RIGOROSUM THESIS. Law Faculty Masaryk University. Public International Law. Department of International and European Law

Transcription

1 Law Faculty Masaryk University Public International Law Department of International and European Law RIGOROSUM THESIS Fair and Equitable Treatment Standard in International Investment Law Mgr. Iveta Štefánková Academic Year: 2013/2014

2 Declaration of Authorship The author hereby declares that she compiled this rigorosum thesis titled Fair and Equitable Treatment Standard in International Investment Law independently, using only the listed resources and literature quoted in footnotes and bibliography. The author grants to Masaryk University permission to reproduce and to distribute copies of this thesis document in whole or in part. Prague, June 2014 Iveta Štefánková ii

3 Table of Contents Abbreviations... v 1. Introduction Unfolding of the Fair and Equitable Treatment Standard Fair and equitable treatment and customary international law Independent character of fair and equitable treatment standard Fair and equitable treatment standard as a part of the IMS required by customary international law Relationship of the FET standard to customary international law in the context of Article 1105 (1) NAFTA The interpretation of fair and equitable treatment standard Relationship with other treaty standards The meaning of fair and equitable treatment standard Stability and the protection of legitimate expectations of the investor What constitutes legitimate expectations? At what time must legitimate expectations exist? In what manner are legitimate expectations created? The Protection of Legitimate Expectations Transparency Due Process Good Faith Freedom from Coercion and Harassment Compliance with Contractual Obligations Discrimination The Investor s Role within the FET standard The Duty to Refrain from Unconscionable Conduct A Duty to Invest with Adequate Knowledge of Risk A Duty to Conduct Business in a Reasonable Manner Reparation for Violation of the Fair and Equitable Treatment Standard The Calculation of Monetary Reparation Conclusion Summary Bibliography Books Articles iii

4 10.3. Awards International Investment Treaties Official Documents Legislation iv

5 Abbreviations BITs ECT FET FCN ICJ ICSID IMS MAI MFN MIGA NAFTA OECD PCIJ SCC UNCTAD bilateral investment treaties Energy Charter Treaty Fair and Equitable Treatment Treaties on Friendship, Commerce and Navigation International Court of Justice International Centre for Settlement of Investment Disputes International Minimum Standard Draft Multilateral Agreement on Investment most-favoured-nation Convention Establishing the Multilateral Investment Guarantee Agency North American Free Trade Agreement Organisation for Economic Co-operation and Development Permanent Court of International Justice Stockholm Chamber of Commerce United Nations Conference on Trade and Development v

6 1. Introduction Throughout the last decades of its development, the international investment law has been concerned with the interpretation and the application of generally formulated standards of treatment of foreign investments. The assurance of fair and equitable treatment (FET) has proven to be one of the most elusive standards of protection for foreign investors. The fair and equitable treatment standard clause is contained in the majority of the bilateral investment treaties (BITs) and other international investment treaties. Today, this concept is one of the most invoked standards in investment litigation. Thus, a body of jurisprudence giving content to the meaning of FET has gradually emerged. Starting in the year 2000 with the Maffezini decision, a first generation of judicial decisions tried to define the FET standard as no previous case law on the meaning of fair and equitable existed in the field of international investment protection. The content of the FET treatment standard may not necessarily be the same in all of the investment treaties in which it is featured. Despite the almost ubiquitous presence of this clause in treaties protecting foreign investments, the wording of the standard is not uniformed and its proper interpretation may be further influenced by the context, negotiating history or the other indications of parties' intent. Moreover, the arbitral tribunals have applied the FET standard to a broad range of circumstances. The obligation to provide fair and equitable treatment required of host states has been defined differently by tribunals and academics alike. Nevertheless, the fair and equitable treatment requirement is considered to be an absolute, non-contingent standard of treatment. Unlike the applicable standards under national treatment or most-favored nation clauses, the determination of what is fair and equitable in a given context does not reckon with state's national laws or with the external facts. The independent character of FET standard signifies that the actions and/or omissions of the host state and investor must be adjudicated in light of meaning of the clause under the particular treaty that is to be applied. The concept of fair and equitable treatment has been perennially measured against the international minimum standard for the treatment of aliens, as contained in customary international law. The question whether the FET standard is synonymous, or part of, the IMS

