Thursday, October 31, 2013

China Reluctant as Philippines Pushes for Arbitration.

Below is a guest post from Vaisakh Shaji, a final year student of West Bengal National University of Juridical Sciences. Vaisakh is enthusiastic about the subject and has earlier interned with maritime arbitration team of a Mumbai based law firm. 

The West Philippine Sea arbitration claim which Philippines has initiated against China in January this year has been at a stalemate due to China’s reluctance to take part in arbitration. 

This sea route is one of the largest trading routes and roughly around 5.3 trillion $ worth of trade pass through it annually.[1] Burdened with several maritime claims over the years, the disputes of the recent past have been mostly settled through diplomatic channel or by following procedure under International Law. In 2002 ASEAN and China agreed to develop a Code of Conduct, which has failed to materialize till date. 

The legal framework: 

The United Nations Convention on the Law of the Sea (UNCLOS) in Part XV contains provisions for compulsory arbitral proceedings over dispute arising under the convention. The choice of procedure is left to the discretion of the States and the parties may choose either the International Tribunal for the Law of the Sea or the International Court of Justice. However vide article 298, a State may decline to accept compulsory jurisdiction over specific kind of disputes on issues relating to sea boundary delimitations. 


The China-Philippine conflict gathered momentum around April 2012, when Philippine navy found multiple Chinese vessels at Scarborough Shoal, which is one of the disputed islands in West Philippine Sea.[2] China on the other hand claims that the entire West Philippines Sea is party of its territory. Manila initiated arbitration under UNCLOS provision for arbitration under Annexure VII. Article 288 in Part XV of the Annexure sets out its jurisdiction “over any dispute concerning the interpretation or application of this Convention which is submitted to it in accordance with this Part.” The matter was brought before the UN Arbitral Tribunal by Philippines over the alleged incursions into its Exclusive Economic Zones (EEZ) by China and to seek clarifications regarding maritime boundaries in West Philippine Sea. China has however decided not to cooperate with the arbitration proceeding and had sent two Note Verbale to Manila and the Permanent Court of Arbitration[3], which is the registry for the proceedings. The Tribunal has however gone ahead with the proceedings and via a recent press release; it has set March 30th, 2014 as the deadline for Philippines to submit its memorial fully addressing all its claims and issues arising out of the arbitration. 

Brokered diplomacy: 

Manila has consistently held the view that a fastidious resolution to the dispute would best serve international peace and cooperation over trade and commerce. India’s Foreign Ministry Salman Kurshid recently echoed Manila’s claims in the recently concluded visit to Manila. He emphasized that compulsory arbitration proceedings provided under UNCLOS should be adhered to order to maintain peace over international waters.[4] In fact Indian Prime Minister Manmohan Singh recently stated that regional forums should have a greater say in trying to find peaceful resolution and to develop maritime norms.[5] This was at the displeasure of China which criticized India’s joint maritime operations with Vietnam in disputed waters between Hanoi and Beijing.[6] Though India has made that its stand merely reflects its foreign policy and is not willingly interfering in a bilateral issue between China and Philippines, Manila is keen on garnering a larger global opinion supporting its claim. 

The legal issue has revolved around enforcement of one-party arbitration. Professor Myron Nordquist is of the view that, “For one thing, it is doomed to failure because if the party won’t consent to the arbitration there is then no room for enforcement”. This however is a misunderstanding over the nature of arbitration under Annexure VII. If there is a non-consenting party, the tribunal would continue to give notice to the boycotting party, and would develop its own independent assessment based on law and facts and by not solely relying on the claims of the participating party.[7]However Julian Ku argues in this post[8] that even though China has agreed to constitute a tribunal and establish its jurisdiction, consent to arbitration would not necessary guarantee enforcement. UNCLOS is absent of any sanction regime if any party fails to comply with its award. For the award to have any sanction, it should be coupled with diplomatic pressure, either from neighboring countries or through regional bodies. 

