The White Industries Arbitration: Implications for Indias Investment Treaty ProgramPrabhash Ranjan April 13, 2012 Twitter Facebook StumbleUpon Digg Delicious In November 2011, an arbitral tribunal found the Republic of India guilty of violating the India-Australia bilateral investment treaty (BIT). It is the first known investment-treaty ruling against India, despite the fact that the country has a mammoth portfolio of BITs with more than 70 countries. News of the award broke only in February 2012.[i] As is often the case with investment-treaty disputes, the award was kept confidential. This is despite the fact that the dispute is squarely in the public interest. Indeed, the award is an indictment of Indias sovereign function, having ramifications both for the executive and the judiciary.This note wishes to unravel the implications of this ruling on two issues. First, the nuances related to the interpretation of the Most Favoured Nation (MFN). Second, the implications of the interpretation of the expropriation provision for the Indian judiciary, particularly in light of the on-going debate in India on enforcement of foreign arbitral awards.Essential facts of the caseWhite Industries obtained an arbitral award in its favour in a contractual dispute with Coal India, an Indian public sector company, and sought enforcement of the award before the Delhi High Court. Simultaneously, Coal India approached the Calcutta High Court to have the award set aside, and the request was granted. White Industries appealed to the Supreme Court in 2004 and the final decision is still pending.In 2010, White Industries took the matter to arbitration on the grounds that the inordinate delay in Indian courts to enforce the arbitration award violates the India-Australia BIT. White Industries argued that the delay violated the provisions on fair and equitable treatment (FET), expropriation, MFN treatment, and free transfer of funds.The tribunal dismissed White Industries allegations related to violation of FET, expropriation and free transfer of funds. However, the tribunal ruled that India violated the MFN provision of the India-Australia BIT, and awarded White Industries 4 million Australian dollars.Most Favoured Nation The tribunal found India guilty of violating the India-Australia BIT because the Indian judicial system has been unable to deal with White Industries jurisdictional claim in over nine years. The tribunal held that the delay by Indian courts violated Indias obligation to provide White Industries with an effective means of asserting claims and enforcing rights. This is despite the fact that the India-Australia BIT does not mention or include such a duty for host states. The tribunal got around that by holding that White Industries could borrow the effective means provision present in the India-Kuwait BIT[ii] by relying on the MFN provision of the India-Australia BIT.[iii]The tribunal overruled Indias objection that such borrowing will fundamentally subvert the carefully negotiated balance of the BIT.[iv] The tribunal held that this balance can be subverted only if the MFN provision is used to borrow a beneficial dispute resolution provision from another BIT.[v] The tribunal held that borrowing beneficial substantive provision from a third-party treaty does not subvert the negotiated balance of the BIT, but rather achieves the result intended by the incorporation of the MFN provision.[vi]It is important to note that of the MFN provision in the India-Australia BIT recognises certain exceptions, such as not extending any treatment, preferences or privileges arising from a) customs union, economic union or a free trade agreement; b) the provisions of a double taxation agreement; and c) any legislation relating wholly or mainly to taxation.[vii] The BIT also has a general exception to the entire treaty, and hence to MFN provision as well, which states that the host country can deviate from its BIT obligations in order to adopt measures necessary for the protection of its own essential security interests or for the prevention of diseases or pests.None of these exceptions were applicable to India in this case, and hence White Industries was permitted to benefit from the broadly worded MFN provision. In light of this ruling, it is pertinent that India reviews the MFN provisions in its BITs, which are often defined in an expansive manner without adequate exceptions. Furthermore, an important implication of this ruling is that inordinate delays in Indian courts in disposing matters related to a foreign investor can, potentially, violate Indias BIT obligations not due to the violation of denial of justice, but due to a violation of the effective means standard, which requires a lower threshold than denial of justice. Further, a tribunal can find a violation of the effective means standard even when the concerned BIT does not contain such a provision as long as it contains a broad MFN provision, which some tribunals will use to import investor guarantees from other BITs.Expropriation For reasons specific to this case, the tribunal did not agree with White Industries that India had expropriated its investment. However, the tribunal made two important points. First, the tribunal disagreed with India that the only form of contractual rights that are capable of being expropriated are those that are a form of intangible property.