India is likely to exclude in bilateral trade pacts a clause that permits a foreign investor to sue the host country at an international dispute settlement agency.
The department of industrial policy and promotion (DIPP) has in principle decided not to include such a condition, an official said on condition of anonymity, which allows firms of the partner country investing in India to take legal action against the government at a global forum in case of any dispute.
“This is now the view worldwide that the state should not get drawn into private disputes,” the DIPP official said. “That’s why we are cautioning to be more careful.”
India had declined to include such a clause, also known as investor to state dispute settlement mechanism, in negotiations over a trade pact with the European Union, Mint had reported on 4 July. The negotiations are not over yet.
Hong Kong-based Philip Morris Asia Ltd, owner of Australian affiliate Philip Morris Ltd, last year threatened to sue Australia at a global forum on the government’s cigarette-packaging norms, which the firm said would violate that country’s obligations under a bilateral investment treaty with Hong Kong.
An Australian draft legislation, which aims to make tobacco products less attractive to consumers, seeks to prohibit all logos, along with different colouring and layout, on cigarette packs. It also requires that health warnings cover a substantial portion of each package, the International Centre for Trade and Sustainable Development said on 29 June.
Australia has said that it will not include a clause that allows an overseas investor to sue the country at any global arbitration body in any of its future bilateral trade agreements.
India has comprehensive economic partnership agreements (CEPAs) with Singapore, South Korea, Japan and Malaysia. Besides the European Union, it is negotiating similar pacts with Australia, New Zealand, Canada and Indonesia.
Customary international law requires foreign investors to sue governments in domestic courts for any claims, or at the World Trade Organization dispute panel.
However, many bilateral agreements on investment allow foreign investors to seek legal action at international arbitration bodies such as the United Nations Commission on International Trade Law or at the World Bank-affiliated International Centre for Settlement of Investment Dispute for alleged breaches of treaty obligations.
India was first sued in an international tribunal in 2002. White Industries Australia Ltd, a mining firm, dragged the Indian government into arbitration quoting the bilateral investment treaty singed between the two countries on a dispute with state-owned Coal India Ltd. The case is currently at the Supreme Court of India.
The contentious clause is part of the bilateral investment promotion and protection agreements (BIPAs) that India has signed with 82 countries. Out of these, 72 have come into force and the remaining pacts are in the process of being enforced.
Whenever a CEPA is signed with a country or region, the BIPA is weaved into the investment chapter of the trade agreement.
While CEPAs are the turf of the commerce and industry ministry, BIPAs are signed by the finance ministry. The DIPP official said the department also wants to review this particular clause in all the existing BIPAs.
However, a finance ministry official said BIPAs help Indian companies more than the foreign firms.
“With the growing clout of Indian companies investing in countries around the world, including the less stable countries in the African and South American regions, they need the protection of the local governments,” the finance ministry official said on condition of anonymity. “So, we are not in favour of reviewing this clause.”
The DIPP official said irrespective of the finance ministry’s move, his department would like to review the clause in the existing CEPAs.
“When there is an international obligation, you cannot change it unilaterally,” the DIPP official said. “At the time of review of such pacts, which is a routine affair, we will definitely want to correct it.”
Given the controversy surrounding this clause and its implications in terms of a regulatory freeze that it sometimes leads to, a cautious approach may be advisable, according to Anuradha R.V., partner at Clarus Law Associates.
“It is not that the absence of such a clause will be a death knell for justifiable action in case of failure by the state to protect foreign investment or violation of commitments made by a state in an international agreement,” Anuradha said. “There are in-built dispute resolution mechanisms in the CEPAs.”
A balance has to be maintained to meet both objectives, said Krishnan Venugopal, Supreme Court advocate.
“Foreign investors often complain they do not have proper recourse in disputes. The danger of the government passing a law that impacts the value of their business is there,” Venugopal said. “However, if there is a genuine concern on the part of the government, you cannot take away the sovereign right of a state to legislate.”