- Investor — Investment — BITs (Bilateral Investment Treaties) — Specialized treaty frameworks — National treatment — Full protection and security — Arbitrary (unreasonable) & discriminatory treatment standard — Fair and equitable treatment standard — Most-favoured-nation treatment (MFN)
In order to protect foreign investors against the political risk resulting from placing their assets under a host country’s jurisdiction, investment treaties stipulate obligations regarding the ‘treatment’ that host countries must give to investors and their investments. Although the treaties do not usually define the meaning of ‘treatment’, that term in its ordinary dictionary sense includes the ‘actions and behaviour that one person takes towards another person’. In other words, by entering into an investment treaty, a state makes promises about the actions and behaviours it will take towards investments and investors of treaty partners.1 The treaty provisions on investor and investment treatment are intended to restrain host country government behaviour and impose a discipline on governmental actions. To achieve this goal, treaties define a standard to which host countries must conform in their treatment of investors and investments. State actions that fail to meet the defined standard constitute treaty violations that engage the offending state’s international responsibility and render it potentially liable to pay compensation for the injury it has caused.
Investment treaties normally contain treatment provisions with respect to numerous matters that investors consider important. One may categorize the various treatment standards included in treaties as ‘general’ or ‘specific’. General standards of treatment apply to all facets of an investment’s activities in the host country. These include host government commitments to grant investors and investments ‘fair and equitable treatment’, ‘full protection and security’, and ‘treatment in accordance with international law’. Specific treatment standards concern particular matters relating to an investment, such as monetary transfers, expropriation, and investor rights in times of war, revolution, or civil disturbance.2 This (p. 229) chapter is concerned with general treatment standards, while succeeding chapters will discuss individual, specific treatment standards.
It should be noted that while investment treaties specify standards for state behaviour towards investors, they generally do not impose standards for the behaviour of investors towards the host country or its government. Presumably, the reason for this is the assumption by treaty negotiators that host country laws and legal institutions are sufficient to ensure proper investor behaviour.
General treatment standards consist of two types: (a) absolute standards, which are not contingent upon specified factors, happenings, or government behaviour towards other investors or persons; and (b) relative standards, which are dependent upon the host government’s treatment of other investments or investors. Examples of absolute standards include guarantees of full protection and security, fair and equitable treatment, or treatment in accordance with the minimum standard of international law. Examples of relative standards are most-favoured-nation treatment and national treatment. Whereas the latter type of standard requires a comparator for its application,3 the former does not.
The present chapter discusses the absolute and relative general treatment standards used most frequently in international investment treaties. These include full protection and security, fair and equitable treatment, minimum treatment according to international law, most-favoured-nation treatment, and national treatment. That these standards exist in one form or another in most investment treaties gives the treaties a strong similarity—indeed, some would say a significant commonality. It must also be acknowledged, however, that not all treaties include all of these general standards and that significant differences exist in the way individual treaties articulate them. For example, particular treaties may grant investments ‘complete protection and security’, ‘full protection and security’, ‘full legal protection and security’, or simply ‘protection and security’. Moreover, some treaties may articulate specific treatment standards as independent commitments, while others may link them to or condition them on another standard. For example, while many early US bilateral investment treaties (BITs) simply required host countries to grant investors ‘full protection and security’, the 2005 US–Uruguay BIT specifies that ‘full protection and security’ requires each party to provide ‘the level of police protection required under customary international law’.4 As a result of these differences, the degree of protection afforded individual investments may vary significantly among treaties. Consequently, persons interpreting investment References(p. 230) treaty provisions should give careful attention to the differing ways individual treaty texts articulate their protections. At the same time, it should be emphasized that treatment standards are almost always expressed in general and even vague terms and thus render the task of applying them to concrete, complex fact situations, like those that usually arise in investment disputes, even more difficult.
(a) In general
In virtually all investment treaties, contracting parties promise to give some degree of ‘protection’ and ‘security’ to the investors and investments of other contracting parties. The precise formulation of that promise varies among treaties. For example, the first BIT ever concluded, the agreement between Germany and Pakistan in 1959, provided that investments by nationals or companies of either party are to ‘enjoy protection and security in the territory of the other party’.5 On the other hand, Article 4(1) of the Germany–Argentina BIT of 1991 states that investments should enjoy ‘full legal protection and full legal security’,6 and Article IV(2) of the Ecuador–El Salvador BIT of 1994 provides for ‘full legal protection’ for the investments of either party’s nationals.7 Article 3 of the China–Qatar BIT of 1999 merely states that the contracting party investments and the activities associated with those investments ‘shall be accorded fair and equitable treatment and shall enjoy protection in the territory of the other Contracting Party’.8 Despite the generality and vagueness of these provisions, they do seem to imply that the host state has an obligation to take measures to protect covered investors and investments from certain negative actions that may affect them.9 Beyond this References(p. 231) basic observation, treaty provisions on full protection and security do little to answer three difficult but essential questions:
1. Against whom is the host state to protect covered investors and investments?
2. Against what actions is the host state to protect investors and their investments?
3. Precisely what measures must a host state take in order to meet its treaty obligations?
To answer these questions, one must consider the historical origins of this standard that has now become a common feature of investment treaties.
(b) Historical origins of the standard
The origin of the terms ‘full protection and security’, ‘constant protection and security’, or simply ‘protection and security’ appears to lie in the bilateral commercial treaties that many countries concluded in the nineteenth and early twentieth centuries. One example is the friendship, commerce, and navigation (FCN) treaties made by the United States during that period.10 Of the twenty-two commercial treaties concluded by the United States before 1920, fourteen contained reference to ‘special protection’ and the remaining eight required ‘full and perfect protection’ of persons’ private property.11 As an illustration, Article 3 of the 1850 FCN treaty between the United States and Brunei provided that His Highness the Sultan ‘engages that such Citizens of the United States of America shall as far as lies within his power, within his dominions enjoy full and complete protection and security for themselves and for any property which they may acquire’ (emphasis added).12 The bilateral treaties of other countries also employed this term.13
Arbitral decisions, judicial decisions, and other forms of international practice have given meaning to the term ‘protection and security’ over the years. Indeed, it is only through jurisprudence that one can fully understand the content of this standard. Most cases involved actions by third persons, such as mobs, revolutionaries, or insurgents, who had physically damaged investments covered under the treaty. Injured investors sought compensation from the host government on the grounds that the government had not taken sufficient measures to protect the investment or the investor. For example, in the Sambiaggio case,14 the References(p. 232) Italy–Venezuela Mixed Claims Commission in 1903 had to adjudicate whether Venezuela was monetarily liable to Italian nationals for damage resulting from the acts of revolutionaries operating in Venezuelan territory. Article 4 of the Italy–Venezuela Treaty of 1861 stated that each state’s citizens should enjoy ‘the fullest measure of protection and security of person and property, and should have in this respect the same rights and privileges accorded to nationals’ of the territory. The umpire in the case declared that he ‘accepts the rule that if in any case of reclamation submitted to him it is alleged and proved that Venezuelan authorities failed to exercise due diligence to prevent damages from being inflicted by revolutionists, that country should be held responsible’.15 He ultimately denied Italy’s claims that the treaty imposed strict liability.
Probably the most authoritative case interpreting the FCN treaty provisions on protection and security was a 1989 decision of a chamber of the International Court of Justice (ICJ) in the ELSI case.16 In that case, the United States brought a claim against Italy under the US–Italy FCN treaty for injuries incurred by Raytheon, a US company, with respect to its subsidiary in Sicily. A factory of Raytheon’s subsidiary in Palermo was taken over by workers and then requisitioned by the mayor in order to forestall its closure by the investor for economic reasons. The United States alleged that such actions violated Italy’s obligation to give US investors ‘the most constant protection and security’, as required by Article V(1) of the FCN treaty. The United States did not contend, however, that the obligation constituted a guarantee resulting in strict liability. Instead, it pointed to the ‘well-established aspect of the international standard of treatment … that States must use “due diligence” to prevent wrongful injuries to the person or property of aliens within their territory’. The ICJ Chamber found that the Italian government had taken adequate measures to protect the investor and its property, stating that ‘[t]he reference in Article V to the provision of “constant protection and security” cannot be construed as the giving of a warranty that property shall never in any circumstances be occupied or disturbed’.17
In general, jurisprudence relating to the FCN provisions on protection and security recognizes that this standard requires host countries to take steps to protect investors against physical injury to their persons or properties, whether by government agents or third persons. However, the FCN provision does not make the host state a guarantor of the safety of the investor or its property. It requires only that the host state exercise due diligence in carrying out its obligations under the treaty. As one commentator has observed, the decisions of tribunals and the other sources offer no definition of ‘due diligence’, noting: ‘No doubt the application of this standard will vary according to the circumstances, yet, if “due diligence” be taken to denote a fairly high standard of conduct the exception will overwhelm the rule.’18 A host state satisfies its due diligence obligation when it References(p. 233) takes all the reasonable measures of protection that a well-administered government would take in a similar situation.19
(c) Full protection and security in the modern era
With the development of bilateral and other investment treaties since 1960, the inclusion of provisions granting investors some form of protection and security has become standard. It can thus be found in countless BITs, NAFTA,20 the Energy Charter Treaty (ECT),21 and the 2009 ASEAN Comprehensive Investment Agreement,22 among others. These provisions have also been the basis of several investor–state arbitrations, and so arbitral tribunals have had to interpret and apply them in a new era. In doing so, contemporary tribunals have relied on the jurisprudence interpreting FCNs to a significant extent but have also extended the scope of protection in certain instances.
The first such BIT case was Asian Agricultural Products Limited v Sri Lanka (AAPL).23 In AAPL, an ICSID tribunal considered the claims of a UK investor in shrimp farming in Sri Lanka which had suffered injuries as a result of the destruction of its facilities by Sri Lankan security forces during an alleged operation against rebels. The claimant maintained that the UK–Sri Lanka BIT’s provision guaranteeing ‘full protection and security’ went beyond the minimum standard of customary international law and imposed an unconditional obligation of protection on the host country. Therefore, failure to comply with the obligation entailed ‘strict or absolute liability’ for the host state once damage to the investor’s property was established. In response, Sri Lanka contended that the ‘full protection and security’ standard incorporates, rather than supplants, the customary international legal standard of responsibility requiring due diligence on the part of states and reasonable justification for the destruction of property, but not References(p. 234) imposing strict liability. A central issue throughout the case was the standard of liability to be applied to the Sri Lankan security forces.
The tribunal unanimously rejected the UK investor’s contentions that the ‘full protection and security’ standard imposed ‘strict liability’ on the host state; however, a majority of the arbitrators did find the Sri Lankan government responsible for the property destruction under the customary international law standard requiring ‘due diligence’ protection from the host state. The tribunal acknowledged that customary international law contemplated a ‘sliding scale of liability related to the standard of due diligence’. This scale would range from the older ‘subjective’ criteria that take into account the relatively limited existing possibilities of local authorities in a given context to an ‘objective’ standard of vigilance in assessing the required degree of protection and security with regard to what one should legitimately expect from a reasonably well-organized modern state with respect to the level of security afforded to foreign investors.24 Applying this reasoning to the facts of the case, the tribunal concluded that the Sri Lankan government could reasonably have used other means than those employed by its troops to exclude suspected rebel elements from the shrimp farm staff. Further, those other actions would have minimized the risk of death and destruction in the counter-insurgency operation. The tribunal also found that the failure to take such precautionary measures was especially significant because such measures fall within the normal exercise of governmental inherent powers. The tribunal concluded that Sri Lanka, both through inaction and omission, ‘violated its due diligence obligation which requires undertaking all possible measures that could be reasonably expected to prevent the eventual occurrence of killings and property destructions’.25
the obligation incumbent upon Zaire is an obligation of vigilance, in the sense that Zaire as the receiving State of investments made by AMT, an American company, shall take all measures necessary to ensure the full enjoyment of protection and security of its investment and should not be permitted to invoke its own legislation to detract from any such obligation. Zaire must show that it has taken all measure of precaution to protect the investments of AMT on its territory. It has not done so … (emphasis added).28
A similar result can be found in Wena Hotels Ltd v Arab Republic of Egypt,29 in which an ICSID tribunal considered a UK investor’s claim under the UK–Egypt BIT. The case concerned the seizure of a hotel by its employees. Relying solely on the standards developed in the AAPL and AMT cases, the tribunal found Egypt responsible for the failure to accord the investment ‘fair and equitable treatment’ and ‘full protection and security’ because it did not take any action to prevent the seizures or to immediately restore control over the hotel to Wena.
A finding of liability for failure to provide promised protection and security is necessarily fact driven. It must be based on the details of the threat as well as the government’s response to that threat. The burden of proving the facts that constitute the threat, the nature and inadequacy of the government’s response, and the connection of these factors to the injury suffered by the investor all rest on the claimants. Failure to carry that burden will result in a denial of government liability. For example, in the case of Técnicas Medioambientales Tecmed SA v United Mexican States,30 a Spanish company that had invested in a Mexican waste disposal facility brought a claim under the Spain–Mexico BIT. It alleged that Mexico had breached its obligation to provide ‘full protection and security’ from various social movements, disturbances, and demonstrations against the investor’s activities. The investor claimed that Mexican authorities had encouraged the community to react adversely to the landfill and its operation. The investors also asserted that the authorities did not act as quickly, efficiently, and thoroughly as they should have to prevent or terminate the adverse actions of the local population. The tribunal found that the claimant failed to provide sufficient evidence to establish a causal link between the public protests and Mexico’s inaction or to show that Mexico acted unreasonably under the circumstances.31 Like many previous tribunals, the tribunal concluded that ‘the guarantee of full protection and security is not absolute and does not impose strict liability upon the State that grants it’.32
A lack of evidence led to similar results in Eureko v Poland,33 which involved the alleged harassment and intimidation of the investor’s local representatives, as well as in Noble Ventures v Romania,34 which concerned protests and demonstrations by employees.
