Report No. 260

C. Article 14.2(ii). Instances where ISDS mechanism is not applicable

(i) Analysis and comment:

5.3.1 Articles 14.2(ii)(a) and (b) preclude a Tribunal's jurisdiction to review 'any legal issue which has been finally settled by any judicial authority of the Host State' and the merits of a decision made by a judicial authority of the State. This appears to have been introduced to ensure that the tribunal does not sit on appeal over the decisions of Indian Courts.

5.3.2 However, this provision renders the entire BIT unworkable. Article 14.3 requires that prior to issuing a notice of dispute, the investor must have pursued domestic remedies.

Article 14.3(ii) provides that a notice of dispute can be issued only where local remedies have been 'exhausted' to the dissatisfaction of the investor or the investor is capable of proving that continued pursuit of domestic relief would be futile for specific reasons. Pursuing domestic remedies would entail an interaction with the judicial authorities of the Host State, which would result in judgements or orders, which would in turn be decisions on merits.

However, the 2015 Model contemplates that all issues on merits must first be tested before a local forum, while, at the same time, providing that any finding by a local Court shall act as a jurisdictional bar in so far as the Arbitral Tribunal is concerned. It is hard to contemplate too many scenarios where an investor would comply with the provision for exhaustion of local remedies and yet overcome the jurisdictional bar imposed by Article 14.2(2).

5.3.3 For instance, assume that Company X takes objection to a Taxation Amendment passed by the Legislature and places the matter before a High Court or Supreme Court, requesting it to be tested for constitutionality. If the Court renders a decision or dismisses the claim, these clauses would prevent the same from being agitated before a tribunal despite it being brought before the Tribunal on the grounds of being a violation of the substantive protections afforded under the BIT (e.g., Fair and Equitable Treatment, National Treatment, etc.)

5.3.4 Article 14.2(ii)(a) is problematic to the extent that it precludes the re-examining of any legal issue that has been decided by a judicial authority. Thus, it is suggested that Article 14.2.(ii)(a) be removed. However Article 14.2(ii)(b) is in consonance with ordinarily accepted tribunal jurisdictions, where tribunals are precluded from reconsidering the merits of a matter and are limited to considering it within the context of treaty protections.

5.3.5 Article 14.2(ii)(d) places decisions taken by the State under Articles 16.1(ii) and (iii) and Article 17 on a pedestal and makes such decisions non-justiciable. While such treatment of Article 17 (which relates to security of the nation) may be justified, such treatment of decisions taken under Articles 16.1(ii) and (iii), which relate to the financial stability of the Host State could be problematic, and may be used as an arbitrary mechanism by States to renege from BIT obligations. Article 14.2(ii)(d) may be reconsidered on this basis so as to restrict its applicability to Article 17.