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Local courts and foreign investors

The apex court has issued a far-reaching judgement that limits the role of local courts in foreign arbitration matters
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First Published: Mon, Sep 10 2012. 11 02 PM IST
Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint
The Supreme Court recently delivered a far-reaching judgement that bars Indian courts from pass interim orders in foreign arbitration awards between an Indian company and a foreign company under the provisions of the Indian Arbitration and Conciliation Act, 1996. It is a measure that has generally been welcomed as one which could boost foreign investor confidence in India.
Foreign arbitrations, which the court have referred to in its judgement, have proliferated in recent years. These stem from the implementation of bilateral investment treaties (BITs) or bilateral investment promotion and protection agreements (BIPAs) as they are called in India. More than 2,000 BITs are currently in force and form the backbone of the regime that protects foreign investors in their host countries. In terms of the number of these agreements, India is among the leading countries: It has signed 82 BIPAs of which 72 are currently in force. Most of the BITs include a set of provisions that allows foreign investors to raise disputes against their host states. These disputes are then handled by private arbitration panels in a limited number of countries.
The investor-state dispute resolution mechanism gained ground particularly after the World Bank established the International Centre for Settlement of Investment Disputes (ICSID) in 1965. The raison d’être of ICSID was to provide proceedings “for the conciliation and arbitration of investment disputes between contracting states and nationals of other contracting states”. ICSID was thus tasked to arbitrate in disputes between the foreign investor and the host country which, in the past, were largely seen to be within the jurisdiction of courts in the host countries. In 1976, further fillip to this form of arbitration was provided through rules adopted by the United Nations Commission on International Trade Law (UNCITRAL). The UNCITRAL rules were designed for use in ad hoc common law/civil law arbitrations. Besides these forums, there are others, including those provided by the International Chamber of Commerce where investment-related disputes are heard. The quantum of disputes handled by these alternative forums are often not available publicly.
By the end of 2011, the total number of known investor-state disputes had reached 450 and the total number of countries that have responded to one or more arbitrations increased to 89. In 2011, 46 new dispute resolution proceedings were initiated, the largest number in any single year. One notable fact is that as the number of BITs has increased so have the number of investor-state disputes.
A key feature of the investor-state dispute process is that it gives investors superior bargaining power vis-à-vis their host governments. This is visible in many ways. The first is that consent of the investors is essential for initiating an investor-state dispute under BITs. Commentators have suggested that this element introduces a pro-investor bias in the system since investors will participate in a dispute only if it is in their interest to do so. A second, “pro-foreign investor”, bias is introduced by the ICSID arbitration process. ICSID Convention does not require an investor to exhaust local administrative or judicial remedies as a condition for arbitration, whereas a country may require the exhaustion of such remedies. Interestingly this dimension of the “pro-foreign investor bias” has been justified by the claim that a foreign investor may not have confidence in the impartiality of the local tribunals and courts in settling any disputes that may arise between him and the host country.
Another feature of arbitration rules that is generally seen in such dispute resolution processes is that the scope of judicial review of the decisions of the arbitration panels is rather limited. Domestic courts have refrained from reviewing arbitration decisions, which, in India’s context has now been confirmed by the Supreme Court. At the same time, several countries have revised their national laws to provide for less rigorous judicial review of foreign arbitration awards in an attempt to create business for the arbitration industry. As mentioned earlier, BITs give the investors the right to initiate disputes, and therefore while deciding jurisdiction, investors often choose countries that limit local judicial review of international arbitration. Belgium is a case in point: it has removed all judicial oversight by its courts on international arbitration awards.
The investor-state disputes are beginning to run into rough weather in the negotiating process of the Trans-Pacific Partnership Agreement (TPPA), a formation in the works of nine Pacific-rim countries. Australia has red flagged the dispute resolution mechanism proposed to be included in TPPA. The Julia Gillard government has opposed this form of dispute resolution in its trade policy statement of 2011 saying that it “does not support provisions that would confer greater legal rights on foreign businesses than those available to domestic businesses”.
It is not without reason that the Gillard government has taken this position. It finds itself on the wrong end of a dispute initiated by the tobacco giant Philip Morris against its regulation on cigarette packaging, aimed at increasing the effectiveness of health warnings on the retail packaging of tobacco products. With such public policy objectives at stake, investor-state disputes are bound to get more attention in the years ahead.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi. Comments are welcome at theirview@livemint.com
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First Published: Mon, Sep 10 2012. 11 02 PM IST