[This guest post is authored by Abhishar Vidyarthi, a fifth-year law student at Maharashtra National Law University, Mumbai. He presently serves as a research assistant at Asian Arbitration and ADR Alliance, Singapore; and takes a keen interest in international commercial and investment arbitration. He can be reached at avividyarthi@gmail.com]

Foreign Direct Investment (FDI) is a crucial source of non-debt financial resource for the economic development of developing countries. To ensure a healthy investment framework, most developing countries enter into bilateral investment treaties (BIT’s) with other countries. BITs are aimed at providing better access to foreign markets to the investors of those countries and ensure fairness in trade.

While BITs are not the sole determinant of investment decisions of corporations, treaty-based protections remain important among other economic and political consideration. Over the years, there has been a substantial increase in BITs all over the world, as they act as risk mitigating instruments for investors in foreign territory.

Motivated to increase the inflow of foreign investment, developing countries like India and Brazil had entered into bilateral arrangements with a plethora of countries. However, recent experience shows that regulatory limitations created by BITs and mistrust in the present Investor State dispute settlement mechanism has caused several developing countries to terminate or renegotiate their BITs.

In this post, I attempt to bring out a ‘developing country paradox’ to discuss how BITs act as a double-edged sword for growing economies by having the effect of promoting FDI whilst also placing limitations on the State’s regulatory powers.

India’s standpoint on BITs

India signed its first BIT in 1994 with United Kingdom with the objective of sourcing Foreign Investment in India. The India-UK BIT was an investor friendly treaty and served the basis for the 2003 Model BIT of India. It contained several safeguards for investors – including MFN protection under Article 4 which provided a level-playing field for all foreign investors by prohibiting the host state from discriminating against investors from different countries.

Twenty-five years on, India has borne the brunt of around 24 BIT violation claims from foreign investors. A major setback was sustained by India in White Industries Australia Limited v. Republic of India, wherein a UNCITRAL tribunal passed an award against India mainly on grounds that India violated the MFN clause in the India-Australia BIT.

Briefly put, White Industries, an Australian investor, initiated investment arbitration proceedings against India after suffering an inordinate delay from Indian courts in their enforcement an arbitral award by an ICC Tribunal against Coal India Limited. The India-Australia BIT required the Host State to treat investors from the other state in the same manner as the Host State would treat an investor from its most-favored nation (MFN Clause). Incidentally, Article 4(5)[1] of the India-Kuwait treaty provided for contracting parties to provide foreign with ‘effective means of asserting claims and enforcing rights with respect to investments’ (effective means standard).

White Industries relied on the MFN Clause in the India-Australia BIT to argue that the effective means standard promised by India in the India-Kuwait BIT can be enforced by White Industries as well. Applying this standard, it was argued that the inordinate delay of Indian courts in enforcing an international arbitral award amounted to a failure on India’s part to provide White Industries with effective means of enforcing rights with respect to investments. The UNCITRAL Tribunal agreed with White Industries’ arguments and held India liable for violating the ‘effective means’ standard. India was also directed to pay White Industries close to AUD 5,000,000/-.

White Industries has been followed by several massive claims, mainly in response to measures regarding taxation and spectrum allocation, by other foreign investors – making India one of the most frequent respondents in investment arbitration.

Identifying the Paradox

Developing nations often regulate, and are expected to regulate, various sectors for public interest and welfare. Even well intended regulatory measures – aimed at protecting matters of public health, the environment, fiscal policy, etc., – may end up having a detrimental impact on foreign investment. If the affected property/investment is protected under a BIT, the aggrieved foreign investor is likely to sue the Host State for unlawful expropriation and failing to accord the investor a fair and equitable treatment.

A successful claim would entail massive an award in damages against the Host State. The award will be satisfied, eventually, with taxpayers’ money. Faced with the threat of expensive BIT claims, developing countries find themselves into a catch-22 situation. Originally aimed at attracting foreign investment, BIT protections therefore also have the effect of deterring Host State’s from exercising their regulatory power.

The problem for developing countries is further heightened by inconsistent interpretation of treaty provisions by a rather closed pool of arbitrators. For instance, Bangladesh has been at the receiving end of expansive interpretations by tribunals three cases – Sapiem v. Bangladesh, Chevron v. Bangladesh, and Niko v. Bangladesh. In Saipem, the ICSID tribunal gave an expansive interpretation to the term ‘investment’. It was held that the right to an arbitral award is an investment, and the decision of a municipal court to set aside an arbitral amount to expropriation. Similarly, the standard of fair and equitable treatment (FET) has also been a frequent recipient of contrasting interpretations.

