Bilateral Investment Treaties (BITs) are agreements between two states that protect foreign investors by ensuring fair treatment, preventing expropriation, and providing dispute resolution mechanisms.
Introduction
Bilateral investment treaties are agreements between two states which provide a framework for the conduct of both governments with respect to investment protection for each other's nationals. Mainly, BITS form parts of larger trade agreements between pending states.
Both treaties guarantee investors from contracting countries fair and equitable treatment, protection against expropriation, and free transfer of funds. Incorporates provisions for arbitration concerning disputes arising out of direct investment between investors and host countries, often under the International Centre for Settlement of Investment Disputes.[1]
What are Bilateral Investment Treaties (BITS)?
BIT is known as the bilateral and investment treaties. Overall, BITS may be defined as treaties between two states, encouraging investors of one state to invest in the territory of another state and protecting the interests of these investors. BITS must provide the following provisions in most cases:
- Just and Equitable Treatment: This, in turn, assures fair, constant, and reasonable treatment to investors, shunning arbitrary or discriminatory means;
- Most-Favoured Nation Treatment and National Treatment: Foreign investors shall not only be given equal treatment with domestic investors but also be accorded with whatever is the best treatment with anybody else from a foreign country;
- Expropriation: BITS prohibits the host state from expropriating foreign investments without proper legal procedure, and compensation must, in addition, always be reasonable and fair;
- Dispute Resolution Procedures: Often included in BITs, investor-state dispute resolution (ISDS) allows investors to file claims against host governments in front of international courts, like the International Centre for resolution of Investment Disputes (ICSID).[2]
By encouraging foreign investors to make investments in a state, BITS help the economy grow and progress completely.[3]
These treaties are essential for countries like India to draw in foreign direct investment (FDI) since they foster investor-friendly conditions while balancing domestic concerns. International investment relations are based on the legal framework created by BITs, which gives investors doing business in other countries protection and recourse.[4]
What is the Purpose of BITS in Promoting International Investment?
Bilateral Investment Treaties (BITs) are treaties that seek to create a cooperative environment for investments and generally provide that contracting states shall offer fair and equitable treatment, preclude expropriation, and provide channels through which disputes can be resolved, primarily under the International Centre for Settlement of Investment Disputes.
The core purposes of BITS in promoting international investment are as follow:
- Legal Protections for Investing: By providing protections including equitable treatment, dispute resolution procedures, and provisions against expropriation, BITs create a predictable legal framework. These clauses lessen the risks for international companies thinking about investing in India.
- Development of the Economy and Inflow of Capital: BITS help India's economy thrive by facilitating investments. In addition to capital, FDI inflows bring state-of-the-art technology, managerial skills, and adoption of global best practices, collectively contributing to long-term job generation and industrial growth.
- Increased Confidence-building Measures for Investors: Clauses such as investor-state dispute settlement and national treatment develop investor confidence through ensuring fair treatment of investments and impartial settlement of disputes.
- Building Inter-Border Relations: By encouraging mutual trust and collaboration in investment-related matters, BITS strengthen bilateral ties. Consequently, this promotes commerce, business alliances, and wider diplomatic relations.
- Enhanced Credibility of the Policy: Signing BITS shows emerging economies like India that they are committed to fostering an environment that is favourable to investors. It positions India as a major destination for foreign direct investment (FDI) in India by highlighting its goal to conform to international standards and integrate into the global economy.
- Dispute Resolution Mechanisms: They create the procedure to resolve disputes arising between investors and host states before international arbitration, thereby ensuring a neutral entity outside the host country's legal system.
- Attracting Foreign Direct Investment: Some researchers have found a positive relationship between BITs in terms of FDI inflows, as such treaties express the nation-state's commitment to protect foreign investments, and thus, are useful to investors.
However, it remains in dispute whether BITS nourishes FDI. While some studies have argued that BITS can instigate an increase in FDI, if they are not supplemented with firmly entrenched domestic policies and institutions, their contribution will turn out to be insignificant. Besides that, concerns about the constraints that BITS can impose on regulatory autonomy in host countries-especially in the fields of environmental protection and public health have been raised.
