The Whole BIT
The revised model text for bilateral investment treaties has addressed many concerns, but to avoid litigations, India should renegotiate existing treaties on the basis of the new norms.
- Feb 19, 2016,
- Updated Feb 19, 2016 10:43 AM IST
On December 17, 2015, US-based Philip Morris, the manufacturer of iconic cigarette brand Marlboro, lost a legal battle against the Australian government in an international arbitration tribunal. The company was trying to challenge an Australian law, which was legislated from a public health perspective to discourage the promotion of tobacco products. The Australian government had limited the use of brands, logos and trademarks on cigarette packs sold in the country. Philip Morris argued that the law harmed its investment interests in Australia.
The global tobacco giant was empowered to drag the Australian government before a tribunal set up under the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules on the basis of an agreement that the country had earlier signed with Hong Kong. The Investment Promotion and Protection Agreement (IPPA), signed by Australia in 1993, had a provision for an investor-state dispute settlement (ISDS) mechanism. Foreign investors could invoke this provision to sue Australia or Hong Kong (depending on who invests where) if any policy or regulatory decision in the host country harms the business interests of investors.
The Australian government won the case only because the tribunal felt that it had no jurisdiction to hear the case, prompting Marc Firestone, Senior Vice President and General Counsel, Philip Morris International, to state that the "outcome hinged entirely on a procedural issue that Australia chose to advocate instead of confronting head on the merits of whether plain packaging is legal or even works".
Australia was perhaps lucky, but countries entering into similar bilateral investment treaties with ISDS provisions are not always so. At least, India was not.
A day before the Philip Morris verdict, on December 16, 2015, the Union Cabinet chaired by Prime Minister Narendra Modi approved a new model text for the Indian Bilateral Investment Treaty (BIT), the Indian version of Australia's IPPA. India had lost a couple of arbitrations in similar situations and was threatened with many more, simply because the agreements signed on the basis of its existing model draft, a 23-year old draft, had not worked to the country's advantage. The revision to the text was an attempt to plug the gaps in the earlier provisions. Now, the improved version will not apply to new Bilateral Investment Promotion and Protection Agree-ments (BIPA), but also be used to re-negotiate the existing ones.
The finance ministry is silent on how it would renegotiate existing agreements. As of now, it seems to be just an intention. The only positive move is the government's decision to put an end to the practice of allowing the commerce ministry to handle the negotiations on the investment chapter in free trade agreements, and restrict the finance ministry's role to negotiations on standalone BITs. From December 28, 2015, the Department of Economic Affairs (DEA) under the finance ministry remains the sole authority to lead all negotiations on standalone BITs as well as investment chapters of CECAs, CEPAs and FTAs, to ensure convergence between trade and investment issues among all stakeholders.
Even if the government decides to renegotiate the agreements, it may not be able to get all the 83 partner countries to agree to it. Countries with less diplomatic and financial clout may agree, but the powerful may not. Even if they do, they would try to push their own set of conditions before reaching for a final settlement. The model law, when looked from an inbound investment point of view, needs a lot of improvement. There are still many loopholes for investors to exploit, but perhaps this can be better explained when one comes to realise that the same rules will also be applicable to facilitate outbound investments. If there is something that helps foreign investors in India, the same rules will also help Indian companies invest in India's BIT partner nations.
In this context, the 2015 model text, for instance, has no provision for the government to sue the investor or company in case of a serious fraud as part of a counter measure. It is true that Indian companies having investments abroad were not very keen to have such a mechanism as that would have subjected them to counter actions from host countries in case of any non-compliance. "Right now the government cannot sue private corporations. It (the proposal) was removed altogether in the final draft. But the clause would have brought some level-playing field," says Singh.
With India's dwindling export earnings, and slower-than-expected economic growth, the Modi government has announced its plans to speed up its bilateral and multilateral engagements. Whether it will be backed by stronger investment protection and promotion agreements is something that needs to be seen. During the past few years, significant changes have occurred globally around BITs in general, and investor-state dispute resolution mechanism in particular. India is not alone. South Africa is in the process of changing the way it negotiates investment treaties. Indonesia has finalised its draft. But even if India does it, are we shying away from renegotiating the existing agreements?
