Lessons from GMR’s Maldives episode

The recent termination of GMR’s contract by the Government of Maldives has once again highlighted issues of propriety and legality of the conduct of sovereign parties to a contract in their dealing with foreign investors.

Very often, states, and particularly developing countries, require capital and technical expertise from nationals of other states. States enter into concession or other agreements for development of their natural resources or infrastructure by foreign investors.

However, many a time, states have repudiated their contractual obligations, “expropriated” the foreign investor’s property or otherwise caused diminution in the value of such property. The question then is, how does the investor recover its investments and the projected returns?

Expropriation of property

There is little, if any, dispute as to its power and right to take for public use any private property within its borders. This is regarded as an essential attribute of sovereignty.

International law does not preclude states from expropriating foreign investments, provided (i) the taking of the investment is for a public purpose in accordance with law, (ii) it is non-discriminatory (iii) and with (adequate) compensation.

Expropriation can be done directly, for example, by nationalisation or by outright physical seizure.

There is also “indirect” or “regulatory” expropriation resulting from interference by a state in the use or benefits of a property, without seizing the property or affecting its legal title.

Seizure of legal title is normally considered to compensable by the acquiring State. But where economic injury results from a bona fide non-discriminatory regulation within the police powers of the state, compensation may not be payable. To determine if indirect expropriation requires compensation, the severity of the economic impact on the property right, and the purpose and context of governmental measure are considered to be the relevant criteria, to be considered together for attaining a balance.

The concession (or other) agreement may be governed by laws of the host sovereign state. The independence of judicial system often gets compromised, even in the most vibrant constitutional democracies, where the contest is between the interest of a foreign concessionaire and ‘national interests’.

The state may agree with private parties for terms such as “waiver of sovereign immunity”. However, such waiver may, at best, only bind the conscience of the sovereign state. It can be argued, and perhaps successfully, that the state, being foremost concerned with the welfare of its citizens, cannot bind itself to relationships with individuals that might in time derogate from that welfare.

Bilateral investment pacts

Over the years, Bilateral Investment Treaties (BIT) have become a popular way of protecting the interest of the nationals of a country investing in another country. The treaties generally provide the assurances concerning the protection of a state’s investors’ interests in the other state. BITs contain provisions of fair treatment and prohibit unlawful expropriation of investors’ assets. They may also provide for indirect expropriation or “regulatory expropriation”. The provision of dispute resolution in BITs as a measure of protection, or as a guarantee, of investor’s interests has attracted considerable attention.

Most BITs contain provision for arbitration for settling the claims of an investor-national by a neutral body outside the host country’s court system, and without its influence. An award passed in the arbitration can be enforced in a proper jurisdiction where the assets of the host country are located. The enforcement is effected by virtue of international treaties which make the awards enforceable in all of the signatory countries. Though perceived to be an effective guarantee, the protection mechanism in BIT is not free from difficulties.

The doctrine of sovereign immunity prohibits the national courts of one state from exercising jurisdiction over other states, as no state may exercise authority over another. But, the earlier view of absolute immunity of states stands diluted by the recent restrictive theory of sovereign immunity which prescribes that the immunity may not be available when a state engages in commercial activities that could be performed by private parties. Nevertheless, defence of sovereign immunity remains available to states against whom an execution of an arbitration award is brought before the courts of another state.

Separate waivers

‘Waiver of Sovereign Immunity’ in a contract may not be sufficient to protect the interests of a foreign investor and it is possible that the national courts, where execution of an award is sought, may not extend the waiver of immunity to enforcement and execution or, may require meeting of the conditions of the state’s own sovereign immunity laws. It may be necessary to include in the contract separate waivers for jurisdiction, execution, and even pre-judgment attachment, to fully ensure executability or, if possible, immediate payment of adequate (pre-determined) compensation.

Also, in times when there is a possibility of two-way flow of investments between the two states to a bilateral treaty, it is unlikely that states would provide for a “general” or wide nature of immunity, giving up their sovereignty for the investors of the other state. Therefore, even though the consent to arbitration (under a BIT or under a contract) may amount to waiver of jurisdictional immunity for the transaction, it may not waive immunity for execution proceedings, at which stage the national court may enquire as to the nature of property against which execution is sought.

Thus, an investor, after obtaining an award, would first have to ascertain where the debtor state has assets such as immovable property or bank accounts. He would then have to satisfy the national courts of the state where enforcement is sought that both the defaulter state and its assets are not entitled to the protection of sovereign immunity. Even if the award is enforced, it can be done only in respect of state property used for a commercial activity.

The private individual may consider certain precautions at the stage of negotiating and concluding the agreement. Some of these precautions are:

Diligence on the state’s assets by the investor (an exercise unlikely to be done) before entering into a private contract.

An affirmation that the sovereign has the capacity to waive the immunity, and it actually does in the contract, even till the stage of enforcement of an award against it.

Make provision for a neutral dispute resolution mechanism with the seat of arbitration outside the territory of the host country.

Appropriate investment backing, for example, through Multilateral Investment Guarantee Agency.

(Dhirendra Negi is partner and Mayank Mishra is senior associate with J Sagar Associates. Views are personal.)

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