Essential restructuring

Bilateral Investment Treaties (BITs) are instruments between two sovereigns aimed at protecting investments made by investors of both countries. The object of a BIT is to protect investments by imposing conditions on the regulatory behaviour of the host state by preventing undue interference with the rights of foreign investors. The interim budget presented by the Union Finance Minister Nirmala Sitharaman has a very interesting portion which states that India will engage in fresh negotiations and economic diplomacy with its trade partners on BITs.

This is a welcome announcement, more so because it comes at a time when we were stuck in a brisk regarding the adoption of India’s Model BIT of 2016, which came into effect as a consequence of the termination of 68 out of the 74 treaties which were executed until 2015 by the Government of India. In this piece, I endeavour to discuss some of the main criticisms of the Model BIT and the impact of this announcement by the finance minister. This proposed revamping of the BIT regime has the potential to encourage foreign direct investment at a time when India’s bilateral treaties have been enfeebled since 2016.

The transmutation of Model BIT

The Model BIT was considered one of the most restrictive models for governing international investment relations of India due to the absence of provisions on Fair and Equitable Treatment (FET) and Most Favoured Nations (MFN). These are well-recognized principles of private and public international law that form the backbone of economic negotiations. The omission of these provisions has been called an unreasoned protectionist measure which hinders the adoption of the Model BIT by the reciprocating countries.

However, it is to be noted that the main reason for dropping the provision on FET was the polymorphous interpretation of these clauses by the Investor-State Dispute Settlement (ISDS) tribunals. It may be recalled that the Model BIT aimed to remove the controversial concept of legitimate expectations, which many ISDS tribunals have held to be part of the FET provision. However, there is a flip-flop in jurisprudence on this issue as the tribunal in Glamis Gold v. USA, had narrowed the scope of legitimate expectations to situations where a host state’s conduct ‘creates reasonable and justifiable expectations on the part of an investor to act in reliance on said conduct’.

So far as the provision on MFN is concerned, post the setback by the award in the case of White Industries v. Republic of India, India took the stand that the practice of using the MFN provision by foreign investors to borrow beneficial substantive and procedural provisions from a third country BITs, in order to replace or supplement the provisions of the primary BIT has to be curtailed. The government in its statement at the World Investment Forum in 2014 had pointed out that MFN provisions disturb the various strategic, diplomatic, and political reasons behind the negotiations of bilateral treaties. Therefore, to prevent the recurrence of the situation which arose in the White Industries case—where the government was ordered to pay USD 4.1 million—the Indian Model BIT orbited the MFN provision.

Furthermore, there were two Awards against the Republic of India in investor-state disputes which significantly contributed to the termination of the existing treaties and the omission of FET provisions from the Model BIT. The first case was of Cairn Energy Plc—a British oil and gas company—which had filed claims under the India-United Kingdom BIT signed in 1994. Cairn Energy got an Award to the tune of USD 1.2 billion as the Tribunal found the Republic of India in breach of FET standards. However, the reasoning of the Tribunal was denounced by many neutral experts. Then in the case of Devas (Mauritius) Ltd., claims were made under the India-Mauritius BIT, alleging violation of FET standards and denial of justice by the Indian Government. Here too, Devas secured an Award amounting to 111.30 million against the Republic of India.

Economic liberalism: embracing BITs

Having discussed the turmoiled story of the Indian investment treaty regime, which is quite riveting, I think the time has come that BIT practice in India needs to evolve keeping three things in mind.

First, when India desires to increase foreign investment inflows, especially under projects like ‘Made in India’, we need to look closely at the rule of law and governance-related justifications for BITs. The polymorphous decision-making process of international investor-state tribunals furthers the interest of the international community as a whole by establishing a legal infrastructure that governs international investment relations. At this juncture, we need an endeavour which delineates the meaning of the international rule of law.

Secondly, for the wider acceptability and sustainability of BITs as tools that advance international rule of law, they need to be remodelled using the normativity of embedded liberalism. Otherwise, states will keep contesting BITS based on laissez-faire liberalism as forces of hyper-globalism that take away many areas of public policy out of democratic contestation. The compromise of embedded liberalism, which has stabilised the WTO system, also needs to be mirrored in BITs, which will in turn soften the edges of liberalism.

Thirdly, BITs must balance investor protection with the host state’s regulatory authority to comply with embedded liberalism’s normativity. Therefore, BITs should permit the host state to depart from its investment protection obligations for strong public policy reasons, such as the preservation of the environment and public health, even though they may also place restrictions on the host state’s use of public power to protect foreign investments. A wide spectrum of stakeholders would be more receptive to BITs that reflect such a compromise, especially in light of the current global discourse on international investment law. Moreover, such BITs shall be acceptable to States because it would restore some power to them which they feel has been transferred to international tribunals.

The way forward

As the great French President Charles De Gaulle had once famously remarked that “one must not confuse the light breezes of fashion with the wind of history”. In the sphere of international investment dispute settlement, the winds of history are with arbitrations, but the art and practice of Mediation followed by Arbitration or vice versa known as Med-Arb and Arb-Med shows that the direction of these winds is changing. We have seen that the investment arbitration regime has an idiosyncratic characteristic and needs due to the interactions between public and private actors coming from various legal and political systems.

Additionally, it operates in a multi-layered legal framework of different sets of laws including public international law, administrative decisions, and host State regulations. The net result is that arbitral case law is not always consistent with the public international law interpretive methodology pronounced in the International Law Commission’s commentaries. The complex interpretive issues that may arise in investment arbitration call for a specialised methodology of interpretation developed in practice by arbitral tribunals. The diversification of the interpretive methodology is consistent with the idea that methods of interpretation may change depending on the specialised nature of each treaty.

Within this background, what becomes important is the need to reveal the gap between the obvious target of dispute resolution and what exists in symbiosis with it. Thus, when India will be negotiating BITs with its trade partners, efforts should be made to incorporate Med-Arb and Arb-Med in the dispute resolution clauses which might promote higher rates of settlement and perhaps make for more mutually satisfying accords, given mediation’s successes in the business context.

The writer is an Associate to Hon’ble Justice AK Sikri, Singapore International Commercial Court and Former Judge of the Supreme Court of India. Views expressed are personal