Out of alignment

India should accept international arbitration

The long-awaited trade and investment treaties between India and the United Kingdom (UK) may founder on New Delhi’s approach to the contentious issue of arbitration. In the negotiations on the India-UK bilateral investment treaty, which is supposed to conclude in parallel with the trade agreement, London has expressed discomfort with New Delhi’s insistence on the “exhaustion of local remedies clause” if there are disputes. This clause has been the chief reason India unilaterally terminated 68 out of 87 Bilateral Investment Treaties (BITs) between 2013 and 2019 and forms a key element of a model BIT the government had started exploring from 2010. One prominent reason for this shift was the high-profile controversy involving a capital gains tax claim sought from British telecom giant Vodafone after it bought the Indian mobile service provider from Hong-Kong-based Hutchison in 2007. But the tortuous journey of the Vodafone case, as with Cairn Energy and others such as Amazon later, is unlikely to boost investor confidence in exploring and exhausting “local remedies”.

The clause is untenable on several counts. First, it is impractical to expect foreign investors to put their faith in local remedies. The Indian judicial system is slow. A case in the high court could take at least three years to conclude; in the lower courts the time taken could be double that. Policy intrusions by the government complicate matters. The Vodafone case took 13 years, not least because the government retrospectively amended tax laws to compel the company to pay capital gains tax. This forced it to appeal to the Permanent Court of Arbitration, which stated that the tax was not payable under the terms of the BIT in force at the time. Second, courts and regulators have not always sought to uphold contractual obligations. For instance, in Amazon’s dispute with Future Group, a Singapore International Arbitration Centre (SIAC) upheld Amazon’s claims, a decision that was confirmed by a single-judge Bench of the Delhi High Court. On appeal, a Division Bench of the same court upheld Future Group’s plea. Later, the Competition Commission of India suspended the Amazon-Future deal and imposed a Rs 200 crore fine on Amazon on grounds that it had suppressed information. Almost a year later, the Supreme Court upheld the SIAC’s decision in a landmark judgment, bringing to an end more than two years of avoidable controversy.

Indeed, the Supreme Court’s move to uphold the terms of BITs or the international arbitral awards in the Vodafone and Amazon cases points to the legal infirmities of this clause. The government’s contention that international arbitration favours investors over governments is also incorrect. The data from the United Nations Conference on Trade and Development shows that of 1,104 known cases of international dispute settlement, 274 were ruled in favour of states (including India) against 212 rulings in favour of investors. Overall, it would be in India’s interests to accept international arbitration as an investor confidence-boosting measure. It is equally critical that the Indian government honour decisions to avoid the embarrassing prospect of corporations seizing Indian assets abroad to enforce arbitral awards, which occurred in the case of Cairn Energy. Capital, after all, is mobile and will go where institutions function efficiently. India is some way from making that claim yet and should not impose this clause in investment treaties.