BILATERAL INVESTMENT TREATIES VIS-À-VIS INDIAN LEGAL SCENARIO: DOES IT REQUIRE A CHANGE?

International Law | Trade & Investment
September 25, 2020

Swarnendu Chatterjee

Mr. Chatterjee is an Advocate-on-Record at the Supreme Court of India. Futhermore, he also holds the position of a Senior Associate at L&L Partners, New Delhi.

Anshita Khandelwal

Anshita is a Third year student from MAIMS, GGSIPU, currently pursuing a B.A. LL.B(H) degree.

Bilateral Investment Treaties (BITs) are written understandings between two nations/states for the reciprocative upliftment and guarding of investments in each other’s sovereign jurisdictions by individuals and companies situated in either nation/state. Briefly, the following are the essential clauses covered under BITs:

1. Applicability

2. Fairand EquitableTreatment and Full Protection& Security

3. National treatment and Most-favoured-nation treatment,

4. Expropriation,

5. Dispute settlement mechanisms, both between States and between an investor and a State.

BITs encourage foreign investors to invest in a Foreign State and thereby contributing towards the overall developments and advancements of the economy of the Contracting State.

The Indian Experience with the BITs

The 1990s witnessed a surge of BITs between the developed and the developing nations. Since then, there has been a substantial rise in their application. It is pertinent to mention here that in the year 2000, the United Nations Conference on Trade and Development (UNCTAD) reiterated that BITs are the most important instruments for protection of foreign investments.[1]The first ever BIT was entered between Germany and Pakistan on November 25, 1959[2]and since then, the BITs have evolved in an unprecedented manner.

By the middle of the 20th century, the BITs came to be recognised as important by the Government of India. The intention was to offer treaty based safeguards to the foreign investors and their anticipated investments. To quote an example, the India-Singapore Comprehensive Economic Cooperation Agreement (CECA) provides for exemption on import duties for investment in the infrastructure sector, which would eventually lure the investors from abroad to invest in the upcoming economy of India with enhanced protection, thus promoting investment inflow. Though it is difficult to quantify the benefits of BITs, it invariably results in increased investment inflows, encourages the transfer of technology and modern management skills. India, as one may recall, was rather a closed economy prior to the 1991 economic liberalisation but after 1991, the Indian economy underwent some major structural changes. For the very first time, countries all around the world were encouraged to invest in India and the Indian economy saw liberalisation to reach new heights. Since, 1994, India has signed around 84 BITs out of which according to the latest data, currently, there are 14 BITs which are in force, 58 out of 84 BITs have been terminated. In addition to the BITs, India has also entered into Comprehensive Economic Cooperation Agreements (‘CECA’) which covers issues like investment, trade, intellectual property rights, etc. India has also contemplated the idea of entering Foreign Treaty Agreements (‘FTA’) with European Nations.[3]

One of the most noticeable features of the Indian BITs is that it does not give ‘a right to make investments’ in India. All rights, under the BITs to which India is a party, can be exercised only after making the pledged investments in India. However, this issue can be debated considering Article 3.1 of the Model BIT of India, which promises to provide favourable conditions to invest in India. It is important to note that the Indian government retains the freedom to determine which sectors are open to foreign investments and under what terms and conditions can those investments be made. It is of utmost importance to note that the investments made in India must be established or acquired in accordance with the national laws of India.[4]

India’s Tryst with BIT Arbitrations in India

After signing its first BIT in 1994, India devolved its first Model BIT in 2003 and it was pari-materia to the Model BIT of the United Kingdom. However, India faced its first round of BIT arbitration in the year 2004 in the infamous Dabhol Power Plant case.[5]The plant was to be set up in the State of Maharashtra and various investor states like the United Kingdom, Netherlands, Mauritius, France, Switzerland and Austria invoked the BIT arbitration against India. More specifically, Bechtel and General Electric brought claims against India under the India-Mauritius BIT, alleging expropriation of their interest in the power plant by the Indian Government. The claims were however settled and India had to compensate for losses.

