The Changing Role of the State in Investor-State Arbitration: a Comparison of Brazil and India’s Proposals

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Investor to State Dispute Settlement (“ISDS”) has been subject to extensive criticism in recent years, with opposition stemming from developing and developed states alike.  Some of the main points raised by critics are:  (i) the unpredictability of the interpretation of the standards of protection and the proliferation of conflicting awards; (ii) challenges to public policy; (iii) the system’s restriction of States’ regulatory freedom; and (iv) the lack of transparency.

As a consequence of this general opposition, some states, such as Ecuador, Bolivia, and India, have seen the systematic withdrawal from BITs. In addition, other states have traditionally refused to take part in the system.  Brazil, for example, has only one BIT in force at the moment.

When addressing ISDS reform, all of these states fall in the group of what scholars have called as the “paradigm shifters.”  In essence, these countries reject the possibility of investors bringing claims directly against the state, and therefore suggest a variety of alternate methods, such as domestic courts, ombudsmen, or state-to-state arbitration.

The preponderance of the role of the investor’s state in these proposals has again raised concerns regarding a possible politicization of investment disputes.  Investor-to-state arbitration was created to avoid the political implications of diplomatic protection as protection to investors.  The primary drawbacks of diplomatic protection include the fact that the state of the investor has control over the existence of the process (meaning that the state has the ability to choose whether or not to sue the host state) and that the state has the ability to drop the claim at any moment. Meanwhile, the investor has no decision-making power at any stage.

Accordingly, the fact that some states receiving considerable amounts of foreign direct investment (“FDI”), such as India and Brazil, have made Bilateral Investment Treaty (“BIT”) proposals that give the states a leading role in investment dispute resolution, renews the debate as to whether diplomatic protection and other parallel means can be adequate solutions for foreign investor claims.

Brazil’s proposal: State-to-state arbitration

Brazil, the ninth-largest economy in the world, was usually seen as the best example supporting the theory that neither BITs nor ISDS were necessary to attract FDI.  However, Brazil’s opposition to BITs ended in 2015, when it signed agreements with some states, including Angola and Mexico.  Additionally, in the same year, Brazil published its Cooperation and Facilitation Investment Agreement (“CFIA”), which intends to serve as Brazil’s model BIT.

For the purposes of this post, the CFIA envisions a dispute-resolution system that intends to avoid the need to resort to arbitration.  Brazil implemented this system through:  (i) the creation of a joint committee composed of representatives of the signatories of the BIT; and (ii) the designation of an ombudsman.

Both the joint committee and the ombudsman have the duty to participate in mediation proceedings before going to arbitration (Article 23).  In the event that they cannot resolve the dispute, then the CFIA provides for state-to-state arbitration (Article 24).  Accordingly, disputes are resolved by representatives of the state, without the participation of the investor.

Brazil justifies its proposal on the grounds that it is intended to avoid disputes.  In Brazil’s view, excessive litigation arising out of BITs and the current regime’s constraints on state sovereignty have had a negative impact on developing states, especially in Latin America and the Caribbean.  Moreover, Brazil’s opinion is that ISDS has the effect of definitively terminating the relationship between the foreign investor and the state, which could be prevented by resorting to mediation. Avoiding disputes is therefore more beneficial to all the parties involved.

India’s proposal: the preponderance of local courts

India’s proposal similarly brings the state to a more leading role, however it does so in a different way.  In recent years, India has started the process of terminating fifty-eight BITs.

Published in 2015, India’s model BIT provides for investor-state arbitration.  However, it includes very specific regulation of the conditions necessary to access this type of dispute settle mechanism, and the procedure to be followed in the event an arbitration arises.

For the purposes of this post, the most relevant provisions of the model BIT are Articles 14(ii)a, 14.3, and 14.7.  These articles set out the basic principles of the system, namely:  (i) that Indian courts and their decisions have immunity, i.e., they cannot be subject to review; (ii) that investors have to exhaust local remedies in order to access arbitration, and start negotiations to solve the dispute amicably for at least one year; and (iii) that the procedure will be conducted under the UNCITRAL rules, since India is not part of the ICSID convention.

Even though this may appear to be a more traditional approach that respects the current ISDS system, practically, the interplay of these provisions may bar investors from litigating their disputes in ISDS.  Since local remedies must be exhausted in order to access arbitration (Article 14.3), and issues decided by the Indian courts cannot be subject to arbitration (Article 14(ii)a), access to ISDS may be difficult, if not impossible.

Conclusion

In conclusion, criticism of the current ISDS regime continues and some states are starting to reject the system altogether through different wordings and other means.  All of these proposals seek to remove investors’ participation in ISDS, which would politicize the process, and could, potentially, make the resolution of these disputes harder.

Nonetheless, some of the various approaches to reforming the system seek to help both investors and host states.  Despite the advantages of ISDS, it is only a matter of time before the future success (or failure) of the system reveals itself.