Investor-State Arbitration 2019 | India
1 Treaties: current status and future developments
1.1 What bilateral and multilateral treaties and trade agreements has your country ratified?
India is a signatory to 83 Bilateral Investment Treaties (“BITs”), of which it has ratified 74. Information available in the public domain as of August 2018 (including the Joint Interpretative Statement for BITs), suggests that 55 are currently in force.
India has signed and ratified trade agreements with several countries such as Korea, Singapore, Japan and Malaysia. Additionally, India is a signatory to several tax treaties as well as intergovernmental agreements such as the General Agreement on Trade-in Services (“GATS”). India has also signed framework agreements with the Association of South East-Asian Nations (“ASEAN”), Mercado Común Sudamericano (“MERCOSUR”) and the European Union (“EU”).
1.2 What bilateral and multilateral treaties and trade agreements has your country signed and not yet ratified? Why have they not yet been ratified?
India has not ratified a total of nine BITs and five other trade agreements.
The making of international treaties is an executive act. Accordingly, in order to ensure that India is in a position to discharge all obligations under a given treaty, the process of ratification is undertaken only after the relevant domestic laws have been amended, or the enabling legislation has been enacted in cases where there are no domestic laws on the subject. While there is no publicly available information on the status of the ratification of treaties, the long, drawn-out process may cause some delay in concluding the ratification.
1.3 Are your BITs based on a model BIT? What are the key provisions of that model BIT?
Indian BITs were largely based on the Model India BIT 2003. On December 28, 2015 a new Model BIT (“Model BIT”) was introduced. This was seen as India’s reaction to the large number of treaty claims brought against India over the last decade. Through the Model BIT, India has adopted an approach which tilts in favour of the State. The Indian government has also expressed its intention to terminate at least 58 of the existing BITs and renegotiate the same on the conservative wording of the 2015 Model BIT. Some of the key provisions of the Model BIT are outlined below:
a) The Model BIT seeks to narrowly define “investment” by adopting a hybrid asset/ enterprise-based definition. An enterprise has been defined to mean any legal entity constituted in compliance with the laws of the Host State and having its real and substantial business operations in the territory of the Host State. For the purpose of the definition of an enterprise, “real and substantial business operations” are required to satisfy certain cumulative criteria, such as, the enterprise must: (i) be a commitment of capital or other resources; (ii) for a certain duration; (iii) for expectation of profit or gain; (iv) involve the assumption of risk; and (v) be of significance for the development of the Host State”.
b) The definition of investor includes both natural and juridical persons who own or control an investment in the Host State.
c) The Model BIT does not include a Most Favoured Nation obligation or a broad Fair and Equitable Treatment obligation. Instead, the Model BIT provides for a defined scope of Standard of Treatment. The 2015 Model BIT however, does accord full protection and security to the investor and its investment and also extends National Treatment to investors.
d) Notably, the Model BIT requires an investor to exhaust local remedies before initiating arbitration proceedings.
1.4 Does your country publish diplomatic notes exchanged with other states concerning its treaties, including new or succeeding states?
India does not maintain publicly accessible treaty preparatory materials.
1.5 Are there official commentaries published by the Government concerning the intended meaning of treaty or trade agreement clauses?
The Government of India does not publish official commentaries concerning the intended meaning of a treaty or trade agreements.
2 Legal frameworks
2.1 Is your country a party to (1) the New York Convention, (2) the Washington Convention and/or (3) the Mauritius Convention?
India is party to the United Nations Convention on the Recognition and Enforcement of Foreign Awards, 1958 (“New York Convention”). India is not however, a signatory to either the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“the Washington Convention”) or the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (“the Mauritius Convention”).
2.2 Does your country also have an investment law? If so, what are its key substantive and dispute resolution provisions?
In addition to compliance with statutes that govern every contract, India is an exchange controlled jurisdiction and investments made by non-resident investors require compliance with the Foreign Exchange Management Act 1999 and Regulations (“FEMA”). Further, depending on the target entity, investments may also require to be made in compliance with the Securities and Exchange Board of India Act 1992 and Regulations (that apply to an entity whose shares are traded on a stock exchange). Further, if the investment crosses certain thresholds, one needs to comply with the Competition Act 2002. There are also specific verticals where specific laws may be applicable, for instance, the Insurance Act, 1938 that governs investments by a non-resident.