References(p. 236) Traditionally, tribunals have interpreted provisions guaranteeing protection and security as protecting investors and their investments from physical injury caused by the actions of host governments, their agents, or third parties. The US–Uruguay BIT quoted earlier appears to adopt this position by making explicit that ‘“full protection and security” requires each Party to provide the level of police protection required under customary international law’.35 At the beginning of the twenty-first century, a few cases have sought to expand the term’s scope to include protection against allegedly unjustified governmental actions that injure an investor’s legal rights but cause no physical injury. The first such case to take this position was CME Czech Republic v Czech Republic,36 a dispute brought under the Netherlands–Czech Republic BIT in which the investor claimed that certain acts and omissions of the Czech Media Council (a quasi-governmental media regulatory body) amounted to a violation of the obligation to provide full protection and security. The tribunal found that the Media Council’s conduct was aimed at removing the security and legal protection from the investor’s investment and so violated the standard of full protection and security. The tribunal stated: ‘The host State is obligated to ensure that neither by amendment of its laws nor by actions of its administrative bodies is the agreed and approved security and protection of the foreign investor’s investment withdrawn or devalued.’37
The decision in CME could be seen as a strong precedent for the expansion of the full protection and security clause to cover non-physical injuries sustained by investors. However, its precedential force would seem to be weakened by two factors. First, in the related case of Lauder v Czech Republic,38 which involved the same parties and the same set of facts as in CME, the tribunal found no violation of the full protection and security clause. Second, the CME tribunal did not provide a historical analysis of the concept of full protection and security, failed to give any clear reason as to why it departed from the historical interpretation traditionally employed by courts and tribunals, and instead chose to expand the concept to cover non-physical actions and injuries.39
Other cases have nonetheless followed the approach of CME. In Azurix v Argentina,40 a US investor argued that the limits of ‘full protection and security’ were not confined to physical protection but also included the kind of protection described in CME. The investor alleged that Argentina breached the standard in question by failing to apply the relevant regulatory framework and the concession References(p. 237) agreement applicable to the claimant’s investment. Argentina thereby destroyed the security provided to those investments. In response, Argentina contested the relevance of the AAPL and AMT cases on the grounds that they involved physical destruction of the investor’s facilities by the armed forces. As for the relevance of CME, it pointed out that relying on CME was questionable without referring to Lauder, where, on the same facts, the tribunal reached the opposite conclusion. As a final argument, Argentina requested that the tribunal consider that during the period under review the country was undergoing the worst economic, social, and institutional crisis in its history.
The cases referred to above show that full protection and security was understood to go beyond protection and security ensured by the police. It is not only a matter of physical security; the stability afforded by a secure investment environment is as important from an investor’s point of view. The Tribunal is aware that in recent free trade agreements signed by the United States, for instance, with Uruguay, full protection and security is understood to be limited to the level of police protection required under customary international law. However, when the terms “protection and security” are qualified by “full” and no other adjective or explanation, they extend, in their ordinary meaning, the content of this standard beyond physical security.43
Thus, Azurix seems to suggest that the omission of the words ‘full’ or ‘fully’, which are included in some investment treaties, restricts the scope of protection to physical security and protection but that the inclusion of those words expands the scope of protection to cover non-physical injuries. On the other hand, in the later case of Parkerings-Compangiet AS v The Republic of Lithuania,44 the tribunal took a different view, stating: ‘It is generally accepted that the variation of language References(p. 238) between the formulation “protection” and “full protection and security” does not make a difference in the level of protection a host State is to provide.’45
It is difficult to understand how the physical security of an intangible asset would be achieved. In the instant case, ‘security’ is qualified by ‘legal’. In its ordinary meaning ‘legal security’ has been defined as ‘the quality of the legal system which implies certainty in its norms and, consequently, their foreseeable application.’ It is clear that in the context of this meaning the Treaty refers to security that is not physical. In fact, one may question given the qualification of the term ‘security’, whether the Treaty covers physical security at all. Arguably it could be considered to be included under ‘full protection’, but that is not an issue in these proceedings.47
Based on this textual interpretation of the standard, the tribunal concluded that Argentina’s initiation of the renegotiation of the contract constituted a violation of its obligations under the BIT because it was done for the sole purpose of reducing its costs, was unsupported by any declaration of public interest, and affected the legal security of Siemens’ investment. Moreover, the qualifying adjective ‘legal’ was meant to extend the scope of the full protection and security clause. One may question the tribunal’s reasoning regarding the emphasis it placed on the fact that intangible assets are not subject to physical injury. Merely because some assets are subject to physical injury and others are not does not necessarily mean that a treaty’s contracting parties intended to depart from the traditional definition and scope of full protection and security. One could equally well conclude from reading the treaty’s provisions that the contracting parties only intended to protect assets from physical injury that are capable of physical injury.
Some awards since the CME decision have maintained the more traditional approach to interpreting full protection and security. In Saluka Investments BV References(p. 239) (The Netherlands) v The Czech Republic, the tribunal determined that the Czech Republic did not violate the Netherlands–Czech Republic BIT when it took measures to stop trading in the claimant’s securities. Under the BIT, investors were promised ‘full security and protection’. In reaching its decision, the tribunal stated: ‘The practice of arbitral tribunals seems to indicate however that the “full protection and security clause” is not meant to cover just any kind of impairment of an investor’s investment but to protect more specifically the physical integrity of an investment against interference by the use of force.’48 The tribunals in BG v Argentina,49 PSEG v Turkey,50 Rumeli v Kazakhstan,51 and Suez, Sociedad General de Aguas de Barcelona SA, and Vivendi Universal SA v The Argentine Republic52 reached a similar conclusion. Many cases since, however, have found that full protection and security does extend beyond physical protection.53
In addition to the apparent divergence of views on the scope of the full protection and security clause, it would seem that the treaty provisions and cases represent two different views of the nature of full protection security. On the one hand, some, such as the tribunal in Saluka, view it as part of a minimum standard of international law elaborated in customary international law. On the other hand, some, such as the tribunal in CME, view it as an independent, self-contained treaty standard to be interpreted without reference to the limitations of customary international law. The NAFTA Free Trade Commission, which is empowered under the NAFTA treaty to make authoritative interpretations of the treaty, has sought to clarify the issue by opting for the traditional approach. In 2001, it issued such an interpretation for the term ‘full protection and security’ as found in Article 1105(1) of NAFTA: ‘The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens’.54
References(p. 240) (d) Conclusion
In reviewing the jurisprudence related to the meaning of the term ‘full protection and security’ and the variations of the term found in investment treaties, one may conclude the following:
1. The core element under this standard is an obligation on the part of a contracting state to exercise due diligence in providing physical protection and security from injurious acts by government agents or third parties to the investor and its investment. The standard imposes an objective obligation that must not be less than the minimum standard of vigilance and care required by international law. Qualifying words such as ‘constant’ or ‘full’ that are found in many treaties might strengthen the required standard of ‘protection and security’ by requiring a standard of ‘due diligence’ higher than the ‘minimum standard’ of general international law.
2. The due diligence obligation requires a host state to undertake all measures that could be reasonably expected to prevent damage to foreign investments. Since due diligence means, according to the cases and commentators, ‘nothing more nor less than the reasonable measures of prevention which a well-administered government could be expected to exercise under similar circumstances’,55 it would seem that a state’s lack of resources or the existence of crisis conditions are not defences to a state’s obligation to meet this objective standard. A state may breach its obligation by action, failure to act, omission to act, or by instigation or connivance. Moreover, a state may not absolve itself of international responsibility arising out of a treaty violation by invoking its legislation as a defence.
3. The nature and scope of the protection and security standard under a given treaty depends on its precise wording and its place in the treaty relative to other standards of investment treatment.
4. Certain arbitral cases indicate that protection may be expanded to cover non-physical injuries caused by host states or their instrumentalities. Thus, the host state may be held responsible for the failure to provide ‘legal security’, which is defined by tribunals as the quality of the legal system and particularly the certainty of its norms and their foreseeable application. Additionally, the interrelationship of ‘fair and equitable treatment’ and ‘full protection and security’ might allow for full protection and security to be breached without physical violence or damage; however, the force and durability of this trend is not yet clear or certain.
Virtually all investment treaties contain promises by the contracting parties to give ‘fair and equitable treatment’ to investors and the investments of other contracting parties. Although the precise formulation of these promises of fair and equitable treatment and the conditions attached thereto vary considerably among treaties, fair and equitable treatment is a core concept embedded in nearly all international investment agreements. Indeed, one might say that it represents the ‘golden rule’ of investment treaties.
While the term ‘fair and equitable’ is vague and ambiguous on its face and is never defined within the treaties themselves, it is invoked so often in contemporary investor–state arbitrations that one scholar has labelled it ‘an almost ubiquitous presence’ in investment litigation.56 Its undefined and potentially elastic nature has made it a favourite of aggrieved investors and their lawyers when seeking compensation for the allegedly injurious acts of host country governments. Indeed, some have claimed that a majority of successful claims in investor–state arbitrations have been based on the fair and equitable clause.57 As a result of its wide use, tribunals have interpreted and applied the fair and equitable standard in a large number of arbitral cases, and scholars have analysed and commented upon it extensively.
Unlike the full protection and security clause, which dates from the development of friendship, commerce, and navigation treaties in the nineteenth century, the concept of fair and equitable treatment in investment treaties has its origins in the post-World War II era. Whereas the concept of full protection and security was developed within treaties whose fundamental purpose was to facilitate trade, the fair and equitable treatment standard arose within international efforts to foster international investment specifically. These early developments took place at both the multilateral and bilateral levels.
Commentators58 seem to agree that the fair and equitable treatment standard became part of the international legal landscape with the attempts to establish an International Trade Organization (ITO) through the Havana Charter of 1948 after World War II. In Article 11(2), the Havana Charter provided that the ITO had authority to make recommendations for and promote bilateral or multilateral agreements on measures designed: ‘(i) to assure just and equitable treatment for the enterprise, skills, capital, arts and technology brought from one Member country to another’ (emphasis added).59 The ITO would never become a reality due to References(p. 242) the failure of certain countries to ratify it,60 but the concept of just and equitable treatment and fair and equitable treatment persisted in subsequent efforts to shape multilateral frameworks for investment. Such efforts can be seen in the failed 1948 Economic Agreement of Bogota among Latin American States,61 the private initiative in 1959 known as the Abs-Shawcross Draft Convention on Investment Abroad,62 and the 1963 OECD Draft Convention on the International Protection of Foreign Property, subsequently revised in 1967.63
Although none of these multilateral efforts resulted in an enforceable treaty, their discussion and elaboration of the fair and equitable concept seem to have implanted the idea into the minds of the epistemic community of international lawyers and negotiators, who would become a principal channel for its diffusion and development among countries. Eventually, these ideas found their way into national programmes to negotiate BITs, and through this process the fair and equitable treatment standard has become a principle of international law and a fundamental norm of the emerging global regime for international investment. Indeed, one would say that fair and equitable treatment is, to employ Hans Kelsen’s concept from his Pure Theory of Law (1934), the grundnorm or basic norm of the investment treaty system.
The first country to adopt the fair and equitable concept in treaty practice was the United States. With the expansion of American investment abroad after World War II, the United States negotiated a series of modern friendship, commerce, and navigation (FCN) treaties whose primary goal was to protect US foreign investments by obtaining treaty commitments from other countries on new absolute standards of investment treatment, one of which was ‘equitable treatment’. For example, US FCN treaties with Uruguay and Ireland contained the obligation to accord ‘equitable’ treatment to the capital of nationals and companies of the other party.64 Subsequent FCN treaties routinely employed the term ‘fair and equitable treatment’ in their texts.65
European countries launched their programmes to negotiate BITs around 1960 and the fair and equitable treatment standard would eventually also become a References(p. 243) basic feature of those agreements. For example, in the period from the early 1960s to the early 1990s, the fair and equitable treatment standard was incorporated into over 300 BITs. One study of 335 of these treaties found that only twenty-eight did not expressly include the standard and 196 combined the fair and equitable standard with the national treatment and most-favoured-nation treatment standards.66
In recent years, the number of capital-exporting countries that have proposed draft BITs for negotiations with their capital-importing counterparts has broadened, so that countries such as Chile and China, not traditionally regarded as capital-exporting states, now have model BITs that incorporate norms of fair and equitable treatment. BITs between developing countries, such as Peru and Thailand, the United Arab Emirates and Malaysia, and Argentina and Chile, as well as those between states in transition and developing countries, such as Bulgaria and Ghana and Russia and the Republic of Korea, are additional evidence of the concept’s broad acceptance. There are still deviations in practice, but the inclusion of the fair and equitable standard is clearly a dominant trend in investment treaty-making.67
(b) Formulation of the standard
The precise formulation of the fair and equitable standard varies among investment treaties. In some treaties, the standard is given a prominent and independent position at the beginning of the general treatment clauses. A number of French treaties, as well as Belgium–Luxembourg and Swedish agreements, adopt this approach. German BITs, on the other hand, tend to refer to the standard in the admission clause.68 In still other treaties, the fair and equitable treatment standard is combined with provisions on the protection and security of the investment, as is the case in UK and US treaties. Yet other treaties have combined the clause with provisions prohibiting discriminatory measures, or with national and most-favoured-nation standards.69 NAFTA includes it as part of the section discussing the protection to be accorded under international law. Thus, Article 1105(1) of NAFTA provides: ‘Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.’
A treaty that offers fair and equitable treatment and combined national and most-favoured-nation treatment provides foreign investors with both References(p. 244) non-contingent and contingent forms of protection. From the perspective of the investor, the fair and equitable component establishes an important fixed reference point because it provides an apparently definite standard that will not vary according to external considerations—its content turns solely on what is fair and reasonable in the circumstances. The fair and equitable standard also prevents discrimination against the beneficiary when discrimination would amount to unfairness or inequity under the circumstances. Simultaneously, national and most-favoured-nation treatment, as contingent standards, protect investments by ensuring equality or non-discrimination in relation to investments by other persons. A foreign investor might believe that even if a state promises protection under national and most-favoured-nation treatment standards that level of protection is insufficient because nationals and investors from the most favoured nation are themselves receiving inadequate protection. In such cases, the fair and equitable treatment standard helps to ensure that the investor will receive a minimum level of protection based on notions of fairness and equity.70
(c) The complexities of interpreting and applying the standard
Interpreting the fair and equitable standard and applying it to the kind of complicated fact situations that usually present themselves in investor–state disputes are not easy tasks. Indeed these tasks are complicated by at least three factors. First the term ‘fair and equitable’ is, one may say without exaggeration, maddeningly vague, frustratingly general, and treacherously elastic. Second, the treaty provisions and the agreements in which the terms are embedded offer no definition for them, nor any real guidance on how to apply them. Third, despite the abundant scholarly commentary on the subject and a growing volume of arbitral decisions, application of the fair and equitable standard is so tied to the facts of the specific cases as to limit the utility of the arbitral decisions and doctrinal analysis.