7 or represents a self-contained standard that is additional to general international law was surrounded by one of the most heated debates. This issue was prominently discussed in the context of the interpretation of Article 1105(1) NAFTA. After early arbitral decisions of NAFTA tribunals affirming the additive interpretation of the FET standard, a binding interpretation regarding Article 1105(1) was issued by the three states parties under which the concept of fair and equitable treatment is equivalent to the minimum standard of treatment under customary international law and does not require treatment in addition to or beyond that. In contrast, tribunals operating outside the NAFTA realm have tended to interpret the pertinent treaty provisions on the basis of their respective wording. The standard of fair and equitable treatment commonly found in international investment treaties is relatively vague. The lack of definition ascribed to the fair and equitable treatment clause has enabled arbitral tribunals to delineate the scope of the notion often depending on the specific circumstances of the case at issue. Accordingly, tribunals have identified host state's cardinal obligations to maintain stability, transparency, fulfilment of investor's legitimate expectations, due process and good faith. Investors' legitimate and reasonable expectations with respect to the investment they have made is now considered as one of the major component of the FET standard. Despite the amorphous character of fair and equitable treatment standard, it still represents a legal concept and tribunals adjudicating investment disputes are obliged to address its alleged breach by the host state. The fair and equitable treatment standard has been discussed primarily in the context of determining the obligation of host states to provide certain level of protection for the foreign investors. However, the growing sympathy of international arbitral tribunals for governmental regulatory measures in public interest indicates that the concept of fair and equitable treatment needs to establish the balance between the protection of the investment and the state s right to regulate its domestic affairs. In this process, the investor s conduct might play a central role in the evolution of the standard. According to the international law on state responsibility, the breach of the FET standard constitutes an illicit act for which a full reparation is required. The remedy may be provided in the form of satisfaction, restitution or compensation. It is the monetary compensation that is generally awarded to investors when their seeking their protection under the fair and equitable treatment standard. 2

8 The main objective of my thesis is to present a better insight into the fair and equitable treatment standard by concise analysis of the origin of the clause and its relationship with the international minimum standard. The core of the thesis is the definition of the FET standard with focus on the protection of legitimate and reasonable expectations. The next part concentrates on the establishment of the balance between regulatory power of the states and the investment protection with the consideration of the investor s conduct. Finally, the thesis closes with the analysis of the issue of remedy for the breach of the fair and equitable treatment standard. 3

9 2. Unfolding of the Fair and Equitable Treatment Standard The concept of fair and equitable treatment has appeared in international agreements long before its widespread appearance in the case law. The reference to the fair and equitable treatment standard is contained predominantly in multilateral or bilateral investment treaties but can be found in drafts of international documents as well as non-binding documents. Authors addressing the origin of the fair and equitable treatment standard readily cite the provisions of the 1948 Havana Charter for the abortive International Trade Organization. 1 Article 11(2) thereof provided the Organization with the possibility to make recommendations for and promote bilateral or multilateral agreements on measures designed to assure just and equitable treatment for the enterprise, skills, capital, arts and technology brought from one Member country to another. 2 However, the history of the concept of equitable treatment under international economic law dates back at least to the 1919 League of Nations Covenant. In accordance with Article 23(e) the member states committed themselves to secure and maintain equitable treatment for the commerce of all Members of the League. 3 Only after two months after the signature of the final text of the Havana Charter Treaty, the Economic Agreement of Bogotá echoed the requirement of equitable treatment concerning the foreign capital. The chapter on private investments provided in Article 22 that: 1 See e.g LG&E ENERGY CORP., LG&E CAPITAL CORP., LG&E INTERNATIONAL INC. v. Argentine Republic, Argentina-United States BIT, ICSID Case No. ARB/02/1, Decision on Liability, October 3, 2006, para. 123 [visited ]. Available at UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT. Fair and Equitable Treatment, Series on Issues in International Investment Agreements. New York and Geneva: United Nations, 1999, p.3 ISBN ; DOLZER, Rudolf. Fair and Equitable Treatment: A Key Standard in Investment Treaties. International Lawyer [online]. 2005, Vol. 39, p , footnote. 12 [visited ]. Available at SCHREUER, Christoph. Fair and Equitable Treatment in Arbitral Practice. Journal of World Investment & Trade [online]. 2005, Vol. 6, No. 3, p , at 357 [visited ]. Available at 2 UNITED NATIONS CONFERENCE ON TRADE AND EMPLOYMENT held at Cuba, Havana. Final Act and Related Documents [online]. Lake Success, New York: Interim Commission for the International Trade Organisation, 1948, Article 11(2) [visited ]. Available at 3 KILL, Theodor. Don t Cross the Streams: Past and Present Overstatement of Customary International Law in connection with Conventional Fair and Equitable Treatment Obligations. Michigan Law Review [online]. 2008, Vol. 106, No. 5, p , at 868 [visited ]. Available at 4

