Thursday, February 9, 2012

BREAKING: Award rendered against India in the White Industries Arbitration

We have been covering the White Industries arbitration for a while. The much awaited award has been rendered. A panel of three arbitrators has found India in breach of her obligations towards White Industries, an Australian investor, under the India – Australia Bilateral Investment Treaty. The arbitrators found that the long delays experienced by White Industries, in the course of trying have its 2002 ICC arbitration award enforced, amount to a breach of India’s obligations to provide "effective" means for Australian investors to assert claims in the Indian courts.

Neither of the parties has made any official statements on the matter and the award has not been published. Following is a discussion with Mr. Luke Eric Peterson of Investment Arbitration Reporter, who has been following this case with interest. His news service revealed the existence of the BIT arbitration last year, and on February 7th it broke the news that a final award has been rendered in the case. Luke was kind enough to discuss the case with Lex Arbitri. He’s also agreed to make several articles discussed herein available for public-viewing on his news website – just click the links to access them.

Q: Luke, Thank you for sharing the information on the case with us. Could you please discuss briefly the line of reasoning adopted by the tribunal and the specific violations that the tribunal ascertained?

A: Hi Deepak. It’s a pleasure to talk with you again. As you mention, the award has not yet surfaced. Its very existence had not been reported prior to our news story on Tuesday. But, based on what we know at the present time, the tribunal found a single breach of the treaty. The tribunal held that the protracted delays in the Indian courts had led to a situation where the Australian investor was denied “effective means” of asserting claims and protecting its rights in India’s courts. This appears to mark the first instance where India has been held liable for breaching one of its 80+  bilateral investment treaties.

Q: The root cause of this dispute was the decision of Indian courts to subject the ICC Award, a foreign award, to an elaborate system of review. This stems from the controversial decision of the Indian Supreme Court in Bhatia International. Has the tribunal held this interventionist approach of Indian courts to be a denial of justice or a violation of any other treaty provision?

A: No, I don’t believe that there has been a denial of justice here. Instead, it appears that the arbitrators have found India liable for delays in rendering justice. It remains to be seen what they have said about the reasons for the delay (i.e. the fact that India’s courts have been so receptive to Coal India’s efforts to set aside a foreign arbitral award.) Many arbitration practitioners and commentators are annoyed that the Indian courts are so receptive to such applications. But, I don’t know that the tribunal has passed judgment as to whether India may be failing to live up to its obligations under the New York Convention on the enforcement and recognition of foreign arbitral awards. My understanding is that they have side-stepped this sensitive question – at least insofar as the treaty-breach has been grounded in delay, rather than a “breach of the NY Convention obligations. However, a fuller understanding of their reasoning can only come with the release of the arbitral award.

Q: Do you have any information on any damages awarded by the tribunal?