Thereafter, one of the first substantive cases related to BIT arbitration came up in the White Industries case.[6]In 1989, the Australian company entered into a contract with the Coal India Limited, a public sector undertaking for developing coal mines in Piparwar (Erstwhile Bihar, now Jharkhand), India. White Industries alleged that due to inconceivable delay at the hands of the Indian judiciary spanning around 9 years, the company had incurred huge losses and there has been a breach of treaty guarantee. One of the interesting facets of the said case was while passing the award, the tribunal held that there had been a breach of guarantee to provide ‘effective means to assert claims’, a guarantee which was not present in the India-Australia BIT and was drawn from India-Kuwait BIT. 

The feature of the Indian BITs is that it does not give ‘a right to make investments’ in India, in our opinion, should be revised to attract foreign investment in India; of course, the investments shall follow the FDI guidelines issued by the Government from time to time in consultation with the Reserve Bank of India. At the present moment, all rights, under the BITs to which India is a party, can be exercised only after making investments in India. It is important to note that the Indian government retains the freedom to determine which sectors are open to foreign investments and under what terms and conditions can those investments be made.

So far as applicability of the BITs is concerned, the general trend suggests that the Indian BITs generally apply to ongoing and autrefois investments pursuant to the date on which India entered into the BIT. Nevertheless, there remains exception to this rule. The BITs with few States like Egypt, Sweden, and Romania etc. have a limited scope and their applicability is only to the investments which have arisen after the treaty has come into force. The disputes that may have arisen prior to these BITs are excluded.

The Indian Story vis-à-vis International Commercial Arbitration

An increase in international trade and investment follows growth in cross-border commercial disputes. Given the need for a robust and dynamic mechanism to settle cross-border disputes, international arbitration has emerged as the preferred option for resolving them and preserving business relationships. With an influx of foreign investments, overseas commercial transactions, and open-ended economic policies acting as a catalyst, international commercial disputes involving India are steadily rising. This has drawn tremendous focus from the international community on India’s international arbitration regime.[7]

The UNCITRAL Model Law was adopted in 1985 and was subsequently revised in 2006. There are more than 60 countries that have adopted this model law that allows comprehensive legislative treatment of the international arbitral process. The Model upholds the validity and enforceability of arbitration agreements (Arts. 7-9) by providing a guideline for competent arbitrators (Art 16) and the absolute judicial non-interference (Art 5). The parties have the choice of arbitral seat (Art 1(2), 20), appointing of the arbitrators (Art 10-15) and the provisional measures (Art 17) to be taken. The Model only lays down an objective procedure for arbitration (Art 18-26), and evidence taking (art 27) as per the applicable substantive law (Art 28) to come to a concluding arbitral award (Art 29-33). Most importantly, the model enforces the recognition and enforcement of foreign arbitral awards including bases of non-recognition (Art 35-36).

Indian law provides provision for dispute resolution by way of International Commercial Arbitration. This mechanism is aimed at resolving commercial disputes between an Indian entity and a foreign entity within the framework of Indian Arbitration Laws. The arbitration proceedings can be governed by the rules of arbitration institutions or the courts have the power to appoint arbitrators under the provisions of Section 11 of the Arbitration and Conciliation Act 1996. By way of arbitration, business disputes between parties are settled through mutually agreed-upon terms. The parties submit the dispute to one or more arbitrators who settle the dispute by making a binding decision on the dispute. Thus, arbitration is a way of settling the dispute outside the courts in an efficient and timely manner. As per Indian laws, section 2(1)(f) of the Arbitration Act defines ICA (International Commercial Arbitration) as a legal and commercial relationship and either of the parties is a foreign national/resident or a foreign body corporate, company, association or body of individuals whose central management is in foreign hands. Thus, as per Indian laws, arbitration with a seat in India involving a foreign party is regarded as ICA, subject to Part I of the Act.

