Analysing India’s Deviation from Investor-State Dispute Settlement through the Lens of India-Brazil Bilateral Investment Treaty 2020

Tushar Chitlangia and Vipasha Verma*

Abstract

India and Brazil ratified the India-Brazil Investment Treaty this year. With this began a new era of diplomacy in foreign investment. The systematic institution of investment arbitration has been evolving over the years and with it, the Investor-State Dispute Settlement (ISDS) mechanism has been the ideal model for many countries. However, owing to fallacies in the model, the judgment by international arbitration tribunals has led States to bear insurmountable costs and drain taxpayers’ money. This article discusses the past experiences of both signatories with ISDS and why it failed to deliver. Building upon these experiences, it goes on to establish the superiority of the State-State Dispute Settlement (SSDS) over the ISDS mechanism.

I. Introduction

India signed a Bilateral Investment Treaty (BIT) with Brazil on 25th January 2020, which marked a new beginning of diplomatic and investment ties between both the signatories. BITs are the instruments that govern the terms and conditions for investments by private investors of one country in another. This article shall talk about the rationale behind adopting a State –State Dispute Settlement (SSDS) mechanism instead of an Investor-State Dispute Settlement (ISDS) in the BIT signed. ISDS is a mechanism where an individual can file a case against another State party, whereas the SSDS mechanism allows only the States to file cases against other States.

The authors discuss the historical experiences which made Brazil and India pitch down to the safest mechanism for them, i.e. SSDS. Furthermore, the authors talk about the benefits of using the SSDS mechanism over the ISDS mechanisms. Then the authors discuss how the dispute prevention model is best for countries like India and Brazil. Finally, the authors briefly critique the existing mechanism in India and go on to assert that it was a wise move by the Indian and Brazilian government to adopt SSDS over ISDS.

Perhaps, the most bizarre aspect of the India-Brazil Bilateral Investment Treaty 2020 (hereinafter India-Brazil BIT) is that in terms of settlement of investment disputes, India adopts an approach significantly different from its Model BIT adopted in 2016. The India-Brazil BIT reserves the right of the parties to opt for only one kind of dispute resolution mechanism, i.e. SSDS.  Whereas the Indian Model BIT 2016 mandates exhaustion of all local remedies for five years before commencing arbitration. The India-Brazil BIT  provides for  an SSDS approach in matters involving  interpretation of the Treaty and observance by nations of the terms of the Treaty .

II. Past Experiences of India

Moreover, India’s deviation from its Model BIT is further evident in the adoption of Brazil’s novel approach to investment dispute settlement in the India-Brazil BIT. The primary reason for adopting the Brazilian Model of BIT was that the Indian Model was way too complicated to be incorporated.  Interestingly, the ISDS mechanism in Indian BITs was hostile to the investors.[1] Instances like that of the Dabhol Power Company where foreign investors were left to the mercy of the hosts, i.e. Indian government, made the Brazilians all the more skeptical about the ISDS mechanisms in India.

 On the other hand, International Investment Agreements are seen as imposing multiple obligations on States while establishing minimal duties on investors. A closer look at India’s previous experiences explains its move to adopt the provisions of the India-Brazil BIT. India’s concern was that the large number of international investment agreements it had entered into rendered it highly exposed to high-cost litigation in which disputants can often have an unjust advantage, providing them with access to arbitral tribunals that prioritise their private interests over the public interests of the host state – and “sometimes awarding large sums of money from public funds with no oversight by domestic courts”.

Cases like White Industries Australian Limited (WIAL) v. Republic of India and the Antrex[2] show how vague and broadly worded provisions of BITs were used by arbitration tribunals to hold sovereign States responsible for violating their agreed BITs. All these cases were decided in favour of foreign investors, and billions of dollars were awarded to them in the form of damages. After losses in these cases, the heightened concern regarding BIT modelled on previously existing mechanisms was evident when the award was criticised in Parliament as “an attack on the sovereignty of the Indian judiciary.” Similarly, civil society organisations demanded a review of India’s Model BIT due to its potential effect on a nation’s regulatory mechanisms. Additionally, India has been a part of investment arbitration disputes on twenty-four occasions, and now “India is wizening-up with its approach towards investments.”

