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TRACKING INDIA'S INTERNATIONAL INVESTMENT PARTICIPATION IN THE ISDS REFORMS

This post has been authored by Urmil Shah, a fourth-year student of B.A.LL.B. (Hons.) at the AURO University, Surat.

Image Credits: - www.tradelab.legal.io

1. INTRODUCTION


The past decade has seen the development of new procedural and regulatory frameworks which are gradually replacing the existing regime of the investor-state disputes settlement ("ISDS") system. The United Nations Commission on International Trade Law ("UNCITRAL") and the International Centre for Settlement of Investment Disputes ("ICSID") have particularly initiated the reforms work aimed however not towards harmonization of the law on a similar footing as commercial arbitration. The ISDS system has come under severe scrutiny due to concerns pertaining to lack of consistency, coherence, predictability, and correctness of arbitral decisions, lack of independence, impartial disclosure mechanism for arbitrators, and costs and duration of the proceedings. While the focus of the present reforms is largely on adopting alternative modes of dispute resolution, the EU and the US have not shied away from introducing bolder changes to systemize and innovate the restructuring process. Although India has to date not presented any proposal or concurred to a particular initiative of collective efforts[1], the author proposes that it has implicitly taken measures opposing the present system.


2. INDIA TRYST WITH ISDS


The UNCTAD statistics show that India has not won a single investor-state arbitration ("ISA") as Respondent since the White Industries saga and the constant threats to treaty violations claims have led to the formation of the new Model Bilateral Investment Treaty ("BIT") in 2016. Most of these claims were pursuant to the regulatory changes in telecom, infrastructure, and taxation frameworks, resulting in the risk of regulatory chill. The Model BIT creates an apprehension of “investor-bias” existing in the ISDS system and attempts to draw a fine line between investor protection and state regulation on account of the inability of the states to bring forward claims of violation of the treaty by investors. Indian BITs with Brazil (2020), Belarus (2018), Taipei (2018). and Bangladesh (2017) based upon the Model BIT provide for numerous exclusions in respect of government subsidies and grants, compulsory licenses, procurements, and taxation measures, thereby reducing the scope of the ISDS system. On the substantive front, the Model BIT excludes investor protection clauses like the most-favoured nation ("MFN"), fair and equitable treatment ("FET"), full protection and security ("FPS"), and legitimate expectation of foreign investors, evidencing clear distrust in the system. The exhaustion of the local remedies clause suggests skepticism with the inconsistent interpretation by arbitral tribunals. India, being a prominent participant in international law, has refrained from the membership of ICSID Convention for undisclosed reasons. Although India has acceded to the New York Convention, it has restricted the applicability of enforcement of foreign arbitral awards under the commercial reservation, resulting in a lack of regulatory framework governing and recognising foreign investment awards. With a weak award enforcement regime, the accession to the ICSID can provide a more predictable, binding, and directly enforceable investment protection regime.


3. IMPLEMENTING MODELS FOR REFORMS


An academic study shows that post-2010 investment treaties entered into by the Asian States have shifted from mere unqualified provisions of advance consent to arbitration encouraging the utilisation of novel models of dispute resolution. While the ISA closely coincides with commercial litigation, the novel models not only provide enough flexibility for the sovereign states to bargain with foreign investors, but also reduces their exposure to extraneous damages on account of negotiating positions.

  1. State-State Arbitration: An alternative to the ISDS system already prevalent, yet rarely invoked, in investment agreements - the State-State Arbitration ("SSA") mechanism is seriously considered by states. It is generally considered as a mode to assimilate public international law consistency within the realm of private international dispute resolution. SSA provides locus standi to the Home State to initiate investment-treaty violations claims against the Host State, on behalf of the home investor, thereby providing grounds for filtering out unmeritorious, frivolous, and controversial claims. Most investment disputes are not likely to escalate towards a formal arbitration on account of cooperation mechanisms between states, thereby reducing the overall cost and duration of the process. While the SSA is not likely to create a judicially coherent legal environment as the awards are not binding precedents, it can create a system that requires a minimum threshold of investors before initiating claims against the Host State, similar to the dumping-related dispute resolution at the WTO. While there was not substantive deliberation regarding the SSA at the UNCITRAL or the ICSID reforms meetings; there are largely two models of SSA utilised presently. The South African Protection of Investment Act, 2015 envisions a straightforward mediation-arbitration clause, wishing to reap benefits of ADR whereas the Brazilian Cooperation and Investment Facilitation Agreement provides for the unconventional Ombudsman-arbitration clause, focussing more on diplomatic negotiations between the states. The Indian stand on the SSA, as highlighted in the Srikrishna Committee Report, is sufficiently clear, albeit without much emphasis on the approach, as it provides states greater control over the arbitral proceedings and increases the scope of reciprocity between states. The recently concluded India-Brazil BIT (2020) does away with ISA in its entirety and incorporates the SSA mechanism.

