Investor-State Dispute Settlement Under The Lens - How The Arbitration Act Of India Fits In

Author: LawSphereX

Category: Arbitration & ADR

Published: 2026-08-23T20:23:29.813142+00:00

Updated: 2026-08-30T07:11:03.598Z

INVESTOR-STATE DISPUTE SETTLEMENT UNDER THE

LENS: HOW THE ARBITRATION ACT OF INDIA FITS IN

Shrestha Saha, B.Com.LL.B. (Hons.), St. Xavier’s University, Kolkata

ABSTRACT

Investor-State Dispute Settlement [“ISDS”] and its intersection with the Arbitration Act of India is an essential subject to be critically analysed in the context of rising foreign investment and international trade. Identifying the challenges which are faced by applying Arbitration Act, 1996 [“Arbitration Act”] in ISDS and proposing constructive recommendations are the objective of this paper. Issues such are transparency, state sovereignty and economic impacts on host States are critically examined. This study analyses key topics which are significant to policymakers and legal professionals on the subject of Indian dispute settlement Statue- Arbitration Act, and International trade dispute settlement mechanism- ISDS, thereby contributing to a broader understanding of arbitration in the global context. Keywords: ISDS Mechanism, Arbitration Act, ICSID, BITs, UNCITRAL, Convention

Introduction

Investor-State Dispute Settlement [“ISDS”] is a procedural mechanism whereby disputes between investor and the Host State is resolved through arbitration. Such disputes arise in case of non-compliance with contract or when the Host State fails to give the investor Fair and Equitable Treatment, standard protection and in cases where the Host State expropriates investors of their investment without prompt, adequate and effective compensation. Bilateral Investment Treaties [“BITs”] and international investment contracts, ISDS allows aggrieved investors to bring claims against Host State. ISDS acts as an investment insurance scheme. Arbitration settles disputes in a cost-effective manner. It is less time consuming and aims to resolve dispute faster than other procedures.

Arbitral awards are binding, non-compliance of the arbitral award is treated as expropriation and the Host State might face Diplomatic protection from the foreign investor’s Home State. Arbitration procedure ensures privacy and confidentiality. It is more efficient than litigation through domestic courts. It provides opportunities to the parties to select arbitrator of their choice, i. e. , one who enjoys their confidence. With a view to integrate and make uniform the laws relating to India’s domestic arbitration, international commercial arbitration, enforcement of foreign arbitral awards and conciliation, and to also comply with Model Law and Conciliation Rules prescribed by United Nations Commission on International Trade Law [“UNCITRAL”] the Arbitration and Conciliation Act, 1996 [“Arbitration Act”] came into force.

1 Though ISDS Mechanism has become a staple for every BITs, India’s Model BIT 2016 differs from such other BITs. It provides more restrictive definition of investment excluding provisions like fair and equitable treatment, thereby prioritising India’s sovereign interest. It has been criticised for imposing strict conditions for initiation of international arbitration. It requires foreign investors to exhaust local remedies for a period of 5 years prior to bringing claim before an international arbitration forum. This paper intends to critically analyse the applicability of the Arbitration Act to ISDS mechanism examining its compatibility with international arbitration frameworks which are

1 Arbitration and Conciliation Act 1996, Preamble

governed by the International Centre for Settlement of Investment Disputes [“ICSID”] Convention, ICSID Additional Facility and Institutions dealing with commercial arbitration, e. g. , International Chamber of Commerce, London Court of International Arbitration or China International Economic and Trade Arbitration Commission, and further assessing the potential challenges posed by ISDS disputes. This paper will also explore whether Arbitration Act which is designed primarily for commercial arbitration adequately supports the resolution of disputes arising under IIAs and other treaties where India is a party.

Through this analysis, the paper aims to illuminate both the strengths and limitations of applying the Arbitration Act to ISDS cases, while also intending to offer constructive recommendations aimed at positioning India as a leading destination for foreign investment by demonstrating a robust and investor-friendly procedure. Research Methodology The present research study is done by critically evaluating and interpreting relevant secondary data that includes legal texts, books, journals, articles, reports, and case laws. The paper employs analytical legal research. Understanding ISDS Mechanism ISDS is a legal provision which States had started to include in IIAs, of which they are a party to, since late 1960s. In modern BITs and other IIAs, ISDS has become a standard element.

