Peer reviewed analysis from world leading experts

India–US bilateral investment treaty going nowhere

Reading Time: 4 mins

In Brief

The India–US bilateral investment treaty negotiations have taken a hit after India insisted on preconditions that will, if implemented, deny foreign investors the right to international dispute settlement measures.

India and the United States have engaged in bilateral investment treaty negotiations to enhance trade relations and investment flows since 2008.

Share

  • A
  • A
  • A

Share

  • A
  • A
  • A

The treaty — which aims to protect and promote investments and guarantee international minimum standards in the treatment of foreign investments — could have further solidified the India–US trade relationship. But this seems highly unlikely now in light of a controversial procedural precondition set by India that would allow Indian courts to have the final say on commercial disputes that arise under the bilateral investment treaty.

The proposed preconditions will harm India’s already fragile investment climate. Foreign investments have dropped dramatically in the last few years, mostly because of the Congress-led United Progressive Alliance’s unfavourable investment climate brought on by uncertain regulatory measures and retrospective changes to India’s taxation regime. In an attempt to improve India’s investment conditions, the government further liberalised its foreign direct investment policy for multi-brand retail, telecommunications and defence. The new tax and regulatory measures, however, failed to achieve the intended results. Rather than drawing in more foreign direct investment, multinationals began to opt out from the Indian market, preferring to invest in neighbouring countries with regulatory climates that offer higher returns, such as Japan and Pakistan. That steel giants Posco and ArcelorMittal announced they would pull out of their projects in India is a testament to the government’s failure in inviting and retaining foreign investors.

Meanwhile, Indian investments in the United States have risen from US$200 million to US$5 billion between 2000 and 2010, and further rose to US$11 billion in 2012. This led to a mentionable growth in the US economy and created more than 100,000 jobs. Similar results were likely to appear in India had the government taken swift, proactive steps to facilitate foreign investments and provide Indian investors with incentives to invest in domestic projects.

Countries concluding investment treaties almost always negotiate a dispute settlement provision. This generally includes conditional or unconditional consent to international arbitration, usually at the International Centre for Settlement of Investment Disputes (ICSID). An international arbitration clause in a bilateral investment treaty has two direct advantages. First, it ensures that investment disputes, which are far more technical than everyday commercial disputes, are adjudicated by qualified, specialist tribunals. The second advantage, which is in the form of procedural fairness, is that foreign investors are not forced to arbitrate disputes at a domestic level and comply with prolonged decision-making in the host country.

India has proposed against an international dispute settlement clause during the latest round of negotiations. If the proposed conditions are accepted, US investors in India will be unable to pursue disputes relating to their investments under the treaty at a more specialised, independent forum such as the ICSID — Indian courts will have the final say on any dispute that arises under the treaty. This condition will also affect the Indian judiciary, which is eternally overburdened and lacks modern case management systems.

A typical investment treaty also has a most favoured nation clause, but, given India’s stance on international dispute settlement in particular and treaty shopping in general, the India–US bilateral investment treaty is unlikely to have such a clause. This means that US investors will be unable to benefit from favourable dispute settlement provisions from the bilateral treaties India has signed with other countries.

In order to get the most out of bilateral investment treaties, countries gladly provide effective measures for foreign investors to assert their claims and enforce their rights. Substantive provisions, such as those that provide for international minimum standards or fair and equitable treatment, are not ordinary and, indeed, require even extraordinary procedure to realise their overriding objective: that is, to safeguard the interests of foreign investors against the subjective, if not biased, opinion of domestic courts in favour of the local government. India’s concern about foreign adjudication, however legitimate, could have easily been addressed by incorporating a clause that would have obliged US investors to exhaust domestic remedies in Indian courts before pursuing it internationally.

Rather than taking positive steps in addressing the excessive red tape and tax and regulatory uncertainties that are afflicting India’s investment climate, India has proposed a fresh procedural hurdle. Clearly, the government has not learnt enough from the Posco and ArcelorMittal fiasco.

Ashish Goel is an LLM candidate at King’s College London. Harish Goel is pursuing business and finance at Xavier Labour Relations Institute, Jamshedpur, India.

5 responses to “India–US bilateral investment treaty going nowhere”

  1. I understand India has also been reticent about including investor-state arbitration provisions in an FTA being negotiated with the EU (although not mentioned here: http://www.eastasiaforum.org/2013/06/14/why-cant-india-and-the-eu-sign-an-fta/). Such a stance may also impede FTA negotiations underway with Australia – although in April 2011 the Gillard Govt announced that it was abandoning its longstanding treaty practice of including investor-state arbitration provisions in treaties with developing countries, if Labour loses power in the 7 September general election, a Liberal government is likely to revert to a more nuanced approach.

