Authors: Samir Malik*, Mohammad Shahan Ulla**, Himani Yadav***, Aryan Mehta****
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India has emerged as an attractive destination for foreign investment, ranking as the 15th largest recipient of foreign direct investment (“FDI”) in 2023. Following the termination of several Bilateral Investment Treaties (“BITs”) in early 2023, the Indian government has actively pursued new agreements to boost FDI inflows. This article analyses significant aspects of the 2024 India-UAE BIT, which became effective on August 31, 2024, by comparing it both with its predecessor the 2013 India-UAE BIT and the 2015 India Model BIT.
Definition of “Investment”
The 2013 India-UAE BIT defined “Investment” broadly and in an open-ended manner (Art. 1.1), covering various forms of economic activity without specifying clear boundaries. This lack of precision led to ambiguity and potential disputes, particularly concerning portfolio investments.
To address this, the 2015 Model BIT adopted the four-prong Salini Test laid down in Salini v. Morocco (Art 1.4), requiring a transaction to demonstrate “Contribution,” “Duration,” “Risk” and “Economic Development” to qualify as an “Investment”’ under the treaty. Notably, during that same period, the Salini Test was incorporated into draft/model investment treaties of emerging economies, for example, the South African Development Community Model BIT of 2012 (Art. 2) and the Draft Pan-African Investment Code of 2016 (Art 4.4).
Additionally, the 2015 Model BIT explicitly excluded portfolio investments from its definition of “Investment,” thereby narrowing its scope of protection. Such express exclusion is a rarity, and is found in a handful of BITs such as the Brazil Model BIT of 2015 (Art 1.3). Other model BITs adopted around 2015 preferred to stay silent on either the exclusion or inclusion of portfolio investments, such as the Model BITs of Azerbaijan (2016), the United States (2012), and Serbia (2014).
Interestingly, the 2024 India-UAE BIT takes a middle ground between the broad definition in the 2013 India-UAE BIT and the restrictive approach of the 2015 Model BIT. In particular, the 2024 India-UAE BIT retains “Contribution” and “Risk” as necessary elements for an “Investment”, but removes “Duration” and “Economic Development” from the definition (Art. 1.4). This relaxation marks a significant contrast to other recent BITs signed after the 2015 Model BIT, such as the India-Belarus BIT and the India-Kyrgyzstan BIT, both of which retained all four elements of the Salini Test. Excluding “Duration” and “Economic Development” as qualifiers enhances the scope of protection of an investment irrespective of its tenure and removes the basis for arguments questioning the materiality of the investment. However, the absolute exclusion of the requirement for “Duration” also runs the risk of unintentional inclusion of one-off commercial transactions within its scope. The exclusion of “Economic Development” in particular moves closer towards the global standard, which is evident from the disapproval of some ICSID Tribunals and Annulment Committees for including “Economic Development” as a criteria for investment.[1] The same is also corroborated by the 2023 Angola-China BIT , 2022 Hungary-Oman BIT, and the 2020 Japan-Morocco BIT, which incorporate the Salini test sans the “Economic Development” requirement.
The 2024 India-UAE BIT also includes portfolio investments within its definition of “Investment,” a divergence from the 2015 Model BIT, and a concession not seen in other treaties such as the India-Brazil BIT, India-Belarus BIT and the India-Kyrgyzstan BIT. The inclusion, however, can be seen in other BITs executed by the UAE, such as the 2021 Hungary-UAE BIT, as well as the 2021 Jersey-UAE BIT, indicating that the insistence on its inclusion may have been provided by the UAE. The framing of the provision on the inclusion of shares and stocks is similar to what is provided for in other BITs across the globe, namely the 2022 Israel-Philippines BIT, 2022 Japan-Bahrain BIT, and the 2023 Angola-China BIT. This highlights a growing trend of the inclusion of such investments – a trend India and the UAE seem to be aligning with.