10 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, art or technology they have supplied. 4 At the bilateral level, the term fair and equitable treatment started to appear in the US treaties on Friendship, Commerce and Navigation (FCN) in the period following the adoption of the Havana Charter Treaty. Some of the US FCN treaties guaranteed equitable treatment for foreign investments, while others provided for fair and equitable treatment. For instance, the FCN treaty with Federal Republic of Germany held that: Each Party shall at all times accord fair and equitable treatment to the nationals companies of the other Party and to their property, enterprises and other interests. 5 The 1959 Abs-Schawcross Draft Convention on Investment Abroad stipulated in its Article 1 as follows: Each Party shall at all times ensure fair and equitable treatment to the property of the nationals of the other Parties. Such property shall be accorded the most constant protection and security within the territories of the other Parties and the management, use, and enjoyment thereof shall not in any way be impaired by unreasonable and discriminatory measures. 6 Article 1 of the 1967 OECD Draft Convention on the Promotion of Foreign Property took the similar view by stating that: (a) Each Party shall at all times ensure fair and equitable treatment to the property of the nationals of the other Parties. It shall accord within its territory the most constant protection and security to such property and shall not in any way impair the management, maintenance, use, enjoyment or disposal thereof by unreasonable or discriminatory measures. 7 4 NINTH INTERNATIONAL CONFERENCE OF AMERICAN STATES. Economic Agreement of Bogotá., signed on 2 May 1948, Article 22 [visited ]. Available at 5 Treaty of Friendship, Commerce and Navigation between the United States of America and the Federal Republic of Germany, signed on 29 October 1954, entered into force on 14 July, 1956, Article 1 Section 1[visited ]. Available at 6 ABS AND SHAWCROSS. The Proposed Convention to Protect Foreign Investment: A Round Table: Comment on the Draft Convention by its Author. Journal of Public Law [online]. 1960, Vol. 9, p , Article 1 [visited ]. Available at 7 OECD. Draft Convention on the Protection of Foreign Property, 1967, Article 1 [visited ]. Available at 5

11 The Draft Convention, although never opened for signature, represented the collective view and dominant trend of OECD countries on investment issues... 8 The 1983 version of the draft for the United Nations Code of Conduct of Transnational Corporation featured the following treatment provision in Article 48: Transnational corporations should receive [fair and] equitable [and non-discriminatory] treatment [under] [in accordance with] the laws, regulations and administrative practices of the countries in which they operate [as well as intergovernmental obligations to which the Governments of these countries have freely subscribed] [consistent with their international obligations] [consistent with international law]. 9 In 1992 World Bank issued the non-binding Guidelines on the Treatment of Foreign Direct Investments which were considered as an important step in the evolution of generally acceptable international standards that were already introduced through the network of BITs. Section III of the Guidelines addressed the treatment of foreign investments as follows: Each State will extend to investments established in its territory by nationals of any other State fair and equitable treatment according to the standards recommended in these Guidelines. 10 The OECD Draft Negotiating Text for a Multilateral Agreement on Investment (MAI) of 1998 was intended to provide a broad multilateral framework for international investment with inter alia the fair and equitable treatment standard with the standard of constant protection and security. At the same time, international law was preserved as a residual standard. 11 Each Contracting Party shall accord to investments in its territory of investors of another Contracting Party fair and equitable treatment and full and constant protection and security. In no case shall a Contracting Party accord treatment less favourable than that required by international law OECD. Fair and Equitable Treatment Standard in International Investment Law. OECD Working Papers on International Investment [online]. OECD Publishing, 2004/3, p. 4 [visited ]. Available at 9 The United Nations Code of Conduct on Transnational Corporations. Current Studies. Series A. New York: United Nations. United Nations publication sales No. E.86.II.A.15, Annex I, p , para. 48 [visited ]. Available at 10 WORLD BANK. Guidelines on the Treatment of Foreign Direct Investment, 1992, Article III on Treatment Section 2 [visited ]. Available at 11 SCHREUER. Fair and Equitable Treatment in Arbitral Practice (n 1), p OECD NEGOTIATIONG GROUP ON THE MAI. The Multilateral Agreement on Investment. Draft consolidated text, April 22, 1998, p. 56 [visited ]. Available at 6