For persons attempting to apply the treaty standard, one initial question is whether the term ‘fair and equitable’ embodies a single standard or two distinct standards, one concerning fairness and the other equity. As a matter of practice, the two words are employed as a single standard of treatment. For one thing, most treaty texts and other instruments providing for fair and equitable treatment for investments combine the two words to refer to a single treatment standard—‘fair and equitable treatment’. For example, the model BITs prepared by Chile, China, France, Germany, the United States, and the United Kingdom, as well as regional instruments such as NAFTA, the 1993 Treaty Establishing the Common Market for Eastern and Southern Africa (COMESA), the 1994 ECT, and the 2009 ASEAN Comprehensive Investment Treaty all use the phrase ‘fair and equitable treatment’ as part of a single concept. An UNCTAD study concluded that this fact points to ‘fair and equitable treatment’ being a single standard and not two separate standards. Two considerations support this view. First, the consistency References(p. 245) with which states have linked the two terms in the verbal formula of ‘fair and equitable’ treatment supports the view that states believe there is a single standard. The history of the term’s use in various efforts to draft a multilateral treaty in the post-World War II era further supports this view. Second, if states intended ‘fair and equitable’ to refer to two separate standards, they would have made that meaning explicit in the treaty texts. No state has chosen to do so. They could, for example, set out the fairness standard in one treaty provision, and the equity standard in another. The fact that they have not done so indicates that the contracting states intended the phrase ‘fair and equitable treatment’ to connote a single standard.71
One may speculate as to whether a promise in an investment treaty of ‘equitable’ treatment or ‘just and equitable’ treatment grants weaker legal protection to investors than a commitment to ‘fair and equitable’ treatment. However, up to this point there seems to be little basis for making such a distinction. For one thing, a reference to fairness and equity together would seem to afford investors at least as much protection as ‘equitable’ treatment. Moreover, in view of the similarity in meaning between fairness, on the one hand, and equity, on the other, in the context of investment relations it is difficult to identify ways in which the combination of the two provides greater protection in practice than the equitable standard alone. Similarly, while the term ‘just and equitable’ treatment occurs in some treaties, it is difficult to determine how this formulation differs in substance from the fair and equitable standard.72
An examination of treaty practice, jurisprudence, and scholarly commentary reveals two different conceptions of the nature of the fair and equitable standard: (1) that fair and equitable treatment merely reflects the international minimum standard required by customary international law; or, (2) that the standard is autonomous and additional to general international law. Let us examine each of these views briefly.
(i) Fair and equitable treatment as the international minimum standard
As was discussed in Chapter 3, the traditional position of western governments and commentators has been that states owe aliens and their property a certain minimum level of treatment regardless of the treatment each state gives to its own nationals. Treatment short of this required minimum creates state responsibility for any resulting injuries. One view of the fair and equitable treatment standard is that it merely refers to that minimum international standard and does not give investors any additional rights. This position has (p. 246) often been advanced by developing countries, which have sought to limit the scope of the fair and equitable treatment standard. For example, during the negotiations for the Draft United Nations Code of Conduct on Transnational Corporations, it has been claimed that the Group of 77, which is constituted exclusively of developing countries, collectively took the position that the fair and equitable treatment language was equivalent to the international minimum standard.73
2. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments. The concepts of ‘fair and equitable treatment’ and ‘full protection and security’ do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights.74
Canada has taken a similar approach in its model Foreign Investment Protection and Promotion Agreement and recent treaty practice.75
Article II(3)(a) of the [US–Estonia] BIT requires the signatory governments to treat foreign investment in a ‘fair and equitable’ way. Under international law, this requirement is generally understood to ‘provide a basic and general standard which is detached from the host State’s domestic law.’ While the exact content of this standard is not clear [citing References(p. 247) Brownlie], the Tribunal understands it to require an ‘international minimum standard’ that is separate from domestic law, but that is, indeed, a minimum standard.77
In Occidental v Ecuador,78 the tribunal asked ‘whether the fair and equitable treatment mandated by the Treaty is a more demanding standard than that prescribed by customary international law’ and concluded that ‘the BIT standard was not different from the minimum standard required under customary international law concerning both the stability and predictability of the legal and business framework of the investment’.79
The most significant and explicit adoption of the concept of fair and equitable treatment as a minimum international standard is found in the text of NAFTA and related practice. Article 1105(1) of NAFTA, entitled ‘Minimum Standard of Treatment’ states: ‘Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.’
Two elements of this text reveal its conceptual basis. The first is its heading, the ‘Minimum Standard of Treatment’, which is a clear reference to customary international law. The second is the inclusion of the fair and equitable treatment standard in referring to international law (‘international law, including fair and equitable treatment’). Both these elements indicate that the NAFTA considers the fair and equitable treatment as part of the minimum standard of treatment under international law, not autonomous from it.80
In some cases, the breach of a rule of international law by a host Party may not be decisive in determining that a foreign investor has been denied ‘fair and equitable treatment’, but the fact that a host Party has breached a rule of international law that is specifically designed to protect investors will tend to weigh heavily in favor of finding a breach of Article 1105.82
The tribunal in Pope & Talbot83 was even more explicit. The tribunal discussed the issue of the relationship between Article 1105 of NAFTA and customary international law at some length, and found that the fairness elements in Article 1105 References(p. 248) were additional to the requirements imposed by international law. It based this conclusion on the view that the language of Article 1105 grew out of bilateral treaties that had conceived of the fair and equitable standard as extending beyond the minimum international law standard. According to the tribunal, ‘the language and evident intention of the BITs makes the discrete (i.e. additive) standards of interpretation the proper one. A contrary reading would do violence to the BIT language’.84 It followed that ‘compliance with the fairness elements must be ascertained free of any threshold that might be applicable to the evaluation of measures under the minimum standard of international law’.85
Minimum Standard of Treatment in Accordance with International Law
1. Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party.
2. The concepts of ‘fair and equitable treatment’ and ‘full protection and security’ do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.
3. A determination that there has been a breach of another provision of the NAFTA, or of a separate international agreement, does not establish that there has been a breach of Article 1105(1).86
In a subsequent decision on damages,87 the tribunal in Pope & Talbot criticized the FTC’s power to issue the Interpretation88 as well as its correctness,89 but reluctantly accepted the FTC’s Interpretation.90 Later NAFTA tribunals in the Mondev,91 UPS,92 ADF,93 and Loewen94 cases relied on the FTC’s Notes of Interpretation in applying the fair and equitable standard. Nonetheless, some scholars have argued that the concept of fair and equitable treatment in NAFTA has little application to the interpretation of other investment treaties. The reason is that the NAFTA standard is expressed in a provision entitled ‘Minimum References(p. 249) Standard of Treatment’, which is not widely used in other treaties, and because NAFTA, unlike other treaties, specifically states that the fair and equitable standard falls within the international law minimum treatment standard. Moreover, other treaties have not been subject to an authoritative interpretation like that issued by the FTC.95
(ii) Fair and equitable treatment standard as an autonomous standard additional to international law
Many scholars and non-NAFTA tribunals have concluded that the fair and equitable standard, when expressed without qualification or condition, is an autonomous, additional standard whose scope is not limited by the minimum standards required by international law. According to this view, the fair and equitable clause imposes a higher standard of treatment on host states than customary international law does. For example, FA Mann states:
The terms ‘fair and equitable treatment’ envisage conduct which goes far beyond the minimum standard and afford protection to a greater extent and according to a much more objective standard than any previously employed form of words. A tribunal would not be concerned with a minimum, maximum or average standard. It will have to decide whether in all circumstances the conduct in issue is fair and equitable or unfair and inequitable. No standard defined by other words is likely to be material. The terms are to be understood and applied independently and autonomously.96
Various arguments support this view. First, if states and investors believed that the fair and equitable standard was entirely interchangeable with the international minimum standard, they could have stated so clearly in their investment treaty texts; instead, most investment instruments do not make an explicit link between the two in the way that NAFTA has done. Therefore, one may reasonably infer that most contracting states do not believe that fair and equitable treatment is implicitly the same as the international minimum standard. Second, attempts to equate the two standards fail to take into account the significant historical debate between developed, capital-exporting countries and developing capital-importing countries concerning the very existence of the international minimum standard. While developed countries have strongly supported the existence of a minimum international standard, many developing countries have denied its very existence in customary international law. Against this uncertain background, it is difficult to assume that countries participating in investment treaties intended to incorporate the international minimum standard into their treaties without expressly stating so.97 One may therefore conclude that the fair and equitable standard References(p. 250) is autonomous and is not necessarily equivalent to the international minimum standard. Indeed, in view of the various historical challenges to the international minimum standard (as discussed in Chapter 3), and the fact that capital-exporting countries have been the driving force behind the investment treaty movement, it is likely that the fair and equitable treatment provision is intended to be a higher standard of protection than that provided under the disputed international minimum standard. The inclusion of the fair and equitable standard, unknown to customary international law prior to the advent of investment treaties, seems to be intended to provide investors with a basic level of protection in situations where the other substantive provisions of international and national law are inapplicable.98 Its function in the treaty can thus be seen as filling gaps not covered by other treaty provisions.99 It also serves to guide the interpretation of other treaty provisions and assure that the general standard of fair and equitable treatment of foreign investment, a fundamental treaty goal, is attained.
These arguments are weakened, however, by the fact that neither the texts of individual BITs nor the available negotiating history demonstrates a clear, mutual intent by the contracting parties to adopt a standard that is higher than that required by customary international law in specific treaties.
Regardless of the different arguments on this issue, it must be admitted that the minimum international standard and the fair and equitable treatment standard overlap significantly with respect to issues like arbitrary treatment, discrimination, and unreasonableness. Moreover, the presence of a provision assuring fair and equitable treatment in an investment instrument does not automatically incorporate the international minimum standard for foreign investors. On the other hand, as at least one tribunal has suggested, the difference between the two standards may for all practical purposes be more apparent than real.100 Indeed, one might say that for the purpose of applying and interpreting a fair and equitable clause in an investment treaty that makes no reference to the minimum international standard, the debate is largely irrelevant. When a claimant invokes the fair and equitable provision of a treaty, the central issue for arbitral tribunals is whether the alleged government conduct was unfair and inequitable, not whether it violated some minimum international standard to which the treaty does not References(p. 251) refer. The challenge is one of interpreting and applying this vague and general term to a usually highly complex fact situation.
The application of the fair and equitable standard in most cases is difficult for a variety of reasons. First, investment treaties do not define the term. Thus, arbitrators, government officials, investors’ legal counsel, and others who would apply the term must begin interpretation by confronting two words, ‘fair’ and ‘equitable’, that because of their vagueness and generality allow for great subjectivity. Second, as a result, the standard created will be highly flexible and may result in a subjective decision-making process that disappointed litigants may consider unprincipled. Third, the fact situations to which the term must be applied are highly complex and in many cases involve troubled relationships between investors and host governments stretching over significant periods of time and involving multiple interactions. Thus, determining whether a particular governmental action violates the fair and equitable standards depends greatly on the facts of the individual case.101
In actual practice, it is impossible to anticipate the entire range of state actions that may injure an investor.102 Some might consider this lack of precision a virtue rather than a shortcoming because it promotes flexibility in the investment process. Like other broad legal principles (such as ‘due process of law’, a term found in many domestic legal systems), the fair and equitable standard has been and will continue to be elaborated and given specific content through judicial and arbitral practice.103 Thus, its very vagueness and generality endow it with a flexibility that will permit it to evolve in the light of experience by investors, host countries, and international arbitration tribunals. At the same time, interpreters of the standard must guard against the danger of subjectivity, bias, and lack of discipline in the interpretation process.
The ‘ordinary meaning’ of the ‘fair and equitable treatment’ standard can only be defined by terms of almost equal vagueness. In MTD, the tribunal stated that: ‘In their ordinary meaning, the terms “fair” and “equitable” … mean “just”, “even handed”, “unbiased” “legitimate.”’ On the basis of such and similar definitions, one cannot say more than the tribunal did in S.D. Meyers by stating that an infringement of the standard requires ‘treatment in such an unjust or arbitrary manner that the treatment rises to a level that is unacceptable from an international perspective’.105
The context of the term ‘fair and equitable’ is the whole treaty in which it is employed. Thus, the term must be interpreted not just as three words plucked from the text but instead must be construed from within the context of the various rights and responsibilities and conditions and limitations to which the contracting parties agreed.
That in turn calls for a balanced approach to the interpretation of the Treaty’s substantive provisions for the protection of investments, since an interpretation which exaggerates the protection to be accorded to foreign investments may serve to dissuade host States from admitting foreign investments and so undermine the overall aim of extending and intensifying the parties’ mutual economic relations.106
Thus, it would appear that tribunals should take these broader goals into consideration when interpreting and applying the term ‘fair and equitable treatment’ and other treaty provisions.
In the end, an analysis of the treaty’s text is necessary, but not sufficient, for the interpretation and application of the fair and equitable standard to an investment dispute. Normally, one must also consider decisions of tribunals in other cases to gain a better understanding of a term now found in virtually all investment treaties. Within a relatively short time, numerous arbitral tribunals have applied the References(p. 253) fair and equitable standard in numerous investment treaties in diverse situations and in many countries and industries. While these decisions only bind the parties in those specific cases, they also elaborate and give content to what is, by its terms, an imprecise standard. Arbitrators, legal counsel, and government officials all refer to this accumulated jurisprudence when seeking to apply the standard to new situations. Moreover, such cases have been the subject of much doctrinal commentary by scholars, yet another source of information for those seeking to apply the fair and equitable standard to specific situations.
