India should hold firm against the European efforts to undermine its new model Bilateral Investment Treaty

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International Economic Law and Policy Blog | 22 February 2017

India should hold firm against the European efforts to undermine its new model Bilateral Investment Treaty

by Rob Howse

In the process of moving to a new approach to international investment law and dispute settlement, India has elaborated a model BIT that differs significantly from older agreements. It is much more balanced between investor interests and those of legitimate public policy. The model BIT, for instance, contains a tightly-drafted general exceptions clause like that of GATT Article XX, safeguarding key policy objectives like health and the environment. Compensation for expropriation may be less than full market value, to take into account policy considerations like environmental impacts. And anti-corruption and corporate responsibility obligations are imposed on investors, making this one of the first models for an investment agreement to be genuinely not one-sided; typically investment agreements impose burdens on states without any corresponding responsibilities on corporations, hardly an equitable state of affairs.There is also in India’s model a robust exhaustion of local remedies provision: while exhaustion seems like a step back to the anachronistic world of diplomatic espousal it is an arguably justified response to the way in which arbitrators have unpredictably expanded jurisdiction, allowing businesses to bring claims where they have reorganized on paper their corporate structure to fall within a particular treaty even without any real contact to that jurisdiction (the so-called "Dutch Sandwich"), allowing end-runs around contractually limited investor protection by elevating contractual claims into treaty violations (sometimes through expansive readings of "umbrella clauses" with vague aspirational language suggesting a host state must honor all commitments to investors), and defining investors to include secondary market purchasers of sovereign bonds from holdouts in sovereign debt restructurings, who have nothing to do with the host country. It is a challenge to reign in such expansion of jurisdiction by arbitrator creativity, since arbitrators are judges for hire, and when they grant jurisdiction they get paid handsomely to hear the case. Exhaustion of local remedies seems an old-fashioned and blunt instrument, but it has the advantage of not being easy for arbitrators to interpret away.

In the transition to its new approach to investor protection, India has sought to terminate its existing BITs with individual EU Members. Now the European Commission is pressuring India to extend those existing treaties, which don’t have the safeguards of the new approach outlined above, for six months. India should not fall for this move, which would undermine significantly its negotiating power to get its economic partners to agree to new treaties based on the 2016 model BIT. The 6 month extension would give European companies an opportunity to get in under the old regime, giving them 10 years or more protection based on treaty norms that India has now determined are not in its national interests. Any company organized so as to be considered a national of any EU state that had an old BIT with India (including those exploiting the "Dutch sandwich" assuming that the Netherlands treaty-already expired-is included in the request for extension) could use the 6 month window to engage in the de minimus level of economic activity to qualify as an investor or investment under the old agreements, and then depending on the treaty they would be guaranteed 10 to 15 years of protection. Having allowed practically any company with the legal resources to figure out how to qualify as an investor or investment of some EU country under the old treaty to lock in 10 to 15 years protection under the old standard (if this is really what the Commission is proposing for the extension), India will have little leverage to bring the EU to agreement on its new approach. The EU can play hardball knowing its companies have used the 6 month window to protect themselves under the old treaties. There is a certain irony in the Commission’s request because post-Lisbon it has sought generally the termination of investment agreements between individual EU Member States and other states, in order to align Member State practice with the shift in competence over investment from the Member States to the EU level, as set out in the Lisbon Treaty. Here the Commission proposal for extension is frustrating its own policy of a timely and efficient transition to the exercise of EU-level competence.

While standing firm against a a six month come one-come all extension of the old treaties, it is arguable, along the lines of this recent oped, that India should be more open to considering the EU/Canada initiative of a multilateral investment court, not dismissing it out of hand. Concerns about expansive jurisdiction can be handled through a judicial model, where instead arbitrators who profit from taking jurisdiction, one has salaried judges who are not in it for personal wealth acquisition.