A CRITICAL APPRAISAL OF ISDS, INDIA AND THEIR SYMBIOTIC SYNTHESIS

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INTRODUCTION

International Investment Relations take its place at the bilateral, regional, inter-regional and multilateral degrees. Bilateral Investment Treaty forms the most crucial part of of the international investment ties across various degrees. The arbitration in case of investment treaty in case of a breach thus forms the public private international dispute, a symbiotic merge under both private and public international law which is now recognized as investment treaty law. The International Treaty Arbitration forms the major recourse for enforcing investment treaty violations by the investors against state.

A Bilateral Investment Treaty refers to a treaty aimed at protecting the investment made by investors of two or more sovereign states in the target country for investors. Bilateral Investment Traety ideally forms an instrument of corporate governance under International Investment Regulatory mechanism for countries across the globe for carving a middle path between investors’ rights and states’ reglatory powers. The Bilateral Investment Treatises however seemed to be an overstepping innovation of neo-colonialism as the early BITs were exclusively slanted towards the formers’ rights at the behest of host states’ rights. The timeline of the early BITs dates back to the 1960s and 1970s where the developing countries were slowly moving towards economic development and the foreign investment seemed to incentivise capital required for set the ball rolling for under developed economies.

The genesis of the regulatory mechanism for international investment law can be traced to the 19th century in the form of Friendship, Commerce and Navigation[FCN] treatises. Historically, in public international law, foreign investors as “outsiders” did not share equal status with the nationals and were consequently denied legal capacity[1]. The first formal BIT was signed for the first time between Germany and Pakistan in 1959. The signing of the Washington Convention in 1965 through which International Centre for Settlement of Investment Disputes [ICSID] came into operation that officiated the global trajectory for BITs. These initial safeguards through the conventions gradually unfolded into negotiating better rights and protections encompassing Most-favored Nation[MFN] clause, national treatment clause, compromissory clause, Fair and Equitable Treatment[FET] clause, etc.

INDIA’S ISDS/BIT TRAJECTORY

India liberalized its economic policies during the 1990s which paved the way for the domestic industries and also allowed for outflow of FDI thereafter. India signed its first Bilateral Investment Treaty with the United Kingdom in 1994 which kick-started the India’s assimilation in the BIT regime[2]. The India-UK BIT served as the archetype based on a model created by a developed country- where emphasis was laid on protection of foreign investment, rather than internationally recognized regulatory powers of the state. [3]The same BIT served as the source for the India’s Model Bilateral Investment Treaty, 2003 endowing greater emphasis on investors’ rights.

By 2016, India had signed 83 BITs, of which 74 were ratified and along with 11 FTAs hosted World’s largest BIT network. The figure 1 presents year-wise distribution of BITs signed by India. It is amusing to note that rights of investors are properly coordinated with state’s rights in India’s Free Trade Agreements which advocates free trade than the India’s BITs.                             

India’s approach towards the investment seemed to be investor friendly and confidence assuring on the part of investor as hardly any dispute arose between investor and India for a considerable long time. Between 1993 and 2011, there was just one instance where foreign investors invoked their rights when Maharashtra State Electricity Board cancelled a Power Purchase Agreement at Dabhol Power Project. In fact, the case was settled with no award issued through international tribunals for arbitration. The year 2011 proved to be the watershed moment in India’s BIT investment arbitration for India where the international tribunal had held in White Industries case as per the India-Australia BIT that procrastination displayed by Indian government for enforcement for investor dispute is in violation of India’s commitment to the BIT. The arbitral award set the ball rolling for more such investor claims by the foreign investors against the Indian government under various BITs. The table 1 shows the total number of BIT disputes against the Indian government:

The surge of cases against the India between 2011 and 2016 garnered India’s unilateral action by unilaterally terminating most of its BITs and chalked out an all new Model BIT 2016. The Model BIT served thereafter as the foundation for negotiating further treatises.

FLAWS IN THE ISDS MECHANISM

The outlook by various countries of the world across the globe is witnessing reorganization. Brazil, despite being an economy with 1.5 trillion dollars remains a non-participant in international investment treaty network. The very recent change in approach is by South Africa, which all terminated all of its BITs and laid down a domestic legislation to govern the claims arising out of expropriation by foreign investors.

The recent debate regarding the same gained ground as India unilaterally derecognized several BITs in 2016 with the advent of a state-centric Model Bilateral Investment Treaty, 2016 to eliminate the eliminate the element of host hostile nature of BITs. The new model BIT introduced paradigm shift in an approach to serve as the cornerstone for further interpretation in international investment arbitration.

