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Human Rights vs Contract Law in Arbitration Mechanisms

Priya Sangameswaran ( is with the Centre for Studies in Social Sciences, Kolkata.

The consideration of human rights is often kept out of international investment arbitration proceedings. This can be related to the privileging of contract law in a market society and the differences in values underlying contract law and human rights. The tension between different kinds of laws can be viewed as being irreconcilable or as reflecting a Polanyian “double-movement.”

In October 2016, the Mumbai Centre for International Arbitration (MCIA) became operational, an event that attracted considerable attention in the realm of commerce and investment (and the legal/institutional framework related to these) in India. MCIA is designed to provide an alternative to the already-existing institutional arbitration mechanisms, such as the Singapore International Arbitration Centre, the London Court of International Arbitration, and the International Chamber of Commerce’s International Court of Arbitration. It is also supposed to be part of the Government of India’s “Make in India” strategy as well as the Government of Maharashtra’s plan to set up an “international financial services centre” in Mumbai. These larger goals are questionable as is the possibility of MCIA successfully meeting them. But the focus of this article is on a particular concern related to international arbitration which has not been dealt with in the case of MCIA or for that matter, in most arbitration mechanisms. More specifically, the manner in which international arbitration (particularly investment arbitration) has been working has often led to a separation between different legal regimes, such that the consideration of human rights or public purpose are kept out of arbitration proceedings and the focus is restricted to contract law. The implications of such a separation are discussed in terms of a relationship between economy, society, and law, drawing on the ideas of Karl Polanyi (1944/1957) and Radha D’Souza (2006). 

Concerns in International Arbitration

It may be useful to start with a brief discussion of the general concerns raised about international arbitration. One question that has constantly come up is the relation between arbitration and the judiciary. Arbitration is meant to be a non-judicial (but legally supported) means of dispute resolution that would (i) save time and costs involved in judicial recourse and (ii) deal with concerns about bias (against foreign parties), in cases where the parties to the dispute are of different nationalities. This purpose would not be served if arbitration awards were constantly being challenged by courts. At the same time, completely foreclosing the option of recourse to the judiciary may neither be desirable nor even possible/enforceable. Most methods of international arbitration today (with the exception of those under the International Centre for Settlement of Investment Disputes and the Dispute Settlement Understanding under the World Trade Organization [WTO]) usually involve—in addition to the specific arbitration rules chosen—rules of procedure of the legal system of the place of arbitration (including the possibility of recourse to the judiciary, if one of the parties wants it). In the Indian case, this tension in the relation between arbitration and the judiciary is reflected, for instance, in recent moves to curtail judicial involvement in arbitration proceedings (in a bid to create a more investment-friendly atmosphere for foreign investors)1 which stand in contradiction to other moves geared towards protecting the ­interests of Indian parties and the Indian state.2 The newly set-up tribunal, MCIA, also attempts to deal with this question through its feature of the “sanity check” that aims to ensure that its awards are scrutinised so that they are less likely to be challenged by Indian courts.

Another concern that has been raised about international arbitration is about the bias in awards in favour of Western countries, which is part of the rationale of setting up new international tribunals (such as the MCIA in India). However, it is not always clear whether the bias is in the interpretation of the contract and the laws/rules to which it is subject (which seems to be what investors typically talk about) or whether the content of the contract itself is already biased because of unequal bargaining positions of the parties in question (a point that is often raised by those critical of international trade and investment agreements). Further, in the case of the latter, whether and under what circumstances biased contract clauses can be overturned or even raised in the course of an arbitration process, is debatable. One possible exception could be when human rights or public purpose considerations are invoked, a point that relates to a third and more fundamental question that one can raise about international arbitration, which is about the relationship between international arbitration law and other kinds of law.

Relationship between Different Kinds of Law

At the onset, it is pertinent to note that arbitration rules, practices, and awards are seen as constituting a distinct form of law, although the current diversity (and sometimes inconsistencies) in this have led to some calls for a more uniform and consistent body of arbitration law (see, for instance, Franck 2005). The question then is whether other kinds of laws, particularly those dealing with human rights or public purpose, should be considered when interpreting and implementing arbitration law. A number of arguments have been made in support of such a position. Thus, Tamar Meshel (2015) argues against the separation of different kinds of laws by drawing on readings of Article 31(3)(c) of the Vienna Convention on the Law of Treaties that talks about the systemic relationship between all kinds of international law. More specifically, he argues that international law is applicable in deciding international investment arbitration disputes even when a particular domestic law or specific arbitration rules have been chosen by the disputing parties, and this would allow for the consideration of human rights too. Further, certain kinds of laws, such as human rights (be it the right to water or other kinds of socio-economic rights) make sense only when integrated across different realms.

