Regulatory Chill: An Analysis with Reference to India

By: Bhavana Suragani (Jindal Global Law School, India)


International investment law has often been known to be inclined towards the protection of investors’ rights which has invariably affected the host state’s perception on enforcement of bona fide regulatory measures. This has resulted in the postulation of the regulatory chill hypothesis; it is conceived as a state’s reluctance to enact certain regulatory or public policy provisions as a result of the threat of arbitration under investor-state dispute settlement (ISDS) provisions, hence curtailing the states’ capacity to regulate. It cannot be stated that regulatory chill always arises from an investor’s threat to arbitrate, as these investor-state disputes are quite complex, however in many cases more often than not it has directly or indirectly emerged as a result of an arbitral threat. The advent of arbitral proceedings against a host state has a negative influence on the state’s reputation in the view of foreign investors, regardless of the result of the case. Other potential negative consequences for a host state undergoing an arbitral proceeding include strained relations with the government of the investor’s home state which may be an important commercial partner or source of financial aid, and/or may be the cause for discourteous relations with the World Bank.

It is pertinent to note here that regulatory chill also emerges as host states often have difficulty while dealing with uncertainty in the realm of international investment law. Investment arbitration awards are only binding on the parties partaking in the dispute, therefore, tribunal decisions are said to have no stare decisis. As a result, tribunals are not required to predicate their decisions on those of preceding tribunals. Furthermore, unlike in the case of trade disputes, there is no appellate institution to ensure that investment treaties are consistently interpreted. Thereby, there have been instances where multiple awards have been granted addressing the same facts with panels reaching contradictory decisions. As a result, some have referred to international investment arbitration as experiencing a ‘legitimacy crisis’. In addition to these issues, regulatory chill most importantly also ensues as a result of the government’s concern of the possibility of industrial flight in the country. Therefore, the host state acting in consideration of these potential detrimental impacts of arbitral proceedings, refrain from implementing certain policy measures.

India underwent numerous investment treaty claims between the year 2011 and 2015. A significant number of these claims were made as a direct result of regulatory changes implemented by India in the telecom and tax regimes. As a result, concerns about regulatory chill or the reluctance to implement policy measures for public welfare, due to the possibility of receiving detrimental arbitral awards began to emerge. This concern was accentuated in India’s reluctance to join International Centre for Settlement of Investment Disputes (ICSID) due to its concern that the system was inherently biased toward the investors, and that it could result in comprehensive interpretation of certain clauses in BITs to favour the investors.

After showing a general lack of trust in ISDS procedures, India has terminated many of its existing BITs and has formulated a model BIT with a considerably more restrictive approach towards investor protection and laid more emphasis on investor obligations. The Model BIT incorporated the possibility of ‘regulatory chill’, striking a fine balance between ISDS and state regulation by inserting many reservations on the treaty’s applicability. Article 2.4 of the Model BIT expressly states that the treaty is not applicable in disputes involving taxation issues, local government measures, subsidies or grants provided by a party, issuance of compulsory licences, government procurements by a party, and services provided in the exercise of governmental authority by the relevant body or authority of a party, among other things. It has also addressed the issue of investor obligations which has been accomplished by the inclusion of a comprehensive ‘compliance with law’ provision. Further, Article 11 of the Model BIT compels investors and their investments to abide by all state laws, regulations, administrative guidelines, and policies. Additionally, the Model BIT also includes a number of extra ‘investor obligations’ to regulate investor accountability.

Succeeding the composition of this Model BIT, the exclusions and obligations mentioned in it have also been included in the BITs signed by India with Brazil (2020) and Belarus (2018). It is essential to note here that this reformative BIT served as a solution to many of the host states’ (India) concerns as ICSID tribunals strictly interpret such clauses to be mandatory requirements for investors. The model BIT has inordinately taken a step further in an attempt to retain the right to regulate. It has done so by excluding the ‘Most Favoured Nation’ (MFN) clause, the ‘Fair and Equitable Treatment’ (FET) clause, and the ‘Full Protection and Security’ (FPS) clause from the Model BIT. Furthermore, while Article 3 of the Model BIT outlines certain substantive obligations of the host state (limited by a customary international law threshold), it clearly does not cover the protection of investors’ ‘legitimate expectations’. Additionally, even in BITs signed by India that include a FET clause, like the BIT signed with Colombia (2018), the clause’s purview is only limited to the ‘minimum standards of treatment under the customary international law’.

In spite of the fact that the responsibility to vigorously advocate for broader regulatory space for general public laws, without being compromised by either the developed countries’ economic strength or their opulent investments is on the developing and under-developed host countries, India has unduly excluded some of the indispensable clauses while drafting the Model BIT. Although ruling out these clauses may benefit the host state it inevitably discourages foreign investors to invest in that country as the investors themselves are not being given adequate protection. Therefore, even though inclusion of clauses pertaining to investor obligations and minimising clauses regarding investor’s protection may reduce the possibility of any form of regulatory chill, the definitive remedy to this conundrum does not lie in conceptual amendments to BITs. Nonetheless, the remedy lies in the development of modern regulatory framework that provides for full consolidation and the proper interplay of international trade law, international investment law, and international human rights law.


(Bhavana Suragani is a Third Year BBA.LLB (Hons.) student studying at Jindal Global Law School, India. Her interests specifically lie in commercial arbitration, corporate law, and mergers and acquisitions.)

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