Drawing parallel from the sphere of investor-state arbitration, Luke Eric Peterson, Editor of the Investment Arbitration Reporter, is of the view that even if the respondent state has refused to participate in arbitration, arbitrations have managed to proceed to final resolution and the non-participating country had ended up paying the adjudged amount.[9] 

It will be pertinent to see whether China would change its stance if Philippine is able to garner enough international support for its cause. Sean Mirski writes[10] that, President Obama’s last minute cancellation of his Asian diplomatic tour was a big blow to Manila and has lead to an increase in anxiety around the region. However a recent notable development is the statement by Philippines, Department of Foreign Affairs that it is shifting the focus to the establishment of a code of conduct in West Philippine Sea.[11] 

Monday, October 14, 2013

Call for Papers: Special Issue of Trade, Law and Development.

Below is the call for papers for the special issue of Trade, Law and Development journal:

The Board of Editors of the Trade, Law and Development journal is pleased to announce Trade and Climate Change as the theme of the special issue 6.1, due to be published in May, 2014. Climate Change is the foremost challenge facing the global community today. The issue intersects with international trade in numerous ways. The deliberations at the ongoing Doha Round as well as the recent COP-15, Rio+20 and Earth Summit negotiations lent impetus to a global solution to climate change. At the end of 2012 UNFCC Conference, an agreement was reached to draw up a successor agreement by 2015 to the Kyoto Protocol. An effective successor agreement to Kyoto Protocol shall necessarily resolve the various conflicts that dissuaded States, particularly from the global south, from undertaking certain obligations and being parties to the Protocol. The issue is gradually gaining significance due to the initiatives taken by States to promote Renewable Energy use to which often have domestic content requirements and involve the imposition of subsidies which are in conflict with WTO law. More information here.

Monday, October 7, 2013

Oral Evidence for Written Arbitration Agreement Not Possible, says the Bom HC.

In the judgment of  Yashvant Chunilal Mody,Applicant v Yusuf Karmali Kerwala & Ors. delivered on September 19, 2013, a single bench of the Bombay High Court has decided on the issue of an arbitration agreement being in writing. 

With respect, the very first sentence of the single bench judgment has an error in it where the Act is wrongly attributed to the year 1997 whereas it is actually of 1996.This may be an inadvertent or a typographical error and needs to be corrected. 

The real issue however is with the regards to interpretation of Sections 7(3) and 7(4) in deciding a matter under Section 11 of the Act which relates to appointment of arbitrator. Section 7(3) of the Act mandates an arbitration agreement to be in writing and Section 7(4) elucidates what constitutes “writing”. 

With all due respect, the learned single bench has in its judgment gone overboard in interpreting Section 7(4) of the Arbitration and Conciliation act, 1996. The issue with regard to the arbitration agreement was that although the Applicant contended that the agreement is in writing, it did not have any copy of the same. On this the Applicant offered to lead evidence and be cross examined. While the learned judge recognized that normally a written agreement can be proved by secondary evidence of the oral account of the contents of the document given under Section 63 (5) of the Indian Evidence Act, 1872, he decided that such oral account of a written document is not contemplated to be allowed for invoking arbitration. The single bench was of the view that this goes outside the mandate of the Arbitration and Conciliation Act,1996 as S.7(4) is exhaustive and accepting such oral evidence would be going beyond the legislative command. This understanding seems to be misplaced. It is a possibility that in the given factual scene, even after giving the Appellant a chance to be examined, the bench would have found that no arbitration agreement existed but not allowing oral evidence to prove that arbitration agreement existed in writing is not the most appropriate way and sets a blurred precedence which may have to be reconsidered and cleared sooner or later. 

Hat-tip to Veena Kolachina for the case alert. 

Using RTI for Production of Documents in an Arbitration? No Problem.

As per this report in ET, the Central Information Commission ruled that pendency of an arbitration proceeding is not a valid reason for denial of information by a government department under the Right to Information (RTI) Act. The Central Information Commissioner in his order held that: 

“The only exemption in sub-judice matters is regarding what has been expressly forbidden by a court or a tribunal and what may constitute contempt of court," 

In the instant case, the petitioner who has an arbitration matter going on with MTNL, had filed 34 applications to seek information from MTNL regarding the expenditure already being inquired into by the authorities. The Information officer had refused to disclose the information citing section 8(1)(h) of the RTI which states that: 

“Exemption from disclosure of information.- 

(1) Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen,-(h) information which would impede the process of investigation or apprehension or prosecution of offenders” 

The Central Information Commissioner did not find this explanation of the Information officer valid and passed the order in favour of the appellant. 