The ISDS mechanism has played instrumental role in settling in investment treaty arbitration since its inception however it suffers from flaws which have gained criticisms from across the world especially developing nations:

  1. ARBITRAL TRIBUNALS AS JUDICIAL INSTITUTION:

The judiciary refers to the authoritative institution at national or supra-national level government to interpret and apply the law, adjudicate legal disputes, and ultimately administer justice. Let’s breakdown the judicial sanctity and integrity of the arbitral tribunals through the basic characteristics of a judicial institution:

  • TRANSPARENCY:

The major flaw with the ISDS mechanism with most area of improvement in the ISDS mechanism is the lack of transparency of the proceedings. The parties involved exercise confidentiality and control transparency even though such assumes public interest. The foreign arbitral awards issued by the arbitration courts against the state are to be paid through the taxes to be paid by the general public. Moreover, the decisions in the ISDS tribunals are taken through closed door meetings and the judgments delivered are not made available at the public domain for public scrutiny of the reasoning employed for such a foreign award.

  • PRECEDENT LAW:

Our law classes have always taught us about the importance of precedent for an independently functioning democracy. The ISDS tribunals’ awards do not hold precedent  value which actually leaves the sovereign states with a ‘regulatory chill’ for legislating even in issues where the sovereign states hold full powers to legislate upon. The precedent value can act as guiding tool for sovereign states for out-lining the balance between sovereign states’ rights and investor’s rights.

  • SEPARATION FROM STATE:

The independent nature of a judicial institution stands on the very foundation of its independence from influence from the other powers or other organs of the governance. The interesting part with ISDS tribunals is that the regulations determining the functioning of ISDS tribunals are drafted by the authorities of the tribunals only.

  •  INDEPNDENT JURY:

The ISDS disputes at either of the tribunals in the world are adjudged by the independent stellar arbitrators. If this is what you thought then you are wrong. The disputes are judged by lawyers hired by the tribunals for hourly-payment contract brochure. Even more amusing is that these lawyers are actually counsel for some MNC at some other dispute within the same or other tribunal. This concludes that the number of roles a person in ISDS tribunals enjoys is even not clear which is often referred to as ‘Multiple-heading’ and further alleviates the element of independent jury.

  • APPEALS PROCESS:

The judiciary across the globe at least provides method of appeal for the party not fulfilled with decision but the ISDS tribunals lack any of the appeals process. The looser stays the looser and it is the sovereign state only that will lose due to the very nature of the modus operandi of the mechanism.

  • PARTI PRIS AGAINST SOVEREIGN STATES:

ISDS tribunals are green eyed towards the sovereign states’ regulatory powers and significantly skewed towards private international law protecting the interests of investors even over the legislations by sovereign states in favor of public interest, domestic security and environment protection. As indicated by the statistics released by the ICSID, by the end of 2018, nearly 60% of the cases administered by ICSID concentrated on several important industrial sectors of a country’s national economy, such as gas, oil, and electricity[4]. The cases in the sector of Oil, Gas, & Mining amount to 24%, cases in the sector of electric power & other energy amount to 17%, cases in the sector of construction amount to 8%, cases in the sector of transportation amount to 9%. The ISDS tribunals always entertain disputes on the initiation by the investors only which means that the states cannot sue the investors in case of impugned violation of duties of the investor. This is fairly apt especially when the very need for BITs for protecting only investor’s rights as envisioned in the ICSID convention however, to utter dismay is exploiting the procedural loopholes in international investment law by the investors. For instance, the Australian Government legislation for plain packaging of cigarettes for larger public interest was exploited by Philip Morris, a cigarette marquee company who shifted some of its operations to Hong-Kong and then challenged the Australian Government’s legislation through Australia-Hong Kong agreement in 1993[5].

The arbitral tribunals decide on the very face of the provisions mentioned under the BIT even without considering the state’s side regarding its sovereignty over legislation issues. For instance, five cases arising from Argentina’s financial crises, which have similar factual backgrounds, were submitted to the ICSID between 2001 and 2003[6].

SUGGESTIVE REFORMS

The broader reform discussions in the ISDS mechanism have been initiated by plurilateral organizations like UNCITRAL, negotiations and terminations by various individual states, newer treatises allocating power to municipal courts and then there are countries vehemently opposing to do away with the system altogether. Out of the catena of reforms initiated at the global level, the most significant being United Nations Commission on International Trade and Law Working Group III [WGIII]. Forward-looking reform proposals can help address some of the public backlash surrounding new agreements.