[viii] The tribunal stated that all contractual rights, whether tangible or intangible, are capable of being expropriated.[ix] Second, and more importantly, the tribunal said that the expropriation claim is unfounded because Indian courts had yet to rule on Coal Indias application to set aside the foreign arbitral award, and, therefore, the award has not been taken.[x] 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 has implications for the debate in India over the role of the judiciary in enforcement of ICA awards. Indias higher judiciary has been expansively interpreting the Arbitration and Conciliation Act of 1996 (A&C Act) to set aside or not enforce ICA awards in India.[xi] The expansive interpretation of the A&C Act by the Indian judiciary implies that an award rendered anywhere can be set aside by an Indian court if it goes against: (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality or it patently violates Indian law.[xii] It is important for India to understand the ramification of this aspect of the ruling, as it potentially turns Indias judiciarys interpretation of the A&C Act into a breach of international law.[xiii]Conclusion India has been entering into BITs without fully understanding their implications. The sanguine belief in the Indian official establishment is that Indian BITs adequately balance investment protection with Indias ability to exercise sovereign powers. This erroneous belief has been strengthened over the years because Indias regulatory actions have so rarely been challenged under BITs. It is a mistake, however, to believe that all is well with Indian investment treaties.The White Industries award draws attention to the fact that BIT provisions like the MFN clause are often vague and broad. This enabled White Industries to indulge in treaty shopping and arrive at a result that India did not anticipate. The ruling also clearly demonstrates how sovereign functions of the Indian judiciary could amount to violation of Indias BITs. Hence, one expects that this ruling should trigger a critical review of Indias BIT program. Such a review is imperative in light of Indias deepening integration with the global economy and increasing number of new trade and investment agreements, such as the India-EU free trade agreement.

SummaryThe arbitration ruling in favour of White Industries has shattered the belief that Indian BITs adequately balance investment protection with Indias exercise of sovereign powers...An investment treaty arbitration (ITA) tribunal has found the Republic of India guilty of violating the India-Australia bilateral investment treaty (BIT). Although the award was issued in November 2011, the Indian government has been silent on the issue. Media reporting brought the arbitral award into the public domain almost three months later. The principle of confidentiality that governs international commercial arbitration (ICA) should not apply to ITA, which, unlike ICA, adjudicates over sovereign functions of the state. Consequently, it has an impact beyond the parties in the dispute. This award is an indictment of Indias sovereign function, having ramifications both for the executive and the judiciary. Therefore, people at large have a right to know about the issues involved and the outcome of the case. This is the first ITA ruling testing Indian BITs. Many foreign investors dragged India to ITA during the Enron debacle. However, the case got settled on favourable terms. As a result, Indian BITs were never put to test. This case arises from the inordinate delay that White Industries, an Australian company, faced in Indian courts to enforce a foreign commercial arbitration award against Coal India. White Industries challenged this delay as a violation by India of its obligations under the India-Australia BIT. White Industries argued that by delaying the enforcement of the foreign arbitral award, India has violated the provisions on fair and equitable treatment (FET), expropriation, MFN and free transfer of funds of the India-Australia BIT. The tribunal dismissed White Industries allegations related to the violation of FET, expropriation and free transfer of funds. However, it agreed with White Industries that India has violated the MFN provision of the India-Australia BIT. The MFN provision obliges India to treat investments in its territory no less favourably than investments of investors of a third country. White Industries used this MFN provision to treaty-shop a beneficial provision in the India-Kuwait BIT, which obliges India to