This article has been authored by Dhananjay Shukla, 4th year B.A.LL.B. (Hons.) student at Gujarat National Law University, Gandhinagar and Priyanshu Ranjan, 4th year B.B.A.LL.B. (Hons.) student at Gujarat National Law University, Gandhinagar.
Introduction
The frenzy around Bilateral Investment Treaties (BITs) is often restricted to their persuasive promise of increasing bilateral investment between the two signatory nations, thereby leading to economic growth and prosperity. Nevertheless, it must not be forgotten that a BIT is essentially a reciprocal agreement for investor protection, which endeavours to protect foreign investors in the host state. The success of these agreements becomes questionable if the protections contemplated therein exist merely in principle and not in practice, subsisting merely in letter and not in spirit. As of now, the Indian regime has been afflicted with a vacuum in the enforcement of arbitral awards resulting from investment disputes.
The ambiguity over enforcement of investment awards in India has gained renewed importance as courts in other jurisdictions (Australia and U.K.) have recently adjudicated on applications filed by foreign investors involving enforcement claims against the Republic of India. Meanwhile, the continuing impasse and the unsettled position in India corrodes investor confidence and obstructs effective award realization, underscoring the urgent need for India to clarify its enforcement framework. This article endeavours to elaborate the framework for enforcement in India, how it is destined to fail, and what courts elsewhere have ruled on this issue.
The Enforcement Mechanism
A Bilateral Investment Treaty provides certain protections such as fair and equitable treatment, protection from expropriation and free transfer of funds, among others, which the host state guarantees to the foreign investors. If these guarantees are breached, the foreign investor can initiate arbitration proceedings against the host state. Upon being successful, the investor can enforce the award against the state. Although the award in an investment dispute may be rendered elsewhere, the parties usually decide to enforce these awards in a country where the assets of the host state are situated. This has resulted in a situation where several investors have knocked the doors of courts, flooding their corridors with litigation and seeking to enforce a foreign award under the domestic laws of the country. The courts in India have given divergent views on the enforceability of such awards under the Indian framework of arbitration. As a result of this, the enforcement of investment awards has become impossible in India.
While the BITs provide for a mechanism for arbitration of disputes arising out of the failure of host states to honour the protections guaranteed under the terms of the treaty, they are silent on the aspect of enforcement of the awards. India has not signed the International Centre for Settlement of Investment Disputes (ICSID) Convention. As a result, such awards can only be enforced under Part II of the Arbitration and Conciliation Act, 1996 (Act of 1996), which contains the apparatus for enforcement of foreign awards.
However, India has adopted the reservation provided under Article I (3) of the New York Convention (NYC Convention), and Section 44 of the Act of 1996 was enacted in a manner consistent with India’s reservation to the New York Convention. ‘Foreign award’ is defined under the section as “arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India.” Accordingly, enforcement of arbitral awards passed under a Bilateral Investment Treaty cannot be guaranteed unless such awards can be said to have arisen out of differences that are considered as “commercial”.
A footnote in Article I (Scope of Application) of the UNCITRAL Model Law states that the term ‘commercial’ in the phrase ‘International Commercial Arbitration’ should be given the widest meaning and it expressly includes a transaction involving investment (But it is noteworthy that Investment Arbitration as a species is distinct from International Commercial Arbitration). The Model BIT of India published in 2016 under Article 27.5 acknowledges that a claim submitted for arbitration under Article 27 shall be considered to have arisen from a commercial relationship for the purpose of Article I of the New York Convention. Consequently, some authors have argued that awards arising from investment disputes can be enforced in India.
However, the UNCITRAL Model Law, the Model BITs, etc., are of no help to interpret the meaning and scope of the term ‘commercial’ because they are not ‘laws in force in India’. Conversely, Section 44 of the 1996 Act requires the differences arising from the relationship to be considered as commercial under the law in force in India. The commercial reservation in section 44 originates from Article 1(3) of the New York Convention, which permits a state to declare that it will apply the Convention solely to disputes arising from legal relationships—whether contractual or otherwise—that are regarded as commercial under the state’s domestic law. Investment disputes, however, are not categorically stated to be commercial under the Indian law. The term ‘Commercial disputes’ has been defined in Section 2(1)(c) of the Commercial Courts Act, 2015. The provision is exhaustive since the expression “means” has been used. Notably, it does not include investment disputes within its ambit.
