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This note wishes to unravel the implications of this ruling on two issues. First,
the nuances related to the interpretation of the Most Favoured Nation (MFN).
Second, the implications of the interpretation of the expropriation provision
for the Indian judiciary, particularly in light of the on-going debate in India on
enforcement of foreign arbitral awards.
In 2010, White Industries took the matter to arbitration on the grounds that
the inordinate delay in Indian courts to enforce the arbitration award violates
the India-Australia BIT. White Industries argued that the delay violated the
provisions on fair and equitable treatment (FET), expropriation, MFN
treatment, and free transfer of funds.
The tribunal found India guilty of violating the India-Australia BIT because
the Indian judicial system has been unable to deal with White Industries’
jurisdictional claim in over nine years. The tribunal held that the delay by
Indian courts violated India’s obligation to provide White Industries with an
“effective means’ of asserting claims and enforcing rights.” This is despite the
fact that the India-Australia BIT does not mention or include such a duty for
host states. The tribunal got around that by holding that White Industries
could borrow the ‘effective means’ provision present in the India-Kuwait
BIT[ii] by relying on the MFN provision of the India-Australia BIT.[iii]
None of these exceptions were applicable to India in this case, and hence
White Industries was permitted to benefit from the broadly worded MFN
provision. In light of this ruling, it is pertinent that India reviews the MFN
provisions in its BITs, which are often defined in an expansive manner
without adequate exceptions. Furthermore, an important implication of this
ruling is that inordinate delays in Indian courts in disposing matters related to
a foreign investor can, potentially, violate India’s BIT obligations not due to
the violation of ‘denial of justice,’ but due to a violation of the ‘effective means’
standard, which requires a lower threshold than ‘denial of justice.’ Further, a
tribunal can find a violation of the ‘effective means’ standard even when the
concerned BIT does not contain such a provision as long as it contains a broad
MFN provision, which some tribunals will use to import investor guarantees
from other BITs.
Expropriation
For reasons specific to this case, the tribunal did not agree with White
Industries that India had expropriated its investment. However, the tribunal
made two important points. First, the tribunal disagreed with India that “the
only form of contractual rights that are capable of being expropriated are
those that are a form of intangible property.”[viii] The tribunal stated that all
contractual rights, whether tangible or intangible, are capable of being
expropriated.[ix] Second, and more importantly, the tribunal said that the
expropriation claim is unfounded because Indian courts had yet to rule on
Coal India’s application to set aside the foreign arbitral award, and, therefore,
the award has not been “taken.”[x] Thus, the tribunal clearly indicated that a
foreign arbitral award is an ‘investment’ under the BIT and that the setting
aside of such valid foreign awards could constitute expropriation under the
BIT.
This observation has implications for the debate in India over the role of the
judiciary in enforcement of ICA awards. India’s higher judiciary has been
expansively interpreting the Arbitration and Conciliation Act of 1996 (A&C
Act) to set aside or not enforce ICA awards in India.[xi] The expansive
interpretation of the A&C Act by the Indian judiciary implies that an award
rendered anywhere can be set aside by an Indian court if it goes against: (i)
fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice
or morality or it patently violates Indian law.[xii] It is important for India to
understand the ramification of this aspect of the ruling, as it potentially turns
India’s judiciary’s interpretation of the A&C Act into a breach of international
law.[xiii]
Conclusion
India has been entering into BITs without fully understanding their
implications. The sanguine belief in the Indian official establishment is that
Indian BITs adequately balance investment protection with India’s ability to
exercise sovereign powers. This erroneous belief has been strengthened over
the years because India’s regulatory actions have so rarely been challenged
under BITs. It is a mistake, however, to believe that all is well with Indian
investment treaties.
The White Industries award draws attention to the fact that BIT provisions
like the MFN clause are often vague and broad. This enabled White Industries
to indulge in treaty shopping and arrive at a result that India did not
anticipate. The ruling also clearly demonstrates how sovereign functions of the
Indian judiciary could amount to violation of India’s BITs. Hence, one expects
that this ruling should trigger a critical review of India’s BIT program. Such a
review is imperative in light of India’s deepening integration with the global
economy and increasing number of new trade and investment agreements,
such as the India-EU free trade agreement.
[ii] Article 4(5) of the India-Kuwait BIT provides that ‘each contracting party
shall…provide effective means of asserting claims and enforcing rights with
respect to investments…’.
