A new investment treaty between the United Kingdom and India is set to make headlines with a provision that will allow companies from either country to sue the other’s government if they believe policy changes have unfairly harmed their investments or profits. This move, confirmed by two sources familiar with the negotiations, marks a significant shift in the approach both nations have taken toward investor protections in recent years.

Investor-State Dispute Settlement (ISDS) Back in Focus

At the heart of the treaty is the Investor-State Dispute Settlement (ISDS) mechanism. ISDS allows corporations to take legal action against governments if they feel domestic policy changes have negatively impacted their business interests. The mechanism is designed to protect companies from what they see as unfair treatment under local laws. The treaty, expected to be finalized alongside a broader free trade agreement, signals a willingness by both countries to provide greater legal certainty for foreign investors.

This is a notable development given that, since leaving the European Union, the UK has avoided including ISDS in any of its bilateral free trade agreements, although it remains a feature of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which the UK has joined. India, for its part, has also moved to restrict the use of ISDS in its treaties, especially after terminating a previous bilateral investment treaty with the UK in 2017. India’s newer model only allows ISDS claims after all domestic legal options have been exhausted.

Why Now? Business Confidence and Political Shifts

According to one source, the UK pushed for the inclusion of ISDS in the new deal, reflecting British businesses’ desire for stronger assurances that they will be treated fairly under the Indian legal system. The Indian government has not commented publicly on the ongoing talks. A spokesperson for Britain’s trade ministry declined to discuss the specifics but stressed that any agreement must guarantee fair treatment for businesses.

The Labour Party, which returned to power in the UK last year, has been eager to present itself as pro-business and to restart trade talks that had stalled under previous administrations. “We are committed to enhancing access for UK businesses, guaranteeing their fair treatment, reducing tariffs, and simplifying trade,” a UK trade ministry spokesperson said.

Track Record and Controversy

Britain has never lost an ISDS case, but UN data shows that of the 30 ISDS claims brought against India since 2003, eight were initiated by UK-based companies under a previous agreement. The ISDS mechanism has not been without controversy. Critics, including the UK’s former Conservative government, have warned that ISDS can hinder efforts to address climate change, as fossil fuel companies have used it to protect their assets from new environmental policies.

What’s Next? Final Talks and Remaining Hurdles

Negotiations between the UK and India have been ongoing, on and off, since January 2022. The Indian Commerce Minister Piyush Goyal was in London earlier this week for advanced discussions and returned on Friday for further talks. Key sticking points remain, including tariffs on whisky, automobiles, and agricultural products, as well as regulatory issues in the pharmaceutical sector.

India’s previous opposition to ISDS led to the scrapping of the earlier bilateral investment treaty with the UK in 2017. The new agreement appears to be a compromise, balancing investor protections with domestic legal safeguards.

For businesses and investors, the inclusion of ISDS is a clear signal that both governments are seeking to create a more predictable and secure environment for cross-border investment. As one UK official put it, the aim is to “improve access for UK businesses, ensure their fair treatment, cut tariffs, and make trade cheaper and easier”.

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