Indian Council of Arbitration Chief Urges India to Write Commercial Arbitration Into New Trade Treaties

The news

New Delhi. India’s recent trade and investment treaties should be written so that they strengthen commercial arbitration at home, argues Arun Chawla, Director General of the Indian Council of Arbitration, in an article in The Hindu. A bilateral investment treaty (BIT) is an agreement between two countries that sets out how each will treat investors from the other, and usually how disputes between an investor and the host government will be settled. A free trade agreement (FTA) cuts tariffs and sets rules on trade, and sometimes on investment. Mr. Chawla notes that India has signed BITs with the United Arab Emirates (2024), Israel (2025) and Uzbekistan (2024), and FTAs with New Zealand (April 2026), the United Kingdom (July 2025), the European Free Trade Association (March 2024) and Oman (signed December 2025). Debate has focused on their economic benefits and on investor-state dispute settlement (ISDS), under which a foreign investor can sue the host state before an international tribunal. Commercial arbitration is different: it is private dispute resolution under a contract, decided by arbitrators rather than courts. In India it is governed by the Arbitration and Conciliation Act, 1996, which covers domestic arbitration, international commercial arbitration and the enforcement of foreign awards. Mr. Chawla makes three proposals. First, India’s recent FTAs have generally left out ISDS. Since a sizeable share of investment in India is made through contracts between foreign investors and Indian state agencies, future FTAs should state, as the European Union–Australia FTA did, why ISDS is not needed; in India’s case, because commercial arbitration remedies are available in India. Second, India’s BITs do provide ISDS but separate it from contract disputes: the India–Uzbekistan BIT excludes “disputes arising solely from an alleged breach of a contract”, and investors must first exhaust local remedies in domestic courts or administrative bodies for a specified period. The wording appears to exclude commercial arbitration tribunals seated in India, which Mr. Chawla sees no reason for, so future BITs should let arbitration in India count as a local remedy. Third, India’s BITs disfavour third-party funding in ISDS, meaning an outside financier paying a claimant’s legal costs for a share of any award. That is understandable for claims against sovereign decisions, he writes, but treaties should make clear it does not signal that such funding is barred in domestic commercial arbitration. The syllabus link is GS3 (investment models) and GS2 (bilateral agreements).

Static syllabus linkage

1. The Arbitration and Conciliation Act, 1996 is India’s single code for arbitration. The Act is based on the UNCITRAL Model Law on International Commercial Arbitration of 1985. Part I governs arbitrations seated in India, both domestic and international commercial, and Section 34 allows an award to be set aside by a court only on limited grounds. Part II provides for the enforcement of foreign awards under the New York Convention of 1958, which India ratified in 1960 with reservations limiting it to commercial disputes and to countries notified on the basis of reciprocity. In BALCO v. Kaiser Aluminium (2012), the Supreme Court held that Part I does not apply to arbitrations seated abroad. The 2015 amendment introduced time limits for awards through Section 29A and narrowed the ‘public policy’ ground for challenge, and the 2019 amendment provided for an Arbitration Council of India in Part IA.
2. India rewrote its investment treaty model after losing an investor-state case. In White Industries v. India (2011), a tribunal under the India–Australia BIT held that India had failed to provide effective means of enforcing an arbitral award because of long delays in Indian courts. Along with disputes over retrospective taxation involving Vodafone and Cairn, this pushed India to adopt a new Model BIT in 2015. The Model BIT uses a narrower, enterprise-based definition of investment, leaves out a most-favoured-nation clause, excludes taxation measures, and requires investors to pursue domestic remedies for at least five years before going to international arbitration. India then served termination notices on most of its older BITs. The Taxation Laws (Amendment) Act, 2021 withdrew the retrospective tax demands that had led to the Vodafone and Cairn arbitrations.
3. ISDS, commercial arbitration and exhaustion of local remedies are three different things. ISDS is a treaty-based right of a foreign investor to bring a claim against a state before an international tribunal for breach of treaty standards such as fair treatment or protection from expropriation. Commercial arbitration arises from a contract between two parties, which may include a state agency, and is decided under the chosen law and seat. Exhaustion of local remedies is a principle of international law that requires a claimant to use the host country’s own remedies before going international. Mr. Chawla’s proposal is to treat arbitration seated in India as one such local remedy.
4. Third-party funding has no dedicated law in India. Third-party funding means an outside financier pays a party’s legal costs in return for a share of any money recovered. No Indian statute regulates it directly. In Bar Council of India v. A.K. Balaji (2018), the Supreme Court observed that funding of litigation by third parties who are not advocates is not barred, while Bar Council rules forbid advocates from charging fees tied to the outcome. Singapore and Hong Kong amended their laws in 2017 to permit third-party funding in international arbitration, and both are the main regional competitors to India as arbitration seats. Institutionally, India created the New Delhi International Arbitration Centre by a 2019 Act, renamed the India International Arbitration Centre in 2022.