In the absence of this provision a dispute arising out of investment contract between the foreign investor and the Host State would be settle by the Host State’s domestic courts, which usually lacks fairness due to the sense of loyalty to the forum State and also executive interventions in court proceedings influencing the outcome of such proceedings. 2 If, in the absence of ISDS provision, the investor feels that the domestic courts were ineffective in giving judgement then their only recourse was to convince their Home State to exercise diplomatic protection. 3 This action was not favourable for both the Host State and investor’s Home State as it makes the Host State a prey to Capital-exporting States and disturbs the foreign policy between the States. ISDS provision offers foreign investors to bring their claims against the Host State before an

2 RUDOLF DOLZER AND CHRISTOPH SCHREUER, PRINCIPLES OF INTERNATIONAL INVESTMENT

LAW (1st edition, Oxford University Press 2008) 214 3 United Nations Conference on Trade and Development, Investor-State Dispute Settlement (UNCTAD Series on Issues in International Investment Agreements II, United Nations 2014) 23 international arbitration tribunal- a neutral forum devoid of unfairness, politics and pressure from the executives of the Host State. Generally, investment dispute claims are brought before ICSID, where the Host State as well as the investor’s Home State are parties to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, also known as ICSID Convention [“Convention”], and before ICSID Additional Facility where only one party to the dispute is also a party to the Convention. In certain case disputes are also brought before institutions dealing with commercial arbitration.

Arbitration is also conducted by ad hoc tribunals under UNCITRAL rules. ISDS has been facing criticism over the years. The proceedings of ISDS cases are meant to be confidential to fill the gaps created by the traditional system of settling investment disputes, i. e. through the domestic courts of the Host State. However, this very characteristic of ISDS attracts intense scrutiny, which again makes that very purpose of ISDS go in vain, i. e. , it began to suffer from lack of transparency in proceedings. ISDS Mechanism has been alleged to provide inconsistent arbitral award, often perceived as favouring one party over the other. ISDS Mechanism has a negative impact on State sovereignty.

Capital-importing States stay in constant fear that any of their host state policy initiative might be brought before arbitral tribunal as a claim on the ground of its interference with foreign investor’s right and arbitral award would be against their favour due to the tribunal’s biasness towards the other party. ISDS Mechanism has proved not to be cost effective either. The proceeding of the ISDS cases extending for years drain out exorbitant money in the form of legal fees and compensation, thereby having negative impact on the Host State’s economy as well. 4 Overview of the Arbitration Act The Arbitration Act was enacted to improve the efficiency, predictability, and conformity of arbitration in India to international norms, influenced by the UNCITRAL Model Law.

The 2015 and 2019 amendments to the Arbitration Act aimed to restrict judicial intervention, reduce delays and promote foreign investment by instilling trust in India’s arbitration system. 4 Davy Karkason, Understanding Problems with Investor State Dispute Mechanisms, Transnational Matters, 18 December 2023 (accessed 9 January 2025), https://www. transnationalmatters. com/understanding-problems-withinvestor-state-dispute-mechanisms/ Some of the major improvements brought about by these amendments include stricter deadlines for proceedings and greater autonomy for the parties in an arbitration. How the Arbitration Act applies to ISDS Mechanism With economic liberalisation India has accepted ISDS mechanism through various BITs.

On January 2016 India adopted Model BIT, terminating the existing BITs, which contains 38 articles answering concerns regarding investor protection and India’s sovereign interests. The Model BIT 2016 states that an aggrieved investor can initiate investor-state arbitration under ICSID Convention, Additional Facility Rules of ICSID, or the UNCITRAL Arbitration Rules, only after exhausting the local judicial or administrative remedies and when domestic remedy proved to provide inadequate redress. 5 Any claim brought to arbitration shall be deemed to arise out of a commercial relationship or transaction as defined in Article I of the New York Convention. 6 India is a signatory to New York Convention and Geneva Convention, which governs the enforcement of foreign arbitral awards.

