COMMENTARY

Silence on InvestorState
Disputes Debate
Law Commissions Suggestion
Bhushan Satish

The Law Commission of Indias

260th report contains a seemingly
innocuous suggestion to include
a clear clause for consent to
arbitrate investment disputes in
Indias 2015 draft Model Bilateral
Investment Treaty. There is
an intriguing absence of any
explanation for this suggestion,
which is curious, especially when
viewed in the context of the
global public debate on
investorstate dispute settlement
clauses. This suggestion requires
robust public debate in India and
must not silently sail past.

Bhushan Satish (bhushan.satish@mids.ch) is

an Advocate at the High Court of Karnataka,
Bengaluru.
Economic & Political Weekly

EPW

april 23, 2016

ilateral investment treaties (BITs)

are treaties concluded typically
with the intention of creating a
stable and favourable investment climate.
They contain treaty standards which
function as constitutionalising norms
regulating sovereign conduct in relation
to foreign investment. Controversially,
many of these BITs give foreign investors
the right to initiate arbitration against
the host state (that is, the state hosting
the investments) to adjudicate violations
of these treaty standards. This system is
often referred to as investorstate dispute settlement (ISDS).
While BITs have been around for more
than five decades now, the first of which
was concluded between Pakistan and
Germany in 1959, they have come into
the public spotlight of late because they
are seen as taking away the states sovereign right to ensure measures in public
interest. India manages an active BIT
programme and has concluded 83 BITs
till August 2015 (PIB 2015). Globally,
approximately 3,200 BITs remain in
force (UNCTAD 2015). Negotiation of
these BITs are often based on the contracting states model BIT.
The first major BIT arbitration against
India was White Industries v India
(2011),1 which dealt with the excessive
court delay faced by the claimant in the
enforcement of a foreign award which it
secured in its favour in a separate arbitral proceeding. The tribunal in White
Industries held India responsible for these
court delays, ruling that these delays
breached the claimants right to access
effective means to enforce its rights,
and accordingly awarded the investor a
compensatory sum. The White Industries
ruling prompted the Government of India
to revise its BIT programme and decided
to refashion the 2003 Indian Model BIT
(Old Model BIT) as a first step. After
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deliberating on the issue for close to

three years, the government released
the revised draft of the Indian Model BIT
(New Model BIT) for public comments
in March 2015. In response, the Law
Commission of Indias 260th report (LCI
2015) refrained from giving recommendations and instead offered suggestions
to balance (more on that later) the New
Model BIT (the exact import of this
sleight of semantics, I leave to the reader
to decipher) (PIB 2015).
The New Model BIT does not contain a
clear consent to arbitrate investment disputes. The LCI report diagnosed this and
suggested that such consent be given.
This comment queries the underlying
policy premise supporting this suggestion,
and calls for wider public debate on the
inclusion of consent to arbitrate investment disputes in the New Model BIT.
Section 1 offers a brief overview of
Indias past treaty practice on ISDS clauses
and points out that Indian BITs do not
contain a consent to arbitrate investment disputes, and that the New Model
BIT only further resonates this position.
Section 2 analyses some factors which
might have contributed to the problematic ex ante policy decision that premised the LCI report. Section 3 looks at
the LCI report itself, while the last section concludes with some suggestions on
the way forward.
1 Indias BIT Practice
Model BITs function as negotiating baselines and reveal, to a large extent, the
states negotiating position on issues.
This makes the analysis of the Model BIT
especially instructive. Conclusions drawn
from the Model BIT, subject to the bargaining dynamic between the contracting
states, often mirror the states treaty
practice. Hence, conclusions from the
Old Model BIT are synoptic of Indias
treaty practice on the issue. Article 9 of
the Old Model BIT contains the ISDS
provision. The operative part of this
provision reads:
(3) Should the Parties fail to agree on a
dispute settlement procedure provided under paragraph (2) of this Article or where a
dispute is referred to conciliation but conciliation proceedings are terminated other than
by signing of a settlement agreement, the
dispute may be referred to Arbitration. The

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Arbitration procedure shall be as follows:
(emphasis added).

