts 14.3(iii) & 14.4), followed by a 1 year cooling-off period during which the parties must use their “best efforts” to try to resolve the dispute amicably through “meaningful consultation, negotiation or continued pursuit of any available domestic remedies or solutions” (Art 14.3(iv)).
- 90 days before submitting any claim to arbitration, the Investor must serve a detailed “Notice of Arbitration” including an identification of the specific breaches of the treaty protections alleged, and a calculation of the amount of damages claimed as a result (Art 14.4(i)(B)).
- Arbitration before a 3 person tribunal under UNCITRAL Rules, where the tribunal shall give “special consideration” to a seat in the capital city of the Host State (Art 14.7).
- A presumption of Transparency whereby the Respondent state shall make available to the public the Notice of Arbitration, and all pleadings, transcripts, orders and awards, save where specific steps are required to protect confidential information (Art 14.8). This presumption extends to holding hearings for argument and the presentation of evidence in public (Art 14.8(ii)).
- The model includes a provision at Art 14.11 allowing for the state party to make a counterclaim against an Investor for breach of Articles 9, 10, 11 or 12 (Corruption, Disclosure, Taxation and compliance with Host State Laws). The question of tribunal jurisdiction over state counterclaims under BITs has been a matter of debate and disagreement in a number of treaty cases (such as in Spyridon Roussalis v. Romania, Goetz v. Burundi and Al Warraq v Indonesia) and it is interesting to see it being explicitly addressed through drafting.
The above selection from the Model BIT demonstrates the extent to which the draft seeks to depart from more common BIT provisions. It is particularly interesting to consider this new draft model in the context of the recent leaked draft investment chapter of the TPP which is heavily based on the 2012 US Model BIT and the CETA text negotiated between the EU and Canada. It is bound to spark debate regarding how far the resultant provision may offer meaningful protection and encouragement for foreign direct investment into India, and also suitable bilateral protections for Indian investors investing into counterparty states. The latter concern is not insignificant as Indian corporates, including public sector undertakings, continue to expand and look to invest into new, and sometimes challenging, overseas jurisdictions. The debate will no doubt continue after the 10 April 2015 deadline set by the GOI for comments on the Model BIT.
For more information, please contact Nicholas Peacock, Partner, Jennifer Hartzler, Associate, or James MacKinnon, Associate, or your usual Herbert Smith Freehills contact.