An examination of the cases applying the fair and equitable standard reveals that arbitral tribunals have developed specific criteria, norms, and principles to determine whether host states have given fair and equitable treatment to investors. In general, tribunals have been called upon to determine whether specific governmental actions, such as amending legislation, revising administrative regulations, and modifying contracts in ways that adversely affect an investor’s interests, have denied investors fair and equitable treatment. Not all such actions are a violation of the fair and equitable standard. States have a right to regulate persons and activities on their territories and do not cede that right when they sign an investment treaty. Therefore, in interpreting the meaning of fair and equitable treatment with respect to investors, tribunals must balance the legitimate and reasonable expectations of investors with the host country’s legitimate regulatory interests.107
Among the principles most often relied upon by tribunals when applying the fair and equitable standard is whether the host state has: (1) failed to protect the investor’s legitimate expectations; (2) failed to act transparently; (3) acted arbitrarily or subjected the investor to discriminatory treatment; (4) denied the investor access to justice or procedural due process; or (5) acted in bad faith. Let us examine each of these arbitration-based interpretations of the fair and equitable standard in turn. It must also be recognized, however, that these five general principles are not separate and distinct, but often overlap and blend into one another. It should also be noted that some of these principles, such as the prohibition on arbitrary or discriminatory actions or on measures that are denials of access to justice, are stated in particular treaties as explicit, independent standards in addition to being subsumed within the meaning of fair and equitable treatment.
(i) Failure to protect the investor’s legitimate expectations
Investor expectations are fundamental to the investment process. It is the investor’s expectations with respect to the risks and rewards of the contemplated investment that have a crucial influence on the investor’s decision to invest. States seek to influence these investment decisions through their actions, laws, regulations, and policies. Indeed, the very idea of investment promotion, which is a fundamental (p. 254) goal of virtually all investment treaties, is to create an expectation of profit in the minds of potential investors that will lead them to commit their capital and technology to the country in question. Thus, when a state has created certain expectations through its laws and acts that have led the investor to invest, it is generally considered unfair for the state to take subsequent actions that fundamentally deny or frustrate those expectations.
Respecting legitimate expectations is not only important to be fair to the individual but also important to the effectiveness of a country’s economic system. The renowned German sociologist Max Weber emphasized the role of ‘calculability’ in the development of modern capitalism. He saw the main contribution of the legal system in modern capitalism as making economic life more calculable or predictable.108 In the economic context, calculability refers to the likelihood that an economic actor will achieve its legitimate economic expectations. Economic activity is negatively affected if calculability is reduced by governmental or other action.
Various bodies of municipal law support the idea that governing authorities must respect the legitimate expectations they create. For example, the concept of ‘legitimate expectations’ is central to EU law and, in fact, forms a ‘general principle of law’ that can justify the European Court of Justice overturning offensive national measures.109 It is also a basic principle of English public law that government entities honour statements of policy or intention, particularly those directed at particular individuals or groups, as part of a general duty of fairness. Such statements may create ‘legitimate expectations’, either procedural or substantive in nature, the disappointment of which can create a cause of action against the government entities concerned.110 And in US law, courts have identified claimants’ ‘investment-backed expectations’ as being a ‘relevant consideration’ in determining whether or not public entities have ‘taken’ property in violation of the Fifth Amendment.111
Numerous decisions of arbitral tribunals seeking to interpret and apply the fair and equitable standard have adopted a similar approach. Underlying these cases is the fundamental notion that it is unfair for a state to create certain expectations in the minds of investors through its laws, regulations, and actions; and then, once the investment is made, to change those laws and regulations in ways that significantly frustrate or cancel the expectations that the state itself has been instrumental in creating. Over thirty years ago, Professor Raymond Vernon characterized foreign investments as ‘obsolescing bargains’.112 By this he meant that References(p. 255) once an investment was made, the host country had the power to change the terms of the investment agreement between the host government and the investor through the use of the former’s sovereign authority. In many cases, arbitral tribunals have found such unilateral action not to be fair and equitable and have therefore held host states liable for rendering their bargains with investors obsolete. Governments may change policies in their continuing search for the best options available to discharge their functions. However, to the extent that earlier policies might have created legitimate procedural and substantive expectations for investors, they may not be abandoned without compensating the investor if the result would be so unfair as to amount to an abuse of power.113
The state is certainly not responsible for all the imaginable factors that could frustrate an investor’s expectations. Thus, changes in a country’s natural conditions, such as its weather, political stability, and markets, among a host of other factors that may have induced certain expectations in the investor, are not what the fair and equitable treatment standard is aimed to guard against. Rather, it is directed at actions of the state through its legal and policy framework. An initial step in most investor–state arbitral cases focuses on the nature of the host country legal order at the time the investment was made. In the case of an allegation that the host country violated the fair and equitable standard, the legal order must be evaluated to determine the reasonable, legitimate expectations that it created in the mind of the investor. The legal order must also be evaluated to determine the extent to which the host government had a legitimate and reasonable right to substantively and procedurally change that legal order. The application of the fair and equitable treatment standard therefore requires an inquiry into the investor’s reasonable expectations and the host country’s reasonable right to regulate.
The principle of respecting investors’ legitimate expectations is not absolute and does not require the host state to freeze its legal system for the investors’ benefit. Such a general stabilization requirement goes beyond what an investor can legitimately expect. It is clear that reasonable evolutions in host state law are part of the environment that investors must contend with. For instance, the adjustment of environmental regulations to internationally accepted standards or the improvement of labour laws to benefit the host state’s workforce would not lead to violations of the fair and equitable treatment standard if applied in good faith and without discrimination.
While the concept of legitimate expectations has helped to refine the even vaguer concept of fair and equitable treatment, its application in particular cases is by no means automatic. That application requires tribunals to carefully evaluate numerous factors in individual fact situations. Although previous arbitral decisions are helpful in understanding how to apply the fair and equitable standard in cases involving alleged disappointed legitimate expectations, such decisions are highly fact specific and that specificity complicates the application of the principles (p. 256) to conflicts in other arbitrations. Nonetheless, a few such cases are now reviewed for illustrative purposes. Many of these cases involve licences, permissions, and regulatory frameworks that were changed after an investment had been made.
In the NAFTA case of International Thunderbird Gaming Corporation v United Mexican States,114 the claimant company, which was engaged in operating gaming facilities, requested an official opinion from Mexican authorities concerning the legality under Mexican law of a planned investment. Its written request (or solicitud), which was submitted to the Secretaria de Gobernacion (SEGOB), described Thunderbird’s planned investment as concerning ‘the commercial exploitation of video game machines for games of skills and ability’ and explained that ‘[i]n these games, chance and wagering or betting is not involved’. In its formal response (or oficio), SEGOB referred to the Federal Law of Games and Sweepstakes, which prohibited ‘gambling and luck related games’ on Mexican territory and also laid out Mexican law regarding the regulation and authorization of gambling establishments. The oficio stated that, if the machines used by Thunderbird operated in the form and on the conditions stated in the solicitud, SEGOB would be unable to prohibit their use pursuant to Mexican law. Thunderbird subsequently opened a number of gaming facilities in Mexico. However, following a change of government, SEGOB began closing down those facilities and issued a resolution declaring Thunderbird’s machines to be prohibited, causing Thunderbird to bring a Chapter Eleven NAFTA claim against Mexico.
the concept of ‘legitimate expectations’ relates, within the context of the NAFTA framework, to a situation where a Contracting Party’s conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct, such that a failure by the NAFTA Party to honour those expectations could cause the investor (or investment) to suffer damages.115
The tribunal concluded that for the purposes of this test the oficio had not generated a legitimate expectation upon which Thunderbird could reasonably rely. In doing so, it pointed out that the information presented in the solicitud had been incomplete and inaccurate. Furthermore, it found that the oficio had done no more than convey a message to the effect that, if the machines operated in accordance with the representations made in the solicitud, SEGOB would not have jurisdiction over them. The tribunal was therefore of the view that Thunderbird could not have reasonably relied to its detriment on the oficio. Indeed, Thunderbird had known when it chose to invest in Mexico that gambling was illegal under References(p. 257) Mexican law. As a result, it was incumbent on Thunderbird to exercise ‘particular caution’ in pursuing its business venture.
In CME v The Czech Republic,116 the investor complained that interference with its contractual rights by the Czech Media Council, a quasi-governmental media regulatory body, created a violation of the fair and equitable standard promised under the Netherlands–Czech Republic BIT. In an important change, the Council reversed its previous position on the legal situation of the investor as a licence holder, a move that had allowed the investor’s local partner to terminate the contract the investment depended upon. The tribunal found that ‘[t]he Media Council breached its obligation of fair and equitable treatment by evisceration of the arrangements in reliance upon which the foreign investor was induced to invest’.117 In finding a breach of the obligation of fair and equitable treatment, the tribunal determined that the Media Council intentionally undermined CME’s investments because it had both the power and the obligation under Czech law to remedy the partner’s unlawful actions in severing the service agreement with CME.118 It also found that CME had a legitimate expectation of reliance on the investment structure that had been arranged by the Media Council and that the Media Council should not have acted, without a bona fide purpose, to undermine the investor’s business.119
Although the facts in Ronald Lauder v The Czech Republic120 were the same as in CME, the Lauder tribunal rejected the investor’s claims. In its discussions of the obligations owed under the fair and equitable treatment standard, the tribunal noted that the investor’s claim could not be sustained because the Media Council had not reversed any prior express permissions.121 The implication of this statement is that a reversal of a prior express permission by a state agency could constitute a breach of fair and equitable treatment in that such an express permission would have created a legitimate expectation on the part of the investor.
In Tecmed v Mexico,122 the dispute concerned the Mexican government’s replacement of an unlimited licence with a licence of limited duration for the operation of a landfill in which the claimant had invested. Applying the provision in the Spain–Mexico BIT guaranteeing fair and equitable treatment, the tribunal concluded that the provision required transparency and protection of the investor’s basic expectations. It noted in particular that ‘[t]he foreign investor also expects the host State to act consistently, ie without arbitrarily revoking any preexisting decisions or permits issued by the State that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial and business activities’.123 The tribunal concluded that Mexico’s behaviour References(p. 258) frustrated the investor’s fair expectations. That behaviour was ‘characterized by its ambiguity and uncertainty which are prejudicial to the investor in terms of its advance assessment of the legal situation surrounding its investment and the planning of its business activity and its adjustment to preserve its rights’.124
The case of MTD v Republic of Chile,125 which involved a BIT between the developing countries of Chile and Malaysia, also raised an issue of fair and equitable treatment. The Malaysian investor had signed an investment contract with Chile’s Foreign Investment Commission (FIC) to construct a large planned community. The project was halted after it was discovered that it was not consistent with existing zoning regulations. The tribunal found that Chile had violated the BIT’s fair and equitable treatment standard by ‘the inconsistency of action between two arms of the same Government vis-à-vis the same investor’.126 While it was the investor’s duty to inform itself of the country’s law and policy, ‘Chile also has an obligation to act coherently and apply its policies consistently, independently of how diligent an investor is’.127 The fact that one arm of the Chilean government had approved a project that was against the country’s urban zoning policy was a breach of the government’s obligation to treat the investor fairly and equitably.
Other cases have held that to establish that government action failed to protect legitimate expectations the investor needs to prove an outright and unjustified repudiation of government regulations.128 Fundamental changes in policy that negatively affect existing contracts are not necessarily violations of fair and equitable treatment.129
When an investor makes a contract with a host government, it expects that the government will respect that contract. However, in the realm of investment treaties and investor–state arbitration, whether the fair and equitable treatment clause protects investors against failures to respect those contracts is an extremely difficult issue. The question is equally difficult if the non-performance of a contract between the investor and the host state, or one of its territorial subdivisions or entities, is contrary to the investor’s legitimate expectations and so a violation of the fair and equitable treatment standard.130 The essential question is whether reliance on contractual undertakings is protected by the obligation to provide fair and equitable treatment. If the answer is affirmative, then investors could use the fair and equitable treatment standard as an ‘umbrella clause’,131 which would effectively elevate contractual breaches to treaty breaches.132
References(p. 259) Answering this question is not easy. On the one hand, an investor’s contract with the government may be viewed as part of the legal framework of the investor’s project and so a failure to respect it would result in a failure to protect the investor’s legitimate expectations. On the other hand, the breach of a contract can also be viewed as one of the ordinary business risks of an investment, which would make such risks objectively in the contemplation of the investor when it enters into the agreement. In an effort to balance these two views, one might draw a line between two situations: (1) simple breaches of contract arising out of a host state’s financial difficulties or legitimate differences between the parties about contractual terms; and (2) wilful refusals by a government authority to abide by its contractual obligations, abuse of government authority to evade agreements with foreign investors, or actions in bad faith in the course of contractual performance.133 Only the latter situation would justify a finding of a violation of fair and equitable treatment on the ground that the host government had failed to respect the investor’s legitimate expectations.
The tribunal in Waste Management seemed to recognize this distinction. One of the investor’s claims, based on Article 1105(1) of NAFTA, involved the failure of the City of Acapulco to make payments under a concession agreement. The tribunal found that the evidence did not support the conclusion that the city had acted arbitrarily or in a grossly unfair way, since it was in a genuinely difficult financial situation. The tribunal said: ‘even the persistent non-payment of debts by a municipality is not to be equated with a violation of Article 1105, provided that it does not amount to an outright and unjustified repudiation of the transaction and provided that some remedy is open to the creditor to address the problem’.134
Other tribunals have indicated that a failure to perform a contract may, under certain circumstances, amount to a violation of the fair and equitable treatment standard. For example, the tribunal in the NAFTA case of Mondev stated that ‘a governmental prerogative to violate investment contracts would appear to be inconsistent with the principles embodied in Article 1105 and with contemporary standards of national and international law concerning governmental liability for contractual performance’.135
Eureko BV v Republic of Poland136 similarly found that the Polish government’s wilful refusal to sell shares to an investor as it had previously agreed ‘consciously and overtly, breached the basic expectations of Eureko that are at the basis of its investments’ and so treated the investor unfairly and inequitably. It will remain for future tribunals to develop criteria for determining which breaches of contract qualify as ordinary risks because a host government is ‘in difficulty’ and which breaches are wilful and abusive.
References(p. 260) (ii) Failure to act transparently
The failure of a host state to act ‘transparently’ towards an investor may also constitute a violation of the fair and equitable standard. Transparency is considered an important element of good governance generally, and it is especially important to investors. To make effective investment decisions, investors need to know the applicable legal rules. It is these rules that create an investor’s legitimate expectations and facilitate the Weberian concept of calculability. Thus, governments need to be transparent about what rules are in force. Once the investor makes an investment, fairness requires that the government inform the investor of changes in the applicable rules so that the investor may plan and manage operations accordingly. The foregoing suggests that even where an investment treaty does not specifically provide for transparency, a fair and equitable treatment clause implicitly requires transparency by the host government.
