The India-UAE Bilateral Investment Treaty: A Step in the Right Direction?

1. India’s History with Bilateral Investment Treaties

1. Bilateral investment treaties (“BITs”) are agreements between countries that provide protections to investors from one state investing in the other (the “host state”). While BITs promote foreign investment in the host state, host states are also held accountable for their treatment of those foreign investors based on the treaty standards.
2. Historically, from an investor’s perspective, a key benefit of BIT protection was access to international arbitration. Not only did BITs remove any disputes from the host state’s home courts to a neutral forum but it also guaranteed investors with an arbitration award enforceable in the 170+ countries that have ratified an international treaty providing for mutual enforcement, such as the New York Convention.
3. India’s experience with BITs and investor state disputes tracks the nation’s economic trajectory. India signed its first two BITs – with the United Kingdom and Russia – in 1994. This coincided with India’s economic liberalization in the early 1990s under the helm of the then-finance minister Manmohan Singh, who noted India’s efforts at the time to “negotiat[e] bilateral investment treaties with several major investor countries” in his February 1994 budget speech. And, corresponding with the consequent increase in foreign direct investment, India signed more than eighty BITs in the next two decades, as well as free trade agreements with investment chapters.
4. While the 2000s saw India being named in only a handful of investor state disputes – all relating to the Dabhol power project in Maharashtra – the following decade saw a wave of claims being brought against the state. Investors who had flocked to India post-liberalization started exercising their rights under the BITs to arbitrate disputes against the country for the violation of their treaty rights.
5. From 2010 to date, India has been named as a respondent in twenty investor-state arbitrations. These include CC/Devas et al. v. India (involving the expropriation of the investors’ interest in a long-term contract for the lease of satellite spectrum), Vodafone v. India (involving a retrospective transaction tax imposed by the state over claimants’ acquisition of an India telecoms business) and Vedanta v. India (also relating to a tax bill imposed by the state for failure by the investor to pay taxes on capital gains). Some but not all of these arbitrations were decided against India with awards running in the hundreds of millions of dollars of damages.

2. India’s 2015 MODEL BIT and its Unilateral Termination of Existing BITs

6. Apparently in reaction to the claims against it, in 2015 India revised its model BIT (the “2015 Model BIT”). The 2015 Model BIT limited investors’ rights and made it more difficult for investors to sue the country. For example, the 2015 Model BIT:
   1. has a requirement that foreign investors must pursue local remedies for at least five years before commencing a BIT arbitration against India (Article 15);
   2. narrows the scope of protected “investments” (Article 1.4);
   3. excludes any taxation measures imposed by India from the scope of treaty protection (Article 2.4(ii)); and
   4. does not allow investors the benefit of a “most-favored nation” or MFN clause.
7. In parallel to revising its model BIT, from 2015 onwards, India unilaterally denounced seventy-six of its existing BITs and then sought to renegotiate new bilateral treaties with its counterparties based on its 2015 Model BIT.
8. That effort did not meet with success. In September 2021, India’s Parliamentary Standing Committee on External Affairs issued a report noting with concern that:

[T]he number of BITs/Investment Agreements signed post 2015 and the number under negotiations [are] [] inadequate and find[ing] that it is not commensurate with the growth of India’s interest in this domain and our rising stature in global affairs.

9. In addressing the Committee’s concern, a legal expert testifying before the Committee recommended that “India needs to revisit its Model BIT in order to strike a balance between giving investors the rights and also recognising the right of the Host State to regulate in public interest.” Based on its review, the Committee recommended that the 2015 Model BIT be further reviewed to arrive at a more “balanced” text.
10. In a subsequent July 2022 report, the Committee noted that the government in its ongoing BIT negotiations is considering amendments to the 2015 Model BIT focusing “on both the investor’s right to get protection and also sovereign interest and [the] State[’]s right to regulate.”

3. The INdia-UAE BIT

11. It is against this backdrop that India negotiated a new BIT with the United Arab Emirates (“India-UAE BIT”), which came into force on August 31, 2024. In an official statement, the Indian government stated:

India – UAE BIT 2024 is expected to increase the comfort level and boost the confidence of the investors by assuring [a] minimum standard of treatment and non-discrimination while providing for an independent forum for dispute settlement by arbitration. However, while providing investor and investment protection, balance has been maintained with regard to [the] State’s right to regulate and thereby provides adequate policy space.

12. While, at first blush, this statement suggests that India has reverted to the historical model of investment protection guaranteeing UAE investors access to international arbitration for the violation of BIT standards, the text of the India-UAE BIT is more nuanced.
    1. Access to Arbitration
13. Article 17.1 of the India-UAE BIT provides for “conditions precedent” that must be complied with before an investor can submit a claim to arbitration.
14. Like the 2015 Model BIT, there is a requirement to pursue local remedies before the investor can commence arbitration. While under the 2015 Model BIT the requirement to do so was for at least five years, this has been reduced to three years under the India-UAE BIT. Although an improvement, foreign investors are still required to subject themselves to India’s domestic courts. And in circumstances where investor-state arbitrations take several years to complete, an additional delay of three years is not insignificant.
15. What may counterbalance this requirement to pursue local remedies is the following carve-out in Article 17.1 of the India-UAE BIT (corresponding to Article 15.1 of the Model BIT):

The requirement to pursue local remedies shall not be applicable, if the disputing Investor . . . can demonstrate that there are no available domestic legal remedies capable of reasonably providing any relief in respect of the same measure or similar factual matters for which a breach of this Treaty is claimed by the disputing Investor

16. This begs the question, who should decide whether the local remedies requirement is inapplicable? An Indian court or an arbitral tribunal? Based on past cases involving other treaties, some foreign investors have sought to reserve this question to an arbitral tribunal (see, e.g., Ambiente Ufficio v. Argentina).
    2. Powers of the Arbitral Tribunal
17. Both the 2015 Model BIT (Article 26) and the India-UAE BIT (Article 27) provide that a tribunal can only award monetary damages and may not award punitive or moral damages or any injunctive relief.
18. However, the two instruments diverge quite significantly on the appropriate measure of monetary damages that may be awarded by a tribunal. The 2015 Model BIT provides:

Monetary damages shall not be greater than the loss suffered by the investor or, as applicable, the locally established enterprise, reduced by any prior damages or compensation already provided by a Party.

