Strengthening Arbitration Through Trade Treaty Policy

Context

Making the India’s trade and bilateral investment treaty (BIT) policy compatible with international arbitration will create a predictable framework, which will instill more confidence among foreign investors and lower the liability of the states.

The Intersection of Trade Treaties and Arbitration

Investor-State Dispute Settlement (ISDS) mechanisms have traditionally been used in trade and investment agreements like Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs). These provisions enable foreign investors to bypass domestic courts and go directly to international tribunals of arbitration against the host states (such as ICSID or UNCITRAL). But the multiplication of multi-million dollar claims against sovereign states has led to a global re-think. Today the countries are not seeking to do away with arbitration, but to modernise it in order to counteract the institutional backlash of new trade treaties.

India’s Shifting Approach to Investment Arbitration

The Indian approach provides an important example of how to strike a balance between sovereign regulatory space and investor protection:

• India has barged into the practice of ISDS by unilaterally terminating more than 70 of its previous BITs following a series of negative awards in the 2010s, such as the Vodafone and Cairn Energy retrospective tax cases.
• In 2016, India enacted a more robust BIT. It has most notable feature, Exhaustion of Local Remedies (ELR) clause. Foreign investors will have to wait five years in Indian courts before initiating international arbitration.
• In recent FTAs (such as with the EFTA bloc and the UAE), India has indicated that it is keen to negotiate bespoke investment chapters, returning to an approach that allows for quicker and more certain arbitration, while protecting public policy.

Strategic Pillars: How Treaties Can Strengthen Arbitration

To make international arbitration a robust tool for economic diplomacy, modern trade policy should focus on four key pillars:

Institutionalizing Appellate Mechanisms

• Ad hoc arbitrations have proven to be unpredictable and have no precedent.
• Treaties should include a two-tiered standing tribunal system in a similar manner to the EU’s Investment Court System approach.
• A permanent appellate body will provide legal security and prevent the free interpretation of the provisions of the treaty.

Narrowing Broad Treaty Definitions

• Tribunals have a history of reading into vague clauses in older treaties, effectively invading state sovereignty.
• Modern treaties must strictly define clauses like “Fair and Equitable Treatment” (FET) and “Most Favored Nation” (MFN).
• Excluding taxation, national security, and public health measures from the scope of arbitration protects legitimate state regulations from judicial overreach.

Enhancing Transparency and Efficiency

• Arbitration has long been attacked as being secretive and too costly.
• UNCITRAL Transparency Rules should be included in treaties and hearings should be open, and case documents made available.
• Imposing strict timelines for tribunal formations and final awards will curb dilatory tactics by litigants.

Promoting Mediation and Pre-Arbitration Consultation

• There is a need to reduce litigation fatigue, which can be addressed by incorporating formal alternative dispute resolution (ADR) provisions into treaties.
• Mandating a “cooling-off period” with compulsory mediation or conciliation before an arbitration claim can be filed reduces adversarial friction.

Way Forward for India

For India to emerge as a global hub for international arbitration, its trade treaty policy must evolve seamlessly alongside domestic legal reforms:

• Calibrate the Model BIT: The rigid five-year domestic litigation requirement should be made more flexible or shortened for trusted trade partners to avoid deterring high-quality Foreign Direct Investment (FDI).
• Leverage Domestic Hubs: Future FTAs should explicitly promote regional centers like the New Delhi International Arbitration Centre (NDIAC) or the GIFT City International Arbitration Centre as preferred venues for resolving disputes.
• Capacity Building: There is a need to enhance the number of international trade lawyers and arbitrators in India with a specialization in representing state interests globally.

Source: The Hindu

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