COMMENTARY

Dispute Settlement in Bilateral

Investment Agreements
Whither India?
Kasturi Das

The investor-state dispute

settlement provisions, which
are generally part of bilateral
investment promotion and
protection agreements, are
increasingly being called into
question by governments of
various nations, especially those
in developing countries. In
the recent past, multinational
corporations have begun
using international arbitration
clauses in the ISDS to challenge
governments in countries where
they invest and operate, thereby
challenging national public policy
decisions. With the global tide
going against ISDS provisions,
can India find a more opportune
moment than now to take a call
on this important issue?

Views are personal.

Kasturi Das (kdas@imt.edu) is with the
Institute of Management Technology,
Ghaziabad.

22

bilateral investment promotion

and protection agreement (BIPA)
is a form of international investment agreement (IIA) aimed at protecting foreign investment. The first BIPA
was signed way back in the 1950s. But
the 1980s and 1990s were witness to a
dramatic proliferation in the BIPAs
signed: from fewer than 200 in 1980,
there were almost 2,000 BIPAs by the
end of the 1990s (UNCTAD 2000). Developing countries, in particular, were under pressure to enter into BIPAs in order
to remain competitive as a destination
for foreign investment and also to
project themselves as reform-minded
economies (Haftel and Thompson 2013).
Likewise, India went on to sign its maiden BIPA with the United Kingdom (UK) in
1994, and has since signed 83 BIPAs (The
Economic Times 2014b). The World Investment Report 2013 published by the
United Nations Conference on Trade and
Development (UNCTAD), indicates that
by the end of 2012 there were more than
3,196 IIAs (UNCTAD 2013a). IIAs include
both BIPAs and investment chapters in
other more comprehensive regional or
bilateral free trade agreements (FTAs).
The most controversial aspects of IIAs,
including BIPAs, are the investor-state
dispute settlement (ISDS) provisions that
allow investors to subject host foreign
governments to international arbitration
if they believe that they have been
subject to expropriation or discriminatory
treatment in that country, among other
grounds. The ISDS mechanism was originally designed to depoliticise investment
disputes and allow foreign investors
a fair hearing before an independent,
neutral and qualified tribunal (UNCTAD
2013a). However, controversies around
ISDS have gained momentum more recently
with the mechanism being widely criticised as unethical, unfair, undemocratic,
July 12, 2014

unsustainable and even unconstitutional,

giving undue power and benefit to
multinational corporations (MNCs) over
host governments and public policy,
thereby placing profit before people and
the environment (Eaton 2014). Some of
the serious concerns that have been
raised about the ISDS mechanism include
lack of legitimacy and transparency;
contradictions between arbitral decisions; difficulties in correcting erroneous arbitral decisions; questions about
the independence and impartiality of
the arbitrators; and costs and time of arbitral procedures (UNCTAD 2013b). It is
indeed striking that under the ISDS regime unelected tribunals of three experts are empowered to overrule a nations highest authorities!
Growing Use of ISDS
According to the World Investment Report
2013, by the end of 2012, the total number
of ISDS cases stood at 514, with 58 new
cases being initiated in 2012 alone the
highest ever filed in one year. A 2014 status
update on the ISDS released by the UNCTAD
in April 2014 reveals that in 2013 investors
also initiated 57 new ISDS cases (UNCTAD
2014). This is a clear testimony to the unprecedented rate at which MNCs are resorting to the ISDS provisions of late.
Hence, addressing the concerns regarding
the functioning of the ISDS, as mentioned,
turns out to be decisive especially for an
emerging economy like India. Strikingly in
66% of the new cases in 2012 the respondents were developing or transition economies (UNCTAD 2013a), which went up to
73% in 2013 (UNCTAD 2014).
In 2013 alone, foreign investors challenged a broad range of government
measures, including changes related to
investment-incentive schemes, alleged
breaches of contracts, alleged direct or
de facto expropriation, revocation of
licences or permits, regulation of energy
tariffs, allegedly wrongful criminal prosecution, land-zoning decisions, invalidation of patents, among others (UNCTAD
2014). As for the forum, the majority of
the cases accrue under the World Banks
International Centre for Settlement of
Investment Disputes (ICSID) and the
United Nations Commission on International Trade Law (UNCITRAL).
vol xlIX no 28

