Context: India’s expanding network of Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs) is creating an opportunity to strengthen India’s domestic commercial arbitration ecosystem.
- India has signed BITs with the United Arab Emirates (2024), Uzbekistan (2024) and Israel (2025), and FTAs with the European Free Trade Association (March 2024), the United Kingdom (July 2025), Oman (December 2025) and New Zealand (April 2026).
- Beyond market access and investment protection, these agreements can influence how foreign investors perceive India’s dispute-resolution framework.
India’s Arbitration Framework
- The Arbitration and Conciliation Act, 1996 provides the principal statutory framework for domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards.
- A predictable, enforceable and trusted arbitration system can reduce uncertainty for businesses when contractual or investment relationships break down.
- India’s treaty policy can complement legislative reforms and the pro-arbitration approach of Indian courts to strengthen this framework.
1. Clarifying the Absence of Investor-State Dispute Settlement
- Recent Indian FTAs have generally excluded Investor-State Dispute Settlement (ISDS), despite its importance in resolving disputes between foreign investors and States.
- A significant portion of foreign investment in India is undertaken through contracts between investors and Indian State agencies, making commercial arbitration particularly relevant.
- Future FTAs could explain that the absence of ISDS is linked to the availability of commercial arbitration and domestic legal remedies in India.
- The European Union–Australia FTA, for instance, clarified that investment protection was outside its scope because of the level of trust in the respective legal systems.
- Similar clarification in Indian FTAs could create a middle ground between India’s reservations about ISDS and investors’ concerns about relying exclusively on Indian courts.
2. Linking BITs with Domestic Commercial Arbitration
- Indian BITs that contain ISDS should clearly distinguish between treaty-based investment disputes and contractual disputes between a foreign investor and the State.
- The India–Uzbekistan BIT, for example, excludes disputes arising solely from an alleged breach of a contract between the State and a foreign investor from ISDS.
- Some BITs make access to ISDS conditional upon exhaustion of local remedies, requiring investors to approach domestic courts or administrative bodies for a specified period.
- Such provisions may not clearly recognise commercial arbitration tribunals seated in India as part of the local-remedy mechanism.
- Future BITs could clarify that investors may satisfy the local-remedies requirement by submitting the substance of an investment dispute to commercial arbitration in India.
3. Clarifying the Position on Third-Party Funding
- Recent Indian BITs indicate that India does not favour third-party funding in ISDS proceedings.
- Third-party funding involves an external entity financing litigation or arbitration in return for an agreed financial return, generally linked to the outcome.
- Restrictions in ISDS can be justified because such disputes involve sovereign decisions and public regulatory policies, potentially affecting the policy space of governments.
- These concerns are different from those involved in commercial arbitration between private or contractual parties.
- Future BITs and FTAs could therefore clarify that restrictions on third-party funding in ISDS do not automatically prohibit such funding in domestic commercial arbitration.
Investor-State Dispute Settlement
- ISDS is a mechanism through which a foreign investor can bring a claim against the host State under an investment treaty before an international arbitral tribunal.
- It differs from commercial arbitration, which generally resolves disputes arising from contractual or commercial relationships.
- Maintaining a clear distinction between the two can allow India to protect its regulatory space while developing its domestic arbitration ecosystem.
Why Third-Party Funding Matters for India
- A clear policy on third-party funding could improve access to arbitration, particularly where parties lack the resources to finance complex proceedings.
- India currently needs a coherent regulatory framework that balances access to justice, transparency, conflicts of interest and protection against abusive claims.
- A nuanced distinction between ISDS and commercial arbitration could support the development of such a framework.
Way Forward
- Future BITs and FTAs should clearly explain the relationship between ISDS, domestic courts and commercial arbitration.
- Commercial arbitration in India could be expressly recognised as a potential means of satisfying applicable local-remedies requirements.
- Treaty provisions should distinguish restrictions applicable to ISDS from the regulatory framework governing domestic commercial arbitration.
- India should continue strengthening the Arbitration and Conciliation Act, 1996, institutional arbitration and predictable enforcement of arbitral awards.
- A comprehensive policy on third-party funding should balance access to justice with transparency, conflict-of-interest safeguards and integrity of proceedings.
India’s Aspiration to Become an Arbitration Hub
- International investors consider not only taxation and market access, but also the predictability and credibility of dispute resolution when deciding where to commit capital.
- India’s recent treaty practice reflects an attempt to balance investment protection, State regulatory interests and dispute-resolution requirements.
- The broader objective should be an ecosystem where disputes are prevented where possible, resolved efficiently through arbitration, and followed by predictable judicial enforcement.
- India need not make every trade or investment treaty an arbitration-focused agreement; targeted provisions can instead integrate commercial arbitration into its wider trade and investment infrastructure.
Conclusion: A coherent connection between India’s trade treaty policy and domestic arbitration framework can reduce investor uncertainty, strengthen contractual enforcement and contribute to India’s emergence as a credible global arbitration hub.
