Investment Treaty and Bilateral Investment Treaty Arbitration

Investment treaty arbitration is a claim by a foreign investor against the State that hosts its investment, brought under a treaty between that State and the investor's own State. There is no contract between the parties and no arbitration agreement in the ordinary sense: the host State makes a standing offer to arbitrate in the treaty, and the investor accepts it by filing a claim. India faced a series of such claims after 2011, terminated most of its older treaties, and adopted a new Model Bilateral Investment Treaty in 2016 which narrows the protection offered and requires the investor to use Indian courts first.

The structure of a treaty claim, what the 2016 Model changed, and why

1. How It Differs from Commercial Arbitration

Basis	Commercial arbitration	Investment treaty arbitration
Source of consent	An arbitration agreement between the parties	A standing offer in a treaty, accepted by the investor on filing
The parties	Two private parties, or a private party and a State acting commercially	A foreign investor and the host State acting in its sovereign capacity
What is complained of	Breach of contract	Breach of a treaty standard, such as expropriation without compensation or denial of national treatment
Governing law	The law chosen by the parties	The treaty, and public international law
Rules	Institutional or ad hoc rules chosen by the parties	ICSID, UNCITRAL or institutional rules as the treaty provides
The award	Enforced under the New York Convention	Enforced under the ICSID Convention where applicable, or under the New York Convention, against State assets abroad

2. Why India Rewrote Its Model

📖 White Industries Australia Ltd. v. Republic of India, award of 30 November 2011

Held: The tribunal, constituted under the India-Australia bilateral investment treaty, held that India had breached its obligation to provide effective means of asserting claims and enforcing rights. The investor could not rely on that standard under the Australian treaty directly; it imported the standard from the India-Kuwait treaty through the most favoured nation clause. The complaint was the delay of about nine years in the Indian courts in enforcing an award in its favour.

Significance: This was the first investment treaty award against India. It demonstrated that the most favoured nation clause allowed obligations from other treaties to be imported, and that delay in the courts could itself found a treaty claim. The review that produced the 2016 Model Treaty followed.

Claims arising from the retrospective amendment of the tax law, brought by Vodafone and by Cairn Energy, reinforced the position. Both were decided against India, and the Taxation Laws (Amendment) Act, 2021 withdrew the retrospective demands. From 2016 India issued notices terminating a large number of its older bilateral investment treaties and offered joint interpretative statements and new treaties on the model of 2016.

3. The Model Treaty of 2016

An enterprise-based definition of investment. The investment must be an enterprise in India with real and substantial business operations, possessing characteristics such as the commitment of capital, the expectation of profit and the assumption of risk. Portfolio holdings, goodwill and market share are excluded.
No most favoured nation clause. The provision that produced White Industries was removed altogether, so obligations cannot be imported from other treaties.
No open-ended fair and equitable treatment standard. In its place is a closed list of specified breaches of customary international law, such as denial of justice, fundamental breach of due process and manifestly abusive treatment.
No umbrella clause. A breach of contract does not become a breach of the treaty.
Carve-outs. Taxation, compulsory licences, government procurement, subsidies and measures of local government are excluded from the treaty's protection or from the dispute resolution provisions.
Exhaustion of local remedies. The investor must first pursue the claim before Indian courts, tribunals or administrative bodies for at least five years, and thereafter serve a notice of dispute and observe a further consultation period before commencing arbitration. A limitation period runs from the time the investor first knew of the measure.

⚠ Why the local remedies requirement is contested

The State's argument is one of sovereignty and of sequence: a foreign investor should use the courts of the host State, as a domestic investor must, before invoking an international tribunal, and the requirement filters out complaints that the domestic system would have answered. The investor's argument is that a five-year requirement is unrealistic where the very complaint is delay in those courts, which was the substance of White Industries, and that a protection which takes five years to reach is not a protection at all. More recent Indian treaties have reduced the period, which suggests the criticism has had some effect.

4. Enforcement in India

An award made in an investment treaty arbitration is not an award under the Arbitration and Conciliation Act, 1996. The relationship between an investor and a host State exercising sovereign power is not a commercial relationship within Section 44, and the Delhi High Court has held that a treaty arbitration is not governed by the Act. The consequence is that a successful investor does not enforce in India at all; it seeks to attach Indian State assets abroad, in a jurisdiction that applies the restrictive doctrine of sovereign immunity. That is what makes immunity from execution, rather than the merits, the decisive question in these cases.

5. Related Topics and Provisions

Topic or provision	Connection
Sovereign and State Immunity in Enforcement	Why treaty awards are enforced abroad
International Commercial Arbitration	The commercial arbitration with which this is contrasted
New York Convention Awards: Sections 44 to 52	The definition of a foreign award and the commercial requirement
ADR in Government Contract Disputes	Disputes with the State in its commercial capacity
Model Bilateral Investment Treaty, 2016	The template for India's current treaties