EPW

Economic & Political Weekly

COMMENTARY

Among the high profile disputes,

Philip Morris International has brought
a case in Hong Kong challenging Australias plain-packaging law for cigarettes. The tobacco company says the
law prevents it from marketing its brand,
in violation of a BIPA between Australia
and Hong Kong. Swedens Vattenfall,
which operates nuclear plants in Germany, is seeking compensation for the
Berlins planned phaseout of nuclear
power following the Fukushima nuclear
disaster. Lone Pine Resources, a United
States (US) company that has licences to
produce natural gas from beneath the
St Lawrence River in Quebec, wants to
be compensated by Canada for a moratorium on fracking in the province (Coy
et al 2014). Examples galore.
An Opportunity for India
Coming to India, the country has already lost a case of international arbitration involving White Industries of Australia in 2011. More recently, companies
like Deutsche Telekom, Vodafone, Sistema, among others have served notices to
the Indian government under various BIPAs currently in force (The Economic
Times 2014a). In this context, the finance
ministrys plan to bring out a retroactive
joint interpretative statement is certainly
a step in the right direction to remove
ambiguity and bring clarity on the scope
of the existing BIPAs. Such a statement is
also in keeping with the Vienna Convention on the Law of Treaties (VCLT) that
applies to inter-state treaties governed
by public international law, such as the
IIAs. As underscored by the UNCTAD, the
contracting states do retain the power to
clarify the meaning of treaty provisions
through authoritative interpretations
jointly. The interpretative statement issued by the North American Free Trade
Agreement (NAFTA) Free Trade Commission, clarifying among other things, the
minimum standard of treatment is an
example of this approach. However, in
order to qualify as authoritative, the interpretative statement corresponding to
a BIPA needs to be endorsed not only by
India but also by the partner country
concerned (UNCTAD 2011), a task that may
not always be easy. Importantly, even if
India opts to terminate the existing
Economic & Political Weekly

EPW

July 12, 2014

BIPAs and renegotiate them in line with

the new model BIPA under preparation,
under a sunset clause the existing BIPAs will continue to apply for another 15year period in respect of investments
made prior to the termination.
As for the renegotiation of the existing
BIPAs, the government is reportedly working on a new model BIPA that would be
the template for renegotiation of existing
BIPAs as well as negotiations of new
agreements. India entered into a number
of BIPAs in the 1990s with an initial fixed
term of 10 years. This essentially means
that over the next few years a number of
existing BIPAs will be up for termination.
Unless terminated at the right juncture,
these treaties would get an automatic extension. This creates distinct opportunities for India for reforming the BIPA regime by terminating the existing agreements and renegotiating them as per the
new model. However, India needs to be
vigilant of the legal and procedural requirements to abide by so as not to miss
the bus. While many of Indias BIPAs follow the more flexible anytime termination model, allowing India to terminate
the agreement unilaterally (after giving
notice) once the initial period is over,
some of the existing BIPAs follow the
end-of-term model. The India-Netherlands BIPA, for instance, provides that unless notice of termination has been given
at least six months before the date of expiry of its validity, the present agreement
will get extended automatically for another 10 years. The difficulty with this latter model is that the failure to notify the
intention to terminate within a specified
notification period will lock India into another 10-year period during which the
treaty cannot be unilaterally terminated.
Missing the bus may turn out to be far
more costly in these latter cases.
As per the information available on
the new model BIPA, foreign investors reportedly would be required to exhaust
all available remedies under the purview
of local laws pertaining to the host country before seeking international arbitration (The Economic Times 2013), which is
not mandatory under the existing model.
While this seems to indicate the governments intention to modify the ISDS regime in the new model BIPA, the scope

