On December 28 2016 India released its new Model Bilateral Investment Treaty (BIT), which replaces the 2003 Model BIT. Compared to the 2003 Model BIT, the new BIT incorporates substantial and critical changes and considers international precedents and trends in investment treaty law. The 2015 Model BIT attempts to safeguard the host state's interests by narrowing investor protection and protecting the state's regulatory power to take measures in the public interest. The 2015 Model BIT is intended to form the basis of India's negotiations with other countries in relation to the redrafting of existing BITs.
Although India has signed as many as 83 BITs since 1994, the critical developments which led to the overhaul of the 2003 Model BIT can be traced back to the 2011 award rendered in White Industries against India under the India-Australia BIT for breach of its obligation to provide an effective means of asserting claims and enforcing investors' rights. The award in White Industries triggered a number of other investor claims, including the following:
- Tenoch Holdings filed a claim under the India-Russia BIT and the India-Cyprus BIT in connection with the cancellation of 2G spectrum licences by virtue of a 2012 Supreme Court judgment.
- Louis Drefyus Armateurs filed a claim under the France-India BIT in connection with disputes following implementation of the Haldia Port venture.
- Vodafone filed a claim under the India-Netherlands BIT in connection with the imposition of taxes by the Indian tax authorities following its 2007 takeover of Hutchison Whampoa's Indian operations.
- Devas and Deutsche Telekom filed a claim under the India-Mauritius BIT in relation to contracts with Antrix Corporation, the marketing arm of the Indian Space Research Organisation.
Given the increased number of claims, the government sought to revise its BITs – not only to protect itself against these claims, but also to ensure that the 2003 Model BIT was up to date with recent trends and developments in investment law.
The Law Commission, chaired by Justice AP Shah (retired), examined the proposed draft of the 2015 Model BIT in August 2015 and provided its suggestions in its 260th Report. The Law Commission's recommendations, as well as comments from the general public, have since been examined by the government, which has now released the 2015 Model BIT.
Major additions and changes
The 2015 Model BIT has introduced several new concepts in connection with investor treatment, investor obligations and the rights of the host state.
Concept of enterprise introduced and scope of investment and investor limited
The 2015 Model BIT uses an enterprise-based concept of investment, rather than an asset-based concept. It defines 'enterprise' as follows:
"(i) any legal entity constituted, organised and operated in compliance with the law of a Party, including any company, corporation, limited liability partnership or a joint venture; and
(ii) a branch of any such entity established in the territory of a Party in accordance with its law and carrying out business activities there."
Interestingly, the initial draft of the 2015 Model BIT limited the definition of 'enterprise' to enterprises which had real and substantial business operations in the host country. However, this condition has been omitted from the final draft, as elements of the same have instead been incorporated in the definition of 'investor'.
Although the initial draft required an enterprise in the host state not only to be constituted, organised and operated in compliance with the law of the host state, but also to be owned or controlled in good faith by an investor, the concepts of control and ownership have been removed in view of potential disadvantages to Indian investors abroad, as the government imposes additional foreign investment restrictions on such investors.
The definition of 'investment' also includes additional requirements in order to limit the scope of investment, such as "commitment of capital and other resources, certain duration, the expectation of gain or profit, [and] the assumption of risk". In particular the definition of 'investment' excludes, among other things:
- portfolio investments;
- government-owned debt securities;
- pre-operational expenditure; and
- claims of money arising from commercial contracts, orders or judgments in judicial arbitration proceedings.
Further, despite the Law Commission's recommendation to the contrary, the definition of 'investment' also seeks to exclude, among other things, goodwill, brand value, market share and other intangible rights.
In addition, the scope of the definition of 'investor' has been narrowed to include only juridical entities which are constituted, organised and operated under the laws of a party and which have a substantial business activity in the territory of that party (or to entities owned and controlled by such entities). This definition appears to have been narrowed in order to prevent treaty shopping and stop multiple claims from being filed on the same cause of action.
Applicability of 2015 Model BIT
The 2015 Model BIT will apply to pre-investment activities or measures adopted or maintained by a party in connection with investments which existed on the date on which the Model BIT came into force. However, it will not apply to claims arising out of events which occurred or claims which were raised before the Model BIT came into force. Specifically, the Model BIT will not apply to:
- measures taken by local government;
- measures relating to taxation;
- the issuance of compulsory licences granted in relation to IP rights; and
- government procurement.
