Some advice to India on the IFA negotiations

Source– The post is based on the article “Some advice to India on the IFA negotiations” published in “The Hindu” on 8th April 2023.

Syllabus: GS3- Economy. GS2- Important international institutions

Relevance– Issues related to WTO working.

News– World Trade Organization is working on investment facilitation agreement (IFA). It is backed by more than 100 countries.

What are the issues with investment facilitation agreement?

There are apprehension that foreign investors could use IFA to bring claims under the existing BITs. Foreign investors may use the most favoured nation provision in BITs to use provisions in IFA perceived to be more beneficial than provisions of underlying BIT.

The foreign investor may use the provision of fair and equitable treatment (FET) present in BITs to challenge non-compliance with IFA.

Older investment treaties rarely explain the meaning of the FET provision. It allows ISDS tribunals to provide its interpretation. Tribunals have held that the FET provision includes investors’ legitimate expectations. The foreign investor may argue that the commitments undertaken by a state under the IFA create ‘legitimate expectations’ of the investor.

Another provision of the IFA that allows the use of ISDS mechanism can be the so-called umbrella clause. It is a BIT clause that allows contractual and other commitments owed to a foreign investor to be brought under the treaty’s protective umbrella.

Why is the ISDS arbitration tribunal unlikely to agree with the investor if a foreign investor brings such claims?

Many BITs exempt an economic integration agreement from the application of MFN. Thus, the possibility of foreign investors successfully importing IFA provisions into the BIT is remote.

It is doubtful that an ISDS tribunal will accept the argument that mere non-compliance with IFA breaches an investor’s legitimate expectations.

Most new investment treaties avoid ‘umbrella clauses’ altogether. This limits the possibility of investors suing states for non-compliance of IFA obligations as a breach of a BIT’s ‘umbrella clause’.

What is the way forward for success for investment facilitation agreement?

The IFA cannot bind an ISDS tribunal. For the ISDS tribunal, the IFA is just another international law instrument that must be interpreted and applied in accordance with the context of the relevant BIT.

Countries can overcome this problem by amending their respective BITs to exclude the IFA from its scope.

The possibility of an ISDS tribunal interpreting provisions broadly can never be ruled out. But this cannot be a basis to oppose international lawmaking.

India should not be opposed to joining the IFA negotiations at the WTO due to fear of ISDS claims.