India must articulate its vision of the sunset clause in future BITS as it seeks to renegotiate these treaties with states
As India seeks to renegotiate its terminated Bilateral Investment Treaties (BITs) with states such as Argentina and Russia and foster new International Investment Agreements (IIAs) with key economies European economies, the United Kingdom (UK) and the United States (US), it must learn from its experience of challenging the 37 Investor-State Dispute Settlement (ISDS) notices of dispute raised by various investors and clearly articulate its vision of the ‘sunset’ implications of future BITs/IIAs. India must be wary of getting caught amid unfavourable international arbitration regimes and the sunset clauses of the subsisting and terminated BITs and IIAs as it further revamps its approach towards these treaties.
India enforced 74 BITs since liberalising foreign investments in 1991. However, India faced many investor-state claims, most significantly the White Industries case, where the ISDS arbitration resulted in damages and costs worth US$1.07 million imposed on India. Between 2011 and 2015, India signed only one BIT with the United Arab Emirates (UAE) and an IIA with ASEAN. This shift followed the introduction of the new Indian Model-BIT in 2015, favouring the host state’s regulatory powers against the broad substantive protections for investors exhibited in the erstwhile 2003 Model-BIT.
India must be wary of getting caught amid unfavourable international arbitration regimes and the sunset clauses of the subsisting and terminated BITs and IIAs as it further revamps its approach towards these treaties.
Since 2016, only eight IIAs have stood against India’s unilateral termination of 77 BITs, while over 68 states have notified for renegotiation for new BITs under the Indian Model-BIT. While it signed only five BITs with Belarus, Taiwan, Kyrgyzstan, Brazil and most recently, the UAE under the new model, India issued joint statements with states, including Bangladesh and Colombia, to bridge interpretative gaps in existing BITs.
India’s host state-centric stance on BITs raises concerns about its ongoing negotiations for new BITs/IIAs with 37 states. For example, the European Union (EU) members seem reluctant to negotiate BITs/IIAs before the EU Commission sanctions an India-EU agreement. Thus, although the India-EU FTA talks have resumed, India’s desire to replace the terminated BITs with new agreements under the Indian Model-BIT has dampened. With cumbersome exchanges hindering new BITs, India has encountered an undesirable roadblock, as expressed by the Parliamentary Committee on External Affairs (CEA).
Sunset clauses typically provide for the lapse of a treaty after a mentioned period but stipulate an artificial extension of the legal essence of the treaty beyond that time. The sunset period generally spans 5-20 years across common IIAs. For instance, the 2008 German Model-BIT provides a 20-year term, while the 2021 Canadian Model-BIT provides a 15-year survival protection. However, contemporary trends reveal a tendency towards shorter durations, exemplified by the Indian Model-BIT specifying a 5-year sunset period. Indian Model-BIT defines the sunset clause as “In respect of investments made prior to the date when the termination of this Treaty becomes effective, the provisions of this Treaty shall remain in force for five years.”
The provision leaves room for subjective interpretation by ISDS tribunals to its applicability of pre-treaty investments and post-termination re-investments.
This “survival effect” of sunset clauses shields investments, extending the substantive protections of a BIT/IIA in case of unilateral termination or denouncement by the host. The Vienna Convention on the Law of Treaties (VCLT) allows the dissolution of BIT/IIAs with mutual consent (Article 54) or their supersession by new treaties covering the same subject matter (Article 59). Under VCLT Article 70(1), termination does not impact pre-existing rights or obligations unless all parties concur otherwise, allowing for negating such survival clauses through mutual agreement upon treaty cessation. The provision leaves room for subjective interpretation by ISDS tribunals to its applicability of pre-treaty investments and post-termination re-investments. Further questions also linger regarding limiting sunset applicability to specific or all treaty protections and the potential to disclaim survival effects in mutual termination/denouncement cases. While the policy intent behind sunset clauses is to protect investors from abrupt policy shifts and the investment landscape in host states, its lack of clarity may dent prospective investors’ confidence in long-term Foreign Direct Investment (FDI) in India’s National Infrastructure Pipeline.
