Investments Stifling Labour: Assessing Labour Reform in Indian Investment Treaty Practice
India’s exposure to global capital has eroded her economic sovereignty to such an extent that the economy has become dependent on foreign investments for the necessary capital infusion.[1] Presently, Foreign Direct Investment (FDI) in India amounts to an impressive $83 billion obtained through low compliance costs and product linked incentive (PLI) schemes.[2] However, this figure is only about half of the required investment and unlikely to expand in status quo, with a global slowdown in capital growth.[3] In light of this, capital importing economies need to liberalize and improve their ease-of-doing-business metrics to capture a greater share of global capital flows.[4] Labour law is one such metric.[5] Just like other regulations, labour laws also impose administrative costs of compliance – costs which are more apparent since they are borne in the manner of a payroll tax at the time of payment of wages/salaries. Naturally, the minimization of these transaction costs is consistent with the ethos of global capital flows and international investment law.
However, apart from a factor of production, labour is a significant aspect of a dignified human life; labour regulations, in this sense, must be regarded as social goods to provide social security and insulate individuals against market/employment shocks, rather than state interventions into factor costs to create market distortions.[6] From this lens, the present trend towards liberalizing labour laws to attract foreign investments is reminiscent of a race-to-the-bottom where the labour class is left in a precarious and vulnerable position.[7] Further, insofar as investment law originates from the need to secure colonial investment and interests in independent former-colonies,[8] the subordination of labour laws to investment instruments can perpetrate the neocolonial subjugation of indigenous workforces.
Indian states are already diluting labour regulations to attract foreign investments.[9] In this backdrop, it is imperative to shield labour from the exploitative whims of global capital and further regulatory backslide. To this effect, in this piece, I – first, show how labour interests find representation in investment treaties; and, second, assess how India’s treatment of labour obligations (or lack thereof) – as revealed in the Model Bilateral Investment Treaty (BIT) – could become contentious in the future. The piece highlights how the dilution of labour regulations in the name of investment, and the proliferation of forthcoming investment treaties can not only exert financial but also political pressure on the State to not reform these laws in the future.
Labour Provisions in Investment Treaties
There are three general ways in which provisions about labour law/obligations may be represented in investment treaties: first, and most likely, a treaty may be silent on labour law specifically, and only require compliance with all domestic laws; second, a treaty may require compliance with some stated minimum labour standards such as those prescribed by the International Labour Organization (ILO),[10] or the business and human rights guidelines issued by the United Nations (UN) and endorsed by the Human Rights Council (UNHRC);[11] or, third, and most familiarly, a treaty (such as the Indian Model BIT) could prescribe the bare compliance with “labour obligations” without further specifying the nature, scope, content or applicability of particular obligations. Of these, the first and third are most illustrative of India’s experience, and will be elaborated upon further in the next section.
Silent Treaties
In the first case of silent treaties, it is fair to say that labour protections are incongruous with the ethos of investment law. The colonial origins of investment laws to secure investments in the Global South generally focused on broad standards such as Fair and Equitable Treatment (FET), Most Favoured Nation (MFN) treatment of investors, full protection and security (FPS) of investments, ‘national treatment’ at par with local investors and guarantees of untrammeled expropriation of investments. To this extent, early BITs did not make any headway towards incorporating labour obligations.[12] For instance, the limited manner in which corporate employees were included in BIT negotiations was to permit the entry and sojourn of non-citizen technical and managerial personnel for activities associated with the investment.[13] Generally, older treaty instruments are likely to not contain provisions that elaborate on any labour obligations incumbent upon investors.
