The Aakhya Weekly #63 | What good is an investment court?
The Aakhya Weekly #63 | What good is an investment court?
In Focus: Europe's ICS: panacea or political headache?
By Sujaya Sanjay
The EU and India are negotiating a new bilateral investment treaty (BIT), under which the EU has proposed an investment court system (ICS) to replace the previous arbitration-based system. The EU trade commissioner, Valdis Dombrovskis, has said that investment protections are necessary to facilitate investments, and with that comes a proper mechanism for investment dispute resolution. The EU, ever the pioneer, has already included the ICS in its agreements with Canada and Vietnam. And it’s trying to get India on board. According to the EU, the ICS would be a permanent body—transparent, with qualified judges, an appeals process, strict ethical standards, and clear rules for investor claims. These negotiations with the EU come after India terminated most of its BITs following the first claim. Check out our article from July to read more about India’s BIT programme, how it began, and why it was abandoned.
But why are we discussing an Investment Court at all? To understand, let’s rewind a bit.
From threats of warfare to backroom negotiations
In the 19th century, before the age of civilised nations, naval powers were sent abroad to protect imperial interests – a tactic famously known as gunboat diplomacy. US President Theodore Roosevelt called it (somewhat crassly) the “Big Stick” approach, making it the key tool of US foreign policy during his time. Gunboat diplomacy was effective in securing American financial interests in the Dominican Republic in 1907 without needing to colonise the country – a kinder solution, by the standards in those days.
Eventually, nations realised the need to find a better way, and the Hague Convention on the Peaceful Settlement of International Disputes was signed in 1907. The crudeness of gunboat diplomacy was eschewed for a more elegant approach – diplomatic protection, where investors involved their governments to pressurise host countries who had nationalised or expropriated their investments, to repatriate or compensate for losses. Consider a petulant bully holding up a younger child’s toy out of reach – which likely sums up the image of expropriation in the minds of erstwhile gunboat crusaders, who now had to negotiate with the bully to get the toy back.
This approach was short-lived, for one key reason: politics. Any diplomatic dialogue between sovereigns involves concessions, trade-offs, and a thousand other considerations in the backdrop of bilateral ties. The Cold War era was an age of expropriations and nationalisation of property by countries influenced by the machinations of Soviet-style governance, and by newly independent former colonies taking their first steps on the unfamiliar plane of sovereignty. It was a delicate time in a M.A.D. world with rampant espionage, covert operations, scientific advancements, and increased cross-border engagement. Eventually, nations came to agree on the inherent unfairness of expropriation, and once again, resolved to find a better way without disturbing the peace.
The advent of neoliberalism was the dawn of a new era, laying the foundations for ISDS through the mechanism of a bilateral investment treaty with an arbitration clause, giving the investor direct access to remedies against the host country before a neutral, independent tribunal – popularly called investor-state dispute resolution (ISDS). This was great for many reasons: investors could directly claim against host States; the disputes became effectively legal and therefore non-political; and arbitration (at least back then) showed great promise as a speedy and cost-effective remedy with procedural autonomy.
ISDS – the EU’s problem child
EU countries had always voiced a strong support for ISDS, especially in treaties with the Global South (see our previous piece on BITs for more context). The Dutch “gold standard” was developed as a global standard for investment protections, and policymakers in Europe naively thought that its effectiveness explained the lack of claims against Europe (Poulssen, Bounded Rationality). However, this approach was quickly abandoned in 2014 with Germany facing its first claim, triggering protests over “secret courts”, and the perception that private enterprise was overriding public interest. All of a sudden, there was great urgency in abandoning these treaties wholesale, including the controversial Energy Charter Treaty (more on the ECT in a future edition). It seems that States, no matter how developed, do not like bending to the edict of international tribunals.
So, what is the solution? Investors have a right to protect their investments from expropriation – this is no longer purely an imperialist view, when you consider the number of South-South BITs in force today. But it is equally true that States cannot prioritise the welfare of foreign corporations over their own citizens. And so, yet again, we need to find a better way.
The Investment Court System
The ICS is envisaged as a permanent institution (like the International Court of Justice) dedicated solely to deciding investment disputes. There’s not much evidence to suggest that this is a popular idea, but the United Nations Commission on International Trade Law (UNCITRAL) began deliberating ISDS reform in 2017, where the ICS figures prominently as a viable solution. Furthermore, wars in Ethiopia and The Ukraine, and the conflict brewing in Taiwan, have reminded nations of their commitment to peaceful settlement of disputes. The nature of power and money is such that it requires systems and processes to keep it in check – be it the excesses of sovereignty or of profitmaking.
The ICS is not entirely a bad idea. It offers transparency, the possibility of appeal or review, open records, streamlining of jurisprudence, and the development of standards that balance investor protections with regulatory rights. However, there are some serious considerations that require fleshing out – such as the appointment and functioning of the judges.
