Article by: Sahaj Mathur
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India’s interaction with the international investment regime experienced a paradigm shift after the 2011 arbitral tribunal decision in White Industries v. The Republic of India. In the White Industries arbitration, Australian corporation White Industries alleged that the Republic of India (India) breached its obligations under a bilateral investment treaty (BIT) between India and Australia. The tribunal granted White Industries a $4 billion award, leading to India’s heightened caution and suspicion against the international investment regime. As a knee jerk reaction to the White Industries arbitration, India terminated a majority of its BITs, and in 2016, introduced a new Model BIT. India intended to use this model as a template as it renegotiated its BITs.
India designed its Model BIT to address the inherent asymmetry in the earlier BITs, which upheld the rights of investors without imposing any corresponding duties. In this light, India introduced a Corporate Social Responsibility (CSR) clause in Article 12 of the Model BIT. The CSR provisions reflect a growing global concern with the inability of the investor-state arbitration system to address the impact of foreign investment on human rights, the environment, corruption, and labor rights of the host state. The inclusion of the CSR clause in the Model BIT, as well as in other new-age BITs, can be seen as a response to the lack of accountability of investors under the International Investment Regime for their conduct in foreign states.
The CSR clause raises crucial questions regarding its scope and functionality. In particular, it is unclear how an investor-state arbitral tribunal will interpret and apply the CSR provision when it interacts with other provisions of the Model BIT.
Deconstructing Article 12 of the Indian Model BIT: CSR and India’s Investment Regime
A significant innovation in India’s Model BIT is the imposition of duties on investors. India’s approach presents a shift from the traditional regime, which imposed liabilities solely on the host state. The CSR Clause contains four key features. First, the CSR Clause applies directly to investors, rather than to host states. In contrast, previous “indirect” CSR clauses imposed duties on States to promote responsible corporate conduct for corporations operating within their jurisdiction. The indirect CSR clauses required the state to take any action necessary through its domestic law and policy to ensure compliance with CSR standards. If the state failed to facilitate compliance, then the legal effect of the indirect CSR Clause would be extremely limited, since investors held no CSR responsibilities. In contrast, the direct CSR clause under Article 12 applies directly to investors, making them responsible for complying with internationally recognized CSR standards. As Section III explores, the direct CSR clause can have a significant role in Investor-State disputes.
Second, the CSR Clause focuses on “non-investment concerns” by emphasizing labor, human rights, environmental, corruption, and community relations concerns. The inclusion of these issues also represents an effort at rebalancing India’s interaction with the international investment regime to safeguard its right to pursue its policy objectives. Given the growing global concern against the international investment regime, the inclusion of such non-investment concerns within the existing regime can provide a significant roadmap to address some of the drawbacks of the current system.
Third, Article 12 expressly states that investors shall incorporate “internationally recognized standards” of CSR into their business practices. However, Article 12 does not state which particular international CSR standards apply, making interpretation challenging. To overcome this uncertainty, a tribunal could look to several international instruments, including the OECD Guidelines for Multinational Enterprises, the Ten Principles of the UN Global Compact, and the UN Guiding Principles on Business and Human Rights.
Fourth, Article 12 characterizes the CSR clause as voluntary. The voluntary nature of the provision implies the absence of any binding obligation on Corporations to comply with the aforementioned CSR standards. Thus, within the context of Investor-State Dispute Resolution, a state cannot claim the breach of a CSR principle as a “claim” or “counterclaim” against an investor. Existing literature analyzing the Model BIT has criticized the voluntary nature of the CSR provision.
In principle, a binding and mandatory CSR provision may appear to be an appealing suggestion. However, under the existing framework of public international law, corporations cannot be definitively treated as subjects of international law on which obligations can be imposed. Therefore, imposing human rights and environmental obligations on corporations lacks doctrinal support. Negotiations on a proposed Business and Human Rights Treaty, which would impose such obligations on corporations under public international law are ongoing. However, unless these negotiations materialize into a legally binding treaty framework, there is minimal theoretical justification for placing CSR obligations on investors. However, despite a lack of doctrinal support for imposing a mandatory obligation, a soft law document may still carry significance and legal effect for investors.
Corporate Social Responsibility and Investor-State Dispute Settlement: Towards a New Approach?
Article 12 may introduce social and environmental concerns to the inquiry undertaken by an investor-state tribunal, particularly at the damages stage. While an investor’s breach of internationally recognized CSR standards may not give rise to a claim, they may factor into a tribunal’s assessment of damages.
The dissenting opinion in Bear Creek v. Peru supported such an approach. In the dissenting opinion, the tribunal asserted that when determining the compensation owed to an investor, certain activities of the investor must be taken into account. Such activities include the investor’s due diligence, environmental impact assessment, and social impact assessment. Thus, the amount owed to an investor can be significantly lowered if the tribunal observes that the investor failed to comply with principles of CSR. Other tribunals have employed this methodology, as in Biwater Gauff v. Tanzania.
Article 26.3 of the Indian Model BIT and the footnote to the Article provide a preexisting basis for adopting this approach. Article 26.3 provides that a tribunal shall reduce damages owed to an investor after taking into account mitigating factors that would reduce the harm. The footnote suggests that such harm can include “unremedied harm or damage” to the local community or environment. Article 26.3 has been criticized for providing arbitral tribunals with wide discretion to determine what would constitute a mitigating factor, given the vagueness of the provision. It is proposed that Article 26.3 can be interpreted in light of Article 12 of the BIT. Thus, the mitigating factors mentioned in Article 26.3 can be derived from the internationally recognized CSR principles in Article 12. Therefore, investor conduct that breaches these provisions would constitute a mitigating factor which would reduce their compensation.
As Markus Krajewski argues in the dissenting opinion in Bear Creek, such a methodological approach would have a direct effect on investors’ behavior. Given the quantifiable impact on damages owed to an investor if a breach is found, the proposed approach can provide an effective mechanism to ensure investors’ compliance with their CSR obligations. Thus, the proposed approach can be significant in introducing non-investment concerns within investor-state arbitration.
CSR clauses in BITs have arisen as a response to the inherently lopsided nature of international investment law characterized by the lack of investor accountability. Article 12 of India’s Model BIT seeks to reinforce its right to regulate to achieve its policy objectives. These CSR clauses are considerably broad in scope, allowing them to serve as the bridge between public policy concerns and investor-state arbitration, which have long been seen as incompatible. Although Article 12 is not directly enforceable, the development of public international law on legally binding corporate obligations would further support these CSR provisions. This could lead to a situation where India could even file a claim against an investor for not acting in accordance with its CSR obligations.