Disputes in India are adjudicated in a manner similar to commonwealth jurisdictions. They are dealt with by either civil courts or specialised tribunals. Given the backlog of cases in Indian courts, large commercial contracts often provide for adjudication of disputes by arbitration.
2.3 Does your country require formal admission of a foreign investment? If so, what are the relevant requirements and where are they contained?
The principal law governing foreign investment in India is the FEMA, the rules prescribed under the FEMA and circulars issued by the Reserve Bank of India (“RBI”). Additionally, the Department of Industrial Policy and Promotion (“DIPP”) makes policy pronouncements on foreign investment through press notes or press releases which are notified by the RBI. Such regulations, press notes, press releases, circulars, etc., together constitute the regulatory framework for foreign investment.
In India, foreign investment can be made either:
1. by the Automatic route which does not require formal/prior approvals from the RBI; or
2. by the Government route which requires prior approval from the concerned Ministries/ Departments through a single window: The Foreign Investment Facilitation Portal (“FIFP”). The FIFP is administered by the DIPP, Ministry of Commerce and Industry and the Government of India.
The Government route however, is mandatory in investments made beyond certain thresholds in some sectors such as mining, defence, broadcasting, telecommunications and banking.
3 Recent Significant Changes and Discussions
3.1 What have been the key cases in recent years relating to treaty interpretation within your jurisdiction?
The Indian courts have not yet had the opportunity to interpret the terms and/or standards of protection under an investment treaty.
3.2 Has your country indicated its policy with regards to investor-state arbitration?
Investor-State Arbitration began to gain major traction in India as a result of the treaty award passed against India in White Industries Australia Limited v. Republic of India (“White Industries”). In May 2002, the Investor-Claimant (White Industries Australia Ltd.) obtained an ICC award against Coal India Limited (a State-owned Indian company). For a period of over nine years, White Industries sought to enforce this award before the Delhi High Court. Finally, in 2010, White Industries took the matter to investment treaty arbitration under the India-Australia BIT on the grounds that the inordinate delay in Indian courts to enforce the arbitration award violated various substantive protections afforded under the said BIT.
White Industries led to a drastic shift in India’s stance on Investor-State Arbitration, which is clearly reflected in India’s Model BIT. India recently concluded a BIT with Brazil. While the text of the India-Brazil BIT is not available at present, it has been widely reported that the BIT does not contain a provision for Investor-State Arbitration.
India also recently approved a BIT with Cambodia, which is the first BIT to be based on the Model BIT.
3.3 How are issues such as corruption, transparency, MFN, indirect investment, climate change, etc. addressed, or intended to be addressed in your country’s treaties?
The Model BIT lays down certain obligations pertaining to corruption. These obligations provide that an investor shall not (i) offer, promise, or give any undue pecuniary advantage, gratification or gift whatsoever, either (ii) directly or indirectly, to a (iii) public servant or official of the Host State as an inducement or reward for doing or forbearing to do any official act, or (iv) make any illegal contributions to candidates for public office or to political parties amongst others.
The Model BIT provides for transparency in the form of specific disclosures to be made by an investor from time to time, as well as transparency in arbitral proceedings.
The Model BIT has omitted the MFN obligation altogether. Further, the cumulative requirements to constitute an investment (as outlined in detail in question 1.3 above) leave little scope for an indirect investment to be afforded substantive protections under the Model BIT.
Finally, the Model BIT carves out broad exceptions for actions or measures of the Host State which have been taken with a view to protect and conserve the environment.
3.4 Has your country given notice to terminate any BITs or similar agreements? Which? Why?
As of 2018, India has discontinued several BITs with most of its trading partners and has issued termination notices to about 58 countries, including several EU States. While no other official government clarification is presently available on the subject, several newspaper reports have noted that only a few countries such as Armenia, Belarus, Kyrgyz Republic, Oman, Qatar, Switzerland, Tajikistan, Thailand, Turkmenistan, UAE and Zimbabwe have agreed to renegotiate the treaties after the draft model BIT was approved by the Union Cabinet in December 2015.