There has been a long way covered in dispute settlement mechanism from inter-state dispute resolution mechanism to investor-state dispute settlement through development in the trade and settlement law across the time. Instead of advocating for reforms within a system that is tested to deliver results for so long, terminating trade agreements solely actually is ironical when advocating democracy despite resorting to undemocratic practice.

The following amendments may try to solve the problems crept in the system:

  1. QUALITY-DECISION MAKING:

The ISDS tribunals have generally lacked in quality-decision making due to the double-faced reason of lacking correctness, consistency and predictability of decisions. The following suggestions may help in quality-decision making at the tribunal:

  1. PRECDENT VALUE:

The lack of uniformity and predictability in arbitral awards by ISDS tribunals deters the developing states to subscribe to the ISDS tribunals for disputes arising out of the international investment disputes. The precedents will serve yardsticks for the states for exercising legislation powers over their sovereign rights and help them not felling prey where a simple legislation could cost them billions and billions of dollars as foreign award. For instance, the infamous Egyptian government and Veolia case, where Egyptian government was sued for legislating minimum wage bill prescribing 50 cents per hour for a laborer during the Arab Spring Uprising which was challenged by the corporation to be in violation of Fair and Equitable Treatment Clause[FET] clause as per the BIT[7].

  1. APPELLATE MECHANISM:

The appeal mechanism serves as the strainer for the mistakes committed while awarding in the first instance by providing the tribunals at higher ranks in order to amend the decision and stabilizes the quality-decision making.  While the appellate mechanism will enhance the decision making at the first instance but will also establish the sovereign state’s right to contend. Most of the ISDS tribunals subscribing to ISDS mechanism are one-way courts where only investors enjoy the sole rights of suing the governments. There have already steps initiated in this regard with the European Union’s so called Investment Court System [ICS] which would act as the seat of the arbitration in CETA- signed with the Vietnam and Philippines along with provided for an appeal mechanism to dispose off the cases.

  • TRANSPARENCY:

Lack of transparency reeks the ISDS as the most vehemently opposed medium for international investment dispute settlement. All the stakeholders in the ISDS mechanism along with the tribunals must seek openness of submissions, inclusion of hearings to the public, third party participation [Non-governmental Organizations, business groups, etc.] and also detailed divulgence of information by arbitral decisions such as ICSID, UNCITRAL, ICC etc. among others. There have been steps initiated in this regard with the UNCITRAL initiated Rules on Treaty based Investor-State Arbitration which serves to render hope but still owing to the lack of significantly less ratification by the member states is like a fly in ointment for the stipulated reforms for transparency.

  • INDEPENDENT JURY:

Another major issue that needs to be addressed in the ISDS mechanism is the impartial and independent jury adjudicating the dispute. A draft model code of conduct with the strict enforceability acting as guiding force of the arbitrators must be initiated so as to ensure the homogenity in the bipartisan decision making by the arbitrators. Also, a threshold on the maximum number of roles an arbitrator can indulge in while serving as an arbitrator of the ISDS tribunal and its implementation must also e nominated by a purely independent body in the ISDS tribunals.

The UNCITRAL rules specify on how 70% of the Arbitrators hail from developed countries while gender composition of the same dictates on how gender divide is 95% of the arbitrator are men while the remaining being women[8]. The whole process needs to be made more spatially, region wise and gender wise inclusive dealing with the bias crept due to the homogenity among the arbitrators in the ISDS mechanism. Eliminating the ideological bias among the arbitrators also need to be taken care of due to the nature of the powers enjoyed by the arbitrators in the ISDS mechanism. There must be mechanism for scrutiny of academic bias of the arbitrator whether an arbitrator is pro-investor or pro-investor through inclination towards public or private international law academia of the arbitrator.

INDIA AS THE REVISIONIST

The dire need for reforms in the ISDS mechanism especially for India is because the fact that India was one of the most frequently named respondent states in BIT proceedings[9]. India has been a vocal critic of the existing mechanism of the dispute resolution for international treaty arbitration. India qua facing international treaty arbitrations against foreign investments constituted a committee for suggesting reforms which the committee recommended aligning very much similar to that proposed by Working Group III of UNCITRAL in 2015. India introduced a brand new Model Bilateral Investment Treaty, 2016 with ground-breaking reforms as it lacked Fair and Equitable Treatment[FET] clause, narrowing the definition of the term investment, provisions for jurisdiction of municipal courts before arbitration, provisions for appeals for discharge and leaves a wider ground for state’s regulatory powers under constitution of expropriation.