The view that investment awards do not arise from commercial relationships has been reinforced by the judicial decisions not only in India but also in other countries. Hence, disputes arising from Bilateral Investment Treaties cannot be considered ‘commercial’ for the purpose of enforcement under the 1996 act.
Judgements of Courts in India
The courts have given conflicting opinions on the enforcement of investment arbitration awards in India. For instance, in the case of Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armatures, while issuing an injunction against arbitration proceedings, the Calcutta High Court assumed that the Act of 1996 is also applicable to investment arbitration disputes in the same way it governs foreign-seated commercial arbitration. However, the Delhi High Court, in the case of Union of India v. Vodafone Grp. Plc U.K. & Anr., held that investment arbitration is not the same as commercial arbitration as the cause of action, is based on “state guarantees and assurances” which make them essentially distinct from commercial contracts. The bench observed that such an award is neither a foreign-seated commercial arbitration nor a domestic arbitration. Furthermore, the Court said that the Act does not apply “proprio vigore” to investment arbitration disputes.
In the same case, the Delhi High Court disagreed with the decision of the Calcutta High Court. The court noted that in the case before the Calcutta High Court, the issue of whether the act of 1996 applies to investment arbitration was neither argued by the parties nor raised by the court. Referring to the principle of sub silentio, the Delhi High Court held that since the matter was not considered or addressed, the Calcutta High Court’s judgment cannot be treated as a binding precedent. Moreover, in Union of India v. Khaitan Holdings (Mauritius) Limited & Ors., the Delhi High Court, relying on the Vodafone Group Plc judgment, held that investment arbitration is a fundamentally distinct category of arbitration and therefore does not fall within the scope of the Arbitration and Conciliation Act, 1996.
Cross-Jurisdictional Analysis
The policies and practices in some other jurisdictions suggest that investment arbitrations were not intended to be covered within the bounds of the commercial reservation contained in Article I (3) of the New York Convention. Lately, courts in other jurisdictions have also decided the issue in favour of the host state. In Republic of India v CCDM Holdings, the Full Federal Court of Australia, while adjudicating the enforcement proceedings against India, held that India’s relationship with the BIT is “in the realm of public international law that gave international law rights to private investors in India”. It, therefore, cannot be considered a commercial relationship.
Recently, the High Court of England and Wales in CC/Devas (Mauritius) Ltd & Ors v Republic of Indiaobserved that the claimants in that case failed to advance any evidence as to whether the BIT awards arise “out of a legal relationship that is considered as commercial under the law of India”. The court noted that although it was not difficult to conclude based on English law that differences of such nature were “commercial”, the court emphasized that the test is to determine their nature in accordance with Indian law. However, the claimants failed to establish that the differences were of commercial nature under the Indian legal regime. It was concluded that since the issue had already been decided by the Full Federal Court of Australia (in the CCDM Holdings Case), a separate judgment was not required on this issue.
Besides, India is not the only country opposing the enforcement of Investment Awards. On 10 April 1987, China’s Supreme People’s Court issued a notice regarding the implementation of the New York Convention. Section 2 of the notice defines “commercial relations” as “relationships arising out of contracts, torts…or relevant provisions of law, but excludes disputes between foreign investors and the host states”. Hence, the New York Convention cannot serve as the medium for recognition and enforcement of international investment arbitration awards in China, as such awards are expressly excluded under its provisions.
Way Forward
A possible reason for this apprehension against the enforcement of investment arbitration awards could be that countries are averse to diluting their sovereign status by liquidating public assets for enforcement of private contracts. Even so, the ambiguity surrounding enforcement of investment arbitration awards in India has jeopardised the foreign investment. The judiciary and the parliament must act proactively to fill the vacuum in the enforcement mechanism, thereby balancing investor protection and state sovereignty. Defining investment disputes as a form of “commercial” relationship for enforcement purposes would align India’s arbitration regime with its Model BIT, the UNCITRAL Model Law and global arbitration standards. A robust, predictable enforcement regime would not only reduce litigation but also position India as an investor-friendly destination—a key step for attracting stable foreign investment. By bridging the legislative gaps, harmonizing jurisprudence, and strengthening treaty frameworks, India can move from ambiguity to certainty, ensuring BITs not only fulfil their promise but also realize their potential.