12 The importance of maintaining the principle of fair and equitable treatments is stressed out in the 1985 Convention Establishing the Multilateral Investment Agency (MIGA Convention) under which the Agency issues guarantees against non-commercial risks in respect of foreign investments in host state area. The availability of fair and equitable treatment for the respective investment made represents a precondition for providing guarantee. Article 12 of the MIGA Convention as amended in 2010 states as follows: (d) In guaranteeing an investment, the Agency shall satisfy itself as to: (iv) the investment conditions in the host country, including the availability of fair and equitable treatment and legal protection for the investment. 13 The North American Free Trade Agreement (NAFTA) of 1992 contains the requirement of fair and equitable treatment in its Article concerning the Minimum standard of treatment: 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. This provision has been repeatedly addressed by NAFTA tribunals especially in the context of determining the relationship between the FET standard and customary international law. The concept of fair and equitable treatment has also found entry into other regional treaties on promotion of investments. The 1987 ASEAN Treaty for the Promotion and Protection of Investments says in its Article IV on treatment that: 13 Convention establishing the Multilateral Investment Guarantee Agency, signed on 11 October 1985, entered into force on 12 April 1988 [visited ]. Available at US/finance/InvestmentTaxAgreements/Documents/Multilateral%20Investments%20related%20Agreements/MI GA%20convention.PDF 14 The North American Free Trade Agreement (NAFTA), signed on 17 December 1992, entered into force on 1 January 1994 [visited ]. Available at 7

13 2. All investments made by investors of any other Contracting Party shall enjoy fair and equitable treatment in the territory of any other Contracting Party. This treatment shall be no less favourable than that granted to investor of the most-favoured-nation. 15 The 1994 Colonia Protocol on Reciprocal Promotion and Protection of Investments concluded between MERCOSUR countries guarantees the fair and equitable treatment for investors from member states at all times. 16 The FET for investors from non-member countries is granted in non-mercosur countries protocol. 17 The Energy Charter Treaty (ECT) of 1994 in its Article 10 on the promotion, protection and treatment of foreign investments provides for fair and equitable treatment among other protection standards of international law: (1) Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment. 18 The obligation to accord fair and equitable treatment is also present in many bilateral investment treaties. First mention of the FET standard can be found in Switzerland Tunisia bilateral investment treaty from However, the requirement of fair and equitable treatment is not provided in all of the BITs as is the practice of certain Asian countries (e.g. some treaties signed by Pakistan, Saudi Arabia and Singapore). 20 For instance, in Czech bilateral investment practice can be identified treaties lacking the pertinent provision (Czech Germany BIT of ) and treaties including it as is the case of Czech Netherlands BIT of 15 ASSOCIATION OF SOUTHEAST ASIAN NATIONS. Treaty for the Promotion and Protection of Investments, signed on 15 December 1987, entered into force on 2 August 1988 [visited ]. Available at 16 MERCOSUR. The Colonia Protocol in Reciprocal Promotion and Protection of Investments, signed on 17 January 1994, Article 3(1) [visited ]. Available online at 17 MERCOSUR. The Protocol of Buenos Aires for the Promotion and Reciprocal Protection of Investments coming from non MERCOSUR State Parties, signed on 5 August 1994, Article 2(C)(1) [visited ]. Available at 18 Energy Charter Treaty, signed in December 1994, entered into force in April 1998 [visited ]. Available at 19 Treaty between the Confederation of Switzerland and the Republic of Tunisia concerning the Protection and the Encouragement of Investments, signed in December 1994, entered into force in April 1998, Article 1 [visited ]. Available in French at 20 OECD. Fair and Equitable Treatment Standard in International Investment Law (n 8), p Treaty between the Czech and Slovak Federative Republic and German Federative Republic on the Promotion and the Reciprocal Protection of Investments, signed on 2 October, 1990 and entered into force on 2 August, 8

14 1992 in which the importance of the FET standard was mention in the preamble and set out in the Article 3: (1) Each Contracting Party shall ensure fair and equitable treatment to the 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. 22 Even if the BIT does not refer to the FET, the investor might still invoke the protection under the standard through the most-favoured-nation clause that requires the host state to render the same level of treatment that the state determined for third parties. In this way, the investor may extend its benefits providing the host state entered into international investment treaty that grants the fair and equitable treatment [visited ]. Available in Czech at 22 Agreement on Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic, signed on 29 April 1991, entered into force on 1 October, 1992 [visited ]. Available at 9