  1. INDIA’S FIX THROUGH MODEL BIT, 2016

The new Model Bilateral Investment Treaty, 2016 counter-equalise the modus vivendi of investors’ rights and the sovereign regulatory powers of the state through incorporating several provisions with respect to the applicability of the treaty itself. Article 2.4 of the Model BIT provides for the exclusion of treaty in disputes concerning taxation, granting compulsory licenses, service provided by governmental authority, government procurements by a party, policies adopted by the local government, etc. The Model BIT also sets forth a clear direction for the issue of investor accountability. Article 11 of the Model BIT brings an insertion ‘compliance with law’ which mandates investors to abide by all the laws, regulations, administrative guidelines and policies. These obligations have been negotiated and inserted in various BITs signed by India with Belarus [2018], Taipei [2018] and Brazil [2020][10]. These provisions can serve as internal aid of interpretation for ISDS tribunals for jurisdictional matters initiated against India.

The significant issue addressed by the Model Bit was of crony investor-bias inherent in the ISDS tribunals. The Model BIT conveniently eliminated several substantive provisions which was exploited by the ISDS tribunals for investors. The Model BIT does not incorporate the Most –Favorable Nation [MFN] clause, Fair and Equitable Treatment [FET] clause and derecognizing the Full Protection and Security to simple physical protection. Such clauses with their vast interpretative etymology leaves greater scope for the investors digressing any boundaries for the sake of stability in treaty interpretations and the model BIT seeks to done away with such largely exploitative provisions. The Model BIT 2016 provides protection against direct expropriation to the foreign investors protecting the state’s regulatory powers over public interest and environmental protection which is frivolously invoked against indirect expropriation claims by investors. The ‘legitimate expectations’ as part of the traditional BITs has also has been done away with the current model investment treaty.

  •   INDIA-BRAZIL BIT 2020

The India-Brazil BIT[11] signed in 2020 fairly modeled on the Brazilian Model BIT 2015 sets the ball rolling for reformation within the investment dispute resolution mechanism. The BIT comes with a unique dispute prevention mechanism with judicial authority vested over domestic courts, ombudsmen, a special joint committee and revisit towards the inter-state arbitration in case of dispute. The article 13 of the India-Brazil BIT proposes for a joint committee to be constituted comprising of Government representatives of both the state parties in order to oversee the implementation of the agreement. The article 18 of the same BIT sets forth a dispute prevention mechanism which stipulates for a written request to be submitted to the joint committee whose main task is to prevent dispute escalation within a given period of time.

The highlight of the India-Brazil BIT has been harking back to the state-state arbitration for dispute settlement[12]. Article 19 of the BIT provides for parties to submit the dispute to an ad-hoc tribunal or a permanent arbitration institution. The details are even succinct with an injunction imposed on tribunals to award compensation in any of the case under India-Brazil BIT. The arbitrator bias has been alleged to be primary reason for developing countries refraining from joining ISDS tribunals has also been addressed with the provision for appointment of arbitrators must be in such a way that each of the two states appoint one arbitrator each and then the two appointed will have to elect a chairperson of an independent third nationality.

The India-Brazil BIT largely fails to address the problems that has crept the ISDS mode of investment regulation. The ad-hoc tribunals is incompetent for issuing compensation or even no provision for the investor to approach the domestic courts of the host state thus succumbing the investor’s options for the protection of its investment. Also, the major innovation as largely being referred seems nothing more than an expression of discontent towards ICSID over the issue of not involving both the India and Brazil by ISCID for dialogue initiated for reformation process within the system.

CONCLUSION

The reservations of the countries like India, Brazil and other developing states are well reasoned and reasonably sound due to the skewed nature of the state of affairs in the ISDS tribunals. India’s trajectory with ISDS has been a downer with India being named for most number of respondent n investment disputes for the year 2016. It is fairly true that India’s approach towards investment dispute settlement may be seen as revisionist but to no extent as a world trade leader due to the confidence vested over inter-state arbitration in the recent BIT signed between India and Brazil in 2020. The Inter-State Arbitration cannot serve as a solution for the current anomalies in the ISDS mechanism in the ISDS as the basic premise of it rests on the diplomatic relationship between the two states which may promote the investments but cannot protect the same. The trade and investment must be separate subjects with different policy approach as the diplomatic relations between states are subject to political realities of the contracting states.

