The participation of the Supreme Court and Delhi High Court
Prof. (Dr.) Mool Chand Sharma, S.J.D., Northwestern University School of Law, U.S.A., and former full-time member of the Law Commission of India. Jayanth Balakrishna, LL.B. (Hons.) U.K., and LL.M. (International Arbitration, Global Energy and Environmental Law) University of Texas School of Law at Austin, U.S.A.
Specialist consultant. The above consultants have co-authored a law book, The Foreign Investor and the Host Nation. Investor-State Arbitration – An Analysis. Special Focus on India’s Investment Treaty Law and Policy, 2018 (750 pages, contact: firstname.lastname@example.org).
he recent media-reported Delhi High Court and Supreme Court decisions, relating to the Vodafone v Union of India retroactive tax demand investorstate arbitration are of concern to the nation. Alongside Parliament’s abdication of its constitutional responsibility in ratifying treaties, the Supreme Court and the High Court’s non-recognition of the justiciability issue in relation to India’s failure to ratify treaties in general, andinvestment treaties in particular are of serious concern to students and practitioners of constitutional law. India being a dualist state, in general, requires national legislation to incorporate treaties into domestic law, and this controversy is at the core of the issue. This issue and the prevalent legislative silence particularly relates to those treaties which have a significant impact on the social and economic conditions in India. The present government inherited the controversy from the previous government. The Vodafone matter involves a claim by the foreign investor
against India on the grounds of unfair application of enacted retroactive provisions under s. 195 of the Income Tax Act, India 1961, and s. 119 of the Finance Act 2012. Vodafone (I) is an arbitration commenced under the Netherlands-India bilateral investment treaty (BIT). Vodafone (II) is arbitration initiated under the U.K.- India BIT. Both arbitrations allegedly have claimants in common with the same corporate group identity, involving the same cause of action and facts, and seek the same emedies. India has argued that pursuing parallel claims would amount to a time consuming, expensive and unnecessary exercise. The tribunals set up under both the BITs provide for arbitration under the UNCITRAL Rules of procedure. Under both BITs, state and local government measures that may affect the stability and protection of foreign investments resulting in a breach of a treaty, may be subject to claims adjudicated by an investortribunal operating under a quasi-supranational legal regime. Today, amongst lawyers, judges and even amongst law schools in India, an understanding of the investor-state regime is marginal at best. None of the law universities in India, including the top law schools have incorporated investor-state arbitration in their curriculum. It may be reasonably concluded that neither the lawyer nor the judge is likely to have significant exposure to this topic of law. The University Grants Commission (UGC) has not included this law topic as a recommendation in its model curriculum to law universities yet. Significantly, the Bar Council of India has not prescribed any courses dealing with international investor-state arbitration.
In recent years, a flurry of about 17 investment treaty-cases have been filed against India by foreign investors. The administrative machinery and sub-national organs of government are completely unaware about the existence and implications of treaty-making by India, which trigger state responsibility under the International Law Commission’s (ILC’s) Articles on State Responsibility, in relation to measures taken by the government that affect the protection and stability of foreign investments in India. India issued a model BIT in the year 2003. The model treaty signaled the desire of the government to seek foreign direct investment (FDI), and likely, also in relation to FDI by Indian entities in other countries. A model treaty serves as a template for negotiating and concluding a treaty with a counterpart contracting nation. India has not adequately demonstrated its ability to deal with treaty-making, ratification, and anticipate and deal with the consequences of a breach in the standards of protection that negatively affects the foreign investor’s investment in India. This is also borne out by the increasing number of foreign investor claims against India. It was with the initial loss to White Industries, in the White Industries v India investment treaty arbitration, that India discovered a need to revise its treaties and responded with what amounts to a knee-jerk reaction by introducing a new 2015 India Model BIT. The Model BIT was analysed by the Law Commission of India (LCI) in its report no. 260. Despite the generation of a revised 2015 India Model BIT, India still has to deal with current BITs and terminated BITs which contain clauses allowing those BITs to survive for many years, thereby ensuring the protection of the foreign investment for the extended period. Several provisions incorporated in the 2015 India Model BIT are flawed in relation to the objectives of balancing the public policy interests of the country with its desire to attract foreign investment. A similar flawed approach is visible in relation to a ‘joint interpretative statement’ issued by India to many of its counterpart nations, which seeks clarifications on the interpretation and application of various provisions incorporated in existing BITs. Some of the incoherence in thinking in the Indian government is partly due to the lack of knowledge of investor-state arbitration case law.
