The State being held accountable by courts is a cherished feature of democracies. Even a submission to the jurisdiction of international courts is applauded on some occasions. But sovereign powers are not usually expected to be bound by decisions of tribunals comprising individuals sans institutional backing. And yet, the Investor-State Dispute Settlement does this very thing. Also referred to as the Investment Treaty Arbitration, this mechanism rooted in the Investment Treaties and Trade Agreements signed among sovereigns subjects the states to arbitration when they fail to provide the promised benefits to foreign investors.
In the Indian context, we have had at least three recent examples of liability fixed upon the state as a result of ISDS — the Cairn arbitration award, the Vodafone arbitration award and the Devas arbitration award. What added to the worries of the embattled Indian economy are proceedings initiated by Devas Multimedia Pvt Ltd and Cairn Energy before US federal courts to seek the enforcement of awards against India to the tune of $135 million and $1.2 billion, respectively.
It may seem arbitrary and a case of a foreign corporation holding hostage a sovereign power to amend and enforce its laws; more so when the country is flailing to fully provide for its own citizens. But there is some method in this madness. India is not the only country to face such proceedings. In 2012, an arbitral tribunal had directed Ecuador to pay $1.77 billion to Occidental for cancelling the latter’s contract. In 2014, an arbitration tribunal at The Hague rendered an award in favour of Yukos against Russia that was in excess of $50 billion. Similarly, Venezuela was ordered to pay $1.6 billion to Exxon to compensate it for nationalizing the country’s oil projects.
That said, it is not always that these tribunals rule in favour of corporations. In fact, as per data available with the United Nations Conference on Trade and Development, out of 1,104 known cases of ISDS, 274 were ruled in favour of states against 212 rulings in favour of investors. In 2018, a tribunal ruled in favour of India and against the French investor, Louis Dreyfus Armateurs. Nevertheless, the ISDS has been criticized by not just states but also other stakeholders.
The primary complaint against the ISDS is that it undermines the powers of the sovereign state. A foreign corporation can bring an arbitration claim against a state and then bind the latter to the award rendered by a private tribunal, all the while bypassing the judicial system in the country of investment. Moreover, it restricts the government from altering its regulatory policies. In cases such as Eli Lilly vs Canada, the legal basis of the decision taken by the government was challenged and eventually upheld by the courts of Canada. In 2009, a Swedish company, Vattenfall, brought an investor claim against Germany when the latter delayed granting permits for establishing a coal-fired power plant. The delay was on account of public opposition and reports of inter-ministerial consultation on climate change, pursuant to which the government intended to alter its laws. The state was faced with an investment arbitration claim of $1.9 billion that ultimately had to be settled.
The ISDS is an imperfect system but all is not wrong with it. It is a two-way street that has the potential to unduly overburden a state but, more importantly, also provide an independent forum for foreign investors to seek redressal of their grievance. Not every country that imports investment has a democratic government or an impartial judiciary. In the absence of these, investors may find themselves in want of a forum to seek compensation for a genuine wrong done to them. For middle-income countries like India, which are investment importing as well as investment exporting, the ISDS can be a useful tool. It is particularly valuable for Indian investors in foreign countries.
In recent years, the Government of India has opposed not only the mechanism but also some of the reforms proposed to improve the system. In 2016, India unilaterally terminated its bilateral investment treaties with over 50 countries. Admittedly, the new model BIT of 2016 retained the provision for resolving disputes through the ISDS but only as a last resort. Moreover, to regain regulatory autonomy of the state, many subject matters have now been excluded from the scope of the ISDS. In an attempt to explore alternatives, the Investment Cooperation and Facilitation Treaty signed with Brazil in 2020 strongly emphasizes a mechanism for dispute-prevention and a tiered dispute-resolution process. Prima facie, the mechanism appears to be arduous and one that could culminate into a diplomatic limbo. The new treaty texts may be a step in the right direction qua regulatory control of the sovereign but they border on protectionism.
On the two-way street of BITs, these also subject Indian investors abroad to similar rigours. It may seem arbitrary that a corporation can hold a government liable for losses. But these are legal obligations that the state has exposed itself to willingly; and legal obligations to which Indian investors in foreign countries can hold foreign governments liable. Governments that have been stronger critics of the system have also complied with adverse awards to maintain bona fides. Even as governments around the world look for a better solution to the BITs, pending arbitrations and their final awards, such as in the case of Cairn, Vodafone and so on, would have to be duly honoured by the state. Future treaties may assert the regulatory authority of the state but a difficult dispute resolution process is bound to detract potential investments in India.
