Summary LLM International Dispute Resolution - Investment Treaty Arbitration II - Module 5 (Non-Contingent Standards)
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Course
LLM
Institution
Queen Mary, University Of London (QMUL)
Standards of treatment
o Contingent/Relative
o Non-contingent/Absolute
Fair & Equitable Treatment
o Definition
o Treaty adoption methods
o Autonomous v Minimum standard
o Substantive content
- Case-by-case
- Creeping violations
- State functions
o Violations
- Frustrat...
Contingent/Relative standards of treatment are determined by reference to the treatment
accorded to other investors/investments. For example, national and MFN treatment clauses
prevent nationality-based discrimination by providing that foreign investors and investment
cannot be treated less favourably than nationals of Host State and their investments, and
investors and investments from Third States respectively.
Non-contingent/Absolute standards of treatment are not determined by reference
to the treatment accorded to other investors/investments. These are sometimes known as
minimum standards of treatment1. They provide ‘a floor below which treatment of foreign
investors must not fall, even if a government were not acting in a discriminatory manner’2.
These mostly include guarantees of full protection and security and fair and equitable
treatment.
What is the Fair and Equitable (FET) standard?
FET standard is most frequently invoked and most successful in terms of investors bringing
claims3.
Definition
Despite no definition in investment treaties, Vienna Convention on the Law of Treaties
(VCLT) has allowed open interpretations. Muchlinski defines FET standard as generally
requiring ‘a particular approach to governance, on the part of the host country, that is
encapsulated in the obligations to act in a consistent manner, free from ambiguity and in total
transparency, without arbitrariness and in accordance with the principle of good faith. In
addition, investors can expect due process in the handling of their claims and to have the host
authorities act in a manner that is non–discriminatory and proportionate to the policy aims
involved.’
Other commentators observed that ‘the fair and equitable standard gives modern
expression to a general principle of due process in its application to the treatment of investors
[...] The standard thus encapsulates the minimum requirements of the rule of law. [...]
The rule of law is properly to be understood as the principle underlying and animating the
concept of fair and equitable treatment. It does not of itself provide a prescriptive set of rules
that may be mechanically applied in the same way in all contexts in which the principle is
invoked. [...] The standard is primarily concerned with the process of decision-making as it
affects the rights of the investor, rather than with the protection of substantive rights (the
latter being the function of the protection against expropriation and the guarantee of full
protection and security).’4
In Biwater Gauff v Tanzania5, tribunal listed the following components: ‘Protection of
legitimate expectations: the purpose of the fair and equitable treatment standard is to provide
to international investments treatment that does not affect the basic expectations that were
taken into account by the foreign investor to make the investment, as long as these
1
Andrew Newcombe and Lluís Paradell, ‘Chapter 6 – Minimum Standards of Treatment’, in Law and Practice
of Investment Treaties: Standards of Treatment (Kluwer Law International 2009) 233-234.
2
SD Myers v Canada, UNCITRAL, First Partial Award on the Merits (13 November 2000) para 259
3
Rudolf Dolzer and Christoph Scheuer, Principles of International Investment Law (2nd edition, OUP 2012)
130
4
Campbell McLachlan and others, ‘Treatment of Investors’ in International Investment Arbitration: Substantive
Principles (2nd edition, OUP 2017) paras 7.15-7.16, 7.355
5
Biwater Gauff v Tanzania, ICSID Case No ARB/05/22, Award (24 July 2008) para 602 (citations omitted)
,expectations are reasonable and legitimate and have been relied upon by the investor to make
the investment”. Good faith: the standard includes the general principle recognised in
international law that the contracting parties must act in good faith, although bad faith on the
part of the State is not required for its violation. Transparency, consistency, non-
discrimination: the standard also implies that the conduct of the State must be transparent,
consistent and non-discriminatory, that is, not based on unjustifiable distinctions or arbitrary.’