Treaties are interpreted using the

principles encoded within the Vienna
Convention on the Law of Treaties
(VCLT). However, without going into an
in-depth legal analysis of the extract
given above, it is evident from a cursory
reading that the Old Model BIT does not
contain a binding consent to arbitrate
investment disputes. That is, it does not
contain mandatory language obliging
the host state to arbitrate disputes.
Non-obligatory text such as this is not
uncommon in global treaty practice on
investment law, and states often conclude
BITs which contain only agreements to
agree (Dugan et al 2008: 23738). That
is, the treaty only gives contracting
states the option to agree to arbitrate
investment disputes.
It is worth pointing out that the India
Australia BIT, which was in consideration before the White Industries tribunal,
too contains similar non-binding language. It is most curious that the government did not raise an objection on this
issue. Consequently, the tribunal did not
make any observations on it. It is arguable
that the tribunal had the power under the
principle of iura novit curiae (the court
knows the law) to verify its jurisdiction
by analysing this provision despite the
Government of Indias silence on this
point. Similar language is present in
many BITs under which investors have
initiated proceedings against India. It
remains to be seen whether this argument will be made by the Government of
India in these cases.
More importantly, this reading is verified by the language (to the extent that
the treaty interpretation principles take
this into consideration) adopted in the
New Model BIT. The LCI report confirms
the understanding that the New Model
BIT does not contain a binding reference
to arbitrate investment disputes. In the
absence of any background literature by
the government on the policy objectives
which drive the New Model BIT, it is
hard to hypothesise why the government decided to leave out consent to
arbitrate investment disputes in the New
Model BIT. However, the fact that it has
done so is determinative of its policy
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decision to not give investors the right

to initiate arbitration proceedings for
investment disputes without a separate
agreement between the host state and
the investor to this effect. One might
conjecture from Government of Indias
standpoint that the numerous pending
investment claims against India question
sovereign decisions taken in public
interest. Moreover, as some (albeit highly
contested) studies suggest, these investment claims might also have a negative
impact on larger investor sentiment and
consequently reduce foreign direct investment (FDI) flows (Allee and Peinhardt
2011). These problems are exacerbated
by the substantial monetary resources
needed to engage in investment arbitrations which often require hiring foreign
law firms. The last issue might only be a
temporary setback, as might be seen
from Indias experience with World Trade
Organization (WTO) disputes, where although the Government of India initially
relied on foreign firms, it soon developed
domestic capacity (Shaffer, Nedumpara
and Sinha 2014).
2 The ISDS Debate
One of the oldest conceptual objections
to ISDS focuses on the access to justice
offered to foreign investors by the ISDS
system, contrasted with unavailability
of such a remedy for the host states local
investors. In other words, the foreign
investors ought not to be given more
rights than local investors. Others point
out that notwithstanding doctrines such
as separation of powers, the host states
municipal courts are an integral part of
the host state, are recognised in those
terms under international law, and
hence must be viewed as safeguarding
parochial national interests. Without
going so far as to call into question the
competence of the judicial system of a
host state, it is undeniable that courts
rule according to law, and law often takes
into account and safeguards national
public interest. Furthermore, the host
state enjoys vast legislative powers to
change its laws and uses them to serve
narrow notions of national interests.
Modern-day detractors add that the
pool of arbitrators who decide these
disputes is extremely small, does not

enjoy much ideological diversity, and is

predominantly from Western Europe
and North America. ISDS shares a lot of
methodological commonalities with commercial arbitration. Arbitrators are often
those who practised private commercial
law for the majority of their professional
careers, and hence might not share the
same world view or have the necessary
degree of appreciation for the concerns
that motivate state actions. The jurisprudence emanating from these investment
tribunals, partly because they are not
ordered in a hierarchical fashion and do
not share the domestic legal concept of
stare decisis (to stand by things decided),
is inconsistent in certain areas. Some go
so far as to say that all of investment
law is a neo-liberal project, wrecked by
regime bias, and that the law is designed
in a manner so as to benefit global capital
and undermine developmental objectives.
Historically, the raison dtre cited for
concluding BITs is that these treaties
embody a political bargain through
which the host state supposedly gains
foreign investment in exchange of stabilising its investment climate and giving
investors access to ISDS. This conventional wisdom is increasingly in question
because of studies which raise doubts
over the positive correlation between
conclusion of BITs and FDI flows (Sauvant
and Sachs 2009). Note that there is a
realignment of historical narratives, and
the argument now made is that the ISDS
system is an integral component of the
international rule of law, and by extension, global peace and security.
These issues were previously simmering only within certain disaffected states,
but have now reached a boiling point
worldwide in light of the negotiations
around the Transatlantic Trade and Investment Partnership and (the recently concluded) Trans-Pacific Partnership. Some
steps towards reforming this system
include making investment arbitrations
more transparent by giving the public
access to documents and hearings, allowing amicus briefs from third parties,
and establishing an appellate body to
shape a more predictable investment
law. These public debates make it evident that ISDS might not be adequately
analysed when viewed from a bipolar

