Do treaties make states responsible to investors?

By Vivek Vashi and Nitisha Bishnoi, Bharucha & Partners
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Of the plethora of treaty-based claims initiated against India in the mid-2000s, White Industries’ arbitration claim is the only known treaty-based arbitration claim pending to date. A commercial affair between two companies has been elevated as an international claim and has enmeshed the government of India.

Vivek Vashi Partner Bharucha & Partners
Vivek Vashi
Partner
Bharucha & Partners

The dispute dates back to 1989, when White Industries and its Indian joint-venture partner, the state-owned Coal India, entered into a contract for the supply of equipment and development of coal mines at Piparwar (now Jharkhand). The 1989 agreement was governed by the International Chamber of Commerce (ICC) Arbitration Rules and the contract purportedly excluded the operation of the Indian Arbitration Act, 1940.

Disputes arose in relation to certain entitlements to bonuses that were granted to White Industries under the agreement. White Industries referred the disputes to arbitration. In 2002, the arbitral tribunal awarded A$4.1million (US$4.2 million), plus interest and expenses, to White Industries.

Delay an abuse of rights?

Later in 2002, White Industries applied to Delhi High Court for enforcement of the ICC award. However, Coal India applied to Calcutta High Court to set aside the arbitral award under section 34 of the 1940 act.

The Calcutta High Court, by an order passed in 2004, adjudicated against White Industries on the grounds that the 1989 Agreement was signed and performed in India and that its choice of law provisions were premised upon Indian law. Today, seven years later, the Calcutta High Court’s order is still pending appeal before the Supreme Court.

Denial of justice?

Faced with difficulties in enforcing an award in its favour in India, and driven by the conviction that the Indian courts were not promptly performing their obligations under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, on the basis that the courts were open to consider setting aside a commercial arbitration ruling rendered outside India, White Industries commenced arbitration proceedings against India under the Australia-India Bilateral Investment Treaty (BIT) in 2010.

The treaty between India and Australia, on promotion and protection of investments, acknowledges that investments by investors of one the contracting parties in the territory of the other contracting party would be made within the framework of laws of the other contracting party.

The present arbitration was invoked based on the well-established approach of prohibition of denial of justice, which has been considered to be an essential component of the “fair and equitable treatment” provision in the BITs.

Proceedings in London

The additional solicitor general of India, who is a former advocate general of Madhya Pradesh, represented India in the international arbitration proceedings in London. Explaining the delay in arriving at a decision with regard to enforcement of the foreign arbitral award in favour of White Industries in India, it was contended that the delay was a result of the wrong legal strategy adopted by White Industries despite knowledge of the fact that an argument under section 34 of the act was maintainable in the circumstances.

White Industries argued that it had obtained a favourable international commercial award and then been denied the legal and/or investment protections guaranteed under the BIT for investment made by an investor of one contracting party in the territory of the other.

White Industries pleaded that the award could not be challenged in India and that justice has been denied by the Indian judicial system, which is evident from the passage of nine years without a final decision on the maintainability of the claim against setting aside the award in favour of White Industries. According to White Industries, India has to take responsibility for non-implementation of the award and the entire claim has to be paid by the Indian state.

The arbitration proceedings in London have been completed and the decision has been reserved. An order is expected in December.

The White Industries BIT case throws up a rather odd situation. A state’s responsibility for the failure of its courts to enforce an arbitral award to the detriment of a foreign investor should be engaged only in cases where the “denial of justice” is gross. If cases where awards have been made and challenged in accordance with the law in Indian courts are considered a denial of justice, the floodgates are likely to open, with every disgruntled investor pursuing BIT arbitrations against India.

This might adversely affect India’s position in such cases, as India has entered into 137 BITs with various countries across the globe. Therefore, lowering the bar any further would result in treaty tribunals acting as unauthorized international appellate courts, which would mar the legitimacy of the international investment law regime.

Vivek Vashi is a partner in the litigation department at Bharucha & Partners where Nitisha Bishnoi is an associate

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