Fork in the Road – Nissan’s Arbitration Against India

[Utsav Prashar is a 2014 graduate of NALSAR University of Law]

The legal maxim Ubi jus ibi remedium expresses that there is no wrong without a remedy.[1] In the landmark case of Ashby v. White,[2] the House of Lords observed: “When the law clothes a man with a right he must have means to vindicate and maintain it……and it is a vain thing to imagine a right without a remedy”.[3]

The above observation in Ashby v. White is true even for an individual or a body corporate making investment in a country other than the country of their origin. In fact today, protection of foreign investments has acquired centre-stage in international trade relations between the nation-states. But the international investment law regime looks at domestic courts, rightly or wrongly, with suspicion as far as obtaining remedies for wrongs allegedly caused to the investor by the host state is concerned. The reasons for this attitude range from lack of independent judiciary to adverse local laws. As a result, the relationship as well the issue of precedence between the local courts and the international arbitration forums is rather precarious under international investment law. This has led to myriad dispute settlement provisions under BITs which manifest in forms like exhaustion of local remedies rule, exclusive forum choice clauses, fork in the road clauses etc.

Fork In the Road (FITR)?

Expressed by the Latin maxim of una via electa non datur recursus ad alteram (once one road is chosen, there is no recourse to the other),[4]  this clause is inserted in the Bilateral Investment Treaties (BITs) essentially to preclude the foreign investor from resorting to international arbitration in case the investor has chosen to litigate its claims before the domestic courts of the host state. This clause does not posit that domestic remedies should be the first step before the dispute is escalated to international level. The investor has to choose between the two forums and that, once made, the choice will be irrevocable or final and will foreclose the option of resorting forum not chosen before.

This is relatively a strict clause as compared to the exhaustion of local remedies (ELR) rule, which is recognised by customary international law for dispute settlement. This is because, as explained by the tribunal in Maffezeni v. Spain, the FITR clause is not bypassed by invoking the Most Favoured Nation (MFN) rule, unlike the ELR rule where investors invoke MFN clause in the BIT by comparing and contrasting it with other BITs of the host State that did not contain the requirement of ELR. But despite being such a favourable provision for the host countries in BITs, the decisions in almost all the cases involving reliance on FITR clause have gone in favour of the foreign investor. The cases like Vivendi v. Argentina, Genin v. Estonia, Middle East Cement v. Egypt, CMS v. Argentina, etc., bypassed the FITR clause by differentiating between treaty and contract based claims and thereby asserting the jurisdiction of international arbitration tribunals with respect to treaty claims. However, it is a different matter altogether though that till date there are no conclusive standards or parameters based on which such differentiation can actually be arrived at with ease or certainty. The threshold, before the FITR clause gets triggered, was set so high by these decisions that practically it became impossible to enforce it. In fact, no tribunal found an investor’s claim under the BIT to have actually been prohibited by this clause until the time Pantechniki S.A. Contractors & Engineers v. Albania came into the picture.[5]

Fundamental basis test

So the question here is what sanctity or utility this clause has when it really cannot assert itself in the face of an aggressive investor’s attempts to drag the host country into international proceedings? This is important because of India’s counter to Nissan’s demand of $770 million under India-Japan Comprehensive Economic Partnership Agreement (‘CEPA’) as compensation for the failure of the Tamil Nadu government to refund the value added tax (‘VAT’) paid by it primarily revolves around the answer to this question.

The tribunal in Pantechniki case moved beyond the framework of difference between treaty and contract based claims which had dominated the landscape of tribunals’ response to FITR clause till date. The tribunal correctly articulated that this differentiation is simplistic for the reason that “this is argument by labelling- not by analysis” (para 61 of the award). Instead it devised, borrowing from America-Venezuela Mixed Commission’s decision in the Woodruff case, what can be termed as the fundamental basis test to determine the international tribunal’s jurisdiction in the face of FITR clause. The test to determine it is whether the “essential basis of a claim” sought to be brought before the international forum is autonomous of claims to be heard elsewhere (paragraph 61 of the award). This test is gradually gaining acceptance and this is exemplified by awards recently passed in cases like Supervisiony Control S.A. v. Republic of Costa Rica and H&H Investments v. Egypt.

