Chinese investments enjoy treaty protection. Beijing can drag New Delhi to tribunals
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The Print | 4 July 2020

Chinese investments enjoy treaty protection. Beijing can drag New Delhi to tribunals

by Prabhash Ranjan

The Narendra Modi government’s decision to ban 59 Chinese apps, and some ministries and states cancelling contracts with Chinese companies might eventually end up in international arbitration as claims brought by investors from China.

One is unsure if these moves, apart from assuaging the nationalistic sentiments of some domestic constituents, will have any tangible economic impact on China. China is contesting the ban arguing it violates obligations that India owes to it under the World Trade Organization (WTO) rules. While the potential violation of WTO rules has been discussed, the ban on the apps and cancellation of contracts also needs to be looked through the prism of international law on foreign investment contained in bilateral investment treaties (BITs).

India-China Bilateral Investment Treaty

India signed a BIT with China that came into force in 2007. This BIT, like all such investment treaties, provides certain rights to foreign investors under international law, such as the right to fair and equitable treatment (FET). The BIT empowers the foreign investor to directly bring claims against the host State before an international arbitration tribunal in case of a dispute. This is known as the investor-State dispute settlement (ISDS). India is currently battling around 20 such dispute claims under different BITs with millions of dollars being claimed as damages. For instance, Vodafone and Cairn Energy are currently battling two ISDS claims against India for imposition of taxes retrospectively.

The India-China BIT stood terminated on 3 October 2018 due to India’s decision to unilaterally denounce the treaty. This unilateral termination had nothing to do with China. It was part of the mass terminations of BITs that the Modi government undertook in 2017 as part of its new BIT policy. Investment treaties with around 60 countries were terminated with the Chinese BIT being one of them. However, as per Article 16(2) of the India-China BIT, in case of unilateral termination, the treaty ‘shall continue to be effective for a further period of fifteen years from the date of its termination in respect of investments made or acquired before the date of termination of this Agreement’.

In other words, the Chinese BIT continues to protect the Chinese investment under international law, provided the investment was made before 3 October 2018. Thus, if any of the current actions of the Modi government, and state governments affects Chinese investments made before the said date, it could trigger ISDS claims against India. Given the fact that the termination date is less than two years back, presumably, a large number of Chinese investments in India continue to enjoy treaty protection. Moreover, the possibility of Chinese investment in India through other countries under different ownership structures and their protection under other Indian BITs cannot be ruled out.

Arbitrariness is an FET violation

Chinese investors may challenge the ban on these apps as a violation of the FET provision of the India-China BIT.

The FET provision, as it has been held in several BIT cases, imposes an obligation on host States not to act arbitrarily. In other words, if States adopt measures on the pretext of public purpose but the real reason is to harm the investor, or if measures are taken in wilful disregard of due process and procedure, such measures shall qualify as arbitrary, and thus breach the FET provision.

A collective ban on 59 apps has been imposed through a press release that relies on Section 69A of the Information and Technology Act. The press release, which is not a legal order, provides vague and generic grounds for banning these apps. Couched in the language of national security, the release says that these apps are prejudicial to sovereignty and integrity of India, defence of India, the security of the state and public order. But, as information technology lawyer Apar Gupta argues, this ban is legally suspect as it appears not to have been imposed as per the procedure laid down in the website blocking rules of 2009. These rules provide for a process of notice, hearing, and a reasoned order before a ban. A departure from these rules is possible if a clear case of emergency is made out. If these processes are not followed, the ban will be arbitrary. Consequently, a Chinese investor can make a strong case that the ban violates India’s FET obligation under the India-China BIT.

Likewise, the cancellation of contracts of Chinese companies could be challenged as arbitrary and thus a violation of the FET obligation owed to Chinese investors. To show that these cancellations are not arbitrary, India will have to prove that there was a justifiable reason for these annulments, and that they have been carried out after following the due process. India has already lost two BIT claims – Devas v India and Deutsche Telekom v India – where it was held guilty of violating the FET provision for arbitrarily cancelling contracts impacting foreign investors without following the due process.

Essential security exception

In case a Chinese investor brings such an ISDS claim, India could try defending its actions under the national security exception provided in Article 14 of the India-China BIT. This provision allows the host State to take measures for the protection of its essential security interests or in circumstances of extreme emergency, provided these measures are adopted after the laws have been reasonably applied on a non-discriminatory basis. Thus, as per the provision under Article 14, India can take actions for the protection of its essential security interests, provided the action is consistent with its domestic laws that are applied reasonably, not arbitrarily. Given the possibility of India’s action being arbitrary under Indian law, it would weaken India’s defence under Article 14 of the India-China BIT.

The Modi government needs to carefully assess its actions by taking into account its international investment law obligations. Or else, the Central government’s attempt to live up to its well-advertised image of a ‘muscular government’ to appease the domestic constituency, might turn out to be a costly affair internationally for India.

Prabhash Ranjan is a senior assistant professor at South Asian University’s faculty of legal studies and author of the book ‘India and Bilateral Investment Treaties: Refusal, Acceptance, Backlash’. Views are personal.

source: The Print