Incorporation of Minimum Standards by Reference
In 1998, the United States broke new ground by including internationally recognized labour standards in the non-binding preamble of its Model BIT: “Recognizing that the development of economic and business ties can promote respect for internationally recognized worker rights.”[14] In 2012, the United States explicitly adopted a provision from the North American Free Trade Agreement (NAFTA) into its Model BIT stating that “it is inappropriate to encourage investment by relaxing […] labour legislation” and identifying freedom of association, collective bargaining, elimination of forced labour, child labour and discrimination, and occupational safety and health as “labour laws” for the purposes of the treaty.[15] Comparatively, Austria has even stronger preambular language in addition to the same non-lowering of standards clause.[16] Among other member countries of the Organization for Cooperation and Economic Development (OECD), the Belgium-Luxemburg Economic Union (BLEU) Model BIT treaty provisions materialized to similarly incorporate internationally recognized labour standards, and encouraged the ratification thereof.[17] Generally, substantive claims are not permitted for breach of these obligations: labour regulation becomes a non-precluded measure (NPM), subject only to diplomatic, non-binding discussion and resolution.[18]
Bare “Legal Compliance” Obligations
A relatively perfunctory representation of labour obligations can be found in India’s latest Model BIT[19] which – allows State parties to restrict the transfer of funds in the name of “compliance with labour obligations” [Article 6.3], and allows enterprises/investors to voluntarily incorporate in their internal policies internationally recognized standards of inter alia labour, in the name of corporate social responsibility [Article 12]. The former of these provisions also found its way to the India-Brazil BIT signed in 2020, while the latter has appeared in the India-Kyrgistan BIT of 2019. India neither recognizes any mutual obligation to not lower standards to attract investments, nor create any positive (albeit, weak) obligation to enforce labour laws. It is not unfair to say that labour law is virtually, and uncharacteristically, absent from the considerations of the Model BIT drafted in 2016. Unlike in the case of old BITs where labour was putatively outside the scope of investment law, a deliberate silence on labour obligations by India could find unexpected purchase with an arbitral tribunal. The following section expands on the composition of such a tribunal, and how the aforementioned silence could work against India.
Assessing the Silence of Labour Provisions
In the above backdrop, it can be assessed how an investment tribunal may deal with claims against domestic labour regulations that might have an expropriating impact. To this effect, this section – first, lays down the less than stellar history of investment arbitration tribunals in matters concerning the Global South; second, examines how tribunals stretch treaty language to admit investor claims on a myriad of grounds; and, third, demonstrates how the prejudiced tribunals and expansive interpretations can threaten sovereignty – with specific reference to the Argentinian economic crisis. This section ultimately presages the potential harms of India’s ostensibly silent treatment of labour in investment treaties.
Characterizing Investment Tribunals
As a prelude, it is also important to flag how it is frequently, albeit anecdotally, observed that investment arbitration tribunals are sites of less than neutral decision making. Be it the perpetuating homogeneity in the ethno-national and gender identity of the arbitrators (tribunals are dominated by old, white men),[20] their associated interests in parallel matters they may be involved in,[21] the expanding breadth of their awards beyond established norms of decision-making,[22] the academic/career prospects that may become available to them,[23] or the perceived national identity of the claimant[24] – a number of unrelated factors have been empirically observed to affect tribunal awards. The diversity deficit has routinely called into question the legitimacy of the awards rendered by these tribunals, enough to shove the entire institution into crisis.[25] It is no stretch of the imagination to suggest that the Indian State is more likely to be at an interpretative disadvantage before such tribunals.
Interpreting Treaty Silences
Where the treaty is silent on labour obligations – a host State may still be able to show that the regulation was for a public purpose, undertaken in accordance with due process,[26] and executed in a non-discriminatory fashion.[27] Where the State action results in the alienation of property, or a restriction in the full enjoyment thereof, [28] the State is also bound to compensate the investor as per the market value of the expropriated property. This last requirement is unlikely to materialize unless the State attaches, sells and realizes the property of an investor pursuant to levying labour contribution dues/fines; welfare measures put in place in a non-discriminatory manner do not impose a compensatory obligation on the State.[29]
Nonetheless, due to the silence of the treaty on this point, claims can arise from multiple other directions as well including but not limited to FET violations qua defiance of legitimate expectations,[30] lack of transparency and consultation,[31] delay in justice delivery if the matter has been ventilated before the Courts,[32] or disproportionate impact;[33] FPS violations qua strikes or lock-outs authorized by the State;[34] or even the elevation of other memoranda of understanding or contract provisions that may have been breached.[35]
Subsuming Sovereign Labour Regulation
The Argentina Crisis Cases serve to illustrate this tension between labour and investment interests inasmuch as labour regulation was a central issue to one case,[36] and the emergency deployment of labour market policies were considered in another three.[37] In the first of these cases (Sempra Energy), the investor challenged the restriction on laying-off workers which allegedly increased the company’s costs – an argument that was deemed peripheral to the larger impact of the economic crisis on the company, since the restriction was monetary (higher compensation had to be paid), non-discriminatory, and temporary.[38] Nonetheless, a violation of FET was found (although it was only later annulled). At the same time, in the latter 3 cases – expert opinion argued, and the tribunal held, that Argentina was responsible for its own fiscal mismanagement and failure to liberalize the market, owing to which the crisis was deemed to be a product of Argentina’s own doing and no crisis-time measures were excluded. Argentina lost these cases, and no application for annulment was entertained in this matter.[39]
In essence, silence on labour obligations which the State would like to change for the better in exercise of its sovereign power in public interest, could be impeded by investors alleging breach of other treaty provisions before less-than-neutral tribunals.[40] Without an exception to this effect, the State would not only be left fielding these claims for a prolonged period of time but also be on the hook to pay compensation in matters that go against it. Especially in contemporary cases, where India has prepared the Model BIT (and has entered into BITs pursuant thereto) in the global context of emergent labour obligations in investment treaties, made the applicability of ILO minimum standards for labour voluntary on the instance of the investor, and represented to the global investment community that she is simplifying labour compliance and diluting obligations in pursuit of foreign investments – any positive change in the labour regime would be politically shut down by the number of investment claims that could rise against it. .
