BITs in pieces

As bilateral investment treaties' dispute settlement mechanisms become controversial and face backlash, Prabhash Ranjan's book serves as a compass for navigating these turbulent waters

India and Investor-State Dispute Settlement: Affronting Sovereignty or Indicting Capriciousness

Author: Prabhash Ranjan

Publisher: Routledge

Pages: 182

Price: Rs 13,650

Countries sign bilateral investment treaties (BITs) to attract foreign investments to enhance manufacturing, generate jobs, and seek new technologies for sustained economic activity. A surfeit of BITs since the 1990s, about 3,000 worldwide, was a consequence of the embrace of the “Washington Consensus” that advocated liberalisation. That bonhomie seems to be over now with BITs facing a backlash largely owing to the contentious “Investor State Dispute Settlement” (ISDS) that empowers a foreign investor to directly bring claims and seek compensation against the state through arbitration. Prabhash Ranjan, an expert on international investment law, puts in perspective in his new book the controversy surrounding ISDS, dispassionately covering competing narratives.

Dr Ranjan quotes a study from the United Nations Conference on Trade and Development to dispel the popular notion that ISDS claims cause huge financial burdens on the host country. According to the study, 1,257 publicly known ISDS claims have been initiated so far, an average of 35 annually. Only in 13 cases did the compensation awarded exceed $1 billion; in 178 cases, it was less than $100 million; and in more than half of all cases, the damages were less than $16 million on average. Hard to explain, however, is the fact that the maximum ISDS claims were made against developing countries that, with meagre financial wherewithal and deficient expertise in trade law, invariably end up in losing battles, sacrificing scarce resources meant to address livelihood issues.

The book offers an insightful account of how India handled its 28 disputes arising out of about 80 BITs/free trade agreements investment chapters concluded between 1994 and 2010. Dr Ranjan draws our attention to some high-profile ISDS claims that India lost and candidly places the blame on a combination of the slackness of our judicial system, abuse of public power and poor governance. For instance, the claim of White Industries, an Australian mining company, was the result of the Indian judiciary’s failure to get its act together for almost nine years. The Devas-Antrix case arose following India’s decision to abruptly cancel the contract, advancing a cocktail of reasons ranging from social objectives, national security, criminal offences, and so on. Retroactively amending the Arbitration and Conciliation Act, 1996, the primary law governing arbitration, which sought to delink ISDS, prompted Devas to initiate a second BIT arbitration.

In the two retroactive tax cases involving Vodafone and Cairn Energy, India’s executive overreach against judicial decisions, by amending the income-tax law retroactively, compelled them to resort to international arbitration. The belated rectification of this error in 2021 did not prevent the damage already done to India’s reputation. The Nissan case is a grim reminder of state luring investors by offering tax incentives and then going back on those promises without any policy justification.

Rattled by these ISDS claims, India sought to decouple investment from international trade. It terminated all BITs that were more than 10 years old; introduced a model BIT in 2015 that accords primacy to local remedies on disputes prior to international arbitration. The author reasons that the gaps in the regulatory framework should be plugged instead of blocking a useful route for foreign investment.  

The unequivocal support for ISDS stems from Dr Ranjan’s belief that, given that not all sovereign actions are in genuine public interest, ISDS is needed to protect investors against the state’s excesses. He stretches this logic to set out protection provisions in the rule book to serve everyone well. This assertion, however, overlooks the dangers of treaty shopping, reckless disinvestment, flight of capital and investors’ proclivity for profit-making, factors that often disregard the development imperatives of host countries. The tribunals’ generous interpretation of BITs clauses such as most-favoured nation, national treatment, protection, pre-establishment, standstill, ratchet, and so on often weigh heavily against developing countries’ compulsions to make or amend laws to accommodate changing socio-economic dynamics.  

Around the world of late, ISDS has become politically toxic even in the capital-exporting developed world. Increasing two-way investment flows make ISDS seem like a double-edged sword even for developed countries. For example, India’s cumulative outward foreign direct investment since 2000 is about $300 billion, approximately one-third of the total inward FDIs for the same period. These developments are forcing nations to explore fresh options. One such effort underway is the reform of ISDS under the United Nations Commission on International Trade Law (UNCITRAL), in which India is actively engaged. State-to-State Dispute Settlement (SSDS), providing for diplomatic interventions and potential tradeoffs is another. The EU is advocating bilateral investment courts with scope for mediation before arbitration. India is also making a concerted effort to make India a hub for international arbitration by setting up the India International Arbitration Centre and Permanent Court of Arbitration.

This scholarly book serves as a useful guide for the judiciary, the legal fraternity, policy, industry, and academia to educate and avoid mistakes. Dr Ranjan alludes to a definitive link between investments flows and protection provisions in BITs, particularly for greenfield projects. His book calls for developing a body of expertise at the policy level that looks at investments as a composite whole of economic activity to drive Viksit Bharat@ 2047.

The reviewer is a serving Indian Foreign Service Officer