India rejects clause on litigation

India rejects clause on litigation

The clause allows European businesses investing in India to take international legal action against the govt

By Asit Ranjan Mishra

4 July 2011

New Delhi: Despite a demand by the European Union (EU), India is unlikely to allow a clause in a proposed trade pact with the bloc that permits an overseas investor to sue a host country at an international dispute settlement agency.

EU wanted the inclusion of such a clause, known as an investor to state dispute settlement mechanism, in a draft investment chapter under the proposed trade and investment agreement, negotiations for which started in 2007. Mint has reviewed a copy of the draft.

India has rejected the EU’s demand on the contentious issue, as a result of which negotiations on the investment chapter of the pact have not moved forward, according to two persons outside the Indian government with knowledge of the development. They requested anonymity.

Commerce secretary Rahul Khullar declined to comment on the matter. “As a matter of principle, India does not negotiate through the media,” he said.

The controversial clause, if agreed upon, would allow European businesses investing in India to take international legal action against the government for damages over policies such as banning of dangerous chemicals, domestic health policies such as tobacco control legislation and measures to reduce prices of essential medicines.

While customary international law requires foreign investors to sue governments in domestic courts for any claims, or at the World Trade Organization dispute panel, such bilateral agreements on investment allow foreign investors to seek legal action at international arbitration bodies such as the United Nations Commission on International Trade Law or at the World Bank-affiliated International Centre for Settlement of Investment Dispute for alleged breaches of treaty obligations.

Hong Kong-based Philip Morris Asia Ltd, owner of Australian affiliate Philip Morris Ltd, recently threatened to sue Australia at a global forum on the government’s cigarette packaging norms, which the firm said would violate that country’s obligations under a bilateral investment treaty with Hong Kong.

An Australian draft legislation that aims to make tobacco products less attractive to consumers would prohibit all logos, along with different colouring and layout, on cigarette packs. It would also require that health warnings cover a substantial portion of each package, the International Centre for Trade and Sustainable Development said on 29 June.

Although other countries, including New Zealand, the UK and Uruguay, have previously attempted to adopt similarly strict requirements for cigarette packaging, Australia would be the first country to actually implement such measures. Losing the case, however, could cost Australia billions in unexpected public spending, the centre said.

The Australian government has announced it will not include a clause that allows an overseas investor to sue the country at any global arbitration body in any of its future bilateral trade agreements.

The EU-India draft investment chapter also seeks to cover intellectual property in the definition of investment, which civil rights groups say could drag the government to international arbitration if a foreign rights holder says the value of its intellectual property is impacted by government regulation.

Such provisions could pose a national risk and may put public policymaking in jeopardy, the groups said.

India should reject the EU’s demand for inclusion of intellectual property in the definition of investment and the so-called investor to state arbitration clause, according to Leena Menghaney, public health lawyer and India campaign coordinator for non-profit Medecins Sans Frontieres.

“The health ministry’s measures to make patented drugs more affordable, tobacco control measures such as bigger pictorial warning on cigarette packets, or banning a carcinogenic chemical could trigger claims of compensation worth millions of dollars by multinational pharmaceutical, tobacco and chemical companies against the government of India under investor to state arbitration proceedings on the ground that such measures damage their investments and profits,” she said.

Companies have initiated litigation against a number of countries across the world, including Canada, Uruguay and now Australia, on similar issues, Menghaney added.

“Governments have been pressurized either to withdraw the public health regulations or have been sued for high amounts by investors citing violation of investment provisions in BITs (bilateral investment treaties) and FTAs (free trade agreements),” she said.

Both the EU and India want the FTA to cover investment as it is important for companies from both sides to ensure there is a right environment for businesses to work together, EU trade spokesman John Clancy said in an emailed response to questions.

“The precise scope and coverage of these provisions have still to be settled,” Clancy said. “Intellectual property rights as part of the investment definition and an investor to state dispute settlement mechanism are standard features of bilateral investment treaties, including those concluded by India, so it is only to be expected that negotiators will want to consider whether to include such provisions also in an EU-India agreement.”

“Any suggestion that such a standard provision in a future FTA would restrict the right of either party—India or the EU—to protect public health and regulate for reasons of public policy are wholly unjustified,” he added.

The so-called investor to state dispute resolution mechanism is indeed a common feature in some FTAs India has signed, according to Abhijit Das, head of the Centre for WTO Studies. “One of the reasons of having an investment chapter in an FTA is to have such a provision,” he said.

However, after the latest instance of Philip Morris suing the Australian government, Das said there is increasing awareness of the possible repercussions of such a clause in trade agreements.

Such a clause may also benefit Indian companies that are increasingly looking for acquisitions overseas, he pointed out. However, Das cautioned that India should seek to keep such clauses off the agenda even if it protects domestic companies, “as in such cases the government might be at the receiving end”.

“There is also concern that the international arbitration tribunals are loaded against developing countries,” Das said.