Indian Journal of International Law (2018) 58(3):327–351

[Link]

ARTICLE

Investor State dispute settlement provisions in India’s

model bilateral investment treaty: a critique

Sanyukta Chowdhury

Published online: 2 April 2019

 The Indian Society of International Law 2019

Abstract India’s Model BIT includes detailed provisions that aim to regulate access to
Investor State Dispute Settlement (‘ISDS’) mechanism. Several law and policy matters
have been excluded from ISDS scope, pursuit of local remedies by investors has been
made mandatory, and, procedural and temporal pre-conditions have been prescribed
in order to file arbitration claim. This paper evaluates whether the ISDS mechanism in
India’s Model BIT strikes an appropriate balance between investor rights and a
sovereigns’ public policy prerogatives. In order to determine the same, the paper
analyzes ambit of ISDS scope exclusions; scope for review of States’ action on
excluded matters and possibility of claiming reparations under the BIT for losses
consequent thereto; and, feasibility of pursuing local remedies. This paper concludes
that India’s Model BIT tilts the scale in favour of the State vis-a-vis investors because
by restricting access to ISDS mechanism, investor rights would effectively be
weakened.

Keywords Arbitration
Bilateral investment treaty
India
Investor state dispute

settlement

Sanyukta Chowdhury is an alumna of National Law School of India University, Bangalore, India (‘NLSIU’).
She completed her B.A., LL.B. (Hons.) from NLSIU in 2005 and was later conferred LL.M. degree by
National University of Singapore, Singapore. In recognition of her academic and professional achievements,
Sanyukta was awarded a scholarship by Faculty of Law, National University of Singapore. Prior to joining
NLSIU as Assistant Professor, Sanyukta worked for over a decade in the India tax practice of multi-national
accounting firms such as Deloitte, KPMG and Ernst & Young. As a tax practitioner, Sanyukta advised her
clients on complex issues of application and interpretation of indirect tax laws as well as tax structuring. She
also represented her clients before tax authorities in relation to dispute resolution. This paper is based on
findings of the author documented in a research paper on this topic that was submitted as part of
coursework for the LL.M. program at National University of Singapore.

Sanyukta Chowdhury (&)

National Law School of India University, Bangalore 560072, India
e-mail: sanyuktasingh@[Link]

123
328 Sanyukta Chowdhury

1 Introduction

Bilateral Investment Treaty (‘BIT’) is a specialized tool used by nations

to meet mutual objectives of investment protection and promotion.1
BITs grant substantive rights to investors such as non-discrimination
(vis-a-vis investors of host State as well as any other State), treatment as
per international minimum standards including fair and equitable treat-
ment, and adequate compensation in case of expropriation.2 Further, in
order to enable investors to enforce such rights against the host State,
BITs provide for special dispute settlement mechanisms by way of
investor State arbitration and/ or State–State arbitration. In doing so,
they add a degree of certainty to investment outcomes, which is in the
interest of investors as well as the host State.
Post-liberalization of its economy in 1991, India became a keen
participant in the BIT program, signing 84 such treaties.3 It is evident
that in signing BITs the objective of the Indian Government was to
attract FDI into India.4 In addition, India has also signed 13 international
agreements that have investment provisions.5 The early BITs executed
by India (during 1990s and early 2000) are characterized by broad
investor rights and minimalist ISDS provisions that granted investors
easy access to arbitration against the host State.6 This is explained by the
fact that the BIT template developed by India in 1993 was based on
OECD Draft Convention for the Protection of Foreign Property, 1967;7
and the template update in 2003 appears to have been modeled on the
1991 OECD model text.8 Any OECD text would expectedly comprise of
provisions suited to capital exporting States and possibly the Indian

1
Apart from BITs, investment related provisions are also embodied in other bilateral or multilateral
treaties such as Free Trade Agreements and Economic Partnership/ Co-operation Agreements that also
contain provisions relating to trade in goods and services.
2
M Jacob, Investments, Bilateral Treaties, in Rüdiger Wolfrum (ed.) Max Planck Encyclopedia of Public
International Law (OUP, Oxford, 2008) [26–41].
3
UNCTAD, International Investment Agreements Navigator, ‘India - Bilateral Investment Treaties
(BITs)’ \[Link]
4
P Ranjan et al., India’s Model Bilateral Investment Treaty: Is India Too Risk Averse?, Brookings India
IMPACT Series (2018) 13.
5
UNCTAD, International Investment Agreements Navigator, ‘India - Treaties with Investment
Provisions (TIPs)’ \[Link]
6
J Nedumpara, Development Space in India’s Trade and Investment Agreements: A Fresh Look, 6 Indian
J Intl Economic L (2014) 123, 131.
7
Department of Economic Affairs, Ministry of Finance, Government of India, Transforming the
International Investment Agreement Regime: The Indian Experience, \[Link]
[Link]/wp-content/uploads/2015/03/India_side-event-Wednesday_model-[Link][.
8
Nedumpara, supra note 6.

123
Investor State dispute settlement in India 329

Government was unable to completely understand the potential impact

of such treaty provisions.9
The significant commitments made by India through international
investment agreements went unscrutinised till 2011, when the first
BIT claim was decided against India by an arbitral tribunal.10 India
was directed to pay approximately USD 4 million to the foreign
investor for breach of treaty obligations.11 Subsequently, more
arbitration claims were filed against India under the aegis of the said
liberal BITs for alleged treaty violations. It is known that total 24
arbitration claims have been filed against India, out of which 12 claims
are pending before arbitral tribunals.12In view of the heightened
activity under the Investor State Dispute Settlement (‘ISDS’) mech-
anism and the significant financial repercussions thereof, the Indian
Government felt the need for re-examining its approach towards
BITs.13 Consequently, with effect from 1 April 2017, the Government
terminated 58 BITs; with the aim of renegotiating the treaties on the
lines of a new Model BIT designed by it.14 However, all the
terminated BITs have sunset clauses and investments made prior to
termination would continue to receive treaty protection for following
10–15 years.15 In respect of the other BITs that India was not in a
position terminate, the Government has requested State parties to
issue joint interpretative statements to reduce discretion of arbitral
tribunals.16 As per information made available by Ministry of External

9
Ibid.
10
Ranjan, supra note 4, at 14.
11
UNCTAD, Investment Dispute Settlement - White Industries v India \[Link]
[Link]/ISDS/Details/378[.
12
UNCTAD, Investment Dispute Settlement Navigator, ‘India - as respondent State’ \http://
[Link]/ISDS/CountryCases/96?partyRole=2[. The list shows 14 pending
claims. However, it has not been updated for decisions issued by arbitral tribunals in the case of Devas v India
and Deutsche Telekom v India. Anuj Srivas & Devirupa Mitra, Swiss Court Ruling Leaves Ghost of Antrix-
Devas to Haunt India, The Wire (New Delhi), December 14, 2018, ff \[Link]
swiss-court-ruling-leaves-ghost-of-antrix-devas-to-haunt-india[.
13
N Shetty & JR Weeramantry, India’s New Approach to Investment Treaties, Asian Dispute Review
(2016) 189, 190. The combined exposure of the Indian Government, for the nine arbitral claims in respect of
which data is available, is USD 6.6 billion. UNCTAD, supra note 11.
14
Government of India, Bilateral Investment Treaties (Unstarred Question no. 1290 answered in Lok
Sabha 25 July 2016) \[Link] Amit Sen & Sur-
abhi, India’s Bilateral Investment Pacts under Cloud, The Hindu Business Line (New Delhi), April 9, 2017, [1–4]
\[Link]
[Link][.
15
See Article 13(3) of India–Mauritius BIT (10 years), Article 13 of India–France BIT (15 years).
16
Ranjan, supra note 4, at 10.