It appears that some of these exceptions have been incorporated due to the Supreme Court's decisions in Vodafone, which dealt with the imposition of tax, and Novartis, which addressed the grant of compulsory licences.
Treatment of investments
The 2015 Model BIT has attempted to lay down minimum requirements with regard to the treatment of investments by prohibiting violations of customary international law. The threshold for determining whether there has been a breach of customary international law has been kept fairly high by using phrases such as "fundamental breach of due process of law", "targeted discrimination on manifestly unjustified grounds" and "manifestly abusive treatment". In view of the Law Commission's recommendations, this provision slightly favours the host state by stating that the tribunal must consider whether the investor sought remedies before the domestic courts before initiating a claim under the treaty.
Narrowing scope of expropriation
The 2015 Model BIT considerably limits the scope of expropriation – not only by expressly setting out what constitutes direct and indirect expropriation, but also by clarifying that mere economic impact does not by itself constitute expropriation. Under the Model BIT, to determine whether expropriation has occurred, the following factors should be considered:
- the duration of the measures undertaken by the host state;
- the nature of such measures; and
- the basis of substantial deprivation of the fundamental attributes of property in the investment.
The new Model BIT also attempts to protect states' regulatory powers by clarifying that non-discriminatory regulatory measures aimed at protecting legitimate public interests or for public purposes (eg, public health, safety and the environment) do not constitute expropriation.
Most-favoured nation clause removed
The most-favoured nation clause contained in most BITs entered into by India came under scrutiny after White Industries. In this case, the investor successfully invoked the most-favoured nation clause in the India-Australia BIT in order to import a clause into the India-Kuwait BIT so that it could invoke the right to be provided an effective means of asserting claims and enforcing rights. As such, the initial draft of the 2015 Model BIT contained no most-favoured nation clause in order to prevent parties from borrowing clauses contained in other BITs. However, in its report, the Law Commission stated that the absence of a most-favoured nation clause would expose investors to discriminatory treatment, and that an exception could be made whereby the scope of the clause would be restricted to the application of domestic measures.
While the Law Commission's recommendation was not wholly followed – and a most-favoured nation clause remains conspicuously absent from the 2015 Model BIT – a clause dealing with compensation for losses has been inserted. Under this clause, investors are assured of non-discriminatory treatment with respect to measures adopted by the host state in relation to losses suffered by investments in the host state in exceptional circumstances (eg, during war, armed conflict, civil strife and national emergencies).
Introduction of specific investor obligations and deletion of home state obligations
Unlike the 2003 Model BIT, the 2015 Model BIT makes compliance with investor obligations a precondition to claiming any benefits contained therein. The 2015 Model BIT imposes these obligations by requiring that investors:
- comply with the applicable law of the host state in relation to the acquisition, management, operation and disposition of investments;
- not indulge in corrupt practices;
- pay any tax liabilities; and
- make appropriate disclosure under the applicable law.
In addition, the 2015 Model BIT requires investors to fulfil their corporate social responsibility on issues relating to labour, environment, human rights and anti-corruption. The initial draft of the 2015 Model BIT contained exhaustive investor obligations; however, these obligations have been reduced following the Law Commission's recommendations, which warned that such onerous obligations may be unreasonable (eg, those requiring disclosure even when not required under the law of the host state and those in relation to contributions to the development of the host state). The initial draft of the 2015 Model BIT also contained an article relating to home state obligations, whereby the home state could take judicial action against any act that occurred in its territory in relation to an investment that led to damages (eg, injuries or loss of life). This was presumably done to avoid incidents such as the Bhopal Gas tragedy, following which the Indian courts were found to be an unsuitable venue on the grounds of forum non conveniens (inconvenient forum). This provision has been removed from the final version of the 2015 Model BIT.
Amendments and additions to dispute resolution mechanism
The 2015 Model BIT has made several amendments to the dispute resolution mechanism contemplated therein by detailing:
- the scope of application of the dispute resolution clause;
- the impact of proceedings under different international agreements;
- the conditions precedent for invoking the dispute resolution clause; and
- the applicable timelines and procedures for the constitution of arbitral tribunals.
In addition, under the new Model BIT, claims must be submitted to the relevant domestic court or administrative body within one year of the date on which the investor first acquired, or should have acquired, knowledge of the measure in question. A claim can be filed under the BIT only after exhausting such remedies or where five years have passed since the dispute was brought before the domestic court or administrative body and no resolution has been reached. This provision will not apply where no domestic legal remedy could reasonably provide relief in respect of the measure in question.