Mexico failed to ensure a transparent and predictable framework for Metalclad’s business planning and investment. The totality of these circumstances demonstrates a lack of orderly process and timely disposition in relation to an investor of a Party acting in the expectation that it would be treated fairly and justly in accordance with the NAFTA.139
Similarly, many of the arbitral cases discussed earlier in this chapter with respect to the requirement of respecting legitimate investor expectations also made reference to transparency in analysing whether a state had acted fairly and References(p. 261) equitably. As will be seen in Chapter 13, at section 13.5, some recent investment treaties contain a specific provision, separate from the fair and equitable treatment clause, that requires host states to act transparently. As of 2014, no investor–state case appears to have alleged a violation of this new treaty standard of treatment.
(iii) Arbitrary and discriminatory actions
Host government actions that are arbitrary and/or discriminatory towards an investor or an investment covered by an investment treaty also violate the fair and equitable treatment standard. The plain meaning of ‘fair and equitable treatment’ indicates that if there is discrimination on arbitrary grounds or the investment is subject to arbitrary or capricious treatment by the host state, then the fair and equitable standard has been violated. This conclusion flows from the idea that fair and equitable treatment inherently precludes arbitrary actions against investors.140 Thus, governmental conduct categorized as arbitrary or discriminatory will generally breach the fair and equitable treatment standard. The problem is to determine whether in a specific situation the particular action of a government towards an individual investor within the framework of a relationship that is complex and long-standing is actually discriminatory or arbitrary. Inevitably, states that take questionable actions justify them as rational and necessary to protect the public interest, while the investors whose interests have been injured claim them to be arbitrary and discriminatory.
In the ELSI case,141 the ICJ, while not specifically interpreting a fair and equitable treatment clause, did seek to determine what would constitute an ‘arbitrary’ measure. Its approach may offer some guidance in deciding what government actions are arbitrary under an investment treaty. The Court stated that an act that is illegal under domestic law is not necessarily arbitrary. Indeed, it suggested that even if a domestic court concluded that an act was arbitrary or unreasonable, that finding would not necessarily make the act arbitrary under international law. Arbitrariness, it stated, ‘is not so much something opposed to a rule of law, as something opposed to the rule of law . … It is a willful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety’.142
When determining whether an investor had received fair and equitable treatment, arbitration tribunals have focused on what they characterized as arbitrary governmental actions. In some cases, they did so in order to interpret the term ‘fair and equitable treatment’; in others, they did so to apply treaty References(p. 262) provisions that specifically prohibit arbitrary or discriminatory treatment. In applying NAFTA’s fair and equitable treatment standard in Pope & Talbot, the tribunal did not emphasize the legitimate expectations of the investor but focused instead on the aggressive and hostile actions of Canada’s Softwood Lumber Division (SLD), a government agency, towards the investor. In particular, it found that SLD’s denials of reasonable requests by the investor for pertinent information, its threats to the investor’s business, and its misleading statements regarding the investor’s actions to the Minister, all contributed to a breach of the fair and equitable treatment standard contained in Article 1105(1) of NAFTA.143
On the other hand, in Genin144 the tribunal considered whether a decision by the Bank of Estonia to withdraw Genin’s banking licence amounted to ‘arbitrariness’ under Article II(3)(b) of the US–Estonia BIT. After examining the totality of the evidence, the tribunal concluded that for Estonia’s action to violate the BIT, ‘any procedural irregularity that may have been present would have to amount to bad faith, a willful disregard of due process of law or an extreme insufficiency of action’.145 It found none of these factors present in the case, stating that the withdrawal of the licence was not ‘an arbitrary act that violates the tribunal’s “sense of juridical propriety”’. The tribunal also attached importance to the fact that the political and economic transition occurring in Estonia at the time justified heightened scrutiny of the banking sector and that the state’s action reflected ‘a clear and legitimate public purpose’.146 Thus, it would seem that to find a government measure arbitrary, that country’s special circumstances and the reasonableness of the government goals in taking that action must be taken into account.
The importance of the context for judging the arbitrariness of a governmental action is also illustrated in LG&E Energy.147 In LG&E Energy, an ICSID tribunal considered whether the measures taken by Argentina during a severe economic and financial crisis and which adversely affected the investors’ gas-distribution licences were arbitrary and therefore in violation of Article II(2)(b) of the US–Argentine BIT,148 which prohibits the host state from taking arbitrary or discriminatory measures against an investor. The investor claimed that the standard for an arbitrary act is ‘disregard for the rule of law’ and that by wilfully repudiating its legal obligations Argentina had followed ‘the rule of power, not References(p. 263) the rule of law’. Because the BIT did not define the term ‘arbitrary’, the tribunal looked to international law to define the term and so considered the ELSI case, described earlier. It then examined the BIT text and interpreted the intent of the contracting parties ‘prohibiting themselves from implementing measures that affect the investments of nationals of the other Party without engaging in a rational decision-making process’.149 A ‘rational decision-making process’, according to the tribunal, would include a consideration by Argentina of the effect of a proposed measure on foreign investments and a balancing of state interests against the burden placed on the investor. After reviewing the process by which Argentina arrived at the measures taken, the tribunal—emphasizing that Argentina was seeking to avert a complete economic collapse—concluded that the measures were not arbitrary because they resulted from reasoned judgment rather than a disregard for the rule of law.
Arbitrary conduct is also often discriminatory against the investor; consequently, the two words ‘arbitrary and discriminatory’ are often part of a single treaty standard or are considered inherent in the concept of unfair and inequitable treatment. The question of whether a measure is discriminatory also arises in the application of the required standards in treaties of national and most-favoured-nation treatment, both of which are discussed later in this chapter. When investment treaties are meant to prohibit discrimination against foreign investors, a measure is considered discriminatory if its intent is to discriminate or if it has a discriminatory effect.150 In determining whether specific actions are discriminatory, and so violate the fair and equitable treatment standard or other specific provisions against discrimination, tribunals often refer to the ELSI case. In ELSI, the ICJ determined that the elements of a discriminatory measure include: (i) an intentional treatment, (ii) in favour of a national, (iii) against a foreign investor, and (iv) that is not taken under similar circumstances against another national.151 However, proving these elements to the satisfaction of a tribunal can be difficult. For example, in the ADF case,152 which concerned the US domestic-contents requirements for the government procurement of a construction project, alleged by the claimant to be discriminatory, the tribunal refused to find a violation of fair and equitable treatment. The tribunal noted that the investor had not claimed that other companies in like circumstances had been granted requirements waivers while the investor was denied, that the investor did not allege that the requirements under the project contract had been ‘tailored’ so that only a particular US company could comply with its specifications, or that the US measures had imposed ‘extraordinary costs or other burdens’ on the investor that were not imposed on the successful project bidders.153
References(p. 264) (iv) Denial of justice or due process
Procedural fairness by governmental and judicial authorities when dealing with nationals or foreigners is a basic requirement of the rule of law and a vital element of fair and equitable treatment. The failure to respect procedural fairness is therefore considered a ‘denial of justice’. According to Brownlie, the term ‘denial of justice’ has been employed by claims tribunals in a way that is coextensive with the general notion of state responsibility for harm to aliens. Regardless, it is widely seen as a particular category of deficiencies in host state governmental organs, particularly those involved in the administration of justice.154 Other commentators have identified at least three different meanings—broad, narrow, and intermediate—of the term ‘denial of justice’. In its broadest sense, ‘denial of justice’ covers all of state responsibility and applies to all kinds of wrongful acts by the state towards an alien. In its narrowest sense, it refers to direct intervention by government authorities in the workings of the judicial system, for example by taking affirmative action to deny an alien access to the courts or to prevent a court from pronouncing its judgment. The intermediate meaning of the term ‘denial of justice’ is related to the improper administration of civil and criminal justice with respect to a foreigner, including a denial of access to courts, inadequate procedures, and unjust decisions.155 It has been observed by three leading scholars of international law that ‘the term may thus be usefully employed to describe a particular type of international wrong for which no other adequate phrase exists in the language of the law’ and that ‘[t]he tendency of the jurisprudence of international tribunals and of previous codifications of the law of responsibility of States has been to give only a generalized meaning to “denial of justice” and to refrain from establishing a list of those wrongful acts and omissions which would constitute a “denial of justice”’.156
The Third Restatement of the Foreign Relations Law of the United States takes the position that although the term ‘denial of justice’ has sometimes been used to refer to any injury done to an alien, it is used more commonly in a narrow sense ‘to refer only to injury consisting of, or resulting from, denial of access to courts, or denial of procedural fairness and due process in relation to judicial proceedings, whether criminal or civil’.157 From the foregoing, it is clear that an actionable failure of justice must be manifest and must constitute a gross deficiency in the administration of justice in the individual case. An error of law by a national court or an incorrect finding of fact by an administrative authority would not constitute such a denial of justice.
A denial of justice may arise out of either procedural or substantive deficiencies. As Freeman has noted, ‘steady international practice as well as the overwhelming (p. 265) preponderance of legal authority, recognizes that not only flagrant procedural irregularities and deficiencies may justify diplomatic complaint, but also gross defects in the substance of the judgment itself’.158
The US Model BIT of 2012 specifically clarifies that the fair and equitable treatment standard protects against a denial of justice and also guarantees due process. Article 5(2)(a) provides that ‘fair and equitable treatment’ includes an obligation not to deny justice in any criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process ‘embodied in the principal legal systems of the world’.159 Free trade agreements signed by the United States specifically prescribe the inclusion of due process rights as a part of the fair and equitable standard. Recent bilateral treaties signed by other states also include similar protections.160 In addition, the 2009 ASEAN Comprehensive Investment Agreement specifies that for purposes of ‘greater certainty’, ‘fair and equitable treatment requires each Member State not to deny justice in any legal or administrative proceedings in accordance with the principles of due process’.161
The jurisprudence of international tribunals indicates that a state’s failure to comply with its duty to grant due process to aliens constitutes a violation of fair and equitable treatment. Both courts and other state agencies may violate this duty. In the field of investor–state arbitration, tribunals have found a denial of justice and a breach of the fair and equitable treatment standard when government or judicial processes affecting investors’ interests failed to give the investor proper notification of the hearing or processes, did not invite or allow the investor to participate or appear, or were influenced by bias or prejudice. For example, in Metalclad162 the tribunal found a violation of the fair and equitable treatment under Article 1105(1) of NAFTA because the construction permit requested by the investor ‘was denied at a meeting of the Municipal Town Council of which Metalclad received no notice, to which it received no invitation, and at which it was given no opportunity to appear’.163 Similarly, in Middle East Cement,164 an investor complained that the Egyptian government had seized and auctioned its ship without proper notice. The tribunal determined that the auction procedure applied to the claimant was not ‘under due process of law’ as required by Article 4 References(p. 266) of the Greece–Egypt BIT and specifically found that the notification procedure had been insufficient.165
If their actions are taken in bad faith, states will fail to meet the minimum international standard and the fair and equitable treatment standard. On the one hand, there is considerable authority indicating that bad faith is not an essential element of a violation of the fair and equitable treatment standard. For example, the Mondev tribunal stated, ‘what is unfair or inequitable need not equate with the outrageous or the egregious. In particular, a State may treat foreign investment unfairly and inequitably without necessarily acting in bad faith’.166
The notion of bad faith is particularly concerned with the motivations of a government or public authority when interacting with an investor. While conceptually it would seem that bad faith actions by a government would violate the fair and equitable treatment standard owed an investor, no modern arbitral decision has actually found a state to have acted in bad faith towards an investor under an applicable investment treaty. Three reasons would seem to explain this result. First, it is not necessary to find governmental bad faith in order to establish a breach of the fair and equitable treatment standard. Second, proving a state’s bad faith can be an extremely difficult task, since a government can usually offer some public policy justification for its actions. And third, most arbitral tribunals would be loath to make such a finding against a sovereign state, particularly if they could give redress to an injured investor without taking such action.
Based on the existing jurisprudence of investor–state arbitral tribunals, one may conclude that the core of the fair and equitable treatment standard includes the previously discussed elements. Thus, a state treats an investor fairly and equitably when its actions respect the investor’s legitimate expectations, are transparent, are not arbitrary or discriminatory, respect due process and access to justice, and are done in good faith. The foregoing, however, do not constitute an exhaustive list. Claims based on the denial of fair and equitable treatment will continue to be a constant feature of investor–state arbitration, and so the standard will continue to be subject to interpretation and refinement in the years ahead.167
References(p. 267) Moreover, some states have taken to defining the scope of the fair and equitable treatment standard more precisely, and in some cases limiting it by using more precise definitions in the treaty itself. An example of this approach is the 2005 treaty between the United States and Uruguay. Article 5 of that BIT, entitled ‘Minimum Standard of Treatment’, stipulates that ‘[e]ach Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security’. A footnote to the Article requires that it be interpreted in accordance with Annex A to the treaty, which states a shared understanding of the parties that ‘customary international law … result[s] from a general and consistent practice of States that they follow from a sense of legal obligation’.168
1. Each Contracting Party shall promptly publish, or otherwise make publicly available, its laws, regulations, administrative procedures and administrative rulings and judicial decisions of general application as well as international agreements to which the Contracting Party is a party and which pertain to or affect investment activities. The Government of each Contracting Party shall make easily available to the public, the names and addresses of the competent authorities responsible for such laws, regulations, administrative procedures and administrative rulings.
