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Weil, P, ‘The State, the Foreign Investor, and International Law: The No Longer Stormy Relationship of a M?nage ? Trois’, 15 ICSID Rev-FILJ 401 (2000)

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Weiler, T, ‘Dodging Bullets: A First Look at the Final Award in Loewen & the Loewen Group v U.S.A.’, 4 JWI 659 (2003)

Wolfe, Robert, ‘Regulatory Transparency, Developing Countries, and the Fate of the WTO’, available at <http://www.cpsa-acsp.ca/paper-2003/wolfe.pdf>.

Zoller, E, La Bonne Foi en Droit International Public (Paris, Editions Pedone, 1977) Footnotes 1Methanex v U.S. , Partial Award, 7 August 2002 (UNCITRAL) para 139, available at <http://www.naftaclaims.com/Disputes/USA/Methanex/MethanexPreliminaryAwardJurisdiction.pdf>. 2 The NAFTA, however, appears to go further than a bilateral investment treaty in terms of the protection it offers for non-discrimination, not only offering protection for foreign investment, but also protection for investors operating in like circumstances throughout the North American Free Trade Area. 3 The most recent and best examples are R Dolzer, ‘Fair and Equitable Treatment: A Key Standard in Investment Treaties’, 39 Int'l Law 87 (2005); C Schreuer, ‘Fair and Equitable Treatment in Arbitral Practice’, 6 JWIT 357 (2005); S Fietta, ‘Expropriation and the “Fair and Equitable” Standard: The Developing Role of Investors' “Expectations” in International Investment Arbitration’, 23(5) J of Int'l Arb 375 (2006); S Schill, ‘Fair and Equitable Treatment under Investment Treaties as an Embodiment of the Rule of Law’, IILJ Working Paper 2006/6. 4 Cited at SD Myers Inc v Canada , First Partial Award, 13 November 2000 (UNCITRAL) 40 ILM 1408 (2001) at para 266. 5 Ibid at para 265, citing FA Mann, ‘British Treaties for the Promotion and Protection of Investments’, 52 Brit YB Int'l L 241 (1981). 6 For the latest figures on the number of BITs, see UNCTAD, ‘The Entry into Force of Bilateral Investment Treaties (BITs)’ IIA Monitor No. 3 (2006), available at <http://www.unctad.org/en/docs/webiteiia20069_en.pdf>. 7 As explained below, a tribunal will not apply its own, subjective view of whether treatment was ‘fair and equitable’. Rather, its appraisal must be informed by the treaty text and applicable rules of international law. The Saluka tribunal reiterates a point made by numerous other tribunals that the circumstances of the case are critical for an assessment under the standard: at para 285: ‘There is agreement between the parties that the determination of the legal meaning of the “fair and equitable treatment” standard is a matter of appreciation by the Tribunal in light of all relevant circumstances: Saluka BV v Czech Republic UNCITRAL Rules Partial Award Permanent Court of Arbitration 17 March 2006 available at <http://www.ita.law.uvic.ca/documents/Saluka-PartialawardFinal.pdf>. As the tribunal in Mondev has stated, “[a] judgment of what is fair and equitable cannot be reached in the abstract; it must depend on the facts of the particular case”.’ Mondev International Ltd v USA, Award, 11 October 2002 (ICSID Case No. ARB(AF)/99/2), 42 ILM 85 (2003) at para 304: '[The] expectations [of the investor], in order for them to be protected, must rise to the level of legitimacy and reasonableness in light of the circumstances '(emphasis in original). The same conclusion of the fact-dependent nature of fair and equitable treatment was made by the MTD tribunal. See MTD Equity Sdn Bhd & MTD Chile SA v Chile (Republic of), Award, 25 May 2004 (ICSID Case No. ARB/01/7) 44 ILM 91 (2005) at para 109, and see Waste Management, Inc v Mexico (No. 2) , Award, 30 April 2004 (ICSID Case No. ARB (AF)/00/3), 43 ILM 967 (2004) (‘Waste Management II’) at paras 99, 118. 8UNCTAD, Fair and Equitable Treatment, Series on issues in international investment agreements (New York and Geneva, United Nations, 1999). Also see UNCTAD, Investment Provisions in Economic Integration Agreements (New York and Geneva, United Nations, 2006) at 99–106; For further details about the national and MFN treatment standards in relation to investment, see UNCTAD, National Treatment, Series on issues in international investment agreements (New York and Geneva, United Nations, 1999) and UNCTAD, Most-Favoured-Nation Treatment (New York and Geneva, United Nations, 1999). 9 NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter 11 Provisions (NAFTA Free Trade Commission, 31 July 2001), available at <http://www.naftaclaims.com/files/NAFTA_Comm_1105_Transparency.pdf>. 10Canada's 2003 Model Foreign Investment Promotion and Protection Agreement (FIPA), available at <http://www.naftaclaims.com/files/Canada_Model_BIT.pdf>. 11United States Model Bilateral Investment Treaty (BIT) (2004), available at <http://www.nafta claims.com/files/US_Model_BIT.pdf>. 12 In 1981, when he wrote his article, Dr Mann observed that the ‘fair and equitable treatment’ and ‘full protection and security’ standards, despite being frequently included in BITs, have ‘… hardly ever been judicially considered’. Mann, above n 5 at 243. Certainly that remained the case until late 2000 when the SD Myers NAFTA award (above n 4) led a wave of new decisions on the fair and equitable treatment standard. 13 The numerous awards listed at <http://www.investmentclaims.com> is a simple and graphic demonstration of this growth. See UNCTAD, ‘Latest Developments in Investor-State Dispute Settlement’, IIA Monitor No. 4 (2006), available at <http://www.unctad.org/sections/dite_pcbb/docs/webiteiia200611_en.pdf>. The total cumulative number of known treaty-based arbitrations increased to a new peak of 255 by the end of 2006, with the majority of those claims launched after 2000. 14 The question of apparently contradictory decisions by arbitral panels has generated a great deal of discussion concerning the need for more consistency in investment arbitration, for example by adopting some form of appellate mechanism. See the BIICL Investment Treaty Forum 2004 discussion on ‘Appeals and Challenges to Investment Treaty Awards: Is it Time for an International Appellate System?’ in Federico Ortino, Audley Sheppard, and Hugo Warner (eds), Investment Treaty Law (London, British Institute of International and Comparative Law, 2006), available at <http://www.biicl.org>; Also see: I Laird and R Askew, ‘Finality versus Consistency: Does Investor-State Arbitration Need An Appellate System?’, 7 J Appellate Practice and Process 101 (2006). 15 See Bala?, ch 27 below, for a more detailed discussion of this topic. 16 Jan Paulsson made a similar observation with respect to the development of the customary principle of denial of justice: see Jan Paulsson, Denial of Justice in International Law (Cambridge, Cambridge University Press, 2005) at 10–11. 