A bilateral investment treaty with a ‘bit’ of change

‘State action on taxation is outside the scope of the India-UAE bilateral investment treaty’
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The bilateral investment treaty (BIT) between India and the United Arab Emirates (UAE) which was signed earlier this year was recently made public. This BIT, which will replace the 2014 India-UAE investment treaty, is critical. It reveals India’s latest investment treaty practice and might elucidate India’s ongoing negotiations with the United Kingdom and the European Union. A typical BIT should accomplish two objectives. First, it should balance the competing goals of investment protection and the state’s sovereign right to regulate. Second, it should contain unambiguous provisions to reduce the discretion of investor-state dispute settlement (ISDS) tribunals.

Departures from the Model

Though India adopted a Model BIT in 2015, it has barely managed to sign a handful of BITs based on this model. Intriguingly, the India-UAE BIT departs from the Model BIT on some significant issues.

First, it provides that a foreign investor must exhaust local remedies for at least three years before bringing an ISDS claim. This period in the Model BIT and subsequent BITs that India signed with countries such as Belarus and Kyrgyzstan is five years. Several countries lament that five years is too long. Given the overstretched Indian judicial system, it is unlikely that a foreign investor’s legal dispute with the state would be resolved in five years. It seems India has taken these concerns on board and softened its stand. This gives foreign investors quicker access to ISDS, thus, bringing the pendulum somewhat back to the pole of investment protection. A shorter waiting period to invoke ISDS does not mean that India is exposing itself to treaty claims, as asserted by some. The function of investment treaties is to safeguard foreign investment from sovereign regulatory abuse. As long as India does not indulge in regulatory abuse it need not worry about ISDS claims.

Second, the definition of investment in the India-UAE BIT states that for an enterprise to qualify as an investment, and thus be eligible for treaty protection, it should possess key economic characteristics such as a commitment of capital, profit expectation, and risk assumption. The criterion that the investment should, in addition, be significant for the development of the host state, which is present in the Model BIT, has been done away with. This is a welcome development clarifying the jurisdictional question. Several ISDS tribunals have held that proving foreign investment is significant for the development of the host state, is an inherently value-laden exercise. Thus, by removing this subjective element from the definition of investment, India and the UAE have reduced arbitral discretion. At any rate, when a lawfully created enterprise satisfies other key economic investment characteristics, it is presumably significant for the host state’s development.

Greater clarity

Third, Article 4 of the India-UAE BIT, which talks of ‘treatment of investments’, specifically lists when state action will amount to a treaty violation such as when there is a denial of justice or when there is a fundamental breach of due process in dealing with investment. These grounds are mentioned in a similar provision in the Model BIT. However, in the Model BIT, these grounds are linked to customary international law (CIL) whereas in Article 4 of the India-UAE BIT, there is no reference to CIL. The content of CIL concerning various aspects of foreign investment is not settled. Thus, a reference to CIL in the treaty, as numerous ISDS cases show, gives too much discretion to these tribunals. Consequently, Article 4 brings greater clarity for states and investors and curbs arbitral discretion.

A continuity

Notwithstanding some departures, the India-UAE BIT establishes a continuity of India’s investment treaty practice. For instance, the India-UAE BIT, like the Model, does not contain the most favoured nation (MFN) provision, which is a core non-discrimination standard in international economic relations. Likewise, state action on taxation is outside the scope of the India-UAE BIT. Thus, arguably, a foreign investor cannot challenge tax measures even if they are abusive. This maximises the state’s regulatory power at the cost of investment protection. Like the Model BIT, Article 14.6(i) of the India-UAE BIT bars the jurisdiction of an ISDS tribunal to review the ‘merits’ of a domestic court decision. Arguably, ‘merits’ means that ISDS tribunals should not act as a court of appeal. However, ‘merits’ can also have an alternative interpretation.

Since the investor will bring an ISDS claim on the same issue adjudicated by the domestic court, the state can plausibly argue that the case is on the ‘merits’ of the domestic court decision. This might impede the tribunal’s ability to hear the case. On some issues, the India-UAE BIT goes beyond the Model. For instance, it specifically disallows third-party funding and the unavailability of ISDS if an allegation of fraud or corruption is made against the investor.

One does not know whether the departures from the Model BIT signify India’s change of heart or are specific to the UAE. Developed countries would be pleased with India’s softening of the five-year domestic litigation requirement. However, they would remain concerned about India’s continued stand of excluding MFN and taxation issues from the BIT’s ambit.

Prabhash Ranjan is a Professor and Director, Centre for International Investment and Trade Laws, Jindal Global Law School. The views expressed are personal