4 Case trends
4.1 What investor-state cases, if any, has your country been involved in?
As of September 11 2018, a total of 24 treaty arbitrations have been initiated against India [according to publicly available information, including the website of the United Nations Conference on Trade and Development (“UNCTAD”)]. Currently, 13 claims are pending, nine have been settled, and an award has been passed in two claims. The White Industries award (discussed in question 3.2 above) was decided against India. In what may be termed as India’s first known victory in treaty arbitration – Louis Dreyfus Armateurs SAS v. The Republic of India, India has recently defeated a claim of USD 36 million by Louis Dreyfus (a French investor), under the France-India BIT. This case has not been updated on the UNCTAD website – which still reflects 14 pending cases.
4.2 What attitude has your country taken towards enforcement of awards made against it?
As it has been noted in respect of question 4.1 above, of all the treaty claims that have been made against India, only one has resulted in an adverse award (White Industries) so far. According to publicly available information, Coal India Limited paid AUD 9.8 million to the investor. There are no known cases at present, wherein India has sought to resist the enforcement of unfavourable awards.
4.3 In relation to ICSID cases, has your country sought annulment proceedings? If so, on what grounds?
India has not sought annulment proceedings in relation to ICSID cases.
4.4 Has there been any satellite litigation arising whether in relation to the substantive claims or upon enforcement?
No. Refer to questions 3.1 and 4.2 above.
4.5 Are there any common trends or themes identifiable from the cases that have been brought, whether in terms of underlying claims, enforcement or annulment?
Of the 13 treaty arbitration cases pending against India, a majority of the cases include a claim for indirect expropriation, the most prominent one being the claims brought by the Vodafone Group.
It has also been observed that there is a trend amongst investors to institute parallel commercial proceedings. For instance, Devas Multimedia (a Mauritian entity) pursued treaty arbitration against India for the termination of its contract with government-owned Antrix Corp Ltd., the commercial wing of the Indian Space Research Organisation. Devas Multimedia also pursued a parallel commercial arbitration under the investment contract in which it received a favourable award for an amount of USD 562.5 million. As far as the treaty arbitration is concerned, the investor has received a favourable determination on the issue of liability, the valuation of which is currently pending.
Investment arbitration disputes in India have been growing in number mostly in sectors such as telecommunications, oil and gas.
5.1 Does your country allow for the funding of investor state claims?
Third- party funding has not been blessed with specific legislation in India. Although there is no express bar on obtaining third-party funding (“TPF”), TPF agreements will nevertheless be subject to several complications due to the lack of legislative framework to regulate such funding.
5.2 What recent case law, if any, has there been on this issue in your jurisdiction?
The subject of TPF is still at a very nascent stage in India and there is no recent case law that adequately addresses the subject. However, the Supreme Court of India has in Bar Council of India v. A.K. Balaji & Ors. (2018 5 SCC 379) observed that, there appears to be no restriction on third parties’ funding litigation and getting repaid upon the outcome of the litigation.
5.3 Is there much litigation/arbitration funding within your jurisdiction?
In practice, TPF institutions have claimed to pursue opportunities in India. Due to the absence of publicly available data on the subject, it is, however, not possible to provide a definitive position on this.
6 The Relationship Between International Tribunals and Domestic Courts
6.1 Can tribunals review criminal investigations and judgments of the domestic courts?
Article 14.2 of the Model BIT clearly states that in addition to the specified limits on a tribunal’s jurisdiction, the tribunal will not have jurisdiction to re-examine any legal issue which has been finally settled by any judicial authority of the Host State. It also provides that the tribunal cannot review the merits of a decision made by a judicial authority of the Host State.
However, the bar on a tribunal’s jurisdiction to review judgments of domestic courts is not absolute, insofar as Article 3 of the Model BIT provides that each Party shall not subject investments of investors of the other Party to measures which constitute a denial of justice under customary international law. Thus, it appears that where the tribunal is required to decide as to whether the Host State’s treatment of an investor constitutes denial of justice, the tribunal would be in a position to review the decision of domestic courts.
