A Bilateral Investment Treaty with a ‘Bit’ of Change: India-UAE Relations (GS Paper 2, IR)
Context:
- In 2024, India and the United Arab Emirates (UAE) signed a new Bilateral Investment Treaty (BIT), which replaces the 2014 agreement between the two nations.
- This BIT not only represents a milestone in India-UAE relations but also provides insight into India’s evolving approach to investment treaties, especially in the context of ongoing negotiations with other nations like the United Kingdom and the European Union.
- It offers a balance between protecting investments and preserving India’s right to regulate its economic and legal environment.
Key Features of the India-UAE BIT
Exhaustion of Local Remedies:
- The India-UAE BIT introduces a more investor-friendly provision compared to India’s earlier Model BIT (2015).
- The new treaty requires foreign investors to exhaust local remedies for three years before seeking international arbitration via Investor-State Dispute Settlement (ISDS).
- This is a departure from the five-year waiting period stipulated in earlier agreements like those with Belarus and Kyrgyzstan.
- India has softened its stance, recognizing concerns about its overburdened judicial system, offering foreign investors a quicker path to dispute resolution.
- However, this does not expose India to unnecessary claims if it doesn’t engage in regulatory abuse.
Definition of Investment:
- The BIT clarifies what qualifies as an investment for treaty protection by specifying the investment should exhibit certain economic characteristics—capital commitment, profit expectation, and risk assumption.
- The previous Model BIT had included a subjective element, requiring the investment to be significant for the development of the host state.
- The India-UAE BIT removes this, thereby reducing the potential for arbitral discretion and offering more clarity in the definition.
Greater Clarity in Treatment of Investments:
- Article 4 of the BIT outlines the treatment of investments and explicitly mentions actions that would breach the treaty, such as denial of justice or a fundamental breach of due process.
- Unlike the Model BIT, which linked these actions to Customary International Law (CIL), the India-UAE BIT removes this reference to CIL, reducing the scope for tribunal discretion and offering a clearer framework for dispute resolution.
Continuity with India’s BIT Practice:
- The India-UAE BIT continues India’s practice of excluding the Most-Favoured Nation (MFN) clause, which would have allowed investors to benefit from better terms under other treaties.
- Additionally, the treaty excludes taxation measures from its scope, meaning investors cannot challenge tax measures, even if deemed abusive.
- The BIT also bars ISDS tribunals from reviewing the merits of a domestic court decision, which might limit the tribunal's power to act as an appellate body.
- However, this provision is somewhat ambiguous, potentially making it difficult for tribunals to hear certain cases.
Departures and Innovations in the India-UAE BIT
While the India-UAE BIT adheres largely to India’s standard approach to investment treaties, there are notable departures:
Exclusion of Third-Party Funding:
- The India-UAE BIT specifically disallows third-party funding, which has been a controversial aspect in other international investment disputes.
- This provision ensures that the parties involved in disputes are directly responsible for the legal costs, preventing external influence on the process.
Allegations of Fraud or Corruption:
- ISDS provisions are unavailable if an investor is alleged to have engaged in fraud or corruption.
- This clause aims to ensure that only legitimate disputes are brought before international tribunals.
Conclusion:
- The India-UAE BIT reflects India’s evolving approach to investment treaties.
- While it shows flexibility and responsiveness—particularly in terms of local remedies and clarifying the definition of investment—it still adheres to core principles such as limiting the scope of ISDS and maintaining regulatory sovereignty.
- The treaty strikes a balance between encouraging foreign investment and safeguarding India’s rights to regulate in areas like taxation and judicial independence.
- The departures from India’s Model BIT could signal a shift in India’s investment treaty approach, though it remains to be seen whether this is specific to the UAE or part of a broader trend.
- Developed nations may appreciate India’s shortened local remedy period, but they might remain concerned about taxation exclusions and the absence of the MFN clause, which could hinder future negotiations with other countries.
