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Bilateral Investment Treaty
Context:
The recently publicised Bilateral Investment Treaty (BIT) between India and the United Arab Emirates (UAE) was signed earlier this year and will replace the 2014 treaty between the two countries.
Significance:
- India’s Evolving Approach to Investment Treaties This BIT is a reflection of India’s evolving approach to investment treaties, offering insights into the country’s ongoing negotiations with the UK and the EU.
- Balancing Investment Protection and Sovereign Rights The treaty aims to protect investments while also ensuring that India retains its sovereign rights to regulate its economy.
- Clearer Dispute Resolution It also clarifies the dispute resolution process, setting limits on the discretion of investor-state dispute settlement (ISDS) tribunals.
Key Changes from the 2015 Model BIT:
- Shortened Local Remedies Period The India-UAE BIT shortens the local remedies exhaustion period from five years (as seen in the 2015 Model BIT) to three years.
- This addresses concerns over delays in India’s judicial system, giving foreign investors quicker access to ISDS.
- While some believe this could increase India’s exposure to legal claims, it mainly strengthens investment protection without compromising India’s regulatory rights, as long as there’s no abuse.
- Clearer Definition of Investment: The BIT defines investment based on three main factors:
- Commitment of capital
- Expectation of profit
- Assumption of risk
This removes the Model BIT’s requirement that the investment must be “significant for the host state’s development,” which used to introduce subjectivity and arbitral discretion. This change simplifies legal questions and aligns with past ISDS tribunal decisions.
- Clarity on Treaty Violations : Article 4 of the BIT specifies what constitutes a treaty violation, such as denial of justice or breaches of due process.
- Unlike the Model BIT, these violations are not tied to customary international law, eliminating uncertainty about unsettled legal principles.
- This reduces arbitral discretion and provides clearer guidelines for both states and investors.
Continuity in India’s Investment Treaty Approach:
- Exclusion of MFN and Taxation Measures Like the Model BIT, the India-UAE BIT excludes the Most-Favoured Nation (MFN) provision, which limits investment protection in favour of more regulatory flexibility for the host state.
- The treaty also does not cover taxation measures, meaning foreign investors cannot challenge potentially unfair tax actions.
- Limited ISDS Tribunal Jurisdiction on Court Decisions Article 14.6(i) prevents ISDS tribunals from reviewing the “merits” of decisions made by domestic courts, reinforcing the importance of India’s local judiciary.
- However, the term “merits” remains vague, which could lead to arguments that limit the tribunal’s ability to review certain claims.
New Additions and Restrictions:
- Ban on Third-Party Funding: The BIT explicitly bans third-party funding, giving India more control over the ISDS process.
- Restrictions in Cases of Fraud or Corruption ISDS claims will not be allowed if there are allegations of fraud or corruption against the investor.
Mixed Reactions : The shorter local remedies period may appeal to developed countries, but there are concerns over India’s exclusion of MFN and taxation issues. It remains unclear whether these changes represent a broader shift in India’s approach to BITs or are specifically tailored to the UAE.
Key Impacts of The India-UAE BIT on other ongoing negotiations :
- Attracting Investment: Shortened local remedies period and clearer investment definitions may make India more appealing to foreign investors.
- Sovereignty Focus: Excluding MFN clauses and limiting ISDS tribunal powers could appeal to countries prioritising regulatory autonomy, but may face resistance from those seeking broader investor protections.
- Dispute Resolution: India’s focus on limiting ISDS discretion and clarifying treaty violations may influence other nations critical of ISDS systems.
- Taxation and Funding: Excluding taxation issues and banning third-party funding could be contentious in negotiations with countries reliant on these mechanisms.