Historical origins
FET standard began to become included in investment treaties after the Second World War,
unlike expropriation and full protection and security. It was not a term used in international
law beforehand6. It was first included in the draft 1948 Havana Charter for an International
Trade Organisation (ITO). Article 11(2)(a) provided that ITO could ‘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’. It was later adopted by other multilateral initiatives. Article
1 of 1959 Abs-Shawcross Draft Convention on Investments Abroad and Article 1(a) of
1967 OECD Draft Convention on the Protection of Foreign Property provided that ‘each
Party shall at all times ensure fair and equitable treatment to the property of the nationals of
the other Parties’. 1998 OECD Draft Negotiating Text for a Multilateral Agreement on
Investment (MAI) provided that ‘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.’ During the 1950s, US FCN treaties with
Belgium, Luxembourg, Greece, Ireland, Israel, France and Pakistan also provided for
‘equitable treatment’. Treaties with the Federal Republic of Germany, Ethiopia and The
Netherlands called for ‘fair and equitable treatment'. Article 1, Section 1 of 1954 Treaty
between Germany and US provided ‘Each Party shall at all times accord fair and equitable
treatment to the nationals and companies of the other Party and to their property, enterprises
and other interests.’
FET standard regularly featured in BITs negotiated by European countries after the
1960s. Until early 1990s, it was incorporated in at least 300 BITs7. However, some States
have tried to exclude or restrict this standard. Revised India Model BIT 2015 does not contain
FET standards. South African Development Community Model BIT 2012 specifically refers
to the ‘Neer test’, which aims to impose strict limits on Tribunals. Investment Agreement for
the COMESA Common Investment Area 2007 specifically considers the Host State’s level of
development. NAFTA Article 1105(1) prescribed that the concept of ‘fair and equitable
treatment’ does not require treatment in addition to or beyond the minimum standard of
treatment under customary international law. This led to significant changes in FET clause in
USMCA.
Treaty adoption methods
6
Andrew Newcombe and Lluís Paradell, ‘Chapter 6 – Minimum Standards of Treatment’, in Law and Practice
of Investment Treaties: Standards of Treatment (Kluwer Law International 2009) 255-256
7
Jeswald Salacuse, The Law of Investment Treaties (2nd edition, OUP 2015) 243
, States have adopted various approaches to include FET standards in their investment treaties.
Silence on FETs may indicate the States’ unwillingness to subject their measures to
review under this standard. These include many IIAs entered into by Singapore. But the
international minimum standard still exists in customary law.
Many IIAs like Belgium-Luxembourg Economic Union-Tajikistan BIT and China-
Switzerland BIT use simple unqualified FET formulations that simply require Host States
to accord FET.
Some IIAs link FET to international law to prevent a purely semantic approach.
These have included Bahrain-US BIT and Croatia-Oman BIT.
More IIAs have linked FET with the minimum standard of treatment of aliens
(MST) under customary law. These have included ASEAN-Australia-New Zealand Free
Trade Area 2009, Chapter 11, Article 6, Agreement between Japan and the Republic of the
Philippines for an Economic Partnership (2006), Rwanda-United States BIT 2008. These help
prevent over expansive interpretations of FET standards and guide them with reference to
gross misconduct that would violate minimum standards of alien treatment. Yet this
presupposes the existence of a general consensus on such minimum standard when it is
highly indeterminate and lacks a clearly defined content8.
Others have continued to add substantive content such as prohibition of denial of
justice and unreasonable/discriminatory measures, irrelevance of a breach of other treaty
obligations, and accounting for the level of development. These include ASEAN
Comprehensive Investment Agreement 2009, Netherlands-Oman BIT 2009, Romania-US
BIT 1994, Mexico-Singapore BIT 2009.
FET standard can be imported by MFN clauses. In Bayindir v Pakistan9, reference to
FET standard in the preamble of Pakistan-Turkey BIT 1995 allowed use of MFN clause to
import it from its BIT with a third party. Tribunal held that ‘the preamble is relevant for the
interpretation of the MFN clause in its context and in the light of the Treaty's object and
purpose pursuant to Article 31(1) of the VCLT’.
What is the expected standard for FETs?
Minimum standard of treatment (MST) under customary international law
Respondent states claim that FET merely reflects the minimum standard of treatment
under customary international law. Such standard is regarded as relatively lenient. This is
seen in Article 1105 of NAFTA titled ‘Minimum Standard of Treatment’, which 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.’
In the Neer case10, tribunal held that ‘the 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 its insufficiency.’ FA Mann also
noted in a lesser known text published in 1982 that ‘In some cases, it is true, treaties merely
repeat, perhaps in slightly different language, what in essence is a duty imposed by customary
international law; the foremost example is the familiar provision whereby states undertake to
accord fair and equitable treatment to each other's nationals and which in law is unlikely to
8
Merrill & Ring v. Canada, UNCITRAL Rules, Award, 31 March 2010.
9
Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/29
10
Neer v Mexico, (1926) IV RIAA 60
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