Aditya P Arora
“Editor’s Note: The paper analyses the case of White Industries v. Republic of India which was the first judgment on investment ruling of Bilateral Investment Treaty (BIT) for India. India lost the case, but the experience has led to deliberations on a better, stronger version of the model BIT for India.”
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. The significance of this would be the in depth analysis of Investment Arbitration and deduction made by the author upon extensive perusal of the judgment itself and comments of the author upon the ratio and obiter of the case as the author would reproduce various extracts of the judgment and bring out the thought process of the judiciary whilst changing the law in entirety. Thus giving a practical presentation of the changing scenario of BITs and Investment Arbitration in International Commercial Arbitration. The utility would be that the readers will be updated with the current change in scenario post the first BIT award passed by the Apex Court against India. There will be a major turn of events owing to the White Industries case which will be very aptly discussed. The readers will also be exposed to its implications and limitations.
The objective behind this study is to understand how judgments pertaining to investment arbitration are to be implemented in the real life litigation and court practice. It is now 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 has to be analysed academically as well as from the practitioner’s point of view. It is amusing to note that these points of view are far apart. The merits which an academician sees in the case are demerits for a legal practitioner. These anomalies have to be resolved.
The judgment has to be analysed academically as well as from the practitioner’s point of view. It is amusing to note that these points of view are far apart. The merits which an academician sees in the case are demerits for a legal practitioner. These anomalies have to be resolved.
Even though 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
CONTENTIONS OF THE PARTIES
Contentions of White Industries
That the inordinate delay of the enforcement of the foreign award has caused a violation of fair and equitable treatment (FET), 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.
Contentions of the Republic of India
That the present mining contract was nothing but a commercial contract wherein the main BIT obligation was the supply of goods and services. Hence it did not come within the four walls of investment and thus there has been no violation as alleged by the appellants.
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 Favoured 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.
ANALYSIS AND COMMENTS OF THE AUTHOR ON THE IMPLICATIONS OF JUDGMENT
The recent ruling of the White Industries Dispute is in much hype for a reason. There are some major after effects of the White Industries:
- Since an exorbitant amount of money has to be given by the Government of India to the White Industries this will affect the public exchequer as the money is going from the government and ultimately it’s the people’s loss as all the money was paid by the common man via tax. Hence it’s the people who are paying for the negligence of the government.
- Just like in the present case if there are more such issues where the Indian judiciary is taking a long time in delivering judgments relating to the international investment agreements this can have an impact on India’s treaty obligations and terms with the other nations ultimately the commerce of the nation is put at stake.
- Another important issue which this judgment highlights is that the tribunal dismissed the grounds of expropriation as the matter i.e. Coal India’s application wasn’t decided upon yet and the ICC award was not set aside even after 9 years and thus held that since the contractual rights and the value of the contract money has not been affected yet hence there is no expropriation clearly hinting that such an award would amount to be an investment and thus the judiciary should be careful while dealing with investment awards in future as they can have major consequences.
- The ruling has another important message for the higher judiciary that has expansively interpreted the Arbitration and Conciliation Act of 1996 to set aside or not enforce ICA awards in India. While dismissing White Industries’ expropriation claim, the tribunal said that this claim is unfounded because Indian courts are yet to dispose of Coal India’s application to set aside the foreign arbitral award and that the award has not been ‘taken’ or set aside. Thus, the tribunal clearly indicated that a foreign arbitral award is an ‘investment’ under the BIT and that the setting aside of such valid foreign awards could constitute expropriation under the BIT. This observation is vital in light of the debate in India over the role of the judiciary in the enforcement of ICA awards.
- Another observation which we need to keep in mind while entering into future agreements and acting upon it is that the court held that unlike what is the belief ,not just tangible but also tangible properties can amount to expropriation and since in the present case the machinery and other such technical support was provided hence if the award was set aside India would have been made liable for expropriation.
- Most importantly, the problem with this ruling is that it has broken the trust of people in the BITs which bragged about creating a balance between the investment protection, economic development and India’s sovereign power. The problem with such BITs is that provisions like Most Favoured Nations which have never been properly included and vague provisions like effective means are given which are so open to interpretation that the parties go treaty shopping and find the most convenient and befitting treaty which helps them get maximum compensation this is affecting the Indian economy.
- The award has given a renewed confidence to the investors regarding the protection of their investment. A bypass has been created which subverts the delayed judicial process. it opens up another route for investors outside of the Indian courts. If investors face many years’ delay in enforcing arbitral awards, they may pursue the Government of India directly. Of course, in order to do this the investors would need to have access to a similar BIT as the Australia-India BIT, or the Kuwait-India BIT. India is a party to over 80 BITs with other countries, including Australia, Belgium, France, Germany, Italy, Singapore, Sweden and United Kingdom
The Bhatia international and Satyam computer were two of the most bitterly criticized judgments pertaining to Indian Arbitration law. They were solely responsible for the delay and inability of White Industries to enforce the ICC award. The Calcutta High court had set aside the foreign award following the ratio laid down in the Satyam Computer case mainly. The critics of these judgments have been fairly vindicated by the tribunal’s award. The award is more like a slap on the face of the judiciary for overstepping its line while interpreting statutes more liberally than what is permitted. It will be interesting to see how courts now interpret the statutes in future knowing that any verdict hindering the enforcement of foreign award will attract grave consequence under BIT‟s with more harsh penalties.
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.
Edited by Amoolya Khurana
 White Industries v. Republic of India, Final Award, November 30th, 2011.
 Bhatia International v. Respondent: Bulk Trading S.A. and Anr., (2002) 2 SCR 411.
 Satyam computer Case, Civil appeal number 3678 of 2007.