[ix] Id
[xi] For more on this issue see A. P. Rebello “Of Impossible Dreams and
Recurring Nightmares: The Set Aside of Foreign Awards in India” (2010) 6
(1) Cambridge Student Law Review, 274; A. N. Jain “Yet Another Misad-
Venture by Indian Courts in Venture Judgement” (2010) 26 Arbitration
International, 251; S. Sattar, “National Courts and International Arbitration:
A Double Edged Sword?” (2010) 27 Journal of International Arbitration 51,
64-65; P Ranjan and D Raju “The Enigma of Enforceability of Investment
Treaty Arbitration Awards in India” (2011), 6 (1) Asian Journal of
Comparative Law, Article 5.
TAGS
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INVESTMENT DEFINITION
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ADR
Aditya P Arora
RGNUL, Patiala
“Editor’s Note: The paper analyses the case of White Industries v. Republic of India
which was the first judgment on investment ruling of Bilateral Investment Treaty (BIT)
for India. India lost the case, but the experience has led to deliberations on a better,
stronger version of the model BIT for India.”
ABSTRACT
INTRODUCTION
The judgment has to be analysed academically as well as from the practitioner’s point
of view. It is amusing to note that these points of view are far apart. The merits which
an academician sees in the case are demerits for a legal practitioner. These anomalies
have to be resolved.
Even though the judgment is not immune from criticism however it’s a huge positive
step taken in improving the laws relating to Bilateral Treaties in international arbitration
in India as the unanticipated result has cautioned India to think twice before entering
into any such treaty with vague clauses again. The judgment covers various aspects of
an international arbitration like the treaty signed, the clauses to be complied with (MFN
Clause in this case), the enforcement of award in the other country, and issues like
definition of investment and expropriation have been discussed at length. Overall the
positives of the judgment outweigh its negatives and therefore one may very well
conclude that the Supreme Court is accelerating in the right direction and interpreting
the law in its true form as well as the spirit.
In September 2002, Coal India applied to the Calcutta High Court to set aside the ICC
Award under the Indian Arbitration and Conciliation Act, (US Dollar Four Decimal Zero
Eight Million) (the set-aside proceedings). Nearly simultaneously, White Industries
applied to the High Court of New Delhi to enforce the ICC Award in India (the
enforcement proceedings). Both proceedings experienced significant delays. The
enforcement proceedings were eventually stayed pending a decision in the set-aside
proceedings. White Industries appealed to the Supreme Court; in the meantime (in
2006) the High Court of New Delhi stayed the enforcement proceedings. For about ten
years White Industries could not get any relief.
After years of fruitless attempts to enforce the ICC Award in the Indian courts, White
Industries commenced arbitration proceedings against India in 2010 under the India-
Australia BIT dated February 29, 1999 (the “BIT Arbitration”), claiming that the inordinate
delay resulted in a breach of the provisions on fair and equitable treatment (“FET”),
expropriation, the “effective means” standard incorporated by the MFN clause and free
transfer of funds under the treaty. That gives rights to Australian or Indian investors in
each other’s country, and where those rights are infringed, the investor can begin
arbitration proceedings against the Government of the other contracting State directly.
Article 12 of the said Treaty, inter alia, provides for reference of a dispute to an ad hoc
tribunal in accordance with the UNCITRAL Arbitration Rules, 1976, with certain
modifications. White Industries has reported claimed that the action of the Indian courts
and of Coal India
That the inordinate delay of the enforcement of the foreign award has caused a
violation of fair and equitable treatment (FET), expropriation, MFN, fair and equitable
treatment (FET), expropriation, MFN and free transfer of funds of the India-Australia BIT
and transfer of funds of the India-Australia BIT.
Contentions of the Republic of India
That the present mining contract was nothing but a commercial contract wherein the
main BIT obligation was the supply of goods and services. Hence it did not come within
the four walls of investment and thus there has been no violation as alleged by the
appellants.
Whether the commercial contract between India and Australia was an investment under Article
1 of the Indian-Australian BIT?
Whether Indian Government committed a violation of expropriation, MFN, fair and equitable
treatment (FET), expropriation, MFN and free transfer of funds of the India-Australia BIT and
transfer of funds of the India-Australia BIT?
The tribunal held the Indian Government liable for violating the effective means
standard according to which effective means of asserting claims and enforcing rights
to the investing country have to be provided by the host country. Since the Most
Favoured Nation clause wasn’t expressly mentioned the tribunal decided that effective
means standard is less demanding and can be squarely applied to the present facts in
hand and the justice can be delivered. The tribunal noted that the effective means
standard means that the system of law in which the redressal is sought is working
objectively and matching the international standards and that the system works
properly and effectively at the time when the dispute arises or any redressal is sought.
The system should function without any loop holes. Thus the contention of the
respondent in the present case that since the Indian legal system is well known for its
delayed justice provision hence there was no ineffective mechanism when White
Industries sought enforcement of award. It was a usual manner in which legal system
functions in India and White Industries should have had information about the same and
should not be creating such a hue and cry for the same was outright rejected.
