This article is written by Anuj Kumar, a law student from Vivekananda Institute of Professional Studies, Guru Gobind Singh Indraprastha University, New Delhi.
Table of Contents
Introduction
Arbitration is a form of alternative dispute resolution in which parties submit their dispute to an independent party. One or more arbitrators solve the dispute. Usually, odd number of arbitrators is preferred; commonly one or three arbitrators are seen. Arbitration is final and binding unlike mediation, negotiation, and conciliation which are non-binding. This article shall discuss what investment arbitration is and can investment awards be enforced in India?
With the expansion and globalization of cross-border investments and trade, the relationship between investors and state has increased and has become more intricate. Investment Arbitration is also called as Investor-State Dispute Settlement. This Investor-State Dispute Settlement is a process to resolve disputes between foreign investors and the host state. In investment protection, the power to sue a host state by a foreign investor plays an important role. This possibility to sue a host state acts as a guarantee for the foreign investor that in the case of a dispute they will have access to unrestrained and knowledgeable arbitrators who would solve the dispute and render an enforceable award.
For a foreign investor to initiate investment arbitration, the host state must give consent to it. The state ensures certain rights and protections to the investors from other contracting states; this includes fair and equitable treatment, most favored nation treatment, full protection, and security to name a few. This allows the foreign investor to avoid national jurisdictions that might be perceived to be biased or have a lack of independence, and to resolve the dispute following different protections that are under international treaties. Each of these protections is in accordance to the international laws and is usually negotiated upon by the contracting parties.
In Investment Arbitration, procedurally, mandatory provisions of the national law are only relevant if the arbitration is governed by non-government organizations such as London Court of International Arbitration (LCIA) or International Chamber of Commerce (ICC) instead of the treaties, like the International Center for Settlement of Investment Disputes (ICSID) or the North American Free Trade Agreement (NAFTA). The national law on investment treaties is by default the law of the host state. This suggests that investors are going to be bound by any future changes within the municipal law of the host state, which happens to be an understanding that is highly disputed when a change results in a breach of the investment treaty and fails to guard foreign investors.
Host State Consent to Investment Arbitration
Consent in investment arbitration directs competence and formation of the tribunal; it is therefore the basic establishment of the investment arbitration. Consent to investment arbitration is established under Section 25(1) of the ICSID convention. It is commonly given by the host state.
The consent is generally given through three methods i.e. Consent by Contract, Consent through National Legislation, and Consent by Treaty. Under the ICSID Convention, the consent must be in writing but there is no particular defined way through which it should be done because of which the parties are free to choose the manner expressing their consent. Consent is by and large nationality-based i.e. the suitable nationality may be that of an individual or a legal entity that provides some room in terms of the treaty or treaties beneath which an investment arbitration may start off.
The Forms of International Treaties that Protect Investment
For the legal protection and to safeguard foreign investments, a number of international treaties are present. These treaties cater between countries, companies or are in regard to a specific industry sector such as energy to take for an instance. The five common types are elucidated below:
- Bilateral Investment Treaty– Bilateral Investment Treaties are arranged to secure, empower and advance investments by nationals of one of the contracting states within the region of other contracting states. BITs are primarily signed to safeguard foreign investments. In 1959, Pakistan and Germany were the foremost countries to sign a BIT. Since 1990, countless developments within a number of BITs have transformed the security of foreign investments. Today BITs have covered almost every region of the world. India’s first BIT was signed with United Kingdom in 1994 and India has signed around 84 BITs till date.
- Free Trade Agreements– The investment provisions of free trade agreements offer a well-tested and effectual means for protecting investments. A Free Trade Agreement is an agreement that is signed between two or more countries to agree on certain commitment that affect the trade in goods and services, and offers different protections to investors. For example, India has signed 42 free trade agreements; within Asia, India has signed FTAs with Sri Lanka (1998), Afghanistan (2003), Thailand (2004), Singapore (2005), Bhutan (2006), Nepal (2009), Korea (2009), Malaysia (2011) and Japan (2011). The South Asian Free Trade Agreement (SAFTA, 2004) and the India-Association of Southeast Asian Nations Agreement (ASEAN, 2010) are the two regional agreements that have been agreed. Furthermore, the USA has signed 14 free trade agreements.
- The Energy Charter Treaty– The Energy Charter Treaty was signed in December 1994 and legally came into force in April 1998. Energy Charter Treaty was formed due to the dissolution of the Soviet bloc and the following emergence of the energy market in Eastern Europe and Central Asia. The Energy Charter Treaties provisions on the security of energy-related investments, which are similar to those of BITs, reflect the need for a stable and even legal framework for development in the energy sector. Having entered into force in April 1998, currently, there are 53 signatories and contracting parties to the treaty. This includes the European Union and EURATOM. Article 10-17 of the ECT lays down investment protection. The ECT investment provisions mirror an apex desire for transparency, stability and cooperation within the energy sector. Numerous cases have been reported and ensuing remedies are provided by arbitral tribunals by following ECT’s investment protections.
- The ASEAN Comprehensive Investment Agreement– The Association of Southeast Asian Nations is a regional set for cooperation mainly in the areas concerning economic development in South East Asia. ASEAN was established on 8 August, 1967. On 15 December, 2008 ASEAN initiated a charter which made it a legal entity that aimed at creating a free trade area. Following, ASEAN Comprehensive Investment Agreement was established on 29 March, 2012. ACIA aimed to create an unrestricted and free investment environment within the ASEAN members. It was also established to ensure a free, open, integrated and transparent investment with the association of ASEAN.