Definition of “Investor”
The definition of “Investor” under the 2013 India-UAE BIT was broad, encompassing any citizen, company or government of the contracting States (Art. 1.2). The 2015 Model BIT not only added detail and specificity by defining “Investor” as a natural or juridical person of contracting States, but also went a step further to define “juridical person” (Art. 1.5). Notably, the 2015 Model BIT did not include any reference to entities controlled directly or indirectly by the government. In contrast, the 2024 India-UAE BIT expands the scope of protection offered to Investors, covering entities owned or controlled directly or indirectly by the government, thereby encompassing a wider range of investors than both the 2013 India-UAE BIT and 2015 Model BIT (Art. 1.5). This insertion of the criterion of “control” can also be found in other BITs signed by the UAE, such as the 2021 Jersey-UAE BIT (Art. 1.2) as well as the 2021 Hungary-UAE BIT (Art. 1.2), highlighting consistency on part of the UAE to uphold this criterion across investor-host state relations. However, what is specific to the India-UAE BIT is the addition of the phrase “directly or indirectly”, specifying the far-reaching scope of the word “control”, extending beyond apparent control to de facto instrumentalities of the government.
Additionally, the 2024 India-UAE BIT stipulates that qualifying as an “Investor” requires more than mere business presence; it mandates “Substantial Business Activity” in the contracting State’s territory (Art. 1.5(ii)). This requirement is assessed on a case-by-case basis, considering factors such as physical presence, central administration, and employment of staff, among others.
The Treatment and Protection of Investments
The 2013 India-UAE BIT provided investors with substantive protections such as Fair and Equitable Treatment (“FET”) and Most Favored Nation (“MFN”) (Art. 5). However, the 2015 Model BIT restructured these protections, excluding both FET and MFN provisions. Instead, it limited the host state’s obligations to those accorded by customary international law (“CIL”), only protecting investors against denial of justice, fundamental breach of due process, targeted discrimination, and manifestly abusive processes (Art. 3).
The 2024 India-UAE BIT similarly omits MFN protection, reflecting India’s intent to avoid the administrative burden of its obligations. This exclusion allows India to treat states differently, making way for tailored benefits when negotiating bilateral treaties.
In safeguarding “Investments”, the 2024 India-UAE BIT mandates that neither contracting state shall subject “Investments” made by an investor of the other contracting state to any measure that may result in denial of justice, breach of due process, discrimination, or arbitrary treatment, except when such measure is taken to give effect to legitimate policy objectives (measures recognized under CIL) (Art. 4).
Even within the doctrine of National Treatment, which both the 2015 Model BIT and the 2024 India-UAE BIT retain, the contracting parties have some added flexibility where National Treatment will be accorded in “like circumstances” (Art. 5). The 2024 India-UAE BIT provides an open-ended definition for “like circumstances,” which leaves the contracting States with a wide scope of discretion to interpret it accordingly.
The 2013 India-UAE BIT only alluded to indirect expropriation by referring to “indirect measures” (Art. 7.1). In contrast, both the 2015 Model BIT and the 2024 India-UAE BIT adopt a clearer stance by explicitly defining expropriation as either direct or indirect, thereby broadening the scope of protection. The 2024 India-UAE BIT further outlines the criteria for what constitutes indirect expropriation, specifying that it includes any measure that deprives an investor from the enjoyment or economic value of their investment without a formal transfer of title (Art. 6.3).
The 2024 India-UAE BIT aligns with the 2015 Model BIT in clearly delineating the host state’s obligations, listing both general and security exceptions. When invoking general exceptions, the necessity test applies, requiring the state to assess whether a less restrictive alternative measure was reasonably available (Art. 34).
While the preamble of the 2015 Model BIT mentioned the host state’s right to regulate, it did not include an explicit provision to enforce this right. However, the 2024 India-UAE BIT, by way of an express provision, affirms the host state’s right to regulate, allowing it to adopt and maintain measures furthering legitimate public policy objectives (Art. 3). Provisions affirming the host state’s right to regulate are common amongst the recent BITs entered into by UAE, such as the 2023 Turkey-UAE BIT (Art. 8) and the 2019 Indonesia-UAE BIT (Art. 14).
