Recent reports about India becoming the fifth-largest economy in the world — surpassing none other than the UK — generated much excitement all round. Additionally, the news of Indian-origin British politician Rishi Sunak leading the government of a country that once maintained a grossly unequal economic relationship with India added zing to Diwali celebrations. Specifically, Sunak’s appointment appears to have renewed interest in an India-UK free trade agreement (FTA).

Apart from trade-related provisions, an FTA may contain a dedicated chapter on investment (as in the case of the North American Free Trade Agreement or NAFTA). Such a chapter, in turn, substantially resembles standalone bilateral investment treaties (BITs), including investor-state arbitration (ISA). The ability of foreign private entities to sue sovereign nations is a deliberate design feature of ISA, mainly to ensure legal safeguards for investors when things go wrong in faraway places (as they often tend to). In this regard, both Indian and British businesses will be keen to find out whether, and how investor protections get addressed in the final text of the FTA.

The last two FTAs signed by the UK — which had to renegotiate some of its treaties post Brexit — involve Australia (2021) and New Zealand (2022), with neither envisaging an ISA. India’s last two FTAs — with the UAE (2022) and Mauritius (2021) — do not contemplate an ISA either, although the UAE deal refers to a 2013 BIT (which contains an ISA) with a promise to replace it soon.

Incidentally, even when India terminated most of its first-generation treaties as a reaction to repeated ISA claims, the UAE BIT (which itself was entered into hurriedly to push through the Jet-Etihad deal) remains in place. Although India’s older FTAs with Singapore (2005), South Korea (2009), Japan (2011), and Malaysia (2011) all contain investment chapters with ISA provisions, there appears to be no such negotiating objective with respect to the UK. In fact, consistent with the current global backlash against ISA, this pact may omit it altogether.

Significantly, while India has been sued 26 times under various BITs, it is yet to suffer a single ISA proceeding under an FTA. One reason for this could be the large difference in treaty numbers: At its peak, 74 Indian BITs were in force, compared to only nine FTAs. Another possibility is that the text of Indian FTAs accommodates sovereign regulatory prerogatives better. That is, perhaps, partly why India did not terminate its ISA-bearing FTAs in 2016 even as it went on a BIT-termination spree.

The ISA advantage

In 1994, the UK was India’s first BIT partner. Almost a fourth of all ISA claims involving India was brought under this BIT. However, such claims did not really clash with India’s right to govern or with public welfare measures — such as when Philip Morris challenged cigarette packaging regulations in Uruguay and Australia. Thus, it is difficult to argue that foreign investors use ISA to undermine Indian democracy.

While the ISA regime is often seen as biased and ‘investor-friendly’, four cases out of ten are, in fact, decided in favour of host states, compared to three in favour of investors. Thus, countries not only succeed in ISA, but also do so oftener. Further, just because a country has signed a large number of treaties does not inevitably mean that it will be hit by a high number of claims. For instance, the UK, with more than 130 investment-related international agreements, has been sued only once (among reported ISA proceedings) — and that too by an Indian national. This rarity might reflect better governance (including a more efficient judicial system) relative to countries that are repeatedly sued. India, for example, took notice of ISA only after losing the (in)famous White Industries case, which involved judicial delays lasting over nine years.

Investor’s obligations

One could argue, of course, that BITs represent one-way traffic: while host countries have obligations, investors don’t. Further, only investors can bring claims and, thereafter, host states can either lose or, at best, successfully defend. As a result, for countries that do not export capital, the costs of ISA can outweigh benefits. A lack of clarity on the relationship between BITs and FDI inflow exacerbates such concerns. Thus, one might ask: Is ISA worth the pain?

However, from India’s perspective, as the divide between exporters and importers of capital continues to blur, it is time it identified itself as a major player in the international investment regime. India should view ISA as a mechanism that subjects economic actors to greater discipline and, simultaneously, seek to improve its governance. Moreover, in the context of an India-UK FTA, a post-Brexit Britain crippled by recession needs to be properly accounted for, including the protection of Indian investors. While the UK’s strategic approach document for the FTA aims to provide sufficient protections to its nationals, individual access to ISA should not be seen as an encroachment upon sovereignty, but rather as a form of judicial review that enables investors to seek justice abroad through independent institutions.

(The writer is a lawyer with S&R Associates, a law firm)