2. When a Contracting Party introduces or changes its laws or regulations that significantly affect the implementation and operation of this Agreement, the Contracting Party shall endeavor to provide a reasonable interval between the time when such laws or regulations are published or made publicly available and the time when they enter into force …
(a) make public in advance regulations of general application that affect any matter covered by this Agreement; and
(b) provide a reasonable opportunity for comments by the public for those regulations related to investment and give consideration to those comments before adoption of such regulations.170
References(p. 268) This provision would seem to require that states provide investors with access to laws and administrative proceedings that affect their interests, notice of new laws and regulatory changes, and the opportunity to comment on regulations. The US–Rwanda BIT extends these protections to include a right of review, stating that ‘[e]ach Party shall establish or maintain judicial, quasi-judicial, or administrative tribunals or procedures for the purpose of the prompt review and, where warranted, correction of final administrative actions regarding matters covered by this Treaty’.171 The treaty requires that parties in a review proceeding receive an opportunity to present their case and that any resulting decision be based on the record.172
These new provisions that specifically outline states’ administrative obligations and explain how a state must act transparently and in accordance with due process encroach on territory that the fair and equitable standard has traditionally covered. These provisions will therefore affect the fair and equitable standard. When confronted with a treaty that includes a separate transparency provision in addition to the vague fair and equitable standard, it would be difficult for a tribunal to incorporate transparency into the fair and equitable standard, as the parties have expressly and specifically addressed it elsewhere. In this sense, the transparency and administrative due process provisions could be interpreted in one of three ways depending on the specific language employed: (a) as limiting certain aspects of the fair and equitable standard; (b) as giving content to the transparency and due process aspects of the fair and equitable standard; or (c) as creating a separate treatment standard, apart from the fair and equitable standard, that requires states to act transparently towards investors and that grants protected investors a cause of action in cases where states fail to meet the transparency standard. Under these interpretations, such separate provisions would limit the scope of those aspects of the fair and equitable standard that are separately addressed. As seen in the previous examples, the new treaties that incorporate separate provisions on transparency and administrative procedures can use different language. Those tasked with interpreting these provisions must therefore carefully evaluate the extent of a state’s obligations and an investor’s rights and how they relate to the fair and equitable standard. Those tasked with drafting these provisions might in the first instance consider clearly stating their relationship to the fair and equitable standard. Chapter 13, section 13.5 will consider in more detail the third of the previously-mentioned possibilities—the creation of a separate treatment standard requiring host states to act transparently towards protected investors.
In interpreting and applying the fair and equitable treatment clause, tribunals have focused primarily on the behaviour of the respondent state. The reason is that most investment treaties set down standards of behaviour for states, not References(p. 269) investors. It is important to recognize, however, that the investor’s behaviour may influence a tribunal in applying the fair and equitable standard. For one thing, whether a state has acted fairly and equitably is not an abstract question but one that requires an examination of the way a state behaved in a particular situation. Investor behaviour is very much a part of that situation, and it is therefore a legitimate area of inquiry by a tribunal. Determining whether a state has acted fairly and equitably towards an investor depends to a significant extent on the acts of the investor as well as the state. An investor that has engaged in corrupt business practices, has conducted its operations recklessly or in an unreasonable manner, or has not appropriately evaluated and protected itself against the risks posed by an investment may well have less standing to claim that a state measure was unfair or inequitable than an investor whose operations have been scrupulously honest, well managed, and attentive to risks. As one scholar has written, ‘if equity means anything it suggests a balancing process and weighing what is right in all the circumstances’.173
(a) In general
Individual investment treaties often stipulate other general treatment standards, most of which could be subsumed within the meanings of either fair and equitable treatment or full protection and security. Thus, alone or in conjunction with such basic general standards of treatment, treaties may require treatment that accords with international law, complies with an international minimum standard, is not arbitrary or discriminatory, or allows access to justice or due process. One might refer to these as ‘limited general treatment standards’ in that their scope is more restricted than that of the sweeping language of fair and equitable treatment or full protection. All of these limited general treatment standards have been discussed earlier in connection with the fair and equitable treatment standard and that discussion should be born in mind in seeking to understand and interpret them when they are stated individually in investment treaties. They become particularly important in two situations: (1) when the applicable treaty does not contain a provision on fair and equitable treatment or full protection and security; and (2) when the treaty concerned does include such provisions but the challenged governmental actions do not constitute a violation of those two basic general standards. In both of these situations, investors may be able to establish that a government has not complied with such other limited general standards of treatment and has therefore committed a (p. 270) treaty violation requiring the payment of compensation for any resulting injury to a protected investment. Two of such limited general standards particularly have potential importance: (1) treatment in accordance with international law; and (2) avoidance of arbitrary, discriminatory, or unreasonable measures. They are each considered briefly.
(b) Treatment in accordance with international law
Many investment treaties specifically provide that protected investments are to be given treatment in accordance with international law. For example, the Benin–Belgium BIT,174 after promising covered investments fair and equitable treatment and protection and security, further provides: ‘The treatment and protection defined in paragraph 1 and 2 will be at least equal to that enjoyed by investors from third states and will not, in any case, be less favorable than that recognized by international law.’175 The implication of this and similar treaty provisions is that it is possible for states to take measures that do not violate fair and equitable treatment and full protection and security but may nonetheless violate international law, and that the intent of such provisions is to protect investments against that eventuality.
Similar provisions are to be found in some of the BITS negotiated by the United States before the beginning of the twenty-first century. Thus, the 1986 US BIT with Egypt stipulates: ‘The treatment, protection and security of investments shall never be less than that required by international law and national legislation.’176 The application of such treaty provisions raises an important question of interpretation: What is the scope of the term ‘international law’? As was discussed in Chapter 3, at section 3.3, international law is derived from three sources: treaties and conventions, custom, and general principles of law. Does the term ‘international law’ as used in such treaty provisions include the whole of international law as derived from all its sources or is it limited to customary international law? If the term international includes a host state’s treaty obligations, the effect could be far reaching. For example suppose an investor covered by a BIT established a factory in a host country in reliance on its ability to import certain raw materials allowed by a bilateral trade treaty or a treaty of the World Trade Organization by which the host state was bound, but that thereafter the host government adopted measures to prevent such imports in violation of its obligations under those treaties, thereby causing a financial injury to the investment in the factory. Even though the government’s failure References(p. 271) to comply with its trade treaty obligations might not constitute a violation of the fair and equitable treatment standard, it might nevertheless violate the host state’s obligation not to afford such investments a treatment less than that required by international law.
In support of that conclusion, one might argue that the plain meaning of the term ‘international law’ is that it includes international law from all sources including treaties. On the other hand, some scholars have argued that this interpretation would create an extremely broad right and that if states intended such a result they would have made that intent clear in the text of the treaty.177 For example, Article 10(1) of the ECT clearly states: ‘In no case shall such Investments be accorded treatment less favorable than that required by international law, including treaty obligations’ (emphasis added). One may contrast that formulation with that of Article 1105 of NAFTA which stipulates: ‘Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.’
More recent treaties seemed to have become more specific in delineating the scope of the term international law. Thus, in contrast to the provision from the Egypt–US BIT cited earlier, Article 5(1) of the 2012 US Model BIT, following the pattern established by the 2004 US Model BIT, provides: ‘Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security’ (emphasis added).
Since the adoption of the 2004 Model, US treaty practice has employed the term ‘customary international law’ rather than simply ‘international law’ in defining this international law standard of treatment, and has also made clear that ‘a determination that there has been a breach of this Treaty, or of a separate international agreement, does not establish that there as been a breach of this article’ (emphasis added).178 The intent of such provision is that the determination of whether a host government’s actions have denied an investment treatment in accordance with international law is to be made only by reference to international custom and not to treaty law. On the other hand, an argument could be made that since the obligation of a state to respect its international agreements is based on international customary law, any failure of a state to respect its treaty commitments is a violation of customary law (ie pacta sunt servanda) and therefore a denial of treatment according to international customary law. Recent Canadian BITs avoid this interpretational problem by limiting the scope of protection under References(p. 272) international law to that accorded by ‘the customary international law minimum standard of treatment of aliens’.179
(c) Avoidance of arbitrary, discriminatory, or unreasonable measures
Neither Contracting Party shall take any arbitrary or discriminatory measures against the management, maintenance, use, enjoyment and disposal of the investments by the investors of the other Contracting Party.180
Each Contracting Party shall ensure fair and equitable treatment to investments of investors of the other Contracting Party and shall not impair, by unreasonable or discriminatory measures, the operation, management, maintenance, use, enjoyment or disposal thereof by those investors. (emphasis added)181
Although included within a single treaty provision, the two treatment standards are separate and distinct. It is possible that a governmental action against a protected investment may violate the fair and equitable treatment standard without contravening the provision against unreasonable or discriminatory measures, and the opposite situation may also come to pass.
Both Contracting Parties shall ensure that the management, maintenance, use, transformation, enjoyment or assignment of the investments effected in their territory by investors of the other Contracting Party, as well as companies and enterprises in which these References(p. 273) investments have been effected, shall in no way be subject to unjustified or discriminatory measures (emphasis added)182
In analysing and applying treaty provisions governing this standard, three elements must be found: (1) there must be a ‘measure’; (2) such measure must impair or negatively affect a protected investment; and (3) the measure must possess the specified negative quality required by the treaty, that is, it must be arbitrary, discriminatory, or unreasonable. It is important at the outset of that analysis to recognize that the focus of the standard is ‘measures’, not ‘treatment’. Thus the objective of an aggrieved investor’s complaint is a ‘measure’ taken by an organ of a host state. Like the term ‘treatment’ discussed at the beginning of this chapter, investment treaties do not define the meaning of ‘measure’.183 The ICJ in the Fisheries Jurisdiction Case adopted a broad definition of the term, stating that ‘in its ordinary sense the word is wide enough to cover any act, step or proceeding, and imposes no particular limit on their material content or on the aim pursued thereby’.184 As a result, an action by a governmental organ, as well as any decision not to act, would be considered a measure for purposes of an investment treaty. Actions taken by third parties, for example business competitors, labour unions, or brigands, would not be considered ‘measures’; however, a decision by a governmental organ not to protect an investment against the actions of such persons would constitute a measure. The measure must affect the investment in a negative way, which in most instances would mean that it diminishes to some extent the financial value of the investment. And finally, the measure must be shown to be arbitrary, discriminatory or unreasonable, as required by the treaty text. This third part of the analysis is usually the most difficult because it requires the application of imprecise, vague, and general concepts to complex fact situations and demands a careful evaluation of a host of competing factors. In that respect, it is similar to the analysis that must be undertaken in judging whether a violation of the fair and equitable treatment standard, and particularly that standard’s application to arbitrary and discriminatory actions, has taken place, as discussed earlier in section 9.4(e)(iii). That discussion should also be consulted when considering the application of treaty provisions on arbitrary, discriminatory, and unreasonable measures.
References(p. 274) 9.6 National Treatment
Economic and business activity is a competitive process. Economic actors constantly seek to gain advantage over their competitors and to remove advantages that their competitors may have over them. In response to their perceived national interests, governments often seek through their laws, regulations, and administrative actions to: (1) assist their nationals and companies in the competitive process by taking measures that favour their interests and disfavour the interests of others; or (2) favour certain foreign nationals and companies over other foreign nationals and companies. Government measures may thus have a discriminatory effect on economic activity.
Such discriminatory measures can impede international investment. In encouraging increased foreign investment, investment treaties often seek to remove the competitive disadvantages that may be placed on foreigners by eliminating such discriminatory treatment. Treaties do this by making non-discrimination a standard that host countries must grant to investors and investment from other contracting states.
Non-discriminatory treatment has two dimensions. The first, known as national treatment, requires host states to treat foreign investors and foreign investments no less favourably than they treat their own national investors and investments. The second, known as most-favoured-nation treatment, demands that host countries treat investments and investors covered by the treaty no less favourably than they treat other foreign investors and investments. The purpose of these treatment standards is to place all economic actors in an equal position on the assumption that such equality of treatment will foster competition and economic growth. Most treaties include, in some form, both of these relative treatment standards. This section will discuss national treatment and section 9.7 will consider most-favoured-nation treatment.
For many countries, agreeing to grant national treatment to foreign investment is often more difficult politically than granting most-favoured-nation treatment. The reason is that national treatment may require difficult changes in existing laws and policies favouring national companies, while most-favoured-nation treatment usually does not. For example, many countries encourage national industries by granting subsidies or other benefits that the country would be unwilling to provide equally to foreigners and thereby undermine the competitive position of those industries. For that reason, the negotiation and drafting of national treatment provisions in investment treaties has often been fraught with difficulty. It is also for this reason that treaties demonstrate a wide variety of formulations in expressing national treatment standards.
(p. 275) Resistance to the national treatment standard was stronger in the early days of the investment treaty movement, when many countries had large state-owned industries to protect. Today, as a result of large-scale privatizations and the resulting shrinkage of the public sector, countries more readily accept national treatment clauses in treaties of one type or another, and a large majority of treaties now include them.185 On the other hand, as was discussed in Chapter 8, many treaties distinguish between requiring this treatment standard for the admission of an investment and imposing it once an investment has been made. Thus, the ECT avoids a firm commitment to grant investors national or most-favoured-nation treatment with respect to the making of an investment, but it does commit the contracting parties to granting national treatment or most-favoured-nation treatment, whichever is the more favourable, to investments, once made, and to their associated activities. These ‘associated activities’ would include the investments’ management, maintenance, use, enjoyment, and disposal.186 On the other hand, the Treaty on the Functioning of the European Union (TFEU),187 which seeks to create a single market for the movement of persons, goods, and capital among the twenty-eight EU states, gives persons and companies of one member state broad rights of national treatment in all other member states. Thus, Article 49 of the TFEU prohibits member states from enacting measures that restrict the freedom of establishment of nationals of other member states and defines the freedom of establishment as including ‘the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms … under the conditions laid down for its own nationals by the law of the country where such establishment is effected’. Article 54 provides that companies formed under the laws of an EU state and having their registered office or principal place of business within the Union shall be treated in the same way as natural persons who are nationals of member states. Furthermore, Article 55 states that ‘Member States shall accord nationals of the other Member States the same treatment as their own nationals as regards participation in the capital of companies or firms within the meaning of Article 54’. As discussed in Chapter 8, at section 8.6, the European Court of Justice has the power to judge and strike down member state measures that offend these principles of national treatment. Its jurisprudence may therefore be a source of assistance for scholars, lawyers, and arbitrators interpreting the provisions on national treatment found in other investment treaties.
For investment treaties granting national treatment, one must thus make a fundamental distinction between treaties that promise non-discriminatory treatment during the entire investment process and those that limit national treatment References(p. 276) to investments after they have been established in the host country. These latter treaties usually provide that each contracting party shall accord protection to ‘investment in its territory’188 or ‘investments made in accordance with its laws’.189 This type of provision allows the host country to deal with competitively threatening foreign investments by simply refusing them the right of establishment while granting that right to those it has admitted into the country. Even after establishment, some treaties make national treatment tentative by making it contingent upon national legislation. Thus, an investment treaty may provide that ‘[e]ach Contracting Party shall, subject to its laws and regulations, accord to investments of investors of the other Contracting party treatment no less favorable than that which is accorded to investments of its investors’.190 This provision gives host countries the power to enact laws favouring national investments when their governments judge it important to advance certain national interests. A variation of this approach is to define the aspects of investment activity that will receive national treatment while stating or implying that other aspects will not receive the same treatment. Many treaties, particularly those negotiated by the United States, make clear that national treatment will be granted to investors or investments of parties that are in ‘like circumstances’ to those of national investors.
1. Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments.
2. Each Party shall accord to investments of investors of another Party treatment no less favorable than that it accords, in like circumstances, to investments of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments.
While discussions of ‘national treatment’ often seem to imply that its meaning is constant and uniform across treaties, that is not the case. Because of the many variations that it takes in particular treaty texts, it is essential for those interpreting References(p. 277) and applying the national treatment commitments contained in particular treaties to examine carefully the specific language of the text in question.
The application of the national treatment standard depends not only on how the standard is articulated in a particular treaty but also on the specific facts of the case in question. Applying national treatment standards in investor–state disputes, like cases involving the fair and equitable standard, is highly fact-specific and not easily amenable to a mechanistic application of treaty provisions.191 But, unlike the fair and equitable treatment standard, tribunals in national treatment standard cases appear to have developed a more or less common, three-step analytical approach. This is particularly the case within the context of NAFTA. The first step involves identifying a group of national investors to be compared with the claimant foreign investor. The second step is to compare the relative treatment the two groups have received and evaluate whether the treatment of the claimant is less favourable than that given to the compared group of national investors. The final step is to determine whether the two are, in the words of NAFTA and similar treaties, in ‘like circumstances’ or whether factors justifying differential treatment exist.192 The completion of each step requires the answer to a particular question. Let us examine each step in greater detail.
The application of the national treatment standard is inherently a comparative process. The foreign investor is complaining because it has compared the treatment it has received from the host government with that received by someone else and found its treatment wanting. In order to determine the validity of such a claim, a tribunal first has to determine whether the investor has compared itself with an appropriate comparator. For example, suppose that a host country provides subsidized electricity to small farmers but not to a foreign investor operating an aluminium smelter. Would such differential treatment constitute a breach of the national treatment standard? Has the foreign investor selected an appropriate basis of comparison? For one thing, the subsidized small farmer and the aluminium producer are operating in two very different economic sectors: agriculture and heavy industry. For another, the size of the the two economic actors and the scale of their respective operations are vastly different. Moreover, the relative costs and benefits of the electricity subsidy are disproportionate because in the production of aluminium electricity is a much higher percentage of total (p. 278) production costs that in a small farm. An arbitral tribunal analysing all of these factors would conclude that it would be inappropriate, for purposes of determining a breach of national treatment, to compare a small farmer with an aluminium smelter.
Several NAFTA cases provide guidance in the determination of an appropriate comparator. In the NAFTA case of Pope & Talbot, the tribunal declared that ‘as a first step, the treatment accorded a foreign owned investment protected by Article 1102(2) should be compared with that accorded domestic investments in the same business or economic sector’.193 Applying this principle to specific cases can prove difficult. An individual tribunal may opt for either a broad or narrow approach in delineating the comparator group. For example, in Feldman v Mexico, the claimant was a trading company that was engaged, among other things, in purchasing Mexican cigarettes from local retailers and then selling those cigarettes abroad. The company alleged that the Mexican government had granted tax rebates to competing exporters of Mexican cigarettes but had denied the same rebates to the claimant. In determining the basis of comparison, the tribunal stated that the ‘universe of firms’ to which the claimant was to be compared were those in the business of ‘reselling/exporting cigarettes’. Other firms that might also export cigarettes, such as cigarette manufacturers, were not in that group.194
In Occidental v Ecuador,195 the host government had originally granted the claimants and other oil producers a rebate on the value-added tax (VAT) they paid on goods purchased for their exploration activities. In 2001, however, Ecuador’s tax authorities stopped granting those rebates to the claimant and other oil exploration companies on the grounds that the participation formulas in their government contract already accounted for such rebates. Although all the companies in the oil sector were treated equally with respect to these value-added tax rebates, the tribunal determined that the relevant comparison group for national treatment purposes was not the oil sector but ‘local producers in general … since the purpose of national treatment is to protect foreign investors as compared to local producers and this cannot be done by addressing exclusively the sector in which that particular activity is undertaken’.196
This conclusion could be criticized as being an overly broad interpretation of the national treatment standard in the US–Ecuador BIT, which requires that national investors in the comparison group be ‘in like situations’. In interpreting this provision, the tribunal would have done well to ask a fundamental question: What does the national treatment clause seek to protect US investors from? One answer is that the purpose of the clause is to protect the investor from unfair References(p. 279) competitive disadvantages and that the claimant in the Occidental case was not in competition with all other ‘local producers’. The claimant competed only against other oil companies, all of which had been treated similarly, since the VAT rebates had been denied to all. Applying the Occidental tribunal’s reasoning to the example given earlier in this section, one would conclude that, because the small farmer and the foreign-owned aluminium smelter are both ‘local producers’, the host government breached the national treatment standard by denying the smelter subsidized electricity.
The second step in the analysis is to determine whether the treatment of the aggrieved foreign investor differs from that accorded to local investors, and if so, in what way it differs. Most tribunals have concluded that discrimination may be either de jure or de facto. Thus, one needs to look not only at discrimination in the text and application of legal provisions but also treatment that, while not being discriminatory in law, nonetheless has a discriminatory impact. In SD Meyers v Canada,197 a NAFTA case, the tribunal pointed to two factors in particular that need to be evaluated in determining differential treatment: (1) whether the practical effect is to create a disproportionate benefit for nationals over non-nationals; and (2) whether on its face the contested measure appears to favour the host country’s nationals over non-nationals protected by the treaty.198 Arbitral tribunals have also generally held that in order to demonstrate discriminatory treatment an aggrieved investor need not show discriminatory intent on the part of the host country,199 nor that the host country’s discriminatory action was specifically due to the foreign investor’s nationality.200 On the other hand, the existence of a discriminatory intent without some differential impact is insufficient. As the tribunal stated in SD Meyers, ‘[t]he word “treatment” suggests that practical impact is required to produce a breach of Article 1101, not merely a motive or intent that is in violation of Chapter 11’.201
Tribunals will often not find a breach of the national treatment standard if the foreign investor and the compared national investors are not in ‘like circumstance’, ‘similar situations’, or if there is a justified policy reason for the differential References(p. 280) treatment. This requirement gives host country governments room to make regulations in the public interest. The tribunal in Pope & Talbot suggested the importance of considering the policy justifications in measures that have a discriminatory effect when it stated that ‘[d]ifferences in treatment will presumptively violate Article 1102(2) unless they have a reasonable nexus to national policies that (1) do not distinguish, on their face or de facto, between foreign-owned and domestic companies, and (2) do not otherwise unduly undermine the investment liberalizing objectives of NAFTA’.202 Thus, in the example given earlier in the section, even if a tribunal found that both the foreign-owned aluminium smelter and local small farmers were local producers, it might nevertheless hold that no breach of national treatment occurred. The reason is that the process of providing subsidized electricity to small farmers does not distinguish on its face between foreigners and nationals, is done for the justified purpose of supporting small-scale agriculture and raising the standard of living of farming families, and does not affect the basic goal of the treaty, which is to promote and protect investment.
The precise boundaries of justified public policy and ‘like circumstances’ are by no means clear and will no doubt be the subject of continuing litigation and debate in the years ahead.
Virtually all investment treaties contain a most-favoured-nation (MFN) provision whose purpose is to prevent host states from treating investors and investments of its treaty partners less favourably than investors from third countries. The provision’s aim is to assure non-discrimination among foreign investors. Countries that have been unwilling to grant national treatment in investment treaties out of a concern to protect domestic industries have been more willing to grant MFN treatment, which they view as less threatening to national enterprises and interests.
In some treaties, the MFN treatment commitment is limited to post-establishment investments and does not apply to the process of making investments. Thus, for example, the ECT avoids a firm commitment to investors regarding MFN treatment when making investments, but grants national treatment or MFN treatment, whichever is the more favourable, to contracting parties once their investments have been made. MFN treatment under the ECT covers the investments’ associated activities, including their management, maintenance, use, enjoyment, and disposal.203
As has been the case for centuries in international economic treaties, the purpose of the MFN clause in investment treaties is to assure equal treatment at the international level so that covered investors and investments receive treatment References(p. 281) no less favourable than that which the host country grants investors from any third country. Like provisions on national treatment, MFN clauses are formulated in different ways in different treaties. As a result, the scope of protection that the clause provides and the stipulated exceptions to it vary from treaty to treaty. For example, some treaties grant MFN treatment only to investments of a treaty partner, while others grant it to investors. Some may specify the particular matters to which MFN treatment applies, for example ‘to the establishment, acquisition, expansion, management, conduct and sale or other disposition of an investment’,204 while others may state generally that ‘[i]nvestments by nationals and companies of either Contracting State … shall not be subjected to treatment less favorable than that accorded to investments by nationals and companies of third states’.205 As a result of the wide variety of MFN treatment formulations found in investment treaties, persons interpreting them need to focus carefully on the particular language of the treaty in question and should not assume that the nature and scope of protection is uniform among treaties.
A host country may favour an investment or an investor from another country in one of two general ways: (1) by using its legislation, regulations, or administrative acts to grant those investments and/or investors a special benefit not generally granted to foreign investors or investments; and (2) by entering into treaties with third countries assuring their investors and/or investments special benefits or treatment. An example of the first way might be a national law that grants investors from a neighbouring country tax exemptions that are denied to investors from all other countries. An example of the latter way might be a country that makes a bilateral investment agreement promising national treatment to investors and investments from a treaty partner when all other treaties with third countries omit the promised treatment. To set limits on the effects of MFN clauses, most investment treaties contain stated exceptions as to matters, such as customs unions and free trade zones, to which the clause does not apply.
Most of the litigation surrounding MFN treatment clauses in investment treaties involves a situation in which an investor that is covered under a treaty from one country is seeking to take advantage of benefits that the host country has granted by treaty to an investor or investment from a third country. MFN provisions allow a country that was not able to negotiate a desired standard with a treaty partner to nonetheless attain that standard if the treaty partner has granted it to a third country in another treaty. Accordingly, one of the effects of the MFN clause is to increase a country’s bargaining power.206 It achieves this result by allowing the investor to import the standards of protection from other treaties References(p. 282) into the treaty applicable to its investment. For example, in the case of Bayindir v Pakistan,207 the claimant, a Turkish construction company, brought an ICSID case against Pakistan under the 1995 bilateral investment treaty between Turkey and Pakistan. That BIT provided that ‘[e]ach Party shall accord to these investments, once established, treatment no less favourable than that accorded in similar situations to investments of its investors or to investments of investors of any third country, whichever is the most favourable’.208 The Turkey–Pakistan BIT contained no provision specifically guaranteeing Turkish investors fair and equitable treatment; however, Pakistan had made investment treaties with various European countries explicitly promising such treatment. The Turkish claimant argued, and the tribunal eventually agreed, that by virtue of the MFN clause in the Turkey–Pakistan BIT Pakistan was obliged to treat the claimant in a fair and equitable manner.209
Similarly, in MTD Equity v Chile,210 Malaysian investors, who had been denied the zoning changes necessary to undertake a land development project, successfully argued that the MFN clause in the Malaysia–Chile BIT made the provisions in the Croatia–Chile BIT and the Denmark–Chile BIT applicable. Both of those BITs provided that ‘[w]hen a Contracting Party has admitted an investment in its territory, it shall grant the necessary permits in accordance with its laws and regulations’.211 The tribunal in MTD considered the incorporation of the protections of the Denmark and Croatia BITs into the Malaysia–Chile BIT as consistent with the treaty’s purpose, which is to protect investment and create conditions favourable to investments. Moreover, the fact that the Malaysia–Chile BIT specifically excluded certain matters from MFN protection, and that the protections provided in the Denmark and Croatia BITs were not among those excluded matters, also supported the applicability of the Malaysia–Chile MFN clause.212
While it is generally agreed that an appropriately drafted MFN clause will import into an investment treaty substantive protective standards, controversy exists as to whether the clause also extends to procedural rights, particularly those relating to dispute settlement in other treaties. The case of Maffezini v Spain213 first provoked this controversial issue. The claimant, an Argentine national who invested in an enterprise in Spain for the production and distribution of chemicals, initiated an ICSID arbitration against Spain under the Spain–Argentina BIT. That BIT required resort to local courts for a period of eighteen months before an investor could invoke international arbitration. Although Maffezini did References(p. 283) not have recourse to the Spanish courts as required by the treaty, he argued that he was not required to do so because the Spain–Chile BIT did not contain a similar eighteen-month requirement and, by virtue of the MFN clause in the Spain–Argentina BIT, he was entitled to avail himself of the lesser requirements in the Spain–Chile BIT.
Interpreting the broad MFN clause, which provided that ‘in all matters subject to this agreement treatment shall be no less favourable than that extended … to investors of a third country’, the ICSID tribunal concluded that Maffezini was entitled to avail himself of the lighter procedural burden included in the Spain–Chile BIT. Therefore, Maffezini did not have to pursue his claim for eighteen months in Spanish courts before requesting ICSID arbitration. Some subsequent cases followed this approach.214 On the other hand, some tribunals have refused to allow the claimants to import dispute resolution provisions from other treaties.215 The difference in the result in these cases can be explained largely by the fact that the MFN clauses in the latter cases were much narrower in scope than the MFN clause in the former cases.
1 In the ICSID case of Suez, Sociedad General de Aguas de Barcelona SA, and Vivendi Universal SA v The Argentine Republic, the tribunal defined ‘treatment’ as follows: ‘The word “treatment” is not defined in the treaty text. However, the ordinary meaning of that term within the context of investment includes the rights and privileges granted and the obligations and burdens imposed by a Contracting State on investments made by investors covered by the treaty.’ Suez, Sociedad General de Aguas de Barcelona SA, and Vivendi Universal SA v The Argentine Republic, ICSID Case No ARB/O3/19 (Decision on Jurisdiction) (3 August 2006) ¶ 55.
4 Treaty between the United States of America and the Oriental Republic of Uruguay Concerning the Encouragement and Reciprocal Protection of Investment (4 November 2005), Art 5(2)(b). See also 2012 US Model BIT, Art 5.2(b).