vol xlIX no 28

and depth of any such reform under consideration is not known, as the draft of
the new model BIPA has not been made
public till date! However, if the recent
developments across the globe are anything to go by, the time is indeed ripe for
India to go for a complete overhaul of the
ISDS regime in the new template, if not
denounce it altogether.
Voices of Opposition
Questions are being raised, research conducted, and actions taken in opposition to
ISDS by a growing number of constituencies including international and intergovernmental organisations (including the
UNCTAD), national and international nongovernmental organisations (NGOs), academics, lawyers, jurists, foreign policy
experts, trade negotiators and even a significant number of countries, among others (Eaton 2014). The voices of opposition
that are advocating an outright rejection
of ISDS are also becoming increasingly
harder to ignore, with many countries
now exploring alternatives. The next few
paragraphs are devoted to delineating the
opposition that has been levelled by various countries and organisations across
the globe against the ISDS provisions.
The ISDS is impeding progress in negotiation on two of the biggest FTAs ever,
both having the US (the strongest proponent of BIPAs and ISDS) on board: the
Transatlantic Trade and Investment Partnership (TTIP) and Trans-Pacific Partnership Agreement (TPPA). Owing to an increasing domestic backlash and opposition from the European Union (EU) member states, in January this year the European Commission announced a halt to the
negotiations on the investment chapter of
the TTIP the worlds biggest ever trade
and investment deal underway between
the EU and the US in order to embark on
a three-month public consultation on
the matter, which has subsequently been
launched on 27 March (ICTSD 2014).
The decision to go for a public consultation was originally intended to help diffuse some of the opposition and explain
why an arbitration mechanism was needed
under TTIP. On the contrary, opposition to
ISDS has only grown since then (Financial
Times 2014a). The biggest blow came in
March 2014 when the German government,
23

COMMENTARY

an erstwhile staunch supporter of ISDS,

joined France to demand complete exclusion of ISDS from TTIP, unless the final text
of the investment chapter of the TTIP addresses its concerns on the ISDS mechanism. While the US is the strongest proponent of BIPAs and ISDS, the EU member
states have also struck over 1,400 of the
3,000 odd IIAs in place, and the EU companies, particularly the German companies,
are among the largest users of ISDS in the
world. The Vattenfall challenge to Germanys nuclear moratorium may have
brought home the pitfalls of arbitration
(Coy et al 2014). It may also be noted here
that according to a report titled Profiting
from Crisis, launched in March 2014 by
campaigning group Corporate Europe Observatory and the Trans-National Institute,
corporate investors have claimed more
than 700 million in arbitration disputes
from Spain; more than one billion euros
from Cyprus and undisclosed amounts
from Greece (Olivet and Eberhardt 2014).
The report observes:
For a long time, European countries were
left unscathed by the rising global wave of
investor-state disputes which had tended to
target developing countries. In the wake of
the global financial crisis, however, corporations and investment lawyers have turned
their eyes to potential pickings in Europe. An
investment regime, concocted in secretive
European board rooms, and that gives corporations powerful rights to sue governments,
has finally come home to roost (ibid: 6).

Opportune Conditions
The US officials, for their part, have continued to push for the inclusion of ISDS
in TTIP, with the chief negotiator Dan
Mullaney expressing the view in March
2014 that a comprehensive and ambitious deal would need to feature such
provisions. However, voices of opposition to ISDS are increasingly being heard
in the US as well. Some trade analysts,
such as Daniel Ikenson of the right-leaning Cato Institute, for instance, have
suggested that a bilateral deal could
have a better chance at survival without
ISDS, and has questioned whether it is
indeed necessary to include ISDS in TTIP
(ICTSD 2014).
Political opposition to ISDS is also
gathering momentum in the context
of the Trans-Pacific Partnership (TPP)
Agreement negotiations involving 12
24

countries from both sides of the Pacific

namely, Australia, Brunei Darussalam,
Canada, Chile, Japan, Malaysia, Mexico,
New Zealand, Peru, Singapore, the US,
and Vietnam. In 2011, Australia, under
the Julia Gillard government, happened
to be the first developed nation to reject,
outright, the ISDS provision in any future treaties. With a new government on
the block, it remains to be seen whether
the Australians agree to ISDS in TPP! Opposition is also growing in Japan, whereas Malaysia is going through a domestic
process of consultation to explain the
agreement to the cabinet and the people; and to have a debate on the agreement in their Parliament before taking a
final decision on the matter. This domestic process is triggered by the fact that
some of the issues covered by TPP, including in particular the ISDS provisions,
raise certain questions pertaining to the
countrys sovereignty (Eaton 2014).
South Korea meanwhile is planning to
hold talks with the US to rework the ISDS
clause in their two-year-old FTA (Yonhap
News Agency 2014). In November 2013,
South Africa went a step ahead by introducing a draft domestic investment
protection law as an alternative to BIPA.
The bill recognises inherent weaknesses
in international investment agreement
arbitration and underscores promoting a
sound, open and transparent legal framework for the protection of investments in
line with the Constitution (Eaton 2014).
Importantly, South Africa had earlier cancelled its BIPAs with a number of European countries including Germany, Belgium
and Luxembourg, Switzerland, Spain and
the Netherlands (Bilaterals 2013).
Indonesia is also contemplating termination of all of its 67 BIPAs containing ISDS
and is currently drafting a new template
for investment treaties. Notably, Indonesia
is facing a billion dollar lawsuit from UKlisted Churchill Mining under the terms of
one such treaty, in addition to several unrelated threats of costly litigation from international companies unhappy with a
new mining law. The country is currently
drafting a new template for investment
treaties (Financial Times 2014b).
In Latin America, the adverse impact of
excessive investor-state arbitral awards
has led the resource-rich countries Bolivia,
July 12, 2014