123
330 Sanyukta Chowdhury

Affairs, a joint interpretative statement has been signed with Columbia

in October 2018.17
In designing the Model BIT, Indian Government’s aim admittedly
was to balance rights of investors with the States’ right to regulate.18
The dispute settlement mechanism in the Model BIT allows ISDS but
incorporates detailed provisions that limit the scope of ISDS mecha-
nism, require pursuit of local remedies as well as place procedural and
temporal limitations. Reportedly, States with which India previously
had BITs are now wary of ISDS provisions of the Model BIT that are
significantly different from text of the earlier treaty signed with India.19
Till date, the Indian Government has been successful in renegotiating
two of the 58 terminated BITs - with Belarus20 and Taiwan.21 Foreign
Direct Investment (‘FDI’) into India from Belarus is not significant;22
however, partnership with Taiwan may potentially be consequential.23
This paper critiques the ISDS provisions in India’s Model BIT with a
view to determine whether the same strikes an appropriate balance
between investor rights and public policy prerogatives of a sovereign,
given the scope limitations, and procedural and temporal pre-conditions
thereof. It begins by discussing exclusions from the scope of ISDS
mechanism incorporated in Model BIT. The paper evaluates four types
of State action that have been excluded from scope of ISDS - general
exception measures, security exception measures, taxation and intellec-
tual property rights. Thereafter, it discusses procedural and temporal
pre-conditions to ISDS specified in the Model BIT and examines the
rationale for incorporating pursuit of local remedies as a pre-condition
for arbitration as well as efficacy of the proposed ISDS provision. Lastly,
it discusses two other key aspects of ISDS mechanism - transparency in
arbitration proceedings and counterclaims against investors.
17
Ministry of External Affairs, Documents, Indian Treaties Database \[Link]
[Link]?3453[.
18
Department of Economic Affairs, supra note 7.
19
Aditi Shah, India’s Proposed Investment Treaty Terms Leave Foreign Partners Cold, Reuters (New
Delhi), January 19, 2018, [6–7] \[Link]
investment-treaty-terms-leave-foreign-partners-cold-idUSL4N1P72N1[.
20
India-Belarus BIT, signed on September 24, 2018 \[Link]
LegalTreatiesDoc/[Link][.
21
India-Taiwan BIT is unavailable in public domain. See Press Information Bureau, Cabinet approves
signing of Bilateral Investment Agreement between India Taipei Association in Taipei and the Taipei
Economic and Cultural Center in India, October 24, 2018 \[Link]
aspx?relid=184328[.
22
Department of Industrial Policy and Promotion, Quarterly Fact Sheet on Foreign Direct Investment,
June, 2018 \[Link]
23
Ibid.

123
Investor State dispute settlement in India 331

2 Exclusions from the scope of ISDS

As per the Model BIT, claims under ISDS provisions would be allowed
only in case of breach of specified treaty obligations by a State and not in
case the dispute arises from breach of any contractual obligations stated in
a contract between the State and the investor.24 All contractual disputes
would have to be resolved as per the dispute resolution mechanism
envisaged in the contract. Only State obligations covered under Chapter II
of the Model BIT would be subject to ISDS,25 which are as under:

• Adoption of measures in compliance with customary international

law that do not result in denial of justice, breach of due process,
discrimination or abusive treatment;
• Full Protection and Security (‘FPS’);
• National treatment;
• Restrictions on expropriation;
• Free transferability of investor funds;
• Compensation of losses due to war, armed conflict, civil strife, state
of national emergency or natural disaster;
• Recognition of subrogation.

Inclusion of the above State obligations within the scope of ISDS is

congruous with BITs executed by India previously and global trends in
investment agreements. Hence, it is unlikely that the same would be
negotiated at any length by States. On the other hand, they may be
reluctant to accept incorporation of ISDS scope exclusions in the BIT
since the same directly increases risk exposure of their investors. In this
context, it is relevant to discuss the General Exceptions clause (‘GE
clause’) and security exceptions clause that have been excluded from
ambit of ISDS. Further, certain acts and measures are per se excluded
from the treaty’s ambit and, ipso facto, from that of ISDS mechanism;26
for instance, taxation measures27 and issuance of compulsory licenses or
revocation, limitation or creation of intellectual property rights in
accordance with the WTO Agreement.28

24
Model Text for the Indian Bilateral Investment Treaty (approved on 28 December 2015) (‘India’s
Model BIT’), Article 13.3.
25
India’s Model BIT, Article 13.2.
26
India’s Model BIT, Article 2.4.
27
India’s Model BIT, Article 2.4(ii).
28
India’s Model BIT, Article 2.4(iii).

123
332 Sanyukta Chowdhury

Moreover, such exclusions from ISDS mechanism were not present in

erstwhile Indian BITs; hence, accepting the same would pose an
additional challenge to present foreign governments. A study of BITs
executed by India with the top ten States from where it receives FDI29
reveals that policy measures had not been kept entirely outside the
scope of ISDS (except in case of Singapore with respect to essential
security interests) (refer table 1). In all other cases, an arbitral tribunal
would potentially have had the jurisdiction to determine whether a
State’s measures were non-discriminatory or reasonable or necessary, as
the case may be, vis-a-vis the permissible objectives. Moreover, the
range of matters in which States’ regulatory freedom is to be protected
has been widened considerably in the Model BIT. As is apparent from
the table 1, only BITs with Singapore and Japan show a similar extent of
policy exceptions.
Given the above, it is reasonable to presume that ISDS scope
exclusions proposed in the Model BIT would be acceptable to States
only if the same achieve the intended purpose and are fair and just.

