Brazil-India Investment Cooperation and Facilitation Treaty – A new economic vision

In India, each year begins with great festivities. 2020 was no exception. Between several festivals dedicated to the Hindu Sun God Surya (Makar Sankranti, January 15, 2020), the harvest (Pongal, January 15-18, 2020) and spring (Vasant Panchami, January 29, 2020), is Republic Day. On January 26, India celebrated the 70th anniversary of its Constitution. And, for the occasion, the chief guest was Jair Messias Bolsonaro, President of Brazil. He could be seen alongside Narendra Modi, Indian Prime Minister and Rajnath Singh, Minister of Defense. This is the third time a Brazilian president has had this honour. The last occurrence dated back to 2004 with President Luiz Inácio Lula da Silva. In a tense global context, especially between China and the United States, the meeting was not trivial. Both members of the BRICS, the 5th and 9th largest economies in the world, took the opportunity to sign no less than 15 international agreements, including an Investment Cooperation and Facilitation Treaty (ICFT). The text is available in English and in Portuguese.

1. Finding a new model for developing countries

An international treaty, this agreement follows the main lines of the two respective model investment treaties of these countries: the Indian model BIT of December 2015/January 2016 and, for Brazil, cooperation and investment facilitation agreements in place since 2015. The ICFT is the third agreement signed since the adoption of the Indian Model BIT and the thirteenth since 2015 for Brazil. However, of all these instruments, only one has entered into force: the one between Brazil and Angola, signed on April 1st, 2015, and entered into force on July 28th, 2017. A similar fate could await the ICFT. It will not enter into force until “90 days after receipt of the second diplomatic note indicating that all internal procedures necessary for the conclusion and entry into force of international agreements have been completed by both parties” (article 28.2 of the ICFT. There is no obligation on either party to undertake internal ratification procedures. And even once in force, a new government could denounce it unilaterally (Article 28.4).

However, the ICFT is emerging as a new model for overseeing international economic relations in the area of ​​foreign investment. In the twenty years since the advent of the third millennium, there has been a geopolitical and economic change. Led by the BRICS, developing countries seek to challenge the American neoliberal model set up in the 1990’s following the fall of the USSR. But on the regulation of international trade, the WTO has been deadlocked since the failure of the Doha Round, the wish of developing countries not having been heard. Moreover, the American blockade prevents the functioning of the dispute settlement body, ultimately threatening the organization (see also the farewell speech of March 5, 2020 by Thomas R. Graham, member of the Appellate Body). In terms of investments, following the revelation of profound problems through emblematic cases (Argentine Crisis, Philipp Morris v. Uruguay, Vattenfall v. Germany, etc.), the protection of foreign direct investments is going through a phase of change. However, the basic idea remains the same and the transformation is struggling to materialize, in particular in North-South relations.

The proposed alternative model is as follows: an evolving framework that is both protective and constraining for the investor and the violation of which will be sanctioned by the two States Parties on a collegial basis. The signing of the ICFT between two of the world’s greatest powers demonstrates the will to change the way investment protection is understood.

This change is reflected in the wording of the provisions of this treaty. Its objective is not the promotion and protection of investments – a classic formula – but the promotion of cooperation between the parties to facilitate and encourage bilateral investments (Article 1). This is achieved through the establishment of an institutional framework for cooperation and the establishment of a mechanism for limiting risks and preventing disputes. Unlike traditional BITs, the State takes an active and central place. The preamble is remarkable in this respect. The focus is first on the ties between the two countries and the importance of communication fostering initiatives and facilitating the resolution of disputes. Then comes the regulation allowing investors to develop their business in a favourable environment, while respecting commonly accepted values: sustainable development, poverty reduction, the right to regulate, and transparency of standards related to investment.

2. The reassertion of States sovereign powers

In the treaty, the Parties reaffirm their control over sovereign powers. The tax domain is excluded from the protection of the treaty (articles 3.6.b, 9.4.f, 11.c and 20). Hence, indirect expropriation and rampant expropriation (or measures equivalent to expropriation) are excluded from the definition of expropriation (Article 6.3) as they can be induced by fiscal measures.

Second sovereign power reinvested by the State: the definition of law. The margins of appreciation are scarce. Protected investment is strictly limited. The concept uses the criteria outlined by the Salini test (article 2.4). Its definition only includes businesses and contains a list of assets covered and items expressly excluded from protection (Article 2.2.4). Quite conventionally now, protection is not granted to investments neither before the entry into force of the treaty, nor to activities carried out pre-establishment (Articles 3.1 and 3.6.g). In the wake of Operation Lava Jato and the accusations against the governments of the previous Indian Prime Minister Manmohan Singh, investments made from funds of illegal origin do not benefit from the protection of the ICFT (Article 10.2) and investors are expressly prohibited from bribing public officials (Article 11.b).

In order to prevent abuse here again, the protected investor can be a natural or legal person, but not a front company (article 2.5.b). States have the option of denying protection to an investor (Article 3.7). This last point looks like a denial of benefits clause, but the same provision obscurely specifies unless inconsistent with this Treaty. Finally, the protection of the treaty is granted to investors exercising at least a significant influence on the investment (Article 2.4). The gaze naturally turns to investment funds (3G capital).

The ICFT does not apply to local government measures, unless national treatment is respected (Article 3.6.a). This leaves wide restrictions open but allows the satisfaction of a democratic interest: the maintenance of the power of the elected bodies closest to the people. However, these local governments are not defined, unlike sub-national government (article 2.11), and the concepts seem to be formally distinct. It also does not apply to subsidies granted to vulnerable groups (Article 3.6.e, we translate) without this concept being defined. The logic holds for the protection of the indigenous tribes, numerous in Brazil as in India, but what of the scope of the concept, and why was it not defined?

