By Sarthak Malhotra
(This article was originally published in ITN Quarterly, December 2016, International Institute for Sustainable Development here.)
India has bilateral investment treaties (BITs) or bilateral investment promotion agreements (BIPAs) in force with 72 countries. The initial duration of these agreements with 25 countries has not yet expired. The Government of India (Government) has recently begun negotiations with these countries proposing a Joint Interpretative Statement (Statement) containing clarifications similar to the text of India’s new Model BIT. We highlight below nine of the clarifications included in the Statement.
- Definition of “investor”
According to the Statement (paragraph 2), the definition of “investor” includes only legal persons established under home state laws and having their seat in the home state. It also adds to the definition a requirement that the legal person be engaged in “substantial business operations,” expressly excluding arrangements to avoid tax liabilities and the passive holding of assets such as stock, securities and land (paragraph 2.1(a)). In an attempt to promote the significance of “direct, real and transparent links” with the economies of the contracting states, the Statement affirms that the term “investor” shall not include domestic entities and those who invest through an entity of a non-contracting state (paragraph 2.2).
- Definition of “investment”
Paragraph 4.1 clarifies that “investment” does not include pre-establishment activities. The Statement also lays down the test for determining what constitutes an “investment,” based on the Salini test (paragraph 4.3). Learning from the unfavourable award in White Industries v. India, paragraph 4.3 excludes orders or judgments sought or entered in a judicial, administrative or arbitral action from the scope of “investment.”
Finally, in a response to the many claims India is facing from large corporations like Vodafone and Cairn Energy related to its retrospective taxation demands, paragraph 5.1 clarifies that taxation measures are not protected by the BITs.
- Fair and Equitable Treatment (FET)
The Statement clarifies that the country’s obligation under the FET standard only extends to the minimum standard of treatment under customary international law (paragraph 6.1). The Government’s intention is to restrict the broad interpretation of the FET standard.
It also provides under paragraph 6.2 that a breach of another provision of the BIT, or of a separate international agreement, shall not constitute a violation of FET, thus reaffirming that FET is an autonomous standard to be distinguished from others. In Philip Morris v. Australia, Philip Morris argued that Australia’s alleged violations of obligations under certain World Trade Organization (WTO) agreements also constituted violations of the Australia–Hong Kong BIT through its umbrella clause. With this clarification in the Statement, the Government intends to shield itself against this type of argument.
Under paragraph 6.3, measures taken for the protection or improvement of the following shall also not constitute breach of FET: (a) natural resources and the environment; (b) human, animal or plant life or health; (c) human capital, conditions of work and human rights; (d) economic conditions and the integrity of the financial system; and (e) implementation of fiscal policy measures, including taxation.
The Statement also clarifies that FET does not render contractual representations and promises enforceable under the BITs. Their legal significance has to be determined under the applicable law specified in the investment contract or under host state law (paragraph 6.5(a)).
- “Effective Means” Obligation
In White Industries, even though the India–Australia BIT did not provide for an obligation to provide White Industries “effective means of asserting claims and enforcing rights,” the tribunal relied on the treaty’s Most-Favoured-Nation (MFN) clause to borrow the “effective means” provision of the India–Kuwait BIT and hold India liable for judicial delay.
To avoid similar situations in future, the Statement clarifies that the “effective means” obligation is merely an obligation to not deny “access to legal or administrative adjudicatory proceedings in accordance with the procedure established by law” and does not create additional substantive obligations (paragraph 7.1). It also expressly states that normal delays in judicial or administrative proceedings do not violate the “effective means” requirement. Further, a breach of this provision shall only be established if the investor has exhausted all domestic remedies (paragraph 7.2).
- Umbrella Clauses
The Statement clarifies that the specific contractual obligations brought under a BIT only include specific obligations entered in a written contract and do not include “acts by governmental, administrative or judicial authority solely in its regulatory capacity or an administrative or judicial consent decree or order” (paragraph 8.1). It also states that any interpretation of such contractual obligations shall be in accordance with the applicable law specified in the contract (paragraph 8.2). However, to establish a violation of the umbrella clause, the investor would have to pursue the dispute resolution mechanism under the contract. Recourse to the BIT mechanism can only be had if no procedure is prescribed in the contract (paragraph 8.3). We believe that this may reduce the scope of the umbrella clause, as it reinforces the distinction between commercial arbitration and investment arbitration which umbrella clauses blur.
- National Treatment (NT) and Most-Favoured-Nation (MFN)
The White Industries tribunal held that the MFN provision could be used to borrow substantive provisions—but not dispute resolution provisions—from third-party treaties. The Statement affirms that MFN does not allow cherry-picking of provisions of other treaties (paragraph 9.2(a)). It also reiterates the tribunal’s view that MFN does not apply to the dispute resolution mechanism contained in the BITs or to “other procedural and jurisdictional issues under any circumstance” (paragraph 9.2(b)).
The Statement also clarifies that the legitimate exercise of prosecutorial discretion, including discretion to enforce a law or regulation, shall also not amount to violation of MFN or NT, as long as the underlying law is not inconsistent with the BIT (paragraph 9.4).
