"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well."

-Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Wednesday, February 22, 2012

Part II: Comments on the Award in White Industries Investment Arbitration against India

In the last post we had listed the facts relevant to the investment arbitration between White Industries Australia Limited (WIAL) and the Government of India (India). In the next few posts, we would be dealing with the contentions of WIAL and India on several aspects. In this short post, we summarize the arguments of WIAL on whether it was an "investor" and whether it made the an "investment" for the purposes of the India Australia Bilateral Investment Treaty (BIT):

1. Article 1(d) of the BIT defines "investor" to mean:
"(i) in respect of India, a company or a national. A national is a person deriving status as an Indian national from the laws in force in India;
(ii) in respect of Australia, a company or a natural person who is a citizen or permanent resident of Australia. A permanent resident is a natural person whose residence in Australia is not limited as to time under its laws
WIAL is a "company" registered in Australia. "Company" is defined in Article 1(a) to mean "any corporation, association, partnership, trust or legally recognised entity that is duly incorporated, constituted, set up or otherwise duly organised (i) under the laws of a Contracting Party...". Since WIAL is a corporation duly incorporated under the laws of Australia, WIAL is an investor. Further, India does not dispute that WIAL is not an investor. Its case is only that WIAL has not made any "investment" as defined in the BIT.

2. As per Article 1(c) defines "investment" to mean: 
"every kind of asset, including intellectual property rights, invested by an investor of one Contracting Party in the territory of the other Contracting Party in accordance with the laws and investment policies of that Contracting Party, and in particular, though not exclusively, includes:
(i) moveable and immovable property as well as other rights such as mortgages, liens, or pledges;
(ii) shares, stocks, bonds and debentures and any other form of participation in a company;
(iii) right to money or to any performance having a financial value, contractual or otherwise;
(iv) business concessions and any other rights required to conduct economic activity and having economic value conferred by law or under a contract, including rights to search for, extract and utilise oil  and other minerals;
(v) activities associated with investments, such as the organisation and operation of business facilities, the acquisition, exercise and disposition of property rights including intellectual property rights;
 "Investment" is broadly defined to mean every kind of asset, tangible and intangible. WIAL's investment consists of (a) all of its contractual rights under the contract, (b) all of its rights in relation to the bank guarantee, (c) all of its rights under the ICC Award given in its favour and against Coal India. 

3. The term "investment" is broadly defined by the BIT. In interpretation of the definition of "investment", plain meaning and ordinary must be attributed to the words in the definition in order to see if the purported investment comes within the definition of the same under the BIT. If plain meaning is attributed to the words in the definition, it would be seen that the rights of WIAL stated above would specifically come within the purview of clauses (iii- right to money or to any performance having a financial value, contractual or otherwise;) and (iv-business concessions and any other rights required to conduct economic activity and having economic value conferred by law or under a contract, including rights to search for, extract and utilise oil and other minerals;) of the definition of "investment". The contract between WIAL and Coal India Limited (CIL) conferred a "right to money" and the right to "conduct economic activity". Further, the commitment extended to mere provision of equipment and services, it included provision of guarantees.

4. The Salini Test does not apply to the BIT because the said Test applied only in the context of the double jurisdiction requirement under the ICSID Convention (The arbitral tribunal's jurisdiction depended on whether there was an "investment" as defined in the BIT as well as for the purposes of the ICSID Convention). Therefore, the Salini test is applicable to arbitrations under the ICSID Conventions, as confirmed in Mytilineos Holdings SA v. State Union of Serbia and Montenegro and Republic of Serbia (pdf) (Para 117-118) .

5. Even if Salini test is applicable, WIAL had satisfied the same for the following reasons:
a. As per Agreement between WIAL and CIL (Contract), the coal mine was to be developed over a duration of five and a half years, the Contract duration was six years and CIL had the right to retain the bank guarantee for several years. 
b. There was an element of risk involved in the project for the below reasons:
i) As stated by the Salini tribunal, the coal mine project was akin to "a construction that stretched out over many years, which total cost cannot be established with certainty in advance, creates an obvious risk for the contract".
ii) It was entitled only to a fixed fee irrespective of the expenses incurred over the contractual term.
iii)WIAL was exposed to the risk of encashment of bank guarantees whose quantum was large and also to the risk of unlawful retention of bank guarantees 
iv) In case of failure to meet the contractual obligations, it was bound to pay a penalty to CIL
v) Its bonus entitlement under the contract was at risk
c. The requirement that the investment should have contributed to the Host State's economic development is no more necessary in investment treaty arbitration. Nevertheless, WIAL's investment met even this criteria: (i) Piparwar was initiated by India to enhance its coal production to more than twice its annual production; (ii) the study conducted by WIAL to improve the productivity of Piparwar was even approved by India's Public Investment Board; (iii) approval by India shows that project contributed to the development of India; 
d. WIAL maintained about 38 of its employees (mostly technical staff) in the Piparwar coal mine and provided substantial know-how in the implementation of project. WIAL also transferred technology in
respect of two crucial processes in the coal mine. In view of the above, WIAL had made an investment even as per the Salini test.

In the next post, we shall see India's response on WIAL's contention that it was an Investor and there was Investment.


Nguyen Hai said...

seems that the case was heard by ICSID however i couldnt find this case from the database on ICSID website. So appreciate if anything you can share

Badrinath Srinivasan said...

@ Nguyen Hai, the case was not heard by an ICSID Tribunal but by a Tribunal constituted under the India Australia BIT. Pl. let us know if you need anything specific in connection with the case. Most of the info on the case is available under the blog label "Arbitration: Investment Arbitration" in this blog. Thanks.