The BITS are mostly intended to enhance the international investment climate through a mix of legal protections, dispute resolution mechanisms, and confidence-boosting measures. In that light, BITS perform a relative function but are affected significantly by broad economic and institutional features in host countries.[5]
Landmark Judgments on Bilateral Investment Treaties
1. Dabhol Case[6]:
Through its Dutch subsidiary, the American company Enron invested in India in order to construct and run a power plant there with the express purpose of selling electricity there. The Maharashtra government then attempted to halt the project by insisting that a non-competitive bidding process be employed. After that, Enron invoked the Dutch-India BIT's arbitration clause, which led to India having to make a substantial payment.[7]
2. White Industries Australia Limited Vs. India[8]:
In 2011, Coal India Limited of India entered into a long-term agreement with White Industries, an Australian mining company, for the provision of vital equipment for coal mine development near Piparwar in Bihar. A dispute arose, dealing with bonus payments, penalty payments, and the quality of coal extracted. In this case, the award was against India based on India's crushing means to its Australian investor, thus breaching its terms and conditions to the India-Australia BIT. This case brought new standards in BIT law such as the 'effective means' clause that would enable the investor to seek protection under a BIT. However, White Industries faced delays enforcing the decree for almost ten years due to the now infamous delays in the Indian Judicial. The White Industries decision was very significant for India because in many ways it sent out a clear and stark message to India that any kind of expropriation of an investment or denial of justice under a BIT of which India is a party, the concerned investor would be able to appeal for an arbitral remedy. It would show that India can no longer afford the luxury of being careless about its administration and legislative systems when pursuing foreign investments.
Emerging Trends in Reforming Bilateral Investment Treaties[9]
- Reforming Investment Treaties with a Focus on Sustainability: Homelands are presently reforming IIA by issuing treaties with guidelines in support of sustainable investment, repealing outdated BITs, and holding discussions on multilateral ISDS reform.
- Declining Old-Style Treaties: Terminations have outpaced new treaties for the third consecutive year with a considerably diminished number of intra-EU BITs. However, the field remains rife with old generation IIAs.
- Urgent Need for Climate-Compatible IIAs: The presence of older treaties and ISDS claims hastens the urgency needed for stronger investment treaty reforms, with UNCTAD advocating for an IIA framework that supports the global energy transition.
Conclusion
Bilateral Investment Treaties form an important part of India's strategy to attract FDI into India to catalyse economic growth. They provide a robust legal framework for the protection of foreign investors, promote cross-border interaction, and improve India's appeal for global investment.
India's evolving BITS framework displays its commitment to developing an environment friendly to investors, all while giving due regard to domestic priorities; by addressing existing challenges, therefore, India can assert itself as a leading global destination for foreign direct investment in the global landscape.
[1] GEORGETOWN LAW LIBRARY, https://guides.ll.georgetown.edu/c.php?g=371540&p=4187393#:~:text=Bilateral%20Investment%20Treaties%20(BITs)%20establish,agreement%20between%20the%20contracting%20states (last visited Jan, 28, 2025).
[2] SIDLEY, https://www.sidley.com/en/us/services/global-arbitration-trade-and-advocacy/investment-treaty-arbitration/sub-pages/the-basics-of-bilateral-investment-treaties/ (last visited Jan, 28, 2025).
[3] Prateek Bagaria and Vyapak Desai, Bilateral Investment Treaties and India (Jan. 28, 2025, 9:45 PM), https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Bilateral_Investment_Treaties_and_India.pdf
[4] Maheshwari & Co., Understanding Bilateral Investment Treaties (BITs) And Their Impact On FDI In India (Jan. 28, 2025, 9:50 PM), https://www.mondaq.com/india/inward-foreign-investment/1573388/understanding-bilateral-investment-treaties-bits-and-their-impact-on-fdi-in-india
[5] DR. THARANATH & PRIYA A. JAGADISH, A CRITICAL ANALYSIS OF ECONOMIC BENEFITS OF BILATERAL INVESTMENT TREATIES 78 (2020)
[6] Maharashtra Power Development v. Dabhol Power Company and Ors., [2003]48SCL135(CLB)
[7] Sundeep Khanna, Backstory: The Dabhol conspiracy and Enron's India misadventure, CNBC TV 18 (Jan, 28, 2025, 10.00 PM), https://www.cnbctv18.com/energy/backstory-the-dabhol-conspiracy-and-enrons-india-misadventure-13186432.htm
[8] White Industries v. Republic of India, IIC 529 (2011)
[9] UN Trade and Development, https://investmentpolicy.unctad.org/publications/1285/trends-in-the-investment-treaty-regime-and-a-reform-toolbox-for-the-energy-transition (last visited Jan.28, 2025).
