Economy

Deconstructing India’s Model Bilateral Investment Treaty

India was one of the most sued countries in 2015. Will the country’s new model bilateral investment treaty attract and safeguard foreign investment more effectively?

Credit: Reuters

In the current, complex environment of domestic and international realities, how India will negotiate its investment treaties is important. Credit: Reuters

India’s efforts to attract and safeguard foreign investment while protecting public interest will be keenly watched in the midst of reforms in international investment agreements.  The country’s new model bilateral investment treaty provides the framework for new negotiations with trading partners such as the US. In addition, India will use the model treaty to renegotiate existing treaties including with several European countries. The country has reportedly terminated several agreements already.

Released in 2015, a few provisions in the model treaty have drawn attention from trade partners. A greater look at this treaty, which will shape investor dispute battles in the future, is clearly necessary.

There have been concerns regarding India’s model treaty and its seemingly protectionist approach that has come to inform this process. Recent reverses including the verdict in the Devas dispute, are also strengthening positions of both  investors and the government. (In the Devas dispute, the government cancelled an awarded contract, when irregularities were found. The investor sued the government and won.)

India has so far signed BITs with 83 different countries. According to UNCTAD, which keeps an account of the number of disputes, a total of 17 known investor-state dispute settlement (ISDS) cases were filed against India by the end of 2015. Of these seven are pending, nine were settled and India lost one case (excluding the recent Devas ruling). India was one of the top 15 most frequent respondent states in 2015 (sued most often). Currently, there are about three cases where India is the home state of claimants. Since arbitrations can be kept confidential under certain circumstances, the actual total number of disputes filed against countries could be higher.

Why should Indian readers care about arbitration between international investors and the government – investor-state dispute settlement (ISDS) as they are known? For one, citizens must demand for transparency on why and how much the government pays to aggrieved investors. Importantly, some of these issues can be dearer than accountability, having implications for public health, for example.

A recent landmark judgement, that favoured a country’s right to protect public health over interests of a tobacco company, will have an immense impact on the way governments can exert policy space. The judgement also exposes in some sense, the limitations of investment treaties. Switzerland headquartered tobacco giant Philip Morris International, claimed that Uruguay’s anti-tobacco law infringed on its intellectual property rights and affected sales. For this, the world’s biggest tobacco company sought to safeguard its interests under the bilateral investment treaty between Uruguay and Switzerland. But Uruguay won the case at World Bank’s International Center for Settlement of Investment Disputes.

In this complex environment of domestic and international realities and compulsions, how India will negotiate its investment treaties is important. There is interest in what the new treaty means, not just for India, but for the Global South in pushing boundaries in investment agreements.  

India’s negotiating abilities

The Wire spoke to a wide range researchers to find out whether India has been able to set its own terms in previous negotiations.  Since countries use model BITs as templates for negotiations, a successful negotiation will generally be one that deviates as little as possible from a proposed model, Wolfgang Alschner, a post-doctoral research fellow in international law at the Graduate Institute in Geneva and the World Trade Institute in Bern said. The textual consistency of a countries’ BIT is a good indicator of how successful a country is in its BIT negotiations, he added.

Alschner and fellow researcher Dmitriy Skougarevskiy, worked on a project where texts of investment treaties are treated as data. It works similar to the plagiarism detection software. This open-access web-based analysis helps policy-makers, practitioners and researchers to gain a deeper, sophisticated understanding of the universe of International Investment Agreements.

Using mapping software, the model compares BITs. “The absence or emergence of consistent patterns then tells us something about bargaining success in negotiations. As one would guess, developed countries are generally more successful than developing countries in achieving consistent treaty networks,” Alschner said.

So how does India fare on this account? “India has actually fared quite well. While one can make an argument that the model it originally chose may not have been in its best interest, it was nevertheless quite successful in aligning its subsequent treaties with its original model. In that sense, India has been a rule-maker rather than rule-taker in many of its BIT negotiations. It remains to be seen, however, how successful India will be in having future BITs or investment chapters conform to its new model BIT,” Alschner said.

How far India will move away from its stated intentions will depend on who it is negotiating with.