Why UPSC loves this

1. GS3 names investment models, and GS2 names bilateral agreements. An answer on why FDI inflows depend on institutions, not just tax rates, is strengthened by the arbitration angle: investors ask “what happens when a relationship breaks down”, as Mr. Chawla puts it. The evolution from the older BITs to the 2015 Model BIT and treaties like India–UAE and India–Uzbekistan is a standard GS2 and GS3 theme.
2. Contract enforcement is the recurring weak point in ease-of-doing-business debates. India long ranked poorly on enforcing contracts in the World Bank’s now-discontinued Doing Business reports, and questions on judicial delays and alternative dispute resolution appear across GS2 and the Essay paper. This op-ed gives a fresh, specific link between treaty policy and domestic dispute resolution.
3. Prelims has a stable set of arbitration facts to test. The New York Convention, the UNCITRAL Model Law, the seat-based rule of BALCO, the Arbitration Council of India and the India International Arbitration Centre are all settled facts suited to statement-based questions. None of them will change with the news cycle.

Analysis

1. Mr. Chawla turns India’s refusal of ISDS into a selling point, but only if Indian enforcement works. The EU–Australia language he cites works because both sides trust each other’s courts. Saying that commercial arbitration in India makes ISDS unnecessary is a claim foreign investors will test against their experience of award enforcement. The White Industries case was precisely about Indian courts taking too long to enforce an award. If awards against state agencies continue to be challenged under Section 34 and appealed for years, the preambular promise will look like a substitute for protection rather than a form of it. The proposal is right in direction, but its credibility rests on courts and on government litigation behaviour, not on treaty drafting.
2. The ‘local remedies’ fix is the cheapest and most useful of the three proposals. Requiring investors to go to Indian courts for a set period before ISDS is meant to give the Indian system a first chance to correct a wrong. Allowing arbitration seated in India to count serves that purpose equally well while being faster and more neutral in the investor’s eyes. It also sends business to Indian arbitrators, lawyers and institutions, which is the capital and entrepreneurship side of the story. The counter-view comes from within government: the Finance Ministry’s 2024 guidelines advised that arbitration should not be routinely included in public procurement contracts, especially large ones, because of the state’s experience of adverse awards. A government sceptical of arbitration at home will be slow to endorse it in treaties.
3. Separating third-party funding in ISDS from funding in commercial arbitration is sound. ISDS claims challenge sovereign regulation, so an investment fund financing claims against a tax or environmental law raises a real concern about regulatory chill. A commercial dispute between a supplier and a buyer does not carry that concern, and funding helps a capital-short firm, often a smaller one, pursue a valid claim. Treating both the same way is a policy error. The honest risk is that funding without disclosure rules can create conflicts of interest for arbitrators, which is why India needs a regulatory framework rather than silence.
4. Treaty text cannot build an arbitration hub by itself. Singapore and London became arbitration centres because of trusted institutions, a deep pool of arbitrators, and courts that rarely interfere with awards. India has passed the laws and set up the India International Arbitration Centre, yet high-value disputes involving Indian parties are still often seated abroad. Treaty drafting is a signal; the pull comes from speed, cost and predictable enforcement. Mr. Chawla himself says India need not make every treaty an arbitration treaty, which is an admission that the harder work lies at home.
5. India’s treaty network is still being judged by investors, not only by negotiators. Since 2015 India has chosen more regulatory freedom over stronger investor protection, and termination of the older BITs left many investors without treaty cover for some years. Supporters argue this protected policy space and that FDI kept flowing anyway. Critics reply that capital that did come may have been priced for higher risk, raising the cost of capital for Indian projects. Linking treaties to a credible domestic arbitration system is a middle path between these positions, which is why the proposal deserves attention.

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