2.1 GE clause

Developing States in general have sought greater latitude towards their

right to regulate, and India’s aim in drafting the Model BIT is no
different. This objective is sought to be achieved by reserving broad
rights for the State under the GE clause and by keeping the same
outside ISDS scope. Under the GE clause, State parties are not bound by
their BIT obligations if it becomes necessary to adopt non-discrim-
inatory measures to meet certain specified objectives.30 Moreover, BIT
protection does not extend to injury or damage caused by such
measures; that means no claim for compensation under the BIT would
lie against the State.31 The objectives specified in the GE clause include
(i) protection of public morals; (ii) maintenance of public order; and (iii)
protection of human, animal or plant life or health.32

29
As per FDI figures disclosed in Reserve Bank of India, 2016–2017 Annual Report, 224 \[Link]
[Link]/rdocs/AnnualReport/PDFs/RBIAR201617_FE1DA2F97D61249B1B21C4EA66250841F.PDF[.
30
P Ranjan & P Anand, The 2016 Model Indian Bilateral Investment Treaty: A Critical Deconstruction,
38 Northwestern J Intl L & Business (2017) 1, 40–41.
31
W Burke-White & A Von Staden, Investment Protection in Extraordinary Times: The Interpretation
and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties, 48 Virginia J Intl L
(2008) 307, 386–388.
32
India’s Model BIT, Article 32.1.

123
Investor State dispute settlement in India 333

Table 1 ISDS scope exclusions in earlier treaties between India and major FDI partners

State Party to Policy exceptions to ISDS Treaty Article

BIT (Year of Exclusion references
Security exception General exception
signing)

Mauritius Protection of essential security Public health, prevention of 11

(1998) interests diseases in pests, animals or
plants
Singapore Measures considered necessary The following subject to the 6.10–6.12
(2005) by a State for protection of measures being non-
essential security interests discriminatory:
(non-justiciable to the extent Protection of (i) public
mutually agreed) morals; (ii) human, animal or
plant life or health; and (iii)
national treasures of artistic,
historic or archaeological
value;
Maintenance of public order;
Compliance with law and
regulations not inconsistent
with the BIT;
Measures of public interest
Japan (2011) Exceptions covered in Article Non-discriminatory measures Taxation 10 and 11
XXI and XIV bis of GATT including the following:
and GATS, respectively; and Protection of (i) public
Measures considered necessary morals; (ii) human, animal or
by State for protection of plant life or health; and (iii)
essential security interests to national treasures of artistic,
protect critical public historic or archaeological
infrastructure value;
Compliance with law and
regulations not inconsistent
with the Agreement
Netherlands Non-discriminatory necessary Non-discriminatory necessary 12
(1995) measures, applied in good measures, applied in good
faith, for protection of faith, for prevention of
essential security interests diseases and pests in animals
or plants
United Reasonable, non- 11
Kingdom discriminatory measures
(1994) applied in accordance with
laws for protection of
essential security interests or
in case of extreme
emergency
Germany Measures necessary for Measures necessary for 12
(1995) protection of essential prevention of diseases and
security interests pests in animals or plants
UAE (2013) Necessary, reasonable, non- Taxation 2 and 14
discriminatory measures
applied in accordance with
laws in case of extreme
emergency for prevention of
diseases or pests

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334 Sanyukta Chowdhury

Table 1 continued

State Party to Policy exceptions to ISDS Treaty Article

BIT (Year of Exclusion references
Security exception General exception
signing)

Switzerland Reasonable, non- 11

(1997) discriminatory measures
applied in accordance with
laws for protection of
essential security interests or
in case of extreme
emergency
France (1997) Necessary, non-discriminatory Necessary, non-discriminatory 12
measures in accordance measures in accordance
with laws applied in good with laws applied in good
faith for protection of faith for prevention of
essential security interests diseases and pests in animals
or plants

Information presented in this table is based on the text of treaties available at UNCTAD, supra note 3
Please note that the table covers only nine States as the top 10 sources of FDI for India includes USA and
there is no investment treaty between India and USA

These objectives are very broad. For instance, in WTO jurisprudence

‘‘public morals’’ has been defined as ‘standards of right and wrong
conduct maintained by or on behalf of a community or nation’ and
‘‘public order’’ as ‘preservation of the fundamental interests of a society,
as reflected in public policy and law’.33 Moreover, WTO dispute
settlement authorities noted that these terms can vary across States and
depend on several factors including ‘prevailing social, cultural, ethical
and religious values’.34 Effectively, the Indian Government may
potentially adopt wide ranging measures within the ambit of these
two terms. For an investor, this implies uncertainty and raises the
spectre of an unstable business environment where enforcement of
investor rights would not be possible.
Protection of public interest is a legitimate concern for any State and
investor rights are not expected to supersede the same. GE clauses
(referred to in certain jurisdictions as provisions relating to non-
precluded measures) are widely used in BITs;35 however, excluding the
same from purview of ISDS is a deviation from global best practice. The
GE clause in the Model BIT seeks to preserve regulatory freedom for

33
UNCTAD, The Protection of National Security in IIAs: UNCTAD Series on International Investment Policies
for Development, (United Nations, Switzerland, 2009) 52\[Link]
34
Ibid.
35
Burke-White & Staden, supra note 32, at 318–320.

123
Investor State dispute settlement in India 335

India and in its present form it clearly achieves the intended purpose.
However, in order to be fair and just there is a need to balance the
States’ motivations with the legitimate interests of investors. A more
balanced approach would be firstly, to apply the complete test of
necessity as formulated in WTO jurisprudence and not merely one part
of it, as currently proposed in the Model BIT; and secondly, to bring the
GE clause within the purview of ISDS mechanism.
The Model BIT states that in determining whether an impugned
measure was ‘‘necessary’’, the arbitral tribunal should consider whether
a less restrictive alternative measure was reasonably available to the
host State.36 This is one limb of a two-pronged test applied by WTO
dispute settlement bodies in relation to the term ‘‘necessary’’, used in
GATT Article XXI and GATS Article XIV to allow measures in
derogation of obligations therein.37 It requires proving that there is no
other measure that would not infringe upon investor rights as much
and yet be equally efficacious in achieving the objective.38 ‘‘Reasonably
available’’ would mean that the alternative is not ‘merely theoretical in
nature, for instance, where the Responding Member is not capable of
taking it, or where the measure imposes an undue burden on that
Member, such as prohibitive costs or substantial technical difficulties’.39
The second limb of the WTO test (excluded from Model BIT) is
tantamount to a cost benefit analysis that would assess the importance
of the objective pursued by State against the impingement on investor
rights as well as suitability of the proposed measure for achieving the
said objective.40 Including this test would make the GE clause more
equitable than it is at present, as derogation from investor rights would
not be permissible merely because the State measure is directed towards
one of the broad objectives stated in the GE clause; relevance of the
specific goal that the State wants to achieve through the impugned
measure would have to be considered as well.
In so far as ISDS mechanism is concerned, since a significant
proportion of investment disputes have arisen in relation to regulatory
measures adopted by States, it has led to formation of a view that ISDS
strengthens investor rights over public interest considerations relating
36
India’s Model BIT, Article 32.1.
37
Continental Casualty Company v Argentina, ICSID Case No ARB/03/9, Award, (5 September 2008)
[193–195].
38
Ibid.
39
Ibid.
40
Ibid.

