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Understanding Bilateral Investment Treaties

By - King Stubb & Kasiva on April 28, 2023

Bilateral Investment Treaties (BITs) are defined as an agreement between two countries to promote and safeguard the investment made by persons and companies from both countries in the other’s territory. It protects the investments by setting a restriction on the host state’s regulatory behaviour, preventing undue interference with the foreign investor’s rights. Such investments include direct investment, portfolio investment, and other forms of financial transactions.

Meaning of Bilateral Investment Treaty

  • It is defined as a legal agreement between two countries that establishes the rules and regulations for private investment done by the individuals and companies of one country in the other country.
  • It aims to promote and protect such investment by providing some guarantees and protections, such as fair and equitable treatment, protection against expropriation without compensation, and the free movement of capital and profits. The treaty also includes provisions for the settlement of disputes between the investors and host countries.
  • The BITs encourage foreign investment and provide a more secure environment for investors by reducing risks that are associated with uncertain legal frameworks, political instability, and other operational risks.
  • It provides an alternative dispute resolution process that allows an investor whose rights under the BIT have been infringed to go to international arbitration rather than challenging the host country in its courts. It is done through the International Centre for the Settlement of Investment Disputes, and it is known as Investor-state dispute settlement.

Background of Bilateral Investment Treaty

  • India’s bilateral investment treaty journey started when the first agreement was signed with the United Kingdom in 1994. It signed BITs with 80 countries after that.
  • In 2011, India’s affection for BITs was shattered when an international tribunal ordered India to pay White Industries 4.10 million Australian dollars (including interest and expenses) under the 1999 Indo-Australia BIT.[1]
  • Then the Indian Government began the process of reviewing its existing BITs. It started getting letters under different BITs concerning retrospective tax revisions and the termination of 2G licenses at the same time. India started writing a new model in the year 2015 to replace the recent model of the Bilateral Investment Promotion Agreement (2003).[2]
  • The BIT model was completed and published in the public domain in 2016.[3] It still shows the government’s indecision, as it is not clear if it wants a BIT to protect foreign investors or to re-establish sovereignty.
  • In addition, India has also provided the notice of termination of existing BITs to at least 74 nations and released two joint interpretational statements with Columbia and Bangladesh. These terminations have been continuing since 2017, with a few BITs expiring in 2021 when the notice period expires.

Importance of Bilateral Investment Treaty

The importance of BITs is stated as follows:

  1. Encouragement of foreign investment- BITs offers investors confidence in investing in foreign countries, as they provide them with an assurance that their investments will be protected, irrespective of economic, political, or social changes or issue that may arise.
  2. Enhanced legal protection- BITs provide investors with a legal framework for dispute resolution, which provides legal protection against expropriation, discrimination, and other associated risks.
  3. Economic development- BITs are beneficial for economic development, as they attract foreign investment, provide access to new markets and modernize the economic infrastructure of the countries, which are involved in the treaty.
  4. Strengthening bilateral relations- It provides opportunities for the countries to strengthen their bilateral relationships, particularly as they foster better cooperation and affiliation between the investors.
  5. Protection of the interests of investors- BITs are critical for protecting the property rights and interests of foreign investors. As a result, investors have greater confidence in investing, even in unstable political situations.

Criticism of the Bilateral Investment Treaty

  1. Loss of Sovereignty- The primary criticism of the treaty undermines the sovereignty of the host countries, as it allows foreign investors to legally challenge the laws and regulations of the host country. It can lead to a situation where a foreign investor can pressure the host country to lessen or repeal laws that conflict with their interests.
  2. Limited Benefits to Local Economy- The BITs primarily benefit the foreign investors, while providing limited benefits to the host country’s economy. The investment reflects under BITs only provides limited jobs and a limited amount of local taxes.
  3. Investor-State Dispute Settlement- BITs include ISDS clauses, which allow the investors to seek compensation for the recognized violation of their rights. This mechanism favors foreign investors, who have greater resources and knowledge than the host countries, which can lead to increased litigation and higher legal costs.
  4. Lax Standards for Investors- BITs do not have stringent standards when it comes to social and environmental responsibilities that foreign investors have to meet in their host countries. As a result, these investors may exploit resources, labor, and the environment in the host countries.
  5. Undermining Democracy- BITs also undermine the democratic process in the host countries. The government is reluctant to create new rules and regulations, fear of foreign investors, who can invoke the ISDS mechanism to claim compensation for violation of rights. It undermines public policies aimed at protecting human rights and the environment.

