Report No. 260

B. Article 1. Definitions

(i) Analysis and comment:

(a) Enterprise (Article 1.2) and Investment (Articles 1.6 and 1.7):

2.2.1 The 2015 Model introduces an 'enterprise-based' definition of investment, not used previously by India. This definition limits protection to only those investors who have established an enterprise in India, i.e., they have substantial and real business presence in India and are under actual control of foreign investors. In contrast, the 2003 Model used an 'open-ended asset-based' definition of investment, enumerating the categories of assets that may be regarded as investments.

However, there have been concerns that an open-ended asset based definition may impose excessive strain on the regulatory space of a State. There is also an apprehension that the State is likely to be under constant threat of a claim being filed by the holder of an asset that is an investment.

Following examples show the potential claims that an open-ended asset based definition may result into: Goetz v. Burundi, ICSID Case No. ARB/95/3: BIT claim of six individual Belgian shareholders in a Burundian company; Suez et al. v. Argentina, ICSID Case No. ARB/03/17: Claim under two BITs of one French and two Spanish shareholders in an Argentine water company; Urbaser et al. v. Argentina, ICSID Case No. ARB/07/26: BIT claim of two Spanish shareholders in an Argentine water company; OKO Pankki Oyj et al. v. Estonia, ICSID Case No. ARB/04/6: Claim under two BITs of one German and two Finnish banks, lenders under a loan agreement; Funnekotter et al. v. Zimbabwe, ICSID Case No. ARB/05/6: BIT claim of 14 unaffiliated Dutch investors in different farms in Zimbabwe; Anderson et al. v. Costa Rica, ICSID Case No. ARB(AF)/07/3: BIT claim of 137 investors in Ponzi scheme; Jurisdiction declined for lack of investments "owned in accordance with the laws" of Costa Rica; Canadian Cattlemen for Free Trade v. United States, NAFTA/UNCITRAL: NAFTA Chapter 11 claim of 109 claimants concerning US ban of Canadian cattle and beef after discovery of bovine spongiform encephalopathy (BSE); Abaclat et al. v. Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility, 4 August 2011, pp 489-492 : 60,000 Italian holders of Argentine sovereign bonds; Ambiente Ufficio S.p.A. et al. v. Argentine Republic, ICSID Case No. ARB/08/9, Decision on Jurisdiction and Admissibility, 8 February 2013, p 141.

See Carolyn Lamm, The Future of Large-Scale Claims in Investment Treaty Arbitration, available at
http://www.arbitration-icca.org/media/3/14246914330120/lamm_ita-asil_keynote_large_scale_claims.pdf

Therefore an 'enterprise-based' definition may be relatively more appropriate for the current Indian context, as it is both a capital-exporting and capital-importing State. However, the language of some of the provisions in this regard needs to be streamlined.

2.2.2 Article 1.2.1 provides an exhaustive list of the elements that constitute "real and substantial business operations". Article 1.2.2 excludes certain types of "business operations" from "real and substantial business operations". This clause, while clarificatory, is also unnecessary, as the test for real and substantial business is already provided in Article 1.2.1. It may also be used to narrowly interpret "real and substantial business operations".24 It is suggested that Article 1.2.2 be removed.

24 See a discussion on the rule of ejusdem generis, for example, in Robert Jennings and Arthur Watts, Oppenheim's International Law (9th edn: vol. I), Oxford University Press: Oxford, 2008, pp. 1279-80; Also see footnote 20 at p. 1280; Richard Gardiner, Treaty Interpretation, Oxford University Press: Oxford, 2010, pp. 311-2.

2.2.3 Article 1.6.1(i) defines 'control', among other things, as a situation where the investor can appoint majority of directors or senior management, or to control management or policy decisions. This interferes deeply with corporate freedom, and investors may not be comfortable with such a provision. It may be appropriate to retain only a general reference to ownership and control in good faith.

Similarly, Article 1.6.1(ii) defines 'owned' as where an investor owns more than 50% of capital or funds or contribution into the company. Besides being disadvantageous to Indian investors abroad, this would also conflict with existing capital requirements under India's foreign investment policy, where foreign investment of less than 50% (as capped under policy) would automatically become excluded from the purview of protection under a BIT. It is suggested that Article 1.6.1 be removed.

2.2.4 Article 1.7 excludes certain assets from the definition of 'enterprise'. However, assets such as "Goodwill, brand value, market share or similar intangible rights" (Article 1.7(v)) are inherently connected with an industry, and should not be excluded. It is suggested that Article 1.7(v) may be removed, while retaining the rest of the provision.

2.2.5 As an alternative to the closed 'enterprise-based' definition adopted in the present version of the 2015 Model, a closed 'asset-based' definition may also be considered. While retaining the test for "real and substantial business operations" as presently contained in Article 1.2.1. This will address circumstances where States are not willing to enter into a BIT with an 'enterprise-based' definition. This will also address India's concerns of treaty shopping and multiple claims being filed based on the same cause of action.25 Option 2 below offers an alternative.

25 It is relevant to note that adopting a closed list is also recommended by UNCTAD, in UNCTAD, Scope and Definition: UNCTAD Series on Issues in International Investment Agreements II, p. 114.

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