6.2 Do the national courts have the jurisdiction to deal with procedural issues arising out of an arbitration?
A recent decision of the Delhi High Court in Antrix Corporation Ltd. v. Devas Multimedia (FAO (OS) (COMM) 67/2017) highlights some of the procedural difficulties associated with arbitrations seated in India. Devas initiated arbitration proceedings before the International Chamber of Commerce (“ICC”) for wrongful termination of the contract by Antrix Corporation Limited (“Antrix”) (see question 4.5 above).
The arbitration clause (pertaining to the appointment of arbitrators) substantially departed from the ICC Rules in relation to the appointment of arbitrators. ICC notified the parties that it was not in a position to make such a departure from its Rules. Antrix objected to the position taken by the ICC and filed an application before the Chief Justice of India under Section 11 (for appointment of an arbitrator) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).
Thereafter, Antrix filed an application under Section 9 of the Arbitration Act (for interim reliefs) before the Bangalore City Civil Court, seeking to restrain Devas from proceeding with the ICC arbitration which was contrary to the parties’ arbitration agreement. In April 2014, the ICC arbitration was stayed by the Chief Justice’s designate and was only subsequently dismissed by the Supreme Court.
Finally, the ICC tribunal awarded Devas USD 562.5 million on the basis that Antrix had wrongfully terminated the agreement with Devas. Upon obtaining the award, Antrix Ltd. proceeded to file a Section 9 application to attach Antrix’s bank accounts in the Delhi Courts. Finally, the Delhi High Court held that designating a seat does not automatically confer exclusive jurisdiction upon the courts of the seat.
In Indian seated arbitrations, parties do, in some cases, run the risk of arbitration-related proceedings being dragged before different forums.
It must be noted however, that the ICC award was passed in relation to the commercial arbitration proceedings initiated against Antrix. The outcome of the treaty arbitration between Devas and Antrix is still pending.
6.3 What legislation governs the enforcement of arbitration proceedings?
The enforcement of a foreign award in India is governed by Part II of the Arbitration Act, which incorporates the provisions of the New York Convention. With respect to enforcement of a domestic award, the same is governed by Part I of the Arbitration Act.
Pertinently, the Delhi High Court in Union of India v. Vodafone Group PLC United Kingdom & Anr. (“Vodafone Case”) (CS (OS) 383/ 2017) held that investment arbitration disputes are fundamentally different from commercial disputes and are thus not governed by the provisions of the Arbitration Act. An appeal before a Division Bench of the Delhi High Court is currently pending.
6.4 To what extent are there laws providing for arbitrator immunity?
A new provision has been introduced in the Arbitration Act by way of the Arbitration and Conciliation (Amendment) Bill, 2018 (“Amendment Bill”). At present, the Amendment Bill has been passed by the Lok Sabha (Lower House) and is pending approval of the Rajya Sabha (Upper House) of the Indian Parliament. The newly inserted Section 42B provides that no suit or other legal proceedings shall lie against the arbitrator for anything which is done in good faith or intended to be done under the Arbitration Act or the rules or regulations made under it.
6.5 Are there any limits to the parties’ autonomy to select arbitrators?
Where India is the seat of arbitration, the parties’ choice of arbitrators would be subject to Schedules V and VII of the Arbitration Act. On October 23, 2015, India became the first jurisdiction to statutorily adopt the IBA Guidelines on Conflicts of Interest in International Arbitration (“IBA Guidelines”) in Schedules V and VII. Schedule V contains circumstances under the Orange List and Schedule VII contains circumstances under the Red List of the IBA Guidelines. Parties can however, waive the bar on the appointment of an arbitrator (where such arbitrator is squarely covered by the circumstances under Schedule VII) after a dispute has arisen between such parties.
6.6 If the parties’ chosen method for selecting arbitrators fails, is there a default procedure?
Where India is the seat, as per Section 11 of the Arbitration Act, if the parties’ chosen method for selecting arbitrators fails, a party may apply to the Supreme Court (in case of an international commercial arbitration) to take the necessary measures to secure an appointment. The Amendment Bill now provides for appointment by arbitral institutions designated by the Supreme Court, for international commercial arbitrations.
