Alexandros-Cătălin Bakos
Introduction:
By the end of 2020, the Cairn Energy PLC and Cairn UK Holdings Limited (the Claimants) v. India Tribunal (sat in the Hague) rendered an Award which might prove to be of high importance for the world of international investment law, owing to the multitude of issues that it raises for states, investors, and for stakeholders in general (a brief presentation of the Award and of possible – but not exhaustive – issues of interest is made below), especially in the area of taxation and the limits that international investment law may bring to state discretion in this area. At the same time, an interesting, but less evident, issue that was clarified by the Cairn v. India Tribunal is the extent to which works that may be connected to the applicable investment treaty in a dispute may be relevant to the interpretation of that treaty as travaux preparatoires (or preparatory works). Before moving on to this aspect of treaty interpretation and the Tribunal’s findings as regards it, however, a brief presentation of the dispute is in order.
Background to the dispute:
It would not be an exaggeration to claim that one of the most important developments in international investment arbitration – and international investment relations, in general – in 2020 was the Cairn v. India Award. Without going into too many details – as the Award’s contents were aptly summarized elsewhere – it is sufficient, for present purposes, to discuss the main aspects of the dispute. Essentially, it revolved around retroactive taxation of capital gains (which had not been taxable at the moment they occurred) – pursuant to intra-group restructuring activities. This was something that the arbitral tribunal considered to have been done in violation of the applicable bilateral investment treaty (BIT). More specifically, in violation of the fair and equitable (FET) treatment standard that was guaranteed via the United Kingdom (UK)-India investment treaty to UK investors committing their capital to India.
The impact of this Award – both on the world of international investment arbitration, in general, and on India, in particular – cannot be understated. To start with, the amount of the damages (exceeding $1.2 billion) that were awarded to the successful claimants could potentially raise questions as to the Indian Government’s ability to pay what it owes pursuant to the Award. Irrespective of this the Claimants found a possible solution to this potential obstacle, as they moved to enforce the award before US courts. And they targeted assets owned not by India itself, but by one of its state-owned enterprises, Air India. Something reminiscent of recognition and enforcement proceedings brought by investors who had obtained favourable awards against Venezuela before investment treaty tribunals. This will clarify even further how, and to what extent, the exception to the separate legal personality of states and state-owned enterprises applies in such investment cases. Thus, it is not a far-fetched assertion to state that, in the context of a backlash against investment treaty arbitration and in the context of a multitude of reform discussions concerning investor-state dispute settlement (mostly via arbitration) – the most popular ones being, perhaps, the UNICTRAL Working Group III discussions – the Cairn v. India dispute will most probably be cited by proponents of reform to underpin their arguments.
Nonetheless, the Cairn Energy award goes both ways. It is not the only time that India found itself a losing respondent before an investment treaty arbitral tribunal for its retroactive tax measures. Such outcomes may negatively affect the reputation of a host state looking to attract foreign investors, since the latter usually put a premium on the general regulatory framework concerning taxation – including enforcement practices – of a state to which they might commit their capital. Even if this is not necessarily a determinative factor to an investor’s decision to invest, it might nonetheless tip the balance towards a decision which would be unfavourable to the state looking to attract foreign investment.
Travaux preparatoires and the Cairn v. India Tribunal’s assessment of their content
Beyond the immediate impact of the Cairn v. India Award lies a plethora of other not so apparent, but nonetheless interesting, legal aspects. One of them is the public international law issue of preparatory works of a treaty. And the multitude of interesting questions that are raised when applying the interpretation rules of the 1969 Vienna Convention on the Law of Treaties (VCLT) (or their customary law equivalent) pertaining to whether, and to what extent, can travaux preparatoires be resorted to when interpreting an international (investment protection) treaty:
More specifically, Article 32 (Supplementary means of interpretation) of the Convention reads as follows:
“Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: (a) leaves the meaning ambiguous or obscure; or (b) leads to a result which is manifestly absurd or unreasonable.”
This provision, if read textually, comes as an aid, if the aforementioned conditions are satisfied, to the tribunal applying Article 31 of the Convention, which mandates the adjudicator to interpret a treaty provision “in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”. In other words, if after following these steps the meaning of a treaty provision is ambiguous or obscure or if the result is manifestly absurd or unreasonable, resort may be had to preparatory works or the circumstances of a treaty’s conclusion.
It is beyond the scope of this brief blog post to discuss the multitude of issues raised by these provisions and their specific application to investment arbitration proceedings. Fortunately, this has been done before. Commentators would focus, for instance, on issues such as fairness, legitimacy, and consent and their role in using travaux preparatoires when interpreting investment agreements, with Vasani and Ugale arguing that “the need to resort to supplementary means of interpretation (in investment treaty arbitration) is even greater, as the system is based on voluntary compliance and depends on its being perceived as fair and legitimate. A well-reasoned decision drawn within the limits of the parties’ consent and the contracting parties’ intent assures the public and the parties that discretion is being exercised fairly. In this way, the entire system succeeds”.
In any case, before going into any in-depth analysis of the need to resort to travaux preparatoires (although, logically, this might come first), it is perhaps better to ask a simpler question, but of equal importance – what exactly amounts to preparatory works of a treaty? To ask such a question, however, might seem somewhat counter-intuitive. Even if Article 32 of the VCLT does not define the type of materials that may amount to travaux preparatoires (for a take on what might be included, see this article by Shirlow and Waibel), it may not be entirely clear why disputes could arise as regards this issue.