III. Dispute Prevention Policies

Taking a step towards innovative reform, the India-Brazil BIT contemplates setting up of two institutions. First one being the establishment of an Ombudsman in each of the nations who shall act as a mediator to settle the disputes amicably. The objective is to help investors maintain their investment, in turn, building a more productive business environment in the long-term. Secondly, a Joint Committee is established with representatives from both the governments. In the absence of an amicable settlement, any of the government may bring the dispute to the cognisance of the Joint Committee. From these mechanisms, it is aptly evident that parties are batting for a procedure that favours them in dispute prevention rather than dispute settlement. Host nations are making attempts to settle disputes amicably, and judging by the level of government intervention required in settling these disputes, nations may look to resolutions through diplomatic discussion before formal complaints. This approach brings to the fore inter-state cooperation and an element of diplomacy.

IV. Concerns over ISDS and Reasons for Adoption of SSDS

Although, the number of treatises featuring ISDS has increased exponentially in the past two decades; however, they have been accompanied by staunch reluctance from the host governments over the rights of the foreign investors. The major criticism of ISDS is that it elevates the foreign investors to the level of a sovereign government, hence challenging a State’s sovereignty. ISDS has also invited criticism from investors.  as, the State, which is in a more powerful position than the investor can dominate decisions based on any agreed interpretations. This possibility is eliminated in case of SSDS as both the parties are on an equal footing. Hence, this would provide Indian investors abroad or Brazilian investors in India a great sense of security. Definitively, the new model’s principal aim (like traditional BITs) is to promote investment but without compromising regulatory autonomy which has lately been a concern for states party to investment treaties.

Despite the rarity of SSDS mechanisms, it is gaining much-deserved attention due to a series of concerns associated with ISDS. SSDS mechanism allows two states to arbitrate together which increases the interests of both governments, thus making two states having more control over the agreed solution. Furthermore, SSDS system is more transparent because when governments enter into arbitrations, their citizens are aware of it. Whereas ISDS mechanisms are mostly private and are criticised for hiding important public policy matters from the citizens. Involvement of SSDS mechanism will ensure that treaty interpretations are not biased against any party and instead remain justified. From an economic perspective, India and Brazil would necessarily want their funds to be engaged in developmental activities rather than using them in curtailing abuses by foreign investors.[3] It is to be noted here that as India and Brazil are not members of the International Centre for Settlement of Investment Disputes Convention, they are not obligated to follow the ISDS mechanism.[4] There will be a development of international law arbitration jurisprudence when States are against States as the matters will be dealt more judiciously and thoughtfully, hence settling the unsettled new jurisprudence of SSDS.

V. Conclusion

To sum up, India’s adoption of the Brazilian model is based on a realistic proposition that there are no magic wands to reform the system in an instant. It is a slow and gradual process, wherein all factors and experiences have to be considered. The India-Brazil BIT reflects a compromise between two emerging economies and is a contributing step towards changing the system at its core. India’s acceptance of the SSDS mechanism must be viewed in the context of changing investment regimes worldwide where increasing questions are being asked about the impact of BITs on the policymaking power of governments. This departure from the ISDS mechanism is a way to strike a balance between host nation’s rights as a State and investor protection. Finally, how this mechanism of dispute prevention and host nation’s increased involvement fares is a question for tomorrow. However, it would highlight the impact of not resorting to traditional mechanisms.


* Tushar Chitlangia and Vipasha Verma are students at National Law University Odisha. They can be reached via LinkedIn or emailed at tusharchitlangia@gmail.com and vermavipasha19@gmail.com.

[1] Prabhash Ranjan, India and Bilateral Investment Treaties – A Changing Landscape, 29 FOR. INV. L. JOURN. 419, 436 (2014).

[2] Antrix Corpn. Ltd. v. Devas Multimedia Pvt. Ltd., (2018) SCC OnLine Del 9338.

[3] Prabhash Ranjan, India and Bilateral Investment Treaties: Refusal, Acceptance, Backlash 265 (Oxford University Press 2019).

[4] Jarrod Hepburn, India and Bilateral Investment Treaties: Refusal, Acceptance, Backlash, 3 ILR 1, 4 (2019).


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