Conclusion: Cornered into Investor Appeasement
Three salient findings emerge from the above piece, to demonstrate how investment law could subsume labour reform. First, the social necessity of labour laws is fundamentally at odds with the agglomerative ethos of global capital and investment law that results in the commodification of public goods as factor costs to be optimized. The tension between social protection and economic growth manifest in the inclusion of labour law in investment treaties has already resulted in comprehensive negotiations coming to a grinding halt in the past, as in the case of the the Transatlantic Trade and Investment Partnership.[41] In this thematic context, a State is always forced to choose between labour interests and capital infusion.
Second, on the balance of investment requirements with labour interests – India is presently skewed towards the dilution of the latter in service of the former. India still occupies a tenuous position in the global community of capital-importing nations, competing with similarly affordable labour markets in the region for increasingly conservative foreign capital flows. However, we cannot myopically prioritize capital infusion without being proactive about how labour standards fare in the larger domestic economy. Further, we also cannot allow for the exclusion of foreign investments/enterprises from the scope of present/future labour reforms; it is too reminiscent of colonialism to be politically tenable.
Third, India – as a capital importing Global South State – is especially vulnerable to the force exerted by foreign capital through the offices of investment arbitral tribunals. India has previously lost face before these tribunals,[42] and revised her BIT regime prevent any such eventuality (by mitigating the option of investor-state dispute settlement in the Model BIT).[43] Yet, even in expanding her police powers and limiting the scope of allegations of breach,[44] India remains susceptible to disputes in matters concerning labour reform, if not by individual investors then by contracting State-actors – a significant number of whose investors may be interested in Indian labour law. In the evolving context of sustainable growth and development in which new investment treaties are negotiated, a treaty instrument silent on labour obligations is an aberration – especially when coming from one of the largest labour markets in the world. This purported choice of treaty-silence on labour interests is likely to work against India in a tribunal setting.
[1] Arun Kumar, “Summary of Report of People’s Commission on Employment and Unemployment Set up by Desh Bachao Abhiyan” (Mainstream Weekly, 21 October 2022) <https://www.mainstreamweekly.net/article12799.html>
[2] Ministry of Commerce and Industry, “‘Make in India’ completes 8 years, annual FDI doubles to USD 83 billion” (Press Information Bureau, 24 September 2022) <https://pib.gov.in/PressReleasePage.aspx?PRID=1861929>
[3] “Sharp Slowdown in Growth Could be Widespread, Increasing Risks to Global Economy | World Bank Expert Answers” (The World Bank, 10 January 2023) <https://www.worldbank.org/en/news/video/2023/01/10/global-economic-prospects-slowdown-growth-risks-economy-expert-answers>
[4] Felipe Saffe et al, “The Micro and Macro Dynamics of Capital Flow,” NBER Working Paper No. 27371 (June 2020) <http://www.nber.org/papers/w27371>
[5] The World Bank, “Ease of Doing Business Score and Ease of Doing Business Ranking” in Doing Business 2020 (2020) ch 6, pp.82 (Treatment of total tax and contribution rate)
<https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402_Ch06.pdf>
[6] “The benefits of International Labour Standards” (International Labour Organization) <https://www.ilo.org/global/standards/introduction-to-international-labour-standards/the-benefits-of-international-labour-standards/lang–en/index.htm>
[7] Roli Srivastava, “’Historic’ labour law raises fear Indian workers will pay price” (Thomas Reuters, 23 September 2020) <https://www.reuters.com/article/india-economy-labour-idUSL5N2GK1A6>
[8] Kate Miles, “Origins of International Investment Law” in The Origins of International Investment Law Empire, Environment and the Safeguarding of Capital (CUP: 2013) ch 1
