The recent tensions between India and China has led New Delhi to introduce a slew of measures restricting Chinese investments into the country, including a ban on 59 Chinese apps such as TikTok, WeChat and CamScanner. Pertinently, the press release stated that the ban follows the available evidence suggesting that through these apps, China is engaged in activities that are “prejudicial to sovereignty and integrity of India, defence of India, security of state and public order”. Earlier, in April, India issued an FDI notification stipulating heightened scrutiny for all inbound investments from neighbouring countries including China, with the objective of protecting its economy during the ongoing pandemic.
Moreover, a Cabinet minister was quoted as saying that Chinese companies would be disallowed from participating in highway joint venture projects and investing in the MSME sector. Do these measures breach India’s international obligations to Chinese investors under the Bilateral Investment Treaty (BIT)? India-China BIT status: The India-China BIT, dated 21 November 2006, came into force on 1 August 2007, mutually promising to protect and promote investments made by nationals of one state (Home State) into the other (Host State). However, this BIT was terminated on 3 October 2018 when India unilaterally repudiated it, seeking to renegotiate the terms based on the new 2015 Model BIT. With India and China not being able to agree upon a new treaty till date, investments after 3 October 2018 do not enjoy any BIT protection.
However, by virtue of a 15-year sunset clause, the terminated BIT protects investments made prior to this date for a period of 15 years. The investor protections under the BIT include the following:
(i) Fair and Equitable Treatment (Article 3): A promise to accord fair and equitable treatment to the Contracting Party’s investment in its territory. This standard generally requires the state to treat the investors in a non-arbitrary manner. It also requires the state to provide a stable and transparent legal environment, while also respecting the legitimate expectations of the investor.
(ii) National Treatment and Most Favoured Nation Treatment (Article 4): A promise not to discriminate between the Contracting Party’s investors and domestic investors in like circumstances, and the Contracting Party’s investors and investors from other countries in like circumstances.
(iii) Right against Expropriation: A promise not to physically deprive the Contracting Party’s investor of their investment or introduce any measure that would harm the value of the Contracting Party’s investment. However, an action by the state with a public purpose is exempt from this rule, provided it is not discriminatory and effective; adequate and prompt compensation is paid to the investor, in such circumstances, to make good such expropriation.
The state’s defences: Besides providing protections to investors, the treaty provides exceptions under which state measures would be precluded from liability. These exceptions are measures aimed at protecting essential security interests (ESI) or taken in circumstances of ‘extreme emergency’ (Article 14). The provision also requires that these measures are non-discriminatory and in accordance with the Host State’s domestic laws applied in a reasonable manner.
For a state to use the defense of ESI under the BIT, it must demonstrate that (i) the threat perceived is legitimate; (ii) meets the threshold of “essential security”; and (iii) the measure has a necessary nexus to the security interests of the state. An analysis of whether a threat falls within the scope of “essential security” is often guided by the definition provided in the BIT itself. However, some BITs, like the India-China BIT, do not provide such a definition. In such cases, guidance is sought from explanations provided under Indian Law and international precedent, including ICJ decisions. International precedents vary, ranging from a limited interpretation by the ICJ in Nicaragua v. USA, which suggests the requirement of a significant military threat, to a more liberal interpretation by an arbitral tribunal in LG&E v. Argentina, which included economic threats as well.
Some BITs incorporate a test of “necessity”, which requires a causal link of the highest order to be established in order to avail of the defence. Such a test is not expressly set out in the India-China BIT and hence it is arguable that it is likely sufficient for India to establish a minimal causal link to show that its measures were taken ‘for’ the protections of an ESI rather than show that it was ‘necessary’ for the protection of an ESI. However, it is crucial for India to establish this causal link based on material evidence.
India can also raise customary international law defences like the ‘Doctrine of Police Powers,’ which precludes an expropriatory measure from being unlawful provided it was adopted in good faith to fulfil a legitimate public welfare objective. To do this, India must overcome the hurdle of establishing that the impugned measures are not discriminatory.
Conclusion: Practically, it is critical for the parties to carefully weigh the consequences of their actions and strength of their claims. Treaty arbitrations take substantial time and money and an award either way can be significantly disruptive. While conducting this analysis, it is helpful to bear in mind factors that a tribunal would weigh while adjudicating FET and expropriation claims, such as the transparency with which the measure was introduced; whether sufficient notice was provided to the investors; permanency of the measure; evidence corroborating the legitimacy of the objective and absence of alternative less restrictive options. It is difficult to predict an outcome as the material evidence likely to be relied upon is not available in public domain; however, it is crucial to flag the above relevant issues.
Anirudh Krishnan / Radha Raghavan
Indian Advocates also qualified in England and New York respectively
(anirudh@aklawchambers.com)