15 3. Fair and equitable treatment and customary international law Fair and equitable treatment and its relations to the minimum standard of international customary law has been the subject of many discussions without a clear denouement. A number of commentators expressed their view that the fair and equitable treatment standard represents an autonomous self-contained treaty standard that is additional to general international law. While others opine that the FET standard only reflects the international minimum standard. This duality adds to the existing confusion surrounding the FET standard Independent character of fair and equitable treatment standard The cornerstone of the additive approach to the concept of FET seems to lie in the matter of textual interpretation. [I]t seems implausible that a treaty would refer to a well-known concept such as the minimum standard of treatment in customary international law by using the expression fair and equitable treatment. 24 Significant proponent of the independent character of FET standard is F. A. Mann who stated in his article about British BITs that: It is submitted that nothing is gained by introducing the conception of a minimum standard and, more than this, it is positively misleading to introduce it. 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. 25 Similarly, Dolzer and Stevens, expressed that [T]he fact that parties to BITs have considered it necessary to stipulate this standard as an express obligation rather than rely on a reference to international law and thereby invoke a relatively vague 23 TUDOR, Ioana. The Fair and Equitable Treatment Standard in the International Law of Foreign Investment. 1 st ed. New York: Oxford University Press, 2008, p. 56 ISBN DOLZER, Rudolf; SCHREUR, Christoph. Principles of International Investment Law. 2 nd ed. Oxford University Press, 2012, p. 134 ISBN MANN, F.A. British Treaties for the Promotion and Protection of Investments. In: British Yearbook of International Law, Vol. 52, 1981, p , at 244 ISBN

16 concept such as the minimum standard is probably evidence of a self-contained standard. Further, some treaties refer to international law in addition to the fair and equitable treatment, thus appearing to reaffirm that international law standards are consistent with, but complementary to, the provision of the BIT. 26 The UNCTAD study on fair and equitable treatment called attention to another fundamental difficulty concerning attempts to equate the two standard. While the international minimum standard is strongly supported among developed countries, developing countries have traditionally held reservations as to whether the IMS is part of customary international law. 27 Bearing this in mind, it is unlikely to assume that states have actually accepted the fact that the fair and equitable treatment incorporated in investment treaties does represent the requirement of the IMS without a considerable debate. The Secretariat study further support the view by stating that: If States and investors believe that the fair and equitable standard is entirely interchangeable with the international minimum standard, they could indicate this clearly in their investment instruments; but most investment instruments do not make an explicit link between the two standards. Therefore, it cannot readily be argued that most States and investors believe fair and equitable treatment is implicitly the same as the international minimum standard. 28 After assessment of various conclusions on the relationship between fair and equitable treatment and international minimum standard the study deduced that: [F]air and equitable treatment is not being synonymous with the international minimum standard. Both standards may overlap significantly with respect to issues such as arbitrary treatment, discrimination and unreasonableness, but 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. Where the fair and equitable standard is invoked, the central issue remains simply whether the actions in question are in all the circumstances fair and equitable or unfair and inequitable. 29 The above mentioned point is also supported by Vasciannie who accented that: 26 DOLZER, Rudolf; STEVENS, Margrete. Bilateral Investment Treaties. 1 st ed. Martinus Nijhoff Publishers, 1995, p. 60 ISBN UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT. Fair and Equitable Treatment, Series on Issues in International Investment Agreements (n 1), p Ibid. 29 Ibid, p

17 [B]earing in mind that the international minimum standard has itself been an issue of controversy between developed and developing States for a considerable period, it is unlikely that a majority of States would have accepted the idea that this standard is fully reflected in the fair and equitable standard without clear discussion. 30 In the practice of arbitral tribunals, an expansive interpretation of the provision dealing with fair and equitable treatment was given in the NAFTA case of Pope & Talbot. The tribunal recognised that the language of Article 1105 suggests that those elements are included in the requirements of international law 31. Nonetheless, the tribunal admitted also another form of interpretation of the requirement of fair and equitable treatment. According to the tribunal: Another possible interpretation of the presence of the fairness elements in Article 1105 is that they are additive to the requirements of international law. That is, investor under NAFTA are entitled to the international law minimum, plus the fairness elements. It is true that the language of Article 1105 suggests otherwise, since it states that the fairness elements are included within international law. 32 The issue was decided as follows: [T]he Tribunal interprets Article 1105 to require that covered investors and investments receive the benefits of the fairness elements under ordinary standards applied in the NAFTA countries, without any threshold limitation that the conduct complained of be egregious, outrageous or shocking or otherwise extraordinary. 33 However, there is also authority leaning to the opposite direction Fair and equitable treatment standard as a part of the IMS required by customary international law The international minimum standard represents an external standard of treatment of foreigners that must be granted by states irrespective of their national legislation. The failure to conform to the IMS constitutes the violation of the norm of international law and thus gives rise to international responsibility of the violating state. Fair and equitable has been identified 30 VASCIANNIE, S. Fair and Equitable Treatment Standard in International Investment Law and Practice. In: British Yearbook of International Law. 1999, Vol. 70, p , at 144 ISBN Pope & Talbot Inc v The Government of Canada, NAFTA, Award on the Merits of Phase 2, April 10, 2001, para. 109 [visited ]. Available at 32 Ibid, para Ibid, para