123
336 Sanyukta Chowdhury

to environment and human rights, amongst others.41 This has probably

motivated India to keep GE clause outside the scope of ISDS, even
though disputes relating to the same would presumably be admissible
under State–State arbitration. State–State arbitration has its own pitfalls,
such as (a) possibility of denial by the home State to accord diplomatic
protection to the investor in order to avoid getting embroiled in
disputes with other sovereigns, (b) fulfillment of the customary
international law pre-condition of exhaustion of local remedies, and
(c) prospect of the State waiving the claim or settling for less than full
compensation.42 Allowing the option to investors to enforce their rights
directly in a neutral forum creates the promise of an effective remedy.43
It would create a basis for expecting equitable outcomes, considering
the decidedly unequal power equation between the host State vis-a-vis a
private investor. Moreover, the preamble of Model BIT reaffirms States’
right to regulate investment in consonance with law and policy
objectives. Any arbitral tribunal would have to take into account
intention of the parties’ discernible from the preamble to the treaty,
when interpreting obligations undertaken thereunder, as per Article 31
of Vienna Convention on Law of Treaties (‘VCLT’). Further, as
explained above, the Model BIT clarifies the meaning of ‘‘necessary’’,
thereby removing any ambiguity about the same. This would ensure
that arbitral tribunals do not equate ‘‘necessary’’ to the customary
international law defence of necessity, which is more onerous for a host
State to fulfill.44 Hence, adequate safeguards have been built into the
Model BIT to preclude successful challenges to invocation of the GE
clause. In view of the same, it appears to be an irrationally defensive
move to exclude the same from the scope of ISDS.

2.2 Security exception clause

The security exception clause is drafted similar to the GE clause and

State parties are not bound by their BIT obligations if it becomes
necessary to adopt measures for protection of ‘essential security
interests’.45 Essential security interests are not exhaustively defined in
41
M Sornarajah, Resistance and Change in the International Law on Foreign Investment, (CUP, New York,
2015) 88.
42
CN Brower & SW Schill, Is Arbitration a Threat or a Boon to the Legitimacy of International
Investment Law? 9 Chicago J Inl L (2009) 471, 480–481.
43
Ibid 477.
44
Burke-White & Staden, supra note 32, at 343.
45
India’s Model BIT, Article 33.1.

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Investor State dispute settlement in India 337

the Model BIT and Article 33.1(ii) of Model BIT merely enumerates an
illustrative list of actions that would fall within its ambit. Further,
Article 33.1(ii) has been drafted as a ‘‘self-judging’’ exception, which
allows the State to take ‘any action which it considers necessary … ’.
In treaties where the national security exception is limited to being self-
judging, arbitral tribunals have held that the measures adopted by a
State are liable to be reviewed in light of the principle of good faith.46
However, Annex 1 to the Model BIT explicitly provides in paragraph (ii)
that any decision taken under Article 33 by a State is non-justiciable and
neither ISDS tribunal nor State–State arbitral tribunal would have
jurisdiction to review the same.
Thus, effectively, by invoking Article 33.1 the State may adopt any
measure in breach of the BIT without such action being subject to
review and there would be no onus to establish that the measures were
undertaken in good faith for essential security interests. This is critical
because even if the State action results in damages or loss to the
investor, no claim for compensation under the BIT would lie against the
State.47 By making the security exception non-justiciable, Model BIT
deprives investors of the possibility of seeking an independent review of
the host States’ action. This combined with the broad ambit of essential
security interests as per Article 33.1(ii) makes the security exception
clause in the Model BIT, one-sided and inequitable.
The Comprehensive Economic Cooperation Agreement signed
between India–Singapore and certain IIAs signed by US (such as the
Peru-US IIA) make security exceptions non-justiciable.48 Nevertheless,
non-justiciable self-judging provisions are an exception, and not
standard practice in BITs. Moreover, the said clauses in India–Singapore
treaty and US IIAs are yet to be invoked; hence, it remains to be seen
whether non-justiciable security exceptions would withstand challenge
by investors.49Pacta sunt servanda is a rule of customary international
law and Article 26 of VCLT defines it to mean that ‘[e]very treaty in
force is binding upon the parties to it and must be performed by them in
good faith’. It would not be possible to hold States’ responsible for

46
UNCTAD, Investor State Dispute Settlement: UNCTAD Series on Issues in International Investment
Agreements II, (United Nations, Switzerland, 2014) 44 \[Link]
diaeia2013d2_en.pdf[; Burke-White & Staden, supra note 31, at 376–378.
47
Burke-White & Staden, supra note 32. Note that investor may be entitled to seek reparations under
other sources of law, as may be applicable to the disputing parties.
48
UNCTAD, supra note 47, at 45.
49
See Ibid 46.

123
338 Sanyukta Chowdhury

conduct in violation of this rule of international law if treaty clauses are

drafted to preclude even a good faith review.50

2.3 Taxation

As per Article 2.4(ii) of the Model BIT, taxation measures (including law
making and enforcement actions) are excluded from BIT scope.
Consequently, they are also precluded from dispute settlement
mechanism envisaged in the Model BIT (ISDS as well as State–State
arbitration). Currently, Indian Government is facing a significant
financial exposure on account of pending arbitration claims that arose
out of tax disputes with foreign investors; and, by excluding taxation
measures from future BITs, the aim is to preclude more such claims.
Vodafone and Cairn Group have initiated arbitrations claims
against the Indian Government for imposition of income tax demand
based upon retrospective amendment of statute. The latter has
initiated two arbitration claims claiming total damages of USD 4
billion from the Indian Government.51 Taxation is a key consideration
in determining economic feasibility of investments. Hence, retrospec-
tive application of amendments in tax law uproots the very basis of
an investment decision that is made on an assessment of the legal
regime in effect at the time of making such a decision. The Indian
Government was clearly malfeasant in its actions and the aggrieved
parties were able to file claims for reparations only because applicable
BITs did not exclude taxation measures. However, a treaty concluded
on the terms of Model BIT would thwart claims against the State
arising from application or interpretation of tax law. The State would
not have any liability under the BIT for damages or losses arising
from its actions.
Another taxation related arbitration claim was initiated by Nissan
Motor in 2017 for alleged arbitrary non-payment of tax incentives
including refunds assured by the Government (of a state located in
India) at the time of making the investment.52 Nissan has claimed USD
776 million as compensation from India’s national Government under
the investment chapter of India–Japan economic partnership

50
See Burke-White & Staden, supra note 32, at 377.
51
UNCTAD, supra note 12.
52
A Shah, Nissan sues India over outstanding dues; seeks over $770 million, Reuters (New Delhi),
December 1, 2017 \[Link]
outstanding-dues-seeks-over-770-million-idINKBN1DV3N5[.

