Saturday, June 28, 2014

White Industries: The appropriate remedy for delay

Srikar – as you know, I am delighted that our paths have re-crossed after so long.  Needless to say, I am also grateful for this opportunity to exchange ideas with you and others on your blog.  

My first blog post will not deal with international trade law but with the other major branch of international economic law – international investment law.  The topic I will consider is the remedy granted by the Tribunal in White Industries v The Republic of India.  
As is well-known, White Industries was the first award rendered in a proceeding brought against India under a bilateral investment treaty (or “BIT”).  The treaty invoked by the Investor was the 1999 Australia-India BIT.
The Investor was successful.  India was found to be in breach of the BIT because of delays that the Investor encountered in the Indian courts.  Various Indian court proceedings had been initiated regarding the enforcement of an international arbitral award (“the ICC Award”) against the Investor's Indian counterparty - Coal India.  Coal India is a PSU and it was resisting enforcement of the ICC Award in the Indian courts. 
The Tribunal found a breach of an “effective means clause” which imposed a duty on India to “provide effective means of asserting claims and enforcing rights with respect to investments”.  The Tribunal interpreted that clause as providing that an “undue delay” in resolving an investor’s claim by local courts would amount to a breach.  In doing so it followed the interpretation of a similar clause in the Chevron-Texaco v Ecuador case (the “TexPet case in short). 
On the facts, the Tribunal made a finding that a nine-year delay in resolving set aside proceedings initiated before the Calcutta High Court amounted to a breach.  Five years of that nine-year delay were attributable to a pending appeal before the Indian Supreme Court and the Tribunal ruled that that delay also amounted to a separate breach. 
The finding on liability has been the subject of scholarly commentary and criticism: see, among others, Sumeet Kachwaha’s article in Arbitration International (2013, Vol 29, p. 275) and Jessica Wirth’s broader note on the effective means standard in the Columbia Journal of Transnational Law (2014, Vol 52, p.325). 
My focus in this post is not on liability but on the Tribunal’s next step: how it remedied the breach that it identified.
The remedy granted in White Industries
The Investor was awarded monetary compensation of AUS$ 4,085,180 (plus post-award interest at 8% per annum).  That sum represents the amounts that were payable under the ICC Award. 
In broad terms, the Tribunal decided that the appropriate remedy for delay was to predict the result that the Indian courts would reach in the ongoing local proceedings and give the Investor the benefit of that result immediately, i.e., without any further delay.  In doing so the arbitral tribunal effectively sat as an Indian court.
In keeping with this approach, it assessed four objections to the enforcement of the ICC Award that had been raised by Coal India (one hopes that additional objections were not ignored by the Tribunal).  It decided that none of them had merit and concluded that the ICC Award would have been held to be enforceable by an Indian court.
It then ordered the Government of India to pay the Investor the amount owed to it under the ICC Award as this would place the Investor in the position that it would have occupied if the Indian court proceedings had: (1) concluded without delay and (2) reached the substantive result that the Tribunal predicted they would reach. 
It is significant that this payment had to be made by the Government of India and not Coal India (which is a legally distinct entity whose conduct the Tribunal found could not be attributed to the Government of India: see Award, para. 8.1.21). 
The path not taken 
The Tribunal’s approach calls for three comments and one suggestion. 
First, it is not obvious that the delays encountered in the Indian courts caused any financial loss to the Investor.  The Investor was granted post-award interest by the ICC tribunal at the rate of 8% – the entire point of such an award is to compensate an award-creditor for delays in paying the award.    As long as the interest rate was set appropriately and as long as the Indian courts would give effect to the award of post-award interest (and there were no suggestions to the contrary by the Investor) that should have been adequate to compensate for any undue delay on account of proceedings before the Calcutta High Court and/or the Supreme Court.  So, arguably, there was no genuine loss to compensate here.