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North versus South perspective; rather

the ISDS system is increasingly being
viewed as retaining internecine elements. However, it would be remiss not
to note the view from certain quarters
that investment law, owing to its acknowledged colonial origins, suffers from
architectural constraints which have
formed a legacy of its exploitative provenance. The modern-day importance of
investment law is also tied to geopolitical interests of contracting states; in a
world where foreign investments by
state-owned entities and private investors are viewed as strategic assets to
be protected and safeguarded. These
dynamics indicate that the ISDS debate
needs more public participation and
multi-stakeholder deliberation before a
policy decision is taken on whether to
enter the ISDS system by giving consent
to arbitrate investment disputes in the
New Model BIT.
3 Law Commission Report
The 260th report of the LCI diagnoses
the absence of a binding consent to arbitrate investment disputes in the New
Model Draft. In light of the problematic
nature of ISDS, it is evident that any suggestions by the LCI regarding consent to
arbitrate in the New Model BIT ought to
be informed by rigorous policy justifications and involve robust interdisciplinary research. Regrettably, there is a
complete lack of engagement on this
front, except for a blithe assertion by
the LCI report on the necessity of including a binding ISDS provision in the model BIT. Since the vineyard of the global
investment regime enjoys the labours
and attention of disciplines other than
law, it is worth pondering whether the
report ought to have made the policy
choices, which undergird its suggestions, clearer. This engagement is indispensable to any serious discussion of
the various alternatives in designing
such a provision.
This problem is symptomatic of the
political nature of the ISDS debate.
Consider, the LCI report sets out its
objective as that of balancing the New
Model BIT, implying a contrario (for
contrary treatment) that the 2015 draft
is currently in a state of imbalance
Economic & Political Weekly

EPW

april 23, 2016

(LCI 2015: 5). That is, the New Model BIT

purportedly overemphasises the primacy
of the host states regulatory space over
investors rights. The report does not
supply any evidence-backed argument
to demonstrate why the crafting of the
2015 draft is a case of overreaction; the
operating assumption of the LCI report.
This lack of engagement with non-legal
issues is again demonstrated in a separate passage of the LCI report where it,
without any supporting research, claims
that the exclusion of government procurement from treaty protection could
lead to an exodus of foreign investors
(LCI 2015: 13).
Without commenting on the legitimacy
of the LCI reports decision to rebalance
the New Model BIT, the ongoing competition between candidates for paradigm,
that is, whether the interests of the host
state or the investor ought to prevail,
might be understood better by a sociological characterisation of the epistemic
communities which back one or the other
candidate (Kuhn 1962). The scope of this
comment does not afford the space for
undertaking such an exercise. However,
there exists considerable scholarship on
the role of epistemic communities in the
formation and operation of the global
investment regime, and it might be interesting to analyse the policy choices of
the LCI report in light of the background
of its contributors. The importance of
this question is evident when examined
in the light of the normative power
wielded by the LCI and the influence
which the epistemic communities within
the institution enjoy in producing and
channelling change.
4 Concluding Observations
A states analysis informing the decision
to give consent to arbitrate investment
disputes in the Model BIT straddles
various disciplines. Without taking any
position on this question, it is incontrovertible that the present ISDS system
ought to be reshaped to be more environmentally and socially sustainable.
The ISDS debate seems to be getting
characterised as a legal issue, inviting
only small-bore tinkering by subject
specialists, and as a result is not receiving
the wider public attention which it needs.
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Further, democratisation of international

law not only requires the active participation of all the states (which unfortunately often act against the interests
of its citizenry), but also the attention
of people and civil society, especially
because ISDS and international law in
general increasingly affect peoples lives
on a day-to-day basis. There is, of course,
the immediate impact which compensatory awards against host states have on
the exchequer and its effects on the
budgetary allocation for social programmes and such. Moreover, undemocratic formation of norms in this area
risks creating an international framework
which does not give adequate regulatory
space to pursue developmental and strategic objectives (Chimni 2010). Sunlight
is said to be the best disinfectant and
it is time that the ISDS debate gets some
in the form of a larger share of the
publics attention.
note
1

White Industries Australia Limited v The Republic

of India, United Nations Commission on International Trade Law (UNCITRAL) Award.

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