EXAMINING THE INDIA – UAE BIT: MODEST CHANGES, MISSED OPPORTUNITIES?
Introduction
Bilateral Investment Treaties (BITs) serve as crucial legal instruments for securing investor interests when investing in a host state. These treaties not only spur cross-border investments but also regulate investor-state disputes. India’s experience with BITs and its foreign investment regime can be described as nothing short of tumultuous. Beginning with the first BIT with the United Kingdom in 1994, India has adopted changing stances in its approach to foreign investment, moving from an ‘investor-friendly’ regime to a more ‘regulatory’ regime in recent years. The latest trend can be traced to the adoption of the ‘Model BIT’ in 2016 which has often been commented upon as having tilted the balance in favour of greater regulatory powers for the host state.
Against this backdrop, India has signed its latest BIT with the United Arab Emirates (UAE), the text of which became public recently. The UAE, India’s fourth-largest investor in 2023 and 7th largest overall with investments totalling $18 billion, is also the fourth-largest destination for outbound Indian investments. Hence, an analysis of the treaty gains immense significance. In this essay, we analyse some of the key changes made in the treaty compared to the Model BIT, primarily focusing on the revised definition of ‘investment’ in Part I, important changes with regards to standards of investment protection in Part II, and modifications to the ‘Exhaustion of Local Remedies’ (ELR) rule in Part III, and. In doing so, we shall argue that these changes, though relaxing regulatory bottlenecks, remain modest and may not fully resolve the challenges within India’s investment regime.
- Defining Investment
The definition of ‘investment’ in a BIT forms its cornerstone, largely determining the scope of rights and obligations under the treaty. An investor is granted rights and guarantees only if they satisfy the prerequisites for an ‘investment’ as per the terms of the treaty. The treaty adopts an enterprise-based definition of investment, continuing the approach of the 2016 Model BIT.However, the new treaty introduces two significant changes: First, by explicitly removing certain elements of the Salini v. Morocco test for determining the prerequisites for investment. Second, including ‘portfolio investments’ within the scope of ‘investment’. Proceeding forward, we shall critically analyse the impact of these changes.
- The Enterprise- Based Approach and the Salini Test
The adoption of the enterprise-based definition can be traced to the fallout resulting from the White Industries v. Republic of India case and the influx of investor claims filed against India right thereafter. In response, India sought to establish a stricter regulatory framework that removed wide definitions which would minimize arbitral discretion and safeguard the state’s right to regulate.Hence, the 2016 Model BIT stipulated that an investment must have, inter alia, ‘certain duration’ and ‘significance for the development of the host state’ (Salini Test’s fourth prong). Despite its purported aim of minimizing arbitral discretion, the inclusion of the latter criteria may have acted against the realisation of such aim. As has been pointed out by various tribunals, this requirement is quite ‘broad and variable’, providing no benchmark test in either economic or legal terms for its ascertainment. In essence, it often grants the tribunal the power to make value-loaded and discretionary judgements, deciding on an ex post facto basis what qualifies as ‘significant’ for the state’s ‘development’. These terms i.e ‘significant’ and ‘development’ are inherently subjective and open to interpretation. As analysed here in detail, tribunals that have upheld this standard have failed to provide concrete substantive content of this conditionality, while others (Quiborax v. Bolivia) have discarded the criteria in defining investment.
In this regard, the new treaty has removed this criterion. Viewed from the Indian state’ regulatory lens, it is a positive step as it removes an additional element for arbitral discretion. From the investors’ perspective as well, it may protect them from vague and often onerous thresholds. Often, tribunals stipulate a high threshold, requiring the investment to benefit the host-state on a macroeconomic level and not on an industry-specific level. For instance, in the Malaysian Historical Salvors v. Malaysia case, the tribunal rejected the argument that the claimant was the largest in their industry and expressed that the litmus test was its impact on the entire economy. Hence, the removal of this criteria may be beneficial both for certain micro-investments and non-traditional forms of investments that do not conform to the Salini test.
In moving away from this criteria, various scholars and tribunals have argued in favour of treating certain characteristics as fundamental for ‘investment’ such as contribution, risk and duration which have had far more uniform acceptance across tribunals. However, in the latest treaty, one of these criteria, i.e., the requirement for ‘certain duration’ has been omitted. Surely, omitting a characteristic of such importance cannot be a mere oversight. While it is true that there is no specific test for determining what constitutes ‘certain duration’, we believe that its removal, as opposed to its precise delineation, can be a counter-productive measure, especially if seen in light of the inclusion of portfolio investments within the ambit of ‘investment’.