17 See Pope & Talbot, Inc v Canada , Interim Award, 26 June 2000 (UNCITRAL) at paras 96–105. The requirement for a substantial deprivation has also been recognized by more recent tribunals, such as LG&E Energy Corp, LG&E Capital Corp, LG&E International Inc v Argentine Republic (LG&E), Decision on Liability, 3 October 2006 (ICSID Case No. ARB/02/1) at paras 190–1, 199 (citing Pope & Talbot at paras 100–2), Azurix Corp v Argentine Republic , Award, 14 July 2006 (ICSID Case No. ARB/01/12) at para 322, and EnCana v Republic of Ecuador (EnCana) , Award, 3 February 2006 (UNCITRAL) at para 174. 18 This has been the subject of great debate before NAFTA Chapter 11 tribunals, and more recently before BIT tribunals, concerning whether the minimum standard must meet a threshold of ‘egregiousness’ or bad faith. The recent awards of the tribunals in Saluka above n 7 at n 18, 34, 38, 41, Azurix , above n 17 at para 372, and LG&E , above n 17, at para 129, have effectively disposed of this question, holding that the customary international standard has evolved and that bad faith is not a requirement of the fair and equitable standard. 19 This has been seen in a very practical manner by the way that investors have made their claims under the headings of multiple treaty obligations. Moreover, given the considerable expense of launching and maintaining an arbitration against a state, and the reality of old-fashioned litigation risk, it is likely that few individual claimants would come forward unless the harm suffered crossed a threshold several times that of the expected costs of the dispute. 20Saluka , above n 7, at para 461, concluded that a breach of the non-impairment standard with respect to arbitrariness and non-discrimination ‘does not therefore differ substantially from a violation of the “fair and equitable treatment” standard’. Similarly, the tribunal held that a deprivation could also be considered an impairment, if it was also unreasonable and discriminatory. However, since the tribunal ruled that there was no deprivation under Art 5 of the Treaty, the expropriation provision, there could not be a deprivation on this ground as well. See Saluka at paras 468–70. 21‘… One of the corollaries of the “general rule of interpretation” in the Vienna Convention is that interpretation must give meaning and effect to all the terms of the treaty. An interpreter is not free to adopt a reading that would result in reducing whole clauses or paragraphs of a treaty to redundancy or inutility.’ See United States—Standards for Reformulated and Conventional Gasoline, Report of the Appellate Body, 29 April 1996 (WT/DS2/AB/R). The principle of effectiveness (ut res magis valeat quam pereat), as a maxim of treaty interpretation, has been recognized by the Permanent Court of Justice and the International Court of Justice. See Case Concerning the Factory at Chorz?w (1927) PCIJ Series A, Vol 2, no. 8 22; South West Africa ( Ethiopia v South Africa; Liberia v South Africa ), Judgment of 21 December 1962 (Preliminary Objections), 1962 ICJ 319, 582 (Dissenting Opinion of Judge Van Wyk). 22 A notion rejected uniformly by NAFTA tribunals. As noted by the tribunal in Waste Management II : ‘Both the Mondev and ADF tribunals rejected any suggestion that the standard of treatment of a foreign investment set by NAFTA is confined to the kind of outrageous treatment referred to in the Neer case, i.e. to treatment amounting to an “outrage, to bad faith, to willful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency”.’ Waste Management II, above n 7 at para 93. 23 The cynic might observe that the level of deference envisaged by the one making the link between the treaty standard and custom is often just enough to ensure that the particular claim at issue fails without systematically hollowing out the obligation—should it be required for future offensive use by one's own investor. This exact scenario played out in the NAFTA context with the final result being the Free Trade Commission Note of Interpretation on 31 July 2001. For a historical recounting of this period and the related NAFTA awards, see I Laird, ‘Betrayal, Shock and Outrage—Recent Developments in NAFTA Article 1105’, in Todd Weiler (ed), NAFTA: Investment Law and Arbitration: Past Issues, Current Practice, Future Prospects (Ardsley NY, Transnational Publishers, 2004) at 49. 24 For a comprehensive collection of provisions, see UNCTAD, International Investment Instruments: A Compendium (New York and Geneva, United Nations 1996–2005) Vols I–XIV, available at <http://www.unctad.rog/iia>; UNCTAD, Fair and Equitable Treatment, above n 8. 25 For example, Judge Stephen Schwebel has noted the importance of the minimum standard as part of the fabric of laws, regulations, norms, and practices regulating state responsibility and foreign direct investment. See S Schwebel ‘The Influence of Bilateral Investment Treaties on Customary International Law’, 5(2) TDM 5–6 (2005) (‘when BITs prescribe treating the foreign investor in accordance with customary international law, they should be understood to mean the standard of international law embodied in the terms of some two thousand concordant BITs. The minimum standard of international law is the contemporary standard’); also see Mondev International Limited v USA , above n 7 at para 117; CME Czech Republic BV v Czech Republic , Award, 14 March 2003 (UNCITRAL) (CME) at paras 497–8. 26ADF Group, Inc v United States of America , Final Award, 9 January 2003 (ICSID Additional Facility), 18 ICSID Rev-FILJ 195 (2003) at paras 39, 89; Mondev , above n 7 at para 121. 27 P Weil, ‘The State, the Foreign Investor, and International Law: The No Longer Stormy Relationship of a M?nage ? Trois’, 15 ICSID Rev-FILJ 401 (2000) at 415. 28ADF , above n 26 at para 184. See also at para 119. 29Waste Management II , above n 7 at para 98. 30 Ibid at 99. 31 As noted by Schreuer, above n 3 at 384: ‘Arbitral Tribunals have confirmed that good faith is inherent in fair and equitable treatment’; Dolzer, above n 3 at 91: ‘Indeed, the substance of the standard of fair and equitable treatment will in large part overlap with the meaning of a good faith clause in its broader setting, with one significant aspect embracing the related notions of venire contra factum proprium and estoppel’. A number of recent awards have recognized the good faith element of fair and equitable treatment, including: Tecnicas Medioambientales Tecmed, SA v Mexico , Award, 29 May 2003 (ICSID Case No. ARB (AF)/00/2), 43 ILM 133 (2004), (Tecmed) at paras 153–4, Waste Management II , above n 7 at para 138, MTD , above n 7 at para 109, Saluka , above n 7 at para 303. 32 Commentary (e) to s 711 confirms that ‘a juridical person of foreign nationality also enjoys some protection, for instance, against denials of procedural justice’ and that ‘for a juridical person, such violations would normally result in economic injury and fall within clause (c)’, Note that clause (c) provides that responsibility attaches for acts that unreasonably interfere with ‘a right to property of other economic interest that, under international law, a state is obligated to respect for persons, natural or judicial, of foreign nationality, as provided in section 712’. 