Investment Arbitration in India is undergoing a sea of change as the bilateral treaties entered into have broad ambiguous provisions which enable the foreign national to bend and mould the provisions according to their whims and fancy. If the government does not intervene in the mechanism of investment arbitration in India at the earliest, the country will face a major economic and commercial setback.

It is established that the White Industries case has far reaching consequences which would completely alter the scene of international arbitration in India. Therefore, an award in White industries also serves as a reminder of the need for smoothening out the creases in Indian arbitration law.

the judgment is not immune from criticism however it’s a huge positive step taken in improving the laws relating to Bilateral Treaties in international arbitration in India as the unanticipated result has cautioned India to think twice before entering into any such treaty with vague clauses again. The judgment covers various aspects of an international arbitration like the treaty signed, the clauses to be complied with (MFN Clause in this case), the enforcement of award in the other country, and issues like definition of investment and expropriation have been discussed at length. Overall the positives of the judgment outweigh its negatives and therefore one may very well conclude that the Supreme Court is accelerating in the right direction and interpreting the law in its true form as well as the spirit.

FACTS OF THE CASE

In 1989, White Industries, an Australian mining company, entered into a long-term contract with Coal India Limited (Coal India), a State-owned Indian company, for the supply of equipment to and the development of a coal mine near Piparwar in India’s north-eastern state of Bihar (the Mining Contract). Disputes relating to bonus and penalty payments as well as to the quality of the extracted coal arose between Coal India and White Industries, prompting the latter to commence arbitral proceedings under the ICC Arbitration Rules in 1999. In a majority decision, the ICC tribunal awarded a USD 4.08 million (US Dollar Four Decimal Zero Eight Million) to White Industries in May 2002 (the “ICC Award”).

In September 2002, Coal India applied to the Calcutta High Court to set aside the ICC Award under the Indian Arbitration and Conciliation Act, (US Dollar Four Decimal Zero Eight Million) (the set-aside proceedings). Nearly simultaneously, White Industries applied to the High Court of New Delhi to enforce the ICC Award in India (the enforcement proceedings). Both proceedings experienced significant delays. The enforcement proceedings were eventually stayed pending a decision in the set-aside proceedings. White Industries appealed to the Supreme Court; in the meantime (in 2006) the High Court of New Delhi stayed the enforcement proceedings. For about ten years White Industries could not get any relief.

After years of fruitless attempts to enforce the ICC Award in the Indian courts, White Industries commenced arbitration proceedings against India in 2010 under the India-Australia BIT dated February 29, 1999 (the “BIT Arbitration”), claiming that the inordinate delay resulted in a breach of the provisions on fair and equitable treatment (“FET”), expropriation, the “effective means” standard incorporated by the MFN clause and free transfer of funds under the treaty. That gives rights to Australian or Indian investors in each other’s country, and where those rights are infringed, the investor can begin arbitration proceedings against the Government of the other contracting State directly. Article 12 of the said Treaty, inter alia, provides for reference of a dispute to an ad hoc tribunal in accordance with the UNCITRAL Arbitration Rules, 1976, with certain modifications. White Industries has reported claimed that the action of the Indian courts and of Coal India

 

QUESTIONS BEFORE THE COURT

  • Whether the commercial contract between India and Australia was an investment under Article 1 of the Indian-Australian BIT?
  • Whether Indian Government committed a violation of expropriation, MFN, fair and equitable treatment (FET), expropriation, MFN and free transfer of funds of the India-Australia BIT and transfer of funds of the India-Australia BIT?

 

CRUX OF THE JUDGMENT

The tribunal held the Indian Government liable for violating the effective means standard according to which effective means of asserting claims and enforcing rights to the investing country have to be provided by the host country. Since the Most Favored Nation clause wasn’t expressly mentioned the tribunal decided that effective means standard is less demanding and can be squarely applied to the present facts in hand and the justice can be delivered. The tribunal noted that the effective means standard means that the system of law in which the redressal is sought is working objectively and matching the international standards and that the system works properly and effectively at the time when the dispute arises or any redressal is sought. The system should function without any loop holes. Thus the contention of the respondent in the present case that since the Indian legal system is well known for its delayed justice provision hence there was no ineffective mechanism when White Industries sought enforcement of award. It was a usual manner in which legal system functions in India and White Industries should have had information about the same and should not be creating such a hue and cry for the same was outright rejected.

Thus the tribunal had no second doubts about holding that the effective means provision has not been properly considered by the court but the tribunal dismissed other contentions of the respondents like FET violation wherein the contentions of the appellants were that the principle of legitimate expectation had been violated by the Indian courts as they expected the ICC award to be immediately enforced and the application of the Coal India to set aside the award would be dismissed immediately but for over nine years they were just hanging and waiting for justice which was least expected under such a bilateral treaty .However, the tribunal held that such legitimate expectations would only have arisen out of a specific, “unambiguous affirmation to the effect by India,” which was not the case.

The other issue raised by the appellants were that their investments were being expropriated by the Indian Government if the same is not set aside but the tribunal ruled otherwise stating that that the primary constituents to an expropriation would be the devaluation or loss to the value of the property to deteriorate or the rights be substantially effected since none of the pre requisites are met with and the investment in no way is affected hence since the award has not actually been disposed off hence no expropriation happened till date.

Thus the only violation ruled against the White industries was of that of the effective means standard due to delay in enforcing the award.

The tribunal in the case concluded that the ICC Award was enforceable under the laws of India, but it was silent on the breach. This means it was expected from the judiciary that they would give an opinion on whether not upholding the award resulted in breach of New York Convention. It would have been interesting had the tribunal given its opinion on this matter as well. In fact as an alternative White Industries could have enforced the awards in any of the other New York convention countries where Indian government has its assets. To further what the tribunal is silent on, the non enforcement of foreign award is indeed in default of the New York convention as Article V of the New York convention contains an exhaustive list of grounds on which a foreign award can be set aside by the courts of the country where enforcement is sought.

 

CONCLUSION

Therefore, the Republic of India can be held responsible for the acts of its organs including its Judiciary. However, there is a requirement of wrongful act for the applicability of this standard. Thus, there is a necessary requirement of existence of conduct of State which induced the delay to hold the Republic of India responsible and allow the claim for damages, but although it may have been absent explicitly under the constitution and executive actions in the present case, the State as a whole has to be considered for act and obligations of an international treaty.

In conclusion, one holds that the arbitral award is not in contravention of any internal law or the treaties in play. But one is deeply unsettled as far as the components of the “effective means” are concerned, particularly the one discussed above. Given the geo-political and economic power matrix, “international” is often seen as synonymous with “western”. This will put the poor countries in a BIT at a disadvantageous position in international commercial arbitrations.

Given that India has been held to breach a BIT, the clarion calls for faster adjudicatory mechanism to be finally acted upon. The call for a faster adjudication mechanism certainly came from an unusual source- an UNCITRAL tribunal. But, the irony here is that White industries has to battle the snail paced Indian judiciary to enforce the second award, the same ground on which it was awarded as it is under UNCITRAL rules, but this decision can lead to future claims, caused due to the overburdened judiciary as one being prepared by the Russian conglomerate Sistema JSFC.

 

Image Source: CIS Arbitration Forum