Thus the tribunal had no second doubts about holding that the effective means
provision has not been properly considered by the court but the tribunal dismissed other
contentions of the respondents like FET violation wherein the contentions of the
appellants were that the principle of legitimate expectation had been violated by the
Indian courts as they expected the ICC award to be immediately enforced and the
application of the Coal India to set aside the award would be dismissed immediately but
for over nine years they were just hanging and waiting for justice which was least
expected under such a bilateral treaty .However, the tribunal held that such legitimate
expectations would only have arisen out of a specific, “unambiguous affirmation to the
effect by India,” [1] which was not the case.
The other issue raised by the appellants were that their investments were being
expropriated by the Indian Government if the same is not set aside but the tribunal ruled
otherwise stating that that the primary constituents to an expropriation would be the
devaluation or loss to the value of the property to deteriorate or the rights be
substantially effected since none of the pre requisites are met with and the investment
in no way is affected hence since the award has not actually been disposed off hence
no expropriation happened till date.
Thus the only violation ruled against the White industries was of that of the effective
means standard due to delay in enforcing the award.
The recent ruling of the White Industries Dispute is in much hype for a reason. There are
some major after effects of the White Industries:
Since an exorbitant amount of money has to be given by the Government of India to the White
Industries this will affect the public exchequer as the money is going from the government and
ultimately it’s the people’s loss as all the money was paid by the common man via tax. Hence it’s
the people who are paying for the negligence of the government.
Just like in the present case if there are more such issues where the Indian judiciary is taking a
long time in delivering judgments relating to the international investment agreements this can
have an impact on India’s treaty obligations and terms with the other nations ultimately the
commerce of the nation is put at stake.
Another important issue which this judgment highlights is that the tribunal dismissed the
grounds of expropriation as the matter i.e. Coal India’s application wasn’t decided upon yet and
the ICC award was not set aside even after 9 years and thus held that since the contractual
rights and the value of the contract money has not been affected yet hence there is no
expropriation clearly hinting that such an award would amount to be an investment and thus
the judiciary should be careful while dealing with investment awards in future as they can have
major consequences.
The ruling has another important message for the higher judiciary that has expansively
interpreted the Arbitration and Conciliation Act of 1996 to set aside or not enforce ICA awards in
India. While dismissing White Industries’ expropriation claim, the tribunal said that this claim is
unfounded because Indian courts are yet to dispose of Coal India’s application to set aside the
foreign arbitral award and that the award has not been ‘taken’ or set aside. Thus, the tribunal
clearly indicated that a foreign arbitral award is an ‘investment’ under the BIT and that the
setting aside of such valid foreign awards could constitute expropriation under the BIT. This
observation is vital in light of the debate in India over the role of the judiciary in the
enforcement of ICA awards.
Another observation which we need to keep in mind while entering into future agreements and
acting upon it is that the court held that unlike what is the belief ,not just tangible but also
tangible properties can amount to expropriation and since in the present case the machinery
and other such technical support was provided hence if the award was set aside India would
have been made liable for expropriation.
Most importantly, the problem with this ruling is that it has broken the trust of people in the
BITs which bragged about creating a balance between the investment protection, economic
development and India’s sovereign power. The problem with such BITs is that provisions like
Most Favoured Nations which have never been properly included and vague provisions like
effective means are given which are so open to interpretation that the parties go treaty
shopping and find the most convenient and befitting treaty which helps them get maximum
compensation this is affecting the Indian economy.
The award has given a renewed confidence to the investors regarding the protection of their
investment. A bypass has been created which subverts the delayed judicial process. it opens up
another route for investors outside of the Indian courts. If investors face many years’ delay in
enforcing arbitral awards, they may pursue the Government of India directly. Of course, in order
to do this the investors would need to have access to a similar BIT as the Australia-India BIT, or
the Kuwait-India BIT. India is a party to over 80 BITs with other countries, including Australia,
Belgium, France, Germany, Italy, Singapore, Sweden and United Kingdom
The tribunal in the case concluded that the ICC Award was enforceable under the laws
of India, but it was silent on the breach. This means it was expected from the judiciary
that they would give an opinion on whether not upholding the award resulted in breach
of New York Convention. It would have been interesting had the tribunal given its
opinion on this matter as well. In fact as an alternative White Industries could have
enforced the awards in any of the other New York convention countries where Indian
government has its assets. To further what the tribunal is silent on, the non
enforcement of foreign award is indeed in default of the New York convention as Article
V of the New York convention contains an exhaustive list of grounds on which a foreign
award can be set aside by the courts of the country where enforcement is sought.
Edited by Amoolya Khurana
[2] Bhatia International v. Respondent: Bulk Trading S.A. and Anr., (2002) 2 SCR 411.
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