Need to Reform International Investment Agreement (IIA) and Investor-State Dispute Settlement (ISDS)

India’s Take on ISDS

• Earlier this year some of the countries led by India, Japan, Argentina and South Africa rejected an informal proposal brought forward by the EU and Canada to form a multilateral investments pact at the World Trade Organization (WTO) that will have an in-built an Investor State Dispute Settlement system.
• The EU and Canada got into an investment agreement that has lead to a controversial decision making on part of the ISDS mechanism, which allows companies/corporate to drag sovereign governments to international arbitration
• Next they wanted to take this a notch higher i.e. they want it to be the norm for multilateral agreements which was absolutely opposed by the aforementioned countries.

Current Issue

• The government observes that the system of International Investment Agreements (IIA) — including the Investor-State Dispute Settlement (ISDS) mechanism — needs to be urgently reviewed and reformed
• This is because the IIA system currently has a pro-investor bias — with an aim to protect only capital and not labor, indigenous people, migrants, or consumers, all of whom have linkages with investment.
• Saurabh Garg, the Joint Secretary (Investments) in the Finance Ministry’s Department of Economic Affairs said “Despite the obvious costs of the current ISDS mechanism, there is little empirical evidence establishing a link between the existence of BITs and FDI flows. This is one area that requires substantial work to reinforce countries’ trust in the legitimacy of IIAs.”
• While observing that ISDS lies at the core of IIAs, he said: “The current ISDS mechanism, which is ad hoc, unpredictable and often arbitrary, needs urgent review… The current ISDS regime can be quite costly for host countries.
• The strong remark was made on the basis of the fact that as per a UN Conference on Trade and Development report, as of end-2016, some 767 arbitration cases were publicly known to have been filed against host countries under IIAs.

Possible Wayout

• There should be a greater focus on other alternative modes of dispute settlement, including domestic remedies or compulsory negotiation and mediation, wherever possible.
• Direct access to international mechanisms should be allowed only when there are no local remedies. Going to ISDS should be the last resort and it should refrain from being a benevolent settlement system and should take up disputes that are genuine and grave in nature which cannot be solved at the local level.

What is India doing about it?

• On July 6, 2016, the Dutch government announced that it has received an official notification from Indian authorities seeking termination of the bilateral investment protection treaty (BIT) signed between the Netherlands and India in 1995.
• India has recently served similar termination notices to as many as 57 countries (including the UK, France, Germany, Spain and Sweden) with which the initial duration of the treaty has either expired or will expire soon.
• For the remaining 25 countries with whom the initial duration of the treaty will expire from July 2017 onward, India has requested them to sign joint interpretative statements to clarify ambiguities in treaty texts so as to avoid expansive interpretations by arbitral tribunals.
• A comprehensive joint interpretative statement text has been prepared by the Indian government clarifying the meaning and intention of key treaty provisions. For instance, the text says that “the treaties that are silent on inclusion or exclusion of taxation measures from their scope, it is implied that such treaties do not apply to any law or measure regarding taxation, including measures taken to enforce taxation obligations.
• This bold policy initiative is essentially an outcome of India’s new model BIT which was released in December 2015.
• The new model BIT is a major departure from earlier models (1993 and 2003) as it provides protection to foreign investors in limited circumstances. Under the new Model, controversial clauses such as most favored nation have been completely dropped while the scope of national treatment and fair and equitable treatment clauses has been considerably narrowed down.
• Although investor-state dispute settlement (ISDS) mechanism – which allows investors to initiate international arbitration against states and thereby bypass domestic courts entirely – has been retained but access to ISDS mechanism has been made conditional on the exhaustion of local remedies.

Challenges for India

• The next big task for India is to negotiate its future treaties as per the new model text. India is currently negotiating standalone BIT with the US and Canada. Besides an investment chapter is part of the proposed free trade agreement (FTA) with the EU.
• India is no longer a purely capital-importing nation.
• Indian companies are increasingly looking at expanding their global footprint by investing abroad. Indian investors are increasingly seeking investment protection tools in those jurisdictions that are generally perceived to have greater potential risks and uncertainties related to regulatory framework and political climate.
• So the government will have to strike a fine balance between the competing claims of this nature.
• Further, it is not yet clear what would be the Indian government’s approach towards investment chapters of the FTAs. The termination of investment chapters of the FTAs is filled up with complexities and legal hurdles.