Experts say that government may be able to insist on the provisions of the model treaty with some states but perhaps not with all states. In any event, the model treaty is not an absolute document. It may ultimately depend on the bargaining power of the other state, and whether it is capital importing or capital exporting.

“When you are dealing with smaller states, India should have greater weight and should be able to set the terms. With more mature trading partners such as the U.S., this will be more difficult,” Rahul Donde, Senior Associate, Lévy Kaufmann-Kohler, in Geneva told The Wire.

Today India is in a good bargaining position and investors do want to invest in the country. There is optimism that India should be able to set the framework in which these investors can come in, notwithstanding uncertainty around retrospective taxation issues, notably in the Vodafone case.  (In this case, Vodafone bought out Hutchison’s 67 percent stake in its telecom JV in India for about $11 billion in an offshore transaction. In 2012, India retrospectively amended its tax laws to go after capital gains that were made on assets in India.)

Crucial features

What are some of the more contentious provisions in the treaty and what do they mean for India’s trading partners?

‘Definition of investment’, intellectual property and compulsory licenses

In its new model treaty, India has adopted an ‘enterprise-based’ definition of investment which essentially “equates investment, with an enterprise incorporated in the host state”, according to a recent analysis on BITs.

Kinda Mohamadieh, Research Associate, at South Centre, an intergovernmental organisation of developing countries in Geneva, explained “The purpose of having an enterprise-based approach is to narrow the scope of protected investments and reduce the potential liability of the state under ISDS claims.”

India’s earlier model treaty of 1993 had a more expansive ‘assets-based’ definition for investments. The asset-based definition for investment arose several decades ago, from the needs of capital-exporting developed countries to protect their investors in capital-importing developing countries.

Experts such as Nathalie Bernasconi-Osterwalder and Lisa Johnson, have in the past pointed out the problems with an asset-based definition of investment, which means that every kind of asset, moveable and immovable, could qualify as investment and enjoy protection under treaties, irrespective of whether such assets contribute to the development of host countries. This, they say could “unintentionally and/or undesirably grant privately owned investments the same rights and opportunities as government-owned or -operated entities”.

Usually the ‘enterprise-based’ definition of investment is understood to exclude intellectual property (unlike the ‘asset-based’ definition of investment). The enterprise-based approach means that an investor would have to be an incorporated legal entity in compliance with domestic law to qualify as a protected investment. In the Indian model treaty, however, patents of such enterprises are covered, to the extent they are recognized under the Law of the State Party (Article 1.4 [f]).

However, when it comes to the issuance of compulsory licenses (CLs) of patented drugs, the model treaty refers to the standards set by the Trade Related Intellectual Property Rights (TRIPs) Agreement under the World Trade Organization. Article 2.4 [iii] of the model treaty specifically addresses issuance of compulsory licenses consistent with the international obligations of Parties under the WTO Agreement. This means that CLs have been excluded (from being classified as protected investments) provided they are issued in accordance with the WTO agreements.

This may be problematic, not the least because how contentious issuance of CLs by countries like India, have become for Western pharmaceutical companies in recent years. There has been consistent pressure on India from the U.S., among others, to reform its patent laws.

“This means that the investor can invoke the treaty provisions to challenge the issuance, revocation, limitation or creation of compulsory license to the extent they are inconsistent with the WTO Agreement”, Mohamadieh at South Center said.

Donde at Lévy Kaufmann-Kohler said. “This may result in a situation where an arbitral tribunal would have to determine whether the CL has been issued in compliance with WTO law. The tribunal would have to consider and interpret WTO law,” he added. (An earlier version of the model treaty excluded CLs, even if they were issued in accordance to domestic law. This was changed to make it WTO-consistent.)

Another matter that IPR forming the subject matter of investment arbitration has been negligible.  

But some say that the exclusion of CLs from what is deemed investment will not be a problem. “Excluding CLs will not be a problem for the U.S. I would not expect it to be an issue for the US.  The US as well wants to keep the right to issue compulsory licenses in line with WTO rules,” Joost Pauwelyn, Professor of International Law at the Graduate Institute of International and Development Studies in Geneva, and Visiting Professor of Law at Georgetown Law Center told The Wire. (The Trans-Pacific Partnership, Chapter 9, investment, Art. 9.8.5 has a similar treatment of CLs.)