33Anglo-Norwegian Fisheries Case (1951) ICJ Reports 116 at 142. 34AMCO Asia v Indonesia , 1 ICSID Reports, 377 at 490 and 493. See also the SapphireAward (1963) 35 ILR 136 at 181. 35 C Schreuer, ‘Article 42 of the ICSID Convention’, 60 AJIL 892 (1996); Art 42 of the ICSID Convention, 4 ILM 532 (1965), sets out the governing law for a tribunal constituted under the ICSID Convention Rules, which is necessary given that the choice of law may not always be set out in the contract or compromis. 36E Lauterpacht, ‘The World Bank Convention on the Settlement of International Investment Disputes’, Recueil d'etudes de Droit International en Hommage a Paul Guggenheim Ignaz (Geneva, Facult? de Droit l'Universit? de Gen?ve, Institut Universitaire des Hautes Etudes Internationales, 1968) 642 at 658–62. A similar conclusion was reached by Seidl-Hohenveldern, citing: ‘General Principles of Law as Applied by the Conciliation Commission Established under the Peace Treaty with Italy of 1947’, 53 Am J Int'l L 853 (1959) at 872. 37 See eg O Chukwumerije, ‘International Law and Article 42 of the ICSID Convention’, 14 J Int'l Arb 79 (1997) at 95–101; or IFI Shihata and A Parra, ‘Applicable Substantive Law in Disputes between States and Private Parties: The Case of Arbitration under the ICSID Convention’, 9 ICSID Rev-FILJ 183 (1994) at 191–5. 38Compa?ia del Desarrollo de Santa Elena, SA v Republic of Costa Rica (Santa Elena) , Final Award, 15 (2000) ICSID Rev-FILJ 169 at 191; Rectification 15 (2000) ICSID Rev-FILJ 205. 39 C Schreuer, The ICSID Convention: A Commentary (Cambridge, Cambridge University Press, 2001) at 609–10. 40 Ibid at 609 and 615–16; Schreuer notes the interesting case of Kl?ckner v Cameroon , Decision on Annulment, 2 (1985) ICSID Rep 121, in which a tribunal was castigated by the annulment panel for having essentially applied a principle of French contract law to the dispute, as if it were a fundamental principle of international law, without having parsed the evidence which would have been necessary to make such a finding of law. 41 C Schreuer, above n 39 at 610–11. 42GAMI Investments, Inc v Mexico , NAFTA/UNCITRAL Tribunal, Final Award, 15 November 2004, 44 ILM 545 (2005) at para 94. The tribunal was cautious, however, to add four comments clarifying its understanding of what does, and does not, constitute a breach of the minimum standard of treatment: (1) the failure to fulfil the objectives of administrative regulations without more does not necessarily rise to a breach of international law; (2) a failure to satisfy requirements of national law does not necessarily violate international law; (3) proof of a good faith effort by the government to achieve the objectives of its laws and regulations may counter balance instances of disregard of legal or regulatory requirements; and (4) the record as a whole—not isolated events—determines whether there has been a breach of international law. 43 One such interesting award is the MTD award (above n 7), which contains a long recitation of the facts (at paras 116–78) of what was essentially an overlapping contract and negligent misrepresentation claim. As has become increasingly more common in European and North American jurisdictions, businesses have used the tort of negligent misrepresentation to overcome, or complement, a contractual claim. The MTD award is just an extension of that practice in the BIT context, and thus the tribunal's ultimate decision—to discount considerably the successful detrimental reliance claim based upon its evaluation of the sophistication and the claimant and the quality of its due diligence work made before entering the relevant concession agreement—should not operate in the same manner as a regulatory detrimental reliance claim, where no contract with the state or a state entity is involved. See also Metalclad Corp v Mexico , Award, 30 August 2000 (ICSID Case ARB(AF)/97/1) 40 ILM 36 (2001) at paras 88–9. 44International Thunderbird Gaming v. The United Mexican States , Award, 26 January 2006 (UNCITRAL) at para 147, available at <http://www.naftaclaims.com/Disputes/Mexico/Thunderbird/Thunderbird_Award.pdf>. At n 7, the tribunal cited Bin Cheng, General Principles of Law as Applied by International Courts and Tribunals (Cambridge, Cambridge University Press, Grotius Classic Reprint Series, 2007) at 123 ff; J?rg M?ller, Vertrauenssschutz im V?lkerrecht (Heidelberg, Max Planck Institut, 1971); E Zoller, La Bonne Foi en Droit International Public (Paris, Editions Pedone, 1977); F Orrego Vicu?a, ‘Regulatory Authority and Legitimate Expectations’, 5 Intl Law Forum, 188 at 193 (2003); Nuclear Test Case (1974) ICJ Reports 253 at 268. 45LG& E , above n 17 at paras 127–30. The tribunal specifically relied upon Tecmed , above n 31 at para 154, MTD , above n 7 at para 114; Occidental Exploration and Production Company v Ecuador , Final Award, 1 July 2004 (LCIA Case No. UN3467) at para 185, available at <http://www.ita.law.uvic.ca/documents/Oxy-EcuadorFinalAward_001.pdf>; CMS Gas Transmission Co v Argentina (ICSID Case No. ARB/01/8, Award, 12 May 2005) 44 ILM 12305 (2005) at para 279; Waste Management II , above n 7 at para 98. 46Saluka , above n 7 at paras 302–3. After taking into account the ordinary meaning, context, and object and purpose of the treaty, the Saluka tribunal concluded that the standard of fair and equitable treatment was closely tied to the notion of legitimate expectations ‘… which is the dominant element of the standard’. The tribunal relied upon the holdings in: Tecmed , above n 31 at para 154, Waste Management II , above n 7 at para 98, Occidental , above n 45 at para 183, and CME , above n 25 at para 155. 47 JF O'Connor, Good Faith in International Law (Aldershot, Dartmouth, 1991) at 92–3. 48 Cheng, above n 44 at 137. 49ADF , above n 26 at para 189. 50Wena Hotels Ltd v Egypt , ICSID Case No. ARB/98/4, Final Award, 8 December 2000, 41 ILM 896 (2002) at paras 85–7. 51 Mann, above n 5 at 59–60. 52LG&E , above n 17 at para 130. 53United States—Section 301-310 of the Trade Act of 1974, Panel Report WT/DS152/R (22 December 1999) at para 7.67. 54 See eg OECD, Report on Regulatory Reform: Synthesis Report (Paris, OECD, 1997) at <http://www.oecd.org/dataoecd/17/25/2391768.pdf>; Robert Wolfe, ‘Regulatory Transparency, Developing Countries, and the Fate of the WTO’, <http://www.cpsa-acsp.ca/paper-2003/wolfe.pdf>; and OECD Financial, Fiscal and Enterprise Affairs Directorate (DAF), Transparency for FDI (January 2003), available at <http://www.oecdobserver.org/news/fullstory.php/aid/821/Transparency_for_FDI.html>. 