A BIT is a treaty between two countries that sets out to provide certain basic protections to the investors of one state investing in another. For instance, most such treaties provide investors a guarantee of “fair and equitable treatment” — the clause, to draw an analogy from constitutional law, is broadly akin to the right of equality and protection against arbitrary state action.
Also have MFN provisions, which guarantees an investor a treatment not less favourable than a treatment afforded to any other investor claiming rights under any other BIT.
It was only in end-2011 that India faced its first adverse arbitral award arising out of a BIT in the White Industries case. White Industries, an Australian entity, succeeded in obtaining a foreign arbitral award against Coal India Ltd. White Industries had initiated proceedings for enforcement of this award before Indian courts and for about 10 years, the said proceedings did not progress. White Industries argued that it had been denied “effective means” of enforcing its rights in relation to its investment, a protection incorporated into the India-Australia BIT by virtue of an MFN clause it contained. The arbitral tribunal accepted the plea and India was forced to pay a huge price for the delays caused by its judicial system.
Several other companies have filed similar suites after that. Indian government is staring at an enormous liability arising out of these actions.
As a reaction government wants to renegotiate BITs and a model was drafted for renegotiation. Model protects interests of state and have following features:
a) providing an extremely narrow definition of investment
b) deleting the MFN clause
c) providing for the exhaustion of remedies on the one hand and for the decision of the court to be binding on the arbitral tribunal on the other and finally
d) by providing for a number of exceptional self-judging state actions, which would not be within the purview of challenge before an arbitral tribunal set up pursuant to the dispute resolutions contained in the BIT.
Law Commission of India has provided his inputs and suggested a balanced approach between states and investors interest. It recommends:
(1). modification from a highly narrow ‘enterprise-based definition’ of investment to a broader and universally accepted ‘asset-based definition’. An enterprise-based definition would mean that a foreign investor who did not set up an enterprise in India to carry on business would have absolutely no protection.
(2). LCI reiterates the stand adopted in the Model Draft that the MFN must not be incorporated since India might chose to provide differential benefits to trading partners based on the extent of incoming investment from a country.
(3). LCI encourages the incorporation of a “denial of benefits” clause, wherein an investor is denied the benefits of a treaty should it be involved in corrupt practices or should it act contrary to the laws of the country.
(4). Model Draft contained general exceptions with a long list of permissible objectives such as public health, environment, public order, public morals, improving working conditions, ensuring the integrity and stability of the financial system, banks and financial institutions etc., and it provided that any measures which the state considered to be in furtherance of the above objectives would not be subject to scrutiny before an arbitral tribunal.
While having a set of exceptions is internationally recognised and is in furtherance of sovereignty, the provision in the Model Draft provided the state with the authority to self-judge,that is, to determine if a measure would fall within the exception and not be subject to a challenge. The LCI has suggested that the said provision be re-drafted so as to not be self-judging.