Sri Lanka’s decision to renege on a 2019 agreement with India and Japan that aimed to jointly develop the strategic East Container Terminal (ECT) at the Colombo port comes as a rude shock to India.
While international relations experts are busy assessing the diplomatic fallout of this problematic decision for India-Sri Lanka ties.
The issue also needs to be looked at through the prism of the India-Sri Lanka bilateral investment treaty (BIT), which forms the bedrock of international law governing foreign investment between the two countries.
About Bilateral Investment Treaty (BIT):
A BIT is an agreement between two countries that sets up “rules of the road” for foreign investment in each other’s countries.
BITs typically serve to protect investments made by investors on a reciprocal basis, specifying conditions on regulatory oversight of the host state and limiting interference with the rights of foreign investors.
India framed a Model Bilateral Investment Treaty:
- The penalty awarded by an Investor-State Dispute Settlement (ISDS) tribunal in the White Industries case in 2011, and subsequent ISDS notices served against India in a wide variety of cases involving regulatory measures led to a review of the BITs.
- However, India framed a Model BIT in 2016. Since its adoption, India has unilaterally terminated 66-odd BITs between 2016 to 2019.
- It had sent negative signals to the global investor community on the grounds of being protectionist.
- This is evident as no country has shown an inclination to re-negotiate based on the Model BIT. Since 2016, India has signed just three treaties, none of which is in force yet.
Background of India, Sri Lanka BIT:
- In 1997, India and Sri Lanka signed a BIT to promote and protect foreign investment in each other’s territories.
- The defining characteristic of this BIT, as is the case with all BITs, is that it empowers individual foreign investors to directly sue the host state before an international tribunal if the investor believes that the host state has breached its treaty obligations. This is known as investor-state dispute settlement (ISDS).
- An important protection provided for foreign investment in the India-Sri Lanka BIT is the fair and equitable treatment (FET) provision given in Article 3(2).
- This Article provides that investments and returns of investors of each country shall, at all times, be accorded FET in the other country’s territory.
- Sri Lanka, by signing the agreement to jointly develop the ECT at the Colombo port, created such expectations on the part of Indian investors.
- Defaulting on this agreement, without specific and reasonable justification, potentially violates the Indian investor’s legitimate expectations, and thus, the FET provision of the BIT.
Unilateral termination and issue of survival clause with Sri Lanka:
- The twist in the tale is that India unilaterally terminated the India-Sri Lanka BIT on March 22, 2017.
- This termination was part of the mass repudiation of BITs that India undertook in 2017 as a result of several ISDS claims being brought against it.
- In cases of such unilateral termination, survival clauses in BITs assume significance because they ensure that foreign investment continues to receive protection during the survival period.
- Article 15(2) of the India-Sri Lanka BIT contains a survival clause, according to which, in case of a unilateral termination of the treaty, the treaty shall continue to be effective for a further period of 15 years from the date of its termination in respect of investments made or acquired before the date of termination.
- Thus, the Indian investment in Sri Lanka and vice-versa made or acquired before March 22, 2017, will continue to enjoy treaty protection.
- But, in the case of the investment in developing the ECT at the Colombo port, this survival clause will be inconsequential, since the agreement was signed in 2019, i.e., after India unilaterally terminated the BIT.
- Hence, the Indian investor will not be able to sue Sri Lanka before an ISDS tribunal, notwithstanding the merits of the case.
Need Bilateral Investment Treaty (BIT):
- When countries enter into a BIT, both countries agree to provide protections for the other country’s foreign investments that they would not otherwise have.
- Under a BIT, governments also commit to treat each other investors on a “fair and equitable” basis in accordance with international law.
- BITs limit foreign governments’ ability to take over Y investments in their country.
- If such an expropriation does happen, BITs ensure governments compensate investors in a fair and timely manner.
- BITs also guarantee that investors from are given the same types of preferences that other foreign investors are given in a market also called “most-favoured nation” treatment.
Important lessons for India’s approach to BIT’s:
This sordid episode has important lessons for India’s overall approach to BITs.
- As a consequence of the onslaught of ISDS claims in the last few years, India has developed a protectionist approach towards BITs.
- The motivation appears to be to eliminate or at least minimise future ISDS cases against India.
- However, an important attribute that perhaps has not received much attention is that BITs are
- Thus, BITs do not empower merely foreign investors to sue India, but also authorise Indian investors to make use of BITs to safeguard their investment in turbulent foreign markets.
- Accordingly, given India’s emergence as an exporter, and not just an importer of capital, the government should revisit its stand on BITs.
In the post-COVID-19 world, regulatory risks will further exacerbate, subjecting foreign investment to arbitrary and whimsical behaviour of countries.
India may explore the option to revise the standard of treatment clause to align it with international practices and include the traditional standard of protection of fair and equitable treatment.
Also, must give clarification regarding the open-ended terms in the Model BIT.
India needs to adopt a balanced approach towards BITs with an effective ISDS provision.
This will facilitate Indian investors in defending their investment under international law should a country, like Sri Lanka, renege on an agreement.