Arbitration & FDI

India is pegged to receive as much as 100 billion dollars in foreign direct investment in 2022 alone. And it is likely to become a $5 trillion economy in the next five years. Therefore, with the ever-increasing FDI, it is also poised to become a hotbed of international dispute resolution, particularly international arbitration

30 April, 2022 Article, Governance
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India is pegged to receive as much as 100 billion dollars in foreign direct investment in 2022 alone. And it is likely to become a $5 trillion economy in the next five years. Therefore, with the ever-increasing FDI, it is also poised to become a hotbed of international dispute resolution, particularly international arbitration. Therefore, and in this regard, a responsible and efficient legal machinery that offers a forum for an investor to ventilate its concerns is imperative. And one way of conferring these investment protections is, as we all know, through bilateral investment treaties, which offer a novel method of dispute resolution directly between an investor and the state. However, the ISTS setup has come under scrutiny, with its potentially crippling awards may have drastic consequences on different economies. And this, to a large extent, has been attributed to vague and undefined standards that may have been found inside these bilateral treaties. The esteemed panelists have assembled in the Panel discussion organised by the SKOCH group to address the merits and demerits of the system and explore its linkages with foreign direct investment.

Do BITs offer increased investment flows on the territory of a state?

 Professor Makane Mbengue (Professor, International Law, University of Geneva) believes that no evidence concludes bilateral investment treaties would contribute to or increase investment flows on the territory of a country. Mr. Mbengue has been working for many African countries, reviewing their bilateral investment treaties and policies. He has made this observation that in many countries, when one checks the countries from which most of the investors would come, one would quite often see that the host country at stake doesn’t have any BIT, any concluded bilateral investment treaty with the government of the countries from which most of the investors are calling from. Investors often try to go to places where they know there would be a favorable investment climate and bilateral investment treaties. Suppose one looks at the traditional model of BITS. In that case, one can see that the focus has been only on investment protection, so what is very important when it comes to FDI is investment promotion and investment facilitation. This is how a favorable investment climate in a country can be built. Facilitation is fundamental, and it is interesting to note that the traditional architecture or design of BITS didn’t have facilitation. The idea of promotion stays or is limited in the agreement’s title; no mechanisms or devices are put in place to ensure that the bilateral investment treaty would be a tool for investment promotion. Again, no means or devices are put in place to ensure that the BIT would also be an instrument of investment facilitation. So, this is what we need if we want bilateral investment treaties to attract FDI.

Role of international law in creating an environment that facilitates investment in trade

Rules and norms for international obligations must be rewritten or practiced afresh. Everyone welcomes FDI for employment. At the same time, it is also included for its positive spillover effects on political diplomacy and consciousness. However, the new economic nationalism will give stiff resistance to FDI. In Mr. Bimal Patel’s (Member Designate, International Law Commission & Vice-Chancellor, Rashtriya Raksha University) view, one will see that much short-term bargaining at bilateral materials delivered to fix short-term solutions means that short-termism of international obligation will arise. As far as India is concerned, one can expect a bright short, mid-term future as the technology and health sector will see a substantial boom. There will be a rush for FDI to India in these two sectors because India enjoys Asia and will see significant projects and activities. However, as the current industry was unprepared for such an eventuality, India or countries in similar situations will rely on bilateral mechanisms instead of an international treaty framework. On the flip side, India has to be careful because there will be a lot of predatory takeovers, which will be skilfully enforced and tested by countries supporting the same. On the positive side, new sectors strongly focus on India, such as infrastructure, maritime aviation, and sports. India comes under stress from the same predatory takeover supporting states having technology. However, experience and funds, as they seek substantial bargaining in India, private sectors will exert tremendous pressure on soaring structures for their survival and growth, and countries starved of foreign reserves or lack of domestic capital will be under pressure from these sectors to seek quick and cheap foreign funding. Therefore, several countries may be tripped soon by the predatory states, ten years from now; it may be possible.

The ISDS regime generally involves jostling between the government that wants to regulate and the investor who intends to seek investment protections. In this regard, if one looks at some instances, such as Occidental versus Ecuador, one might have seen that the ISDS regime has been termed in many ways as biased in favor of corporate interests. Ecuador had to face a $2.3 billion award, the highest quantum of award ever rendered by the exit. That year, this significantly constituted 135% of Ecuador’s budget for health care. This has led to a dubious overture towards bilateral investment treaties. Similarly, the White industries case opened India to the realities of multi-billion-dollar awards. India’s response to the white industries case was the model bilateral investment treaty of 2016, which was termed more conservative than it ought to be by certain commentators.