123
Investor State dispute settlement in India 339

agreement.53 However, as per Article 10 thereof, provisions of the said

agreement are not applicable to any taxation measures. Since claim
documents filed by the disputing parties are not available in public
domain, the grounds on which tax incentives were denied to Nissan are
not known. In the absence of facts, it is not clear whether a taxation
measure lies at the heart of this dispute, which in turn would take the
matter out of the purview of the investment arbitration tribunal set up
in terms of the agreement. India–Japan agreement has left scope and
meaning of the term ‘taxation measure’ undefined. This by itself may
give some room for intervention to a tribunal - to determine its
jurisdiction by first analyzing whether the government action qualifies
as a taxation measure. In order to avoid such situations in future
disputes, Article 2.4(ii) of Model BIT clarifies that decision of a State on
the question of whether disputed conduct is a taxation measure would
be non-justiciable and arbitral tribunals would not have jurisdiction to
review such a decision. Thus, the Model BIT comprehensively excludes
ISDS tribunals from investment disputes arising from taxation
measures.
Businesses abhor uncertainties and understandably, the aforesaid tax
disputes have adversely impacted investor confidence in India. It will be
a long time before these events are forgotten and for now, prospective
investors have reasons to believe that business risks arising from tax
uncertainties are very high in India. Consequently, States that are
mindful of such concerns of their investors are unlikely to accept the
absence of investor protection from taxation measures as envisaged in
the Model BIT. Exclusion of taxation measures is another instance of an
irrationally defensive move by the Indian Government. It is widely
accepted that a States’ police powers includes taxation and therefore, a
bona fide and non–non-discriminatory taxation measure would not entail
payment of compensation to affected investors even if it is expropri-
atory in nature.54 Hence, India’s concerns remain protected even where
taxation measures are brought within the purview of BIT and ISDS
mechanism. Additionally, by doing so, investor interests would be
protected from an abuse of regulatory power by the State where the
taxation measure is arbitrary or discriminatory in nature.55 In view of
53
UNCTAD, Investment Dispute Settlement - Nissan Motor v India\[Link]
org/ISDS/Details/828[.
54
R Dolzer & C Schreuer, Principles of International Investment Law, 2nd edn (OUP, Oxford, 2012) 120–121;
Ranjan, supra note 4, at 35.
55
Ranjan, supra note 4, at 35.

123
340 Sanyukta Chowdhury

the above, protection of the Model BIT including its’ ISDS mechanism
should be extended to taxation measures. This would enable a better
balance between regulatory power of the State and investor interests.

2.4 Intellectual property rights

Article 2.4(iii) of Model BIT excludes issuance of compulsory licenses or

revocation, limitation or creation of intellectual property rights in
accordance with the WTO Agreement from its scope. Consequently,
they are also precluded from dispute settlement mechanism envisaged
in the Model BIT. India has been at the forefront of intellectual property
rights advocacy for the developing world since the time the WTO
Agreement on Trade Related Intellectual Property Rights (‘TRIPS
Agreement’) was being negotiated.56 Subsequently, in implementing
TRIPS Agreement through the domestic legal regime, India has adopted
certain interpretations of the TRIPS Agreement that developed States
such United States of America view as contentious and tantamount to
inadequate intellectual property right protection.57 Till date, only one
compulsory licence has been issued by India,58 but the domestic
intellectual property rights laws are progressive on matters relating to
revocation, limitation or creation of such rights. India’s stance on patent
rights has ensured access to life-saving medicines to residents of several
developing States. The exclusion of intellectual property rights issues
from Model BIT is clearly aimed at preserving its regulatory freedom in
this area from investor challenges and ISDS tribunals.
However, the exclusion under Article 2.4(iii) of Model BIT applies
only to Government measures that are consistent with WTO Agree-
ment. The overall effect would be that arbitral tribunals would have to
determine whether the alleged violations of investment rights arise out
of WTO-consistent measures.59 If they do not, Model BIT protection
would be available to the investor. Hence, it is important to note that

56
See, P Drahos, Developing Countries and International Intellectual Property Standard-Setting, 5 The
Journal of World Intellectual Property (2002) 765, 771 and 773.
57
See Office of the United States Trade Representative, Executive Office of the President of United
States, 2018 Special 301 Report (2018) 49–50\[Link]
20Special%[Link][. (The intellectual property watchdog for the United States of America has placed
India under the ‘‘priority watch list’’, which is the category for worst offenders. India has consistently
featured in this category for several years due to the legal positions adopted on intellectual property issues.)
58
O Serrano & M Burri, Making use of TRIPS flexibilities: Implementation and diffusion of compulsory
licensing regimes in Brazil and India, WTI Working Paper (March 2016) 1, 4.
59
Ranjan, supra note 4, at 36.

123
Investor State dispute settlement in India 341

the Model BIT does not entirely exclude ISDS tribunals from
investment disputes relating to intellectual property.
It has been suggested in academic literature relating to India’s Model
BIT that scrutiny by ISDS tribunals on issuance of compulsory licenses
may be avoided by amending the Model BIT to require the licenses to
be issued in accordance with India’s domestic laws instead of WTO
Agreement.60 However, this is unlikely to resolve the issue since ISDS
tribunals may still be required to determine whether the Government
measure complies with the various terms and conditions envisaged in
India’s domestic intellectual property laws.

3 Pursuit of local remedies and other pre-conditions to ISDS

As per Model BIT, in the event of breach of treaty obligations embodied

in Chapter II thereof, the investor is required to initiate proceedings
before domestic courts or relevant administrative bodies of the
respondent State.61 The time limit prescribed for the same is one year
from the date on which ‘the investor first acquired, or should have first
acquired, knowledge of the measure in question and knowledge that the
investment, or the investor with respect to its investment, had incurred
loss or damage as a result’.62 The said local remedies are required to be
pursued for five years ‘from the date on which the investor first
acquired knowledge of the measure in question’ and thereafter, the
investor may initiate ISDS proceedings.63 The drafting of the proposed
clause indicates that the investor would be entitled to do so irrespective
of whether at the end of five years, the domestic proceedings were
pending disposal or the investor was otherwise dissatisfied with the
order passed by domestic courts in the matter.
The only ground on which requirement to initiate proceedings in the
domestic legal system would be waived, is if the investor proves that
local remedies cannot reasonably provide any relief in the disputed
matter.64
Further, commencement of ISDS proceedings does not directly lead
to an arbitration claim. First, a notice of dispute has to be issued by the
60
Ibid.
61
India’s Model BIT, Article 15.1.
62
Ibid.
63
India’s Model BIT, Article 15.2.
64
India’s Model BIT, Article 15.1 proviso.