18 as one of the elements of the minimum standard of treatment of foreigner and of their property, required by international law. 34 The landmark definition of the IMS was rendered in 1926 by the General Claims Commission established by the United States and Mexico. The award in the Neer v. United Mexican States case stated as follows: [T]he propriety of governmental acts should be put to the test of international standards [T]he treatment of an alien, in order to constitute an international delinquency, should amount to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognise insufficiency. 35 The evidence supporting the view that the FET standard is equivalent with the IMS as a part of customary international law can be found in international documents, especially within the NAFTA. The 1967 OECD Draft Convention on the Protection of Foreign Property refers to the obligation of states to accord the fair and equitable standard of treatment. In the Notes and Comments to the relevant article, the Drafting Committee stated that the FET standard, commonly granted in bilateral investment treaties, indicates the standard set by international law: 4. (a) The phrase fair and equitable treatment, customary in relevant bilateral agreements, indicates the standard set by international law for the treatment due by each State with regard to the property of foreign nationals. The standard requires that protection afforded under the Convention shall be that generally accorded by the Party concerned to its own nationals, but, being set by international law, the standard may be more exacting where rules of national law or national administrative practices fall short of the requirements of international law. The standard required conforms in effect to the minimum standard which forms part of customary international law. 36 The 2004 Canadian Model BIT contains similar language and identifies FET standard as a reflection of customary international law: 34 OECD. Fair and Equitable Treatment Standard in International Investment Law (no 8), p L. F. H. Neer and Pauline Neer (U.S.A.) v. United Mexican States, Award, October 15, 1926, para. 4 [visited ]. Available at 36 OECD. Fair and Equitable Treatment Standard in International Investment Law (no 8), p. 9 13

19 Minimum Standard of Treatment 1. Each Party shall accord to covered investments treatment in accordance with the customary international law minimum standard of treatment of aliens, including fair and equitable treatment and full protection and security. 2. The concepts of fair and equitable treatment and full protection and security in paragraph 1 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 this Agreement, or of a separate international agreement, does not establish that there has been a breach of this Article. 37 The US Model BIT of 2012 goes even further and tries to define the content of the customary international minimum standard of treatment of aliens in its Article 5 in accordance with Annex A: Article 5: Minimum Standard of Treatment 1. Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security. 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 the standard, and do not create substantive rights. The obligation in paragraph 1 to provide: (a) fair and equitable treatment includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world; and (b) full protection and security requires each Party to provide the level of police protection required under customary international law. Annex A 37 Canada's Model Foreign Investment Promotion and Protection Agreement (FIPA), 2004 [visited ]. Available at 14

20 Customary International Law The Parties confirm their shared understanding that customary international law generally and as specifically referenced in Article 5 [Minimum Standard of Treatment] and Annex B [Expropriation] results from a general and consistent practice of States that they follow from a sense of legal obligation. With regard to Article 5 [Minimum Standard of Treatment], the customary international law minimum standard of treatment of aliens refers to all customary international law principles that protect the economic rights and interests of aliens. 38 The continuing relevance of this view was recently confirmed by the European Parliament's resolution concerning investment treaties concluded by the European Union. Accordingly, European international investment policy should be based on the presumption that fair and equitable treatment is defined on the basis of the level of treatment established by customary international law. 39 International organization also expressed their positions regarding the position of fair and equitable. The study of the United Nations Centre on Transnational Corporations presented the fair and equitable treatment as a classical international law standard and remarked that: Classical international law doctrine normally considers certain elements to be firm ingredients of fair and equitable treatment, including non-discrimination, the international minimum standard and the duty of protection of foreign property by the host State. 40 The Note prepared by the WTO Secretariat for the Working Group on the Relationship between Trade and Investment recognizes that: Fair and equitable treatment has its roots in customary international law. It is generally considered to cover the principle of non-discrimination along with other legal principles related to the treatment of foreign investors, but in a more abstract sense than the standards of MFN and national treatment USA's Model Bilateral Investment Treaty, 2012 [visited ]. Available at 39 The European Parliament resolution 2010/2203(INI) [online] adopted on 4 June 2011 on the future European international investment policy, Section 2 [visited ]. Available at 40 UNCTC. Bilateral Investment Treaties. New York: United Nations, 1988, p [visited ] ISBN Available at 41 WTO WORKING GROUP ON THE RELATIONSHIP BETWEEN TRADE AND INVESTMENT. Nondiscrimination, Most-Favoured-Nation Treatment and National Treatment. Note by the Secretariat, June 4, 2002, para. 39 [visited ]. Available at DP.aspx?language=E&CatalogueIdList=48333&CurrentCatalogueIdIndex=0&FullTextSearch= 15

