Using trade treaty policy to strengthen arbitration

This article highlights a significant shift in India's approach to Investor-State Dispute Settlement (ISDS) mechanisms within international treaties. Historically, ISDS clauses allowed foreign investors to sue host states in international tribunals, often bypassing domestic courts. However, due to concerns over regulatory sovereignty (e.g., retrospective taxation cases like Vodafone and Cairn), India has recently omitted ISDS clauses from many FTAs and heavily restricted them in newer Bilateral Investment Treaties. The author suggests that future FTAs should explicitly state that the absence of ISDS is justified because India possesses a robust commercial arbitration system. By doing so, India can assure foreign investors of a fair dispute resolution process while protecting its sovereign right to regulate. UPSC candidates should understand this tension between investment protection and regulatory space, and how treaty design can manage it.

The piece advocates for utilizing international treaties to reform and strengthen domestic governance structures, specifically the commercial arbitration ecosystem governed by the Arbitration and Conciliation Act, 1996. The author points out that current BITs require foreign investors to exhaust local remedies before accessing international arbitration, but often exclude domestic commercial arbitration from this definition. To enhance confidence in the Indian legal system, future treaties should clarify that submitting a dispute to commercial arbitration in India satisfies this exhaustion of local remedies requirement. This approach aligns with broader governance goals of reducing the burden on traditional courts, improving the ease of doing business, and enforcing contracts efficiently—key metrics often evaluated in international rankings.

The economic implications of dispute resolution are central to attracting foreign direct investment (FDI). Investors evaluate not just market entry but the security of their capital when disputes arise. The author addresses the complex issue of third-party funding (where an outside entity finances legal costs in exchange for a share of the settlement). While the Government of India restricts third-party funding in ISDS cases to prevent frivolous claims against the state, the author argues this prohibition should not automatically extend to domestic commercial arbitration. Allowing third-party funding in commercial cases could make arbitration more accessible for businesses, align India with global best practices, and economically incentivize the growth of a domestic arbitration hub, similar to Singapore or London. For UPSC, analyze how legal predictability acts as a catalyst for economic growth.