Report No. 260

C. Article 2. Scope and General Provisions

(i) Analysis and comment:

2.3.1 Article 2.1 is a standard 'non-retroactivity of treaties' clause. Besides clarifying that those investments made on or after the date of entering into the BIT would be protected, it provides that measures adopted by the Home State prior to the treaty shall not be challengeable. The scope also extends to "any subsequent modifications" of any measure or law that existed in a Host State before entering into the treaty.

This phrase could be used by a Host State to change laws at any point in time, and may, in turn, prejudicially affect investors and could also have an adverse impact on Indians investing abroad. It is suggested that this phrase may be removed.

2.3.2 The first part of Article 2.4 ("Nothing in this Treaty shall be interpreted to restrict the rights of either Party to formulate, modify, amend, apply or revoke its Law in good faith") seeks to protect the sanctity of legitimate laws made by a State under a treaty, but this concern is unfounded, as it is addressed under customary international law.

See, for example, discussions on regulatory freedom in Saluka Investments BV (The Netherlands) v The Czech Republic, Permanent Court of Arbitration, Partial Award, 17 March 2006, followed subsequently in innumerable cases such as Marvin Feldman v Mexico, Award, ICSID Case No. ARB (AF)/99/1, 16 December 2002.

The second part of Article 2.4 ("Each Party retains the right to exercise discretion with respect to regulatory, compliance, investigatory, and prosecutorial matters, including discretion regarding allocation of resources and establishment of penalties") is unnecessary and may make investors vulnerable to State action. According to precedent, provisions granting freedom of investigation and prosecution are prone to abuse.

This was an integral factor in most of the cases relating to expropriation decided by the Iran-US Claims Tribunal. Other examples of such abuse are Antoine Biloune v. Ghana, UNCITRAL, Award on Jurisdiction and Liability, 27 October 1989, 5 ILR 189; Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the Congo), 2010, ICJ Reports 639. It is suggested that Article 2.4 be removed.

2.3.3 Article 2.5 appears to repeat Article 2.1. It is suggested that Article 2.5 be removed.

2.3.4 Article 2.6 lists the circumstances in which the treaty will not apply. Article 2.6(i) excludes government procurement from treaty protection. However, foreign investors enter a country through the government procurement process, for example, through infrastructure projects. Excluding public procurement could lead to the exclusion of many activities that would otherwise meet treaty objectives of contributing substantially to the Host State's development (as provided in the test for "real and substantial business operations").

Absence of treaty protection could lead to an exodus of foreign investors which may not be desirable in the long term. It is suggested that Article 2.6(i) be removed.

2.3.5 Article 2.6(iv) excludes taxation measures from the purview of the treaty. However, including taxation measures here is not necessary, and may, in fact, suggest an anti-investor bias. The power to tax is an integral part of the State's police powers in international law. The power to tax exists independent of a treaty, unless the tax itself is arbitrarily imposed to destroy the State's regulatory freedom.

Third Restatement of American Law; Also see FA Mann, The Legal Aspects of Money (5th edn), Oxford University Press: Oxford, 1992; Marvin Feldman v Mexico, Award, ICSID Case No. ARB (AF)/99/1, 16 December 2002, paras 103-6; Link-Trading Joint Stock Company v Department for Customs Control of Moldova, Final Award, 18 April 2002, para 69, 72. The absence of this clause will not affect India's taxing power. It is suggested that Article 2.6(iv) be removed.