Impact of Termination of Bilateral Investment Treaty

The termination of a Bilateral Investment Treaty (BIT) can have significant negative effects on foreign investors and the host country's economy. Here are some ways in which the termination of a BIT can impact investment:

  • Loss of Investor Confidence: When a BIT is cancelled, it can destroy investor confidence as investors may perceive that the host country is not committed to providing adequate protection for their investments. This loss of confidence can discourage new investment and may even lead to the withdrawal of existing investments.
  • Barriers to Entry: In some cases, the termination of a BIT may result in barriers to entry for new investors. For example, if a foreign investor's treaty has expired or been terminated, they may be barred from entering the host country.
  • Reduced Protection for Investments: If a BIT is terminated and replaced with a protectionist treaty, the level of protection provided to Indian enterprises abroad may be reduced. This can have negative implications for Indian businesses looking to invest overseas.
  • Aversion to International Law: The termination of a BIT may demonstrate a host country's aversion to being held responsible for its regulatory actions under international law. This can force foreign investors to rely solely on domestic laws and courts to protect their interests, which may not be perceived as impartial or efficient.
  • Lack of Faith in Judicial System: Foreign investors may not have much faith in the Indian judicial system as a platform for quick dispute resolution. This lack of confidence can have a negative impact on India's ease of doing business, as it may discourage foreign investors from investing in the country.

New Model of Bilateral Investment Treaty

The new model for a Bilateral Investment Treaty (BIT) establishes a foundation for future trade discussions with trading partners. This model specifies that it only applies to investments with a physical presence and significant economic activity in the host state's jurisdiction.

The investor-state dispute settlement mechanism provided in the new model offers major benefits to investors, but only after they have exhausted all domestic options. This helps to ensure that domestic courts have the first opportunity to resolve any disputes before resorting to international arbitration.

Moreover, the objective of the new BIT model is clear - it intends to provide more than just investor protection. It recognizes the need for a balance between investor protection and the right of host states to regulate in the public interest.

In summary, the new model BIT offers a more balanced approach to investment protection and promotes a cooperative relationship between investors and host states.

Recommendations of the Standing Committee[4]

Model BIT Fine-tuning:

The Model Bilateral Investment Treaty (BIT) needs to be fine-tuned to strike a balance between protecting the state's regulatory interests and ensuring that foreign investors' rights are safeguarded. To achieve this, the language of current provisions must be improved to limit the discretion of investor-state dispute settlement (ISDS) arbitral tribunals. It is crucial to maintain a balance between investment protection and the state's right to adopt regulatory measures in the interest of public welfare.

Expedition of Existing Negotiations:

Since the approval of the Model BIT, the committee has noted that India has only signed four investment treaties with four countries. The committee advises that India should increase the current negotiation pace and conclude agreements as early as possible. Delay in this regard may result in harm to foreign investment.

Foreign Direct Investment:

The committee acknowledges that BITs have the potential to attract foreign direct investment. To encourage FDI, the committee proposes that India sign additional BITs in priority sectors.

Capacity Building:

The committee recommends strengthening government officials' capacityin the area of investment treaty arbitration. This can be achieved through an institutionalized framework for capacity building in cooperation with public and private universities with subject expertise in this area. The government could also explore the establishment of chairs in institutions to promote research and teaching of international investment law.


A significant number of investor-state dispute settlement (ISDS) claims against India have been the result of poor governance, including retroactive changes in laws (such as the Vodafone[5] and Cairn cases[6]), nullification of agreements based on unproven allegations (the Devas case[7]), and delays in the judiciary's enforcement of commercial awards (the White Industries case[8]). The Standing Committee could have focused more on enhancing regulatory coherence, policy stability, and robust governance structures to prevent ISDS claims.

To address these challenges, the government should establish an expert team to review the current BIT Model, with a focus on promoting pluralistic viewpoints and uniting them into an effective policy. This team should include critical voices to ensure a thorough and comprehensive review of the model and its impact on foreign investment in India. By prioritizing good governance and regulatory coherence, India can continue to attract foreign investment while also safeguarding the public interest.


What is a Bilateral Investment Treaty?

A Bilateral Investment Treaty (BIT) is an agreement between two countries that establishes the terms and conditions for private investment by nationals and companies of one country in another country.

What is the main objective of a Bilateral Investment Treaty?

The main objective of a Bilateral Investment Treaty is to protect foreign investment by setting constraints on the host state's regulatory behavior, preventing undue interference with the foreign investor's rights, such as imposing duties on host countries to give foreign investors fair and equitable treatment and not discriminating against them.

How many Bilateral Investment Treaties are currently in force?

The first BIT was signed between Pakistan and Germany on 25 November 1959. Currently, there are more than 2500 BITs in force, involving most of the countries in the world.

[1] White Industries Australia Ltd v India, Final award, IIC 529 (2011), 30th November 2011.




[5] Vodafone International Holdings BV v. Govt. of India, (2012) 6 SCC 613.

[6] Cairn Energy PLC & Cairn UK Holdings Limited v. Republic of India, PCA Case No. 2016-7.

[7]Devas Multimedia Private Limited v. Antrix Corporation Limited, ICC Case No. 18051/CYK.

[8]White Industries Australia Ltd v India, Final award, IIC 529 (2011), 30th November 2011.

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