[This article has been authored by Abhay Raj, a third year law student at JGLS, Sonipat.]
Keywords: Foreign Investment, Arbitration, International Developments, BITs
India, being one of the exponentially growing economies, has entered into more than 85 Bilateral Investment Treaties (BITs) since signing its first-ever BIT in 1994 (India-United Kingdom BIT). However, India’s experience in these investment agreements, for instance, losing the first BIT case of White Industries v. India, where India violated its obligation under the India-Australia BIT, 1999, has led to the termination of more than 75 BITs, leaving it with only 7 BITs. These include India-UAE, India-Lithuania, India-Latvia, Bangladesh-India, India-Senegal, India-Libya, and India-Philippines.
The recast movement emanates from various concerns including, inter alia, policy concerns between the investors and the host state, cost of representation in arbitral tribunals, costs to be awarded, and most primarily broad interpretative clauses in the BITs. Additionally, the arbitral tribunals have confusingly applied BITs that have furthered the fracas between the host state’s management of sovereign rights and investor’s protection.
The argument which the author posits, is based on the criticism put forward by Dr. Prabhash Ranjan, that India’s decision to terminate BITs is a problematic one. While this post does not deal with the merits of such termination, it engages with the avenue of interpretative declarations as a means of transpiring sovereign obligations in lieu of direct termination. The issuance of interpretative declaration rather than the termination of BITs is preferrable because BITs increase the confidence of the investors, and the studies conducted by Rashmi Banga, Niti Bhasin, and Rinku Manocha have shown that BITs contribute towards rising foreign direct investment (‘FDI’) inflows. Furthermore, the lack of Investor-State Agreements (ISAs) exposes the investment rendered to regulatory abuse which discourages FDI inflows.
Thus with this prelude, the author has attempted to look into how the State obligations can be managed under different BITs i.e. how States can prevent and control unintended results emanating from tribunal decisions. Further, the author examines whether terminating BITs was the only option available to the Indian government and its implication in regards to State obligations under BITs.
States, in order to, protect their interest (including sovereign rights and reassertion of control) in investments and disputes, have often adopted different strategies. As such, States are interested in rebalancing their arbitration approach. While some choose to rebalance and remove problematic clauses, or publish a joint interpretive authoritative declarations of the provisions, India chose to be a bull in a china shop by terminating its BITs.
1. Termination of BIT- How India Managed its Obligations
The future of Indian investment arbitration is interesting to observe. On one hand, India’s termination of BITs shows its resentment for the arbitration regime. On the other, it is performing systemic reforms in the investment arbitration regime, for instance, signing BITs with Belarus and Kyrgyzstan. Firstly, India’s resentment emanates from its long-standing history of not joining the ICSID convention. India, through its recent BIT signed with Brazil, depicted its intention of ‘dispute prevention’ rather than ‘dispute resolution’ and its preference for traditional methods like conciliation and mediation. Additionally, the non-enforcement of investment awards in India creates doubt of India’s commitment to investment arbitration. The Indian government has been exploring various other options, such as specialist courts, for settling investment claims. It has been criticised by the sceptics, who claim that India’s protectionist stand is paradoxical to Prime Minister Modi’s statement of facilitating “a vibrant ecosystem for alternate dispute resolution, including arbitration, mediation and conciliation” which is meant to “provide additional comfort to investors and businesses”. While the words of the Indian government give the impression of an intention to create a vibrant ecosystem for dispute resolution, the actions of the government appear contradictory. The BITs’ termination shows the reluctance for arbitration. With that, India’s stand of not joining the ICSID also acts as a stimulus in depicting India’s reluctance.
India, after terminating its BITs in 2017, has only signed three BITs (Brazil - India BIT (2020); India - Kyrgyzstan BIT (2019); Belarus - India BIT (2018)) which are strangely not even in force. While the government of India terminated its BITs signalling the possibility of upcoming reforms in the investment arbitration, there have been no concrete reforms. The recent invitation for suggestions on the Draft Mediation Bill, 2021, by the Department of Legal Affairs will be interesting to see in terms of what it holds for the future of arbitration in India. The bill particularly aims to facilitate mediation in India, per se, institutional mediation for dispute resolution.