Do the investors look at destinations that provide better protection?

Another question arises: Is it correct that the investors look at destinations with greater protections differently, and what alternatives do they have if they want to invest in jurisdictions that do not offer such protections. Answering this question, Naomi Briercliffe (Counsel, Allen &Overy) said, “the investors that I advise tend to take the availability of investment treaties into account when making international investments, provided that a treaty provides adequate protections.  Now, another question is whether or not the investments would have been made in the absence of an investment treaty. A favorable investment climate will be the thing that attracts and is the most important thing for an investor while investing. There is a perception that investment jurisdiction is risky in India because of the Indian court system. In those circumstances, investment treaties can help investors get comfortable investing in that environment. Perhaps, India is getting great investment flows, but if there were available investment treaties with sufficient protections, then there would probably be greater investment flows. Now, of course, there are alternatives for investors when considering making investments. To mitigate political risk, for instance, they can enter into investment contracts that contain favorable dispute resolution provisions or other clauses which manage host state risk or, indeed, can undertake political risk insurance. But, none of those alternatives to mitigate investment risk is of the same scope and benefits as an investment treaty, which contains the investment protections that the investors generally look for.”

Arbitration under the Treaty is the best available alternative. 

Mr. Manish Sansi (Chief Legal Officer, Vodafone-Idea Ltd) presented his views on the issue of a good-to-have investment treaty. He said, “India went ahead and terminated so many of its BITs in the last decade, and that was also when India possibly had seen the best FDI in flow. While the country may not have a robust BIT regime, it was still able to attract a lot of foreign investment into the country. But then, as Naomi mentioned, she deals with many investors and potential investors and shows their interest and curiosity about the country’s investment protection regime. So from that perspective, I would say, it will always be good to have a sound and robust bilateral investment treaty regime in the country to provide good investor production.”

 Elimination of investors from the process of dispute settlement

Valpak Desai (Head, International Dispute Resolution, Nishith Desai Associates) said during the discussion, “again, we are talking about investment protection, and we are eliminating investors from the whole game. I think this is the biggest disruption in the BIT world, which will have many debates in the future. I think countries forget that this kind of mechanism is not only when talking about investors going against themselves; it can also be the other way around. Like many Indian companies are going abroad, there are instances in the past where Indian investors have used BITs to protect their investments outside India. So, I think somewhere; you can’t only look at this from an inflow perspective; you also have to look at it from an outflow perspective. And with regards to protecting one’s corporates when they go and invest outside, this cannot be just one way of looking at it. One must see it from a country-to-country perspective. One must also see how one would balance it when looking for investment. Second, if you are eliminating investors from the whole game, what if the investor doesn’t have a good rapport with their home state governments. There may be several other reasons why the home state would act in a particular manner in a situation rather than worry about a particular investment from a particular investor in the other state where they have to run a State-to-State arbitration. It throws up more complications for promoting and protecting investment between two countries. This does not give an investor confidence while entering a new jurisdiction. I understand that there can be several preconditions to invoking an arbitration, whether the exertion of local remedies or committees between two states. We can look at how this can be effective and efficient before the investor has a particular recourse either in a commercial arbitration or an investment treaty arbitration. We can look at different models, but to eliminate something which provides some degree of protection to the risk to the business.”

What are the possibilities of India setting up specialist courts to solve international investment disputes?

Naomi Briercliffe feels it’s a question for the Indian Government related to its capacity and interest. This is undoubtedly an option that has been looked at very closely by other governments worldwide. The European Union, in particular, is pushing for establishing an investment core to solve this investor-state dispute resolution. Currently, very detailed discussions are going on about whether or not there should be a universal agreement on establishing some permanent institution to address investment treaty arbitration. Now we probably don’t have time to discuss all of the pros and cons of that option, but from a practical perspective, Naomi Briercliffe feels that she is not convinced. She thinks there are some severe cons from a kind of efficiency and cost perspective. 

Recommendations 

  • Rules and norms for international obligations must be rewritten or practiced afresh.
  • To mitigate political risk; investors can enter into investment contracts with favorable dispute resolution provisions or other clauses that manage host state risk or undertake political risk insurance.
  • It will always be good to have a sound and robust bilateral investment treaty regime in the country which can provide good investor production.
  • Investment promotion and investment facilitation are what is more important when it comes to FDI.
  • With regards to protecting one’s corporates when they go and invest outside, one must see it from a country-to-country perspective.

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