123
342 Sanyukta Chowdhury

investor. Thereafter, disputing parties are required to spend at least the

next six months in seeking a resolution to the matter through
negotiation, conciliation or any other third party procedure.65 If the
same does not lead to satisfactory resolution of the dispute, then a
notice of arbitration has to be sent to the respondent State.66 An
arbitration claim may be submitted only after a minimum period of 90
days from the date of sending the notice of arbitration.67
Further, the claim for arbitration has to be submitted within six years
of the cause of action having arisen;68 else it would be barred by
limitation of time. Importantly, the prescribed six-year period includes
the five years that an investor is mandatorily required to spend in
pursuit of local remedies.

3.1 Pursuit of local remedies as a pre-condition for arbitration:

Rationale

The origins of the rule requiring a person aggrieved by an act of a State,

other than her home State, to seek redressal locally within the
respondent State can be traced back to the eighteenth century.69 This
rule evolved as part of the jurisprudence on the subject of diplomatic
protection.70 Exhaustion of local remedies was a pre-condition for
exercise of diplomatic protection.71 The apparent reason was that
sovereign States are equal in international legal order and therefore, to
mitigate the impact of any potential friction between State sovereignty
and international law, due regard has to be given to national law before
enforcement of international responsibility.72 Local remedies rule
allowed the State an opportunity to redress the transgression alleged,
within the framework of its domestic laws, before the dispute was
internationalized.73 Thus, it prevented interference in the affairs of a
State from another State, which would be an anathema to any
sovereign.74
65
India’s Model BIT, Article 15.4.
66
India’s Model BIT, Article 15.5(v).
67
Ibid.
68
India’s Model BIT, Article 15.5(i).
69
AA Cancado Trindade, The Application of the Rule of Exhaustion of Local Remedies in International Law,
(CUP, New York, 1983) 8.
70
Ibid 8–9.
71
Ibid 9–10.
72
Ibid 51.
73
Ibid 13.
74
Ibid 50–51.

123
Investor State dispute settlement in India 343

Since then, exhaustion of local remedies before institution of

international proceedings has been recognized as a rule of customary
international law.75 The rule essentially means that the aggrieved
person should pursue available judicial or administrative remedies
within the respondent State, till a final or non-appealable order is
obtained on the matter.76
Currently, however, in the sphere of investment arbitration the rule
of exhaustion of local remedies is no longer a general rule and it is
applicable only if an investment treaty specifically mandates the same.77.
Certain Latin American States continue to preserve exhaustion of local
remedies rule in their investment treaties.78 However, a more common
practice appears to be incorporation of clauses in investment treaties
requiring pursuit of local remedies (not exhaustion thereof) and if the
dispute is not satisfactorily resolved within a specified period of time,
allowing access to arbitration.79 Such treaties clearly do not require
exhaustion of local remedies; they merely require expiry of the
stipulated time period or, protraction of the dispute despite a judicial
decision or completion of an administrative review.80 The time period
differs across treaties, but most commonly ranges from three months to
two years.81 In the Model BIT, Indian Government has proposed a time
limit of five years.
The main purpose of local remedies rule is to give the host State an
occasion to affirm its commitment to treaty obligations by remedying
the impugned infringement under its national laws.82 It would be
patently unreasonable to bring a State to trial for action of lower court
judges or subordinate officers in government departments, when the
wrong done can be rectified by resorting to appellate or review
75
GK Foster, Striking a Balance between Investor Protections and National Sovereignty: The Relevance
of Local Remedies in Investment Treaty Arbitration, 49 Columbia J Transnational L (2011) 201, 209.
76
Ibid.
77
Alejandro López Ortiz et al., The Role of National Courts in ICSID Arbitration, in Crina Baltag (ed.)
ICSID Convention after 50 Years: Unsettled Issues (Kluwer Law International, Netherlands, 2017) 329, 331.
78
Wei Shen, Is This a Great Leap Forward? A Comparative Review of the Investor-State Arbitration
Clause in the ASEAN-China Investment Treaty: From BIT Jurisprudential and Practical Perspectives, 27 J
Int’l Arbitration (2010) 379, 408.
79
C Schreuer, Calvo’s Grandchildren: The Return of Local Remedies in Investment Arbitration, 4(1) The
Law and Practice of Intl Courts & Tribunals (2005) 1, 3.
80
Siemens A.G .v The Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction (3 August
2004) [104] cited in Ibid 4.
81
Schreuer, supra note 80; Martin Dietrich Brauch, IISD Best Practices Series: Exhaustion of Local Remedies in
International Investment Law, (IISD, Canada, 2017) 9–11 \[Link]
publications/[Link][.
82
Foster, supra note 76, at 211.

123
344 Sanyukta Chowdhury

mechanisms in place.83 This would be cost efficient for the host State,
besides mitigating against negative perceptions that are likely to form
against it upon news of filing of arbitration claims by foreign investors.84
Another factor in favor of local jurisdiction in the initial phase of dispute
is ease of availability and examination of evidence including witnesses.85
Hence, the rule may serve a useful purpose from a fact-finding
perspective by overcoming barriers of local language and legal
formalities such as power to subpoena witnesses that may be outside
an international tribunal’s jurisdiction.86
Naturally, it must be borne in mind that the rule is merely a means to
achieve the goal of resolution of dispute and reparations, and is not an
end in itself.87 Accordingly, the arbitral tribunal, in exceptional
circumstances, can dispense with the requirement of pursuit of local
remedies.88 The investor would have to furnish evidence to establish
that available alternative courses of action would be ineffective or futile
in the context of the specific facts and issue of the impugned matter.89 In
legal terminology, this is referred to as the ‘futility exception’. For
instance, in Ambiente Ufficio v Argentina, the argument for futility
exception was accepted because Argentina was under an emergency law
under which the domestic courts were prohibited from granting redress
to investors.90 Another example would be cases where the alleged
infringement of rights arises from a decision taken at the highest level of
government within the host State.91 On the other hand, general
submissions or assumptions about inadequacy of national legal
system,92 impossibility of hiring lawyers or communicating with them,
and complaints about the stipulated time to obtain or exhaust local
remedies being too less, have not been treated as acceptable grounds.93

83
Ibid 219.
84
Ibid 211.
85
Ibid 262.
86
Ibid.
87
Trindade, supra note 70, at 57.
88
Pierre Marie Dupuy, Preconditions to Arbitration and Consent of States to ICSID Jurisdiction, in Meg
Kinnear et al. (eds.) Building International Investment Law: The First 50 Years of ICSID (Kluwer Law
International, Netherlands, 2015) 219, 233–234.
89
Kiliç Insßaat Ithalat Ihracat Sanayi Ve Ticaret Anonim Sßirketi v Turkmenistan, ICSID Case No. ARB/10/1,
Award (2 July 2013) cited in Ortiz et al., supra note 78, at 337.
90
ICSID Case No. ARB/08/9, Decision on Jurisdiction and Admissibility (8 February 2013) cited in Ortiz
et al., supra note 78, at 337.
91
Foster, supra note 76, at 231; Trindade, supra note 70, at 111.
92
Kilic v Turkmenistan, supra note 90.
93
Trindade, supra note 70, at 111.

