Exiles from Diego Garcia protested in force as a five-day Appeal Court hearing began in their fight to return.
The islanders were exiled in the 1970s to make way for a US airbase
Foreign Secretary Margaret Beckett wants to overturn a High Court ruling made last May that said exiling a population was "repugnant".
On Monday her QC, John Howell, said the High Court approach had represented a "revolutionary" legal change that would affect all British overseas territory.
Diego Garcia, in the Indian Ocean, became a US airbase in the 1970s.
Many exiles came to the UK and settled near Gatwick Airport in Sussex when they landed.
A large group of islanders protested outside court as the hearing began.
In court, Mr Howell said the appeal raised issues that would affect "the constitutional relationship between this country and British overseas territories".
He said the High Court had asserted a jurisdiction "to determine what considerations Her Majesty may take into account" and the purposes for which she may legislate.
And he said it had asserted "that Her Majesty may not legislate for such a territory to promote the interests of the UK and in particular its defence and security".
He said the "unprecedented" conclusion was "hard to reconcile" with the remaining British interests overseas.
The island has been used to launch bombing missions in Iraq
In 2000, the High Court ruled the islanders had a right of return to the Chagos Archipelago's 65 islands, but not Diego Garcia itself.
Robin Cook, then Foreign Secretary, said there would be no appeal and a study would look at their possible return.
Fears came from the US that resettlement would compromise security of the island used to launch bombing missions in Iraq and Afghanistan.
In 2004, the British government made an order under the royal prerogative that no person had a "right of abode" in the British Indian Ocean Territory.
Last year's High Court ruling overturned that order and rejected government argument that the royal prerogative, exercised by ministers in the Queen's name, was immune from scrutiny.
The case continues.