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By Pieter Bekker, Kushal Gandhi and Jessica Foley
In a significant move for India’s trade and investment agenda, the Government of India has approved the text of the new Indian Model Bilateral Investment Treaty (“Model BIT”). The Model BIT will form the basis for India’s future treaty negotiations, including the renegotiation of some of its 83 existing BITs and progressing discussions on a U.S.–India BIT, which have been ongoing since 2009.
BITs are international, reciprocal agreements that promote and protect investments made in one signatory state by nationals of the other. They set out the terms of investment and the rights of foreign investors who, in the event of breach of the BIT, may bring an arbitration claim against the host state. The first BIT ruling against India in the 2011 White Industries case prompted a number of aggrieved foreign investors to bring claims against the Government of India and raised questions about the effectiveness of India’s 2003 Model BIT in balancing the rights of investors and the obligations of the state.
In March 2015, the Government published the draft text of a new Model BIT (the “Draft Model”), following which the Law Commission of India (“LCI”) made various detailed suggestions. The final text of the Model BIT adopts a number of these suggestions but also fails to address certain issues highlighted by the LCI, which could limit the effectiveness and practicality of the Model BIT’s provisions.
The following summary highlights the key aspects of the Model BIT.
The Draft Model adopted an “enterprise-based” definition of investment, which would have limited the Model BIT’s scope to investors with a “substantial and real business presence in India” which are “under the actual control of foreign investors.” The final text contains a broader definition of investment that removes the requirement of control and requires instead that the enterprise operating in the host state (together with its assets) has the “characteristics of an investment,” with a non-exhaustive list of examples given in the text. The definition also includes a non-exhaustive list of assets which a covered enterprise may possess. These changes address the LCI’s concern that the original definition could have increased the likelihood of investors restructuring their businesses in order to fall within the scope of the BIT. The revised definition should make the Model BIT more appealing to potential counterparty states who are alive to the risk of “treaty shopping.”
Fair and Equitable Treatment (FET) provisions are a common feature of BITs and protect foreign investors against host state interference with the investor’s legitimate expectations. The Model BIT lacks an FET provision and instead includes a “Treatment of Investments” provision, which imposes an obligation on the contracting states not to subject foreign investments to measures that “constitute a violation of customary international law” through i) denial of justice, ii) fundamental breach of due process, iii) targeted discrimination on manifestly unjustified grounds, or iv) manifestly abusive treatment. As such, the provision incorporates elements of both FET and the guarantee against arbitrary or discriminatory measures commonly found in BITs. In the Draft Model, the requirement to establish a violation of international law was linked to establishing denial of justice only. It is now a requirement in relation to all four types of treatment noted above, effectively narrowing the standard and limiting protection under this provision only to investors who can establish such a violation.
The Treatment of Investments provision in the Model BIT also includes a “full protection and security” (“FPS”) standard, which is another common feature of BITs and obliges host states to take reasonable measures to prevent harm to foreign investments. Although FPS standards are usually concerned with physical security of investments (in contrast to the FET standard), some Tribunals have interpreted the standard broadly to require states to ensure legal security to protect investments. This protects the framework for investment and covers the security of intangible assets. However, the FPS standard in the Model BIT is expressly restricted to “physical” security, clarifying the scope of protection for investors under this standard.
As with the Draft Model, the expropriation standard in the Model BIT covers both direct expropriation and “measures having an effect equivalent to expropriation” (indirect expropriation). The treaty drafters have taken on board the LCI’s concerns that the definition of indirect expropriation should not require both legal and economic deprivation of the investment. Indirect expropriation occurs “if a measure or series of measures […] substantially or permanently deprives the investor of the fundamental attributes of property in its investment, including the right to use, enjoy and dispose of its investment.” The focus is therefore legal deprivation. Tribunals are also required to consider “the economic impact of the measure”; however, “an adverse effect on the economic value of an investment” is not by itself sufficient to establish indirect expropriation. The Government also has incorporated the LCI’s suggestion to delete the requirement of appropriation of the investment by the state; there is no need for “formal transfer of title or outright seizure” to establish expropriation in any form.
The LCI had highlighted a contradiction in the Draft Model, which precluded a Tribunal from re-examining “any legal issue which has been finally settled by any judicial authority of the Host State,” yet provided in the subsequent provision that an investor must exhaust all judicial and administrative domestic remedies before commencing arbitration proceedings. The former provision has been deleted from the final text, removing this unworkable jurisdictional bar.