One of the criticisms of ISDS is that the system incentivises tribunals to favour investors in order to secure future appointments. Because only investors can raise claims under BITs, arbitrators who favour claimants tend to be appointed more frequently. The ICS takes this appointing power away from the parties and creates a permanent roster of judges. But this is not much different: in ICS, it is the States that appoint all the judges.
The appointment of judges in international institutions has always been (and will continue to be) a political affair. Syed Akbaruddin’s book, India vs UK (2021), illustrates this issue in great detail while describing one of India’s great diplomatic triumphs in beating the UK to a seat on the International Court of Justice.
UNCITRAL WGIII is currently deliberating on the code of conduct for arbitrators (in the existing ISDS setup) and for judges in the proposed Investment Court. While the arbitrators’ code has received general agreement, the judges’ code has not. The political nature of judges’ appointments could affect Court’s impartiality, as it so often does at the ICJ, necessitating diplomatic action by countries like India to preserve national interest.
In summary, the EU's push for an Investment Court System in its investment treaty negotiations with India reflects efforts to address past criticisms of the ISDS system. The ICS aims to offer enhanced transparency, appeals mechanisms, and a better balance between investor rights and state interests. However, challenges remain, including the potential for political influences in judge appointments and the ongoing debate within UNCITRAL on codes of conduct for judges in the proposed ICS. The journey towards an effective and fair international investment dispute resolution system continues.
Top Stories of the Week
An outpouring of enthusiasm for the IT Hardware PLI 2.0
Three months since the notification of the PLI Scheme 2.0 for IT Hardware, local and global firms alike appear to have leapt for the incentives on offer - with the Government receiving as many as 38 applications from entities from India and abroad. By the close of its application window on August 30, the scheme had drawn interest from global firms like Dell, Lenovo and HP, as well as local electronics manufacturers like Dixon Technologies’ subsidiary Padget, VVDN, Optiemus and Sahasra.
India currently imports nearly 65% of its laptops/ PCs. The new scheme, the second for the sector, promises to reverse this trend, shoring up domestic production. This tranche of PLI comes with increased incentives (upto 5%, from 3%), a longer target period (6 years, from 4 years) and a larger target segment (ultra-small form factor added) compared to the first one. Under the scheme, incentives are given based on ‘net incremental sales’ - the additional sales they have managed over the previous year. Applicants are expected to begin with assembly of IT hardware, adding one domestically manufactured product every subsequent year. The incentive offered ranges from 0.41% for power adapters and batteries to 3.78% for processors designed with co-ownership in India, declining every year over the scheme’s lifetime.
The PLI scheme is well intentioned, hoping to stimulate the manufacturing sector and substitute imports. However, success is not guaranteed. Import substitution is usually effective only when the country has or can develop a comparative advantage in those goods. Challenges such as a lack of technological expertise, unreliable infrastructure and an unstable regulatory environment pose hurdles to India’s success. Despite the world seeking alternatives to China for manufacturing partnerships, moreover, India may struggle to attract collaborations due to the favourable trade agreements and lower tax rates offered by countries like Vietnam and Thailand. In these circumstances, such a scheme may potentially result in a wastage of taxpayer’s money, unless broader changes ensure India’s overall attractiveness as an investment destination.
ISRO’s next big voyage
After the successful landing of Chandrayaan-3, ISRO has set out on a yet more ambitious project - Aditya L1, the country's first space-based observatory designed to study the sun. The mission is scheduled for launch on September 2nd at 11:50 AM from Sriharikota Island. Upon launch, the spacecraft will take four months to cover a distance of 1.5 million km to reach its destination - a halo orbit around Lagrange point 1 (L1), the nearest of five points in the solar system where the gravitational forces of the sun and the Earth balance each other perfectly. This allows the craft to retain a stable location without spending fuel, enabling the continuous, uninterrupted monitoring of solar activities and their impact on space weather in real-time.
The space probe will carry seven distinct payloads, each specifically designed to investigate different layers of the Sun over the next five years. The emphasis of ISRO’s probe is on three of these - the chromosphere, photosphere, and the outermost layer -corona. The staggering distance that Aditya L1 must cover, the many moving components of the satellite and the attendant risk of collision arguably make this the most daring mission that the organisation has undertaken to date.
ISRO’s solar voyage has the potential to provide new understandings of solar dynamics and reorient the direction of space exploration. Equally, however, this project is testimony to the growing scale of the ISRO’s ambitions.
A Few Good Reads
Christine Huang, Moira Fagan and Sneha Gubbala decode how the world sees India - summarising the results of a recent Pew survey.
Pratap Bhanu Mehta tears down the recent project of ‘decolonisation’, noting its warped intellectual and political context.
Ben Cohen zooms into an under-appreciated aspect of the Chandrayaan 3 mission - its incredible frugality.
The Bharatiya Nyaya Sanhita may, in the garb of preventing sexual violence, limit the sexual autonomy of young Indians, warns Neetika Vishwanath.
Read Calvin Trillin’s 1963 ground report on the lead-up to Martin Luther King Jr.’s seminal “I Have a Dream” speech.