Yet the usual experience of investment tribunals has been that the adverse effects of trade and investment treaties on human rights have not been acknowledged and instead, it is the text of the contract laid down in the treaties that has been emphasised and upheld. For instance, Meshel (2015) considers the case of the human right to water raised in water-related investments, most of which to date have been in the context of Latin American countries. Meshel points out that while there is some selective recognition of civil and political rights when invoked by investors, in general when the human right to water has been raised as a justification for actions of host nations, international arbitration tribunals have either not acknowledged it at all or acknowledged it without recognising the right in the resolution of the dispute itself or discussing its impact in any meaningful way. In other words, contract law and human rights have been treated as two separate areas of international law.

How does one make sense of this separation of different kinds of law and of the privileging of some kinds of law over others? I would like to bring together here two arguments made in very different contexts—Polanyi’s (1944/1957) characterisation of market societies in terms of a disembedded economy and D’Souza’s (2006) discussion of the differences in the character of law under state regulation and market regulation. In his work The Great Transformation, Polanyi talks about how market societies are characterised by attempts to disembed the economy from society, a process that would also require the demarcation of an autonomous domain called the “economy.” It is perhaps most useful to see these attempts as continuous and never entirely successful (à la Block 2003), and therefore a completely disembedded economy and a purely market society as something always in the making. But assuming for analytical purposes that one can think of a (disembedded) economy, such an economy would require a distinct set of laws for its existence and functioning.

The growth of contract law and the increased importance accorded to it (whether via distinct institutional mechanisms for its enforcement or its privileging vis-à-vis human rights) needs to be understood in this context. The contract form and contract laws are neither new nor restricted to the economic domain; the idea of individuals or entities entering into a relationship on the basis of (what is attributed to be) their own free will and choice, and the need to lay down and enforce the terms of such a relationship, has been a critical function of many older states too. But the increase in international commerce and investment, particularly in the wake of liberalisation and globalisation processes in the latter half of the 20th century, has led to a large variety of contracts—including between nations—and consequently to an increase in the number and complexity of disputes. Examples of the new kinds of contracts include trade agreements under the WTO, regional trade agreements like the North American Free Trade Agreement and bilateral investment treaties (or BITs).

More importantly, the kinds of economic processes and contracts that constitute an important part of the current form of the economy require law to take on particular characteristics, something that D’Souza (2006) refers to as “market regulation.” For the purpose of our discussion, what is crucial about market regulation is the emergence of a whole new set of institutions, legal innovations, and discourses of legitimation that operate on (or privilege) private law principles and of a society wherein “... the contract form of social relations [is taken] to new heights by restructuring the relations between corporations, states and social groups, qua collective/corporate entities as contracting parties” (D’Souza 2006: 16; emphasis in original). The increased emphasis on arbitration as a means of resolving disputes arising out of the new kinds of international trade and investment contracts as also the strict enforcement of contract law in arbitration processes can be seen as examples of this.

The dominance of contract law and of particular kinds of legal institutions/instruments is in keeping with the goals of a market society, but the fact remains that other kinds of laws (related to questions of public interest and human rights) and institutional mechanisms supporting these are also simultaneously present. How, then, are the two kept separate?

Human Rights and BITs

It is useful to consider the case of BITs in India, which is one of the kinds of contracts in which recourse to arbitration is increasingly taking place. India signed its first BIT with United Kingdom in 1994 and has signed 80-odd BITs since then. But as Prabash Ranjan (2014) points out, until about 2010, there was pretty much no discussion in most BITs of the relationship between investment flows and non-investment issues, including the host country’s regulatory power about the environment, decisions about privatisation, and so on. In general, although there has been a fair amount of debate on the implications of the WTO for different sectors and concerns related to livelihoods and democratic processes, similar work in the context of trade/investment treaties outside the WTO (be it BITs or other trade agreements) is far more limited (Bhutani 2015). The actual provisions within these treaties to take account of concerns about public purpose or human rights also leave a lot to be desired. Thus, while BITs often contain a general exception clause that allow countries

to temporarily deviate from their BIT obligations in situations that warrant giving precedence to non-investment objectives over investment protection … in more than 60 Indian BITs these exceptions are very narrowly formulated … to allow deviations from the treaty only in situations of “essential security interest” or in “circumstances of extreme emergency.” (Ranjan 2014: 435)