provide Kuwaiti investors with an effective means of asserting claims and enforcing rights with respect to investments. The ITA tribunal allowed White Industries to undertake such treaty shopping because the MFN provision in the BIT does not recognise any exception to this effect. The tribunal found that the Indian judicial system has been unable to deal with White Industries jurisdictional claim in over nine years. The tribunal held that this delay by Indian courts violates Indias obligation to provide White Industries with effective means of asserting claims and enforcing rights, which, in turn, is a violation of the MFN provision. The tribunal ordered India to pay damages to White Industries to the tune of A$4,085,180 plus $84,000 for the fees and expenses of arbitrators and A$500,000 for arbitral expenses. All these payments have to be made with an interest of 8% per annum from March 24, 1998, until the date of payment. There are six key aspects of the ruling that need to be circumspectly noted. First, a sizeable chunk of tax payers money will be used to pay damages to White Industries, hence having an effect on the public exchequer. Second, the inordinate delay by the Indian judiciary in disposing matters related to a foreign investor can, potentially, violate Indias BIT obligations. Third, 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 Indias 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. Fourth, again on the question of expropriation, the tribunal disagreed with India that the only form of contractual rights that are capable of being expropriated are those that are a form of intangible property. The tribunal stated that all contractual rights, whether tangible or intangible, are capable of being expropriated. Fifth, the tribunal also made it clear that deference to Indias laws in the India-Australia BIT does not mean that national laws can trump international laws. Thus, a provision subjecting BIT to national laws cannot be used to undermine clearly stipulated BIT provisions. Sixth, and most importantly, this ruling has shattered the sanguine belief in the Indian official establishment that Indian BITs adequately balance investment protection with Indias exercise of sovereign powers. A critical offshoot of the ruling is that BIT provisions like the MFN clause are vague and broad, which enabled White Industries to indulge in treaty-shopping and arrive at a result that India didnt anticipate. This ruling should trigger a critical review of Indias BIT programme. Such a review is also imperative in light of Indias deepening integration with the global economy by signing more and more BITs and FTAs such as the India-EU FTA.

India loses White Industries BITArbitrationPosted on February 9, 2012 by Shashank Kumar UPDATE (13 February 2012): We now have access to the full text of the arbitralaward:White Industries v. India ArbitralAward(Click to download; PDF ~ 5 MBs)According tovarious reports(Indian Express, IAReporter),an arbitral tribunalconstituted under theAustralia-Indiabilateral investment treaty (BIT)hasheld India to be in breach of its obligations under the BIT and international lawto an Australian mining company White Industries. We havent discussed this dispute before, except in passing, however, this arbitration proceeding has been quite high profile, generating a lot of interestin the Indian news media and press (Times of India).A detailedbackground of the facts is available through an earlier IAReporter report. Very briefly, here are the essential details:The treaty claim by White Industries Australia Ltd., an Australian mining company, was filed against the Government of India [in 2010 presumably]following complaints by the company that the Indian courts have failed to enforce a foreign arbitration award obtained in 2002 in a dispute between White Industries and its Indian joint-venture partner, Coal India Ltd., an Indian state-owned entity.The Australian firm entered into a joint-venture agreement in 1989 for the development of a major coal mine in Eastern India. At the time, the mine represented the largest investment by Australia in India.In 1999, White took its JV partner, Coal India Ltd. to arbitration under the International Chamber of Commerce (ICC) rules provided by their agreement.