    Australia should be particularly attentive to including some form of investor-state arbitration provision in an FTA with India. Its existing Bilateral Investment Treaty allowed an Australian mining company (White Industries) to successfully claim in 2011 against the Indian government, after the company was unable to enforce a commercial arbitration award given its favour against a government-linked company in India – despite India’s accession to the 1958 New York Convention for straightforwardly enforcing such awards, the case got bogged down for around a decade in Indian courts. The Australian company was able to invoke via the Most-Favoured-Nation clause in the India BIT a promise by India (actually contained in its BIT with Kuwait) to provide prompt and effective enforcement of awards.

    Given that experience, and the experiences of other foreign companies whose claims have also got stuck in Indian courts – generating further investment treaty claims after the White Industries case – I would be cautious about the authors’ compromise proposal of allowing investor-state arbitration provisions in India’s future BIT with the USA, provided the investor first must “exhaust domestic remedies in Indian courts”. At the least, the treaty should set a time limit (eg 3 years) for trying to enforce investor rights via local courts, before being able to initiate an investment treaty arbitration.

    However, India (and indeed the US, or Australia) should also be careful in drafting provisions related to investor-state arbitration (and substantive protections accorded to foreign investors) that effectively balance private and public interests. For example, future treaties should provide for greater transparency of proceedings (along the lines of the recently revised UNCITRAL Arbitration Rules, and indeed the Australia-Chile FTA of 2009) and the definition of “expropriation” could be narrowed through an Annex restating the Australian Constitution’s definition (which is arguably narrower than the usual international law standard: certainly it prevented tobacco companies claiming last year through the High Court of Australia regarding Australia’s strict new plain packaging laws, which have also unfortunately generated an ongoing arbitration against Australia under on old BIT with Hong Kong).

    • My case for the inclusion of ICSID arbitration in India’s BIT rests completely on equity and due process of the law.

      Unfortunately, in India, neither do the courts have sufficient time, infrastructure nor adequate expertise in handling investment disputes – the Tribunal’s observation in White Industries being a fit case in hand.

      Then comes the issue of fairness. It would be completely naive to suggest that all foreign investors will benefit satisfactorily from the outcome of any litigation that takes place in India. And the time requirement in the dispute settlement clause of any BIT cannot, of course, eternally prevent foreign investors from going to ICSID, for instance. And as you correctly point out, foreign investors using MFN clauses in BITs to jump the procedural hurdles is not uncommon.

      India’s only concern at the moment seems to be dealing with frivolous international arbitration claims by foreign investors in future. Though the costs of an international arbitration cannot be underestimated by the host state, there is also no guarantee by the Indian government that it will prioritise its obligations under the BIT to protect investments and ensure speedy, effective trial to foreign investors in the event of any dispute. And this applies to the FTAs as well.

      • It is only natural that the disputes which arise in India should be tried in India itself. For disposal of such affairs, the judicial system should be modernized and rationalized. It is customary in India that whenever an urgency emerges, the government constitutes special court to try it. Such special arrangements are needed in such circumstances.

  2. I think the article is poorly researched and actually fails to take into account the actual experience of developing countries. Brazil has not signed a single investment agreement with a investor-state dispute mechanism and continues to attract high levels of FDI. Secondly a number of countries have experienced serious problems – with even basic policies such as tobacco control being challenged by corporations in arbitration. Due process of law as Mr. Goel has grandly referred to requires a number of things including transparency which ICSID and other forums lack.

    • Dear Madam, may I politely disagree with you when you say that, and I paraphrase, governments should completely do away with international investment arbitration just because there have been in the past or, there is likelihood that, in the future there will be frivolous claims by investors against host governments. I leave it to your understanding of rule 41 of ICSID, particularly and the legal jurisprudence on dispute settlement, generally. So far as transparency in ICSID is concerned, you do not set out your point very clearly. What exactly is it that you suggest ICSID or “other forums” lack which makes the dispute resolution process less transparent than that carried out in domestic courts and tribunals? Thank you for setting forth the Brazil versus India argument, but I am afraid, Brazil attracts foreign investment not solely because of the absence of an investor-state dispute clause just like India will not attract foreign investment solely by the presence of an investor-state dispute clause. There are significant policy and related differences in both countries (http://articles.economictimes.indiatimes.com/2012-02-03/news/31021346_1_sao-paulo-brics-global-investors). This is primarily why I label the precondition in my piece as a “procedural hurdle”.

Support Quality Analysis

Donate
The East Asia Forum office is based in Australia and EAF acknowledges the First Peoples of this land — in Canberra the Ngunnawal and Ngambri people — and recognises their continuous connection to culture, community and Country.

Article printed from East Asia Forum (https://www.eastasiaforum.org)

Copyright ©2024 East Asia Forum. All rights reserved.