Conflict with China: India’s BIT dilemma

Abhileen Chaturvedi | Updated on August 11, 2020

The commercial measures against China open India to arbitration from foreign investors, implying a heavy financial cost

The world of treaty arbitrations can be uncharitable. A treaty arbitration is essentially a legal mechanism to resolve investor-state dispute before an independent arbitral tribunal, and often comes into play when nations renege upon their obligations under a bilateral investment treaty (BIT). Since 1994, India has executed more than 80 investment treaties with various nations either bilaterally or multilaterally. With the execution of these treaties also came various BIT arbitrations against the Indian government, where the government has had to justify its measures before independent arbitral tribunals. Perhaps, it was these multiple arbitrations that led India to terminate its BITs in 2015-16 and introduce a ‘Model BIT’ as the basis for any future negotiations.

Be it decisions like adopting a solar energy policy (Spain), banning nuclear energy (Germany), plain packaging to curtail smoking (Australia), policy measures to control the effects of recession (Argentina) and so on — countries are often found in the unenviable position of balancing their investment treaties against the greater good. As noble as those measures may sound, nations have had to compensate foreign investors.

India-China tensions

Going by current statistics, Chinese investments in India may well be over tens of billions of dollars. The dragon has not restricted itself to under-priced goods, but zigzagged its way through sectors including banking, energy, infrastructure, services, and software. While China Inc pervaded through India Inc and all seemed hunky dory, the two nations have not exhibited the same level of symbiosis when it becomes to their borders. Tensions between the nations reached a tipping point after the Galwan attacks. Given the current India-China tensions and the subsequent measures taken by the Indian government, it is very likely that a Chinese investor may rely upon the India-China BIT (now terminated) and question such measures.

The counter-offensive started with the government of India banning several mobile applications that originated in China. Few days later, tenders where Chinese infrastructure companies participated were either cancelled or said to be re-tendered in the future. In the telecom sector, too, government companies are now looking at European entities as opposed to the existing set-up where 3G networks mainly comprise equipment manufactured by Shenzhen-based companies. What started at the Centre now seems to have percolated to State governments and local bodies, too. Projects in various States where there is Chinese investment have been stalled. The offensive against Chinese products has become stronger, too, with several politicians calling for boycott of Chinese electronics publicly. The government in fact has gone on to say that it would not allow Chinese companies to participate in highway projects including through joint ventures, and also not allow Chinese investors in the MSME sector.

A BIT offers protection to investors in instances like these, and the China-India BIT is no different. It promises investors that the receiving country shall not expropriate investments (but for a fair and equitable compensation) and accord the same treatment to a foreign investor as it does to a domestic industry. It will also accord the same rights that the receiving country extends to other foreign investors, and should the investments suffer losses due to an armed conflict or war, compensation will be offered. Also, before a claim is made under a BIT arbitration, the BIT itself will mandate exhaustion of local remedies, i.e., litigating before domestic courts.

The China-India BIT, however, states that business concessions granted by the government (for government projects) to an investor may also come within the ambit of the definition of investment under the BIT. This effectively means that a future arbitral tribunal can perhaps decide that claims under a commercial contract with the government may in fact be granted protection under the BIT too — essentially stating that a concessionaire need not litigate in domestic courts but can directly invoke provisions under the BIT. While this may be peculiar to a business concession, given the sentiment that prevails right now, an investor may perhaps argue that it is futile to litigate before domestic courts. Also, in 2015-16, the government came up with the Model BIT. The China-India BIT was terminated but like most BITs, it will remain in force for some time (15 years) and investments made before the termination will continue to be protected.

The measures that India has taken may or may not be questioned before an independent arbitral tribunal. However, there may be other foreign investments that might get affected if a Chinese investment in the country gets expropriated or suffers damage. These foreign investors, too, can initiate BIT arbitration against India. If not dealt with tactfully, India could be at the receiving end of a flurry of arbitrations with the measures being undertaken currently.

The writer is with Economic Laws Practice. Views are personal

Published on August 11, 2020

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