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INDIA’S BATTLE UNDER BILATERAL INVESTMENT TREATIES

The events during the past few months have resulted in various arbitrations knocking at the doors of the Government of India (“GoI”) in terms of the Bilateral Investment Treaties (“BITs”) executed by GoI with various countries around the world. In most of these arbitrations, one is likely to see the GoI defending claims for damages arising from its failure to protect investments in India of the investors from other contracting countries as well as its failure to resolve issues related to erosion of investments.

Experts and businesses around the globe feel that, irrespective of the outcome, arbitration under BITs is an experience any country doesn’t need, as it implies wide publicity of disputes with the very investors such country would be attempting to attract.

Potential BIT Arbitrations:

A number of BIT arbitrations are expected to result from the judgment delivered by the Supreme Court of India (“SC”) in February this year, whereby the SC cancelled 122 telecom licenses on account of impropriety during their issuance by the GoI in 2008. Among the entities whose licenses were so cancelled were the Indian joint ventures of Sistema Telecom from Russia and Telenor from Norway. These investor companies have, as of now, sought assistance of the GoI for protection of their investments in terms of the BITs executed between GoI and their respective Governments. Failure in resolution of the issues through discussions would lead to arbitrations under the respective BITs being invoked by these companies.

Adding to the number of potential BIT arbitrations, Vodafone, UK is also, reportedly, considering invoking a counter-claim against the GoI under the BIT executed between India and the UK, in response to the tax claim of US$ 2.3 billion that the GoI intends to revive against Vodafone. In 2007, Vodafone acquired a majority stake in Indian mobile operator, Hutch Essar, from Hutchison Telecom of Hong Kong. The transaction was sealed overseas. The Indian tax authorities however claimed tax jurisdiction over the transaction, arguing that the underlying telecom assets were based in India, and that Vodafone should have deducted withholding tax from capital gains realized by Hutchison Telecom from the transaction. Ending the four year long legal battle, the SC in January 2012, struck down the tax claim against Vodafone, holding that the transaction was concluded overseas, and thus beyond the jurisdiction of the Indian tax authorities.

Soon thereafter, the GoI, has in its annual budget proposed amendment of the Income Tax Act, 1961 in a manner so as to render the said transaction, and similar transactions, taxable in India retrospectively. The proposed amendment, if confirmed by the Indian Parliament, would have the effect of overturning the judgment of the SC. The amendment would also entitle the GoI to revive its tax claim against Vodafone.

BITs and their Dispute Resolution Provisions:

BIT’s are voluntary agreements executed between two countries comprising of a number of mutual guarantees, usually including fair and equitable treatment of investors of one country in the other country as well as, protection and security of cross border investments from expropriation. Majority BITs also include Most Favored Nation (“MFN”) clause, which assures equally favorable treatment to the investments by the nationals and companies of a contracting country, as the Government of the investee country would accord to the investors of any other country under any other BIT.

The BITs executed between different countries across the globe, by and large, follow similar format, with limited specific variations. BITs stipulate alternative dispute resolution mechanism between the contracting countries and their investors in the event of disregard or violation of any investment related rights or obligation assured by such BIT.

Most of the BITs prescribe that any disputes in terms of the BIT that an investor of a country may have with the Government of the other country may be resolved through amicable negotiations between them. If the negotiations fail, the BITs prescribe adjudication of disputes through:

(a)       International conciliation in accordance with the conciliation rules of United Nations Commission on International Trade Law.

(b)       International arbitration either under the auspice of the International Center for the Settlement of Investment Disputes or an ad-hoc arbitral tribunal.

The BITs also prescribe for resolution of disputes between the two contracting countries, ordinarily related to interpretation or application of the BIT, through friendly consultations and negotiations, followed by arbitration.

India’s Track Record of BIT Arbitrations:

India has recently lost what reportedly was the first ever and the only international arbitration that it faced under a BIT till date. The arbitral tribunal held that India has breached its obligation in terms of the BIT to provide “effective means” of asserting claims and enforcing rights. The arbitral tribunal was convinced that inability of the Indian judicial system to conclusively determine the jurisdictional claim of the claimant, namely White Industries Australia Limited (“WIAL”) over a period of 9 years amounted breach of India’s obligation under the BIT (through application of MFN clause) of providing “effective means” to WIAL of asserting claims and enforcing rights.

Stop Press!

The arguments in the matter concerning jurisdictional claim of WIAL have been concluded on February 29, 2012, i.e. after pronouncement of the WIAL arbitral award. The SC is expected to deliver its judgment within the next couple of months. The judgment is much awaited as it would be settling amongst other issues, the question whether foreign arbitral awards can be challenged in India on merits under the Indian Arbitration and Conciliation Act, 1996.

Critical Considerations:

India has reportedly executed approximately fifty BITs with different countries around the world. The outcome of the WIAL case, treating delay in adjudication by the court as breach of the “effective means” assurance provided by the GoI in many BITs, makes one wonder whether the GoI exhaustively perceived the implications of this, and various other clauses of the BITs prior to their execution.

Furthermore, the stance of the GoI of overturning the judgment of the SC, by retrospective amendment to the tax legislation may not only shake faith of foreign investors and render GoI liable under the BITs, it also sends a signal of futility of any tax litigation with the GoI.

It would be interesting to see whether the GoI complies with the award passed in favour of WIAL, without WIAL having to seek its enforcement in India, and if WIAL needs to seek enforcement of the award in India, whether the Indian judiciary may wish to indulge in assessing merits of the award before granting its execution.

The BIT arbitrations resulting from cancellation of telecom licenses by the SC are also expected to throw open crucial issues related to maintainability of claims for damages, as consequence of a judicial pronouncement. Judiciary beyond the control of the Government is a fundamental tenet of democracy and an impartial social structure.

By: Alishan Naqvee, Partner (anaqvee@lexcounsel.in), assisted by Rupal Bhatia, Senior Associate (rbhatia@lexcounsel.in)