Explained: The Investor State Investment Disputes and the Indian Stance

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Initially, India didn’t have an open economy. But, it was in 1991 when the Indian government opened doors for the whole world. It was at that time; India implemented the policy of LPG. This transformed India into a global market. Foreign companies now entered the Indian market without much problem. India slowly increased the system regarding Foreign Direct Investment. This attracted major companies like Coca-Cola, Amazon, and Singapore Airlines to enter the Indian market. Recent incentives for foreign companies also showed a little positive sign. As a result, India got its first Apple manufacturing unit and other multinational companies. Similarly, many Indian companies also started investing in foreign countries. One of the most successful companies is Tata Consultancy Services, which was awarded as the world’s most valued firm. 

With success comes different challenges, leading to a large number of disputed arising. For instance, sometimes due to change in the policy of the government, sometimes due to companies working strategy. Hence, India realized the need for Investor-State dispute settlement(ISDS). Let’s see what do the recent changes in ISDS have on India. 

What is ISDS?

Investor-State dispute settlement (ISDS), is one of the most important concepts involved in the investment treaties. It is a way of settling disputes regarding a treaty by way of arbitration rather than going to court. This technique enables a company to sue a state which is a signatory to an investment treaty or a trade treaty. The company which sues the state must belong to the other signatory country of that treaty. It is a procedural mechanism. Under the treaties, which include ISDS mechanisms, an investor from one country can argue against the new laws or regulations which may harm the company’s profits. Any investor may claim compensation in case of a violation of a substantive investor-protection standard. This is a one-way system. This means that only the corporation can sue the state and not the other way around. 

In this mechanism, each country appoints one arbitrator as a representative of themselves. Both parties also choose a third arbitrator. These three arbitrators meet in an international arbitration tribunal. Hearings are carried out there. 

Their tribunal, which is to be used, is decided in advance. These hearings are kept very discrete. Most of the treaties include the tribunals working under the law of the United Nations Centre for International Trade Related Arbitration Law.

ISDS and Doctrine of Legitimate Expectation

This law is similar to the concept of “Doctrine of Legitimate Expectations.” It is a tool that the court devised to review administrative action. This doctrine is related to the relationship between individual and public authority. It says that if any administrative action causes any harm to an individual by coming in violation of any legitimate expectation which may exist. Legitimate Expectations may arise out of the past practices of the administration and their policies. The person who feels that their rights have been violated can go to court and ask for a review of the impugned administration actions. 

Similarly, the ISDS mechanism keeps in mind the legitimate expectation of the investors. It ensures that due to sudden or arbitrary action of the administration. It acts as a safety valve by controlling the actions of the government of the signatory countries.

Reforms at work

Many developing countries raised voice against the ISDS mechanism. This mechanism permits companies to drag the governments into arbitration without any serious ground. Hence a lot of developing countries started demanding changes. This caused some specific jurisdiction changes. Apart from the major changes were initiated on numerous fronts like OECDthe WTO, and UNCITRAL. 

UNCITRAL is going through a state influenced ISDS reforms. These states belong to Working Group III. This group has decided to follow a three-step procedure:

  1. Identifying and considering all concerns regarding the ISDS mechanism
  2. Considering whether reforms are desirable in the light of any of the earlier identified areas. 
  3. Developing a desirable solution that needs to be conveyed to the commission for consideration. 

Working group III has decided to divide all the concerns into four different categories. These categories are:

  1. Correctness and consistency of arbitral awards 
  2. Arbitrators and the decision-maker related problems 
  3. Cost related issues 
  4. Fundy by way of the third party 

The working group then sent delegations for developing solutions relating to all the problems.

Another one of the arbitral institutions ICSID is also focused on making reforms. Major objectives of the changes that ICSID is working on are:

  • Modernization of the rules-based on case experiences. 
  • Making the whole process time and cost-effective, while it should maintain the due process, it should not disturb the balance between the investors and states. 
  • Reduce the paper-intensive nature of the whole procedure. Improve the use of technology. 

India and ISDS reforms 

India signed its first bilateral investment treaty (BIT) in 1994. According to the data available on the site of the Department of Economic Affairs, Government of India. India has signed a total of 86 BITs and 14 treaties with Investment provisions. Since 2010, India has been involved in 25 disputes till now. Keeping in mind these increasing numbers of cases, the Indian government issued a new mechanism of BIT. 

India has shown constant oppose to some reform measures and yet has been one of the leaders in the reform process. 2016 was exactly the kind of change that India has been looking for. It diverged the BITs from their traditional method. Though it does not address the main concerns of the old methods, yet it is a change in the status quo.  

New BIT signed between India- Brazil in 2020 offers some new templates for dispute resolution. The new scheme gives more focus on dispute prevention. It completely removes ITA in favour of the State-to-State Dispute Settlement. This treaty is very important for the paradigm shift in the disputed resolution mechanism. What is worth noting is that this positive step has been taken by two developing nations. 

India was initially not in working group III. But this positive change noticed by the UNCITRAL gave India a place in the working group. A high-level committee set up by the government of India under the guidance of Mr. Justice B N Srikrishna gave some suggestions. This committee was made to find better ways for the speedy resolution of commercial disputes and to make India an international hub of arbitration. This committee issued a 143-page report. This report contains the idea of a paradigm shift from ISDS. This report shows that India might switch from the existing investor-state arbitration. This report gives an idea of a multilateral investment court as one of the alternatives for ISDS. 

Conclusion

India is a developing nation that has a big market. It has a lot of unutilized resources. This makes it a great place for foreign companies to invest in. Even the current government is trying to promote making India into a producer rather than an exporter. Hence, we see many companies coming into our country. Hence comes the need for a mechanism like ISDS. But there are many problems which this mechanism has. But this mechanism has its problem. There is a lack of transparency. Organizing hearing is also a big problem. This is because an investor can file a case against the state. But there is no provision that the government can sue investors on any violation done by them. 

India being the leader of the developing nation, needs to take care of its stance. Similar to the way Singapore has spoken against it. India should look towards the changes that might occur after UNCITRAL completes the process of reforms. The government of India is getting options from different answers from the law commission. If India chooses to leave the ISDS method and opt for the new method given under the TPP agreement, it will be a major change in the developing nations. Currently, TPP is being used by 12 countries in modern-day treaties. 


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