A European Court of Justice ruling will have bearing on India-EU pacts.

During their recent meeting in Germany, Prime Minister Narendra Modi and German Chancellor Angela Merkel agreed on the need to resume India-European Union (EU) free trade agreement (FTA) talks. These negotiations, covering trade, investment protection and intellectual property, have remained deadlocked since 2013.

The recent and hasty unilateral termination of bilateral investment treaties (BITs) by India with many EU member countries including Germany has complicated things further, leaving many European businesses worried about investment protection in India. As India prepares to resume FTA negotiations on all issues including investment protection, a recent landmark decision by the European Court of Justice (ECJ) — the highest court in the EU in matters of EU law — which has not attracted much attention assumes importance.

The ISDS mechanism

The European Commission negotiated an FTA with Singapore from 2010 to 2013 covering a wide range of issues such as tariff reductions, intellectual property and investment protection including the investor-state dispute settlement (ISDS) mechanism. The ISDS provision in the EU-Singapore FTA gives investors a choice between bringing a dispute against a host state before the national court of the country where the investment has been made and submitting the dispute to international arbitration. The European Commission and the EU member states disagreed as to who had the competence to ratify the FTA. The ECJ decided that EU had the exclusive competence over almost all aspects of the FTA barring non-direct foreign investment — also known as portfolio investment — and the ISDS mechanism. In other words, for agreements containing non-direct foreign investment and/or ISDS provisions, EU member states enjoy mixed competence to approve such treaties. The court held that since the ISDS provision allowed the removal of the disputes from the jurisdiction of the courts of an EU member state, it could not be done without the consent of the member states.

This decision will impact the EU’s ongoing FTA negotiations, including with India. As Anthea Roberts of the Australian National University has argued, to honour the ruling, the EU might consider different options. First, it could decide to jettison the ISDS clauses in all its future FTAs. In other words, it may negotiate FTAs where disputes between investors and states would be resolved using the state-state dispute settlement (SSDS) mechanism. Given India’s protectionist stand on BITs and ISDS, as reflected in the 2016 Model BIT, India might be happy with this outcome. However, it is unlikely that the EU would totally abandon the ISDS system. Its FTA-text with Singapore and also the recently signed EU-Canada FTA reveals the EU’s preference for ISDS. Though, one major change is that the EU, in its FTA with Canada, has moved away from arbitration to a bilateral investment court system to settle investor-state disputes. Under this system, both countries nominate a roster of 15 tribunal members for a five-year period, and three members shall be randomly selected to serve on one tribunal. In addition to this, an appellate tribunal will be established to review tribunal decisions. Not just this, the EU is also keen to set up a multilateral investment court (MIC) with an appellate mechanism as reflected in Article 8.29 of the EU-Canada FTA.

Second, the EU could negotiate an FTA with ISDS provisions subject to the treaty being approved by all EU member states. However, this option is not feasible because all EU member countries might not ratify such an FTA. Third, it could negotiate the main FTA without an ISDS provision but make ISDS provisions a subject matter of an optional protocol provided this is permitted under EU law. The optional protocol could theoretically bind the EU’s partner country and only those EU member countries that ratify it and thus give their consent to the removal of investor-state disputes from their jurisdiction.

Challenges for India

Assuming the EU exercises the third option and tailors the ISDS optional protocol on the lines of the EU-Canada FTA, India will have to think about its ISDS negotiating strategy carefully on three fronts. First, will India accept allowing foreign investors to submit cases to international tribunals without first resorting to domestic courts? The 2016 Indian Model BIT requires a foreign investor to litigate in national courts for at least five years before approaching an international tribunal. Second, is India prepared to accept the proposal of setting up a MIC and submit to the jurisdiction of such a court? This would mean that all BIT disputes would be settled by the MIC and not through ad hoc arbitration as India currently proposes in its Model BIT. There is a lot of merit in developing an MIC because it will help fight the vices of current ISDS system based on ad hoc arbitration. The MIC system will bring in tenured-judges with expertise in international investment law (IIL) unlike the party-appointed arbitrators, many of whom are not experts in IIL; usher in transparency in the ISDS system; introduce an appellate mechanism to correct errors of law made by tribunals of first instance, which is missing in the current ISDS system. Third, pending the creation of the MIC, will India accept the creation of a bilateral investment court system with tribunal members being appointed for a five-year period and with an appellate mechanism? The method of dispute resolution in the Indian Model BIT is based on ad hoc arbitration through party-appointed arbitrators though the possibility of creating an appellate mechanism is recognised.

India should use the ECJ decision to rethink the best way of approaching the ISDS, such as whether it should move forward with the option of negotiating for a MIC. As a democracy based on the rule of law, India should actively engage with the EU as part of its FTA negotiations, towards creating a robust and transparent international judicial system like the MIC that would protect foreign investment from state’s regulatory abuse.

Prabhash Ranjan is an Assistant Professor of Law at South Asian University. The views expressed are personal