21 Jurisprudence of international arbitral tribunals supporting the view that fair and equitable treatment is the reflection of the IMS includes the decision in the case of Alex Genin v. Estonia. After considering whether the actions of the Respondent violated the international standard of fair and equitable treatment of investment the tribunal concluded: 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, the Tribunal understands it to require an international minimum standard that is separate from domestic law, but that is, indeed, a minimum standard. 42 The proposition that the FET standard represents the customary international law standard of minimum treatment was also eventually accepted by NAFTA tribunals but this conclusion needs to be dealt with in some detail Relationship of the FET standard to customary international law in the context of Article 1105 (1) NAFTA The nature of relationship between the IMS and the FET standard has been discussed predominantly in the context of Article 1105(1) NAFTA. The wording of the pertinent article including its heading - Minimum Standard of Treatment - is evident reference to international law, specifically to its rules on the minimum standard of treatment. 43 However, decisions of arbitral tribunal in early NAFTA cases considered the fair and equitable treatment standard to be additional to the requirements of international law. The S.D. Myers tribunal in its partial award stated that the breach of a rule of international law may not be decisive in the analysis of the alleged breach of fair and equitable treatment standard. 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 favour of finding a breach of Article Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil v. The Republic of Estonia, Estonia-United States BIT, ICSID Case No. ARB/99/2, Award, June 25, 2001, para. 367 [visited ]. Available at 43 SCHREUER. Fair and Equitable Treatment in Arbitral Practice (no 1), p S.D. Myers, Inc. v Government of Canada, NAFTA, First Partial Award, 13 November 2000, para. 264 [visited ] Available at 16

22 In reaction to this finding, The NAFTA Free Trade Commission (FTC) issued a binding interpretation of Article 1105(1) on July 21, The Note of Interpretation reads as follows: 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 NAFTA, or of a separate international agreement, does not establish that there has been a breach of Article 1105(1). 46 The Pope & Talbot tribunal responded to the FTC interpretation in its further Decision on Damages where it expressed great concerns about the true nature of the FTC's interpretation as it can be binding only if it is an interpretation and not an amendment of Article 1105(1) NAFTA as suggested. 47 In the end, the tribunal reluctantly accepted the FTC's interpretation but rejected the static conception of customary international law minimum standard of treatment of aliens. 48 Although the FTC's interpretation was challenged in other NAFTA cases 49 as well, the subsequent NAFTA tribunals have embraced it without further resistance. Considering the meaning and implications of the FTC's Note of Interpretation, in the context of the NAFTA the fair and equitable treatment standard is equivalent to the international minimum standard of treatment of foreigners under customary international law. 45 The Free Trade Commission, a body composed of representatives of the three State Parties, adopted this interpretation in accordance with its powers granted in Article 2001(2)(c) NAFTA. Article 1131(2) stipulates the binding effect of FTC's interpretations on a Tribunal established under Section B of Chapter XI. 46 NAFTA FREE TRADE COMMISSION. Notes of Interpretation of Certain Chapter 11 Provisions, July 31, 2001, Section B [visited ]. Available at 47 Pope & Talbot Inc. v. The Government of Canada, NAFTA, Award in respect of Damages, May 31, 2002, paras [visited ]. Available at In this case, the Interpretation made by the Commission states that Article 1105(1) prescribes the customary international law minimum standard of treatment, whereas the text of that Article refers to rather to treatment in accordance with international law. It is well accepted that the content of the international law is a good deal broader than customary international law. Article 38 of the Statute of the International Court of Justice makes it clear that there are four sources of international law, of which custom is only one. 48 Ibid, paras See e.g. Claimant Methanex Corporation Reply the Response of Respondent United States of America of October 26, 2001to Methanex's Submission Concerning NAFTA Free Trade Commission's Interpretation at 2, Methanex Corp. v. United States (November 9, 2001) 17

23 It does not follow that the results reached in the NAFTA context should necessarily be applied also to other treaties, notable to BITs. 50 Although BITs often contain provisions concerning process of their interpretation, binding interpretation of NAFTA by an authorized treaty body remains rare in this context. Similarly, the exact wording of the international investment treaty plays the crucial role in the interpretation of the FET standard as was proved in the case of NAFTA. Despite the wide prevalence of the requirement of fair and equitable treatment in international investment agreements there are many drafting variations from which different level of treatment can be derived SCHREUER. Fair and Equitable Treatment in Arbitral Practice (no 1), p See TUDOR, Chapter 1 (no 23) 18

