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The Lie of Sovereign Rights: India and Bilateral Investment Treaties

Introduction

In March 2017, the Government of India issued notices to terminate its bilateral investment treaties (‘BITs’) with 58 partner countries. This move was the culmination of a multi-faceted review process initiated by the Indian Government that sought to bring about a change in India’s approach towards BITs (and, by implication, international investment law) in light of adverse awards (e.g., White Industries) by international arbitral tribunals. The Indian Government also released a ‘Model BIT’ in 2016, radically different from the BITs it had signed in the past, that was to now serve as the negotiating reference point for future BIT negotiations.

The rationale put forward by the Indian Government for this volte-face in its approach to the legal protection of foreign direct investment was primarily based on sovereignty. The Government’s principal argument was that prior BITs that India had signed contained widely-worded provisions that granted undue leeway to ad-hoc arbitral tribunals and favoured private investors’ interests over those of the general public. The Government also argued that the 2016 Model BIT struck a better balance between foreign investors’ rights and public interest, such as by shifting to an enterprise definition of ‘investment’ (Article 1.4), precluding the treaty regulation of taxation measures (Article 2.4), and limiting recourse to international arbitration (Article 15).

This paper subjects these arguments to a critical enquiry. It seeks to address the question of whether India’s motivations for making a radical change in its approach towards BITs are based on genuine concerns around sovereignty. This paper proceeds by: first, delving into a historical contextualisation of BITs vis-à-vis India’s approach towards the protection of foreign investments; second, critiquing India’s articulation of sovereignty-centric arguments in relation to BITs; and third, summarising and concluding.

India and BITs: The Story So Far

BITs find their genesis in the minimum standard of treatment of aliens under customary international law.[1] The essential philosophy underlying BITs is the customary international law norm of according equal treatment to foreigners (and, by extension, their investments) vis-à-vis citizens. BITs crystallise this amorphous standard into defined enforceable rights for foreign investors and substantive obligations for the contracting states.[2]

India’s approach towards BITs (and international investment in general) can be, according to Prabhash Ranjan, analysed as three distinct phases – (1) the Refusal phase; (2) the Acceptance phase; and (3) the Backlash phase.[3] In the Refusal phase, India, guided by socialist principles and a protectionist economic policy, refused to sign BITs or the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (‘ICSID Convention’). The Refusal phase can be deemed to have lasted from independence till the liberalisation reforms of 1991. In the Acceptance phase, bolstered by increasing economic prowess brought about by the liberalisation of the economy, India went on what can be described as a “BIT signing spree”. By and large, India adopted a liberal approach towards the substantive provisions of the BITs it signed, choosing to grant expansive protections to foreign investors in line with prevailing practices in the Western world. Nevertheless, even during the Acceptance phase, India did not accede to the ICSID Convention. Finally, the Backlash phase (currently ongoing) began in 2010 with India’s loss in the White Industries case, which resulted in the Indian Government paying out substantial damages to White Industries due to protracted delays in adjudicating the case in Indian courts.

Bolstered by the pro-investor decision in White Industries, a wave of investor-State dispute settlement (ISDS) claims (including claims for payouts worth millions of dollars) were initiated against the actions taken by the Indian Government. It marked a turning point in India’s approach to investor-State dispute mechanisms, prompting the Government to initiate a review of its existing BITs, eventually leading to the termination of 58 such agreements and the introduction of the 2016 Model BIT. It is this Backlash phase and the Indian Government’s actions therein that merit the deepest consideration. That is the analysis the next part of this paper undertakes.

The Fallback on Sovereignty

While not all BIT claims led to arbitral awards, the mere existence of these claims constituted sufficient reason for the Indian Government to take steps to protect its legitimate ‘sovereign interest’. However, a closer analysis of prominent ISDS claims against India tells a different story – most of these claims brought against India reflected genuine, principles-based issues with arbitrary and highly discriminatory regulatory and/or judicial action.[4]

For instance, the White Industries decision itself was born out of undue judicial interference and delays in enforcing the initial arbitral award. It is an accepted proposition in international investment law that BIT-based ISDS mechanisms offer more efficient and impartial dispute resolution, especially in developing country contexts where judicial (in)efficiency is a major concern.[5] It is hardly reasonable to argue that a foreign investor seeking recourse to a more efficient and effective means of dispute resolution in order to enforce a vested right, tantamounted to an infringement of Indian sovereignty.

