Bilateral Investment Treaty Between India and Brazil: A Dispute Prevention Mechanism

[By Arush Mittal]

The author is a student at Hidayatullah National Law University, Raipur.

Introduction

India inked the Investment Cooperation and Facilitation Treaty with Brazil on 25th January, 2020. This treaty is a Bilateral Investment Treaty (‘BIT’) between the two countries. The signing of this treaty gathered a lot of deliberation as it contains a unique clause that uses the concept of ‘dispute prevention’ instead of the commonly known ‘dispute resolution’. This is India’s 4th and Brazil’s 10th bilateral investment treaty since these countries procured the Model BIT. Through this article, I have tried to analyze the features of this BIT and what it holds for India.

Tracing the History of Indian BIT Model

India signed its first-ever BIT with the United Kingdom in 1994 that laid emphasis on foreign investment; this treaty served as a base for India to ink several other BITs. This led India to sign more than 80 BITs and ratify over 70 treaties from the period of 1994 to 2011. India was ecstatic with the signing of the BITs until the upheaval due to the White Industries case.

The ICC Tribunal had awarded USD 4.08 million to the White Industries as compensation since it was found that India had violated its obligation to provide ‘effective means’ of asserting claims to the investor; this provision was entailed in the Most-Favoured Nation (‘MFN’) clause of the India-Australia BIT.

After this catastrophe, India underwent a sea-change towards the investment treaties. India scrapped BITs with 53 countries and signed only one BIT from the period of 2011-2015, with UAE. The inception of a new Model BIT was brought forward by the government of India in 2016 that became effective from 2017.

Features of the Treaty in Brief

The India-Brazil BIT is symbolic for a variety of reasons. The treaty neglects the widely known ‘investor-state’ dispute settlement (‘ISDS’) and promotes ‘state-to-state’ dispute settlement (‘SSDS’) with the primary focus on dispute prevention. It is also a south-south agreement between two large and growing countries as the nations have committed to cooperate in the field of cybersecurity, oil and natural gas, health and traditional medicine, science and technology, etc.

Unlike other investment agreements, this treaty confers that no compensation can be awarded by a tribunal. However, it gets its encouragement from the WTO dispute settlement mechanism where it allows the tribunal to interpret the BIT. This treaty sets aside arbitration and yields for the settlement of disputes in an ‘amicable manner’ that would mainly involve mediation. A principal feature of this treaty is that the foreign investor cannot file a claim against the country where investment takes place, instead, the state to which the investor belongs, files the claim.

Investor-State Dispute Settlement Vs. State-State Dispute Settlement

The ISDS has been subjected to extensive criticism in the contemporary times. Some of the main reasons include the unpredictable nature of the interpretation of the standards by which the conflicting awards are protected; and the restriction placed by the system on the States’ regulatory freedom. Countries such as South Africa, India, and Brazil have rethought their long-followed approach recently and have led to various policy innovations. For example, Brazil follows a model of “Cooperation and Facilitation Investment Agreements” that does not mention the ISDS model in any sense. Neither the Australia-Japan Economic Partnership Agreement nor the Australia-United States Free Trade Agreement (has adopted the SSDS) allows the ISDS model.

The SSDS is an alternative for the ISDS. The way States provide diplomatic protection, in a similar manner, the SSDS model protects the private investor. If an investor believes that a host state has committed a breach of the investment obligations, it can ask its home state to file a case of his/her behalf. The States also have the power to prevent controversial claims; this helps to assuage the fear of developing countries towards expensive lawsuits, as the home states would have considerations other than mere gains of its corporation. The Southern African Development Community amended its Finance and Investment Protocol to include the SSDS instead of the ISDS; and the Australia-China FTA added the filter of SSDS.

In the India-Brazil BIT, Brazil justifies its proposal for the SSDS on the ground that it intends to avoid disputes. According to Brazil, the ISDS model involves excessive litigation that puts a constraint on the sovereignty of a state and has a negative impact on the developing states. It also believes that ISDS has the potential of terminating the relationship between the state and the foreign investor; which could easily be prevented if the States resort to mediation. Indian model BIT shows a traditional approach in this regard as it follows the ISDS model (in a restrictive manner). The provision of the Indian model BIT bars the investors from litigating the disputes in ISDS, as the issues decided by the Indian courts cannot be subject to arbitration and the investors must exhaust all local remedies to access arbitration.