In 2002, the National Commission to review the working of the Constitution recommended that procedures be adopted by Parliament visa~- vis article 253 and other related articles of the Constitution of India. Under these articles, treaty-making in India requires the incorporation of treaty law into domestic law through enactment of legislation, thereby giving effect to India’s commitments under various treaties. By entering into a treaty, India may cede the primacy of its national laws to treaty law and also when in conflict with its international commitments. A dispute arising from an alleged breach of a treaty by India will then be justiciable before the courts of India.
It is axiomatic that India, its states and local governments, should not contribute to avoidable violations of customary international law and municipal law which could trigger an investor claim under a BIT. The initiation of investor-state arbitration by Vodafone in response to areportedly retroactive tax demand by India raises several issues. Firstly, whether the matter brought before a court of the respondent state India, is justiciable in its courts, having regard to the lack of compliance with the treaty-making and ratifying provisions under its Constitution. This issue is to also be viewed in the context of compliance with the principles of international law, treaty law and municipal law which an investor-state tribunal is required to interpret and apply in deciding a dispute before it. Secondly, the issue is whether the jurisdiction of an international investment tribunal is ousted by the decision of a national court of the respondent state, in this case India, where relief is sought in relation to the arbitration proceedings. International investment tribunals have held that a nation’s consent to arbitration to the exclusion of any other remedies empowers an international arbitration tribunal with jurisdiction over the dispute. For example, arbitral tribunals have relied on article 26 of the UNCITRAL Arbitration Rules which provides that the granting of interim measures by domestic courts does not preclude the protection or competence of the tribunal. The investment tribunal is not barred from passing an interim order, even if it negates an order passed by a national court over the dispute. A tribunal typically traverses treaty law, international law and municipal law in order to decide the dispute. A foreign investor could potentially assert that the Indian courts have no jurisdiction by applying the municipal law of India as an argument in support of non-justiciability.
Thirdly, the issue that arises is in respect of near identical multiple claims by the same investor or different investors under different investment treaties, with the same respondent state, and whether the claimant can be enjoined from doing so by the international tribunal and a national court of the respondent state. The international investor-state arbitration regime provides jurisdiction to the arbitral tribunal to decide multiple claims, and when required to do so, takes into account overlapping claims and considers the risk of double recovery by the claimant investor when arriving at the amount of reparation or compensation that is to be awarded, if at all.
International investment case law appears to have evolved to the point wherein recently in Orascom v Algeria (2017) the tribunal concluded inter alia, that the claimant was part of a group of companies in a vertical chain and that the facts, issues and reliefs in parallel proceedings that were instituted were essentially the same, and held that the claimant was precluded from proceeding with a parallel claim. This decision is an illustration of the competence inherent in the investment tribunal to
determine its own jurisdiction, and also addresses the issues that could be raised in the national courts of the respondent state. This power vested in an arbitral tribunal to determine its own jurisdiction, is made possible under the umbrella of a quasi-supranational arbitration authority created by intergovernmental cooperation which results in the culmination of an enforceable treaty.
However, investor-state arbitration tribunals do not adhere to the principles of precedence followed under common law. Amongst other things, a criterion that will be examined by the tribunal is whether the measures adopted by the state discriminated against the claimant resulting in injury to his foreign investment.
The UNCTAD World Investment Report 2016, states that more than 40 percent of foreign affiliates are owned through complex vertical chains with multiple cross-border links involving on average 3 jurisdictions. The 2015 India Model BIT attempts to limit this blurring of investor nationality to avoid multiple claims, by introducing limiting measures.
A UNCTAD report indicates that for the period 1987 to 2016, 36 percent of investor-state arbitration decisions were decided in favour of the respondent, 27 percent were decided in favour of the investor-claimant, 25 percent were settled, 10 percent of the cases were discontinued, and in 2 percent of the cases liability was found, but no damages were awarded. Despite the impression conveyed by these statistics, there have beenallegations of bias, corruption and incoherence in relation to the decisions rendered by investor-state tribunals. Presently, the investor-state regime does not incorporate an appeals mechanism, and arbitral decisions have lacked consistency and coherence. Many countries including India, have expressed an interest in incorporating an appeals mechanism on an institutional level, when negotiating BITs.
Under the present circumstances, and on the topic of Vodafone and any similar claim that typifies an appearance by the respondent state, India before its own courts, the apex court should lead from the front and rule that the claim is not justiciable. The administration of justice requires selfeffacing judicial withdrawal or recusal.