BY SUNIL SINGH, FOURTH-YEAR STUDENT AND SOURAV VERMA THIRD-YEAR STUDENT AT HNLU, RAIPUR
Huawei is a Chinese phone-maker company. It is the world’s second largest smartphone supplier with 18% market share. It started its operation in the UK in 2001 and since then it had strong ties with the country. In 2012, The company surpassed Euro 2 billion five-year investment and procurement target for UK, thereby becoming one of Britain’s largest sources of investment from China. The Company invests in R&D partnerships with British universities and works with UK’s top academic institutions.
However, On 15th July, the UK government banned Huawei from its 5G infrastructure, by reversing its January order where Huawei was excluded from participating in sensitive ‘core’ parts of 5G and gigabit-capable networks. According to the order passed in July, the telecom operators by the end of this year had to stop buying any 5G equipment from Huawei and also were directed to remove all the 5G gears installed in their telecom network by the end of 2027. This decision came forth as a result of a report submitted by the National Cyber Security Centre (‘NCSC’) which highlighted some “significant technical issues”. The core issue highlighted in the report was Huawei’s relation with the Chinese govt. This caused reasonable amount of apprehension that Huawei’s equipment could be used by the Chinese govt. for the purpose of conducting espionage.
However, the decision has some repercussions and can backfire against the UK in the form of investment claims resulting from the 1986 UK-China Bilateral Investment Treaty (‘BIT’). The authors through this article attempt to evaluate – whether the level of security contemplated by the BIT between the UK and China is impaired by the govt.’s decision to ban Huawei from participating from its 5g infrastructure. Further, the article analyses the safeguards that the UK could use under the BIT and customary international law in the context of investment arbitrations resulting from such infringements.
Protection against Expropriation
Expropriation is the act of a govt. claiming private property forcibly from the owners, ostensibly to be used for the benefit of the general public. In the context of international investment, an act/measure of state is said to be expropriatory in nature if such an act deprives the foreign Investor from the economical or other benefits arising from his investment. Foreign investors are often protected by an expropriation clause provided in the BIT.
The expropriation clause, as provided in Article 5 of the UK-China BIT, stipulates the host state’s pledge not to forcefully deny the investor of the contracting party of its investment or to implement any action which might adversely affect the valuation of the invested property of the contracting party.
Regardless of the consequences of the individual expropriation cases, in expropriation disputes, tribunals usually look at the overall severity of the conduct of the host state to decide whether or not, the substantial protection under the expropriation clause can be conferred upon the investors. If the tribunal is of the view that an expropriation has taken place, such an action will be in the breach of relevant agreement or treaty unless the owner is not compensated. However, the liability of compensation stands precluded for acts concomitant with public interest, provided that the acts performed are not discriminatory in nature and the investors are duly reimbursed by the host state.
Usually, the state takes the defence of ‘The police powers doctrine’, which basically acts as a frontier safeguard in situations of expropriation. Police powers doctrine signifies powers that reside in the governments., allowing them to take bona fide, non-discriminatory action in general to preserve public welfare. Such rights grant the state the right to control the interests of the public in its jurisdiction, even though the investment is significantly impacted. The UK hence, can defend its act by contending that the measure was introduced as a part of the police forces of the state.
Even though the BIT does not include any specific clause in this respect, as a principle of customary international law, its acceptability is not subject to a specific provision to that effect. Additionally, several ISDS tribunals have also ruled that when operating in execution of their police powers, states do not breach any BIT obligations.
Another defence originating from customary international law is that of ‘necessity’ resulting from Article 25 of the Draft Articles on Responsibility of States for Internationally Wrongful Acts (‘ARSIWA’). Although the presence of urgency as a basis for the avoidance of wrongdoing under international law is no longer questioned, grounds of invocation of Article 25 of ARSIWA have a high threshold to avoid abuse[i]. Various sources of international law (present state policy, rulings of the international forum, and academic writings[ii]) amply support the need to take stringent approach in interpretation of ‘necessity’ as a defence. For instance, in the Rainbow Warrior arbitration[iii], the arbitral tribunal expressed doubt as to the existence of the defence of necessity. It observed that the Commission’s draft article “allegedly authorises a state to take unlawful action invoking the defence of necessity” and identified the commission’s proposal to be “controversial”. The plausibility of this defence may therefore rely on a case-by-case basis, paying attention to the responsibilities from the measures, as well as the circumstances surrounding them such as the scope of the obligation, the degree of the effect, the expediency of the contested measure and the factual conditions surrounding it.
