Bilateral Investment Treaty

         Bilateral Investment Treaty

  A bilateral investment treaty (BIT) is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in another state. This type of investment is

called foreign direct investment (FDI). BITs are established through trade pacts. A nineteenth-century forerunner of the BIT is the friendship, commerce, and navigation treaty (FCN).[1] Most BITs grant investments made by an investor of one Contracting State in the territory of the other a number of guarantees, which

typically include fair and equitable treatment, protection from expropriation, free transfer of means and full protection and security. The distinctive feature of many BITs is that they allow for an

alternative dispute resolution mechanism, whereby an investor whose rights under the BIT have been violated could have recourse to international arbitration, often under the auspices of the ICSID

(International Center for the Settlement of Investment Disputes), rather than suing the host State in its own courts.[2] This process is called investor-state dispute settlement. The world's first BIT was signed on November 25, 1959 between

Pakistan and Germany.[3][4] There are currently more than 2500 BITs in force, involving most countries in the world.[5] Influential capital exporting states[citation needed] usually negotiate BITs on the basis of their own "model" texts (such as the Indian or U.S. model BIT) Bilateral investment Treaties (BITs) or Bilateral Investment Protection Agreements (BIPAs) are agreements between two countries for the reciprocal promotion and protection of investments in each other’s

territories by individuals and companies situated in either State. They provide treaty based protection to foreign investment. The BITs are thus bilateral agreements by countries to protect the investment by each country’s investors in the other country. Though they are signed by governments, their beneficiaries are business entities. New Model Bilateral Investment Treaty (BIT) The government had brought a new Model Bilateral Investment Treaty (BIT) in 2016 (often 2015 is also mentioned) and it became effective from April 2017 onwards, replacing the earlier framework. As a result of this change, new investment into the country has to be treated under the revised guidelines and negotiations should be started with partner countries.

Why the new Model BIT?

 Main reason for bringing the Model BIT was the constant suing of the country by foreign firms. India was one of the most sued country during 2015 and 2016. According to UNCTAD- the international

institution that tracks global investment trends, around 17 investor-state arbitrations are filed against the country launched by foreign investors by the end of 2015. Of these, nine are settled and

seven are six are pending and in two cases the country has lost the arbitration. In these two cases, the entities –White Industries and Devas Multimedia have won arbitration against the country. The

flooding of arbitrations including that of the Sistema, Vodafone, Children Investment Fund etc. tempted the policy makers to reframe the BITs.The government thus has modified the existing 1993 BIT framework and brought out the 2015 Model BIT. The move is important as it will help the country to make its treaty more specific in international arbitrations. The textual consistency of a countries’ BIT

determines its success in BIT negotiations and disputes.

     Features of the new Model BIT

 The Model Treaty brings several provisions either new or modifications of the existing one. Important features are mentioned below.

1. Enterprise based definition of investment instead of asset based

definition

 The Model has adopted an ‘enterprise-based’ definition of investment that under which investment is treated as the one made by an enterprise incorporated in the host state. Under the earlier ‘asset based definition’ of investment included intellectual property and other assets that whereas these assets are not considered as assets under the new definition. The objective of adopting enterprise-based

approach is to narrow the scope of protected investments and reduce the potential liability of the state under Investor-state disputesettlement (ISDS) claims. Asset based definition considers every kind of asset – both movable and immovable as investment and gives

protection under treaties, though their contribution to national economic development is meagre.

2. Exclusion of MFN treatment

 The most important feature of the amended model is that it droped the Most Favoured Nation (MFN) status previously included. Purpose of the MFN clause for the investors angel is to ensure that a say, a US investor is not discriminated compared to say, a Japanese investor.

 In recent years, complaining foreign investors sued India arguing that they have to get the same beneficial treatment given to companies from other countries. This was happened in the case of White

Industries. The Australian firm has highlighted the MFN status provided under the India-Kuwait BIT to claim compensation from the government and won an international arbitration. The White Industries case is pointed as the main factor that produced the deletion of the

MFN clause. 

3. Full Protection and Security (FPS): In the context of the Model, FPS means obligations only relating to physical security of investors and to investments.

4. State government as stake holders: Actions of the state Governments are included under the Model BIT.

5. Fair and equitable treatment (FET)

 The Model BIT links Fair and Equitable Treatment to international laws. This is aimed to counter a broad interpretation and risk misuse. Here, customary international law, which is built in state practice, gives a minimum standard of protection to investors. Any potential violation listed in the provisions of denial of justice, breach of due process etc, requires a violation of customary international law for a claim to be justified.When the Model BIT linked FET to international law, it gives more scope for government and regulators.

6. Expropriation

 Expropriation means nationalization of assets of foreign companies. As in other BITs, the Model BIT provides that the State cannot nationalise or expropriate an Investment or take measures equivalent to expropriation, except “for reasons of public purpose” in accordance with the procedure established by law and on payment of adequate compensation. But it gives certain exemptions. Here, the Model BITsays that, any measure by a judicial body aiming to protect public interest will be outside the purview of expropriation. Similarly,non-discriminatory regulatory measures were also excluded.

7. Non-Discriminatory treatment

The Model BIT includes a new clause on non-discriminatory treatment for compensation of losses. As peer the clause, investors can avail non-discriminatory just compensation in circumstances like armed conflict, natural disasters and in the state of national emergency.

8. Provision for transparency

 The Model BIT incorporates a clause for transparency, requiring the Parties (government and regulators) to ensure that all the laws, regulations, procedures and administrative rulings regarding matters covered in the BIT are published or are available for interested persons to get acquainted with them. The clause thus ensures clarity of laws and policies for the investors.

9. Corporate Social Responsibility

 The Model BIT mandates foreign investors to voluntarily adopt internationally recognized standards of corporate social responsibility.

10. Conditions for initiating arbitrations at international arbitrations The Model BIT stipulate that the aggrieved investor should use all local remedies as well as negotiations and consultations initiating

arbitrations against the host State. Investor can use outside remedies only five years after resorting to all domestic arrangements.

11. The model BIT approved by the cabinet excludes matters relating

to taxation. The model Bill thus tries to balance protection to the investor with

state regulations. More importantly it was configured in the context of excess legal arbitration against the state. What is more important is to renegotiate with the partner countries and attract foreign investment in the context of the change.