Supreme Court Justice PS Narasimha on Wednesday questioned the institutional framework of international investment arbitration.
He said that disputes involving government decisions affecting millions of people are traditionally decided by tribunals comprising just three arbitrators, without a general appellate mechanism to correct errors or ensure consistency.
He was speaking at the ninth anniversary of the Centre for Trade and Investment Law (CTIL).
Justice Narasimha said that although investment arbitration was originally designed to protect foreign investors, it has increasingly come to involve government policies on taxation, public health, environmental protection and financial regulation.
He observed that the growing public importance of these disputes has raised fundamental questions about the legitimacy and accountability of the institutions adjudicating them.
"Investment disputes may involve government measures affecting millions of people. Yet these disputes have traditionally been decided by tribunals constituted for a particular case, usually consisting of three arbitrators."
Justice Narasimha pointed out that different tribunals could interpret similar treaty provisions differently, while investment arbitration, unlike most domestic judicial systems, lacked a general appellate structure for correcting errors and developing consistent jurisprudence.
He also highlighted concerns about the length and cost of proceedings, substantial damages claims and questions surrounding the appointment, independence and repeat appointment of arbitrators.
The judge cited investment disputes arising from Argentina's financial crisis as an illustration of these institutional weaknesses.
Different arbitral tribunals examining similar emergency measures adopted during the same financial crisis had reached different conclusions on questions concerning necessity and Argentina's treaty obligations.
According to Justice Narasimha, such inconsistencies contributed to wider concerns about the legitimacy of investor-State arbitration.
He referred to the reform proposals being examined by UNCITRAL Working Group III, including the creation of a standing adjudicatory mechanism and an appellate mechanism.
Justice Narasimha said that moving away from ad hoc tribunals towards a more permanent institutional framework could ensure greater consistency, continuity and accountability in investment adjudication.
However, he cautioned that institutional reform alone would not resolve the differences arising from varying treaty obligations and standards of investor protection.
The judge also stressed that protecting foreign investments could not come at the cost of a government's ability to regulate matters of public interest.
Referring to India's experience, Justice Narasimha discussed the White Industries arbitration, where delays in enforcing an arbitral award through the Indian judicial system resulted in a finding that India had breached its treaty obligations.
He also cited the Vodafone and Cairn investment arbitrations concerning retrospective taxation, in which tribunals ruled against India.
The judge noted that India subsequently revised its investment treaty policy through the 2015 Model Bilateral Investment Treaty, which narrowed investment protections and required investors to pursue domestic remedies before initiating international arbitration.
The judge concluded by calling for a long-term institutional approach to investment law reform rather than responding to individual controversies through additional treaty provisions.
"The challenge, therefore, is not to choose between investment and sovereignty. It is to create a legal order in which both can be protected," he opined.