Efficacy of Investment Treaty Arbitration: Justice Ravindra Bhat[Video And Full Text Of Speech]

He asserted that even though arbitration has become the "predominant means" of dispute resolution in investment treaties, the ISDS framework is extremely controversial and "threatens to jeopardise" several trade agreements.

He explained that ISDS mechanism can be used to challenge government policies, actions or decisions that corporations allege, reduce the value of their investments.

"These include rules on court procedures and evidence, which aid in ensuring the fairness, legitimacy and reliability of proceedings; rules on who may bring lawsuits and under what circumstances, which aid in balancing the right to sue with the need to ensure that government regulation in the public interest is not made impossible due to unlimited litigation; rules on the power of courts, appropriate remedies, punishment, and compensation; and rules on the independence and accountability of judges who decide cases against the government." Thus, it is viewed as "a threat to the rule of law and national sovereignty," he said.

"While dispute settlement is a private mechanism, the issues being arbitrated are public in their nature," he remarked.

He pointed out that through BITS, foreign investors acquire the ability to "bypass" robust democratic institutions that otherwise safeguard public interests. Investors therefore, often challenge a wide range of environmental, health, and safety regulations laws, apart from a plethora of other subjects of public importance.

"They are able to frame questions of domestic law as treaty claims, and have these ascertained by a panel of private arbitrators, circumventing the national judicial process. Corporations can further raise arbitral claims in cases they have already lost in domestic courts. BITs lack, at times, basic safeguards provided by the judicial system. There are no mechanisms for domestic citizens or entities affected by arbitral claims, to intervene in or meaningfully participate in the disputes; there is no appeals mechanism to address errors of law or fact made in arbitral decisions; and there is no oversight or accountability of the private lawyers who serve as arbitrators, several of whom may rotate between being arbitrators and bringing cases for corporations against governments," he said.

He said that the "wake up call" for India came in 2012, when a claimant namely White Industries Australia Ltd. won an ICC award against the country.

"Treating the award as a debt, White Industries successfully claimed against the Indian government under the Australia-India BIT, invoking principles of international law and contending that the means of asserting claims or enforcing rights (guaranteed under the Australia-India BIT), in order to be effective could not be subjected to indefinite or undue delays. This claim was upheld in the arbitral award dated 30th November, 2011, despite a provision in the India-Australia BIT that subjected legal proceedings to the laws of the host-state, i.e., India."

He added however, that the UNCTAD has recommended the introduction of an appeals mechanism, and the creation of a standing International Investment Court. It also recommended that it should be made compulsory for investors to 'exhaust local remedies' before resorting to international arbitration, and for arbitral tribunals to follow precedent and adhere to timelines for dispute resolution, he said.

Reminding the gathering that treaties are a mechanism designed to be negotiated to take into account the interests of all parties entering into the treaty, Justice Bhat said,

"clauses in BITs must be seriously negotiated by the contracting states, in a balanced manner. The practise of negotiating and interpreting BIT clauses should take into account the absence of a level playing field between developed capital exporting nations with stupendous legal resources at hand, and developing capital importing states that might not have such access to legal resources…

… Developing countries can avoid burdensome claims by foreign investors by negotiating and drafting treaties clearly, providing evidence of state practice (such as model treaties), actively taking part in setting up frameworks for dispute settlement, and issuing joint or unilateral instruments clarifying the intent of the contracting parties."

Another significant problem with investment treaty arbitration, Justice Bhat said, is "precedential instability".

"Arbitral tribunals should follow precedent while interpreting commonly used phrases in BITs, such as 'fair and equitable treatment', 'full protection and security', 'national treatment', etc. The treaty practise in this regard has been inconsistent, and the repeated arbitration of concepts that should have settled meanings, puts a strain on economic resources and the time taken for dispute resolution," he remarked.

He also recommended that arbitral tribunals must be composed more equitably to include arbitrators from developing and third world countries, as well as persons with experience in domestic legal systems.

"This would help increase confidence in the dispute settlement mechanism and also ensure that arbitrators are cognizant of the constraints upon governments to take policy decisions in public interest," he said.

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