It is only after 2010 when foreign investors started suing India under different BITs and adverse awards against the Indian government were pronounced in a number of arbitration cases that there has been some attention focused on the inequities associated with BITs. Even then, the concern has been more about the bias in favour of Western countries and less about human rights per se. While there have been changes made recently that explicitly bring in consideration of laws relating to human rights and public interest, the manner in which they are likely to interact with contract law still does not allow much room for optimism. Consider, for instance, the new model BITs treaty adopted in December 2015 which is supposed to be used for renegotiation of existing BITs as well as for negotiation of future BITs and investment chapters in trade agreements or agreements about economic cooperation and partnership. While initial draft versions of this talked about compliance of investors and their investments with the law of the host state, including laws relating to human rights (Dahlquist and Peterson 2016), the version finally adopted only mentions this in a softer form under a corporate social responsibility clause, wherein investors are supposed to

endeavour to voluntarily incorporate internationally recognized standards of corporate social responsibility in their practices and internal policies, such as statements of principle … that may address issues such as labour, the environment, human rights, community relations and anti-corruption. (Article 12 of the Government of India’s Model Text for the Indian Bilateral Investment Treaty)

There are, of course, other avenues to bring in considerations of public policy or human rights. In the context of arbitration, for instance, states which are signatories to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) usually have legislation under which recognition or enforcement of a foreign arbitral award (with the exception of those under the International Centre for Settlement of Investment Disputes) can be prevented on the grounds that the award is contrary to the state’s own public policy. In the Indian case, while the Arbitration and Conciliation Act, 1996 had clauses that allowed applications to be made to the judiciary to set aside an arbitral award and also for courts to refuse to enforce a foreign award when an award is in conflict with the public policy of India (Sections 34 and 48 respectively), this was defined only in terms of fraud or corruption in the making of the award, violation of confidentiality, and restrictions on the admissibility of evidence in other proceedings. However, a recent amendment to the arbitration law—the Arbitration and Conciliation (Amendment) Act, 2015—added two new conditions to define when an award is in conflict with the public policy of India, namely if “it is in contravention with the fundamental policy of Indian law” or “is in conflict with the most basic notions of morality or justice” (Sections 18 and 22). While this amendment seems to provide space to bring together the enforcement of contract laws and laws related to social justice (such as human rights related legislation), the problem is that there is no clarity about what “basic notions of morality or justice” means or the manner in which these would translate into specific domains (whether in terms of legislative and policy frameworks or in terms of actual implementation).

Reconciling Underlying Values

Consider, once again, the case of right to water in India. Although there is strong judicial support for the right to water (with the right to water being read as part of the right to life, a fundamental right under Article 21 of the Indian Constitution), an explicit adoption of a legal right to water along with corresponding rules and policies (as in the South African case) is missing. More importantly, there is no clear discussion of what such a right would imply for different dimensions of a right to water, such as the quantity and quality of water to be supplied, system of water delivery, pricing, long-term sustainability of the resource, and so on. This, in turn, would make it difficult to ensure that trade or investment agreements involving or affecting water or arbitration awards made in case of disputes under these, would be compatible with a right to water. Whether national governments even want to ensure such compatibility or have the bargaining power to do so (particularly in negotiations with other countries) is a separate question.

However, even if the desire and power to integrate different kinds of laws were present, there is a concern that remains about attempts to do so, which is perhaps the most crucial point in explaining the continuing separation between contract law and human rights. This is related to the differences in values underlying laws. For instance, Hugh Collins (2012) expresses scepticism about whether human rights can just be transplanted to the domain of contract law given that there are fundamental differences in values between public law and private law (of which human rights and contract law can be considered examples respectively).3 This is a point that is also linked to the earlier discussion about (the construction of) a disembedded economy requiring a particular form of law. Polanyi argues that in pre-market societies, similar principles underlie social relationships and economic activities; also, these principles do not lead to the creation of institutions which are meant exclusively for one purpose. Further, moving away from such a society is not a linear or automatic process. That is, there is work involved in creating new kinds of institutions and in transforming values and principles (be they in the domain of law or others).