Ecuador and Venezuela to withdraw

from the ICSID and from existing BIPAs.
Argentina is now reportedly considering
following suit. The most significant development in Latin America with regard to
ISDS rejection is taking place under the
leadership of Ecuador with 12 Caribbean
and Latin American countries attempting
to establish a major alternative to the ISDS
system (Eaton 2014).
With the global tide going against
ISDS provisions, can India find a more
opportune moment than now to take a
call on ISDS?
References
Bilaterals (2013): Why South Africa has Ripped
up Foreign Investment Deals, bilaterals.org,
viewed on 11 April 2014, http://www.bilaterals.
org/?why-south-africa-has-ripped-up#sthash.
ef Eu1zrG.dpuf
Coy, Peter, Brian Parkin and Andrew Martin
(2014): In Trade Talks, Its Countries vs Companies, Bloomberg Businessweek, 20 March,
viewed on 10 April 2014, http://www.businessweek.com/articles/2014-03-20/in-trade-talksits-countries-vs-dot-companies
Eaton, Janet M (2014): Multiple Countries Reject
Investor-State (2013 Update), Sierra Club
Canada, viewed on 10 April 2014, http://www.
sierraclub.ca/en/main-page/multiple-countries-reject-investor-state-2013-update
The Economic Times (2013): India to Draft Model
Treaty on MNCs Mediation Rush, 9 August.
(2014a): Government to Clarify Intent of Provisions under BIPA, 10 March.
(2014b): India Reviewing Its 83 Bilateral
Investment Pacts: Anand Sharma, 22 February.
The Financial Times (2014a): Transatlantic Trade
Talks Hit German Snag, 14 March, London.
(2014b): Indonesia to Terminate More Than 60
Bilateral Investment Treaties, 20 March, London.
Haftel, Yoram Z and Alexander Thompson (2013):
When Do States Renegotiate International
Agreements? The Case of Bilateral Investment
Treaties, for presentation at the University of
Maryland, 15 November.
ICTSD (2014): EU Launches Public Consultation
on TTIP Investment Provisions, Bridges Weekly
Trade News Digest, 18(12), viewed on 7 April
2014, http://ictsd.org/i/news/bridgesweekly/
187618/#sthash.puOZ6ZVI.QhN0fuz8.dpuf
Olivet, Cecilia and Pia Eberhardt (2014): Profiting
from Crisis: How Corporations and Lawyers
are Scavenging Profits from Europes Crisis
Countries, Transnational Institute and Corporate Europe Observatory.
UNCTAD (2000): Bilateral Investment Treaties 19591999 (New York and Geneva: United Nations).
(2011): Interpretation of IIAs: What States Can
Do, UNCTAD IIA Issues Note, No 3, December.
(2013a): World Investment Report 2013: Global
Value Chains: Investment and Trade for Development (New York and Geneva: United Nations).
(2013b): Reform of Investor-state Dispute Settlement: In Search of a Roadmap, UNCTAD IIA
Issues Note, No 2, June.
(2014): Recent Developments in Investor-State
Dispute Settlement (ISDS), UNCTAD IIA Issues
Note, No 1, April.
Yonhap News Agency (2014): S Korea to Hold
Talks with US over ISD Clause in Free Trade
Pact, viewed on 10 April 2014, http://english.
yonhapnews.co.kr/national/2014/03/09/4/03
01000000AEN20140309000800320F.html
vol xlIX no 28

EPW

Economic & Political Weekly