Introduction
The healthy economic relationship between India and the UAE, where there is a cross-border trade of US$83.6 billion in FY2023-24, is buttressed by an elaborate legal system that safeguards investments. To Indian investors, it would be important to manoeuvre within this framework, particularly when there is a dispute. This has dramatically reinforced the ecosystem of dispute resolution with the recent India- UAE Bilateral Investment Treaty (BIT), which went into force on August 31, 2024, providing a fresh way of protecting investments. This paper is an in-depth study of redressal frameworks that are in place and accessible to legal redressal, both at local and international levels, and the strategic recovery mechanisms that can be utilised by Indian investors.
THE LEGAL FRAMEWORK: ONSHORE AND FREE ZONE SYSTEMS
The UAE does not have a single legal system, but a number of different jurisdictions, each of which has its own courts and processes. It is essential to understand this structure because every investor seeking redress must first be aware of it.
- Onshore Courts: The common UAE civil and commercial litigation court system consists largely of civil litigation and draws its motivation from civil law principles. It is a two-level system that is divided into local judicial departments and a federal judiciary. The Emirates of Abu Dhabi, Dubai, and Ras Al Khaimah have their own independent court systems, whereas the remaining emirates (Sharjah, Ajman, Fujairah, and Umm Al Quwain) follow a federal system. These courts usually undertake hearings in Arabic, and the procedure includes a Court of First instance, an appellate Court of Appeal and a Court of Cassation.
- Common Law Free Zones: It is a key characteristic of international investors that the jurisdiction has financial free zones with autonomous common law-based courts. Both the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) have their own laws and courts where proceedings are conducted in English. An example of this is the DIFC Courts, which have a Small Claims Tribunal with claims of up to AED 500,000 and a Court of First Instance with bigger disputes. These courts are the venue of choice for many international commercial contracts because of their familiarity and transparency in the procedures.
The following table summarises the key characteristics of these judicial pathways:
|
Feature |
Onshore UAE Courts |
DIFC/ADGM Courts |
|
Legal Origin |
Civil Law (with Sharia influence) |
Common Law |
|
Primary Language |
Arabic |
English |
|
Key Levels |
Court of First Instance, Court of Appeal, Court of Cassation. |
Court of First Instance (incl. Small Claims Tribunal), Court of Appeal. |
|
Notable Features |
Public court hearings; Judges apply civil codes |
Procedures resemble English CPR; Party-appointed judges; Ideal for international commerce. |
INDIA–UAE BIT 2024: A NEW PARADIGM
The India-UAE BIT 2024[1] is a noteworthy improvement over its predecessor and a foundation of investor protection. It embodies an elegant solution of India, based on its post-2016 Model BIT, to seek to harmonise robust investor protection with the entitlement of the state to regulate.
SUBSTANTIVE PROTECTIONS FOR INVESTMENTS
The treaty provides a specific range of protections, though not as comprehensive as older models:
- Expropriation: It expressly safeguards both direct and indirect expropriation, with definite details on the circumstances of an indirect expropriation and compensation provisions.
- National Treatment: It provides treatment no less favourable to the investor than is given to a domestic investor under circumstances similar to the ones being faced, but it is also subject to carve-outs as part of legitimate regulatory purposes.
- Other Key Protections: These are protection against denial of justice and arbitrary treatment, full protection and security (but not beyond physical security) and guarantees of free transfer of funds.
Interestingly, the 2024 BIT does not include two conventional safeguards: the Fair and Equitable Treatment (FET) provision and the Most-favoured-Nation (MFN) provision. The MFN renders the adaptation of more favourable terms as applied in other treaties signed by India or the UAE for imports by investors.
ISDS MECHANISM
The BIT offers investors a direct channel of claiming against the host state under the international arbitration process, which is termed Investor-State Dispute Settlement (ISDS). The 2024 BIT brings some new procedural characteristics:
- Local Remedies: This is a material precondition that international arbitration may only commence after three years of exhaustion of local remedies by investors in local courts. This compares to the five years in the 2016 Model BIT of India, but is a substantial change in contrast to the 2013 BIT, which did not stipulate such a requirement.
- Ban on Third-Party Financing: The treaty categorically bans third-party financing of arbitration claims, which is one of the strategies to minimise the possible conflict of interest and speculative nature of litigation.
- Anti-Corruption Protections: The BIT stays arbitration where domestic anti-bribery action is undertaken with respect to the investment, which would allow a state to delay disputes by the claim.
- Monetary Compensation Only: Tribunals may not award consequential and future damages, but only actual loss, which can be compensated with monetary reward.
- Enforcement of Awards: Awards under the New York Convention (NYC) are commercial and thus they can be enforced cross-border. The treaty further commits both countries to ensure the enforcement of the treaty under their domestic laws, despite India’s particular reservation concerning the enforcement of NYC awards.
IN INDIA ON PAPER TRAILS: COMPLIANCE
To Indian investors, adherence to Indian law when investing is of extreme importance to avail these protections in future. The Indian government has been increasing its investigation into foreign investments and unreported assets[2].
- Foreign Exchange Management Act (FEMA): It has the Liberalised Remittance Scheme (LRS) as the main legal means through which residents can remit up to 250,000 dollars per financial year to invest overseas. Any payments needed on properties should be made using the approved banking channels; credit card payments made using international credit cards are a breach.
- Tax Compliance and the Black Money Act: Indian residents are to include both global income and foreign assets in their tax returns. Any omission to file those foreign assets, including UAE property, may lead to the filing of the Black Money Act, which will result in a tax amounting to 30 per cent and up to 120 per cent of the tax rate and even prosecution.
- Directorate of Enforcement (ED) Actions: In case suspected undisclosed foreign assets are suspected to be illicit funds, the ED can take action under the Prevention of Money Laundering Act (PMLA) by attaching properties in India and overseas. The recent events, including the raids on the BC Jindal Group, demonstrate the dangers of complicated set-ups along with so-called sham transactions aimed at evading FEMA.
DEVELOPMENT OF STRATEGIC RECOVERY MECHANISMS, AND PRACTICAL GUIDANCE
It is important to approach a dispute proactively and strategically in order to make it successful.
- Pre-Dispute Strategies: The most essential step is to make sure that there is compliance with the investment laws of both India and the UAE in the very beginning. This involves the utilisation of LRS channels, careful documentation and appropriate disclosure of assets. Investors should remember to add a jurisdiction clause to the contract draft in favour of a neutral court, such as the DIFC or ADGM court, to resolve commercial disputes.
- Post Dispute Procedure: In treaty-based claims, investors are forced to go through the three-year compulsory local litigation of the BIT. In other conflicts, the first step is to take action in the relevant UAE court or free zone court. Cooling-off period in most of the investment treaties may also be a time to have a quiet settlement before the actual arbitration.
CONCLUSION
In the UAE, the dispute resolution environment under which Indian investors can invest has developed greatly and is supported by the contemporary and comprehensive 2024 BIT. Although the treaty offers a strong, explicit path to arbitration, it also requires a stronger devotion to trying all local remedies and following high standards of corporate practices.
The convergence between the dual court system of the UAE and the international arbitration system of the BIT provides a complex, yet extensive, legal redressal ecosystem. Long-term success to the Indian investor depends on a two-fold approach: compliance, which is proactive and sufficient to continue enjoying these elite protections; and the foresight in the structure of investment and contracts, to take advantage of the most favourable judicial routes that the UAE may have to offer. Through a good comprehension and a keen navigation within this complex framework, Indian investors will be able to safeguard their assets, and even more importantly, help India to grow sustainably in one of its greatest economic partners.