Second, the claim for compensation (and the Tribunal’s award) is built on a prediction about the outcome of future Indian court proceedings.  That prediction is inherently uncertain.  The Tribunal could have held that claims for damages that rest on predictions about the outcome of litigation will be treated as speculative and disallowed.  This is the position that the European Court of Human Rights (ECHR) has adopted in cases brought under Article 6 of the European Convention of Human Rights (which also regulates the length of proceedings).  The ECHR has consistently held that it cannot speculate on the outcome of legal proceedings for the purposes of awarding compensation.  See Incal v Turkey, para. 82; Wettstein v Switzerland, para. 53; Bayrak v Germany, para. 38.  In sharp contrast, the Tribunal in White Industries showed no hesitation at all in speculating about the outcome of Indian court proceedings.  However, it did indicate that the parties had consented to its approach (see Award, para. 14.2.2) and one can also see considerable force in the position that a tribunal must resolve questions about how a court would rule just as it must resolve questions about what an investor’s future market share will be.  Arguably, these are all hypotheses about future events which a tribunal must assess in order to calculate damages.   Nevertheless, the failing of the Tribunal in White Industries is that it did not justify the standard that it applied while making predictions about the outcome of the Indian court proceedings.  India argued that the Investor needed to show that Coal India’s opposition to enforcement and its set aside application had “no prospects of success” (Award, para. 14.2.1), i.e., that the Investor needed to show that a positive legal outcome was virtually certain.  But the Tribunal did not deal with that contention or explain its approach in any detail.  Indeed, the indications are that it placed the burden on India to show that the Investor would not succeed in the domestic proceedings (which it sought to justify by reference to the New York Convention (which was not part of the applicable law) and Indian law (without specific explanation)). 
Third, in usurping the role of the Indian courts, the Tribunal also arguably compromised the due process rights of a third party – Coal India.  It effectively decided on the validity of Coal India’s objections to enforcement without the participation of Coal India.  Of course, one may respond that Coal India did not lose anything – to the contrary it gained because the Government of India was forced to pay the ICC Award that it would have been required to pay.  That only raises further questions (which have no answer in the Award) such as whether the Investor could maintain its claim under the ICC Award against Coal India (leading to a situation of potential double recovery), whether the Government of India could recover the amount that it paid to the Investor from Coal India and, if not, whether an outcome where the Indian taxpayers pay foreign investors but cannot claim restitution from the party bearing the true liability is an altogether fair one.  These concerns may seem theoretical because Coal India is a PSU (however, it is not a wholly-owned PSU) but they will have much greater resonance in cases where the opponent of a foreign investor in the Indian courts is a private party.     
Finally, my (tentative) suggestion is that if the Tribunal was determined to grant relief (notwithstanding the existence of an order for post-award interest) it should have considered a novel remedy: ordering India to resolve the proceedings within a short period (say 6 months) with a qualification that if India failed to comply within that period the Tribunal would go on to make predictions about the outcome of pending proceedings and award damages.   This remedy recognises the reality that the Indian courts were progressing with their consideration of the Investor’s claims (the Supreme Court actually issued its judgement on the narrow question of jurisdiction less than a year later) and gives India a final opportunity to rectify the concrete problem faced by the Investor.  It is less intrusive (in that it potentially avoids a situation where the Tribunal substitutes itself for an Indian court) and limits the risk that one or the other of the litigants in the Indian courts may be unjustly enriched.  While investor-state tribunals have been historically reluctant to grant conduct-based remedies and conditional remedies there is no fundamental bar in public international law to their grant – indeed a broadly analogous remedy is given as a matter of course by WTO panels. 
Before closing it is worth considering the potential implications of the White Industries ruling. 
The effective means clause which was considered in White Industries can be imported into any Indian BIT (as they are all likely to have MFN clauses).  And that clause would apply to any proceeding in an Indian court which involves claims/rights “with respect to” foreign investments protected under a BIT (not just proceedings between a foreign investor and the Government of India).  So proceedings between two private entities, for instance between a foreign investor and a local Indian joint venture partner, could also be regulated by the effective means clause.  As a result, delays in a broad range of judicial proceedings do have the potential to trigger the liability of the Government of India. 
For this reason, the approach to remedies followed in White Industries (and prior to that in TexPet) may well be of consequence in the future.