(1) Kapitalanlagen von Staatsangehoerigen oder Gesellschaften einer Vertragspartei geniessen im Hohheitsgebiet der abderen Vertragspartei vollen rechtlichen Schutz und volle rechtliche Sicherheit. Vertrag zwischen der Bundesrepublik Deutschland und der Argentinischen Republik über die Förderung und den gegenseitigen Schutz von Kapitalanlagen (9 April 1991).
(2) Cada Parte Contratante, una vez que haya admitido en su territorio inversiones de inver-sionistas de la otra Parte Contratante, concederá plena protección legal a tales inversiones y les acordará un tratamiento no menos favorable que el otorgado a las inversiones de sus propios inversionistas nacionales o de inversionistas de terceros Estados. Convenio entre el Gobierno de la Republica del Ecuador y el Gobierno de la Republic de El Salvador para la Promoción y Protección Reciprocas de Inversiones (16 May 1994).
8 Agreement between the Government of the People’s Republic of China and the Government of the State of Qatar Concerning the Encouragement and Reciprocal Protection of Investments (9 April 1999), Art 3.1.
13 See eg the bilateral treaty between Italy and Venezuela, stating that ‘citizens of each state should enjoy in the territory of the other “the fullest measure of protection and security of person and property, and should have in this respect the same rights and privileges accorded to nationals”’. Quoted in the Sambiaggio case, Italy–Venezuela Mixed Claims Commission, UN Reports of International Arbitral Awards, vol 10, p 512.
19 On the meaning of due diligence, tribunals and scholars have often referred to the statement of Professor AV Freeman in his lectures at the Hague Academy of International Law: ‘The “due diligence” is nothing more nor less than the reasonable measures of prevention which a well-administered government could be expected to exercise under similar circumstances.’ AV Freeman, ‘Responsibility of States for the Unlawful Acts of Their Armed Forces’ (1956) 88 Receuil des Cours 261. See also Asian Agricultural Products Ltd v Sri Lanka, ICSID Case No ARB/87/3 (Final Award) (27 June 1990) ¶ 170.
20 NAFTA, Art 1105, entitled ‘Minimum Standard of Treatment’, provides: ‘1. Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.’
22 Art 11(1), on the Treatment of Investments states: ‘Each member state shall accord to covered investments of investors of any other member state fair and equitable treatment and full protection and security.’ Art 11 (2) further provides: ‘For greater certainty … (b) full protection and security requires each Member State to take such measures as may be reasonably necessary to ensure the protection and security of covered investments.’
23 Asian Agricultural Products Ltd v Sri Lanka, ICSID Case No ARB/87/3 (Final Award) (27 June 1990). The Sri Lanka–United Kingdom Agreement on the Promotion and Protection of Investments (entered into force 18 December 1980) (1980) 19 ILM 886.
39 On this point, see Suez, Sociedad General de Aguas de Barcelona SA, and Vivendi Universal SA v The Argentine Republic, ICSID Case No ARB/03/19 and AWG Group Ltd v The Argentine Republic, UNCITRAL (Decision on Liability) (30 July 2010) ¶ 177.
the Respondent has breached its obligations to accord fair and equitable treatment under Article II(3)(a) of the Treaty. In the context of this finding the question of whether in addition there has been a breach of full protection and security under this Article becomes moot as a treatment that is not fair and equitable automatically entails an absence of full protection and security of the investment.
ibid ¶ 187.
52 Suez, Sociedad General de Aguas de Barcelona SA, and Vivendi Universal SA v The Argentine Republic, ICSID Case No ARB/03/19 and AWG Group Ltd v The Argentine Republic, UNCITRAL (Decision on Liability) (30 July 2010) ¶ 179.
53 See eg Unglaube v Republic of Costa Rica, ICSID Case No ARB/08/1 and ARB/09/20 (Award) (16 May 2012) ¶ 281 (rejecting the standard expressed by the tribunal in Saluka); Total SA v Argentine Republic, ICSID Case No ARB/04/01 (Decision on Liability) (27 December 2010) ¶ 343; Frontier Petroleum Services Ltd v Czech Republic, UNCITRAL (Final Award) (12 November 2010) ¶ 263; Mohammad Ammar Al-Bahloul v Republic of Tajikistan, SCC Case No V064/2008 (Partial Award on Jurisdiction and Liability) (2 September 2009) ¶ 246.
55 Freeman (n 19 above).
57 Dolzer and Schreuer (n 9 above) 119.
Foreign capital shall receive equitable treatment. The States therefore agree not to take unjustified, unreasonable or discriminatory measures that would impair the legally acquired rights or interests of nationals of other countries in the enterprises, capital, skills, arts or technology they have supplied.
62 This draft, prepared under the leadership of Herman Abs (Director-General of the Deutsche Bank) and Lord Shawcross (the UK Attorney-General), stipulated in Art 1 that ‘each party shall at all times ensure fair and equitable treatment to the property of the nationals of the other Parties’. H Abs and L Shawcross, ‘The Proposed Convention to Protect Foreign Investment: A Round Table: Comment on the Draft by the Authors’ (1960) 9 J Pub L 119, 119–24.
64 Wilson (n 11 above) 101, 104.
65 R Wilson, United States Commercial Treaties and International Law (Hauser Press, 1960) 120. The US FCN treaties with Belgium and Luxembourg, France, Greece, Ireland, Israel, Nicaragua, and Pakistan contained the express assurance that foreign persons, properties, enterprises, and other interests would receive ‘equitable’ treatment, while other US FCN treaties—including those with Ethiopia, the Federal Republic of Germany, Oman, and the Netherlands—contemplated ‘fair and equitable’ treatment for a similar set of items in the foreign investment process.
69 ibid 59.
75 C Yannaca-Small, Fair and Equitable Treatment Standard in International Investment Law (OECD, 2005) 87. See eg Agreement Between the Government of Canada and the Government of the People’s Republic of China for the Promotion and Reciprocal Protection of Investments (9 September 2012), Art 4.2; Agreement between the Government of Canada and the Government of Romania for the Promotion and Reciprocal Protection of Investments (8 May 2009), Art II.2(b).
90 ibid ¶¶ 48–69. See also P Dumberry, ‘The Quest to Define “Fair and Equitable Treatment” for Investors under International Law—the Case of the NAFTA Chapter 11 Pope & Talbot Awards’ (2004) 3 JWIT 4658.
99 Dolzer and Schreuer (n 9 above) 123.
The purpose of the third sentence is to set a floor, not a ceiling, in order to avoid a possible interpretation of these standards below what is required by international law. While this conclusion results from the textual analysis of this provision, the Tribunal does not consider that it is of material significance for its application of the standard of fair and equitable treatment to the facts of the case. As it will be explained below, the minimum requirement to satisfy this standard has evolved and the Tribunal considers that its content is substantially similar whether the terms are interpreted in their ordinary meaning, as required by the Vienna Convention, or in accordance with customary international law.
ibid ¶ 361.
102 Vasciannie (n 67 above) 100, 104, 145.
109 De Smith, Woolf, and Jowell, Judicial Review of Administrative Action (Sweet & Maxwell, 1995) 867. See eg Cases C-104/89 and 307/90, Mulder v Council and Commission  ECR 1–3061; Case C-152/88, Sofrimport Sour v Commission  ECR 1–2477; and Case 74/74, CNTA SA v Commission  ECR 533.
113 F Vicuna, ‘Regulatory Authority and Legitimate Expectations: Balancing the Rights of the State and the Individual under International Law in a Global Society’ (2003) 5 International Law Forum Du Droit International 188, 194.
130 Dolzer (n 56 above) 104.
131 Ch 11 discusses the umbrella clause.
132 Schreuer (n 80 above) 360, 379.
135 Mondev International Ltd v United States of America, ICSID Case No ARB(AF)/99/2 (Award) (11 October 2002) ¶ 134. See also SGS Société Générale de Surveillance SA v Republic of the Philippines, ICSID Case No ARB/02/6 (Decision on Jurisdiction) (29 January 2004).
140 Vasciannie (n 67 above) 100, 133.
142 ibid 73–7. In his dissent, Judge Schwebel concurred in the Chamber’s concept of what constitutes an arbitrary act in international law but interpreted Article I of the Supplementary Agreement of 1951 as creating an obligation of result (as opposed to an obligation of conduct). He stated that ‘failure to correct an arbitrary measure constitutes a violation of the FCN treaty regardless of the existence of local remedies’.
148 The 1994 BIT, Art II(2)(b) provides: ‘Neither Party shall in any way impair by arbitrary or discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion, or disposal of investments.’
150 Vandevelde (n 98 above) 77.
154 Crawford (n 18 above) 619.
160 See eg Malaysia–Australia Free Trade Agreement (22 May 2012), Art 12.7(2); Agreement for the Promotion and Protection of Investments between the Republic of Colombia and the Republic of India (10 November 2009), Art 3.4(a); Bilateral Agreement for the Promotion and Protection of Investments between the Government of the United Kingdom of Great Britain and Northern Ireland and the Republic of Colombia (17 March 2010), Art II.4(b); Agreement between the Government of Canada and the Government of Romania for the Promotion and Reciprocal Protection of Investments (8 May 2009), Annex D.
in the same way as one can speak of creeping expropriation, there can also be creeping violations of the FET standard … A creeping violation of the FET standard could thus be described as a process extending over time and comprising a succession or an accumulation of measures which, taken separately, would not breach that standard but, when taken together, do lead to such a result.
El Paso Energy International Co v Argentine Republic, ICSID Case No ARB/03/15 (Award) (31 October 2011) ¶¶ 518–519.a.
168 Treaty between the United States of America and the Oriental Republic of Uruguay Concerning the Encouragement and Reciprocal Protection of Investment (4 November 2005), Annex A. See also 2012 US Model BIT, Annex A.
169 For a discussion on transparency provisions see Ch 13, section 13.5.
170 Agreement among the Government of Japan, the Government of the Republic of Korea and the Government of the People’s Republic of China for the Promotion, Facilitation and Protection of Investment (13 May 2012), Art 10.
173 P Muchlinski, ‘“Caveat Investor?”: The Relevance of the Conduct of the Investor under the Fair and Equitable Treatment Standard’ in F Ortino et al (eds), Investment Treaty Law, Current Issues II (British Institute of International and Comparative Law, 2007) 209–10.
175 ibid Art 3(3). (‘Le traitement et la protection definis aux paragraphes 1 et 2 seront au moins egaux a ceux dont jouissent les investisseurs d’un Etat tiers et ne seront, en aucun cas, moins favorables que ceux reconnus par le droit international.’)
178 See eg Treaty between the United States of America and Oriental Republic of Uruguay Concerning the Encouragement and Reciprocal Protection of Investment (11 April 2005), Art 5(1) and (3); Treaty Between the Government of the United States of America and the Government of the Republic of Rwanda (19 February 2008), Art 5(1) and (3).
179 eg Agreement between Canada and the Slovak Republic for the Promotion and Protection of Investments (20 July 2010, terminating and replacing the 1997 BIT), Art III 1(a); Agreement Between the Government of Canada and the Government of the Republic of Latvia for the Promotion and Protection of Investments (5 May 2009, terminating and replacing the 1995 BIT), Art II 2(a); Agreement Between Canada and the Czech Republic for the Promotion and Protection of Investments (6 May 2009, terminating and replacing the 1990 BIT) Art III(1)(a).
183 It is interesting to note that the 2012 United States Model BIT, which unlike its predecessors omits a general prohibition of arbitrary or discriminatory measures while prohibiting specific types of measures, states that ‘“measure” includes any law, regulation, procedure, requirement, or practice’ (Art 1).
191 Dolzer and Schreuer (n 9 above) 179.
199 ibid ¶ 254, stating: ‘Intent is important, but protectionist intent is not necessarily decisive on its own. The existence of an intent to favour nationals over non-nationals would not give rise to a breach of Chapter 1102 of the NAFTA if the measure in question were to produce no adverse effect on the non-national complainant.’
204 Agreement between the Government of the Republic of Korea and the Government of His Majesty the Sultan and Yang Di-Pertuan of Brunei Darussalam Concerning the Encouragement and Reciprocal Protection of Investments (14 November 2000), Art 3.2.
209 Bayindir Insaat Turizm Ticaret VeSanayi (n 207 above) ¶ 231.
214 eg Siemens v Argentina, ICSID Case No ARB/02/8 (Decision on Jurisdiction) (3 August 2004); Suez, Sociedad General de Aguas de Barcelona SA, and InterAguas ServiciosIntegrales del Agua SA v The Argentine Republic, ICSID Case No ARB/03/17 (Decision on Jurisdiction) (16 May 2006); Suez, Sociedad General de Aguas de Barcelona SA and Vivendi Universal SA v Argentine Republic, ICSID Case No ARB/03/19 (Decision on Jurisdiction) (3 August 2006); RosInvestCo UK Ltd v Russian Federation, SCC Case No Abr. V 079/2005 (Award on Jurisdiction) (5 October 2007) ¶¶ 132–133; HOCHTIEF Aktiengesellschaft v Argentine Republic, ICSID Case No ARB/07/31 (Decision on Jurisdiction) (24 October 2011) ¶ 75; Teinver SA, Transportes de Cercanías SA and Autobuses Urbanos del Sur SA v Argentine Republic, ICSID Case No ARB/09/1 (Decision on Jurisdiction) (21 December 2012) ¶ 186; Garanti Koza LLP v Turkmenistan, ICSID Case No ARB/11/20 (Decision on the Objection to Jurisdiction for Lack of Consent) (3 July 2013) ¶ 96.
215 eg Salini Costruttori SpA and Italstrade SpA v Jordan, ICSID Case No ARB/02/13 (Decision on Jurisdiction) (9 November 2004) ¶¶ 118–119; Plama Consortium Ltd v Bulgaria, ICSID Case No ARB/03/24 (Decision on Jurisdiction) (8 February 2005) ¶ 184; Telenor Mobile Communications AS v Republic of Hungary, ICSID Case No ARB/04/15 (Award) (13 September 2006) ¶¶ 91–95; Wintershall Aktiengesellschaft v Argentine Republic, ICSID Case No ARB/04/14 (Award) (8 December 2008) ¶ 167; ICS Inspection and Control Services Ltd (United Kingdom) v Argentine Republic, PCA Case No 2010-9 (Award on Jurisdiction) (10 February 2012) ¶ 318; Kilic Insaat Ithalat Ihracat Sanayi ve Ticaret Anonim Sirketi v Turkmenistan, ICSID Case No ARB/10/1 (Award) (2 July 2013) ¶ 7.9.1.