[9] K R Balasubramanyam, “Karnataka’s proposed changes in labour law aimed to push investments from likes of Foxconn, Wistron” (The Economic Times, 11 March 2023) <economictimes.indiatimes.com/industry/cons-products/electronics/karnatakas-proposed-changes-in-labour-law-aimed-to-push-investments-from-likes-of-foxconn-wistron/articleshow/98556260.cms>; Express News Service, “Foxconn to set up Apple phone manufacturing unit in Karnataka, inks pact” (The Indian Express, 4 March 2023) <indianexpress.com/article/cities/bangalore/foxconn-invest-karnataka-cm-basavaraj-bommai-8478911/>
[10] See:International Labour Organization (ILO) Declaration: Declaration on Social Justice for a Fair Globalization (97th Conference Session, Geneva, 10 June 2008); ILO Declaration: Declaration on Fundamental Principles and Rights at Work and its Follow-up (86th Conference Session, Geneva, 1998); See also: ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy 2017 (1 March 2017), pp 17 Annex-I (List of ILO Declarations, International Labour Conventions and Recommendations, Codes of Practice, Guidelines and Other Guidance Documents Relevant to the Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy)
[11] United Nations Office of the High Commissioner on Human Rights, Guiding Principles on Business and Human Rights (HR/PUB/11/04: Resolution 17/4, 16 June 2011)
[12] Bentram Boie, “Labour Related Provisions in International Investment Agreements” (Employment Working Paper No. 126) (Geneva: ILO, 2012)
[13] Agreement between the Government of Australia and the Government of the People’s Republic of China on the Reciprocal Encouragement and Protection of Investments (Beijing, 11 July 1988), art. 4
[14] Office of the United States Trade Representative, “Agreement Between the Government of the United States of America and the Government of [Country] Concerning the Encouragement and Reciprocal Protection of Investment” (Prototype, revised 4/1998) <https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/2868/download>
[15] Office of the United States Trade Representative, “2012 US Model Bilateral Investment Treaty: Agreement Between the Government of the United States of America and the Government of [Country] Concerning the Encouragement and Reciprocal Protection of Investment” (2012), art. 13 <https://ustr.gov/sites/default/files/BIT%20text%20for%20ACIEP%20Meeting.pdf>
[16] “Agreement for the Promotion and Protection of Investment between the Republic of Austria and [Country]” (2008) (“REAFFIRMING the commitments under the 2006 Ministerial declaration of the UN Economic and Social Council of Full Employment and Decent Work […] RECOGNISING that investment, as an engine of economic growth, can play a key role in ensuring that economic growth is sustainable […] COMMITTED to achieving these objectives in a manner consistent with the protection of health, safety, and the environment, and the promotion of internationally recognised labour standards […] ACKNOWLEDGING that investment agreements and multilateral agreements on the protection of environment, human rights or labour rights are meant to foster global sustainable development and that any possible inconsistencies there should be resolved without relaxation of standards of protection;”)
[17] “Agreement Between the Belgo-Luxemburg Economic Union (on the one hand) and the Government of [Country] (on the other hand), on the Reciprocal Promotion and Protection of Investments” (1806/007) (2019), art. 16 <https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/5854/download>
[18] Organization for Economic Cooperation and Development, International Investment Perspectives (2006)pp 171 ch b (5.2.1 – Substantive Claims); See: “2012 US Model BIT” (n 23) art. 24; US Model BIT (n 15) art. 27
[19] Government of India, Ministry of Finance, ‘Model Text for the Indian Bilateral Investment Treaty’ (‘Model BIT, 2016’) available at <dea.gov.in/sites/default/files/ModelTextIndia_BIT_0.pdf>
[20] Payel Chaterjee, Vyapak Desai, “Is Increasing Gender and Ethnic Diversity in Arbitral Tribunals a Valid Concern?” (Kluwer Arbitration Blog, 1 March 2020) <arbitrationblog.kluwerarbitration.com/2020/03/01/is-increasing-gender-and-ethnic-diversity-in-arbitral-tribunals-a-valid-concern/>
