"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.

Thursday, March 15, 2012

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

In the last post in this blog on the above topic, we had discussed the stand of White Industries Australia Ltd. (WIAL) on the issue as to whether it was an "Investor" and whether it made an "Investment" under the India-Australia BIT (pdf). In this post, we summarize India’s stand on the same:

1. WIAL is not an investor as per the BIT. "Investment" as defined in the BIT must be given an ordinary meaning having regard to the object and purpose of the term. In this regard, Article 31(1) of the Vienna Convention on the Law of Treaties provides:
"A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose."
2. Zachary Douglas has summarized the applicable legal test for investment in "International Law on Investment Claims" (p. 161) which is:
"Rule 22: The legal materialization of an investment is the acquisition of a bundle of rights in property that has the characteristics of one or more of the categories of an investment defined by the applicable investment treaty where such property is situated in the territory of the host State or is recognised by the rules of the host State’s private international law to be situated in the host State or is created by the municipal law of the host State."
"Rule 23: The economic materialisation of an investment requires the commitment of resources to the economy of the host State by the claimant entailing the assumption of risk in expectation of a commercial return."
3. WIAL does not even meet any of the categories of the Salini test (see sl. no. 4& 5, previous post).

4. The contract concerned was merely a commercial contract and the rights of WIAL are merely contractual rights. The rights are in the nature of rights in personem and are not rights in rem. In Malaysian Salvors v. Malaysia, it was held by the tribunal:
"while the contract did provide some benefits to Malaysia, they did not make a sufficient contribution to Malaysia’s economic development to qualify as an ‘investment’ for the purposes of Art. 1(a) of the BIT."
For the purposes of the BIT, the right should be a right in rem. Even by affording an ordinary meaning to "investment", the right must be a right in rem. As opined by Zachary Douglas:
"Of all the investment categories considered… it is a ‘claim to money’ or ‘right of future income’ which generates the most controversy in practice. There is clearly a significant degree of overlap between each of these rights and an analysis of them must grapple with an additional problem of distinguishing between rights in rem capable of constituing an investment pursuant to Rule 22 and simply contractual rights that are not. The problem is the subject of a separate Rule 24 and much of the discussion accompanying it is directly relevant to the investment category under consideration. Investment securities confer a right in rem to a ‘claim for money’ and therefore are capable of being a ‘invesmtnet’ pursuant to Rule 22. The category of ‘rights to money or future income’ tends to feature in BITs where there is no separte rerference to investment securities, such as the Germany Model BIT. Insofar as the category under consideration is introduced in the Germany Model BIT as an ‘asset’, it would seem to follow that there must be a proprietary foundation for any alleged investment in the form of ‘claim to money or future income."
Thus, neither the rights under the contract concerned nor the rights under the bank guarantee, which are not rights in rem, have any "proprietary foundation". Retd. Justice Srikrishna, expert witness had confirmed that as a matter of Indian Law (which was the applicable law in the relevant contract between Coal India Limited and WIAL), the rights under the contract were mere rights in personem and not rights in rem.

5. WIAL’s rights under the bank guarantees were merely a sub-set of rights under the contract. Further, as WIAL admitted, the bank guarantees were not independent investment but were rights forming part and parcel of the contract. The bank guarantees, which guaranteed performance, did not afford any substantive rights to WIAL. WIAL’s complaint was that the bank guarantees were improperly retained by CIL. WIAL now seeks refund of the amounts drawn down by India in the bank guarantee which had expired after seven days from the date of invocation by India of the bank guarantee. The bank guarantees in any case were furnished by a bank to CIL and not to WIAL. In Joy Mining Machinery v. Egypt (pdf), a claim relating to performance guarantees was made under the Egypt- UK BIT. The tribunal had held that the contract was merely an ordinary sales contract and not "investment" and that guarantees did not amount to investment.

6. WIAL’s reliance on Saipem v. Bangladesh for the contention that its rights under an arbitral award constituted "investment" is incorrect. In Saipem v. Bangladesh, it was held:
"The Tribunal agrees… that the rights arising out of the ICC Award arise only directly from the investment. Indeed, the opposite view would mean that the Award itself does not constitute an investment under Article 25(1) of the ICSID Convention, which the Tribunal is not prepared to accept."
Further, in GEA Group AG v. Ukraine (para 161-162) (pdf), it was held that the ICC Award therein was not an "investment" under the Germany-Ukraine BIT.  The award is in any case not an asset invested in India. As stated by Doughlas, in respect of an award, there is no additional commitment to the resources of the host State and there is no assumption of risk in expectation of commercial return.

The decision of the tribunal on the above would form the subject matter of the next post on this topic.

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