55 The concepts of regulatory fairness and transparency (or perhaps ‘regulatory certainty’ or ‘regulatory due process’) may obviously be grounded in a concept such as ‘fair and equitable treatment’. If ‘fair and equitable treatment’ is now accepted as a requirement of customary international law, as increasingly appears to be the case, then regulatory transparency is required of all states—with the only question in a given case being whether a state which has failed to provide such treatment can be held to account by an individual through recourse to an applicable BIT. 56United States—Restrictions on Imports of Cotton and Man-made Fibre Underwear, WT/DS24/AB/R, 10 February 1997, at 21. 57 See eg OECD, Recommendation of the Council of the OECD on Improving the Quality of Government Regulation, OCDE/GD(95)95, 15 September 1995, available at <http://www.olis.oecd.org/olis/1995doc.nsf/LinkTo/OCDE-GD(95)95>; and APEC, Leaders' Statement to Implement APEC Transparency Standards, 27 October 2002 and 21 October 2003, available at <http://www.apec.org/content/apec/leaders__declarations/2003_leadersstmtimplapectranspstd.html>. 58Occidental , above n 45 at paras 183–6. See also MTD , above n 7 at paras 109–15. 59Tecmed , above n 31 at paras 154–6. 60Occidental , above n 45 at paras 190–1. 61NAFTA Art 102(1). 62 This was the primary ground for Mexico's successful review of a portion of the tribunal's award. With the support of an intervention from the government of Canada, counsel for Mexico was fortunate enough to find a local review judge who apparently misunderstood the customary international law approach to treaty interpretation adopted by the tribunal, and thus failed to understand the meaning of a minimum standard of treatment provision contained within an international economic treaty. See Todd Weiler, ‘Metalclad and the Government of Mexico: A Play in Three Parts’, 2 JWI 685 (2001). 63Metalclad , above n 43 at para 76. 64Metalclad , Award, ibid at para 88. 65Saluka , above n 7 at paras 301–6. 66LG&E , above n 17 at para 125, citing in support CMS , above n 45 at para 274; Occidental , above n 45 at para 183; Metalclad , above n 43 at para 99 (‘Mexico failed to ensure a transparent and predictable framework for Metalclad's business planning and investment’). 67Saluka , n 7 above at para 294. 68Saluka , ibid at para 291: ‘Whatever the merits of this controversy between the parties may be, it appears that the difference between the Treaty standard laid down in Article 3.1 and the customary minimum standard, when applied to the specific facts of a case, may well be more apparent than real. To the extent that the case law reveals different formulations of the relevant thresholds, an in-depth analysis may well demonstrate that they could be explained by the contextual and factual differences of the cases to which the standards have been applied’. 69 See also Occidental , n 45 above at para 190. 70CME , n 25 above at 290. 71Azurix , n 17 above at para 361. Reliance was placed on Tecmed , above n 31 at para 155, on this point. 72 Cheng, above n 44 at 132–4 and 122. 73 Georg Schwarzenberger, International Law and Order (London, Stevens, 1971) at 89–90 and 99–100. 74Saluka , above n 7 at para 307. 75Occidental , above n 45 at paras 162–3. 76Occidental , ibid at paras 172 and 177. 77The Loewen Group, Inc and Raymond L Loewen v United States of America (ICSID Case No. ARB(AF)/93/3, 26 June 2003) 42 ILM 811 (2003) at para 132. 78Waste Management II at para 98, cited above at n 7. 79 In fact, it is very difficult to find an investment claims tribunal award explicitly founded upon the theory. This is because most underlying treaty language includes additional terms such as a guarantee of ‘fair and equitable treatment’ or a prohibition against arbitrary, unreasonable or discriminatory conduct. However, if the minimum standard, as memorialized in the various treaty provisions available, only promises ‘treatment in accordance with international law’ it may be necessary to rely upon general principles and customary international law norms to attribute some meaning to these provisions. 80Pope & Talbot v Canada , NAFTA/UNICTRAL Tribunal, Award on Damages, 31 May 2002, at para 68. 81Metalclad , above n 43 at paras 90–7. 82Elettronica Sicula SpA (ELSI) ( US v Italy ), (1989) ICJ Reports 14 at para 74. 83Nykomb Synergistics Technology Holding AB v Latvia , Award, 16 December 2003 (Energy Charter Treaty/ SCC) at 37–8. 84Saluka , above n 7 at para 313. 85Saluka , ibid at para 498. 86LG&E , above n 17 at para 146. 87LG&E , ibid at para 148. 88 A difference the Saluka tribunal itself acknowledged ‘may be more apparent than real’: Saluka, above n 7 at para 291. See also both Azurix , above n 17 at para 361 and LG&E , above n 17 at paras 125–7 in support of this point that the treaty and customary law standards are effectively the same. 89Saluka , ibid at paras 303, 499. 90 The traditional customary international test was described by the LG&E tribunal (n 17 above), although it did not apply it, at para 146: ‘As stated in the ELSI Elettronica Sicula SpA case (United States of America v Italy), ICJ Report 1989 RLA 56 at 61–2 (20 July 1989), in order to establish when a measure is discriminatory, there must be (i) an intentional treatment (ii) in favor of a national (iii) against a foreign investor, and (iv) that is not taken under similar circumstances against another national’. 91 See eg Argentina—Safeguard Measures on Imports of Footwear (2000), WTO Doc WT/DS121/AB/R at para 81 (Appellate Body Report). See also: Korea—Definitive Safeguard Measure on Imports of Certain Dairy Products (2000), WTO Doc WT/DS98/AB/R at para 81 (Appellate Body Report). It may also be added that this may blur the distinction between the ‘absolute’ standard of fair and equitable treatment and the ‘relative’ standards of MFN and national treatment, which may involve different standards of protection; on which see further: UNCTAD, Fair and Equitable Treatment, above n 8 at 46–8. 92 In addition to the recent Champion case (Champion Trading Company, Ameritrade International, Inc, James T Wahba, John B Wahba, Timothy T Wahba v Egypt, ICSID Case No. ARB/02/9, Award, 27 October 2006, available at <http://www.ita.law.uvic.ca/documents/Championaward_000.pdf>) one rare example is the lesser known RFCC v Morocco case (ICSID Case No ARB/00/6, Award of 22 December 2003, 20 ICSID Rev-FILJ 391 (2005) ), which resulted in a French-language award, where the tribunal appeared to state that proof of discriminatory intent was required to satisfy that treaty's seemingly comparative national treatment test, but subsequently concluded that such intent could be found in the substance of the treatment received, even if not explicitly stated as being intended to harm the foreign participant in the local market. 93Pope & Talbot v Canada , Award on the Merits of Phase 2, 10 April 2001, at 9–37. 94 Ibid at 35. 