July 14, 2015

Investment Treaties and Disputes Within

~ By Kanu Agrawal

‘Importance of Bilateral Investment Treaties’

In a fast paced, technologically driven globalized world, foreign investment plays a crucial role in the progress of most developing countries. The role of foreign investment becomes more complex, as it mostly takes place from ‘developed’ economies to the ‘developing’ economies. There are basic social, political and transactional differences between domestic investment and foreign investment, which provides the latter with increased scrutiny and attention. The basic jurisprudential point where the conflicts emerge are the methods through which foreign investment takes place and the control that the host-state wants to exert over the investors. The investors seek mechanisms to protect their investments and are reluctant to take the increased risks that come with bringing their resources in a legally and politically turbulent foreign country. To address such concerns, several mechanisms have been developed to reduce the uncertainties associated with investing in such countries by providing assurances and security to foreign investors. In fact the need to regulate trade and provide protection was what prompted the parties at first to enter into Bilateral Investment Treaties (BITs). These bilateral investment treaties are international contracts between two sovereign states where they guarantee each other protection of investments, fair treatment, mechanism to resolve disputes and the provision dealing with other technicalities like expropriation and repatriation.

When a dispute takes place between a developing nation and a foreign investor, the respective international investment tribunal, which derives its powers from the BITs, becomes the disputes resolvers. The International Centre for Settlement of Investment Disputes resolves disputes for most countries of Europe, South and North America and some countries of Asia; it was established through a special multilateral treaty between these nations. Although, India is not a party to the Convention establishing the Centre, its jurisprudence and membership is likely to become a bone of contention for India in the future.  Presently, the investor state tribunals concerning India gain legitimacy from the dispute settlement clauses in the BITs between the investor’s home state and India. These settlement clauses are inserted to provide protection to the investors in matters where the agreed economic standard in the BITs has been breached by the host country.

‘Model BIT and Negotiations’

In the modern era, the negotiations in entering new treaties happen on the basis of the Model BITs released by different countries. The Model BITs must be considered as the starting point for negotiations, based on which each country takes the deliberations further. The new Model BIT released by the Finance Ministry unsurprisingly makes significant departures from the principles enshrined in the earlier one, such as, to tilt the balance back in favor of securing India’s sovereign investment rights.

For the settlement of ‘investment disputes’ with a foreign investor, the new BIT provides for the establishment of an arbitral tribunal to be governed by the United Nations Commission on International Trade Law (UNCITRAL) model, but successfully protects the Indian judiciary’s turf by providing for the constitution of arbitral tribunal only after exhaustion of all domestic remedies, and with a prohibition that such a tribunal shall not review pre-decided judicial matters. The non-exhaustion of local remedies is one of the defining points, which protects the host nation’s sovereignty, with the basis argument being that a local legal system provides equality of treatment within the market and basically represents the risk a foreign investor shall take for seeking the enhanced profits as compared to its investment in its own state.

The new BIT makes a tectonic shift to an enterprise-based definition of investment by requiring a foreign enterprise to be constituted in India and to carry out ‘real and substantial operations’ along with employing ‘substantial number’ of employees in India with a long-term commitment of capital.

The Most Favoured Nation (MFN) clause, a creation of the developed countries which provides equal treatment to investors of a particular country in future in light of further treaties entered by the host country with other countries. On the face of it, the MFN clause seems be a novel and reasonable invention, but in practice it summarizes the biased regime and its one-sided direction. MFN clause proved a nemesis for the government in the case involving the White Industries o and Coal India.  An arbitral tribunal found the Republic of India guilty of violating the India-Australia bilateral investment treaty (BIT) and excluded tax dispute matters from its coverage.


There is one thing common in the Modi Government’s agenda and the debate surrounding the International Investment law experts, i.e., Development. Mr. Modi personally deserves a lot of credit to make the term an election agenda, which was a very welcome departure from the borderline communist and fundamentally populist election discourse in the country. While the term may understandably have varying political connotations depending upon on a party’s ideological affiliations and priorities, surprisingly, the term is quite an enigma even for legal experts.

Development as an international right has been frequently recognized in international human rights instruments, particularly the 1986 United Nations General Assembly Declaration on the Right to Development. While the justifiability of the right to development remains contested by governments and scholars, the binding quality of the right does not depend on its justifiability. There must be a necessitated push for the right to development, which would be similar to other international norms and must operate within the parameters of State sovereignty and investor protection.

The present regime of solving disputes between host nation and foreign investor represents an inherent disadvantage to the host nation and thus restraining these tribunals to take jurisdiction over the matter becomes imperative. ‘Development’ then becomes one of the most debated and contested criterion. The inclusion of development, even if not directly but through the inclusion of ‘real and substantial’ in the definition as a necessary criterion for any protection under the BIT is a much neglected but welcome move. The developing countries faction in the international investment dispute settlement regime have been fighting for this very provision for years and it represents the ideological central point of view around which debates take place around the world.

In conclusion, the new Model BIT is a welcome move and it would be interesting to see in which direction the Indo-US BIT moves, considering the renewed relationship and the diabolically opposite nature of the countries’ respective BITs.

Kanu Agrawal is a graduate of the National Law Institute University, Bhopal and is currently practicing law in Delhi. Views expressed are his own.


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