Introduction:
Currently, disputes between international corporations and countries are settled through the Investor-State Dispute Settlement (ISDS) system. The cases usually involve demands for compensation by investors on account of policy changes brought about by the state in areas such as the environment, nuclear power etc., even if these laws are aimed at protecting people’s health or the environment.[1] These disputes are adjudicated by ad hoc tribunals or domestic courts. However, the EU has, in 2016, pushed for a certification of its proposal for the establishment of a Multilateral/World Investment Court (MIC). The MIC system seeks to establish one court for all such disputes between corporations would directly be able to approach it and settle their disputes, thereby circumventing domestic courts. The disputes concerning the interpretation of Bilateral Investment Treaties (BITs) would be adjudicated by salaried judges.
The primary reasons cited by the EU for the establishment of the MIC are inconsistency of verdicts by ad hoc/domestic courts, multiplicity of proceedings and the need to protect corporations from the conflicting interests of the state and its judicial system. While India has staunchly opposed the MIC, the EU has consistently attempted to corner India by using the India-EU Free Trade Agreements as a bargaining chip. This blog post seeks to outline the points of contention with regard to the India-EU deadlock and presents the principal facets of India’s precarious situation. The author concludes the paper by suggesting a possible solution to balance the interests of both the parties.
Balancing Free Trade and Justice:
Countries, especially developing countries, have greatly opened up their markets for foreign corporations through BITs, in order to secure a greater amount of Foreign Direct Investment (FDI).[2] The primary aim of the ISDS system was to ensure the security of foreign investors from the losses caused due to the host country’s legislative actions. A country brings about policy changes to alleviate the difficulties faced by its citizens. These policy changes may be in relation to food security, environment, nuclear power etc. If the disputes are fought in domestic courts, the domestic laws have some form of authority and organisations like NGOs, interest groups etc., can file cases against these corporations.
However, if the disputes are fought in the MIC, corporations can firstly, circumvent a country’s domestic laws and secondly, avoid having to face the aforementioned organisations, which cannot file cases in the MIC since the MIC only allows investors to file cases against governments. Thus, the system of MIC appears to crystallise the privileged position of the investors vis-a-vis its disputes against governments.
On one hand, the ISDS system, particularly the one in India, has faced immense criticism due to multiple reasons, including the lack of consistency of verdicts rendered by the courts and tribunals, the sluggish nature of proceedings conducted by domestic courts, the lack of transparency, collusion between the arbitrators and lawyers[3] and the lack of appellate review.[4] As a result of these factors, mistakes of law made by ISDS tribunals while interpreting a BIT are never corrected, thus leading to a inconsistencies.[5]
On the other hand, India and other developing countries have severely criticised the EU’s proposal of establishing a World Investment Court at the WTO, where the then Commerce Minister Nirmala Sitharaman had clearly stated that India shall not allow investors to drag the country to a MIC.[6]
However, this act of criticism has caused a roadblock in India’s negotiations with the EU on the India – EU Free Trade Agreement (FTA). In 2015, several provisions of India’s Model Bilateral Investment Treaty have been modified to synchronise with the requirements of the EU.[7] The treaty excludes matters relating to taxation, provisions which bring down tariff rates below MFN rates and the rules regarding national treatment of foreign investors & their equitable treatment have been relaxed to a great extent. The treaty however, provides for the ISDS mode of dispute settlement, that is, it requires parties to seek recourse through local remedies and if there is no solution reached after doing so, it allows parties to proceed for arbitration.[8]
India has also amended its IT Act to align with EU legislative requirements. India seeks liberalization of services with regard to Mode1 and Mode 4 under the General Agreement on Trade in Services (GATS) of the WTO. Mode 1 requires a data secure regime for BPOs and knowledge process outsourcing, which India is currently seeking to achieve from the EU. Mode 4, which covers the movement of skilled professionals, needs a significant change in terms of visas and work permits. If the EU accedes to India’s demands, Indian IT workers could have preferential access to the EU labour market.[9]
The FTA contains the above mentioned points, which need to be negotiated by the two parties. The FTA also contains EU’s proposal to establish the MIC. Since the India – EU FTA is still being negotiated, EU wants India to amend its Model BIT and implement the MIC system as the mode of dispute settlement. Thus, India’s liberalization requirements are being used as a bargaining chip by the EU to get India to agree to the establishment of the MIC. EU’s position is bolstered by the fact that India had been embroiled in almost 22 proceedings with major corporations such as Cairn Energy, Vodafone etc. It faced a lot of flak for the manner in which the disputes had dragged on. The EU had attributed this sluggishness to a lack of competence on the part of the Indian Judiciary, which drove India to align its laws with the legislative requirements of the EU, as stated above.[10]
Conclusion:
The failings of the ISDS system have driven both India as well as the EU to a deadlock. A possible solution to this impasse could be to adopt a cautious approach in implementing the system of a MIC. Since conventional ISDS mechanisms have been riddled with several problems and have failed to provide speedy recourse, it would be in India’s best interests to endorse a better platform like the MIC. However, the current system of MICs must be amended to allow NGOs, interest groups and other interested parties to sue corporations before the MIC as this would make the process of approaching the court fair and just.
Further, an Appellate Body must be established, either under the WTO or under the MIC system itself, in order to ensure an effective review of the MIC’s decisions. Lastly, the MIC system must be made accountable and more transparent to overcome the problems of the ISDS system.
This post has been authored by Aditi Vasani a second year student of the West Bengal National University of Juridical Sciences, Kolkata.
[1] Fabian Flues, Multilateral Investment Court: An utterly flawed and unjust system, Euractiv (Oct. 12, 2017 4:50 PM),
[2] Natasha Marusja Saputo, Paradoxical Pacts: Understanding the BIT Phenomenon and the Rejection of a Multilateral Agreement on Investment, 41 OHIO N.U. L. REV. 121, 123-24 (2014).
[3] David M. Howard , Creating Consistency Through a World Investment Court , 41 Fordham Int’l L.J., 26(2017).
[4] Id at 38-39.
[5] Prabhash Ranjan, India Should Reconsider its Stand on Investment at the WTO, The Wire , February 13, 2018, https://thewire.in/107960/india-investment-agreement-wto/
[6] Jayshree Sengupta, Future of EU-India free trade agreement, Observer Research Foundation (July 13, 2017 4:50 PM), http://www.orfonline.org/expert-speaks/future-of-eu-india-free-trade-agreement/
[7] Arun S, A court to fix all investor-state rows?, The Hindu, October 29, 2017, http://www.thehindu.com/business/Economy/a-court-to-fix-all-investor-state-rows/article19944869.ece
[8] Article 14.3(b)(i), Article 14.4(i), Model Text for the Indian Bilateral Investment Treaty, 2016.
[10] Arun S, supra, note 7.
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