Using Trade Treaty Policy to strengthen Arbitration: FTAs, BITs and Arbitration

Why in News?

India’s expanding network of Free Trade Agreements (FTAs) and Bilateral Investment Treaties (BITs) provides an opportunity to strengthen commercial arbitration. Investors seek not only market access but also confidence that disputes will be resolved fairly and efficiently.

What are FTAs and BITs?

• Free Trade Agreements (FTAs) primarily seek to facilitate cross-border trade by reducing tariffs and other barriers and establishing rules governing trade in goods and services. Modern FTAs may also cover investment, intellectual property, digital trade, government procurement and dispute settlement.
• Bilateral Investment Treaties (BITs) primarily establish reciprocal standards for the protection and treatment of investments made by investors of one country in the territory of another. They may provide protections against discriminatory treatment and unlawful expropriation and may establish mechanisms for resolving investment disputes.

Commercial Arbitration and Investor-State Dispute Settlement:

(i) Commercial Arbitration: 

• Commercial arbitration is an alternative dispute resolution method where parties agree to submit business or contractual disagreements to a private arbitrator instead of a public court. 
• Legal Basis: In India, this is governed by the Arbitration and Conciliation Act, 1996, which covers both domestic and international commercial arbitrations. 
• Cross-Border Application: Foreign investors and Indian companies or government bodies rely on an explicit arbitration clause in their contracts to bypass local court delays. 
• E.g., it can be used to recover unpaid dues or address breach-of-contract claims between a foreign contractor and an Indian public sector undertaking or government agency.

(ii) Investor-State Dispute Settlement:

• Investor-State Dispute Settlement (ISDS) is a specialised legal mechanism embedded in international investment agreements (IIAs) and bilateral investment treaties (BITs). It grants eligible foreign investors the right to directly initiate international arbitration against a host government.
• Legal Basis: Claims are brought if the host State allegedly breaches specific treaty obligations, such as expropriating property without compensation, denying fair and equitable treatment, or implementing discriminatory regulations.
• ISDS bypasses local domestic courts, providing foreign investors with a neutral, international forum to protect their capital and seek financial compensation.

India is a party to the New York Convention, 1958, subject to reciprocity and commercial reservations. It supports cross-border recognition and enforcement of arbitral awards, but enforcement remains subject to prescribed conditions. 

Major Challenges in the Existing Framework:

• Investor Protection vs. Policy Space: Balancing robust investor protection with host-state sovereignty is a primary hurdle. India’s strict Model Bilateral Investment Treaty (BIT) tilts heavily toward defending state regulatory powers. While this shields the government’s authority to act on public interests (such as health, tax, and environment), the omission of baseline protections like the Most-Favoured-Nation (MFN) clause significantly dampens foreign investor confidence.
• The ISDS void in Modern FTAs: India’s recent trade policy shows a strong aversion to traditional international tribunals. Major pacts like the India-UK CETA omit ISDS entirely, opting instead for State-to-State dispute resolution. Consequently, foreign investors face unclear remedies. While commercial arbitration can resolve standard contract disputes with state entities, it cannot enforce or protect broader treaty rights.
• Lengthy local-remedies requirements: Some BITs require investors to pursue domestic remedies before international arbitration. E.g., India-UAE BIT: Provides a three-year local-remedies requirement. India-Uzbekistan BIT: Contains a five-year requirement, with specified qualifications. Given the backlog in the Indian judicial system, this mandatory litigation period adds severe delays and prohibitive cost burdens.
• Lack of a Statutory Framework for Third-Party Funding (TPF): While Indian courts passively permit third-party funding for commercial disputes, the country lacks a dedicated statutory framework to govern it in arbitration. This regulatory vacuum creates compliance uncertainty regarding mandatory disclosures, conflicts of interest, and cost liabilities for international funders backing complex claims against state entities.
• Delays in Domestic Enforcement: The efficiency of any international or commercial award relies heavily on swift enforcement. If a foreign investor wins an award against an Indian entity, the subsequent domestic litigation required to enforce it through Indian courts often turns into a multi-year battle, undermining the primary speed advantage that arbitration is supposed to deliver.

The Editorial’s Three Proposals: 

1. Explain Why an FTA Omits ISDS: When an FTA deliberately leaves out Investor-State Dispute Settlement (ISDS), the treaty text should explicitly map out the alternative domestic courts and contractual remedies available to investors. This transparency reduces market uncertainty and establishes clear expectations from day one 

2. Recognise Suitable Commercial Arbitration as a Local Remedy: Future Bilateral Investment Treaties (BITs) should explicitly state that time spent pursuing private commercial arbitration in India counts toward fulfilling the mandatory local-remedies timeline (such as the 3 or 5-year periods). 

3. Separate Funding Rules for ISDS and Commercial Arbitration: Treaties must draw a sharp line between different types of dispute financing. A blanket treaty ban on Third-Party Funding (TPF) for international investment claims should explicitly exclude domestic commercial arbitration, allowing India to maintain a distinct, pro-business policy for commercial disputes. 

Conclusion:

India’s treaty policy should link market access and investment protection with credible dispute resolution. Clear treaty obligations, effective commercial arbitration and predictable enforcement can strengthen investor confidence while preserving legitimate regulatory space.