In matters of substantial protection, Fair and Equitable Treatment (FET) is the subject of an exhaustive list which, unlike that of CETA, is cut off from legitimate expectations (Article 4). This resolves the debate over their definition. Measures concerning vulnerable groups (article 4.2) with the same questions as above are excluded from the FET. Clearly defined both in its form and in the compensation to be provided, direct expropriation is regulated (article 6). At the border between these two concepts, non-discriminatory regulatory measures taken to protect a public interest do not constitute expropriation (Article 6.4) and do not appear to constitute a violation of the FET either. The standard of full protection and security is absent. The reduction is therefore drastic compared to traditional protections.

In reference treatments, national treatment (NT) is present (Article 5) unlike most favoured nation treatment (MFN). Paradoxically, losses suffered during armed conflicts, revolutions, states of emergency or other similar events enjoy protection not only equivalent to that of investors from the other contracting State but also to those from third countries (article 7). This application of the NT and the MFN to crisis situations raises the question of the integrity of the regime, especially with the onset of health crises such as the Covid-19.

The capital transfer clause, generally very liberal, is restricted in the context of temporary measures for the protection of the balance of payments and the respect of obligations vis-à-vis the International Monetary Fund (Articles 9.2 and 9.3). More generally, it cannot hinder the application of the law (Article 9.4). A non-exhaustive list expressly mentions certain areas (liquidation, respect for labour law, respect for tax law, etc.). The exceptions somewhat empty the principle of its substance.

Finally, the investor must respect the law of the host State for the establishment, acquisition, management and disposal of his investment (Article 11) and the State has the obligation to inform him of rules surrounding it in full transparency (Articles 8 and 17). The ICFT also encourages sustainable development and compliance with certain obligations relating to corporate social responsibility, but without obligation (article 12). However, numerous and broad exceptions (Articles 20 to 24) give the parties a right to regulate in order to protect, among other things, public interests, the environment, and the stability and security of the State.

Justice also returns to the heart of the State. Brazil and India have long opposed investment arbitration – e.g. they are not members of the ICSID Convention. Naturally, recourse to arbitration is ruled out for investors and the ICFT is initiating the return of a new form of diplomatic protection. The emphasis is on the prevention of disputes through negotiation (Article 18), with arbitration being only a last resort inter partes in the event of failure (Article 19). The dispute prevention procedure is subject to a monopoly of the joint committee. Composed of representatives of the two governments to meet at least once a year, this committee is set up to administer the treaty and resolve any disputes between the parties (Article 13) on a confidential basis (Article 18.5). An Ombudsman is also set up to support investors (article 14). The investor therefore has no direct procedural action and must go through his State. An optional – and unprecedented – fork in the road clause allows one of the parties to refuse the investor to submit his dispute to the prevention mechanism if he has already sought recourse through another dispute settlement mechanism (article 18.3.c). Such a system de facto excludes small investors and is designed for world trade between large semi-public companies (Petrobras) or that can be heard by their government (Tata, ArcelorMittal).

3. Towards a new world economic paradigm?

This reassertion of the State in its natural domains undermines the traditional conception of BITs. The preamble announced it: the aim of ICFT is not to promote investment but cooperation between the parties. This translates into numerous rights conferred on States, very strictly circumscribed protection and a dispute settlement mechanism putting the investor in the background. It ultimately affirms mutual respect for the sovereignty of each State. In a world where greed, for lack of a better word, is good, and in which there are many business partners, will the ICFT really apply? In the short term, that would be surprising. In addition, there is little exchange between the two parties. Brazil represents 1.177% of exports (16th) and 1.051% of imports (15th) of India and the latter represents 1.893% of exports (9th) and 2.502% of imports (10th) of Brazil (OECD (2017), Trade in value by partner country, OECD Quarterly International Trade Statistics). Faced with competition from other treaties, the ICFT could even act as a brake on trade between these two States.


What if, rephrasing Gekko’s moto, Greed is good, for lack of a better world? In the long term, the establishment of a network of similar cooperation treaties, entering into force at the same time – which would explain the non-entry into force of most recent treaties – could induce a shift in the global economic paradigm. The latter always includes the WTO, the ICFT making explicit reference to the interactions between the two instruments (Article 26.1). One element corroborates this theory of long-term vision: the ICFT is seen as a living agreement. The parties can change it with the establishment of agendas for cooperation and investment facilitation (article 25) whose management is entrusted to the joint committee (article 13.4.c) and with the open and explicit possibility of ”amending the treaty” (Article 27).

But is it really a better world? Or merely a step backwards? The ICFT is shaped primarily for large corporations and re-politicizes international disputes. Traditional BITs allowed multinationals to have protection, but small and medium size business could also benefit. The cause of the latter seems to be abandoned. Finally, the resolution of economic disputes resumes the path of diplomatic protection with, potentially, the same failures that this path caused in the past. The future will tell if sic itur ad astra or bis repenita placent.

A final point, slightly parenthetical, caught the attention of the drafters and fits into ICFT’s long-term vision: the appointment of arbitrators for the settlement of disputes. In the event of disagreement between the parties, one of them may request the President of the ICJ to make the necessary appointments. If the latter is a national of one of the two countries, the request can be made to the Vice-President. And if the latter is also a national, to the judge with the most seniority within the Court. With the entry of the first representative of India to the ICJ in 2012 and the Messianic Brazilian judge present since 2008, one can legitimately wonder if this provision will not be intended to apply.

Charles-Maurice Mazuy

Leave a Reply

Your email address will not be published.