6.7 Can a domestic court intervene in the selection of arbitrators?
As addressed in question 6.6 above, in arbitrations where India is not the seat, there would be no court involvement in the selection of arbitrators.
7 Recognition and Enforcement
7.1 What are the legal requirements of an award for enforcement purposes?
Under Article I of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (embodied in the First Schedule of the Arbitration Act), India has declared that the New York Convention applies only to differences arising out of legal relationships, whether contractual or not, that are considered “commercial” under Indian law.
At present, it is uncertain whether investment arbitrations are covered by the Arbitration Act for the purposes of enforcement. This has already been highlighted with respect to the Vodafone Case in question 6.3 above.
India has not officially recognised all of the signatories to the New York Convention and thus, Indian courts will only enforce foreign awards under the Convention if such awards have been issued in a State that has been notified in the Official Gazette of India, as a country to which the New York Convention applies. At present, only Australia, France, China, Hong Kong, Japan, Singapore, the United Kingdom and the United States have been notified by India in the Official Gazette.
7.2 On what bases may a party resist recognition and enforcement of an award?
A party may resist the enforcement of an award in the circumstances set out in Article V of the New York Convention. These circumstances have been incorporated in Part II, Chapter I of the Arbitration Act along with some amendments. Section 44 lays down circumstances in which an award may be declared to be in conflict with the public policy of India. These circumstances have been limited to an award which is (i) induced or affected by fraud or corruption, (ii) in violation of Section 75 of Section 81 of the Arbitration Act, (iii) in contravention with the fundamental policy of Indian law, and (iv) in conflict with basic notions of morality or justice.
An explanation to Section 44 further clarifies that a test as to whether there has been a contravention of the fundamental policy of Indian law shall not entail a review on the merits of the dispute.
7.3 What position have your domestic courts adopted in respect of sovereign immunity and recovery against state assets?
India does not have a separate legislation on foreign State sovereign immunity. Section 86 of the Code of Civil Procedure (“CPC”) provides that no foreign State may be sued in any Court (otherwise competent to try the suit) without prior consent of the Central Government.
While India became a signatory to the the United Nations Convention on the Jurisdictional Immunities of the States and their Property on January 12, 2007, the same has not yet been brought into force. It is however, indicative of India’s inclination to more formally adopt the “qualified” immunity approach, which has, in any case, been adopted by Indian courts. In Ethiopian Airlines v. Ganesh Narain Saboo (“Ethiopian Airlines”) (2011 8 SCC 539), the Supreme Court held that Ethiopian Airlines was not entitled to sovereign immunity with respect to a commercial transaction, which was in consonance with the growing body of international law principles.
7.4 What case law has considered the corporate veil issue in relation to sovereign assets?
As highlighted in the preceding question, the Supreme Court in Ethiopian Airlines made it abundantly clear that a corporate entity which carries on business or trade in India does not fall within the protection of the doctrine of sovereign immunity as embodied in Section 86 of the CPC.
In Qatar Airways v. Shapoorji Pallonji (2013 2 BomCR 65), the Bombay High Court placed reliance upon the decision of the Supreme Court in Andhra Pradesh State Road Transport Corporation v. Income-tax Officer (AIR 1964 SC 1486), to hold that in dealing with corporations established by a State, the corporation, though statutory (or not), has a personality of its own and this personality is distinct from that of the State or other shareholders. In this context, the Supreme Court also referred to the observations made in Tamlin v. Hanna (1950 1 K.B. 18) that, “the corporation is its own master and is answerable as fully as any other person or corporation. It is not the Crown and has none of the immunities and privileges of the Crown. Its servants are not civil servants and its property is not that of the crown”.
These decisions collectively lay down a position that so far as commercial actions of a given corporation are concerned, the corporate veil may not be lifted for the purpose of claiming sovereign immunity.
1. Rajendra Barot, Partner
2. Sonali Mathur, Partner