Affluent corporations leverage their financial prowess to navigate costly arbitration proceedings under the ISDS mechanism, often burdening the finances and policies of host states. For example, Pakistan was ordered to pay US$5.9 billion—substantially more than the International Monetary Fund’s (IMF) 2019 bailout package—in the Tethyan Copper v. Pakistan arbitration. Besides such enormous risks, there is a tangible threat of investors seizing India's overseas assets, including state-owned entities. For instance, seemingly impacted by the Vodafone and Cairn arbitrations, the Indian Parliament amended its taxation laws in 2021, making offshore indirect transfer of Indian assets taxable only from 28 May 2012, nullifying any tax demands raised before that date if specified conditions are met.
India is concerned that the commonly accepted investor-state arbitration within ISDS mechanisms favours investors over the host state’s regulations. India has received over 24 notices for claims since 2017 during the sunset period. Out of these, eight have proceeded to investor-state arbitration. Five are pending, one is discontinued, and two are settled. With India’s conservative position concerning investor-state arbitration, as evident from its non-ratification of the International Centre for Settlement of Investment Disputes (ICSID) Convention that facilitates the ISDS process, India aims to settle claims following the example of Nissan v. India, where the Japanese automaker withdrew its arbitration following a settlement with Tamil Nadu.
India is concerned that the commonly accepted investor-state arbitration within ISDS mechanisms favours investors over the host state’s regulations.
Sunset clauses preserve mandatory ISDS provisions and are prompted invariably for disputes arising on account of termination, imminently settling their survival effect, explaining India’s drift away from ISDS. Recent agreements such as the 2022 India-Mauritius CECPA do not posit codified investment chapters/annexes nor detailed termination-sunset provisions, as it eschews ISDS to favour a more collaborative approach akin to the WTO model. On the other hand, the 2020 India-Brazil BIT excludes ISDS in favour of state-state arbitration. These developments further signal India’s shift from investor-state arbitration. Additionally, the Indian Model-BIT stipulates local remedies, i.e. recourse to domestic courts/tribunals before proceeding with arbitration.
India's deliberate caution regarding BITs/IIAs over the past five years starkly contrasts with its previous policy when it signed several BITs between 1994 and 2011. The Ministry of External Affairs justified this approach before the CEA, citing litigation costs, loss of reputation, reduced policy space, and legal uncertainty as outweighing their benefits. It contested the claims of a causal relationship between BITs and FDI inflows, stating that BITs were not “the only condition” for investments.
Several countries have emulated India’s stand. Indonesia and South Africa unilaterally terminated numerous BITs, many of which contained sunset clauses, with the latter even enacting domestic legislation to govern potential expropriation claims. In 2020, EU member states terminated approximately 130 intra-EU BITs.
It contested the claims of a causal relationship between BITs and FDI inflows, stating that BITs were not “the only condition” for investments.
Despite increasing protectionist actions, BITs remain influential tools to push FDI levers, especially in the Global South. They establish norms governing foreign investor-state relations, assure investors of host state compliance with international law and protect Indian investments abroad, a facet often overlooked despite significant outbound investment growth. At the same time, the sunset clauses will ensure claims pile up.
While they are valuable in policies where adaptability is essential, enabling periodic treaty reassessment and alignment with evolving host-state policies, the absence of explicit sunset provisions or ISDS mechanisms in recent FTAs, such as the 2022 India-Australia ECPA, demand finding a middle ground to navigate a favourable ISDS system and further fructify a shorter survival period.
India must negotiate new BITs soon if it is keen to omit the 15-year sunset period stipulated in most of its terminated BITs. There are precedents where states such as Indonesia terminated BITs together with the survival effect of sunset clauses. India can reach a mutual understanding with states to forego the rest of the sunset period, thereby reducing the risk of new claims after facing sunset period claims in the past five years. Such clarity is necessary for India’s FDI ambitions, strengthening bilateral relations and gradually uplifting India’s position to a favourable pedestal in the murky waters of investment treaty law.
Dharmil Doshi is a Research Intern at the Observer Research Foundation
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