- Inclusion of Portfolio Investment
The second major change in the new treaty is the inclusion of ‘portfolio investments’—such as shares, stocks, bonds, and other equity participation (Articles 1.4B & 1.4C)—marking a clear departure from the Model BIT, which excluded them (Article 1.4(i)). The Global Trade Research Initiative warns this could greatly expand the scope of protected investments and increase potential claims against India. This risk is heightened by the removal of the ‘certain duration’ test, allowing short-term or speculative investments to seek protection—contrary to India’s goal of limiting multiplicity of investor claims.
However, certain factors offer a more nuanced rationale for these changes. As noted earlier, the UAE is a key investment destination, and relaxing standards may enable more Indian investors to gain protection under the BIT. This shift can also benefit the Indian state. A recent study shows that foreign investments—especially portfolio investments—increase by nearly 40% when protected by a BIT. With net FDI having sharply declined from 1.7% of GDP in 2016 to 0.5%, likely due in part to India’s regulatory stance post the 2016 Model BIT, such reforms may aim to reverse this trend. Furthermore, India’s low ease-of-doing-business ranking in 2020 highlights the need for pro-investor reforms to attract broader investment. This may reflect a deliberate effort to stimulate inflows while mitigating the risks of investor claims.
Nevertheless, these revisions do represent certain drawbacks. The elimination of the ‘certain duration’ threshold, rather than clearly delineating its scope, is a significant misstep. If the ostensible aim was to reduce whatever limited arbitral discretion that existed, perhaps a better approach could have been for parties to expressly agree on delineating the contours of the test, clearly defining the required duration for a protected investment. As mentioned, simply removing the requirement may open the host state to extending protection to short term, passive or speculative investments.
II. Lessons from India’s Failure in Investment Treaty Claims
Change in Formulation of Standard of Investment Protection
Both the Model BIT and the India-UAE BIT omit the standard unqualified Fair and Equitable Treatment (FET) clause found in treaties like the India-UK BIT. Instead, the Model BIT ties FET to the Minimum Standard of Treatment (MST) under customary international law (CIL), reflecting India’s stance in high-profile arbitrations such as Cairn Energy (¶1701), Vodafone, and Devas-Antrix (¶428). In these cases, India argued that ‘autonomous’ FET clauses in treaties like the India-UK, India-Netherlands, and India-Mauritius BITs offered no greater protection than MST under CIL. However, tribunals consistently rejected this view, affirming that such FET clauses constitute an independent treaty standard not linked to MST.
As noted by the Cairn Energy tribunal, the practical differences between FET clauses and the MST standard have diminished, due to cross-fertilization in arbitral decisions that recognize common elements, making the distinction more theoretical than real (¶1704). The only clear difference observed was that MST sets a ‘floor’, while an FET clause unlinked to MST is a broader, ‘capacious’ standard. The India-UAE BIT avoids this ambiguity and departs from the Model BIT by offering a closed list of investment protection standards under Article 4, rather than tying them to MST. This approach mirrors Article 8.10 of the CETA and is increasingly seen in recent BITs, aiming to limit arbitral discretion and safeguard states’ regulatory space.
Right to Regulate as a Treaty Objective
There are high profile instances of India’s regulatory measures being held to be an infringement of FET clauses in BITs, including violations of the requirement to ensure legal stability/certainty/predictability, basic investor expectations of good faith, requirements of due process and transparency. In this background, Model BIT and latest BIT’s inclusion of maintaining the states’ ‘right to regulate’ as a preambular objective has important bearing on exercise of arbitral discretion and treaty interpretation.
Article 24 of the Model BIT required that interpretation of the treaty should reflect the “high level of deference” that international law provides to the States with regard to its internal policy-making. This was reflected in the Myers award where the tribunal was interpreting Article 1105 of the NAFTA which provided for FET treatment “in accordance with international law”. NAFTA, while linking this article with MST standard, noted that the determination of its violation must be done in light of the high deference that international law accords to domestic state regulation.
This deferential approach to state regulation contrasts with the Cairn Energy tribunal’s stance under the India-UK BIT (1994), which prioritized investor protection—reflecting India’s early strategy to attract foreign investment. In rejecting India’s attempt to link the FET clause to MST under CIL, the tribunal relied on Article 31 of the VCLT, interpreting the treaty based on “ordinary meaning, context, and object and purpose.” Citing the preamble’s focus on the “promotion and protection” and “fostering” of investments, it concluded that the treaty’s purpose was to grant protections exceeding those under MST.