Further, according to the new Model BIT, after receipt of a notice of dispute, the parties must try to resolve the dispute amicably for at least six months before submitting a claim to arbitration. In addition, a claim to arbitration can be submitted only where:
- no more than six years have elapsed from the date on which the disputing investor first learned, or should have learned, of the measure in question; or
- no more than one year has elapsed since the conclusion of domestic proceedings, where applicable.
Significantly, until now, BITs entered into by India did not reference the International Centre for Settlement of Investment Disputes (ICSID), as India is not a party to the ICSID. However, the Law Commission recommended that reference to ICSID and its additional facilities (applicable where only one of the parties is a signatory to the ICSID Convention) be included, as this may benefit Indian investors abroad seeking to bring a claim against a party to the ICSID Convention. Accordingly, the dispute resolution mechanism contained in the 2015 Model BIT (as well as the United Nations Commission on International Trade Law Rules) allows the ICSID Convention to be applied to matters such as:
- consent to arbitration;
- the appointment of arbitrators; and
- the conduct of arbitration proceedings, where applicable.
In addition, the Model BIT exhaustively outlines detailed parameters to prevent conflicts of interest and resolve challenges to the appointment of arbitrators.
Amendments to governing law
Under the 2003 Model BIT, investment was governed by the laws of the host country. Under the 2015 Model BIT, the governing law in relation to the interpretation of a BIT is the BIT itself, followed by the general principles of international public law which relate to the interpretation of BITs.
Amendments to finality and enforcement of awards
The 2015 Model BIT clearly states that tribunal awards are binding only on the disputing parties, and that each contracting state must provide for enforcement of the award in its territory in accordance with its law. In relation to India, this means that an enforceable BIT award is akin to any other arbitral award and can potentially be set aside if it does not meet the requirements set out under the Arbitration and Conciliation Act 1996. The 2003 Model BIT did not provide for the enforcement of awards arising from the treaty.
Provision for state-to-state dispute settlement
The 2003 Model BIT did not contain a state-to-state dispute settlement mechanism; however, the 2015 Model BIT incorporates a detailed dispute resolution mechanism for disputes between contracting states in relation to the interpretation or application of the Model BIT or compliance with obligations by way of arbitration.
The 2015 Model BIT contains a separate chapter on both general and security exceptions. According the Model BIT, any measures taken in relation to these exceptions will override the BIT, as long as they are applied in a non-discriminatory manner. General exceptions include those taken in order to protect:
- public morals;
- public order;
- human or plant life and health; and
- the environment, including living and non-living natural resources
Security exceptions include measures taken by a contracting state:
- to protect essential security interests;
- during times of war; and
- during other emergencies.
The exceptions stipulated in the Model BIT are broad and thus capable of abuse by the host state. The Law Commission also warned that, at the very least, the general exceptions clause should not be self-regulated, as this may hinder the objective of balancing investment protection with the host state's regulatory regime.
Denial of benefits
In accordance with the 2015 Model BIT, a party to the treaty may deny the benefits therein to:
- an investment or investor owned or controlled (directly or indirectly) by persons of a non-party or of the denying party; or
- an investment or investor that has been established or restructured with the primary purpose of gaining access to the dispute resolution mechanisms provided in the Model BIT.
The inclusion of the denial of benefit clause is consistent with other international investment treaties which have sought to discourage treaty shopping and encourage investment in the host state. The denial of benefits is left to the host state's discretion. However, the Law Commission has cautioned that such clauses could be detrimental to the interests of Indian investors that are unable to bring their claims through more beneficial BITs.
The 2003 Model BIT was a seven-page document which had only a basic scope and function. Undoubtedly, the 28-page long 2015 Model BIT is far more comprehensive and considers various contemporaneous issues and problems faced by investors and countries in relation to investment law. The amendments show that the 2015 Model BIT favours the host state by providing suitable provisions to ensure that the state retains its regulatory power at least in relation to public policy and public interest, and to prevent parties from treaty shopping. It will be interesting to see the extent to which India can persuade countries which have significant investments in India to adopt the 2015 Model BIT.
For further information on this topic please contact Sanjeev Kapoor or Saman Ahsan at Khaitan & Co by telephone (+91 11 4151 5454), fax (+91 11 4151 5318) or email (firstname.lastname@example.org or email@example.com). The Khaitan & Co website can be accessed at www.khaitanco.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.