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BILATERAL INVESTMENT TREATIES IN INDIA: BALANCING INVESTOR PROTECTION AND STATE SOVEREIGNTY

INTRODUCTION

The implications of Bilateral Investment Treaties (BITs) in India for foreign investors and states, examine the key provisions of BITs, analyze their impact on both parties and dive into the debate surrounding Investor-State Dispute Settlement (ISDS) procedures.

India signed its first ever BIT in the year 1994, which was with the United Kingdom, post which it has signed nearly eighty-six more BITs[1]. These treaties are governed by the specific provisions of each BIT as well as by international law and domestic laws. The Model BIT of 2016 acts as the template for negotiations which also incorporates reminders to address concerns related to Investor-State Dispute Settlement (ISDS)[2].

ANALYSIS

IMPLICATIONS FOR FOREIGN INVESTORS

Bilateral Investment Treaties create a foreseeable legal environment that instils confidence and encourages foreign investment by offering legal safeguards like national treatment, fair and equitable treatment, and protection from expropriation. With the addition of Investor-State Dispute Settlement in BITs investors can now directly sue host governments before international tribunals, bypassing the domestic courts which may lead to faster and less biased judgments all while strengthening the confidence in the investors.

CONCERNS FOR THE FOREIGN INVESTORS

The 2016 Model BIT restricts the definition of “investment” and limits the grounds for using ISDS. This creates a limited scope for investor recourse[3]. BITs also have sunset clauses. Sunset Clauses mean protection ceases after a certain period which creates an uncertainty in long-term investments.

IMPLICATIONS FOR THE STATE

Both Bilateral Investor Treaties (BITs) and Investor-State Dispute Settlement (ISDS) raise concerns about the effects on national policy space and financial stability. Critics argue that the arbitrary standards i.e., treaty clauses like ‘fair and equitable treatment’ offer large discretionary power to tribunals, thus leading the State to not being able to implement actual regulations deemed biased or discriminatory by investors. Due to the fear of potential lawsuits and the threat of ISDS, states may hold back from enacting labour standards, public health, and environmental protection even if the regulations are well-founded. Also, defending the claims from ISDS costs the state heavily even if the state defends itself successfully and diverts the public finances and resources from the required priorities. If the state is unsuccessful in denying the claims it can result in hefty financial compensation which creates burdens on the state’s finances.

CONCERNS FOR THE STATE

Under sovereignty concerns, there is a power imbalance where ISDS gives corporations from developed nations undue power over the governments of developing countries. This creates a pressure on the state. Decisions made through close-door tribunals raise concerns about democratic accountability as there is limited public access to the hearings and limited public scrutiny and involvement in the process. Traditional ISDS lacks the transparency of domestic courts.

In 2016, the case of White Industries (Mauritius) Ltd. V. Republic of India[4] stands as a landmark dispute with implications for both foreign investors and the State i.e., India and its regulatory landscape. An Australian company, White Industries, sued India when their coal mining licenses were cancelled. White Industries challenged it against an older Bilateral Investment Treaty (BIT) between Australia and India.  

 Following the cancellation of their licenses, White Industries initiated arbitration proceedings under the BIT, claiming a breach of treaty obligations by India. They argued that they were unfairly targeted resulting in a violation of the BIT’s “fair and equitable treatment” clause. They contended that the license cancellations resulted in the expropriation of their investments, without compensation and violated the BIT’s protection against expropriation. They even argued that India granted more favourable treatment to domestic companies to foreign investors, violating the BIT’s MFN clause. The arbitral tribunal ultimately favoured White Industries on the MFN clause violation, rewarding them damages of 4 million Australian dollars, all the while disregarding the claims of fair and equitable treatment and expropriation.

This case brought out the potential recourse available to foreign investors through BITs in case of disputes with the host government. It highlighted the need for investors to thoroughly check and understand the legal and regulatory landscape of the host government. Also balancing regulatory objectives with investor protection became a highlighted issue while reviewing India’s BITs and ensuring a balance between investors and protecting national interests. The White Industries Case has been cited in subsequent investor-state disputes concerning India, influencing interpretations of BIT provisions like MFN and fair and equitable treatment.

Another recent case in 2020 was the Vodafone International Holdings B.V. v. Republic of India[5]. The case started from the Indian Government’s attempt to retrospectively apply capital gains tax on a 2007 deal where Vodafone had acquired Hutchinson Essar, an Indian telecom company. This based on a 2012 amendment, opposed both the domestic laws and the Bilateral Investment Treaty (BIT) between India and the Netherlands, under which Vodafone International Holdings B.V. functioned.

Vodafone initiated arbitration under the BIT in 2016, triggering the ISDS, and allowing Vodafone to bypass Indian courts. This process potentially damaged India’s investment situation and raised concerns about foreign companies circumventing domestic legal systems. While arbitrations were going on, both sides negotiated. These talks led to a “settlement” in 2020. The arbitral tribunal issued India to reimburse Vodafone’s legal costs.

CONCLUSION

BITs (Bilateral Investment Treaties) contribute to India’s foreign investment, but they have implications for both investors and the state-policy space. They balance investor protection with India’s sovereign interests which tends to be very crucial. The landscape of international investment law is seeing important changes, due to the standing concerns about the Investor-State Dispute Settlement (ISDS) mechanism. There are multiple solutions beyond taking apart the ISDS, one key approach could be renegotiating existing Bilateral Investment Treaties (BITs), by updating the ISDS clauses within these treaties, both parties can introduce safeguards and address similar issues. The issue of transparency could be removed by making arbitral proceedings open to the public, making sure there is credible accountability and public scrutiny. Introducing bifurcation could separate liability questions arising from compensation calculations, additionally, adding provisions against frivolous claims can help prevent unnecessary lawsuits. Such targeted changes and revisions can modernize existing BITs without leaving out essential investment protections. Beyond revising existing mechanisms, exploring alternative dispute resolution (ADR) options holds promise. Utilizing domestic courts equipped with specialized investment chambers could advantage of existing legal frameworks and promote transparency. Governments can design dispute resolution processes tailored to the specific needs and concerns. Actively designing the evolution of international investment laws itself serves as an important long-term strategy. Advocating for provisions that prioritize sustainable development, environmental protection and social responsibility along with investor rights can ensure a more holistic approach to investment governance. By shaping the broader legal landscape, states can exert greater influence on the rules governing international investments.  

Author(s) Name: Sourajyoti Mukherjee (Symbiosis Law School, Hyderabad)

Reference(s):

[1]Kshitij Pandey, Why is it necessary to effectively draft a Bilateral Investment Treaty”  (iPleader September 10, 2020) <https://blog.ipleaders.in/why-is-it-necessary-to-effectively-draft-a-bilateral-investment-treaty/>accessed 10th February, 2024

[2] Standing Committee Report Summary, India and Bilateral Investment Treaties (prsindia.org, 2021) para 6

[3] Standing Committee Report Summary, India and Bilateral Investment Treaties (prsindia.org, 2021) para 4 & 5

[4]White Industries (Mauritius) Ltd. v Republic of India [2011] IIC 529

[5]Vodafone International Holdings B.V. v Republic of India [2010] 329 ITR 126