The broad treaty clauses often leave tribunals with the interpretative power to decide upon the clauses as provided in the BIT, which in turn, leads to unpredictable and divergent results in the jurisprudence. India itself admitted that the Indian BITs “contained many provisions which can be subjected to broad and ambiguous interpretations”. At the same time, India admitted that its MFN and FET clauses are vague. However, the question then arises is why States allow such wide and open-ended clauses in BITs? The prime answer to the question is the fact that these techniques allow equitable and tailored results in favor of the Host State, which is often not possible within the rigid rules being isolated from the dispute. Nonetheless, these broad clauses cause problematic issues for the Host State, for instance, the tribunal interpreting the clause against the State. Thus, the same sometimes acts as a catalyst for the States to resort to including wide clauses in the BITs, as was observed in the Indian case.
2. Interpretative Declarations- How India Could Have Managed its Obligations
While broad clauses cause issues for the Host States and terminating the BITs is an option, the easier and more balance approach is the issuance of interpretative declarations. Governments can resort to the issuance of a Authentic Joint Interpretative Declaration, that assists the arbitral tribunal in interpreting broad clauses added in BITs. These declarations (i) clarify the meaning of treaty provisions and increase coherence, predictability and consistency in treaty interpretation; (ii) eliminate ambiguity and uncertainties, as also observed by the Indian government while declaring its interpretative statement with Bangladesh in 2016; and (iii) correct any misinterpretation made by the arbitral tribunal, as observed in Section 6 (e) of EU-CETA Joint Interpretation, 2017.
The strategy of relying upon authoritative declarations can be understood through India-Bangladesh BIT’s Article 4 (Most-Favoured Nation Treatment) which was cleared by the 2017 interpretative declaration. The broad clause was deliberated as both exclusive and inclusive of procedural clauses, and the arbitral tribunal indeed interpreted it in both ways. Through such declaration, the parties use a ‘backdoor’ method for resolving the disputes under international law and array their intention in arbitration.
The interpretative declaration of a treaty’s provisions is regarded as its true interpretation, distinguishable from a treaty amendment and cannot lead to retroactive effects at the expense of investors. To that, Gabrielle Kaufmann Kohler precisely states that it is often arduous in distinguishing between ‘true interpretation’ and an ‘amendment’. However, at the same time, such amendment, in the understanding of Enron v. Argentina, “[sh]ould not affect rights acquired under the Treaty by investors or other beneficiaries”. To clarify, States cannot, under the garb of interpretative declaration, change the goalposts in light of pending disputes or disputes that arose before such amendment.
While India may particularly have its reasons for dissimulating the investment arbitration law on one hand and contrasting the international investment law, on the other hand, one needs to remember the benefits in both these paradigms. India being a promoter of foreign investment has always aimed at providing an active space for investors, but it has simultaneously also aimed at protecting itself as a Host State. In this context, in the author's opinion India took a problematic step five years ago, but, it should now enter into an era of acceptance for investment arbitration by playing a more investment arbitration-friendly role. If in future, India believes that its BITs are flawed, it will be better to release a joint interpretative declaration or make renegotiations, rather than terminating the BITs silently. The country should finally move from being a protectionist State towards strengthening the global regime for arbitration.
 Prof. Dr. Prabhash Ranjan, “The Present and the Future of the Indian BIT Programme: Throw the Bathwater, but Keep the Baby”, 14 Global Trade and Customs Journal 372, 372-375 (2019), https://kluwerlawonline.com/journalarticle/Global+Trade+and+Customs+Journal/14.7/GTCJ2019042.  G. Kaufmann-Kohler, ‘Interpretive Powers of the Free Trade Commission and the Rule of Law’ in E. Gaillard and F. Bachand (eds.), Fifteen Years of NAFTA Chapter 11 Arbitration (Juris 2011), p. 191.