Source: Just Investment
By Leena Menghaney, Lawyer, New Delhi, India
Often, investors use bilateral investment treaties (BITs) or investment provisions in free trade agreements (FTAs) in ways that can take governments by surprise. The investor-to-state dispute mechanism hidden in these agreements is effectively used to sue outside of domestic courts, in investor friendly arbitration forums (ICC, ICSID, UNCITRAL) to generate rulings that favor the claims of multinational companies over the government’s right and need to regulate different sectors such as taxes, health, telecom, banking, mining and environment. To put it mildly, they are used by corporations to discipline governments, particularly those of developing countries. India is no exception.
Today India has investment agreements with over 70 countries including major European countries.
Its first recorded brush with such an investor-state dispute has been the controversial Dabhol Power Company case initiated by the partner firms of Enron, under the India-Mauritius BIT. India had cancelled the deal once it realized that the electricity supplied by the project was at rates much higher than it could afford. None of the documents related to the case and the billion dollar damages paid by India have been made public.
More recently, Australian mining company, White Industries filed and won damages against India under the India-Australia BIT. Both the Dabhol and White Industries cases have opened the floodgates of investor to state disputes against India challenging its domestic policies, legislation and court decisions in a number of sectors from telecom, taxation to coal prices.
Vodafone through a Dutch subsidiary served a notice of dispute on the Indian government over proposed legislation that would result in the company owing nearly $3 billion in back taxes. The Children’s Investment Fund, a UK hedge fund, has threatened to sue India over its policy to regulate the price of coal in India as it hurt the returns on its investment in Coal India. Both, Sistema, a Russian telecom company and Telenor, the Norwegian telecom company have threatened to sue over the cancellation of 2G licenses of their joint ventures and local partners in India. These disputes against the government arise through the vast network of BITs to which India is a party. Many of these disputes are clearly intended to bypass the Indian parliament and courts system, as they do not necessarily always favour multinational companies and their investments.
Unsurprisingly, news of the growing number of cases against the government coincide with unconfirmed news reports that India is planning to exclude investor to state dispute clauses from investment agreements currently under negotiation with the EU and other countries. Its decision to do so could limit some future liability but it will still need to undertake the task of reviewing existing BITs. Indian policy makers now have the unenviable task of renegotiating these existing investment treaties signed in the 90s, which have a ‘chilling effect’ on the ability of the government to regulate different social and economic sectors, with the constant threat of possible claims being filed in arbitration by investors for billions of dollars.