95 See eg Emilio Agustin Maffezini v The Kingdom of Spain , Case No. ARB/97/7, 25 January 2000, 16 ICSID Rev-FILJ 212 (2001) Decision of the Tribunal on Objections to Jurisdiction, at para 56. See also Pope & Talbot, Inc v Canada , Damages Award, above n 80 at para 62, n 54. 96Marvin Feldman v United Mexican States , Final Award, 16 December 2002 (ICSID Case No. ARB(AF)/99/1) 18 ICSID Rev-FILJ 488 (2003) at para 70. 97 It did so for both the NAFTA's investment and trade-in-services provisions. The Panel could engage in such speculation because, similar to the practice established in the GATT/WTO, a claim can be made under Chapter 20 without any allegation of loss (which is required of investors under Arts 1116(1) and 1117(2) ). See United States—In the Matter of Cross-Border Trucking Services, Panel Report, USA-MEX-98-2008-01, 6 February 2001, at para 247. 98ADF , above n 26 at para 72. 99SD Myers , above n 4 at para 251. 100Loewen , above n 77 at para 119 (re: denial of justice) and para 140 (re: national treatment comparators). 101 In most cases, a denial of justice claim is more properly brought under Art 1105. See T Weiler, ‘Dodging Bullets: A First Look at the Final Award in Loewen & the Loewen Group v. U.S.A.’, 4 JWI 659 (2003). 102 See eg United States Section 337 of the Tariff Act of 1930, 7 November 1989, 36 GATT BISD 345 (1990); World Trade Organization Appellate Body, Japan Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R at 6 (4 October 1996); World Trade Organization Appellate Body, Korea Taxes on Alcoholic Beverages, WT/DS75/AB/R, WT/DS84/AB/R at 43 (18 January 1999); World Trade Organization Panel, Canada-Certain Measures Affecting the Automotive Industry, WT/DS139/R, WT/DS142/R at 10.78 (31 January 2000). 103 See eg Pope & Talbot above n 93 at para 63. 104Myers , above n 4 at paras 252–4. 105US—Trucking, above n 96 at para 254. 106Pope & Talbot , above n 93 at para 85. 107ADF , above n 26 at para 74. 108 The similarity is likely due, in part, to the fact that the ADF tribunal was chaired by a former WTO Appellate Body judge. 109Feldman , above n 96 at para 75. 110 Ibid. 111 Ibid. 112NAFTA Chapter 11 is a hybrid because it appears to provide national treatment and MFN treatment for investors, under Arts 1102(1) and 1103(1), without any limitation on where the investment is made in the Free Trade Area established under NAFTA Art 101. 113Feldman , above n 96 at paras 75–6. 114 See Pope & Talbot , above n 93 at paras 35–6. 115 See eg Pope & Talbot , ibid at paras 35–6; and US—Trucking, above n 96 at paras 68–9. 116United States—Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, 12 October 1998, at para 158. 117Pope & Talbot Inc v Canada , above n 93 at paras 78–9: ‘Differences in treatment will presumptively violate Article 1102(2), unless they have a reasonable nexus to rational government 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 the NAFTA’. 118Myers , above n 4 at para 162. 119Feldman , above n 96 at para 73. 120 Ibid , quoting the WTO Appellate Body in United States—Measure Affecting Imports of Woven Wool Shirts and Blouses from India, WT/DS33/AB/R, 23 May 1997, at 14 (emphasis added). 121 Ibid , ‘In case a party adduces some evidence which prima facie supports his allegation, the burden of proof shifts to his opponent’. Id at para 73 n 38; quoting Asian Agricultural Products Limited v Republic of Sri Lanka , 5 ICSID Rep 245, 272 (1990). 122 Ibid at 78. Such a finding is welcome, given that the alternative would have been to reward Mexico for failing fully to participate in the evidence-gathering process. Since it is practically impossible for an ad hoc international tribunal to compel a sovereign country to comply with a discovery request, the drawing of adverse inferences is one of the few ways where a tribunal can preserve the equality of the parties to arbitration, as required under NAFTA Art 1115. 123Thunderbird , above n 44 at 177. 124 Ibid at paras 178–83. 125 Note that the focus of the NAFTA expropriation provision, Art 1110(1), is on an investment made in the territory of another party, which is also a narrower form of protection than the breadth of protection offered under Arts 1102 and 1103, which presumably includes investors acting in their own right, arguably anywhere in the Free Trade Area established under NAFTA Art 101. Unlike many BIT provisions, NAFTA Art 1101(1) does not limit the ambit of the chapter's protection to ‘investors with investments in the territory of another NAFTA Party’. Early drafts of the Chapter contained such language (see <http://www.naftaclaims.com>), but the territoriality requirement appears to have been excised from the final draft. 126Waste Management II , above n 7 at para 98. 127 In reliance on statements of the tribunal in SD Myers v Canada , the Saluka tribunal underscored that the determination of a breach of the fair and equitable treatment requires a balanced approach to the interests of the disputing parties by ‘… a weighing of the Claimant's legitimate and reasonable expectations on the one hand and the Respondent's legitimate regulatory interests on the other’. See Saluka, above n 7 at paras 305–6. As noted by the SD Myers tribunal, above n 4 at para 263: ‘The Tribunal considers that a breach of Article 1105 occurs only when it is shown that an investor has been treated in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective. That determination must be made in the light of the high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders’. Also, other tribunals have reflected this type of balancing process in their awards, for example: LG&E , above n 17 at para 162; Azurix , above n 17 at paras 386, 393; MTD , above n 7 at para 196. 128 On which, see further Peter Muchlinski, ‘ “Caveat Investor”? The Relevance of the Conduct of the Investor under the Fair and Equitable Treatment Standard’, 55 ICLQ 527 (2006). 0 Sign Up for Alerts Receive free updates on Investment Claims by email or RSS. <a href="#top" class="red-link-plain" title="Top of page">page top</a> <img src="../images/arrow_up.gif" alt="" width="15" height="15" align="absmiddle" /> м Authors: Pia Acconci ? Keywords: Standards of treatment – Most-favoured-nation treatment (MFN) – Most-favoured-nation, jurisdictional matters – Most-favoured-nation, procedural matters – Most-favoured-nation, substantive matters This chapter examines how the most-favoured-nation treatment standard has come to be regularly included in international instruments and treaties concerning foreign investment. After outlining the special features of this standard in international investment law, it considers the relevant cases that have dealt with claims for applying such a standard differently from what many states and scholars were expecting. The chapter then evaluates whether or not this case-law is actually altering the present international scenario for foreign investment, as one could think in light of the debate which arose from the ICSID Awards in the Maffezini and other subsequent cases.