Therefore, in light of this type of possible overexpansion interpretation being given to a FET clause, India-UAE BIT (2024) explicitly acknowledges and states that the objective of investment protection must be considered in conformity with the host states’ right to regulate based on ‘legitimate policy objectives’. By this addition, it reduces the likelihood of similarly expansive interpretation of the treaty’s substantive obligations favouring the investors by invoking the object and purpose of the BIT.
- Contours of FET and Need for a Balancing Exercise
The FET standard emerged in BIT’s initially due to the perceived pro-capital/pro-western bias of the international minimum standard. Others also link it to the amorphous nature of custom that provided insufficient substantive content for investment protection. Nonetheless, the move towards FETs has been termed as part of the phenomenon of ‘treatification” which has resulted in FET standard to be treated as an independent and autonomous standard in BITs
However, the interpretation of this ‘autonomous’ treaty standard by the arbitral tribunal that excessively favoured the investors and investment protection caused discomfort among the states viewing this as unreasonable restrictions on their regulatory powers.Faced with such criticisms, the tribunals have emphasized that FET Clause does not allow the tribunal to subjectively decide the standards applicable. Rather, in ascertaining the contents of FET obligations, recourse has been taken to Article 31 of the VCLT.
Article 31(3)(c) of the VCLT permits reference to “relevant rules of international law” in treaty interpretation. This is often understood as a reference to the sources listed in Article 38 of the ICJ Statute. However, there is debate over whether this allows tribunals to apply the “totality of substantive international law”, potentially ignoring the contextual limits imposed by Article 31(3).
Nevertheless, as noted by the Cairn Energy tribunal, Article 38(1)(c)—the general principles of law—is particularly relevant in interpreting investment treaty standards. Unlike the other sources under Article 38, which typically address state-to-state relations, general principles are derived from municipal legal systems and are better suited for disputes involving investor-state relations. These principles provide tribunals with objective benchmarks for standards like fair and equitable treatment, reducing reliance on subjective notions of fairness.
Tribunals have noted that ascertaining breach of investor treaty protection clauses is a fact-driven exercise. However, various principles have been listed as being central to FET Clauses, and some which are also common to MST under CIL. Some of these are : legal stability, certainty and predictability, legitimate expectations; due process; conduct which is arbitrary and discriminatory; reasonableness and proportionality. Tribunals disagree on precise contours of these standards. For example, there is divergent opinion on interpretation of FET that tends to give an effect of requirement of legal stability. Micula v. Romania I tribunal explicitly acknowledged that the FET standard does not per se give a right of regulatory stability divorced from legitimate expectations.
Aware of the potential consequences, the Cairn Energy tribunal—while finding India in breach of FET under the India-UK BIT for undermining legal certainty through retrospective taxation—clarified that this is not an absolute rule requiring a frozen legal framework. Instead, it emphasized that legal certainty must be balanced against a state’s regulatory powers rooted in legitimate policy objectives. Crucially, the tribunal held that this balance must be assessed through the principle of proportionality. The following section explores the source, standard, and implications of proportionality—a doctrine increasingly relevant under India’s latest BIT, which explicitly upholds both investor protection and the state’s right to regulate in pursuit of legitimate policy goals.
B. Proportionality in Balancing State Regulation and Investor Protection
Proportionality, recognized as a general principle of international law under Article 38(1)(c) of the ICJ Statute, becomes relevant under Article 25 of the India-UAE BIT (2024), which subjects treaty interpretation to general principles of public international law. While Article 4 of the BIT excludes measures taken for “legitimate policy objectives” from being considered “arbitrary,” it is silent on reasonableness or proportionality of such a measure. Nonetheless, proportionality remains a relevant threshold in assessing treaty breaches.
Applying proportionality raises obvious concerns of tribunals second-guessing state policy. More fundamentally, proportionality presumes a normative backdrop—as seen domestically, where it protects constitutional rights by requiring minimal restrictions and less restrictive alternatives. The normative value for which proportionality enquiry is directed is to provide maximum protection and minimum restriction on certain rights. In BITs, this normative value is typically investment protection, leading tribunals to favour investors.
However, the India-UAE BIT’s preamble emphasizes both investment protection and state regulatory space, creating a dual normative value framework. As a result, applying proportionality under this BIT demands a more nuanced balancing exercise. In this sense, the tribunal would have to take into account both state regulation and investor protection–two core-treaty values seemingly pulling in opposing directions, as background normative value as stated in the preamble to the new BIT in conducting the balancing exercise.
