Current Affairs

Bilateral Investment Treaties (BITs)

Why in News:

In an attempt to redraft 83 archaic Bilateral Investment Treaties (BIT), the Law Commission of India (LCI) in its 260th report on the Draft Model Indian Bilateral Treaty (Model Draft).



BITs: An Overview


Bilateral investment Treaties (BITs) are agreements between two Countries (States) for the reciprocal promotion and protection of investments in each other’s territories by individuals and companies situated in either State.


The following are the essential clauses covered under BITs:

  1. Applicability
  2. Fair and Equitable Treatment and Full Protection & Security
  3. National treatment and Most-favoured-nation treatment,
  4. Expropriation,
  5. Dispute settlement mechanisms, both between States and between an investor and a State.


BITs encourage foreign investors to invest in a State and there by contributing towards overall developments and advancements of the economy.



  • “fair and equitable treatment” clause draw an analogy from constitutional law and is broadly akin to the right of equality and protection against arbitrary state action.
  • Right against Expropriation both direct or indirect of Investor’s investment.

India and its Tryst with BITs

  • It was in mid 90s that the BITs were initiated by the Government of India. The pretext was to offer favourable conditions and treaty based protection to the foreign investors and investments.
  • For example, the India-Singapore Comprehensive Economic Cooperation Agreement (CECA) provides for exemption on import duties for investment in infrastructure sector, which would eventually attract the investors from abroad to invest in the growing economy of India with enhanced securities against adverse changes, thus promoting investment inflow.
  • One of the most noticeable features of the Indian BITs is that it does not give ‘a right to make investments’ in India. All rights, under the BITs to which India is a party, can be exercised only after making investments in India.
  • The Indian government retains the freedom to determine which sectors are open to foreign investments and under what terms and conditions can those investments be made. It is of utmost importance to note that the investments made in India must be established or acquired in accordance with the national laws of India.


Benefits of BITs

  1. Increased investments inflows
  2. Encourages transfer of technology
  3. Modern management skills.


Problems: International Experience

  • Deficiencies in treaties are accompanied by shortcomings in the functioning of the international investment arbitration ‘regime’.
  • Fragmented system without common standards.
  • Recurring episodes of inconsistent awards.
  • Divergent legal interpretations of identical or similar provisions and differences in assessment of the merits of cases involving the same facts.
  • No appeal mechanism to rectify incorrect awards or ensure consistency.
  • Inconsistent interpretations lead to uncertainty about the meaning of key treaty obligations compounding problems of unpredictability of treaties.
  • Also, questions whether arbitration process by three individuals, appointed on an ad hoc basis, possesses sufficient legitimacy to assess acts of State on particularly on sensitive public policy issues.
  • Undermines the domestic legal system and can pose challenge to democratic decision making.
  • Growing number of cases
  • 75% of the awards against developing countries in favour of investors.
  • Widening scope of challenges to government measures: changes to the domestic regulatory framework, the tax regime, public tenders, public health, environment and recently measures to address the financial crisis (bailouts and withdrawal of subsidies).
  • From “shield of last resort to a sword of first resort” for disputes.


The White Industries Case

  • India faced its first adverse arbitral award arising out of a BIT in the White Industries case.


  • White Industries, an Australian entity, succeeded in obtaining a foreign arbitral award against Coal India Ltd.


  • White Industries had initiated proceedings for enforcement of this award before Indian courts and for about 10 years, the said proceedings did not progress.



  • White Industries argued that it had been denied “effective means” of enforcing its rights in relation to its investment, a protection incorporated into the India-Australia BIT by virtue of an MFN clause it contained.


  • The arbitral tribunal accepted the plea and India was forced to pay a huge price for the delays caused by its judicial system.



  • The award opened a Pandora’s Box and since then 17 investors have issued notices of arbitration against India.


  • All of a sudden, the Indian government was staring at an enormous liability arising out of these causes of action.


  • As a reaction, the government published a Draft Model proposing to renegotiate the BITs it had already entered into in line with the draft.


Problems of Model Draft

  • The Model Draft, no doubt, protected the interests of the government; however, it defeated the very purpose of entering into a BIT — that is, to provide some level of cushioning to foreign investors — by drastically narrowing down the protection for investors by
  1. a) Providing an extremely narrow definition of investment
  2. b) Deleting the MFN clause
  3. c) Providing for the exhaustion of remedies on the one hand and for the decision of the

Court to be binding on the arbitral tribunal on the other

  1. d) By providing for a number of exceptional self-judging state actions, which would not be

Within the purview of challenge before an arbitral tribunal set up pursuant to the dispute

resolutions contained in the BIT.


  • Therefore, India required a New Model Draft which has been proposed by sub-committee of Law Commission of India (LCI)). It tries toensure that the interests of India are taken care of while providing an internationally recognised basic minimum protection for investors.


  Recommendations of Sub-Committee of Law Commission:

  1. LCI recommends a modification from a highly narrow ‘enterprise-based definition’ of investment to a broader and universally accepted ‘asset-based definition’. An enterprise-based definition would mean that aforeign investor who did not set up an enterprise in India to carry on business would have absolutely no protection. 


  1. LCI reiterates the stand adopted in the Model Draft that the MFN must not be incorporated since India might chose to provide differential benefits to trading partners based on the extent of incoming investment from a country.


  1. LCI encourages the incorporation of a “denial of benefits” clause, wherein an investor is denied the benefits of a treaty should it be involved in corrupt practices or should it act contrary to the laws of the country.


  1. LCI suggests amendments to certain provisions of the dispute resolution mechanism contained in the Model Draft.

–The Model Draft precluded an arbitral tribunal from reviewing “any legal 

         issue which has been finally settled by any judicial authority of the home 


–Concurrently, there existed a provision, which made it mandatory for the investor to 

          first approach the local courts and exhaust its local remedies. It is hard to

contemplate too many scenarios where an investor would comply with the latter provision and yet overcome the jurisdictional bar imposed by the former provision. To make the mechanism workable, the LCI has suggested omitting the jurisdiction bar.


  1. Model Draft contained general exceptions with a long list of permissible objectives such as public health, environment, public order, public morals, improving working conditions, ensuring the integrity and stability of the financial system, banks and financial institutions etc., and it provided that any measures which the state considered to be in furtherance of the above objectives would not be subject to scrutiny before an arbitral tribunal.


While having a set of exceptions is internationally recognised and is in furtherance of sovereignty, the provision in the Model Draft provided the state with the authority to self-judge that is, to determine if a measure would fall within the exception and not be subject to a challenge. The LCI has suggested that the said provision be re-drafted so as to not be self-judging.


  • It is to be seen if India is successful in renegotiating the existing BITs.


  • The recommendations may not be of universal application — that is, investor-favourable rights and state obligations must be modified based on whether India’s position vis-à-vis a negotiating country is that of a capital exporting country or a capital importing country.


  • All that the LCI report does is to set out certain basic minimum internationally recognised criteria that India must keep in mind in order to appear reasonable to international investors and yet ensure that the White Industries saga is not repeated.


  • That said, these negotiations would only be prospective and India will have to face the numerous proceedings that have been initiated by investors already.

Critically analyse the success of Bilateral investment Treaties (BITs) in India? Do you think the proposed model draft by the Law Commission’s subcommittee strikes a right balance between Government and Foreign investor’s interests?

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