Most of the legal protections which are commonly included in BITs can be seen in the ACIA. It also includes the right of investor to submit investment disputes for arbitration to the International Centre for Settlement of Investment Disputes (ICSID). India became part of it in 2014. ACIA offers various investment protections such as full protection and security, free transfer of funds, protecting insurer’s right to recover to name some. It also includes several constraints, in specific by requiring, where relevant, specific approval by the proficient state authority and by limiting the possibility of “treaty shopping” by forecasting the possibility of the states to turn down the benefits of the treaty to certain types of investments.
- Human Rights Treaty– Commonly the investors engage in some form of property right on the part of the investment. This at times leads to overlay with the protection of the right to the peaceful enjoyment of property, as recognized in various human rights treaties. This right is engaged whenever property has to be taken over (in fact or law), without giving sufficient compensation. Human rights treaties protect both foreign investors from despotic treatment by the host government. Thus, for example, the European Convention on Human Rights guarantees the peaceful enjoyment of possessions to corporate entities even as it does to individuals.
Initiation of Investment Arbitration
In investment arbitration, the investor and host state are invited to engage in negotiations and find a mutual solution; this is done in the cooling off period which is generally a time frame of 6 months. Cooling off period typically starts with a notice of intent to commence arbitration proceedings against the host state. If the dispute is not settled over the cooling-off period, the foreign investor must file a request for arbitration in accordance to the rules which are applicable. It is commonly seen that the host state waits for the cooling off to get over; this is done to see whether the investor would take the high cost of investment arbitration. In several instances, the investor may be required by the arbitration agreement upon which the claim is based to go through all effective domestic legal remedies before commencing a claim for arbitration. On the opposite, “fork in the road” clause in the arbitration agreement forces the investor to decide whether to sue the host state in the domestic courts, through the arbitration mechanism provided in the agreement or before other relevant bodies.
Enforcement of Investment Arbitration Awards
According to Articles 53 to 55 of the ICSID convention, the host state is bound to respect the enforcement of international investment awards. According to the ICSID Convention Article 54(1), “Each Contracting State shall recognize an award rendered according to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that state.” The enforcement of arbitral awards is implemented through the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 if the host state is not a party to the ICSID convention. Even though each state must recognize the award but, according to article 55 of the ICSID convention every state’s laws related to immunity continue to apply.
Confidentiality and Transparency
For investment arbitration, there is blended picture for privacy and straightforwardness. The ICSID Convention and most of the BITs say very less or nothing on whether the arbitration procedures and awards should be treated as confidential, private or not. But in practice, little confidentiality is seen; which is commonly through parties agreement, where parties adjust their level of confidentiality which is then signed by the parties and adopted by the tribunal through an order. Sometimes parties don’t agree on the confidentiality, and then they can request the tribunal for this issue, following article 47 and rule 39 of the ICSID convention tribunal can issue a decision or through article 44 and rule 19 of the ICSID convention the tribunal can decide the issue in accordance to the assuming power it has to decide an issue which is not covered under the convention. The arbitrators are also made to sign a declaration under Rule 6(2) and Rule 15 of the convention to keep all information confidential. Confidentiality can also be maintained when treaty containing parties consent to arbitration has a specific provision for confidentiality. This can be seen in a treaty United States-Dominican Republic-Central America Free Trade Agreement under Article 10.21.
Can Investment Arbitral Awards be Enforced in India?
The first case in India for investment arbitration was of Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armatures in which Calcutta High Court proceeded under the assumption that the Arbitration and Conciliation Act, 1996 applies to investment arbitration whereas the Delhi High Court, in the case of Union of India v. Vodafone Group Plc, assumed the opposite seeing that the act applies only to commercial arbitration. In 2019, Union of India v. Khaitan Holdings (Mauritius), the Delhi High Court decided for the third occasion for an Indian court relating to international investment treaty in which it again assumed that the act applies only for commercial arbitrations.
This disagreement between courts gives us uncertainty on the enforceability of investment arbitral awards in India. India is not a party to the ICSID convention because of which it is under no obligation to recognize any investment arbitral awards like final judgments of the courts. India has also taken commercial reservation period for in Article I(3) of the New York Convention. Accordingly, Sec. 44 of the arbitration and conciliation act, 1996 restricts the New York Convention’s applicability in India to foreign awards arising out of legal relationships considered as commercial under Indian law.
Conclusion
Investment Arbitration has become a foundation for protection and recourse for international investors. These protections and arbitration are needed by the investors both when structuring their foreign investments and when they face interference by the host state. Today, states need to attract foreign investments and give legal security to investors. This aspect of providing protection plays pivotal role in captivating investments by foreign investors. The crucial need for arbitration emerges if there is a change in the government or some political structural change or will in the country, or there may be some conflicts with the foreign investors and the host state. During this time for dispute resolution between the state and the investor, the investor hopes to get an unbiased decision. This decision is made possible through investment arbitration.
In India, the unpredictability of the courts for this issue is due to the lack of analysis in cases such as Calcutta and Delhi High Court judgments regarding the Arbitration and Conciliation Act, 1996. It is still unclear whether the act is applicable or inapplicable to investment arbitrations, making it impossible for one to suggest that subsequent courts may prefer one High Court’s approach over the other based on the strength of their reasoning. The investors can seek enforceability only if the Indian Parliament amends Sec. 44 of the Arbitration and Conciliation Act and explicitly includes investment arbitral awards within the scope of India’s commercial relationship reservation to the New York Convention.
With growing investments around the world, the relationship between parties may break, or need to be considered again and the best means to resolve this dispute which could possibly arise is through arbitration.
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