The options at the international investment law framework being considered for bringing modifications to the existing ISDS mechanism needs a global revisit and redirect towards fine-tuning the already existing machinery. The other alternates to the system being considered in the world of the likes Multilateral Investment Court [MIC], Inter-State Dispute Negotiation envisioned under China-BRI ISDS mechanism etc. are at a budding stage which will require time for acceptance by the sovereign states. As the ICSID along with similar ISDS tribunals provide for a transparent, reliable and predictable legal framework for investor and sovereign state’s rights, India must vouch for the membership to boost investor confidence in conjunction with state’s sovereignty.

The United Nations convention on Transparency in Treaty-based Investor-State Arbitration also known as Mauritius Convention are laudatory steps to the weight equal for both the proponents of public and private international law. The investment law’s public law nature and breaking with the so far still dominant conceptualization of investor-State dispute settlement (“ISDS”) as a form of commercial arbitration and private justice[13].

These treatises along with the skewed ISDS tribunals are shifting the risk of operating the business to the common taxpayers of the sovereign states and if such innocuous and opaque justice administering system is not revised where common people have no say about the decision-making or participating, then the very foundation of the people paying tax is needless and so is the democracy in the sovereign states.


[1] R. Arnold, ‘Aliens’, in R. Bernhardt, (ed), Encyclopedia of Public International Law, Vol. I (Amsterdam: North-Holland Pub. Co, 1992).

[2] Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of India for the Promotion and Protection of Investments, United Kingdom-India, 6 January 1995.

[3] Rashmi Banga, “Impact of Government Policies and Investment Agreements on FDI Inflows”, Indian Council for Research on International Economic Relations, Working Paper No. 09, 2003.

[4] International Convention for Settlement of Investment Disputes, Report on Caseload Statistics 2019, (Feb, 2020), https://icsid.worldbank.org/news-and-events/news-releases/icsid-releases-2019-caseload-statistics.

[5] Norton Rose Ful bright, Philip MorrisAsia v Australia, 2016, available at https://www.nortonrosefulbright.com/en/knowledge/publications/ded9c356/philip-morris-asia-v-australia.

[6] CMS v. Argentina, ICSID Case ARB/01/08, Award, 12 May 2005; Sempra v. Argentina, ICSID Case ARB/02/16, Award, 28 September 2007; Enron v. Argentina, ICSID Case No. ARB/01/03, Award, 22 May 2007; LG&E v. Argentina, ICSID Case ARB/02/1, Award, 3 October 2006; Continental Casualty Co. v. Argentine Republic, ICSID Case No. ARB/03/9, Award, 5 September 2008.

[7] ISDS Platform, Veolia loses ISDS case against Egypt – after six years and millions in costs, 2018, available at https://isds.bilaterals.org/?veolia-loses-isds-case-against.

[8] “International arbitration skewed in favour of developed world: Ravi Shankar Prasad”, Business Standard, Aug. 27, 2016.

[9] United Nations Conference on Trade and Development, World Investment Report: Investment and the Digital Economy (UNCTAD, 2017), 115, figure III.13, https://unctad.org/system/files/officialdocument/wir2017_en.pdf.

[10] Abhisar Vidhyarthi, “Revisiting India’s Position to Not Join the ICSID Convention”, Kluwer Arbitration Blog, (August 2, 2020), available at http://arbitrationblog.kluwerarbitration.com/2020/08/02/revisiting-indias-position-to-not-join-the-icsid-convention/ (last accessed on June 29, 2021).

[11] Brazil – India Investment Cooperation and Facilitation Treaty (2020) available at https://dea.gov.in/bipa?page=7.

[12] Prabhash Ranjan, “India-Brazil Bilateral Investment Treaty – Anew template for India”, Kluwer Arbitration Blog, (March 19, 2020), available at http://arbitrationblog.kluwerarbitration.com/2020/03/19/india-brazil-bilateral-investment-treaty-a-new-template-for-india/ (last accessed on June 27, 2021).

[13] This article arises from a research project titled “Investment Arbitration & Sustainable Development in Asia: The Regulatory Turn towards the State”. The lead author is the Principal Investigator for this project, which is kindly funded by the Singapore Management University (SMU) through a Ministry of Education of Singapore Tier 1 (Category B) Academic Research Fund.

Author: Abhyuday Pratap, Dr. Ram Manohar Lohiya National Law University, Lucknow

Editor: Kanishka VaishSenior Editor, LexLife India.

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