Take the case of BIT claims arising out of the Indian Supreme Court’s decision to cancel 2G telecom licenses that were doled out on a first-come-first-serve basis by the Indian Executive in 2008-09. Foreign telecom companies, that had entered into otherwise lawful purchases of telecom licenses from Indian ones, were particularly affected by this decision, with many of them taking the step of initiating ISDS claims.[6] These claims have not, as of the time of writing this paper, led to final arbitral awards. However, it is not hard to see the plausibility of the foreign investors’ case. In the time since the decision to cancel 2G telecom licenses was handed down, the Supreme Court itself has partly overruled the rationale for its holding. Furthermore, the decision itself was criticised for being based on an exaggerated ‘notional loss’ theory. The Indian Government’s initial reaction to BIT claims arising out of the decision was to argue that acts of the Indian judiciary could not be attributed to the Indian State, an argument that flies in the face of international law on state responsibility. Pursuing a legal claim against a plausibly flawed court decision, again, does not represent an infringement of the sovereignty principle vis-à-vis India. Foreign investors were merely exercising a right against unlawful indirect expropriation, which is what the Supreme Court’s decision amounts to,[7] that finds its genesis in the minimum standard of the treatment of aliens (customary international law).[8]

Finally, one must consider the retrospective taxation, i.e., Vodafone (I) and Cairn Energy, cases. It is a generally accepted principle that taxation is one of the core sovereign functions of the state. However, it is also an accepted principle that retrospective imposition of obligations via legislation is against the rule of law.[9] There is a general consensus in academic and professional commentary that the sovereign right to tax is not an absolute right and that retroactive taxation is, at best, a controversial exercise of public power and, in reality, a practice that is inimical to investors. Vodafone and Cairn, both foreign investors, had resorted to BIT arbitration to challenge the retrospective imposition of taxes on their capital gains. It is important to note that the Indian Government’s retrospective imposition of tax was against a judgement of the Indian Supreme Court itself. Adverse arbitral awards in Vodafone (I) and Cairn Energy ultimately led to the Indian Parliament repealing the amendments it had enacted to retroactively impose taxes on foreign investors.

From this analysis, it becomes clear that a series of adverse BIT claims (and, in some cases, final awards) following White Industries led the Indian Government to realise that its BITs, as they existed before 2017, contained provisions that opened India up to a level of liability that it was not comfortable assuming. This is a fair concern. Indeed, different countries (including developed ones) have, in the recent past, begun extensive reviews of their BIT frameworks.[10] The problem, however, is the rationale for India’s response. These adverse BIT claims were born out of legitimate concerns around arbitrary regulatory action by the Indian Executive, such as the allocation of telecom licenses on a flawed first-come-first-serve basis, the imposition of retrospective taxation or undue judicial interference and delays (White Industries). India’s extreme response of terminating existing BITs and notifying a Model BIT with an excessive pro-state inclination (which, surprisingly, does not adequately address concerns around unnecessary arbitral discretion that actually derogates from State sovereignty[11]) represents a flawed notion of what sovereignty entails. It appears that the Indian Government has taken ‘sovereignty’ to mean an absolute regulatory power vis-à-vis foreign investments. This is a problematic approach as it derogates from the international rule of law that BITs contribute to and is downright anachronistic given how the principle of sovereignty itself has undergone a sea change in light of new realties.[12]

Reasonable proposals for reforming the global investment law regime in order to better calibrate the relationship between foreign investors and host states do exist.[13] India’s “reforms”, however, do not reflect this. The 2016 Model BIT deprives foreign investors of legitimate protections, opens up the doors to abusive regulatory practice, and, overall, detrimentally affects India’s competitiveness as an investment destination. Indeed, it is telling that India has been unable to persuade partner countries to sign on to its new Model BIT. India’s underlying conception of sovereignty that motivated this move is without basis and is detrimental to the development of a consistent, predictable, and rules-based system for adjudicating international investment claims. As Prabhash Ranjan argues, India has, in moving to an extreme position on BITs, “thrown the baby out with the bathwater”.[14]

