A recent report by the Standing Committee on External Affairs shows how there are two missing pieces to the puzzle for India’s model for its BIlateral Investment Treaties.
The recent Standing Committee of External Affairs (SCEA) report on India’s involvement with bilateral investment treaties (BITs) comes exactly a decade after the infamous White Industries case, the fallout of which helped lead to the unilateral termination of existing BITs and adoption of a new model in 2015.
The SCEA report, among other things, recommends that the 2015 model BIT should be reviewed, which is welcome, given the fact that the present model is skewed in the favour host state’s regulatory power – a primary reason why India has not been able to convince important treaty partners such as the US, Canada, or the EU.
Any meaningful review of the model which is palatable to the other states must consist of balanced rights and obligations for both the investors and the host state.
In this context, there are two important issues which the policy makers must address – ‘investor obligations’ and ‘transparency in ISDS proceedings.’
Investor obligations in older Bilateral Investment Treaties
The older generation of BITs has been asymmetrical. While these treaties granted rights to the foreign investors and imposed responsibilities on the states, they were conspicuously silent on the obligations of the foreign investors. The 2015 model partially addressed this asymmetry, by requiring the investors to voluntarily adopt corporate social responsibility principles addressing issues like labour, environment, human rights, community relations and anti-corruption. However, this provision is in the form of a best endeavour clause, which means that it cannot be enforced. The absence of mandatory investor obligation is closely related to the procedural incapacity of the host state in bringing counter-claims against the erring investor.
Counter-claims are the claims brought by the respondent host state in an ISDS proceeding against the claimant investor, on grounds that the investor has violated local law, human rights obligations, environmental obligations etc. However, where the BIT does not provide for mandatory investor obligations, the state cannot press a counter-claim despite investor’s activity leading to an adverse impact on the environment or human rights. Simultaneously, it is important that the BIT expressly allows the respondent state to bring counterclaims. In the absence of express provision, the possibility of bringing the claim will depend on the discretion of the arbitral tribunal. The 2015 model of India, is deficient on both counts. It neither provides mandatory investor obligations, nor does it expressly allow the host to file counterclaims. Thus, any BIT signed on the basis of the 2015 model will not allow bringing counter-claims.
On this issue, the UNCITRAL Working Group III on ISDS reforms has suggested that including binding investor obligations in the BITs would provide host states with a legal basis to raise counter-claims. This would remove the uncertainties and arbitral discretion which may ensue in the absence of such obligations. Likewise, the recent report of the UN Working Group on human rights, transnational corporations and other businesses, stresses the need to include binding and enforceable investor obligations concerning human rights and the environment. The adoption of mandatory investor obligation in the BITs to respect human rights and the environment would also be consistent with India’s duty to protect human rights under the UN Guiding Principles on Business and Human Rights.
Transparency and the cost of adverse awards
The SCEA while analysing the existing ISDS caseload against India, remarked that the adverse awards pose a huge cost to the public exchequer. The cost of adverse awards against India till date runs in thousands of crores in Indian currency.
The reason behind this cost to the public exchequer is the sovereign act of the government which is challenged in ISDS. This raises, therefore, a question of accountability which can only be ensured through transparency in the ISDS proceedings. ISDS is different from other commercial arbitrations as it raises, ‘important issues of public interest and public policy involving a sovereign which is ultimately accountable to its people.’
For instance, the ISDS case between Ras-al Khaimah Investment Authority (RAKIA) and Indian government under the India-UAE BIT arises from cancellation of bauxite supply agreement after there was public agitation over mining in a scheduled area in Andhra Pradesh. The case involves environmental concerns which is a public interest, and a compensation claim of 44 million USD, a huge cost to the public money.
Even as the 2015 model has incorporated a provision on transparency of ISDS related documents such as awards, notice of arbitration etc, the approach of the Indian government is to stonewall any ISDS related information. Hiding behind the confidentiality order passed by the ISDS tribunals, the government denies supplying the information on ISDS under the Right to Information Act.
The Vodafone award was not disclosed by the government citing the confidentiality order of the tribunal and that it did not have the consent of the other party. The apparent contradiction in the approach of the government is laughable at best. On the one hand where the government did not budge until the end and maintained that it never intended to submit tax disputes to ISDS tribunal; it was so meek and humble in complying with the confidentiality order of the tribunal by saying that it did not have consent of the other party.
This approach is problematic because the government is bypassing its legal obligations under the domestic law by according primacy to the confidentiality orders of the arbitral tribunal. The intention of the legislature in enacting the Right to Information Act could never have been to allow the government to abdicate its accountability by slipping in the shadows of confidentiality order of arbitral tribunals. Therefore, all the talk of transparency in the 2015 model in just an exercise in smoke and mirrors. The SCEA in its report recommended that our model BIT should be reviewed in light of the developments globally.
The approach of the new 2021 Canadian Model BIT with regard to transparency in ISDS proceedings is informative in this regard. The Canadian model expressly prioritises the dissemination of the ISDS related information under its domestic law despite such information being designated as confidential by the arbitral tribunal.
Putting the pieces together
The very rationale which calls for the imposition of mandatory obligations on the foreign investors – i.e. possibility of adverse impact on human rights and public interest from the activities of foreign investors and business enterprises in the host country, and the duty of the state to protect human rights which includes the right to receive information on issues of public concern – also calls for greater accountability of the government in dealing with the foreign investors, which can be ensured only by dissemination of ISDS related information to the public.
The government would do well to find these two missing pieces when they sit again for reviewing the 2015 model.
A version of this article originally featured in The Wire. Read this article about closer economic cooperation between the UK and India, which also discusses some challenges with Bilateral Investment Treaties.