GS Paper 2
Syllabus: Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests
Source: TH
Context: India should not be opposed to joining the investment facilitation agreement (IFA) negotiations for fear of investor-state dispute settlement claims.
Background:
- Even if the World Trade Organization (WTO) is inactive, IFA is one area of rule-making where there is a lot of action.
- Backed by over 100 countries (it does not include India), the proposed IFA is meant to create legally binding provisions aimed at facilitating investment flows.
- This will require states to augment regulatory transparency and predictability of investment measures.
- This agreement will be very different from investment protection agreements (such as BITs) that allow foreign investors to bring claims against the host state for alleged treaty breaches.
- This is known as investor-state dispute settlement (ISDS).
Why is India not a party to IFA negotiations?
- Fear of ISDS: Apprehension that foreign investors could use a future IFA to bring claims under the existing BITs.
- Foreign investors may use the –
- Most favoured nation (MFN) provision in BITs: To import terms from the IFA that they believe to be more favourable than those provided in the underlying BIT.
- Ubiquitous provision of fair and equitable treatment (FET) in BITs: To challenge non-compliance with IFA.
- ‘Umbrella clause’ in BIT: A clause that allows contractual and other commitments owed to a foreign investor to be brought under the treaty’s protective umbrella.
These are mere presumptions:
- Many BITs exempt an economic integration agreement from the application of MFN. Thus, the possibility of importing IFA provisions into the BIT is remote.
- It is unlikely that an ISDS tribunal will accept the claim that a simple IFA violation breaches an investor’s reasonable expectations.
- Most new investment treaties avoid ‘umbrella clauses’ altogether.
Way ahead:
- The IFA categorically state that it
- Cannot be used to interpret or apply any rule for the protection of investment contained in any investment treaty.
- Does not create rights for non-signatory countries and their investors.
- Reforming BITs: Countries can amend their respective BITs to exclude the IFA from its scope.
Conclusion: The possibility of an audacious ISDS tribunal interpreting provisions broadly can never be ruled out. But this cannot be a basis to oppose international law-making.
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