III. Analyzing the Exhaustion of Local Remedies Rule (ELR)
In this context of balancing investor protection with state sovereign regulatory measures, some of the changes made to the ELR rule also gain significance. The rule of exhausting local remedies is a long-standing rule of customary international law, rooted in the idea of protecting state sovereignty.Expressions of this rule take various forms, including fork-in-the-road clauses, mandatory exhaustion of local remedies, or their mandatory utilisation for a specific period.The latter rule, requiring their mandatory utilisation as opposed to exhaustion, is often seen as a toned-down version of the customary rule that has become increasingly prevalent. It merely requires a pursuit for a remedy before local courts.The rationale behind this was well explained in the Daimler Financial Services AG v Argentina award, where the court held that this rule was meant to provide the domestic courts the first opportunity to resolve the dispute in a ‘prompt manner’.
In this context, the Model BIT too adopted a similar provision. It required local remedies to be pursued as a condition precedent to the submission of a claim to arbitration. However, the terminology used therein is quite contradictory and misleading. Throughout the text of Article 15, the phrase utilised was that the investor has an ‘obligation to exhaust’ all local remedies. However, the proviso to Article 15.1 expressed the futility exception, allowing the investor to resort to arbitration in case no satisfactory remedy was available. Furthermore, Article 15.2 nevertheless allowed investors to resort to arbitration after 5 years. This could mean two things: that there was an obligation to merely pursue local remedies for a specific period after which arbitration could be resorted to or worse, that the obligations were to be ‘exhausted’ within this 5-year period. Surely, the latter could not be envisaged or be considered feasible in a heavily backlogged Indian judicial system. Nonetheless, the aim here is to show that, at the very least, the terminology used was quite confusing and contradictory.
In addition to the requirement to pursue local remedies for five years, the Model BIT imposed further procedural hurdles before arbitration: a six-month conciliation period with the host state, followed by another 90-day notice-period, all of which was circumscribed by a requirement for the entire process to not exceed a period of six years (Article 15.5(i)). As has been pointed out, this layered structure makes pursuing arbitration extremely difficult, heavily favouring the host state.
The India-UAE BIT, while largely mirroring the Model BIT, introduces key improvements. First, it replaces the ambiguous “exhaust” terminology with the clearer obligation to “pursue” local remedies – eliminating prior confusion. Second, it reduces the local remedies period from five to three years. Third, it allows the six-month conciliation to run concurrently with the 90-day notice (Article 17.4(iv)), shortening the overall process. Lastly, the total window is capped at five years (Article 17.4(i)), offering a broader and more practical timeframe for arbitration. These changes appear aimed at reducing procedural bottlenecks and improving investor access to arbitration.
However, even with shorter timelines, the rule’s utility remains questionable. Its effectiveness hinges on the efficiency of national courts which, in the Indian context, is problematic as 51% of cases in Indian High Courts exceed five years. For many investors, pursuing local remedies may thus seem like a costly and futile formality. In this regard, some tribunals, like in Abaclat have prioritized investor interests, bypassing the ELR clause and even the futility exception, where local resolution is merely a ‘theoretical possibility’. Such interpretations could undermine the state’s very rationale for including ELR as well, especially India’s intent to reduce arbitral discretion and encourage local resolution.
Hence, the India-UAE BIT must be analysed in this broader context. There may have been better alternatives available such as the tiered consultative structure in the India-Brazil BIT, or something along the lines of the European Union’s proposal for an Investment Court. In a recent survey, it was observed that fewer than 8% of the modern BIT’s had ELR clauses. In sum, while there is no correct solution for this problem, there does exist the missed opportunity to adopt a more suitable alternative considering a variety of global practices. Simply adopting a slightly toned-down version of the existing Model BIT, while adding its own set of ambiguities, may not have been the best approach to boost investor confidence.
Conclusion
The latest BIT undoubtedly reflects India’s move towards a more regulatory friendly treaty regime. This is a continuation of the broader framework of the Model BIT but with some important changes as highlighted above in the context of standards of treatment of investment, definition of investment and local remedies rule. This paper has also shown that emphasis on ‘right to regulate’ and ‘legitimate policy objectives’ in the new BIT will have important implications for treaty interpretation. On an immediate level, the latest India-UAE BIT reflects India’s latest treaty practice and gains much importance in the backdrop of India’s ongoing treaty negotiations with important trade partners such as the UK and the European Union (EU).