19. The India-UAE BIT goes a step further and provides:

Such compensation shall not be greater than an amount determined by such Tribunal with reference to actual loss but monetary damages shall not be greater than the actual loss suffered by the Investor (excluding incidental and consequential damages including future profits, and assets excluded from the scope of this Treaty).

20. This is a departure from the customary international law standard of “[f]ull reparation [which] encompasses both actual losses (damnum emergens) and loss of profits (lucrum cessans).” (Flemingo DutyFree v. Poland.)
    3. Protected Investments
21. Article 1.4 of the India-UAE BIT lists the kinds of investments that are protected under the treaty.
22. In a departure from the 2015 Model BIT, which excluded “portfolio investments” (Article 1.4(i)), the India-UAE BIT includes within the scope of protection investments in the form of “[s]hares, stocks and other forms of equity participation” as well as “[b]onds, debentures, and loans and other debt instruments” (Articles 1.4.B and 1.4.C).
23. Commenting on this, an Indian think-tank (the Global Trade Research Initiative) has cautioned:

This broadens the scope of the treaty, allowing investors with passive financial holdings to use the ISDS mechanism. This shift increases India’s exposure to disputes over financial instruments, even those that don’t significantly contribute to economic development, moving away from the model BIT’s focus on long-term investments.

24. Such concerns are potentially assuaged by the requirement under Article 14.1 that in order to qualify for treaty protection, investments must have “the characteristics of an investment such as the commitment of capital or other resources, the expectation of gain or profit and the assumption of risk.” This appears to be a nod to the seminal case of Salini v. Morocco pursuant to which “financial instruments” which do not contribute to the host state’s “economic development” would not qualify as investments.
    4. Other Standards
25. In keeping with the 2015 Model BIT, the UAE-India BIT limits the scope of protections available to foreign investors.
26. For example, perhaps in reaction to its losses in Vodafone v. India and Vedanta v. India –both relating to tax bills imposed by the state – the 2015 Model BIT excluded from the scope of protection “any law or measure regarding taxation, including measures taken to enforce taxation obligations.” (Article 2.4(ii)). This is mirrored in Article 2.4(ii) of the UAE-India BIT.
27. Tracking the 2015 Model BIT, the UAE-India BIT also does not include an MFN clause and instead provides that “[a] determination that there has been a breach of another provision of this Treaty, or of a separate international agreement, does not establish that there has been a breach of this Article.” (Article 4.3).
28. And, like the 2015 Model BIT, the obligation to accord investments “full protection and security” under the UAE-India BIT is expressly limited “to [the] physical security of Investors and to Investments made by the Investors of the other Party which does not require a treatment in addition to or beyond that which is required by the customary international law regarding the Minimum Standard of Treatment of aliens.” (Article 4.2).
29. Quite notably, counterbalancing the standards of protection available to investors, the India-UAE BIT includes an express provision (Article 2) on the state’s so-called “right to regulate,” which provides:

The Parties reaffirm the right of each Party to regulate, including through adopting or maintaining measures, within its Territory in pursuit of legitimate public policy objectives including, but not limited to the protection of the environment, health and safety. The mere fact that a Party regulates in a manner which negatively affects an Investment or interferes with an Investor’s expectations, including its expectation of profits, is not a breach of an obligation under this Treaty.

30. The 2015 Model BIT – which was criticized for being skewed in favor of the state – did not include a comparable provision.
    5. Third-Party Funding
31. Finally, while the 2015 Model BIT was silent on the issue of third-party funding, the India-UAE BIT provides that “Third Party funding of the Investor in case of dispute is not permitted.” (Article 16).
32. This is particularly notable in light of the fact that the latest investment treaty case to be filed against India (Indo Gold v. India) arising out of the Australia-India BIT and relating to a gold mine in the state of Rajasthan is being funded by a third-party funder.

4. Concluding Remarks

33. According to UNCTAD’s 2024 World Investment Report, “FDI in developing Asia fell by 8 per cent to $621 billion” and “[s]izeable declines were recorded in India,” and one of the reasons attributed for that decline may be India’s stance as regards its BITs.
34. According to one source, the reaction to India’s 2015 Model BIT was “almost immediate” in that “[s]ince 2016, net FDI inflows have fallen as a percentage of GDP from about 1.7 percent to a little over 0.5 percent.” This is echoed by others who state that “the instantaneous absence of BIT-based extended investor protection to new investments makes investors less confident about the security of their assets and therefore they tend to reduce new investment activity in favor of alternatives.”
35. The India-UAE BIT does show a shift towards softening some of the positions under the 2015 Model BIT. And, as discussed above, there may be sufficient room to interpret certain provisions in favor of a foreign investor. Despite this, there are other provisions that are, in some ways, more state-friendly than the model treaty. Evidently the UAE – one of India’s key trading partners – was sufficiently comforted by the changes to sign on to the treaty. Whether other countries – such as the United Kingdom with whom treaty negotiations have stalled – will be persuaded to sign on to treaties with similar terms remains an open question.