In the negotiations for Trans-Pacific Partnership (TPP) treaty, stronger protection of intellectual property has drawn opposition from critics. There have been concerns that these proposed new standards seek to offer higher protection than the prevailing standards enshrined in the WTO agreement on Trade Related Intellectual Property Rights (TRIPS).

These discussions are important since they seek to set de facto standards for bilateral trade agreements. They could eventually come to influence India’s negotiations with trading partners, experts say. In addition, this has to be seen in the context of India new IPR policy, which indicates that India could become a party to deals such as the TPP where the TRIPS-plus agenda is the norm, experts say.  

Most favoured nation clause

One of the most contentious clauses in BITs has been the one concerning countries that are granted most favoured nation (MFN) status.

Originally, the MFN clause was meant to make sure that, for example, US investors in India are not discriminated as against, say, Chinese investors in India. But it has often been put to use to achieve other ends.

The level of investment protection has varied widely across different bilateral investment treaties in force today. The MFN provision has allowed the linking of different investment treaties; it has allowed foreign investors to choose the provisions of those BITs that have given them the maximum benefits.

Wheeling-and-dealing at the G20 Summit. Credit: Reuters

Wheeling-and-dealing at the G20 Summit. Credit: Reuters

Here’s how. The provision allows investors from country ‘B’ to claim equally favourable treatment that host country A offers in a BIT to investors who come from country X. As a result, the ‘more protective’ standard offered by host state A in any BIT, with any country X, may be invoked by a foreign investor from country B even if the BIT with the home country B entitles them to different or lower levels of protection.

For example, in the White Industries case, the Australian firm ‘imported’ a beneficial provision from the India-Kuwait BIT to claim damages. The Australian investor was unable to enforce an award issued by the International Court of Arbitration against Coal India in Indian courts for nearly a decade. The court, an institution for the resolution of international commercial disputes, is part of the International Chamber of Commerce. The court had ruled in the investor’s favour in a contractual dispute with Coal India.

The Australia-India BIT has a broad MFN provision. The investor argued that India had not provided it with ‘effective means’ to enforce the ICC award. However, it cited an ‘effective means’ provision in the India-Kuwait BIT. The investor argued that a similar standard on effective means was not provided to Australia. In effect, it argued that, India had discriminated against Australia by providing Kuwait with the provision and hence had violated MFN clause in the Australia-India BIT.

India’s model treaty does not have the MFN clause; some say as a direct consequence of the White Industries case.  Not having the MFN provision at all in the model treaty has been seen as a disproportionate reaction, experts say. The MFN, after all, seeks to safeguard non-discrimination in international economic relations. “The MFN is an important guarantee and the absence of it in the model raises a problem in this respect,” Pauwelyn said.  

States reforming or renegotiating some of their treaties have an interest in avoiding the inclusion of the MFN clause, like India did. There are fears that commitments made in treaties with ‘problematic’ provisions may filter through to newer or renegotiated agreements through the MFN clause. This could result in the unintended incorporation of older ‘more protective’ standards from older model treaties that might still be in force at the time the new reformed treaties are put in place, Mohamadieh at South Center said.

Experts are of view that optically it is odd to not have any MFN provision, especially because MFN has been a part of India’s earlier BITs. However, the question of whether India was unjustified in excluding the MFN in its model treaty is not straightforward to answer.

One reason to drop the MFN clause is to address fears of say, US investors, who could use the MFN clause in a potentially new US-India BIT, so that they can invoke “better treatment” in any other BIT that India has concluded previously.

In other words, investors can use MFN as a tool to neutralise any other elements in a new BIT that seek to reduce investor protection, by simply using the MFN to refer to another BIT with stronger investor protection. “This may indeed hamper the ‘legal innovations’ that India is now trying to impose through its new model,” Pauwelyn said.

For example, the new model may define Fair and Equitable Treatment (FET – another clause in the BITs) more restrictively, but if the model includes an MFN clause, investors could still rely on an older FET definition set out in a pre-model BIT that India may still have in place, he explained.

Over the past decade, given the increasing number of disputes, states have become increasingly knowledgeable of investment arbitration. There have been innovations in treaty language inter alia because the number of disputes has gone up.