Under the Statement, the “like circumstances” test carried out in MFN and NT analyses must be “a fact-specific inquiry that is highly dependent on context.” For this purpose, the Statement offers guidance on relevant factors that must be considered, such as the actual and potential effects of the investments on the local community, and the aim of the policies or measures concerned (paragraph 9.3(b)).
The Statement affirms that determining whether a measure constitutes direct or indirect expropriation requires a case-by-case and fact-based inquiry. It also states that tribunals shall consider factors such as total or near-total and permanent destruction of the value of the investment and deprivation of rights of management and control over investment in determining whether an expropriation occurred (paragraph 10.2). Moreover, it clarifies that interference with management or control, when done in good faith and in compliance with host state laws such as financial or insolvency laws, would not constitute expropriation (paragraph 10.2(b)). Mirroring the newly added clarifications to the scope of FET, the Statement clarifies that measures taken for achieving certain public policy objectives shall not constitute expropriation (paragraph 10.3).
- Essential Security Interests
To limit the scope of review by tribunals when the “essential security interests” defence is invoked, the Statement provides that, in such cases, it shall not be open to any tribunal to “review the merits of any such decision, even where the arbitral proceedings concern an assessment of any claim for damages and/or compensation, or an adjudication of any other issues referred to the tribunal” (paragraph 11.1).
- Dispute Settlement
To establish the existence of a dispute, an investor shall have to demonstrate that it has suffered actual and non-speculative damages as a direct and foreseeable result of the breach and that its claims are ripe for adjudication under the BIT (paragraph 12.1). As per paragraph 12.1(c), a claim will be “ripe” only if (a) it is based on a government conduct, (b) the government conduct is final and legally binding, and (c) the government conduct inflicts a definitive and concrete injury capable of being assessed as a breach.
The Statement seeks to find the right balance between protecting foreign investors and investments from certain types of government behaviour and maintaining states’ flexibility to adopt measures in the public interest. In particular, the clarifications on the FET and expropriation protections demonstrate India’s commitment to ensure that its right to regulate is not impeded. The Statement also seeks to mold BITs into a tool to promote ethical business practices. It raises important points to be addressed in reforming India’s foreign investment regime, and could encourage other developing countries to undertake similar reforms.
 United Nations Conference on Trade and Development (UNCTAD). (2016). International investment agreements navigator (IIA navigator). Retrieved from http://investmentpolicyhub.unctad.org/IIA/CountryBits/96#iiaInnerMenu.
 These countries are Bahrain, Bangladesh, Bosnia and Herzegovina, Brunei, China, Colombia, Finland, Iceland, Jordan, Kuwait, Laos, Latvia, Libya, Lithuania, Macedonia, Mexico, Mozambique, Myanmar, Saudi Arabia, Senegal, Serbia, Sudan, Syria, Trinidad and Tobago, and Turkey.
 India’s Consolidated Interpretive Statement. (2016, February 8). Retrieved from http://indiainbusiness.nic.in/newdesign/upload/Consolidated_Interpretive-Statement.pdf.
 Government of India. (2015). Model text for the Indian bilateral investment treaty. Retrieved from http://indiainbusiness.nic.in/newdesign/upload/Model_BIT.pdf.
 For a detailed discussion, see Grabowski, A. (2014). The definition of investment under the ICSID Convention: A defense of Salini. Chicago Journal of International Law, 15(1), 287–309. Retrieved from http://chicagounbound.uchicago.edu/cjil/vol15/iss1/13.
 White Industries v. India, Final Award, November 30, 2011. Retrieved from http://www.italaw.com/sites/default/files/case-documents/ita0906.pdf.
 We believe that the actual effect may not necessarily be so, since, according to the interpretation of several arbitral tribunals, the minimum standard of protection under customary international law has evolved due to the impact of BITs on protection of alien property. See, for example, Chemtura v. Canada, Final Award, October 2, 2010, para. 121. Retrieved from http://www.italaw.com/sites/default/files/case-documents/ita0149_0.pdf; Mondev v. United States, ICSID Case No. ARB(AF)/99/2, Award, October 11, 2002, paras. 116–117. Retrieved from http://www.italaw.com/sites/default/files/case-documents/ita1076.pdf.
 See S.D. Myers v. Canada, First Partial Award, November 13, 2000. Retrieved from http://www.italaw.com/documents/SDMeyers-1stPartialAward.pdf.
 White Industries, supra note 6, paras. 11.4.19–20.
 In Apotex v. United States, the tribunal held that the U.S. Federal Drug Administration (FDA)’s decision to impose an “Import Alert” on certain drugs manufactured by Apotex but not on other drug manufacturers with comparable problems amounted to de facto discrimination. However, the tribunal ultimately found the discrimination to be for a legitimate purpose and therefore justified under the North American Free Trade Agreement (NAFTA). Apotex v. United States of America, ICSID Case No. ARB(AF)/12/1, Award, August 25, 2014. Retrieved from http://www.italaw.com/sites/default/files/case-documents/italaw3324.pdf.