  2. Investor-State Settlements: While optional pre-arbitration consultations are common among BITs, mandatory resolution through mediation/conciliation has the potential to overcome most concerns with the ISDS system. Not only does it respect the sovereignty of the contracting parties, but also provides investors with long-term business-friendly avenues for dispute mitigation. In practice, institutional arbitration centres have been promoting the active use of settlements – the HKIAC offers free use of the premises where a developing State is involved as a disputing party and the PCA Financial Assistance Fund provides financial concessions to developing countries for administering settlements. Meanwhile, the ICSID and the UNCITRAL are updating their mediation and conciliation rules, the Singapore Mediation Convention is expected to be the enforcement framework governing mandatory and cross-border investor-state mediation to provide binding value to the mediated settlement agreements. Presently, there exist three broad models of investor-state settlements – firstly, the Chinese Investment Agreements with its Special Administrative Regions providing for investor-state mediation as a replacement to investor-state arbitration, secondly, the African Union’s Pan-African Investment Code’s approach of providing advanced consent and thirdly, the ASEAN-ACIA (2012) allows hybrid settlement in form of “arb-con-arb” or “con-arb” to run simultaneously with adjudication. While the Indian approach towards investor-state mediation is unexplored, it is foreseeable that the Chinese model of utilizing investor-state mediation as an alternative to ISA will not be adopted for the want of bindingness of the latter. The ASEAN-ACIA opt-in/opt-out approach can however be favourable to the Indian practice as it not only maintains state sovereignty but also reduce investor arbitrariness.

  3. Multilateral Investment Courts: One of the notable reasons contributing to the ISDS reforms is excessive bilateralism contributing to starkly different practices amongst jurisdictions. The EU’s proposal of establishing a multilateral investment court ("MIC") not only prospers multilateralism amongst investing states but also ensures neutral information dissemination and transparency in resolution. The MIC as a permanent institution can provide a standing body of qualified and accredited arbitrators/mediators along with ensuring the requirement of gender and cultural diversity among adjudicators. It envisages a transparent and objective appointment of arbitrators/mediators by State members for a fixed tenure period, similar to the appointment procedure of the International Court of Justice ("ICJ"), thereby disallowing disputants from nominating. While one of the approaches could be a standalone ISA binding upon the parties, providing for appellate mechanism with the judgement court of the first instance appealable to an appellate court on limited grounds like manifest errors of law or appreciation of facts or procedural shortcomings is in vogue. Not only does such a system creates a precedent-friendly atmosphere of adjudication but also allows third parties submissions from interested parties like NGOs, trade unions or consumer groups. The Indian Finance Minister has starkly opposed the MIC proposal over political difficulties on account of the failure of negotiations over the EU-India Free Trade Agreement (EU-FTA) stating that “we will not allow investors to drag the government to a multilateral investment court.” The Srikrishna Committee Report on the other hand favours the mechanism asking the government to incorporate provisions for appellate mechanisms in its existing BITs. Considering the merits of the MIC, it presents a unique opportunity for developing countries like India to not only systematize investment arbitration but also to judicialize the process.

4. CONCLUSION: THE WAY FORWARD


The recent decisions of arbitral tribunals in Cairn India, Vodafone, and Deutsche Telekom holding the Indian Government liable for compensation epitomizes India’s uncomfortable tryst with investment treaty arbitration. Moreover, the substantial rise in the outbound investments from India presents further evidence of the need for structural reforms in the law and practice of international investment. While perfect consistency at the international level is seemingly impossible, however, even before dawning into the reformed practice of international investments, India needs to consider improving the domestic regime for foreign investments, even considering the ratification of the ICSID Convention. A specific domestic legislation detailing the framework for foreign investment protection and facilitation, regulatory exemptions and dispute resolution mechanism can effectively imbibe certainty within the India investment treaty practice. Further, administrative exigencies can be reduced by appointing a single point authority to deal with foreign investments related correspondence.


Endnotes:

1. Catharine Titi, Proceedings of 5th Annual Conference on International Arbitration, Centre for Advanced Research and Training in Arbitration Law (2020).