The foreign arbitral awards shall be binding in India when such award is issued in a country which is signatory to either of these Conventions and is issued from a territory recognised by India as a convention country. 7 The Part II of the Arbitration Act addresses and state conditions for the enforcement of foreign arbitral awards under the New York and Geneva Conventions, thereby ensuring their binding effect and serving as a bridge between Indian and global arbitration practices. For the enforcement of a foreign arbitral award, the judgement-holder needs to file an execution petition and produce the original award or its duly authorised copy, the arbitration agreement and any evidence substantiating the award as a foreign award before the Hon’ble High Court having original jurisdiction to decide on the subject-matter of the award.

8 The Court then decides on evaluation of the award, whether the award satisfies the criteria laid down in the Arbitration Act. When the award is found to be enforceable, it may be executed and enforced as a decree of the Court. The enforcement of the award may be refused if the Court comes to conclusion that the subject-matter of the award beyond the scope of Indian law or that the

5 The Model BIT 2016, Article 15

6 The Model BIT 2016, Article 27

7 Arbitration and Conciliation Act 1996, section 44

8 Arbitration and Conciliation Act 1996, section 47

enforcement of the award would be contrary to India’s public policy. The enforcement of award may also be refused at the request of judgement-debtor on satisfying any or all the conditions stated under section 48 of the Arbitration Act. Challenges faced when enforcing foreign arbitral awards under Arbitration Act i. Ambiguity in public policy interpretation The Arbitration Act allows the Court to refuse the enforcement of foreign arbitral awards if such award is against India’s public policy. 9 It has exhaustively stated that contravention of public policy can be proved only if the Court finds the award have been made fraudulently, or is against the sovereign interest of India, or is unjust and against morality. 10 The broad judicial interpretation of the term “public policy of India” stands as a challenge in enforcing foreign arbitral awards.

Courts interpret public policy depending on whether they are having civil law or common law jurisdictions. In the first jurisdiction, “public policy” refers to the principles on which foundation of India’s sovereign interest rests, without fully defining them. In the latter jurisdiction, the term refers to exhaustive, defined and broad principles such as justice, fairness or morality. 11 The Hon’ble Supreme Court of India in Phulchand Exports Ltd. v Ooo Patriot12 [“Phulchand Exports Ltd. ”] held that enforcement of foreign arbitral awards may denied if such awards are patently in violation of statutory provisions, i. e. on the ground of patent illegality. However, the Hon’ble Supreme Court overruled this judgement in Shri Lal Mahal Ltd. Vs. Progetto Grano Spa13 [“Shri Lal Mahal Ltd. ”] and held that ground of denying enforcement would be contravention of public policy, i. e.

Indian law’s fundamental policy and sovereign interests of India. The Court in ONGC Ltd. v. Western Geco International Ltd. 14 [“ONGC Ltd. ”] interpreted “fundamental policy” as containing three core elements, they are, judicial or adjudicating authority must avoid

9 Arbitration and Conciliation Act 1996, section 48(2)

10 Arbitration and Conciliation Act 1996, section 48(2) Explanation 1

11 IBA Subcommittee on Recognition and Enforcement of Arbitral Awards, Report on the Public Policy Exception in the New York Convention, October 2015, 6

12 Phulchand Exports Ltd. v Ooo Patriot, (2011) 10 S.C.C. 300 (India)

13 Shri Lal Mahal Ltd. Vs. Progetto Grano Spa, (2014) 2 S.C.C. 433 (India)

14 ONGC Ltd. v. Western Geco International Ltd., (2014) 9 S.C.C. 263 (India)

arbitrariness, observe principles of natural justice and lastly avoid perverse and irrational decisions. 15 ii. Sovereign immunity The doctrine of sovereign immunity poses a significant challenge in the enforcement of foreign arbitral awards against the State. This doctrine stands as a hurdle when a foreign arbitral award, to the satisfaction of the Court, interferes with India’s sovereign functions thereby leading to State resistance in complying with the award. This resistance can delay or prevent the enforcement of awards, leading to uncertainty for investors.

In Cairn Energy PLC v Union of India16 [“Cairn Energy PLC”] Cairn Energy instituted international arbitration proceedings against the Indian Government under the India-UK BIT, contending that the Income Tax Department of India violated the guarantee of fair and equitable treatment and protection against expropriation as per the BIT by making retrospective tax demands. An arbitral award of about 1. 2 billion USD was granted in favour of Cairn Energy. India contested the enforcement, invoking domestic tax laws as a defence. Although Cairn initiated enforcement proceedings globally, India resisted by claiming sovereign immunity over certain assets. iii.