123
Investor State dispute settlement in India 345

Where an investment treaty mandates exhaustion or pursuit of local

remedies, the rule is treated as procedural in nature by arbitral tribunals
and non-compliance with the same would render an arbitration claim
invalid even in cases of breach of treaty obligations.94 However, in
certain fact situations pursuit of local remedies may potentially affect
merits of the case as well. There have been a series of decisions to this
affect in cases where infringement of rights through acts or omissions of
administrative authorities was alleged by the investor.95Generation
Ukraine was a prominent case in this context, where it was held that
despite there being no procedural requirement in the BIT of seeking
local remedies, the investor should have sought judicial intervention to
overrule the decisions of the administrative authorities.96 Since the
investor did not petition local courts for redress, it failed to prove the
merits of the claim of infringement of treaty rights by the State.97 The
tribunal observed that had the investor tried but failed to obtain a
remedy through judicial means, there would have been a valid claim
based on denial of justice by the State courts.98 Hence, the outcome of
local proceedings may be determinative of whether the State actually
infringed the rights guaranteed in the BIT.

3.2 Proposed ISDS provision in Model BIT: Evaluation

As stated above, including the requirement of pursuit of local remedies

does serve a limited purpose. It gives the State machinery a chance to
rectify an alleged breach of international obligations either through
executive or judicial action instead of being subjected to intervention by
an arbitral panel. An international investment arbitration claim would
cost a State not just monetarily but also in terms of lost goodwill.
However, making it mandatory to pursue local remedies for five years
is excessive, especially since the limitation period for filing an arbitration
claim has been set as six years from the date on which cause of action
had arisen. Consider the following hypothetical timeline of events:

94
Foster, supra note 76, at 210.
95
Ibid 219.
96
Generation Ukraine, Inc. v Ukraine, ICSID CASE No. ARB/00/9, Award (16 September 2003) cited in
Ibid 220–221.
97
Ibid.
98
Ibid.

123
346 Sanyukta Chowdhury

• 1 January, 2019 - Investor acquires knowledge of the disputed

Government measure that would result in investment losses
• 31 December, 2019 - Last date for submitting claim before domestic
courts or relevant administrative bodies of the respondent State
• 31 December, 2023 - Date till which local remedies have to be
pursued by the investor
• 1 January, 2024 - Issuance of notice of dispute
• 30 June, 2024 - Date till which negotiation, conciliation or any other
non-adversarial third party procedure has to be undertaken by the
disputing parties
• 1 July, 2024 - Submit notice of arbitration
• 31 December, 2024 - Due date for filing arbitration claim

Essentially this means that an investor has six months at best to

prepare and submit the arbitration claim, if all prescribed steps are
undertaken forthwith.99 There is no apparent rationale for prescribing
such tight timelines. In the BIT signed between India and Belarus, the
limitation period has been increased to seven years, which is likely to
ease the situation.100
The rigorous timelines envisaged in the Model BIT along with slow
disposal rate of cases in Indian judicial system will impact the
seriousness with which local remedies route is explored by an investor.
A recent study of select High Courts showed that time taken for
disposal of civil suits was more than five years for about 51% of cases.101
Hence, the probability that an investment dispute would be resolved in
five years or less is not high.102 Interestingly, the first BIT arbitration
that India lost (White Industries Australia Ltd. v India103) was on the issue

99
Ranjan & Anand, supra note 31, at 51.
100
Article 15.5 of India–Belarus BIT, 2018.
101
Law Commission of India, Analysis of the 2015 Draft Model Indian Bilateral Investment Treaty
(August 27, 2015) 20 \[Link] Please note that in
India, High Courts are the second highest level of judiciary. Appeals against orders passed by High Courts
are filed before SC.
102
India has enacted the Commercial Courts, Commercial Division and Commercial Appellate Division
of High Courts Act 2015. The objective is to reduce time delays in resolution of commercial disputes. While
the commercial courts are yet to be set-up, the High Courts are in the process of completing the legal
formalities to set-up commercial and commercial appellate divisions. Hence, the efficacy of the new set-up is
yet to be tested. See Registrar, Madras High Court, Practice Note for Commercial Division and Commercial
Appellate Division in Madras High Court, (Notification 48/2018 dated 31 January 2018) \[Link]
[Link]/[Link][.
103
UNCITRAL, Final Award (30 November 2011).

123
Investor State dispute settlement in India 347

of inordinate judicial delays.104 Even if the domestic courts take a little

over five years to resolve the dispute, the investor would not really have
the time to remain committed to the local remedies option and will
inevitably immediately commence ISDS proceedings upon expiry of the
five-year period.
Therefore, as it stands now, pursuit of local remedies is unlikely to
achieve the objective of either of the disputing parties’. For the investor
it is likely to result in increased expenditure to meet all procedural
requirements leading up to filing of arbitration claim and not redressal
of the grievance. For the Indian Government, making access to
international arbitration more difficult is unlikely to reduce the disputes
that result in arbitration claims.
Pursuit of local remedies, in order to be effective, would have to be
backed by evidence that local courts or designated administrative bodies
dispose-off commercial disputes in a reasonable time period and that
there are laws in place in the host State which present an ‘effective
means of asserting claims and enforcing rights’. Where this is true, it
should be possible to reduce the mandatory period for pursuit of local
remedies to three years; thereby also allowing a more reasonable
timeframe for preparation and filing of arbitration claim. In view of
absence of the same in India, ISDS provisions of the Model BIT would
remain a bone of contention in negotiations with other States because
of the requirement of pursuit of local remedies and other procedural
and temporal pre-conditions to arbitration.
Even if the BITs are signed with the proposed provisions, it would
still remain important to achieve the factors stated above for the pursuit
of local remedies to be effective. Else, an arbitral tribunal may justifiably
uphold the defence of futility of local remedies and waive the
requirement as a pre-condition to arbitration. Establishment of
precedence in this regard would render the provision effectively
redundant.

104
U Varottil & S Chakravarthi, Judicial Delays in India and Turning Tides-The Significance of the
Commercial Courts Act to India’s Dispute Resolution Mechanism, Oxford Business Law Blog (2016)\https://
[Link]/business-law-blog/blog/2016/04/judicial-delays-india-and-turning-tides-–-significance-
commercial[; SK Dholakia, Investment Treaty Arbitration and Developing Countries: What Now and What
Next - Impact of White Industries v Coal India Award, 2 Indian J Arbitration L (2013) 4, 8.