“One of the innovations in treaty language is variations in the MFN clause, such as to narrow the scope of the MFN clause. While investors can look to other treaties, this pool could be limited. An option could be to exclude certain regional agreements that are favourable to India’s neighbours. These options could have been used in the model treaty,” Donde said.  

India could, for instance, also include MFN and make it applicable in future investment treaties, so as to ensure the trading partner that in the future, if India gives another country any better deal that better deal will also go to it. “Limiting MNF to future treaties would also put to rest the ghosts of old BITs that India may still have in place,” Pauwelyn said.

Therefore getting rid of the MFN may not be the solution, as much as restricting the risk of its broad and unqualified interpretation.  

On the other hand, retaining the MFN in the model treaty and narrowly circumscribing rights of investors, would only encourage investors to look to other BITs and claim protection under the MFN to be treated at par with other investors from other countries. Countries like India, have clearly learned from past experience.

Fair and equitable treatment (FET)

This catch-all clause has been invoked by investors and accounts for majority of successful claims in investment arbitration – unsurprising – given that this broad standard includes governmental measures and actions that fall outside the scope of other provisions. This absolute standard of protection risks overreach in its application, UNCTAD has said.

In the model treaty, Article 3.1 on FET says:  “No Party shall subject investments made by investors of the other Party to measures which constitute a violation of customary international law through: (i) Denial of justice in any judicial or administrative proceedings; or (ii) fundamental breach of due process; or (iii) targeted discrimination on manifestly unjustified grounds, such as gender, race or religious belief; or (iv) manifestly abusive treatment, such as coercion, duress and harassment”.

To counter a broad interpretation and risk misuse, the model treaty links FET to customary international law. Customary international law, rooted in state practice, provides a minimum standard of protection to investors. Every potential breach listed in the provision above (denial of justice, breach of due process etc), requires a violation of customary international law for a claim to be justified.

By linking the FET to international law, it is an effort to give greater scope to regulatory authority of governments as opposed to broad interpretations by investment tribunals, experts say.

But the clause as currently drafted in the model treaty also risks broad interpretation. Biswajit Dhar, Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal University, New Delhi, told The Wire, “FET can indeed be interpreted in a broad manner especially when the government has promised to protect the substantive investments of a foreign investor in the country. The new model treaty has adopted the ‘enterprise-based’ definition. This will protect all the investments made by the affiliates of a foreign company which has invested in India through a single enterprise”.

In some cases, denial of justice may be considered in the context of a FET provision. The model treaty makes is mandatory for foreign investors to first exhaust domestic remedies before pursuing international arbitration.

Approaching domestic courts (exhaustion of domestic remedies) is a requirement in several investment agreements. Arguably, the investor should not have to go through a futile process and should be allowed to proceed directly to an arbitral tribunal. Lawyers say that investors could potentially argue their way out of going through the processes of domestic courts.

Investor obligations and transparency

The model treaty has not only toned down investor obligations, it also abandoned the possibility of India to launch counter-claims against the investor, compared to earlier drafts of the treaty.

For greater protection of the host country interests, it would be useful to stipulate that a breach of the obligations set on the investor would result in the investor losing the benefits of the treaty protections including ISDS and/or would enable the host state to bring a counterclaim against the investor, Mohamadieh of South Center said.

The treaty does ask investors to voluntarily incorporate recognized standards of corporate social responsibility. But experts believe that these provisions are of limited impact given the ‘best-endeavor’ and voluntary nature of the language used.

Some believe that investment treaties are not about investor obligations. “It is not usually in the architecture of an investment treaty to impose obligations on investors. The objective of an investment treaty is generally to encourage investment flows. The focus is on the mutual benefit of both countries as a result of investment flows. The investors of both countries have reciprocal protection,” Donde said.

A state could impose obligations on investors in specific sectors under domestic law, without imposing conditions en masse on all investors, he suggested. To be sure, an investment made in violation of the host-state’s law will not enjoy protection. 

On transparency, the model treaty has a provision on transparency in arbitral proceedings (Article 22). Given both the White Industries case and the recent Devas dispute, there will be pressure on the government to be transparent about why and how the government has attracted investor claims.

  • Nishant

    Very informative article , thank you