Objectives of International Commercial Arbitration

Arbitration is a progressing alternative to the legal system and aims to fill up gaps that persist in the conventional court proceedings. Various legal aspects of commercial arbitration in India include provision of a Neutral Dispute Resolution Forum against the local courts, providing parties with commercial expertise to adjudicate the tribunal, unlike courts that merely exercise general jurisdiction. The law in India provides parties with an enforceable award as opposed to jurisdictional uncertainties in litigation and the arbitration procedure is speedy avoiding the delays and appeals that always persist in the court system. In addition, the parties are not subject to public trials, thereby upholding the confidentiality of the parties.

International Commercial Arbitration with Seat outside India

There is no generally applicable procedural code that applies to ICA worldwide. Each procedure is tailored to specific cases that are distinct from litigation. Thus, specific country based institutional rules apply. This can be seen in the judgment of Bhatia International v/s. Bulk Trading in which it was held that Indian courts have the right to use their jurisdiction to test the significance of an arbitral award made in India, even if the actual law of the contract is foreign. The court recognized that Part 1 of the Arbitration and Conciliation Act, 1996 gives effect to UNCITRAL Model Law allowing courts to grant interim relief even when the seat of international commercial arbitration is outside India.

International Commercial Arbitration with Seat in India

The International Commercial Arbitration process in India begins with a notice of arbitration, which is sent from one party to another to represent the intention of the party to settle the dispute through arbitration. Under section 8 of the Arbitration and Conciliation Act, 1996 (the Act), if the party before a judicial authority, applies along with the original copy of the arbitration agreement, on the date of submitting its first statement itself, then the judicial authority must accept such application. As per the Act, section 9 allows interim relief to be granted to the parties by the court. In addition, section 17 allows the same for the arbitral tribunal. These provisions provide security to the party seeking relief until the final decision is given.

CONCLUSION

In this era of rising cross-border disputes and India’s emerging role in attempting to be the industry leader in myriad fields and as a developing economy, which calls for a re-look at the model BIT framed by India, as every document should adapt to the changing laws and scenario. Therefore, it is upon the Government of India to keep aligning its BITs in accordance with the changing global scenario. The post-pandemic world will be the real test for the Indian Government to effectively accommodate the grievances and concerns of the FDIs and make sure that the companies do not waste their productive hours in courtrooms, rather settle their disputes effectively in the boardrooms.

(Views are personal and based on personal understanding and interpretation of law)


[1]UNCTAD Bilateral Investment Treaties, 1959-1999 UNCTAD/ ITE/IIA/2 UN (2000) available at http://www.unctad.org/en/ docs/poiteiiad2.en.pdf   

[2]Treaty Between Federal Republic of Germany and Pakistan for Promotion and Protection of Investments dated 25-11-1959 (Bonn)

[3]Department of Economic Affairs, Bilateral Investment Treaties (BITs)/Agreementshttps://dea.gov.in/bipa

[4]http://www.nishithdesai.com/fileadmin/user_upload/pdfs Bilateral_Investment_Treaties_and_India.pdf

[5]Capital India Power Mauritius I and Energy Enterprises (Mauritius) Company v. India, ICC Case No. 12913/MS, Award dated 27-4-2005 (ICA).

[6]White Industries Australia Limited v. Republic of India, Final Award dated 30-11-2011 (UNCITRAL)

[7]https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/International_Commercial_Arbitration.pdf


Preferred Citation: Chatterjee, S; Khandelwal, A, “Bilateral Investment Treaties Vis-A-Vis Indian Legal Scenario: Does It Require A Change?” The law Culture (2020)

Authors

Swarnendu Chatterjee

Mr. Chatterjee is an Advocate-on-Record at the Supreme Court of India. Futhermore, he also holds the position of a Senior Associate at L&L Partners, New Delhi.

Anshita Khandelwal

Anshita is a Third year student from MAIMS, GGSIPU, currently pursuing a B.A. LL.B(H) degree.

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