This method seems to be an interesting way to seek production of documents/discovery from government departments, bypassing the usual procedure of asking the tribunal to do so.

Saturday, October 5, 2013

As India and Italy Investigate, Arbitration Ensues.

The infamous chopper gate scam which the Indian and Italian government authorities have been investigating is going to have new twist to it. According to this report from the Reuters, AgustaWestland, the seller of Helicopters to India has invoked the arbitration clause. The dispute is on non-payment in a contract worth 560 million euro ($762.91 million) involving sale of 12 Helicopters by the company to India. India had stopped the payment over allegation of bribery. Arrest of the then CEO of Finmeccanica was also much in news after he allegedly paid bribe to officials in India to secure the deal.

In a statement to Reuters, the company said:

"The need to resolve this issue has left AgustaWestland with no other option but to invoke arbitration; the next step prescribed by the contract. This is not a step we take lightly,"

According to the report, the law governing the arbitration agreement is the Indian Arbitration and Conciliation Act, 1996.

It would be very interesting to see how the arbitration proceeds under the Indian arbitration Act. This is because in N Radhakrishnan v Maestro Engineering, a case decided in 2009, the Supreme Court of India had held that issues involving criminality, serious fraud and financial malpractices can only be resolved by court. Although, this is not in conformity with the international standards, it stands valid where the seat is India.

A report on this from Economic Times is also available here. Picture taken from here.

Thursday, October 3, 2013

An Indian Company Goes Treaty Shopping…

The following is a guest post by Shashank P. Kumar, originally published on the International Law Curry blog. 

Amidst reports of yet another investment treaty arbitration against India over the cancellation of 2G licenses by the Indian supreme court (ToI, IE, Also see this post), the ICSID has registered an arbitration that may well represent the first time an Indian TNC has gone treaty shopping.

According to its website, on 27 September 2013, the ICSID registered an arbitration proceeding initiated by Spentex Netherlands, B.V., against the Republic of Uzbekistan (ICSID Case No. ARB/13/26). A quick Google search reveals that the Claimant in this case, Spentex Netherlands, B.V., is actually a subsidiary of Spentex Industries Ltd., a textile company registered and incorporated in New Delhi and managed by Indian nationals. The 2012-13 Annual Report of Spentex Industries Ltd. provides some insight on the relationship between the Indian parent and the Dutch and Uzbek subsidiaries. Note 42 of the Financial Statement states that:

The Company [Spentex Industries Ltd.] has an investment of Rs. 56,10,11,339 [approx. USD 89,83,362] and Rs. 93,23,779 [USD 1,49,301] in its subsidiary Spentex Netherlands B. V. (SNBV) and its step down subsidiary Spentex Tashkent Toytepa LLC (STTL) respectively. Further it has Rs. 7,00,12,404 as export receivable from STTL and advances of Rs. 9,50,70,902 in SNBV as on March 31, 2013.

The ICSID website does not yet give any further details about the arbitration, except that its subject matter relates to the “Textile Industry.” Spentex India’s statements provide some insight on the details of the dispute. Spentex India describes its version of the developments in Uzbekistan in a press release (apparently) dated 31 May 2012:

An Indian investor SIl (Spentex) through its project company STTL invested and commenced its business in Uzbekistan in right earnest and made investment vide Investment Agreement dated 26th September 2006 entered between the Government of Uzbekistan and Spentex (investor). However, in the midst of term of the Investment Agreement certain changes in legal provisions, economic and business conditions and policies were adversely changed by the authorities in Uzbekistan. These changes being contrary to the provisions of Investment Agreement jeopardized the legal stability of its project company and its business became completely unviable. Spentex made many representations to Uzbek authorities and its financers for rectifying the situation but the same went unheard and ultimately project company was forced to shut down all its factories in Uzbekistan and bankruptcy was thrust upon it. Harassment by tax authorities and prosecutors was another reason which never allowed STTL to function normally as arbitrary penalties were imposed and pressure from the prosecutor was a common feature

The arbitration proceeding also finds a mention in Spentex India’s 2012-13 Annual Report:

During the period of investment Government of Uzbekistan changed certain laws and policies by breaching the investment agreement and rendered operation of STTL unviable. Since treaties entered between the Governments of India and Uzbekistan and the Investment agreement entered between Govt. of Uzbekistan and STTL were breached, company has issued notice claiming in excess of USD 100 Mn. towards protection of investment and payment of dues & compensation for the losses suffered by the company.