A Dispute Prevention Mechanism

The India-Brazil BIT varies from the Indian BIT model. The India-Brazil BIT model retains features from the models of both the countries, attaining more inspiration from the BIT model of Brazil as it leads to the settlement of investment disputes by using a distinctive approach. This approach focuses on ‘prevention’ of the disputes, rather than settlement.

Article 13 of the BIT between India and Brazil establishes the creation of a joint committee that comprises officials from both the countries, and this committee supervises the execution of the treaty, resolving the disputes in an ‘amicable manner’. Article 14 of the BIT talks about the creation of an ombudsman in Brazil and India that would follow the recommendations of the joint committee and therefore address the differences in the dispute.

Article 18 establishes the dispute prevention mechanism. If a case arises where the joint committee is impotent to prevent the dispute, the matter is then referred to as the state-to-state dispute settlement procedure. Article 19 is responsible for the state-to-state dispute settlement. Article 19.2 clearly says that the dispute prevention mechanism is used to observe the terms of the treaty and interpret it. The Indian Model BIT has the SSDS as well as the ISDS, whereas the Brazil Model BIT only incorporates the SSDS system for dispute prevention.

Not Entirely Brazil-based

The India-Brazil BIT may resemble the Brazil model BIT to a great extent, but it differs from it when it comes to awarding compensation, the MFN clause, and the taxation related regulatory measures.

The India-Brazil BIT draws back the power of the tribunal to award compensation to the parties. The Brazil Model BIT contains a provision that allows the arbitration tribunal to examine the extent of damages and award compensation for these damages through an award. However, the India-Brazil BIT has not stipulated an award by way of compensation(from the arbitral tribunal) in any of the provisions, to either of the parties. This concept has been accrued from the WTO regime, where a dispute settlement body is appointed to decide the disputed measures; and whether they contravene a WTO obligation. The WTO regime does not award any sort of compensation to either of the parties in the dispute. The country that is at fault must immediately correct its fault; if it fails to do so and does not conform to the WTO rules, that country faces a suitable response. This response is not an actual punishment but is a kind of remedy; this serves as the ultimate goal to comply with the country at fault to follow the WTO rules.

Most of the BITs embrace the MFN clause as a standard procedure, in fact, the Brazil BIT Model supports the MFN clause. However, there is no provision in the Indian Model related to the MFN clause due to the fiasco of the White Industries case (as discussed above). Hence, the India-Brazil BIT remains taciturn on the MFN clause.

Showing some resemblance to the Indian Model BIT, Article 20.3 of the India-Brazil BIT puts taxation related regulatory measures outside the purview of the treaty and does not use the language of ‘non-justiciability’. Article 2.4(ii) of the Indian Model, however, states that the decision of the host state to decide whether an impugned regulatory measure is taxation related would be ‘non-justiciable’ and final.

Direct Expropriation Clause

A Direct expropriation takes place at the time of nationalization, or when a downright seizure is made, or when the expropriation is made through direct formal transfer of the title. The Indian-Brazil BIT completely excludes indirect expropriation from its purview of the expropriation clause. Article 6 of the BIT talks about ‘direct expropriation’ and Article 6.3 incorporates a provision that says the treaty only covers direct expropriation.

Brazil has been critical of indirect expropriation as it allows investors to bring claims on indirect expropriation on imperceptible grounds. The Brazilian approach believes that this provision opens the gates to the foreign investors to shrink regulatory spaces of the host state and make abusive claims that benefits the host state in the protection of public interest (environment, public security, public health, etc).

India recently concluded a BIT with Belarus and Taiwan that provided protection to foreign investment from indirect as well as direct expropriation; it also laid down the formulae of determining indirect expropriation that could act as a helpful guide for investment tribunals. Although there is a slight possibility of abusing power under the concept of indirect expropriation, the complete removal of this concept is a blunder. Leaving the indirect expropriation outside the scope of the India-Brazil BIT creates a massive gap in the protection of foreign investment.

Conclusion 

The India-Brazil BIT reflects a compromise between the Brazilian and Indian approaches to investment treaties. This BIT does not contain any clause on indirect expropriation that creates a yawning gap in the protection of foreign investment. The primary focus of this BIT is on dispute prevention. The introduction of the dispute prevention mechanism as provided by the India-Brazil BIT acts like a building block for addressing various barriers that come in the way of settling investment treaty disputes by mediation. Mediation proves to be an amicable manner to settle such disputes as it develops a healthy relationship between the investor-state and the host state. This BIT holds a special significance as the world is experiencing large scale privatization; and huge foreign investments get attracted towards the developing countries.

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