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  • Intisar Aslam

India-EU BIT: Can the Dispute Resolution Clause Spark ISDS Reforms Globally?

[Intisar is a student at National University of Study and Research in Law.]

The tryst of India with investor-treaty arbitrations has been muddled with large claims of compensation. From Vodafone to Devas Multimedia, India’s picture of an investor-friendly country has been marred by a series of arbitral awards passed against it. In 2017, a mass termination of Bilateral Investment Treaties (BITs) was carried out by India owing to the large volume of ISDS claims and subsequent adverse rulings. As India progresses towards negotiating ‘reformed’ BITs with different nations, one such BIT that is lately on the verge of finalisation is the India-European Union (EU) BIT. However, the dispute resolution clause has thrown a spanner in the works of the negotiation. While India sticks up for exhausting the local remedies (ELR) as a condition precedent to submitting the dispute to arbitration, the EU advocates for an investment court system (ICS). This post will clarify what ELR and ICS entail in the two nations, what the alternatives are, and where in the author’s view we should be headed.

Exhaustion of Local Remedies: Testing the Clause in the Waters of Two Nations

Customary international law lays immense emphasis on the exhaustion of local remedies as a procedural prerequisite to arbitration- a concept premised on respect to state sovereignty. Article 44 of the Commentary to the ARSIWA provides that the local remedies have to be available and effective and their mere existence on paper does not entail their use in every case. Affirming the same, the Urbaser v. Argentina laid down that if the host state is entitled to a ‘fair opportunity’ to handle the dispute within its own judicial system, the investor must likewise be afforded a ‘fair opportunity’ to have the matter considered by the competent domestic courts. The ILC Draft Articles on Diplomatic Protection, affirmed in Great Britain v. Mexico and BG v. Argentina (BG Award), provides that local remedies do not need to be exhausted “where there is undue delay in the remedial process which is attributable to the State alleged to be responsible”. In the BG Award, the tribunal also underscored the requisite of an independent, stable judiciary system.

According to the National Judicial Data Grid, there is a pendency of over 5 crore cases in the Indian Courts. Similarly, the CJEU takes 17 months on average to decide a case. In White Industries Australia Limited v. Republic of India, arbitration proceedings were initiated against India for breaching the Australia-India BIT (included the ELR Clause) on account of inordinate delays caused by its domestic courts in the enforcement of the arbitral award. It is evident that burdening the domestic courts with investment arbitration cases is highly impractical considering the huge backlog of cases these courts have been facing.

In Siag v. Egypt, the tribunal accepted the argument of the investor on the failure to accord fair treatment due to corruption at the government level including the domestic court proceedings. It can be inferred, therefore, that corruption can also be an exception to the ELR clause. As per the latest Corruption Perception Index (CPI), India’s score has been stagnantly low at 40. At the same time, the average score of the EU has been 66 with even the least-scoring member state at 42. CPI captures the prevalence of officials using public office for private gain without facing consequences as well as red tape and excessive bureaucratic burden. Exhausting local remedies within a red tape-ridden system would be futile and would not lead to an effective resolution of the dispute.

In essence, the feasibility of ‘exhausting’ local remedies in India appears to be bleak with the prevalent judicial and administrative system. On the contrary, the EU may be more conducive comparatively however, the judicial backlog persists.

Investment Court System for India and EU: A Better Option?

The EU advocates for the ICS model of investment arbitration which would comprise an international court to be permanently appointed for which both parties to the dispute would need to pay. One reason behind such a stance is its previously concluded investment agreements with Canada, Singapore, Vietnam, and Mexico which provide for such a model of dispute resolution. However, the EU has overlooked a major concern of ICS that comes along with its adoption in the India-EU BIT: the EU does not have exclusive competence over its member states to enter into treaties that include ISDS provisions.

Given the foregoing, the consent of all the member states shall be required to oust the jurisdiction of the national courts while negotiating the BIT with India. Interestingly, even among EU member states, there is no unanimous consensus regarding the creation of a multilateral investment court. Some member states have expressed doubts about whether such a court aligns with the principle of the EU’s independent legal system. With no clarity on the adopting protocol for ICS- as it evolves and makes decisions, ICS could lay down decisions that may be inconsistent with the nation’s domestic laws and policies. This inconsistency could pose challenges in not only harmonising international decisions with national legal frameworks but also in their enforcement.

