Investment Treaty Arbitration (“ITA”) is a method of resolving disputes between Foreign Investor(s), on one hand, and the State, on the other. This is also commonly referred to as an ‘Investor-State Dispute’. The entire concept of ITA is premised upon four factors, which include:
- a Multilateral/Bilateral Investment Treaty,
- the National Law of the Host State with respect to such investments,
- an Independent Investment Agreement, and
- a general preference of ITA over an Independent Arbitrator and Tribunal.
Without the fulfillment of these factors, the functioning of the entire regime of ITA becomes a futile exercise.
During the past decade, the gradual shift towards ITA has proven to be a big success. ITA presents an attractive approach, especially from a Foreign Investor’s point of view, and particularly in reference to the tiresome alternative of approaching the Local Courts in the Host State for resolution and settlement of disputes. The availability and accessibility of ITA makes it lucrative for Foreign Investors to invest in the Country as ITA enables fair disposal of the dispute without any bias.
Furthermore, Foreign Investments in the country tend to strengthen the economy which result in a number of Host States being naturally inclined towards doing all they can to attract Foreign Investment. Another important aspect is that ITA intends to de-politicize Investment Disputes, specifically in comparison to the conventional alternative of diplomatic protection, which requires the involvement of the Governments of the Investors as well as the Host States.
INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES (“ICSID”)
ICSID is an International Arbitration Institution established in the year 1996, with the main purpose of acting as one of the first forums for the resolution of Investor–State disputes by way of including Arbitration Clauses in Contracts. While India has not ratified the ICSID Convention, it has been a part of several such Arbitrations and has also entered into Bilateral Investment Protection Agreements with a considerable number of countries.
The Indian Government had also released the Model Indian Bilateral Investment Treaty Plan in December 2015. This Model however, contains certain controversial clauses in reference to certain favorable nations, which may not gel with the interests of the contracting States.
Under the current Indian regime, Investors are required to focus on the fact that these Investment Treaties are usually an addition to the normal contractual rights that the Investor will have against its counterpart and, finally, that the protection afforded by Investment Treaties are enforceable by the Investor against the Host State, often with the help of International Arbitration and without the need to litigate in the Host State’s Local Courts.
CRITICISM AGAINST ITA
Despite its success, ITA has received some criticism, whereby the future of ITA has also been questioned. Some have voiced their opinion against the reliance on Arbitrations in general, and some against specific aspects of the ITA system. One of the criticisms against ITA is that this process works in favor of the Investors, consequently, the States are often on the losing side in Investment Disputes. This has led certain Host States to denunciate the ICSID Convention, and to terminate the Bilateral Investment Treaties.
Another condemnation of ITA has been on the ground of lack of transparency. Confidentiality and secrecy are traditional hallmarks of an International Commercial Arbitration (“ICA”). Parties often resort to Arbitration precisely because of the confidentiality it offers. However, when States get involved, the issue gains relevance for the public at large. Therefore, it is not surprising that there have been demands for greater openness and transparency in ITAs.
PRECEDENTS PERTAINING TO ITA IN INDIA
The Awards passed through ITA don’t serve as precedents. However, as a customary practice, it has been observed that Tribunals do apply certain cases that have dealt with the same issue and/or principle, before passing the Award. The landmark decisions of ITAs in India are mentioned hereunder:
- Cairn Energy PLC and Cairn UK Holding v The Republic of India (PCA Case No.2016-07) (“Cairn Award”)
The issue in the present case pertained to the Government claiming tax on Capital Gains retrospectively. In 2006, Cairn Energy PLC and Cairn UK Holdings Limited (collectively referred to as “Cairn”) had worked on a Corporate Restructuring internally, involving an indirect transfer of assets by Cairn to its Indian Subsidiary. Cairn was retrospectively asked to pay taxes, to the tune of INR 24,500 Crores, on the Capital Gains in lieu of this transaction.
Aggrieved by the above decision, Cairn initiated Arbitration Proceeding as there was an Investment Treaty between them. It was alleged that India infringed the Fair and Equitable (“FET”) Clause which was vaguely drafted as follows:
“Investments of Investors of each Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party.”
Thus, the primary issue before the Arbitral Tribunal was whether India’s tax demand from Cairn, in lieu of its 2012 Amendment, was in violation of the FET Clause.
India contended that the FET Clause did not coherently specify the applicable standards, therefore, the protection under the Clause needs to be restricted to the bare Minimum Standard of Treatment (“MST”) a principle in Customary International Law, which governs the treatment of Foreign Investors in by providing minimum set of principles which the Host State is required to consider. On the contrary, Cairn argued that the relevant FET Clause must not be restricted by the MST and should be autonomous and free, as there is no particular mention to MST under the FET Clause.
The Tribunal then found the 2012 Amendment to be in contravention of the FET Clause under the India-UK BIT. The Tribunal took the view that the protection under the India-UK BIT offered to Cairn shall prevail over India’s sovereign right to implement taxes retrospectively. The Tribunal found that India’s treatment of Cairn violated the FET Clause under the India-UK BIT and, thus, directed India to pay more than $1.2 Billion to Cairn.
- Vodafone International Holding BV v Government of India (PCA Case No. 2016-35)
The facts of the Vodafone Case are similar to the aforementioned Cairn Case. The Tribunal had rendered the Award in favor of Vodafone and had held that the enforcement of the tax liability would be in violation of the country’s international obligations. It had also conclusively taken the view that the demand made by Vodafone was in breach of the India and Netherlands Bilateral Investment Treaty.
ANALYSIS OF THE BREACH OF FETS IN INVESTMENT ARBITRATION AGREEMENTS IN INDIA
The Supreme Court noted that the demand raised by the Indian Revenue Authorities in both of the above cases was an afterthought and not a rational decision, and further stated that the Government’s power to invoke such Amendments was still in Draft Tax Code and it hadn’t been crystalized into a legislation, hence the said retrospective taxation was without jurisdiction.
The Damodaran Committee appointed by Supreme Court on the issue of investor lack of trust to invest in India found that “while the legal powers of a Government extend to giving retrospective effect to taxation proposals, it might not pass the test of certainty and continuity.”
In both the above cases, the advisors to Cairn as well Vodafone were right in advising against the taxability on transfer of assets. The Government’s approach seems to have been malicious as it has altered the existing tax regime in the garb of clarification – the mischief was overt and it had no solid reasoning or object behind doing this act. The Government, by doing so, effectively discriminated against both the entities which created regulatory instability and further depleted the position of India in terms of compliance with and upholding the international obligations.
The Government has since rectified the error by deleting the concerned part of Amendment of 2012 which allowed for retrospective tax collection and allowed the tax to be charged only prospectively 2012 onwards.
Considering the background, utility as well as criticism of ITA, the most pertinent question to answer at this stage is whether ITA still has a long and viable future. In the backdrop of increasing global investments, it would seem like ITA is here to stay. Despite the shortcomings it entails in the current nascent stage, the whole system has overall been a success.
The resolution of such Investor-State Disputes further acts as added encouragement and incentive for prospective investors in India, since it helps build their faith that their investments will be safe. The Tribunals’ decisions in upholding the principle of FET and, in turn, upholding the rights of the Investor, reiterates the effectiveness of the ITA. While there is still ample room for improvement and refinement of the ITA system, the future of ITA in India seems quite promising at the moment.
– Team AMLEGALS, assisted by Ms. Shereen Samant and Mr. Sanidhya Jain (Interns)
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