24 4. The interpretation of fair and equitable treatment standard The standard of fair and equitable treatment is currently lacking the generally accepted form of definition and thus remains shrouded with considerable uncertainty. 52 Muchlinski aptly summed up the situations as follows: The concept of fair and equitable treatment is not precisely defined. It offers a general point of departure in formulating an argument that the foreign investor has not been well treated by reason of discriminatory or other unfair measures being taken against its interests. It is, therefore, a concept that depends on the interpretation of specific facts for it content. 53 The relevance of the specific circumstances of the case at issue was embraced by the Mondev tribunal which mentioned that: When a tribunal is faced with the claim by a foreign investor that the investment has been unfairly or inequitably treated or not accorded full protection and security, it is bound to pass upon that claim on the facts and by application of any governing treaty provision. A judgment of what is fair and equitable cannot be reached in the abstract; it must depend on the facts of the particular case. 54 Similarly, the tribunal in the case of Waste Management held that: Evidently the standard is to some extent a flexible one which must be adapted to the circumstances of each case. Accordingly it is to the facts of the present case that the Tribunal turns. 55 At the same time, the high level of generality may be a virtue rather than a shortcoming. 56 The protection of the investment is thus guaranteed irrespective of the manifold types of infringements upon the investor s rights that might occur. The lack of specific content does not imply its inutility in assessing the potential infringements upon the investor s legal position. As Weil put it: 52 MUCHLINSKI, Peter. Multinational Enterprises and The Law. 2 nd ed. New York: Oxford University Press, 2007, p. 635 ISBN MUCHLINSKI, Peter T. Multinational Enterprises and The Law. 1 st ed. New York: Oxford University Press, 1999, p. 625 ISBN Mondev International Ltd. v. United States of America, NAFTA, Award, October 11, 2002, para. 118 [visited ]. Available at 55 Waste Management v. United Mexican States, NAFTA, ICSID Case No. ARB(AF)/00/3, Award, April 30, 2004, para. 99 [visited ]. Available at 56 SCHREUER. Fair and Equitable Treatment in Arbitral Practice (no 1), p

25 The standard of fair and equitable treatment is certainly no less operative than was the standard of due process of law, and it will be for future practice, jurisprudence and commentary to impart specific content to it. 57 Although the concept of fair and equitable treatment requires the application of equitable principles, it must be distinguished from the deciding a case ex aequo et bono, i.e. applying equity as the general principle of international law. Though fair and equitable treatment clauses present in international investment agreements are remarkably uniform, generalizations about the standard should be treated with caution. Every variation in wording of the clause has to be interpreted in accordance with the interpretation rules of customary international law laid down in Article 31 of the Vienna Convention on the Law of Treaties. The application of literal interpretation of the standard of fair and equitable treatment does not, however, bring meaningful effect to the clause. As pointed out by the tribunal in the case MTD v. Chile: In their ordinary meaning, the terms fair and equitable mean just, even-handed, unbiased, legitimate. 58 Hence, [t]he concepts of fair and equitable are, to a large extent, interchangeable 59. And it may be securely assumed, that the fair and equitable represent a single, unified standard. 60 Similarly, some treaties refer to equitable and reasonable rather than fair and equitable but this variation does not appear to reflect a difference in meaning. 61 The provision has to be now examined in lights of the context and object of the international investment protection agreements. The broader context in which the notion of fair and equitable treatment must be seen includes the other provision of the treaty. The relevant provisions may be found in the preambles of international investment treaties that usually present the motives for the conclusion of the treaty. The rationale is to stimulate the flow of capital and technology and the economic development of the Contracting Parties. In addition, it is necessary to 57 WEIL, Prosper. The State, the Foreign Investor, and International Law: The No Longer Stormy Relationship of a Ménage à Trois [online]. ICSID Review Foreign Investment Law Journal. 2005, Vol. 15, Issue 2, p , at. 415 ISSN [visited ]. Available at 58 MTD Equity Sdn, Bhd. and MTD Chile S.A. v. Chile, Chile-Malaysia BIT, ICSID Case No. ARB/01/7, Award, May 25, 2004, para. 113 [visited ]. Available at 59 MUCHLINSKI, Peter. Caveat Investor? The Relevance of the Conduct of the Investor under the Fair and Equitable Treatment Standard. International & Comparative Law Quarterly [online]. 2006, Vol. 55, p , at 531 [visited ]. Available at 60 DOLZER, Rudolf. Fair and Equitable Treatment: A Key Standard in Investment Treaties (no 1)., at DOLZER; SCHREUR (no 24), p