But one of the contested issues that arose before the Cairn v. India tribunal was exactly this. Essentially, India tried to argue that the UK-India BIT’s FET standard did not have an autonomous meaning, but one grounded in the customary international law minimum standard of treatment (see para. 1704, fn 2146 of the Award). For practical purposes, it is enough to mention here that the difference between the two standards – generally speaking – is that applying the minimum standard of treatment (MST) could potentially lead to a higher threshold that must be reached in order to hold the state liable for not observing its international obligations (at the same time, it must also be acknowledged that the MST may have evolved towards greater protection for investors, as found by the Bilcon v. Canada tribunal, in the NAFTA context – especially at paras. 434-8). Of course, whether this would have been the case in Cairn v. India is another issue, which I will not address here. Moving back to India’s argument, what is most interesting about the present Award is that the Respondent tried to underpin its position by linking the FET standard to the MST one by reference to a journal article, written by Eileen Denza and Shelagh Brooks, two of the officials involved in the negotiations of the UK’s investment treaties, and published in 1987. This would qualify as preparatory work to the UK-India BIT, India’s argument goes, and would clarify the way in which the FET standard should be interpreted. Essentially, the authors discussed in the cited article how one of the UK’s draft BIT (among those preceding the UK-India BIT) was heavily influenced by the 1967 OECD Draft Convention on the Protection of Foreign Property (pp. 910-1 of Denza’s and Brooks’ article). This Draft Convention essentially equated the FET standard with the minimum standard of treatment (see p. 9 of the forecited Draft Convention, with comments).
The Tribunal, however, avoided discussing the merits of the article and its substantial relevance (historically, the UK changed its Model BIT in 1991, after Denza’s and Brooks’ article was published, and before concluding its BIT with India) or the influence of the Draft Convention on the UK’s treaty practice. It simply stated that “[t]he Denza and Brooks article, the historical accuracy of which the Tribunal has no reason to doubt, does not qualify as travaux préparatoires within the meaning of the Vienna Convention. Nor have any such materials developed by the Contracting Parties to the present Treaty been submitted into the record of this arbitration, which would show that the negotiators expressed a shared understanding (or even exchanged views) that FET, as used in Article 3 [of the applicable treaty], was to be understood in the light of the 1967 OECD draft Convention's commentary. In short, there is no evidence that FET is to be interpreted other than in accordance with Articles 31 and 32 of the Vienna Convention, which in the absence of (i) proper travaux préparatoires, (ii) a subsequent agreement between the Parties regarding the interpretation of the Treaty or the application of its provisions, (iii) evidence of a subsequent practice of the Parties which establishes the agreement of the Parties regarding the Treaty's interpretation, or (iv) evidence that a special meaning is to be given to FET showing that a different meaning than that borne by the plain meaning of the text, mandates the interpreter to give effect to the plain meaning of the words used in the Treaty.” (para. 1704 of the Award, fn 2146). While it is not entirely clear from the Award what exactly was argued by the Respondent to constitute travaux preparatoires, it seems that Denza’s and Brooks’ article was considered an indispensable link in the Respondent’s argument. The Tribunal also expressly denied the relevance of such scholarship as a form of preparatory work, so it is reasonable to assume that this is what India attempted to qualify as travaux preparatoires.
In fact, what the Cairn tribunal seems to have done (albeit implicitly) in rejecting the relevance of Denza’s and Brooks’ article was to clearly separate the treaty provision (containing the FET standard) – and its interpretation by possible reference to historical preparatory works, if existing – from a different secondary source of international law: the “the teachings of the most highly qualified publicists of the various nations” (as provided for in Article 38 contained in the Statute of the International Court of Justice). In other words, it did not matter that these teachings (in this case, writings, to be more precise) belonged to persons taking part in the negotiation of the treaty under consideration before the arbitral tribunal. And it did not matter that what was written therein was related to the treaty that was being interpreted by the arbitral tribunal. As long as what was mentioned in those teachings/writings was formally contained in a secondary source of international law, it would be treated as such. To be considered preparatory works, the relevant sources need to satisfy other criteria.
For instance, the Inceysa v. El Salvador tribunal considered that communications sent between the parties to the applicable treaty in that dispute before that agreement entered into force satisfied such criteria (para. 192). Thus, the emphasis there was on exchanges between the parties, which could be qualified as pointing to a common intent. Somewhat more liberally, for instance, the Berschader v. Russia tribunal seems to have leaned towards accepting unilateral declarations by the organs of one state party to the applicable treaty, made in connection with the ratification of that treaty, as a form of travaux (para. 158). Such liberal approaches might raise the question of the extent to which arbitral tribunals are willing go when construing the relevance of certain documents, or acts, as preparatory works influencing a treaty’s interpretation. It is in this context that the Cairn v. India tribunal findings must be considered. The added value of the Tribunal’s decision, thus, is that the Tribunal seems to have clarified what cannot amount to travaux preparatoires, even if connected to officials involved in treaty negotiations.
Conclusion:
While at first it may not necessarily seem so, the Cairn v. India Tribunal’s clarification that academic writings pertaining to officials who took part in the negotiations of the applicable treaty in a dispute may not be used as preparatory works with a view to interpreting that agreement is a welcome development. Since even domestic explanatory materials could be qualified as travaux preparatoires (or as relevant to the conclusion of a treaty), thus going beyond what is strictly discussed, and debated, during treaty negotiations, it is important to show to what extent can an interpreter go beyond such treaty negotiations. Of course, since there is no formal duty of binding precedent in investment treaty arbitration, there is no guarantee that the Cairn v. India Tribunal’s approach will be replicated – especially if a different Tribunal might consider the former’s approach incorrect.