A: My understanding is that the arbitrators ordered that India should pay damages in the amount of the original arbitral award obtained by White in 2002 against Coal India, plus interest. I don’t have a precise figure, but the original 2002 arbitral award was for 4 Million Australian Dollars, plus interest.
Q: Is it common for investment arbitration tribunals to hold delays in domestic courts to be a violation of treaty obligations? If so, do you think this will have a positive impact on countries like India in terms of improving the efficiency of their domestic dispute resolution mechanisms?
A: Arbitrators are just starting to make such findings. Not all treaties contain an obligation to provide “effective means” of claims resolution. However, because India’s treaty with Kuwait has such an obligation, and White Industries was able to invoke that obligation through the use of the Most-Favored Nation clause in the India-Australia BIT, it appears that India was on the hook for not providing “effective means”. Given the notorious delays in India’s judicial system, you wonder if the government will find that it routinely falls afoul of this heretofore-ignored treaty obligation. In some sense, this is a remarkable watershed event: for the first time that I am aware of an international tribunal has held that extensive delays in the Indian courts breach international law.
In terms of background, as I wrote in our report  earlier this week, the ruling in the White Industries arbitration follows in the footsteps of a ruling in another international arbitration. In the Chevron v. Ecuador case, arbitrators also ruled that extensive delays in the Ecuadorian courts had led to a breach of the “effective means” standard.
It’s much easier to make out a breach of this type of obligation than it is to prove a “denial of justice” under international law. And, moreover, investor-claimants don’t need to exhaust domestic remedies – they just need to show that domestic cases are going on … and on … and on without resolution!
So, my guess is that investor-claimants will seize increasingly on this previously underutilized obligation when they face lengthy judicial delays in their host countries. However, some governments, especially Ecuador, are not amused that tribunals are not merely finding that delays are breaching a BIT, and that arbitrators are then stepping into the role of local courts and purporting to rule on disputes that may have been languishing in local courts. So, Ecuador is trying to undo the 2010 ruling in the Chevron case via several avenues, including a set-aside of the award, and a new arbitration with Chevron’s home-state: the United States.
Indeed, many countries may find that their slow judicial processes place them on the wrong side of this “effective means” obligation. So, will that lead to a backlash from governments – and perhaps calls for more acceptance by foreign investors of the delays that plague everyone else, including local citizens and businesses, who uses local courts? I don’t know.
Q: I understand that the award in this dispute has been rendered in an unusually short span of time. Are you aware of any special factors which may have contributed to this?
Well, arbitrators issued their award a mere two months after hearings in the case. So, my guess is that they did not want to be open to the criticism that their own arbitration process dragged on for years and years. Certainly, this is one of the swiftest deliveries of a BIT award that I am aware of. The only other case that comes to mind is the Pantechniki v. Albania case  at ICSID, where a sole arbitrator took only a couple months to issue a 27 page award. Otherwise, BIT tribunals can take up to a year – and sometimes more - to render an award once hearings are concluded. And the entire arbitration process can run for years and years. One claimant at ICSID recently got an award nearly 9 years after filing for arbitration against Argentina. Moreover, that ruling in the El Paso case may need to go thru a further 18 to 24 months of review by another ICSID panel before it is finalized. So, BIT arbitration is not always the swiftest form of justice either.
One can also speculate that the arbitrators might have wanted their award to be rendered before the Indian Supreme Court renders its own ruling in the cases which are re-examining the Bhatia International judgment. But, I have no way of knowing whether that was a consideration for arbitrators. I also don’t know if they were simply sympathetic with a claimant that has waited nearly a decade to collect on a 2002 arbitral award. Perhaps the arbitrators did not think that White should have to wait many years longer!
Q: To the best of my knowledge, this is the first investment arbitration that India has been a party to. From your experience, do you usually see a large number of claims being filed against a country immediately after one award is rendered against the country?
Well, there were a number of claims filed under various BITs by foreign investors and project-lenders in relation to the whole Dabhol Power Project controversy earlier last decade. However, those all got settled before they went terribly far.
Otherwise, there have not been reported cases against India until this one came along. Mind you, one never knows if a government is being forthcoming about claims that it is facing. As you know, the Government did not announce that it was facing a claim by White Industries. We at IAReporter caught wind of it and reported on it last July , and that led to a further flurry of press coverage inside and outside of India. You and your blog have been trying since then to get information out of India about the case, and they have not divulged anything. So, who knows if there are other cases pending without publicity.
I would suspect, though, that the result in this case could embolden others to test BIT claims against India. However, foreign investors may be reluctant to take such steps unless they find themselves in truly dire situations. Those who see their long-term future in India, may try to work out problems through other means before resorting to an investment treaty arbitration.
Q: As you note, the Government of India is yet to disclose any information about this arbitration to the public. The only public statement in this regard appears to have come from the Additional Solicitor General who was chosen to represent India. Is it standard practice among countries to keep such disputes under wraps?
A: The short answer is that it varies. However, one thing is constant: rumours of cases begin to circulate, or the investor reveals that it has filed some sort of claim, and then governments typically come under pressure to reveal more information about such cases, and this has sometimes had a salutary influence over the long term. For instance, in Canada and the United States, governments initially tried to hide such arbitrations from the public, but this only amplified media and public interest in such claims. After some resistance, both countries took policy positions in favor of openness, and it is now commonplace for them to post key documents related to such arbitrations on government websites like this one for Canada  and this one  for the United States.
Not all governments are as open, especially those that are closed-societies. But, even democracies can be very secretive, at least in the early days when the first cases are cropping up.
My own view is that governments should be open about these things, and I’m hopeful that India will come around to a position of openness. Certainly, there are powerful arguments for transparency rooted in concepts of human rights, good governance and economic efficiency.
Q: The department of Industrial Policy and Promotion of the Government of India recently recommended that India should discontinue the use of investor State dispute resolution clauses in its investment agreements. Do you think this is a direct reaction to the White Industries Award? Also, could you tell us if such a strategy would be effective or even desirable? If this is adopted, would it hurt Indian investors more than it will protect India from claims of foreign investors?
A: Well, from what I can tell, different Indian ministries take different views on these issues – and those views may be in flux as new developments and new information come to light. So, I don’t know if the White Industries result is coloring the DIPP’s views.
 Ultimately, you would hope that governments were influenced by new information and new developments, and that they recognize that BITs don’t just protect outward investment, but that they also condition what the government can do to inward investors.
As you know, Australia has made a major policy shift , and they’ve decided that the risks of these agreements outweigh the benefits associated with them. So, Australia is telling its own investors to take out insurance for their investments abroad, and the Australian government wants to stop negotiating treaties that protect Australian companies (but which expose Australia to suits from foreign investors.)
Of course, in spite of this new policy stance, Australia’s BIT with India remains in force, and it was the very legal instrument that White Industries availed itself of in its fight with India. So, even if governments come to take a more skeptical policy stance, they may be bound by their old agreements – sometimes for many years. No doubt, some would say that the White case offers proof that BITs “work”, but I’m not sure that that will sway the Australian government which is more concerned about the legal claims that it is starting to see from foreign investors – including a hefty one  brought by the Philip Morris tobacco company.
India will have to take its own assessment of the risks and benefits. But, the risks are starting to come into starker relief, and as BIT arbitration becomes more popular, governments are starting to grasp the downsides of treaties that may have been negotiated with much less care and craft than, say, a national constitution or other types of treaties – like those governing human rights. So, that’s why Canada – which learned certain lessons after agreeing investment protections with the United States – has developed a model investment treaty that runs to dozens of pages and is heavily caveated with all sorts of clarifications, exceptions and carve-outs.