0subscriber_article?script=yes&id=%2Fic%2FMonograph%2Flaw-iic-9780199231386&recno=62&searchType=browse Chapter 10 Most-Favoured-Nation Treatment

(1)The Essential Features of the MFN Standard365

(2)The MFN Treatment Standard as a Treaty Clause367

(a) The MFN Clause in BITs 370

(b) The MFN Clause in other International Instruments 373

(3)The International Case-Law Applying the MFN Standard381

(a) Substantive Treatment 381

(b) Procedural Matters 387

Concluding Remarks401

WITH increasing globalization, and with most developing countries no longer advocating the establishment of a New International Economic Order (NIEO), the so-called ‘open-door policy’ on foreign investment has become widespread and the non-discrimination principle is generally more accepted than in the past. The two typical non-discriminatory treatment standards, that is most-favoured-nation and national treatment, are usually included in international treaties, whether bilateral or multilateral, concluded in the field of foreign investment. As is well known, the most-favoured-nation standard takes the rights granted by the host state to foreign investors of other countries as a benchmark, whereas under the national treatment standard the foreign investor is entitled to be treated as a host state national would be. 1 These are both relative standards, that is, variable and comparative, as they presuppose comparison with the way other foreign investments (most-favoured-nation treatment, MFN) and national ones (national treatment) are dealt with by the host state in a like situation. Their aim is to ensure uniformity and equality of the treatment granted by a host state and to balance competition in this country's market. This chapter will assess how the most-favoured-nation treatment standard has come to be regularly included in international instruments and treaties concerning foreign investment. After outlining the special features of this standard in international investment law, it will examine the relevant cases 2 that have, inter alia, dealt with claims for applying such a standard differently from what many states and scholars were expecting. Then, the chapter will evaluate whether or not this case-law is actually altering the present international scenario for foreign investment, as one could think in light of the debate which arose from the ICSID Awards in the Maffezini and other subsequent cases. 3

