June 24, 2024
Home » Recognizing the Need for Bilateral Arbitration Treaties : From Theory to Practice
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This article has been written by Nooransh Grover.

Introduction

Economic prosperity of a nation is a direct corollary of increased investment, no matter what the territorial source of that investment be. It is an undeniable fact that investors are driven by profit motives and it becomes necessary that necessary processes and policies are established by States to ensure that they become a favourable investment destination for investors. In order to instil confidence and trust in the host state with regards to the safety of the investment, States enter into Bilateral Investment Treaties (BIT) which applies to the host state and investors from the home state. The first BIT was entered between Germany and Pakistan and since then, various countries have followed this path as it is a legally recognized framework which provides for a series of protections to investors and their investment.

Increasing Reliance on BIT

There has undoubtedly been an unprecedented rise in the amount of international commercial transactions since the emergence of globalization and foreign investment. In particular, when India embarked on the journey to allow foreign investment and eased the routes for the same, global players felt that they could make use of the vast consumer base in India. The journey started off with Vodafone, being one of the first big investors to have set its foot in India which was then followed by many other big players. Countries often evaluate these protections based on prevailing domestic and international situations as well as their own experiences such as what India witnessed in White Industries v. India and Vodafone International Holding v. Union of India pursuant to which India revamped its Model BIT in 2016 removing the Most Favored Nation Clause and adopted processes such as Exhaustion of Local Remedies etc.

There has been an upsurge in the reliance on BIT’s as a viable method for providing protections to the investors for their investment. These bilateral investment treaties or BITs are entered between 2 States and its provisions are applicable to the investor and the host state. One of the most common modes adopted in the dispute resolution clause in a BIT is arbitration as it allows for foreign investors to adopt a neutral, unbiased and competent forum for resolution of their disputes and also ensure greater enforceability and finality of awards unlike those in an International Commercial Arbitration.

Legal Regime for Investment Arbitration: Drawing Parallels with ICA and its Analysis

There is a separate legal regime for investment arbitrations such as through the ICSID Convention etc. The virtues of a BIT are many ranging from providing finality, ease in enforcement of awards, a separate appeal mechanism apart from that of national courts etc. There are certain protections which are granted by virtue of a BIT such as that against Expropriation, the Most Favoured Nation (MFN) Clause, Fair and Equitable Treatment (FET) etc. But these protections are applicable only on foreign direct investments by an investor from the home state in the host state.

There are a series of other transactions which are purely commercial in nature between foreign parties and do not fall under the ambit of a BIT. The parties to an international commercial transaction are governed by their own separate agreement in which they can incorporate arbitration as the preferred mode of dispute settlement, thus allowing them to take recourse of International Commercial Arbitration.

It thus becomes necessary that even international commercial disputes are also subject to such bilateral treaties and thus it becomes necessary to give genesis to a new model of bilateral treaties known as the Bilateral Arbitration Treaty (BAT). The concept of a Bilateral Arbitration Treaty suggests that international commercial disputes, as international investment disputes, shall be subject to a bilateral treaty between two nations and shall govern international commercial disputes by means of arbitration. This concept, though seems lucrative and effective, has some serious concerns to it which is necessary to be considered and resolved prior to its adoption and implementation.

International Commercial Arbitrations are subject to the separate agreement of the parties and are governed by the UNCITRAL Model Law and the New York Convention. There are no bilateral agreements to establish a mechanism similar to that of a BIT. Foreign companies, when entering into business and commercial contracts with their Indian counterparts and vice versa, have to either take recourse of national courts or even if they have an arbitration agreement in place, they need to take recourse of national courts in order to get the arbitral award enforced. This pathway of crossing through the doorsteps of national courts gives rise to various complexities such as those pertaining to impartiality, expertise, fairness, timely disposal etc. Under the Investment Arbitration regime, these issues do not arise as a unique feature of this regime is that investment arbitral awards are automatically enforceable upon the parties and the recourse of appeals etc. occurs within the separate legal framework established unlike in national courts of the host or the home state. Under the regime of a BAT, parties shall have recourse to separate forums established for hearing appeals and not the national courts.

Another important issue which props up is that whether the autonomy of the parties goes for a toss if international commercial disputes shall be subject to a BAT between two states. The answer to this issue lies in the fact that the autonomy of the parties remains intact because parties can, even though there exists a BAT between the host state and the home state, have a separate agreement in place wherein they can opt for a different dispute resolution mechanism or even the same dispute resolution mechanism as provided in the BAT with changes if needed. This way, the autonomy of the parties remains intact. The purpose of a BAT is not to curb the autonomy of the parties but to provide international arbitration as the default dispute resolution mechanism for parties. This is due to the virtues which an international arbitration possesses as compared to resolution of disputes by national courts of a country.

Another important issue which is of crucial importance is that of liability of parties. Under Investment Arbitration, the host state is liable for the breach of the protections guaranteed by that specific BIT. This is due to the fact that in an investment arbitration or in fact in any foreign investment, the State is the party. It is the State which attracts the foreign investment and not any particular individual. But this is not so in case of an international commercial arbitration. In an international commercial arbitration, the parties to the contract are two individuals or two or more individual entities and not the state. In such a situation, the issue which arises in the implementation of a BAT is that who share bear the liability of the breach; the State or the Individual?

The answer to this issue is that the Individual entity share bear the liability in case of a breach of terms of the BAT. The BAT is only to act as a blanket mechanism for dispute resolution which tends to provide a legal framework for resolution of disputes in a situation wherein the parties have not incorporated a dispute resolution clause in their agreement. The purpose of a BAT is not to upset the liability cart and shift it away from the parties to the State but to establish arbitration as a default mechanism for settlement of international commercial disputes in an impartial neutral forum and ensuring that the autonomy of the parties remains intact.

Conclusion

Thus, the present trends in international commercial disputes necessitates, if not overhaul, reconsideration. The number of international commercial disputes have arisen in unprecedented numbers compelling the legal think tanks as well as legislative and rulemaking bodies to devise mechanisms and methods for the parties to have a speedy, neutral and impartial dispute resolution. Such a mechanism should be devised in such a manner which facilitates commerce and commercial transactions rather than posing obstacles and hindrances.

Thus, the need for a BAT is real. Although, there has to be a separate legal framework setup for the same which is important for majority of nations to ratify and be a part of, otherwise it shall be a toothless setup. The considerations and challenges to the implementation of a BAT needs to be thoroughly solved but its source, that is, BIT’s have shown remarkable success, an indicator of that been cases such as RosInvestco v Russian Federation, MetalClad v. Mexico among many others wherein tribunals have upheld investor protection and rights. The adoption of a BAT would thus ensure and establish international arbitration as a default mechanism for dispute resolution in international commercial transactions which will eventually benefit international commerce and business.


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