[...][T]he Australian firm obtained a favourable arbitral award in May of 2002 and turned to the Delhi High Court in September of that year in an effort to enforce that award.For its part, Coal India Ltd. responded by lodging its own bid before a different Indian Court, the Calcutta High Court, to have the award set aside. White Industries objected to these efforts, and filed a petition contesting that Courts jurisdiction to entertain a set-aside request.On May 17, 2003, a Judge of the Calcutta High Court ruled that the Court had jurisdiction over the set-aside proceedings. Following an appeal by White Industries, a panel of the same Court ruled the following year that the Indian courts could consider a setting-aside of the ICC award. The May 7, 2004 judgment did not rule on the merits of the set-aside application.That judgment is currently on appeal before the Indian Supreme Court.Badrinath Srinivasan, over at the Practical Academic blog,provides more details, obtainedunder the Right to Information Act from Coal India,on theoriginal ICC arbitration between White Industries and Coal India.Presumably,White Industries, tired bythe delay in the Indian court proceedings(its been 7 years since thematter has been pending before the SupremeCourt), decided to file a claim under the Australia-India BIT in 2010. Thearbitration was held under the UNCITRAL Rules (recall that India isnot a party to the ICSID Convention), with hearings taking place in September 2011 at Maxwell Chambers in Singapore. The three member tribunal hearing the claim consisted of: of Charles N. Brower (claimants nominee), Christopher Lau (Indias nominee), and J. William Rowley (tribunal chair). On the details of the partys legal representation andthe proceedings, IAReporter notes:White Industries is understood to be represented by the law firm Mallesons in the treaty claim. On its website, the firm indicates that it is handling a claim under the Australia-India BIT. A Partner with the firm cited confidentiality obligations, when asked for comment. Meanwhile, Luthra, an Indian law firm, is representing White in the domestic Indian proceedings.The Government of India is understood to have engaged the services of Toby Landau QC, a London-based barrister and arbitrator.The Tribunal rendered its award in November 2011, merely two months after the oral hearing:In a unanimous November 2011 arbitral award, a three-member tribunal ruled that White Industries Australia Ltd. was denied effective means of asserting claims and enforcing rights with respect to its investment in India. The award has not yet been published.According to IAReporter, in reaching its conclusion, the tribunal held that a commercial arbitration award can be an integral component of a broader foreign investment. The resultseems tobe similar to the Saipem arbitration involving Bangladesh(although, in my opinion, the tribunal in Saipem did not conclusively answer the question of whether an arbitral award, in itself,constitutes an investment that can be expropriated by national courts bydenying enforcement. Andrew Newcombe, over at the Kluwer Arbitration Blog, seems to agree on this). Also relevant heremay bethe award in GEA v. Ukraine (concerning aclaim arising out of non-recognition and non-enforcement of a prior ICC award by Ukranian courts)where the tribunal held that the held that the relevant arbitral award did notconstitute a protected investment under the Germany-Ukraine BIT or the ICSID Convention.Of course, whether an ICC arbitral award constitutes an investment for the purposes of the BIT is an important question for, if the answer is yes, the non-enforcement and non-recognition of this award, in violation of the relevant international norms,can amount to expropriation by the state, thus providing acause of action under the BIT. In this sense, these BIT tribunals can be seen as assessing the lawfulness ofthe actions of the national courts in enforcing and recognizing foreign arbitration awards. Thiscomes close to the idea of an international court for the enforecement of arbitral awards, as proposed by, amongst others, Judges HowardHoltzmann and StephenSchwebel. On the desirability of treaty tribunals taking up this role,a key question is obviously that of state consent for suchfunction by the tribunals. Indeed, express state consent on this issue remains absent (hence the absence of an international courtas proposed above), and it might not help the legitimacy of investment treaty arbitration if tribunals adoptsuch an appellatefunction over national courtsin the absence ofsuch consent.Of course, thats quite aclassical view of the problem. The transnationalists, obviously, might not see the absence ofexpress state consent as a problem at all.Anotherrelated issue is that ofclaims for the denial of justice underBITs. I shallsave my thoughts on that for alater post.As a practical matter, Indias loss can certainly help explain the recent reports indicating that India will not include investor-state arbitration clauses in its future bilateral investment agreements.On another note, the award in White industries also serves as a reminder of the need forsmoothening out the creases inIndian arbitration law, a process that might already be underway as evidenced by the reconsideration of the law laiddown in Bhatia Internationalby a constitution benchof the Supreme Court of India.P.S. Since the arbitration was held under the UNCITRAL Rules, the award has not been made public. In case it is,I will obviously post the link here.P.P.S. A special thanks to Luke Eric Peterson of IAReporter for allowing free access to the reports on this dispute