The ICS proposal deals with the enforcement issue by stating that awards rendered by the tribunal shall be treated as ICSID  or New York Convention (NYC) awards. However, there is a lack of consistency between the EU and India in acceding to NYC. India has notified 48 NYC notified territories as reciprocating territories, including 12 EU member states. On the contrary, the EU is not a party to the NYC, and cannot be a party. Therefore, for the EU, obtaining consent to exclude member-state court’s jurisdiction will also entail consent from the states for enforcement of the award.

The average cost of defending an investor claim is estimated at US $4.5 million. In Loewen v. USA, the tribunal had observed that if the remedy is formally available but cannot be pursued for the economic or financial conditions of an investor, it is futile to pursue. While Japan as the then third-largest economy rejected the ICS citing its heavy costs, India, as a developing country, will find the adoption of ICS way more challenging posing a heavy financial burden on the public exchequer. On the other hand, the EU remains the single largest trading market in the world, so it is very unlikely that the high costs of ICS would turn out as a factor for it.

Grundnorm to Arbitration: Party Autonomy

On the question of bias, the idea of ICS has been floated by most developed nations like the EU and it is highly probable that the EU would play a major role in the constitution of the adjudicatory body. This calls into question whether there shall be any consultation with the stakeholders and the degree of transparency in the appointment of members of the tribunal. For India, the perspective can be two-fold. First, if India is put in the category of a nation deciding the method of the constitution of the tribunal, the appointment may be questioned due to political consideration and bias considering its domestic appointment of judges in the past. Lately, the Supreme Court of India held that past political link is no bar in the appointment of judges to the Indian Courts. Second, if India has no say in the appointment, it might be in a disadvantaged position considering the stature of the EU in the appointment as a developed country.

While the ICS provides room for non-transparency and bias, the 2016 Indian Model BIT upholds party autonomy in appointing arbitrators and offers the stakeholders the opportunity to participate in appointing arbitrators. Further, the CETA (EU-Canada), and the EVIPA (EU-Vietnam) also incorporate this principle in the appointment of arbitrators. The principle has been endorsed not only in national laws, but also by arbitral institutions like ICSID and UNCITRAL. Therefore, a ‘reformed’ ICS can be adopted giving respect to the principle of party autonomy with India having an equal say in the appointment of arbitrators of the international panel. This can be ensured by jointly proposing a list of arbitrators by the host State and collectively by the investor (stakeholder) and its home state. At the same time, while no one country can make such a decision, the adherence to party autonomy under ICS is essential by the EU given its normative nature in the modern world of arbitration.

Conclusion: Charting the Future Through PLR-ICS

The Indian stance on the inclusion of ELR and the Model BIT fails to take into consideration any urgent relief that may be required by small investors who might have incurred a significant loss in the value of their investments. India could push for the ‘pursuit’ of local remedies (PLR) clause (like Argentina-UK BIT and Belgium-Luxembourg Economic Union-China BIT) for an agreed specific period which, if ineffective, can be bypassed to submit the dispute either to the investment court proposed by the EU or to the traditional ISDS system. The submission to the Investment Court must, however, include a ryder entailing the investors to seek approval of the EU to ensure that the case is merited and not a frivolous compensation claim. This will also prevent India from being unduly burdened with the high costs of the investment court. Further, it will enable the domestic courts of India and the EU to speedy disposal of cases in line with the principle of prompt and efficient resolution of disputes.

In Kelsenian terms, any ISDS reform would only derive its validity by basing its foundation on the grundnorm of arbitration- the party autonomy principle. As discussed earlier, it is evident that the EU-proposed ICS shakes the very roots of arbitration. In sum and substance, the disagreement is not a hurdle for the two nations to witness a new dawn of investment but an opportunity to chart a course for a redefined and more equitable era in investor-state arbitration globally.


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