Joint ventures in shipping: Complex but rewarding
Joint ventures have been prevalent in the shipping industry for many years.
In December 2015, the Indian Ministry of Finance released an updated and approved version of the Indian Model Bilateral Investment Treaty (Indian Model BIT). The Ministry of Finance confirmed that the Indian Model BIT will be used as the starting point for the negotiation of all standalone Bilateral Investment Treaties (BITs) and the investment chapters of Free Trade Agreements.
A BIT is entered into between two states, with the aim to protect investments made by a national of either of the states into the other. It affords extra rights to investors and gives them an effective remedy for unlawful actions by host states that cause damage to their investments. The benefit for a foreign investor is that they can feel secure that their investments will be protected. The benefit for a state is that such measures encourage foreign direct investment.
BITs were embraced by the Government of India in the mid-90s. To date, India has signed 84 BITs with a wide spectrum of countries, of which 73 are in force. The previous Indian Model BIT released in 2003 (Previous Indian Model BIT) and India’s existing BITs are widely seen as being investor-friendly. Over the past few years, a number of foreign companies have commenced, or taken steps towards commencing, arbitration claims against the Government of India. The release of the Indian Model BIT is a reaction to these foreign investors suing India under different BITs and seeks to redress the balance more in India’s favour.
Below is an analysis of the significant provisions of the Indian Model BIT which offer important protections to foreign investors. We also address some common investor protections that have been left out of the Indian Model BIT.
Article 3.1 sets out that investments will not be subject to measures in violation of customary international law. The Previous Indian Model BIT contained a provision requiring the host state to grant fair and equitable treatment (FET) to an investor. Tribunals applying this standard have held that “fair and equitable treatment” involves reasonableness, consistency, non-discrimination, transparency and due process. The removal of a FET provision and inclusion instead of a "Customary International Law” provision may be seen as something of a watering down of the substantive protections, although still offering investors a base level of protection.
Article 3.2 sets out that investors and investments will be granted full protection and security. This creates an obligation on the host state physically to protect investors and their investments. In practice, what constitutes adequate protection, and what should be protected, can be heavily contested and often reaches arbitral tribunals.
Article 4.1 sets out that investors will be treated no less favourably than nationals of the host state. This creates an obligation on the host state not to act in a discriminatory manner against foreign nationals, therefore providing an important fundamental protection to attract foreign direct investment.
Article 5.1 sets out that an investment may not be nationalised or expropriated, except in accordance with the law of the host state and upon payment of adequate compensation. In common with most BITs, this does not prevent the host state from nationalising an investment; rather, it ensures that any nationalisation must be carried out with due process and that investors will be adequately compensated. Adequate compensation is set out to be at least the fair market value of the investment on the day before the expropriation takes place and must be paid in freely convertible currency.
Article 5.3 clarifies that this provision covers both direct and indirect expropriation. Direct expropriation covers situations where the host state takes actual ownership of the investment. Indirect expropriation covers situations where the state interferes with an investment, to the extent of depriving the investor of the use or benefit of it, as though it had been nationalised.
Article 14.4 of the previous draft of the Indian Model BIT released in March 2015 (March Draft) did not contain any clear consent to arbitration by the host state. This was particularly worrying for investors, as the investment arbitration mechanism gives the investor potential teeth by providing a method of enforcing these rights directly against the host state. This has now been changed and article 17.1 contains a standing offer by the host state to arbitrate any dispute under the Indian Model BIT.
Article 15 sets out that in order to submit a dispute to arbitration, bar certain exceptions, an investor must first exhaust all local remedies for a period of five years. There is current debate about the status of such a clause and non-compliance with it, but it is clearly something that would need to be considered carefully before commencing any claim.
Under the March Draft, all arbitrations were to be conducted under the UNCITRAL Arbitration Rules. Article 16.1 now gives investors a choice of arbitrating a dispute under either the ICSID Arbitration Rules, the Additional Facility Rules of ICSID or the UNCITRAL Arbitration Rules. Investors generally prefer arbitrating under the ICSID Arbitration Rules, primarily because under the ICSID Convention, consent to arbitration on the part of the host state bars it from raising any plea of immunity that would frustrate arbitration proceedings. However, as India is not currently a party to the ICSID Convention, the ICSID Arbitration Rules are not currently available.
As explained above, the Previous Indian Model BIT contained a FET clause. This is a common and valuable provision in BITs and is often the subject of claims before arbitral tribunals. Although investors should note its absence, the United Nations Conference on Trade and Development has suggested that this provision could be made redundant by the inclusion of a “Customary International Law” clause, which the Indian Model BIT does contain. Whilst a “Customary International Law” clause may not go quite as far as a FET clause, investors should be reassured it does provide a similar form of protection.
The Previous Indian Model BIT also contained a provision requiring the host state to treat investors no less favourably than investors from other countries.
A most favoured nation (MFN) clause is generally included to level the playing field between foreign investors. Although the Indian Model BIT no longer contains a MFN clause, the national treatment clause set out above provides that treatment will be at least no less favourable than nationals of the host state, so there is a minimum standard.
Another provision not included in the Indian Model BIT is a clause which requires both parties to observe contractual obligations. This is known as an umbrella clause, as it effectively brings contractual obligations under the umbrella of BIT protection.
A concern amongst investors is often the reliability of the court system in the host state. This can cause issues in enforcing contractual obligations, since the courts may not remedy a breach of contract, particularly when the contracting party is the host state. A solution is the inclusion of an umbrella clause, so that a failure of the host state to observe contractual obligations is a breach of the BIT.
As there is no umbrella clause, a claim on the basis that the host state did not observe a direct contractual obligation might be limited to being pursued in the domestic courts. In a scenario where the failure of the courts then caused an investor significant losses, a claim would need to be brought under one of the investor protection provisions set out previously.
The Indian Model BIT has addressed many of the concerns in the March Draft regarding India’s consent to the arbitration of disputes and should give investors comfort that they have a direct route to commence proceedings. Whilst there are certain notable omissions versus a belt and braces gold standard BIT, which are most likely due to India’s recent negative BIT experiences, the Indian Model BIT still presents significant protections to investors.
Of course, the Indian Model BIT is only the starting point for negotiations between India and its trading partners. The outcome of any future BITs will depend on the relative bargaining power between the contracting states.
Authors: Sherina Petit, Partner and Head of India Practice, Mathew Buckle, Associate and Daniel Jacobs, Trainee Solicitor
Joint ventures have been prevalent in the shipping industry for many years.
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