[21] Malcolm Langford et al, “The Revolving Door in International Investment Arbitration” (2017) 20(2) Journal of International Economic Law 301
[22] Gus Van Harten, “Pro-Investor or Pro-State Bias in Investment-Treaty Arbitration? Forthcoming Study Gives Cause for Concern” (Investment Treaty News, 13 April 2012) <https://www.iisd.org/itn/en/2012/04/13/pro-investor-or-pro-state-bias-in-investment-treaty-arbitration-forthcoming-study-gives-cause-for-concern/>
[23] ibid
[24] Anton Strezhnev, “Detecting Bias in International Investment Arbitration” (Working Paper, 57th Annual Convention of the International Studies Association) (2016) <https://scholar.harvard.edu/files/astrezhnev/files/are_investment_arbitrators_biased.pdf>
[25] A K Bjorklund et al, “The Diversity Deficit in International Investment Arbitration” (Academic Forum on ISDS Concept Paper 2020/1) (21 January 2020) <https://www.jus.uio.no/pluricourts/english/projects/leginvest/academic-forum/papers/2020/5-diversity.pdf>
[26] c/f RosInvestCo UK Ltd. v. The Russian Federation, Final Award (12 September 2010) SCC Case No. V079/2005
[27] c/f Ampal-American Israel Corporation and others v. Arab Republic of Egypt, Final Award, (21 February, 2017) ICSID Case No. ARB/12/11
[28] c/f LG&E Capital Corp, LG&E International Inc v The Argentine Republic, Decision on Liability(3 October 2006) ICSID Case No ARB/02/1 [34]-[70]
[29] Saluka Investments B.V. v. The Czech Republic, Partial Award (17 March 2006) UNCITRAL, [255]
[30] Crystallex International Corporation v. Bolivarian Republic of Venezuela, Final Award (4 April 2016) ICSID Case No. ARB(AF)/11/2
[31] Técnicas Medioambientales Tecmed, S.A. v. The United Mexican States, Final Award (29 May 2003) ICSID Case No. ARB (AF)/00/2
[32] White Industries Australia Ltd. v Republic of India, UNCITRAL (30 November 2011) Final Award; See also: Cervin Investissements S.A. and Rhone Investissements S.A. v. Republic of Costa Rica, Final Award (7 March 2017) ICSID Case No. ARB/13/2
[33] Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador, Final Award (5 October 2012) ICSID Case No. ARB/06/11
[34] Copper Mesa Mining Corporation v. Republic of Ecuador, Award (15 March 2016) PCA No. 2012-2
[35] SGS (General Surveillance Society) S.A. v. The Republic of Paraguay, Award (10 February 2012) ICSID Case No. ARB/07/29
[36] Sempra Energy International v. Argentina, Award (2007) ICSID Case No. ARB/02/16
[37] El Paso Energy v. Argentina, Award (2011) ICSID Case No. ARB/03/15; Impregilo S.p.A. v. Argentine Republic, (Award 2011) ICSID Case No. ARB/07/17; c/f Continental Casualty Company v. Argentine Republic, Award (2008) ICSID Case No. ARB/03/9
[38] Sempra Energy (n 36) [194]
[39] One unique example of investment tribunals going beyond the scope of treaty provisions to allow socially beneficial legislations is in the case of Honduras; the retroactive application of minimum wage legislation was upheld to not be in breach of the investment treaty in the matters of — Elsamex v. Republic of Honduras, Award (2012) ICSID Case No. ARB/09/4 & Astaldi S.p.A. v. Republic of Honduras, Award (2010) ICSID Case No. ARB/07/32
[40] Anton Strezhnev, “Detecting Bias in International Investment Arbitration” (Working Paper, 57th Annual Convention of the International Studies Association) (2016) <https://scholar.harvard.edu/files/astrezhnev/files/are_investment_arbitrators_biased.pdf>
[41] Julia Rone, “Why Europeans may not want a U.S. trade deal” (The Washington Post, 4 October 2018) <washingtonpost.com/news/monkey-cage/wp/2018/10/04/why-europeans-may-not-want-a-u-s-trade-deal/>
[42] Nikhil Inamdar, “Retrospective tax: Global investors cheer as India scraps policy” (BBC, 6 August 2021) <https://www.bbc.com/news/world-asia-india-58110615>
[43] ‘Mapping the Backlash: Once BITten Many Times Shy!’ in Prabhash Ranjan, India and Bilateral Investment Treaties (OUP, 2019) ch 7
[44] Ashutosh Ray, ‘New Indian Model BIT on the Anvil’ (Kluwer Arbitration Blog, 9 January 2015) available at <arbitrationblog.kluwerarbitration.com/2015/01/09/new-indian-model-bit-on-the-anvil/>; Ashutosh Ray, ‘Unveiled: India Model BIT’ (Kluwer Arbitration Blog, 18 January, 2016)