India Draft Model Bilateral Investment Treaty (2015): Where to now post the extreme pendulum swing?

The Law Commission of India (LCI) has submitted its Report No 260 (Report) to the Indian Minister for Law and Justice setting out its keenly awaited analysis of India’s 2015 Draft Model Bilateral Investment Treaty (Draft Model). This development is a step closer to the Government of India finalising its model Bilateral Investment Treaty (BIT) and reinvigorating its BIT programme, which has been under review since 2003.

BITs are effective international law instruments that protect the rights of investors making investments abroad, particularly in emerging markets. They are often used in conjunction with sound contract drafting as part of long-term investment planning. India entered the world of BITs in 1994, when it signed its first BIT with the United Kingdom. Since then India has concluded 83 BITs, of which 72 are currently in force (see here).

Once the Draft Model is finalised it will form the basis for future investment treaties to be concluded by India, including in replacement of its existing BITs. As such, the wording of the Draft Model is an important part of India’s foreign investment policy and affects foreign investors seeking to invest in India.

Background

White Industries’ successful arbitration against India (2011) is the first known BIT ruling against India. This case, combined with the uncertainty that was created as a result of events such as the retrospective application of tax laws, has put India’s BITs in sharp focus.

Boosting and keeping foreign investment in India continues to be on the Government’s declared policy agenda. However, the increasing trend of investors threatening BIT claims against India, together with India’s experience in the White Industries case, appears to have made the Government apprehensive about BITs. This is reflected in the Draft Model, which departs from common BIT provisions and brings into question whether India’s next-generation BITs will provide meaningful protection for foreign investors in India. By limiting the protections for foreign investors, the Draft Model inherently restricts the protections for Indian investors investing in counterparty states. This is not an insignificant issue given the increasing outward investment from India. As such, ensuring the Draft Model is balanced and in line with international practice will be important for both foreign and Indian investors.

LCI Report

The LCI has made various suggestions for amendments to the Draft Model that seek to balance the interests of investors and the state alike. We set out below a summary of the LCI’s key suggestions.

• Maintaining a certain and transparent investment environment: The preamble to the Draft Model contains wording affirming the sovereign right of a state to modify the conditions for investment in its territory. The LCI has proposed additional wording which aims to reassure foreign investors that, notwithstanding this right, laws will not be abruptly changed and disturb the existing investment environment.
• Definition of ‘investment’: The Draft Model adopts an ‘enterprise-based’ definition of investment, which the LCI has agreed is appropriate (subject to some drafting comments). It limits the scope of the BIT to investors with a ‘substantial and real business presence in India’ which are ‘under the actual control of foreign investors’. However, the LCI has also suggested that an ‘asset-based’ definition be considered as an alternative. Such a definition would appeal to states not willing to enter into a BIT comprising an ‘enterprise-based’ definition for fear of investors engaging in ‘treaty shopping’, i.e. structuring their businesses so as to take advantage of a favourable BIT available in a particular jurisdiction. The categories of assets that the LCI suggests be regarded as investments covered by the BIT include: property, IP rights, shares, stocks, bonds and contractual rights.
• Scope: Article 2 of the Draft Model lists the circumstances in which the treaty will not apply, including government procurement. The LCI considers that this particular exclusion would prevent a number of foreign investors from investing in India, for example through infrastructure projects. It has therefore proposed that this exclusion be deleted.
• Fair and Equitable Treatment (FET): An FET provision, which is commonly featured in BITs, protects a foreign investor against host state interference with the investor’s legitimate expectations. The Draft Model lacks an FET provision. However, the Article 3 ‘Standard of Treatment’ provision in the Draft Model imposes an obligation on the contracting states not to subject foreign investments to measures which constitute i) a denial of justice under customary international law; ii) unremedied and egregious violations of due process; or (iii) manifestly abusive treatment involving continuous, unjustified and outrageous coercion or harassment. The absence of an FET provision arguably avoids the difficulties that can arise in practice in determining the scope of these inherently ambiguous clauses. The Standard of Treatment provision balances the protection of investors/investments with the need for state regulation, although the LCI has proposed deleting words such as ‘outrageous’ and ‘manifestly’ to ensure a lower threshold for investors to prove violation of due process and harassment by the state.
• Most Favoured Nation (MFN): An MFN provision guarantees an investor treatment not less favourable than that afforded to other investors claiming under other investment treaties concluded by the same host state. The LCI highlighted the absence of an MFN provision in the Draft Model, which would mean that investors will not be able to rely on potentially beneficial provisions, whether procedural or substantive, in other BITs.
• Expropriation: Article 5 provides for protection against expropriation of investments. It sets out the test for expropriation as requiring both legal and economic deprivation, i.e. deprivation of both the investor’s right of management and control over the investment and of the value of the investment itself. Given the difficulties for the investor in satisfying both limbs of this test, the LCI proposes that either legal or economic deprivation should be sufficient. The LCI also considers that the test should not require appropriation of the investment by the state. It is sufficient that ‘substantial or total deprivation’ be established, without transfer of the investment from the investor to the state.
• Dispute Resolution Mechanism: The LCI has highlighted an apparent contradiction in the Dispute Settlement chapter of the Draft Model. Article 14.2(ii)(a) precludes an investment tribunal from reviewing ‘any legal issue which has been finally settled by any judicial authority of the Host State’ and ‘the merits of a decision made by a judicial authority of the Host State’. These provisions are designed to ensure that the tribunal does not act as an appeal body for the decisions of Indian courts. However, they also conflict with the subsequent provision requiring that an investor exhaust all judicial and administrative domestic remedies before commencing a proceeding under the BIT. The LCI has therefore proposed that the provision be deleted entirely.
• Exceptions: Under the Draft Model the host state may take measures in pursuance of one or more of the objectives set out in Article 16. As currently drafted, Article 16 provides that the state may take measures ‘which it considers necessary’ to achieve the objective/s. The LCI considers that this ‘self-judging’ wording makes the provision susceptible to abuse by the state as the necessity of a measure would be entirely subjective from the state’s perspective. The LCI has suggested that the provision be re-drafted with this concern in mind.
• Denial of benefits: Article 20 allows for certain investors to be excluded from treaty benefits for policy reasons, e.g. security or diplomatic concerns. The current wording of this provision suggests that the denial of benefits must be by way of a decision of the state made in its discretion. The LCI has suggested amending the wording of this clause to remove the requirement of the exercise of discretion/a decision by the state, as this could raise issues as to whether such exercise is valid.
• Duration: Article 24 of the Draft Model currently requires the express agreement of the contracting parties every ten years to prevent the BIT from automatically lapsing. The LCI has proposed redrafting this clause to allow for automatic extension of the BIT, making renewal the norm and termination the exception.

The LCI’s full report can be accessed here.

Conclusion

The LCI scrutinised each provision of the Draft Model in light of existing BITs and international practice. The LCI’s suggestions aim to avoid contradictions and issues of interpretation and ensure the proper balance is struck between investors’ rights and state sovereignty. Although the suggestions are not binding on the Government of India and may not all be incorporated into the final text, they do at least provide guidance as to the considerations the Government should take into account in ensuring the next-generation BIT shows India to be an investment-friendly country with clear and robust protections for foreign investors in line with international practice.