Conclusion

In conclusion, this paper has demonstrated that India’s sovereignty-centric concerns with regard to BITs rest on fundamentally flawed assumptions. Sovereignty today is a qualified principle; it ought not to be construed as granting states an unrestricted license to undertake measures as they deem fit, regardless of concerns around arbitrariness and abuse of power. Unfortunately, India’s 2016 Model BIT does not consider this reality. While BITs and investment law are generally concerned with commercial interests, they do have profound implications for the development of public international law. Indeed, BITs can serve a wide range of functions ranging from promoting principles like rule of law, non-arbitrariness, etc. to nudging states, especially developing ones, towards institutional and capacity-building reforms. BITs represent a principled trade-off between larger institutional benefits and narrow, strict conceptions of state sovereignty.[15] One only hopes that India will catch on to that idea soon enough.

Shreyas Sinha is a current undergraduate student pursuing a B.A., LL.B. (Hons.) at the National Law School of India University (NLSIU), Bengaluru.

Further References

[1] Nigel Blackaby and others, Redfern and Hunter on International Arbitration (6th edn, OUP 2015) 441; See also, Neer and Neer (USA) v United Mexican States (1926) 4 RIAA 60.

[2] Eric De Brabandere, Investment Treaty Arbitration as Public International Law: Procedural Aspects and Implications (CUP 2014) 58.

[3] Prabhash Ranjan, India and Bilateral Investment Treaties: Refusal, Acceptance, Backlash (OUP 2019) 43.

[4] ibid 187-88.

[5] Jan Peter Sasse, An Economic Analysis of Bilateral Investment Treaties (1st edn, Gabler 2011) 124-26.

[6] Ranjan (n 3) 179; For an analysis of the BIT claims arising out of the 2G case, see, Sanya Malhotra, ‘Cancellation of Telecom Licenses in the 2G Case: Claim for Indirect Expropriation?’ (2013) 6 NUJS Law Review 335.

[7] Malhotra (n 6).

[8] See, Edwin Borchard, ‘The “Minimum Standard” of the Treatment of Aliens” (1940) 38(4) Michigan Law Review 445.

[9] Lon Fuller, ‘Positivism and Fidelity to Law – A Reply to Professor Hart’ (1958) 71(4) Harvard Law Review 630; Brian Bix, ‘Natural Law: The Modern Tradition’ in Jules L Coleman, Kenneth Einar Himma, and Scott J Shapiro (eds), The Oxford Handbook of Jurisprudence and Philosophy of Law (OUP 2004).

[10] Daniel Behn, Ole Kristian Fauchald, and Malcolm Langford, ‘The International Investment Regime and Its Discontents’ in Daniel Behn, Ole Kristian Fauchald, and Malcolm Langford (eds), The Legitimacy of Investment Arbitration: Empirical Perspectives (CUP 2022).

[11] Prabhash Ranjan, ‘The Present and the Future of the Indian BIT Programme: Throw the Bathwater, but Keep the Baby’ (2019) 14(7/8) Global Trade and Customs Journal 372; Manu Thadikkaran, ‘Model Text for the Indian Bilateral Investment Treaty: An Analysis’ (2015) 8 NUJS Law Review 31; Prabhash Ranjan and Pushkar Anand, ‘The 2016 Model Indian Bilateral Investment Treaty: A Critical Deconstruction’ (2017) 38(1) Northwestern Journal of International Law & Business 1.

[12] Nico Schrijver, ‘The Changing Nature of State Sovereignty’ (1999) 70(1) British Yearbook of International Law 65.

[13] For example, see, Georgios Dimitropoulos, ‘National Sovereignty and International Investment Law: Sovereignty Reassertion and Prospects of Reform’ (2020) 21 Journal of World Investment & Trade 71.

[14] Ranjan (n 3) 252.

[15] Santiago Montt, State Liability in Investment Treaty Arbitration: Global Constitutional and Administrative Law in the BIT Generation (Hart Publishing 2009) 125.

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