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Needed: a BIT dispute management strategy

LiveMint logoLiveMint 11-09-2017 Suchindran B.N.

The adverse arbitral awards in White Industries v. India and Devas Multimedia v. India have finally woken the Union government to the perils of bilateral investment treaties (BITs). The government’s reaction has been to introduce a new Model BIT in 2015 as a template for future investment agreements, and to issue 58 BIT termination notices. Given that existing investors will continue to enjoy the protection of these terminated BITs for a period of 10-15 years due to sunset clauses, both these measures cannot replace the need for a coherent dispute management strategy to deal with disputes that may arise under BITs.

According to latest available data, there are 11 known claims against India currently, the most prominent claims being those by Vodafone and Vedanta/Cairn on retrospective taxation. The potential liability under these claims may amount to millions of dollars.

With most existing BITs entered into at a time when India was keen to attract foreign investment, their provisions largely favour investors and do not adequately safeguard India’s legitimate concerns. Therefore, it is no surprise that justified regulatory action has often been made the subject of BIT claims. For these reasons, appropriate dispute management requires serious and immediate consideration. Recognizing this need, the government had mandated a high-level committee chaired by Justice B.N. Srikrishna to focus on arbitrations involving the Union of India, and specifically BIT arbitrations. The committee’s report, submitted last month, emphasizes a five-pronged dispute management strategy comprising a focus on dispute management procedures, a nodal agency representing the state, coordination at national and sub-national levels, counsel with special expertise and adequate funding for dispute resolution.

The committee’s recommendations, made after consultations with international experts and government officials handling BIT disputes, suggest the creation of the post of an international law adviser (ILA) with the rank of additional solicitor general, who shall be responsible for advising the government and coordinating its dispute resolution strategy. The committee also recommends the creation of a five-member permanent inter-ministerial committee (IMC), comprising representatives from the ministries of finance, external affairs, law and justice, the ministry/department directly involved in the dispute, and the ILA as member-secretary, to effectively manage BIT disputes. The committee further recommends the designation of the Department of Economic Affairs (DEA) as the nodal agency for receiving correspondences in existing BITs. The empanelment of experienced counsel, and the creation of a database of arbitrators having relevant expertise and experience are also recommended. The government has already taken measures towards dispute management by designating the DEA as its representative in the Model BIT and empanelling counsel to defend it in BIT disputes. It is now the government’s task to ensure that the recommendations suggested by the committee are suitably implemented.

In addition, in relation to existing BITs, the government must establish a clear channel of communication for investors with grievances by notifying a nodal agency and a single point of contact. Further, once a notice of dispute is received, the government must ensure there is effective coordination between different ministries and agencies to avoid unnecessary delays, inconsistent positions and other prejudicial consequences. The IMC, as proposed by the committee, should be able to do this task adequately as long as its powers are sufficient and clearly defined. The IMC must be suitably empowered to enable it to meet at short notice and take decisions swiftly.

Given the short timelines in BIT arbitrations, it is also necessary to lay down standard procedures governing the conduct of India’s defence, including time-bound appointment of counsel, nomination of shortlisted arbitrators, etc. For example, in the ongoing Vodafone BIT dispute, the arbitrator nominated by India recused himself after accepting appointment, and another arbitrator had to be nominated. This caused a lot of delay, and indicates the need for a comprehensive strategy, including in relation to appointment of counsel and nomination of arbitrators. The government must also stipulate suitable procedures for effectively conducting settlement negotiations (wherever feasible) between aggrieved investors and the IMC.

Lastly, the importance of ongoing coordination with state or local government agencies cannot be overemphasized. Actions taken by state or local government agencies in respect of foreign investments without sufficient consideration of liability under BITs may put the Central government in the unenviable position of facing and defending large claims. There must be adequate dissemination of information regarding India’s BIT commitments. A procedure could be established whereby state or local government agencies consult the nodal agency/the ILA prior to taking any action that may affect BIT commitments.

Irrespective of the current mood against BITs, BIT disputes are unlikely to go away anytime soon. In such circumstances, the more pragmatic approach is to put India in a position where it can effectively manage such disputes.

Suchindran B.N. and Anjali Anchayil are advocates practising in India. They assisted the Justice Srikrishna committee in reviewing the institutionalization of arbitration mechanism in India.

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