Whether Article 96(6) is FITR clause?

At this juncture, article 96(6) of the CEPA needs some analysis. Article 96(6) is sort of a hybrid FITR clause, for it provides a narrow escape route to the investor to pursue international arbitration if the investor withdraws the proceedings instituted by it before the domestic courts within thirty days of filing the case. This kind of wording in article 96(6) is at variance with the generally accepted definition of FITR which insists on the finality of investor’s choice of forum in explicit terms. But the tribunals in Middle East Cement v. Egypt and the Pantechniki case have recognized inconclusive clauses worded on the lines of article 96(6) as FITR clause. It can be presumed that providing a very limited escape route in an overall explicit and definitive clause will not change the FITR character of article 96(6). The reading of article 96(6) with article 96(2) makes it clear enough that it is a FITR clause which tilts more towards international arbitration instead of domestic courts in case of dispute.

Whether the dispute satisfies fundamental basis test?

In the present case, the ‘fundamental basis’ of Nissan’s claims both before the Madras High Court as well as proposed international arbitration rests on the same normative source, i.e., amendments to the Tamil Nadu Value Added Tax Act, 2006 (‘VAT Act’) which allegedly denied Nissan the promised tax benefits. The amendments to the impugned VAT Act were apparently aimed towards addressing the lacuna which was creating the scope of undue benefit for Nissan and it never intended to deny the subsidy on VAT paid by Nissan. In fact, the law only questioned the ingenious business model adopted by Nissan to claim which rightfully did not belong to it. The amendment in the statute has been challenged before the High Court with a prayer that the said change has deprived it of the benefits which it was entitled to and hence should be struck down. And the same deprivation is also now being impugned, although couched in treaty terms, before the international tribunal. Both the claims trace their origin to essentially the same source and hence satisfies the ‘fundamental basis test’.

So does India have a case?

In light of the above, article 96(6) of the CEPA does stand a chance to counter Nissan’s claim before the international tribunal. In the case of Occidental v. Ecuador, where refund of VAT was one of the issues, the tribunal suggested that FITR clause is premised on a real and free ‘choice’ between two forums, which would have no meaning or purpose if there are onerous timelines which compel a claimant to choose one over the other (e.g., an extremely small window of 20 days available for the claimant to challenge the Ecuadorian VAT law, failing which it became final and binding). In the present case, however, there is nothing on record to suggest that it will be onerous for Nissan to pursue the matter before the High Court as well as the Supreme Court instead of resorting straight away to international arbitration.

Last but not the least, in case Nissan fails to get the relief from the courts of India then it does have an option to pursue international arbitration on the ground of ‘denial of justice’ which is recognized under the customary international law.

Nissan will be well advised if it pursues the matter before the Madras High Court and possibly before the Supreme Court before it goes ahead with international arbitration. The judiciary in India has shown remarkable independence when it comes to dealing high stakes matters, especially which involves international investors. Vodafone Group plc can definitely vouch for that. Hence, a little faith in Indian judiciary will not be detrimental to Nissan at this moment.

– Utsav Prashar

[1] Ted Sampsell Jones, The Myth of Ashby v. White, 8 U. St. Thomas L.J. 40 (2010).

[2] (1703) 92 Eng. Rep. 126 (QB) 128.

[3] The Myth of Ashby v. White (above), at 43

[4] Christoph Schreuer, Travelling the BIT Route: Of waiting periods, Umbrella Clauses and Forks in the Road, 5 J.W.I.T. 2.

[5] Fiona Marshall, Commentary: Pantechniki v. Albania decision offers pragmatic approach to interpreting fork-in-the-road clauses.

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