Update: Financial Express also has a report on the outcome of this case.

1 comment:

  1. Hi Deepak,

    I'd like to comment on the transparency aspect of this particular dispute. I assume the Indian government has kept the matter under wraps owing to confidentiality provisions in rules governing arbitration framed by whichever institute they have chosen. I know for a matter of fact that UNCITRAL rules are quite prohibitive in terms of the parties disclosing even whether they are in a dispute. One instance similar to the present matter that comes to my mind is a case a few years back when the an Indian lawyer in the UK initiated arbitration proceedings against the UK government under the UK-India BIT. The matter was not known until it had come before a UK Court for some legal reason. However, surprisingly, the UK government refused to either confirm or deny the existence of an arbitration dispute, citing confidentiality provisions under the UNCITRAL rules.

    With regard to the references to the US being a bit open about arbitration proceedings, this would stem from provisions in US law(I cant recall which statute) which mandate arbitration proceedings under FTAs to be open; similar provisions under the 2004 Model BIT of the US and the Canadian FIPA.

    In the Indian context, I guess there would be no need for any such provisions, since India has decided to stop incorporating dispute resolution clauses in its BITs. In any case, assuming that India did revert to its original position, then I assume (and hope) that India would insist on open hearings at arbitrations, going by the Canadian and US models.


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