Third-Party Funding
The 2015 Model BIT did not address third-party funding, however, the 2024 India-UAE BIT expressly provides that “third-party funding of an investor in case of a dispute shall not be permitted” (Art. 16). The express exclusion of third-party funding is notable considering the recent third-party funding secured by an investor in a dispute arising from the 1999 India- Australia BIT. The prohibition of third-party funding reflects the growing emphasis of the Government of India on safeguarding their interests in international arbitration, avoiding any potential imbalances that might be created due to third-party funding.
This is not the first instance where the UAE has expressly prohibited third-party funding, for instance the 2018 UAE-Argentina BIT also prohibits third party funding (Art. 24).
Third-party funding in Investor State Dispute Settlement (ISDS) has been identified by UNCITRAL Working Group III (Investor-State Dispute Settlement Reform) as a serious concern “raising ethical issues such as third-party funders influencing the arbitral process.” In the discussions of WG-III, it has been suggested that third-party funding in ISDS can be regulated through prohibition models, restrictive models, and permissive models. While many BITs are silent on third-party funding, the restrictive model is more prevalent in such instruments, where States can restrict third-party funding by attaching qualifiers, for instance the 2019 EU-Vietnam Investment Protection Agreement (Art. 3.36); the 2019 Australia-Hong Kong Investment Agreement (Art. 24); and the 2019 Agreement between the United States of America, the United Mexican States, and Canada (Art. 14.D.5). It would therefore be interesting to see if the prohibition model gains more traction amongst states which are apprehensive of the concerns raised by third-party funding in ISDS.
Dispute Resolution Mechanism
The 2013 India-UAE BIT adopted a multi-tier dispute resolution process, requiring an initial six-month period for amicable resolution efforts, followed by a choice between ICSID, UNCITRAL arbitration, or a host state’s court (Art. 10). The 2015 Model BIT eliminated this choice, requiring the exhaustion of local legal remedies for five years, followed by a six-month negotiation period before arbitration could commence (Art. 15), thus extending the dispute resolution timeline significantly.
In contrast, the 2024 India-UAE BIT further reduces the time period to pursue local legal remedies to three years. It also clarifies that this requirement is met if local remedies are pursued within the stipulated three-year time, irrespective of any ongoing proceedings or pending appeals (Art. 17). This provision strictly caps the duration of local remedy exhaustion at three years, streamlining the dispute resolution process. However, the process is still more strenuous when juxtaposed to global practice. The exhaustion of local remedies rule does not find general application unless it is explicitly mentioned in the treaty. Even amongst treaties, references are far and few in between such as in the 2007 Albania-Lithuania BIT (Art. 8.2.). The global practice still revolves around a multi-tiered clause that first requires attempts to settle the dispute amicably, before invoking arbitration. Therefore, while the 2024 India-UAE BIT may be more lenient than the 2013 BIT, it is still more cumbersome than the general international approach dispensing with the requirement of exhaustion of local remedies.
Powers of the Tribunal to Award Damages
Both the 2015 Model BIT and the 2024 India-UAE BIT limit the tribunal’s authority to awarding only monetary damages, explicitly excluding injunctive relief, as well as moral or punitive damages. However, the 2024 India-UAE BIT provides greater clarity on the types of damages excluded. While the 2015 Model BIT (Art. 26) restricts damages to actual losses suffered, the 2024 India-UAE BIT (Art. 27) further specifies that only actual loss is compensable, explicitly excluding incidental, consequential damages, and future profits. This exclusion of excluding incidental, consequential damages, and future profits may arguably conflict with the principles of CIL i.e., full reparation. However, there has been an increasing growing global consensus such as in the 2023 Turkey-UAE BIT which highlights that “Compensation shall neither include losses which are not actually incurred nor probable or unreal profits.” A similar position can also be found in the 2019 Indonesia-UAE BIT which, in the context of compensation for expropriationm specifies the exclusion of “speculative or windfall profits” (Art. 9.2).
