The White Industries Arbitration: Implications for India’s Investment Treaty Program

In November 2011, an arbitral tribunal found the Republic of India guilty of violating the India-Australia bilateral investment treaty (BIT). It is the first known investment-treaty ruling against India, despite the fact that the country has a mammoth portfolio of BITs with more than 70 countries. News of the award broke only in February 2012.[i] As is often the case with investment-treaty disputes, the award was kept confidential. This is despite the fact that the dispute is squarely in the public interest. Indeed, the award is an indictment of India’s sovereign function, having ramifications both for the executive and the judiciary.

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.

Essential facts of the case

White Industries obtained an arbitral award in its favour in a contractual dispute with Coal India, an Indian public sector company, and sought enforcement of the award before the Delhi High Court. Simultaneously, Coal India approached the Calcutta High Court to have the award set aside, and the request was granted. White Industries appealed to the Supreme Court in 2004 and the final decision is still pending.

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 dismissed White Industries allegations related to violation of FET, expropriation and free transfer of funds. However, the tribunal ruled that India violated the MFN provision of the India-Australia BIT, and awarded White Industries 4 million Australian dollars.

Most Favoured Nation

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]

The tribunal overruled India’s objection that such borrowing will “fundamentally subvert the carefully negotiated balance of the BIT.”[iv] The tribunal held that this balance can be subverted only if the MFN provision is used to borrow a beneficial dispute resolution provision from another BIT.[v] The tribunal held that borrowing beneficial substantive provision from a third-party treaty does not subvert the negotiated balance of the BIT, but rather achieves the result intended by the incorporation of the MFN provision.[vi]

It is important to note that of the MFN provision in the India-Australia BIT recognises certain exceptions, such as not extending any treatment, preferences or privileges arising from a) customs union, economic union or a free trade agreement; b) the provisions of a double taxation agreement; and c) any legislation relating wholly or mainly to taxation.[vii] The BIT also has a general exception to the entire treaty, and hence to MFN provision as well, which states that the host country can deviate from its BIT obligations in order to adopt measures necessary for the protection of its own essential security interests or for the prevention of diseases or pests.

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.

Author: Prabhash Ranjan is a PhD Candidate in Law at King’s College London. Some parts of this article draw from a previous column of the author on the same topic – ‘Revisiting India’s Bilateral Investment Treaties’, The Financial Express, 23 February 2012, available at http://www.financialexpress.com/news/revisiting-indias-bilateral-treaties/915480/0