Monday, June 14, 2010

Camel's nose under the tent: should courts interfere with arbitrations under BITs?

In the previous post, I had promised I would deal with this topic soon. In the meanwhile, Mr. Prabhash Ranjan and Mr. Daniel Mathew have published a post on Law and Other Things as to how the proposed amendments do not serve to protect investment arbitration in India from interference by courts. In this post, I examine the more fundamental question of whether domestic courts in India, which have taken an expansionist view of their own powers in respect of arbitration in general, should extend that stand to investment treaty arbitrations too.
First, the very purpose of shift from a contract based system of investment protection to a treaty based system suggests a hands-off approach. Treaty based protection of investments was brought as an alternative to a contract based system. In a contract based system of investment protection, the obligation of the host State to protect investments arose out of a contract between itself and the investor. This meant that the enforcement of these contracts were at the mercy of the judicial bodies of the host State. If this was coupled with a Calvo Clause in the contract (a clause through which the investor affirmed that no right of his would be protected against the host State by the State of his nationality by invocation of diplomatic protection), the investor had no remedy but in national courts of the host State. The shift to a treaty based regime sought to remedy this. Under a BIT, it is an international obligation arising out of a treaty that binds the host State to protect investments. Adjudication of a dispute under a BIT is mostly meant to occur before neutral fora for which the BIT and not domestic law constitutes the primary source of rights and obligations. Therefore, it is only logical that the domestic courts should not interfere with arbitrations under BITs.

Second, the most important reason that has been used in support of judicial intervention in arbitration is absent in the case of BIT arbitration. In Rohtas Industries v Staff Union [AIR 1976 SC 425], the Supreme Court was vocal in its reasoning that an arbitral tribunal should be kept within the limits of judicial behaviour as they substitute courts and discharge their role in the sovereign's dispensation of justice. This line of reasoning has been impliedly or expressly accepted in subsequent cases including Renusagar and ONGC which have been discussed in a previous post. This is hardly the case where tribunals acting under the BITs are concerned. They are not substitutes for domestic courts and they do not partake in sovereign's dispensation of justice - to the contrary they seek to administer a system of law in which the sovereign (after its voluntary acceptance of the system) is merely a subject. 

Third, the basis of adjudication applied by domestic courts and BIT tribunals are different. A domestic court adjudicates a claim based on domestic law and the applicability of international law is dependent on the rules of recognition of the domestic law. Therefore, if a governmental action is valid in domestic law, it cannot be successfully assailed before a domestic court on the grounds of violation of an international norm unless such international norm finds recognition in domestic law (either by general acceptance of monism by the domestic law or by the incorporation of the specific norm by statute or precedent). However, even acts which are perfectly legal in domestic law can constitute violations of international law. Investment tribunals have often held that acts and omissions which are perfectly legal and valid in domestic law are violations of a BIT. Two such cases have been discussed in a previous post. Given this difference in the nature and basis of adjudication, it is anomalous for a domestic court to purport to exercise supervisory or appellate jurisdiction over a BIT tribunal.

Fourth, it will be impossible for any award against the government in an investment arbitration to stand judicial scrutiny at least in India. In India, as discussed before, an award can be set aside on the ground of public policy, if it is "against the interests of India". An award which rejects the position adopted by India as a sovereign State before an international forum is certainly "against the interests of India". This leads to a paradoxical situation where India has inserted an arbitration clause into every single one of its BITs but none of them ever being capable of resulting in a valid award in favour  of the investor.

For these reasons, it is my opinion that domestic courts should accept a hands-off approach to arbitration under BITs. 

However, this is not to suggest that the domestic courts are entirely powerless in the matter. While it is not open for them to interfere with the dispute resolution process itself, they can engage in judicial review of any governmental action taken in pursuance of an award. In this respect, the position is similar to that regarding judicial intervention in settlement of disputes between sovereign States. In Maganbhai Ishwarbhai Patel v Union of India [AIR 1969 SC 783] where the settlement of international borders between India and Pakistan through arbitration was challenged, it was held that while settlement of international disputes is the sole prerogative of the executive, there could be judicial review of governmental action adopted in furtherance of any settlement in such disputes.

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