Enforcement of Awards
Despite being a signatory to the New York Convention (NYC), India has adopted the reciprocity reservation and commercial reservation under Art. I(3) of the NYC. As per the reciprocity reservation, Indian courts will only enforce those foreign awards which are rendered in the jurisdiction that have been formally notified in the Gazette by the Indian government under Section 44 of the Arbitration and Conciliation Act, 1996. In furtherance of its commercial reservation under the NYC, Indian courts will enforce awards concerning “differences arising out of legal relationships, whether contractual or not, which are considered as commercial” as per Indian Law. Interestingly, while judgements passed by courts in the UAE are enforceable in India, awards passed in the UAE are not enforceable in India as the UAE has not been recognized as a reciprocating state by India.
In the 2024 India-UAE BIT, India has relaxed the requirement of a formal notification. (Art. 22.1) i.e., an award passed within the territory of UAE can be enforced without formal notification. Further, the 2024 India-UAE BIT provides an enforcement mechanism for awards as it provides that claims under it shall be “commercial” (Art. 28.5). The relaxation offered in the 2024 India-UAE BIT is indicative of India’s attempt to forge a strategic economic partnership with the UAE, considering the value of investments made to and from both nations. It would be interesting to see whether India offers similar relaxation to other major investors like Japan or the United States, who have not yet been notified by India as a reciprocating state under the NYC.
Conclusion
The foregoing analysis highlights that the 2024 India-UAE BIT provides the host state with greater regulatory control over foreign investments compared to the 2013 India-UAE BIT.
The 2024 India-UAE BIT adopts a more nuanced approach to investments. While it expands the scope of investments and investors eligible for protection, it also redefines the conditions under which such protections apply. While the host state’s obligations now extend to a broader array of investors and investments, it also enhances the state’s authority to regulate in the pursuit of legitimate public interests by inter alia restricting investors from availing third-party funding in raising disputes, and by making it mandatory for investors to take recourse to local remedies for a period of three years before resorting to arbitration under the 2024 India-UAE BIT. It would be interesting to see whether express prohibition of third-party funding under the 2024 India-UAE BIT would foster encouragement among other emerging economies to adopt a prohibition model.
Overall, the changes in the 2024 India-UAE BIT are a “mixed-bag” in terms of India’s commitment to fostering cross-border investments. The protections and relaxations offered in the 2024 India-UAE BIT are unique and set it apart from India’s other recent BITs. It remains to be seen how these protections and relaxations will contribute to India’s and the UAE’s efforts to boost FDI and whether other nations will pursue similar agreements with these countries.
*Samir Malik is a Partner at DSK Legal with over 15 years of experience in civil, commercial, and regulatory litigation, as well as arbitration. He has successfully led several groundbreaking and precedent-setting litigations in India.
**Mohammad Shahan Ulla is a Principal Associate at DSK Legal specializing in International Dispute Resoltuion. He holds an Advanced LLM in International Dispute Settlement and Arbitration from Universiteit Leiden.
***Himani Yadav is an Associate in the Dispute Resolution team at DSK Legal, based out of the firm’s New Delhi office. She holds a Bachelor of Laws degree from Jindal Global Law School and a BA (Honours) in Psychology from Lady Shri Ram College, University of Delhi. Her areas of interest include international arbitration, investment law, and policy.
****Aryan Mehta is an Associate in the Dispute Resolution team at DSK Legal, also based out of the firm’s New Delhi office. He earned his Bachelor of Laws degree from Jindal Global Law School.
[1] For example, Malaysian Historical Salvors Sdn Bhd v Malaysia, ICSID Case No ARB/05/10, Decision on Annulment, 16 April 2009; L.E.S.I.-Dipenta v. Algeria, ICSID Case No. ARB/03/08, Award, 10 January 2005.