Scholars and practitioners have also argued that the international investment arbitration mechanism is generally biased against the developing States. This apprehension stems from the belief that the international investment arbitration is dominated by western influence and does not take into account the concerns of a developing nation.[2] The systemic predominance of old Anglo-European men is evident as ICSID statistics reveal that in 84% of the cases, two or more of the tribunal members were Anglo–European, or the sole arbitrator was Anglo–European.[3] This apprehension has arguably deterred India from becoming a member of ICSID.[4]

Ambivalent attitude of other developing countries

India’s ambivalent attitude towards BITs is mirrored by several other developing nations. South Africa, for instance, has terminated most of its treaties in 2014 and intends to supplement the present system with a domestic legislation for protection of foreign investments. Ecuador, Bolivia and Venezuela have also denounced the ICSID convention in 2007, 2009 and 2012, respectively and also terminated their respective BITs. Brazil and Indonesia have also adopted a similar course of action.

Interestingly, both India and Brazil have continued to attract abundant foreign investment despite the vast domestic market and cheap labour at disposal.  Perhaps this is an indicator of the fact that BITs play only a limited role, if any, attracting foreign investment.

Handling the Paradox

Glaring loopholes in the present investment arbitration mechanism suggest an urgent need for reform. A multilateral investment framework seems unlikely to materialize as it would require a complete overhaul of the present system. Similarly, any endeavour to incorporate treaty-like protections into domestic legislation will most likely lead to the same problems that triggered need for the prevalent framework in the first place. Adopting a balanced approach is the need of the hour.

India’s present approach, unfortunately, does not reflect a balance. For instance, India’s Model BIT’s requires an aggrieved foreign investor to exhaust all local remedies before initiating any treaty-based claim. Given the prevailing condition of and pendency before Indian courts, this requirement is likely to render the entire mechanism futile for foreign investors.

Further, instead of blanket removal of the MFN clause, it would be more beneficial to incorporate a provision similar to the MFN clause found in Comprehensive Economic and Trade Agreement (CETA) between Canada and EU, which reads as follows:

For greater certainty, the “treatment” referred to in paragraphs 1 and 2 does not include procedures for the resolution of investment disputes between investors and states provided for in other international investment treaties and other trade agreements. Substantive obligations in other international investment treaties and other trade agreements do not in themselves constitute “treatment”, and thus cannot give rise to a breach of this Article, absent measures adopted or maintained by a Party pursuant to those obligations.

BITs should therefore be interpreted as balancing agreements that protect investor rights while providing States with a framework to base future regulatory actions.

Concluding remarks

Investor-State disputes provide a peculiar situation, since they encompass elements of public and private international law, commercial law, and international arbitration. While the idea of private tribunals adjudicating on public disputes may seem problematic, it is the only manner in which the interests of investors and States can be secured. For an efficient investment framework across the globe, all stakeholders must come together to establish a uniform mechanism founded on mutual trust and respect.

[1] “Each Contracting State shall maintain a favourable environment for investments in its territory by investors of the other Contracting State.

Each Contracting State shall in accordance with its applicable laws and regulations provide effective means of asserting claims and enforcing rights with respect to investments and ensure to investors of the other Contracting State, the right of access to its courts of justice, administrative tribunals and agencies, and all other bodies exercising adjudicatory authority, and the right to employ persons of their choice, for the purpose of the assertion of claims and the enforcement of rights with respect to their investments.”

[2] C. Dolinar Hikawa, ‘Beyond the Pale: A Proposal to Promote Ethnic Diversity Among International Arbitrators,’ (2015), 12(4) TDM, https://www.transnational-dispute-management.com/article.asp?key=2249, accessed 13 June 2019.

[3] ICC Arbitration posts strong growth in 2015, (2016) https://iccwbo.org/media-wall/news-speeches/icc-arbitration-posts-strong-growth-in-2015/, accessed 12 June 2019.

[4] Shreyas Jayasimha et. al, ICSID and India: Should India Ratify the ICSID Convention? TDM 2 (2018), in India.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s