Procedural Hurdles and Judicial Overreach One of the most challenging factors faced by foreign investors filling application for the enforcement of the foreign arbitral award is the procedural delay with the overstepping of judicial authority. The over-burdened Indian judicial system with lengthy timelines for litigation can be the source of considerable delay in the enforcement of foreign arbitral awards. Such procedural redundancy goes against the core tenet of arbitration, which is to be an efficient and cost-effective mechanism for dispute resolution. Foreign investors are often confronted with the grim reality of a complicated substantive and procedural regime when seeking to enforce awards in India.

The Courts also examine the merits of foreign arbitral award as part of their jurisdictions to examine their 15 Anshu Singh Rathore, Public Policy Conundrum in the Enforcement of Arbitral Award, Manupatra, 7 October 2022, (accessed 18 January 2025), https://articles. manupatra. com/article-details/Public-Policy-Conundrum-inthe-Enforcement-of-Arbitral-Award

16 Cairn Energy PLC v Union of India, PCA Case No 2016-7

procedural compliance or as to whether the award is attuned with India’s public policy. Such actions go against the judicial principle of limited interference recognized globally as applicable in respect of arbitration matters and diminish investor confidence in India’s arbitration system. The case of Cruz City 1 Mauritius Holdings Vs. Unitech Limited17 [“Cruz City 1 Mauritius Holdings”] emphasised how procedural delays and judicial overreach can frustrate enforcement efforts and allow judgement-debtor to exploit the arbitration system. In the Cruz City 1 Mauritius Holdings, the Cruz City initiated an arbitration and obtained an award against Unitech. When Cruz City filed application for the enforcement of the award before the Delhi High Court, Unitech raised numerous objections and prayed for the refusal of the enforcement of the award.

As a result, the Court had to scrutinize each and every aspect of the award, claims made, objections raised and evidences produced in order to come to decide whether the award is enforceable. iv. Jurisdictional Overlap The involvement of long-running parallel litigation in the domestic courts of India during arbitration proceeding in an international forum contributes to delay in enforcement of the foreign arbitral award, undermining the finality of arbitral award. The overlapping jurisdiction of domestic courts and international arbitration forms results in conflicting decisions as well. In certain cases, India had also challenged the jurisdiction of international arbitration forum stating that the dispute did not fall within the scope of the BIT, under which the allegedly aggrieved foreign investor brought the claim. 18 v.

Shifting to Model BIT 2016 India terminating its traditional treaties and enforcing the Model BIT reflected its growing resistance to ISDS Mechanism, emphasizing sovereign interest over investor

17 Cruz City 1 Mauritius Holdings Vs. Unitech Limited, (2017) MANU/DE/0965/2017 (Delhi High Court)

18 Louis Dreyfus Armateurs SAS v Republic of India, PCA Case No 2014-26 (Final Award, 11 December 2018)

rights. Conclusion The application of the Arbitration Act to ISDS Mechanism represents a significant intersection of domestic arbitration law and international investment law. This paper emphasises that, although the Arbitration Act provides a robust legal framework for arbitration, the concurrence with specific dynamics of ISDS remains incomplete. On one hand, the Arbitration Act guarantees transparency in its procedural framework and provides provisions for enforcement of foreign arbitral awards made under the New York Convention. On the other hand, there are still many issues concerning judicial intervention, transparency, and compatibility with international norms on arbitration, undermining the pros of the Arbitration Act. Several reforms can be implemented such as: a.

clarity of provisions in the Arbitration Act with regard to ISDS should be enhanced, especially jurisdictional issues and involvement of domestic courts in investor-state arbitration, thereby making the arbitral and enforcement proceedings more predictable; b. harmonizing the Arbitration Act with ICSID Convention or similar international arbitration forums, thereby making India a hub for foreign investment; c.

training and sensitization of judges and arbitrators, considering only ISDS dispute procedures, may significantly cut delay and inconsistency in enforcement of arbitral awards; India should start renegotiating its present BITs to address the gaps present in the protection of investor rights while safeguarding national interests without undermining the state sovereignty, that is, attuning the BITs with the Arbitration Act and creating a harmonised legal framework aligned with India's broader economic ambitions.