123
348 Sanyukta Chowdhury

4 Other key aspects of the ISDS mechanism

4.1 Transparency in arbitral proceedings

There are three ways to achieve transparency in arbitral proceedings.

Firstly, by placing all documents related to the arbitration proceedings
in the public domain; secondly, by allowing public hearings; and thirdly,
by permitting non-disputing parties to make submissions during the
course of the proceedings.
As per Article 22.1 of the Model BIT, host State is required to place
certain documents relating to the arbitration proceedings in the public
domain. These are (a) notice of dispute and notice of arbitration; (b) all
written submissions on jurisdictions and merits submitted to the arbitral
tribunal by the disputing parties; (c) transcripts of hearings, where
available; and (d) decisions, orders and awards issued by the tribunal.
Further, Article 22.1 and 22.3 take into consideration that the said
documents may contain confidential information. Accordingly, confi-
dential information is permitted to be redacted from award of the
tribunal as well all the other aforesaid documents prior to granting
public access to the same.105 Further, it appears that confidential
information may also be withheld from disclosure, if required under the
applicable law on protection of such information.106 Confidential
information is a defined in Article 1.1 of the Model BIT and covers two
categories of information - (a) commercial, financial or technical
information which could result in material loss, gain or prejudice a
disputing party’s competitive position; and (b) information that is
protected from disclosure under the laws of a party. The Model BIT
largely succeeds in introducing transparency in documentation without
undermining concerns of confidentiality.107 A potential improvement
would be expand the list of documents (in Article 22.1) required to be
made public to include documents covered under the UNCITRAL
Transparency Rules such as expert reports and witness statements.108
Article 22.2 of the Model BIT provides for allowing public access to
hearings. However, hearings are allowed to be held in private in certain
cases such as, if there is a need to protect confidential information or

105
India’s Model BIT, Article 22.3.
106
India’s Model BIT, Article 22.1.
107
P Ranjan, ISDS Transparency Provisions in the Indian Model BIT: A Half-Hearted Attempt?, 15(2)
Transnational Dispute Management J (2018) 8.
108
Ibid 9.

123
Investor State dispute settlement in India 349

protect the safety of participants in the proceedings.109 Therefore,

transparency and confidentiality are sought to be balanced with respect
to public hearings as well.
Article 22.4 of the Model BIT allows oral and written submissions by
a non-disputing party regarding interpretation of the treaty. However,
interestingly Article 13.7(ix) defines ‘non-disputing party’ as party to the
treaty but not to the dispute, which means the home State. Thus,
affected and/ or interested third parties such as civil society groups and
non-governmental organisations would not be allowed to submit amicus
curiae briefs to the tribunal.110 This is despite the fact that several ISDS
tribunals have noted the important role amicus curiae submissions can
play in conferring greater legitimacy to the arbitration proceedings.111
Further, UNCITRAL Transparency Rules also allow for amicus curiae
submissions, subject to the parties agreeing otherwise.112
In view of the above, it emerges that Model BIT sets out to achieve a
laudable objective - transparency in arbitration proceedings - and does
so to a limited extent.113

4.2 Counterclaims against the investor

Article 13.2 of the Model BIT stipulates that ISDS mechanism only
applies to investment disputes ‘arising out of an alleged breach of an
obligation of a Party under Chapter II of this Treaty…’. Chapter II of
the Model BIT covers the obligation of parties to the treaty. Obligations
of investors are specified in Chapter III of the Model BIT. Thus, an
arbitration claim may be submitted only in respect of breach of treaty
obligations by the host State. In terms of the Model BIT, jurisdiction of
an ISDS tribunal constituted thereunder would not extend to claims
relating to breach of investor obligations. Moreover, Article 16 of the
Model BIT specifies that the arbitration claim may be submitted by a
disputing investor. This further ensures that counterclaims filed by the
host State would not be entertained by the ISDS tribunal since in terms
of the treaty the host State does not have the locus standi to submit an
arbitration claim.

109
India’s Model BIT, Article 22.2(a).
110
Ranjan, supra note 108, at 13.
111
Ibid 12.
112
Ibid 13.
113
Ibid 14.

123
350 Sanyukta Chowdhury

The earlier draft of the Model BIT had specifically permitted

submission of counterclaims by host States.114 The reason underlying
removal of the same from the final version is not apparent, especially
since the Model BIT includes investor obligations. While the raison
d’être of BITs is protection of investments, permitting counterclaims
against investors would make the ISDS mechanism more
equitable since it would offer a forum for resolution of host States’
grievances as well. Possibly considering all the limitations to and
exclusions from the ISDS mechanism under the Model BIT, the Indian
Government felt that it may be excessive if in addition the State was
allowed to file counterclaims against the investors.

5 Conclusion

The early BITs executed by India had hardly any restrictions on, or
regulation of ISDS mechanism. Consequently, the treaty provisions
guaranteed ease of access to arbitration as a means of enforcing the
broad investor rights conferred by the BITs. These treaties were viewed
as investment promotion vehicles and favored investors. Over time and
with exposure to investment arbitration, greater details were included
in dispute settlement provisions of BITs such as exclusion of certain
matters from scope of ISDS and limitation period for bringing claims. It
was an attempt in balancing investor rights with some safeguards for
the States’ interests.
In the Model BIT, however, the scales are tilted in favor of the State
vis-a-vis investors. By making taxation and national security measures
non-justiciable under the BIT dispute settlement mechanism, thus
leaving no scope for review of States’ action or grant of reparations for
any losses consequent thereto; restricting general exception measures to
State–State arbitration; and requiring pursuit of local remedies for five
years out of a six year limitation period, Model BIT has weakened
investor rights. The rights granted under Chapter II of Model BIT are
meaningless if they cannot be effectively enforced due to significant
scope exclusions and onerous procedural and temporal limitations to
ISDS.
Indian Government’s objective in signing BITs is to attract FDI into
India. However, as explained in this paper, the extant ISDS provisions in

114
Article 14 of original draft of the Model BIT.

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Investor State dispute settlement in India 351

the Model BIT do not provide an effective mechanism of investor rights

protection. Hence, ISDS provisions including the BIT exclusions in their
current form are unlikely to stimulate investor confidence and may
hinder achievement of the said objective.
Moreover, the Model BIT appears to have been drafted with a view
to safeguard India’s interest as a capital importer. However, BIT
provisions apply to outbound investments as well, and as Indian
investors widen their presence across the globe, their claims against
expropriatory action by other States would stand undefended.
If the Government wishes to preclude investor-State arbitration, have
the efficacy of alternatives thereto been duly studied?

Publisher’s Note Springer Nature remains neutral with regard to

jurisdictional claims in published maps and institutional affiliations.

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