National Treatment and Most Favoured Nation Clause
National Treatment and the Most Favoured Nation Clauses are the two types of status given by one contracting state to another for easy regulation of trade & investment. While under national treatment clause both – goods imported from contracting state and locally produced ones – are treated equally, MFN Clause ensures that one party is treated no less favourably by the respective member states to a treaty than any other member state. In other words, restricts the states from acting in a discriminate manner, under identical conditions, between the investors of the contracting state and local investors or other overseas investors. This means that pursuant to Article 3 of the UK-china BIT, the UK is under an obligation not to differentiate between Huawei and other locally or foreign investors under identical conditions. In order to safeguard UK’s position, the examination that needs to be made here is about interpreting the term ‘like circumstances’. The term ‘like circumstances’ ensures that only investors or investments with similar traits are compared. These conditions include not only competition in the relevant business sector or economic sectors but also other specific conditions, including the legal and regulatory system in place, or if the differential treatment is rendered on the basis of certain legitimate welfare goals[iv] .
Thus, invocation of these clauses requisites a traditional fact-specific interpretation and requires the conditions surrounding the investment disputes to be holistically considered. After looking into situations in entirety, some awards such as Daniel Midland v. United Mexican States, have held that investors or investments, despite being in “identical situations” have been treated unfairly on the basis of their nationality. However, awards have also been made, for instance, in the case of Grand River Enterprises v. the United States of America, where courts have recognised differences in treatment between investors or investments that are plausibly related to valid public welfare goals and also have given weight to whether investors or investments are subject to similar legal requirements according to their conditions.
In addition to investment law, a breach of the status of MFN through the prism of international trade law may theoretically amount to violation of the obligations of the World Trade Organization (‘WTO’) between UK and China. Nonetheless, it is important to note that member nations are entitled to exclude from being governed by these commitments in such matters relating to national security. Under the defence exceptions of Article XXI of the General Agreement on the Trade and Tariffs (‘GATT’), it is noteworthy that the exception is given to any action, which is deemed necessary for the safety of ‘critical security interests’. For instance, in 2019, in a WTO settlement between Russia and Ukraine, WTO affirmed the assertion of a national security exemption under the GATT in order to validate Russia’s trade blockade in breach of some WTO obligations with a regard to national security.
This ban can potentially trigger investment claims against the UK as Huawei already has made its intention to initiate investment claims against Canada, Australia the Czech Republic, if the ban violates its right as a foreign investor. However, this ban was applauded by countries like USA and Australia who already have banned Huawei from their 5G infrastructure. The UK govt. may justify the ban on grounds of national security. However, the BIT provides sufficient space to accommodate Huawei’s claims. It will be interesting to see how these claims will be dealt with by arbitral tribunals or some other quasi-judicial body.
Alternatively, a solution may also be adopted to avoid disputes: instead of blanket-banning Huawei, the UK government may provide Huawei a window of 6 months or 1 year to remove all gears that are susceptible of snooping and replace them with new gears under the strict supervision of NCSC – this may prove to be a win-win situation for both the parties. Howsoever, this idea too seems far-fetched and is unlikely to happen, for UK’s decision is influenced by the US govt., which is already in loggerheads with the Chinese govt. over trade policies.
[i] Commentary to the Articles on the Responsibility of States for Internationally Wrongful Acts, ILC Yearbook 2001/II (2),80 Para 2; CMS V Argentina (n 4) Para 317
[ii] August Reinisch, ‘Necessity in International Arbitration’ (2010) 41 Netherlands Yearbook of International Law 142, Badar AIModarra, ‘The defense of Necessity in International Law and Investor Versus State Dispute Settlement’ (2019) 23 (37) Journal of Legal Studies 78
[iii] France-New Zealand Arbitration Tribunal, 82 I.L.R. 500 (1990)
[iv] Drafter’s Note on Interpretation of “In like circumstances” under National Treatment and Most Favoured Nation Treatment, http’//www.mfat.govt.nz/assets/Trans-Pacific-Partnership/Other-documents/Interpretation-of-In-Like-Circumstances.pdf.