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(1) The Essential Features of the MFN Standard

Commonly, uniformity and equality are deemed appropriate terms to define what consequences are supposed to derive from reference to the non-discrimination principle. 4 Undoubtedly, this does not mean that such a principle obliges a host state to grant an ‘equal or identical treatment’ to all investors operating on its territory. A host state can grant different treatment to investors from different foreign states, if they are in a different objective situation. That is why investment treaties often include the ‘in like situations’ or ‘in like circumstances’ requirement in their most-favoured-nation treatment clauses. This means that such clauses apply only to investors and investment that are ‘in like situations’ or ‘in like circumstances’. 5 Reference to this requirement underlines the comparative nature of the non-discriminatory treatment standards and the key role of comparators. As the ultimate goal of the non-discrimination principle is to make foreign investors from different countries and national investors compete on the same level, it is enough that a host state accords foreign investors a ‘“treatment no less favourable” than that accorded to the “most favoured” third nation … and to [its] nationals’, 6 provided that the ejusdem generis principle is satisfied.

The ejusdem generis principle requires that the international treaty including a most-favoured-nation clause (so-called ‘basic treaty’) deals with the same subject-matter as the international treaty providing for the most favourable treatment (so-called ‘third-party treaty’). 7 Otherwise, in conformity with general rules of international law, the ‘third-party treaty’ is res inter alios acta in respect of the state which, under the ‘basic treaty’, is the beneficiary of the most-favoured-nation treatment. 8

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From a foreign investor's point of view, both the non-discriminatory standards, being variable, do not, however, ensure certainty of treatment. In order to achieve the highest level of protection possible, modern international treaties concerning foreign investment prescribe that a contracting state has to grant another contracting state's investors most-favoured-nation treatment or national treatment, ‘whichever is the more favourable’. In addition, these treaties often refer to both such standards combined with other different treatment standards, such as fair and equitable treatment. This is a non-contingent standard, that is, invariable and absolute, since it is independent of the treatment accorded by the same country to other investors.

The 1994 Dutch Model BIT provides a typical formulation of how the possible different treatment standards can be combined. By Article 3 (1) and (2):

1. Each Contracting Party shall ensure fair and equitable treatment of the investments of nationals 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 nationals. Each Contracting Party shall accord to such investments full physical security and protection.

2. More particularly, each Contracting Party shall accord to such investments treatment which in any case shall not be less favourable than that accorded either to the investments of its own nationals or to investments of any third State, whichever is more favourable to the national concerned. 9

Most-favoured-nation treatment cannot apply if only investors of the same country have invested in another country. In such a case there is no possibility of comparing the treatments granted by the same country to foreign investors coming from different countries. Thus, fair and equitable treatment becomes a very important reference standard. 10 This is probably one of the main reasons why the latter is often considered more typical of the field of foreign investments than the most-favoured-nation treatment standard, whose functioning in such a field has indeed been quite a neglected issue so far.

Recently, some claimants and scholars have, however, started to be interested in this issue. Actually, applying the most-favoured-nation treatment standard has become one of the most controversial issues in international investment law,

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especially since the 2000 ICSID Award in the Maffezini case. As will be seen, the ICSID tribunal established that, by including a most-favoured-nation standard clause in an investment treaty, uniformity can be achieved as regards not only substantive treaty rules but also procedural ones, particularly those concerning dispute settlement and consent to arbitration. Afterwards, other ICSID tribunals interpreted and applied this treatment standard extensively, causing much public debate at an international law level. 11 Notably, the line of reasoning adopted by these tribunals has contributed to the ongoing debate on ICSID and its possible reform. In fact, ICSID is criticized by some developed and developing countries that are no longer satisfied with the increasingly frequent recourse to its arbitration by private investors, resulting in increasingly complex amounts of inconsistent case-law.

(2) The MFN Treatment Standard as a Treaty Clause

Most-favoured-nation treatment is provided for in a treaty clause. In effect, there are no rules of general international law in this respect. 12 This was also the view of the UN International Law Commission which, in 1978, proposed some Draft Articles on Most-Favoured-Nation Clauses to the UN General Assembly to promote negotiations for a pertinent multilateral agreement within the UN. 13 These negotiations did not take place. The 1969 Vienna Convention on the Law of Treaties would have been the key reference point for such negotiations, since the most-favoured-nation treatment standard is provided for in a treaty clause. The relevance of such a Convention

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would have derived from the fact that, at least partly, it incorporates rules of general international law on the Law of Treaties. 14

With respect to international agreements providing for the most-favoured-nation treatment standard in the field of foreign investment, bilateral investment treaties (BITs) must be distinguished from multilateral ones, especially from recent regional ones, which mostly establish free trade areas. Whereas BITs tend to focus on treatment and protection of private investments, 15 recent multilateral agreements also tend to ensure progressive liberalization and promotion of trade and investment. Therefore, these agreements, inter alia, deal with matters such as market access, right of establishment, performance requirements, government procurement, and transparency. However, multilateral agreements have only a limited geographical and sectoral coverage and provide more exceptions than BITs. Furthermore, as far as specific treatment standards are concerned, such agreements generally follow the typical formulation of corresponding BITs provisions. Thus, BITs remain basic for evaluating chief trends in present international investment law. In particular, these bilateral treaties, being great in number and being widely applied by international arbitral tribunals, are a very important means to understand the main issues of modern international investment law, such as that related to the functioning of the most-favoured-nation treatment standard.

Implementing treaty obligations concerning treatment standards generally means protecting the foreign investor against non-commercial risks, that is, against any action of the host state authorities that may impair his/her legal position and economic activity. Eventually, the observance of these obligations ensures that, during the normal life of an investment, the relationship between a host state and a foreign investor remains almost uneventful.