However, Polanyi’s argument does not stop here. He also talks about continuous resistance to the movement to a market society and introduces the idea of a “double movement,” which, as Kari Polanyi Levitt (2005: 172) argues, signals

… an existential contradiction between the requirements of a capitalist market economy for unlimited expansion, and the requirements of people to live in mutually supportive relations in society.

The tension between contract law and human rights—the need to integrate these laws versus actual attempts to separate them and the potential difficulty in reconciling the differences in values underlying them—can hence be seen as reflecting the tension between attempts to move towards a different kind of society and resistance to this movement.

At stake here is also the question of the role of law and the extent to which changes in legal institutions and instruments can be a means of bringing about change in society, as against merely being a reflection of it. Thus, when there is optimism expressed (in Meshel 2015, for instance) about the possibility that investment arbitration tribunals can strengthen and re-enforce human rights norms that may be negatively affected by trade and investment treaties, even when institutions more directly responsible for enforcing such rights have often not done so, what is being hoped is that arbitration institutions and instruments would take on functions beyond the mandate with which they were originally set up. If this contributes towards common values in law across different domains, the separation and importance accorded to a particular form of economy can potentially be questioned.

Whatever one’s opinion about realising this potential, there is little doubt about the need for such a change in various domains, including arbitration. A lot of arbitration today is centred on trade agreements and investment treaties pertaining to crucial resources like oil, gas, energy, and water as well as services that are increasingly essential, such as telecommunications. Hence, it is undeniably important that disputes that arise in this context be resolved by drawing on a wide range of considerations (including, but not limited to, human rights).


1 These include both court judgments and legislative tools. For instance, in December 2014, the Supreme Court refused to interfere in an international arbitration matter and directed the parties to the arbitration tribunal. Similarly, in 2015, the government amended The Arbitration and Conciliation Act, 1996 to encourage arbitration, enable speedy disposal of proceedings, and prevent parties from approaching the court to stall the proceedings (in cases where arbitration is held in India).

2 For instance, India’s Model Bilateral Investment Treaty of 2015 requires (with some qualifications) that investors exhaust “local remedies” (that is, the Indian judicial system) before initiating arbitration.

3 Collins (2012) talks about how in the case of public law, protecting the weaker party is important, while in the case of private law, all parties are considered to be equal; another difference is the greater focus on values of negative liberty in public law and on more positive conceptions of liberty in private law.


Bhutani, Shalini (2015): “The Long Arms of Trade,” India Together, 4 November,

Block, Fred (2003): “Karl Polanyi and the Writing of The Great Transformation,” Theory and Society, Vol 32, No 3, pp 275–306.

Collins, Hugh (2012): “On the (In)Compatibility of Human Rights Discourse and Private Law,” Law, Society and Economy Working Papers 07-2012, London School of Economics and Political Science, Law Department,

D’Souza, Radha (2006): “Dams, ‘Development’ and International Law,” paper presented at the International Environmental Law Research Centre’s Workshop entitled “Water, Law and the Commons,” New Delhi.

Dahlquist, Joel and Luke Eric Peterson (2016): “In Final Version of Its New Model Investment Treaty, India Dials Back Ambition of Earlier Proposals—But Still Favors Some Big Changes,” Investment Arbitration Reporter, 3 January,

Franck, Susan D (2005): “The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions,” Fordham Law Review, Vol 73, No 4, pp 1521–625.

GoI (1996): “The Arbitration and Conciliation Act, 1996,” Ministry of Law and Justice, Government of India, Delhi: Controller of Publications.

— (2015): “Model Text for the Indian Bilateral Investment Treaty,” Ministry of Finance, Government of India,

— (2015): “The Arbitration and Conciliation (Amendment) Act, 2015,” Ministry of Law and Justice, Government of India, Delhi: Controller of Publications.

Levitt, Kari Polanyi (2005): “Karl Polanyi as a Development Economist,” The Pioneers of Development Economics: Great Economists on Development, Jomo K S (ed), New Delhi: Tulika Books, pp 165–80.

Meshel, Tamar (2015): “Human Rights in Investor-State Arbitration: The Human Right to Water and Beyond,” Journal of International Dispute Settlement, Vol 6, No 2, pp 277–307.

Polanyi, Karl (1944/1957): The Great Transformation: The Political and Economic Origins of Our Time, Boston: Beacon Press.

Ranjan, Prabash (2014): “India and Bilateral Investment Treaties: A Changing Landscape,” ICSID Review, Vol 29, No 2, pp 419–50.

Updated On : 6th Feb, 2018


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