On December 17, 2015, US-based Philip Morris, the manufacturer of iconic cigarette brand Marlboro, lost a legal battle against the Australian government in an international arbitration tribunal. The company was trying to challenge an Australian law, which was legislated from a public health perspective to discourage the promotion of tobacco products. The Australian government had limited the use of brands, logos and trademarks on cigarette packs sold in the country. Philip Morris argued that the law harmed its investment interests in Australia.
The global tobacco giant was empowered to drag the Australian government before a tribunal set up under the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules on the basis of an agreement that the country had earlier signed with Hong Kong. The Investment Promotion and Protection Agreement (IPPA), signed by Australia in 1993, had a provision for an investor-state dispute settlement (ISDS) mechanism. Foreign investors could invoke this provision to sue Australia or Hong Kong (depending on who invests where) if any policy or regulatory decision in the host country harms the business interests of investors.
The Australian government won the case only because the tribunal felt that it had no jurisdiction to hear the case, prompting Marc Firestone, Senior Vice President and General Counsel, Philip Morris International, to state that the "outcome hinged entirely on a procedural issue that Australia chose to advocate instead of confronting head on the merits of whether plain packaging is legal or even works".
Australia was perhaps lucky, but countries entering into similar bilateral investment treaties with ISDS provisions are not always so. At least, India was not.
A day before the Philip Morris verdict, on December 16, 2015, the Union Cabinet chaired by Prime Minister Narendra Modi approved a new model text for the Indian Bilateral Investment Treaty (BIT), the Indian version of Australia's IPPA. India had lost a couple of arbitrations in similar situations and was threatened with many more, simply because the agreements signed on the basis of its existing model draft, a 23-year old draft, had not worked to the country's advantage. The revision to the text was an attempt to plug the gaps in the earlier provisions. Now, the improved version will not apply to new Bilateral Investment Promotion and Protection Agree-ments (BIPA), but also be used to re-negotiate the existing ones.
The finance ministry is silent on how it would renegotiate existing agreements. As of now, it seems to be just an intention. The only positive move is the government's decision to put an end to the practice of allowing the commerce ministry to handle the negotiations on the investment chapter in free trade agreements, and restrict the finance ministry's role to negotiations on standalone BITs. From December 28, 2015, the Department of Economic Affairs (DEA) under the finance ministry remains the sole authority to lead all negotiations on standalone BITs as well as investment chapters of CECAs, CEPAs and FTAs, to ensure convergence between trade and investment issues among all stakeholders.
Even if the government decides to renegotiate the agreements, it may not be able to get all the 83 partner countries to agree to it. Countries with less diplomatic and financial clout may agree, but the powerful may not. Even if they do, they would try to push their own set of conditions before reaching for a final settlement. The model law, when looked from an inbound investment point of view, needs a lot of improvement. There are still many loopholes for investors to exploit, but perhaps this can be better explained when one comes to realise that the same rules will also be applicable to facilitate outbound investments. If there is something that helps foreign investors in India, the same rules will also help Indian companies invest in India's BIT partner nations.
In this context, the 2015 model text, for instance, has no provision for the government to sue the investor or company in case of a serious fraud as part of a counter measure. It is true that Indian companies having investments abroad were not very keen to have such a mechanism as that would have subjected them to counter actions from host countries in case of any non-compliance. "Right now the government cannot sue private corporations. It (the proposal) was removed altogether in the final draft. But the clause would have brought some level-playing field," says Singh.
With India's dwindling export earnings, and slower-than-expected economic growth, the Modi government has announced its plans to speed up its bilateral and multilateral engagements. Whether it will be backed by stronger investment protection and promotion agreements is something that needs to be seen. During the past few years, significant changes have occurred globally around BITs in general, and investor-state dispute resolution mechanism in particular. India is not alone. South Africa is in the process of changing the way it negotiates investment treaties. Indonesia has finalised its draft. But even if India does it, are we shying away from renegotiating the existing agreements?