As a rule, the most-favoured-nation clauses included in investment treaties are formulated as unconditional because these clauses are often unrestricted as well as automatically and immediately applicable to investments made by nationals of each contracting state. These clauses are also indeterminate since they are unlimited ratione materiae, ratione personae, and ratione temporis. Furthermore, such clauses are usually reciprocal since they refer to mutual relationships among all contracting states of the investment treaty taken into consideration. On the other hand, since foreign investment is also a field in which states ‘wish to retain their sovereign rights … in line with the traditional diversity of their economic structures’, 16 investment treaties tend to provide for exceptions and reservations to the

end p.368

most-favoured-nation treatment standard. 17 By so doing, a balance can be achieved between the non-discrimination principle and possible diverging interests at stake.

Note that to some extent a host state can control the treatment standard accorded to foreign investors under non-discriminatory standards. 18 Specifically, with respect to the most-favoured-nation treatment standard, this state's control derives from the fact that it can decide the treatment granted to the most favoured nation. Thus, a host state can, at least in principle, limit the scope of most-favoured-nation treatment clauses which are included in its international treaties. Mostly, the level of treatment, that is, the content of the rights accorded, is not spelled out directly. Instead these rights are to be inferred from the actual texts of the treaty clauses which provide the treatment standards, and which must be interpreted in conformity with the international rules on treaty interpretation, and from the provisions of other pertinent legal instruments. 19 Thus, as there are a very great number of treaties and instruments in the field of foreign investment, determining the field of application of the pertinent most-favoured-nation clauses can be hard. Such a field of application can vary both ratione materiae and ratione personae.

Particular problems may arise from the fact that the scope of these clauses may be different from treaty to treaty. Although the main difference between most-favoured-nation treaty clauses is whether or not they apply only at the post-entry stage or also at the pre-entry stage, there are other important distinctions. For example, some treaties do not limit the functioning of their most-favoured-nation clauses at all, whereas other treaties confine it to specific matters. Hence, it is relevant to examine what sorts of clauses are in principle included in international treaties concluded in the field of foreign investment. 20

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(a) The MFN Clause in BITs

BITs typically include a most-favoured-nation clause which runs as follows:

Neither Contracting Party shall subject investments in its territory owned or controlled by nationals or companies of the other Contracting Party to treatment less favourable than it accords in equivalent circumstances … to nationals or companies of any third State. 21

In general, the object of the most-favoured-nation BIT clause is the investment rather than the investor. Anyway, some clauses refer to both 22 or only to investors. 23 As a rule, most-favoured-nation BIT clauses are unconditional, reciprocal, and indeterminate, although different clauses may be detected. For example, the most-favoured-nation clauses of a few German BITs cover only ‘similar treaties’ of one contracting Party. 24 Besides, some BITs do not refer to the ‘in like [or equivalent] circumstances’ requirement. 25 Most BITs refer to treatment standards, including the most-favoured-nation standard, only with respect to the post-establishment phase. In fact, as already pointed out, BIT treatment clauses tend not to deal with admission and establishment matters. This is due to the fact that BITs per se do not grant a general right to make foreign investments. American, and some recent Canadian, BITs are significantly different in this respect, as they also include a most-favoured-nation commitment as regards market access. 26 A similar undertaking is also provided by

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the 1988 BIT between Japan and China. 27 In any case, most of the treaty obligations concerning treatment standards cover ‘the management, maintenance, use or enjoyment of investments’ 28 or ‘activities in connection with investments’ 29 or ‘activities associated with investments.’ 30 Furthermore, beyond an indefinite most-favoured-nation clause, many BITs include other most-favoured-nation clauses in relation to specific matters.

Notably, some BITs include a most-favoured-nation treatment clause concerning transfers of payments or in general ‘returns on investments’. These clauses may run as follows: … the contracting States undertake to accord to transfers … a treatment as favourable as that accorded to transfers originating from investments made by investors of a third State. 31

There are also specific treaty clauses which provide for the most-favoured-nation standard to ensure equality of treatment of foreign investments as regards the consequences of expropriations, nationalizations, or any other similar measure that a host state may, directly or indirectly, adopt and/or the consequences of war or similar events which may occur in a host state. To this end, some BITs include a clause, according to which ‘nationals or companies of either Contracting Party shall enjoy most-favoured-nation treatment in the territory of the other Contracting Party in respect of the matters provided for in this Article’. 32

Some BITs refer to both non-discriminatory treatment standards only as regards determining the consequences of war or similar events which may occur in a host state. In this regard, a typical clause is the following:

Each Party shall accord national and most favoured nation treatment to covered investments as regards any measure relating to losses that investments suffer in its territory owing

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to war or other armed conflict, revolution, state of national emergency, insurrection, civil disturbance, or similar events. 33

As will be seen, some of these BIT clauses have been applied by ICSID tribunals to compensate foreign investors for damages caused by domestic riots and acts of violence which occurred in host states. 34

Moreover, some BITs include a clause to ensure automatic adjustments of their treatment standards, which may provide that:

If the legislation of either Contracting Party or obligations under international law existing at present or established hereafter between the Contracting Parties in addition to this Treaty contain a regulation, whether general or specific, entitling investments by nationals or companies of the other Contracting Party to a treatment more favourable than is provided for by this Treaty, such regulation shall to the extent that is more favourable prevail over this Treaty. 35

At any rate, investment treaties do include some exceptions to the applicability of the non-discriminatory treatment standards, even if these standards are often provided in clauses which at first sight are indeterminate, reciprocal, and unconditional. These exceptions may be justified by a host country's desire to retain control over foreign investors or by a host country's propensity for a progressive, rather than immediate, liberalization. There are general exceptions concerning public policy matters, such as public order, health, and national security, which often apply to all the provisions of a BIT. Other common exceptions to the treatment standards aim at ensuring the priority of international obligations that the contracting states of an investment treaty may have taken in other fields, such as regional economic integration 36 and taxation. 37 Some US BITs provide for an exception in relation to protecting intellectual property

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rights. For example, many US BITs include a clause according to which: …‘the obligations … do not apply to procedures provided in multilateral agreements concluded under the auspices of the World Intellectual Property Organization relating to the acquisition or maintenance of intellectual property rights’. 38