The requirement to exhaust remedies has also been amended: An investor may commence arbitration proceedings under the BIT where he has first exhausted “all judicial and administrative remedies […] for at least a period of five years from the date on which the investor first acquired knowledge of the measure in question.” On the one hand, this provision ensures that foreign investors will not be expected to pursue domestic proceedings in the host state courts in vain for years—they can proceed to arbitration after five years. However, this provision could also be construed as imposing an additional condition precedent on the commencement of arbitration proceedings, i.e., the investor must pursue domestic remedies for at least five years before bringing an arbitration claim against the host state. The investor must then issue a notice of dispute to the host state, which is to be followed by six months of further attempts by the parties to resolve the dispute. The claim to arbitration must then be submitted not more than six years after the investor first acquired knowledge of the measure in question.
This provision could therefore require foreign investors to pursue domestic proceedings for at least five years, regardless of the likelihood of their obtaining a resolution in that forum, following which they would have only a six-month window in which to submit an arbitration claim. In addition to clogging up the Indian court system, this would delay foreign investors’ access to a remedy. Unless clarity is provided on the interpretation of this provision, it is likely to be a source of disagreement in treaty negotiations and, where ultimately included in India’s BITs, could significantly erode investor protection in practice.
The Model BIT includes a new provision allowing the contracting states to develop an appeals mechanism for the review of investment awards. This mirrors the provision recently included in the investment chapter of the multi-lateral Trans-Pacific Partnership (TPP) treaty and the discussions between the United States and the EU on creating an appeal mechanism in connection with the Transatlantic Trade and Investment Partnership (TTIP).
Under the Model BIT, investors will have the option of submitting their claims under the Washington Convention, supporting the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), the ICSID Additional Facility Rules or the UNCITRAL Arbitration Rules (the Draft Model only provided for UNCITRAL arbitration). The addition of the ICSID remedies gives investors more choice, although it is noteworthy that certain provisions in the Model BIT depart from the default position under all three sets of Rules, e.g., as regards transparency of proceedings and challenges to arbitrator appointments.
The preamble to the Draft Model contained wording affirming the sovereign right of a state to modify the conditions for investment in its territory. The Government has deleted this wording from the final text, acknowledging the LCI’s concerns that foreign investors could be wary that the expressed right would allow laws to be abruptly changed, disturbing the investment environment.
Article 2 of the Model BIT lists the circumstances in which the treaty will not apply, including “government procurement.” The LCI had suggested this exception be deleted from the list because it might deter foreign investors from investing in India via the procurement route. A new exception has also been added, namely “any measure by a local government,” even further limiting the measures that will benefit from treaty protection.
An MFN provision guarantees a covered investor treatment not less favourable than that afforded to other investors from third countries, under other investment treaties concluded by the same host state. Despite the LCI highlighting the absence of an MFN provision in the Draft Model, one has not been introduced into the final text. Investors will therefore not be able to rely on potentially beneficial provisions, whether procedural or substantive, in other BITs entered into by India.
Article 35 of the Model BIT permits the host state, at any time, to exclude certain investors from its benefits. This may be for policy reasons such as security or diplomatic concerns. As with the Draft Model, this provision states that it can be invoked “at any time,” not just at the outset of a dispute, which should help to avoid disputes over the timing of denial of benefits, which has been an issue in past arbitrations.
The Government has not adopted the LCI’s suggestion that a BIT should automatically extend beyond its initial term of 10 years unless the parties agree to terminate it. Instead the BIT will lapse after 10 years unless the parties expressly agree to renew it.
The approval of the new Model BIT is a significant step for India as it seeks to position itself as a preferred destination for foreign direct investment. On the whole, the final text represents a balance between investor rights and Government obligations and reflects international standards and practice. According to a memorandum accompanying the final text of the Model BIT, the Indian Department of Economic Affairs (“DEA”) will now lead all negotiations on standalone BITs and investment chapters in other agreements. The DEA’s task is unlikely to be without challenges; certain aspects of the Model BIT, such as the unclear exhaustion of remedies requirement and the lack of an FET standard, may concern potential counterparty states. Overall, however, the adoption of the Indian Model BIT is a positive development for foreign and Indian investors alike.
The full text of the Model BIT is available at http://finmin.nic.in/the_ministry/dept_eco_affairs/investment_division/ModelBIT_Annex.pdf.
Pieter Bekker is a partner at CMS, Edinburgh. He may be reached at email@example.com. Kushal Gandhi is a senior associate at CMS, London. He may be reached at firstname.lastname@example.org. Jessica Foley is a lawyer at CMS, London. She may be reached at email@example.com.
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