Interestingly, although the above quote from the Annual Report refers to the the bilateral investment treaty (BIT) between India and Uzbekistan being breached, the claimant in the arbitration proceeding is the Dutch subsidiary of Spentex India, suggesting that the claimant has sought protection under the Netherlands-Uzbekistan BIT. This is not unusual, as transnational corporations investing in foreign countries often structure their investments through a subsidiary in The Netherlands in order to avail the benefits of the vast network of Dutch BITs. The IISD, in a critical piece, notes that Dutch BITs “invite[] ‘treaty shopping,’ – i.e. routing investments through third countries to acquire the protection of investment treaties that investors would not, otherwise, have in their home state jurisdiction.” Even though the merits of the practice continue to be debated, there is no general international legal rule prohibiting investors from structuring their investments in a manner that allows them to avail of the greater protection available under certain treaties.

This development is interesting because it, once again, shows the blurring of the traditional capital-importing/capital-exporting dichotomy in the discussions on investment treaties and investment arbitration. While investment treaties and investment arbitration may initially have emerged in a world where capital exporting countries primarily sought to protect their investors operating in capital importing countries, the scenario today does not allow for such a clear and easy distinction to be drawn as traditional capital exporting countries gradually find themselves fending off claims by foreign investors today. This, for example, is reflected in the evolution of the United States BIT program, which was focused mainly at investment protection abroad in its early days. In recent times, however, as the flow of investments into the United States has increased, its BITs have evolved to take into account not just the need for protecting investments abroad, but also the impact of such treaties and claims by foreign investors on the domestic regulatory space available to the government.

Faced with several claims by foreign investors under different BITs, there has been widespread criticism of the Indian BIT program as being too “pro-investor.” The Indian government has gone back to the drawing board and is currently reviewing its BITs. Cornered by the many treaty claims it faces, the government may well see BITs and investment arbitration as liabilities that expose it to unnecessary international litigation. However, as the Spentex case well illustrates, Indian investors are also increasingly investing abroad. Given the reciprocal basis of BITs generally, if India dilutes the standards of substantive and procedural protection in its BITs in immediate response to the claims filed against it, this would also weaken the protection available to Indian investors abroad. Therefore, as India undertakes to review and rationalize its BIT program, it must strike a careful balance between its domestic regulatory interests, on the one hand, and the interests of the Indian investor abroad, on the other. In its attempt to shield itself from claims by foreign investors, India should not deprive its own investors the benefits and protection promised by BITs.

Hat-tip to Aditya Singh for the alert about the Spentex arbitration.

Tuesday, October 1, 2013

India in Investment Arbitration LOOP.

A news report in the Indian Express here reports that Khaitan Holdings (Mauritius) Limited (KHML), a Mauritius based investor in Loop Telecom has initiated investment arbitration under the India-Mauritius BIT seeking damages over USD 1 billion for cancellation of its investment in 2G licenses which were cancelled by the Supreme Court of India.  To quote from the report: 

“KHML in the notice said that Supreme Court judgement has held Indian government process to issue licence "seriously flawed and legally untenable, as well as its policy being inherently arbitrary," and neither KHML nor Loop were blamed for this. ‘Despite this, neither adequate or any compensation has been paid to KHML and the spectrum has been subsequently re-bid,’ the notice said.”   

India now features as one of the top nations against which investment treaties claims lie. It all began with the success of White industries’ investment claim against India. Readers who wish to have a detailed analysis of the White Industries’ case may read my article in Kluwer’s Journal of International Arbitration. The abstract along with the citation is: 

“The Indian arbitration landscape is set for a completely new twist in the wake of the first investment arbitration award rendered against India. The decision was rendered in the matter between White Industries Australia Ltd. and the Republic of India in an United Nations Commission on International Trade Law (UNCITRAL) arbitration. This article examines the case, observes the questions which were considered by the tribunal, and discusses the rationale of the tribunal in arriving at its decision. Apart from an analysis of the case, the article also discusses its ripple effect which has already set in.
Ashutosh Ray, 'White Industries Australia Ltd. v. Republic of India: A New Lesson for India' (2012) 29 Journal of International Arbitration, Issue 5, pp. 623–635”

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