Fair and Equitable Treatment

History

1. Most of the BITs and other investment treaties provide for fair and equitable treatment (FET)
of the foreign investments.
2. Highest practical relevance
3. It is not new and appeared in international documents
4. Just and equitable treatment
5. United Nations Code of Conduct of Transitional Corporation- Transnational corporations
should receive fair and equitable treatment.
6. The Organisation for Economic Co-operation and Development (OECD)- Article 1- Fair and
Equitable treatment to the property of the nationals of the other party
7. North American free Trade Agreement (NAFTA), 1992- Article 1105- FET Principles
8. Energy Charter Treaty (ECT), 1994 – Article 10(1): the Provision of this treaty should
encourage and create stable, equitable, favourable and transparent conditions for Investors.

Heterogeneity of Treaty language

1. Every type of clause has to be interpreted in accordance with Article 31 of the VCLT, duly
taking into account its context, its history.

Nature and Functions

1. To fill the gaps, left by the more specific standards

2. In practice, the FET standard may offer redress where the facts do not support a claim for
expropriation.
3. The general assumption is that fair and equitable must be considered to represent a single,
unified standard.
4. FET is a autonomous standard
5. FET standard is meant as a rule of International Law
6. The FET standard may be violated, even if the foreign investor receives the same treatment
as investor of the host state nationality, its totally independent principle.

FET and Customary International Law

1. Whether FET= International Minimum Standard?

2. OECD Draft conventions on the protection of Foreign property, 1967 indicate that FET
standard is set by customary international law.
3. Article 1105 of the NAFTA treats FET as the part of international law.
4. CMS vs. Argentina- FET is not different from the international minimum standard required by
international law.
5. Vivendi vs. Argentina- the applicable BIT provided for fair and equitable treatment
according to the principles of international law. FET is not limited to international minimum
standard and such interpretation would not counter to the text of ordinary meaning.
6. El Paso Case- the content of international minimum standard is as little defined as the BIT’s
FET standard.

Evolution of FET

1. Mondev vs. United States- The court said that, what is fair and equitable cannot be reached
in the abstract, it must depend on the facts of the particular case.
2. Waste Management vs. Mexico- The standard is to some extent a flexible one which must
be adapted to the circumstances of each case.
 3. In interpreting Article 1105 of NAFTA, the court said that Article 1105 (1) is not frozen in time
and that the minimum standard of treatment does evolve.

Definition of FET

1. In Tecmed Case: the court said, that the tribunal should interpret the concept of FET
autonomously taking into account its text according to its ordinary meaning, international
law and good faith principle.
2. Saluka vs. Crech Republic- Page 44 (Must Read)
3. Discrimination against foreigners has been regarded as an important indicator of failure to
grant fair and equitable treatment.

Investor’s legitimate expectations

1. The investor’s legitimate expectations are based on the host state’s legal framework and on
any undertakings and representations made explicitly or impliedly by the host state.
2. Legal Framework Includes:
- Legislations
- Treaties
- Assurances in decrees, licenses
- Contractual undertakings
3. A reversal of assurances by the host state that have led to legitimate expectations will violate
the principles of FET.
4. CMS vs. Argentina- The respondent had given guarantees for the price adjustments for the
transportation of natural gas in legislations, regulations and under a license. Subsequently,
an emergency law and other laws and regulations first suspended and then terminated these
guarantees. The tribunal found that Argentina’s actions had breached the FET standard.
5. Investor’s expectations will be seriously reduced, if there is instability in the political
conditions of the particular country.
6. Expectations are only protected, if they are legitimate and reasonable.
7. Saluka vs. Czech Republic – Investor’s right to stability will prevail over state’s right to
regulate.
8. Continental Casualty vs. Argentina- Mere political statements are not capable of creating
reasonable expectations.

Transparency

1. Transparency means that the legal framework for the investor’s operations is readily
apparent and that any decisions affecting the investor can be traced to that framework.
2. SPP vs. Egypt- Page 149
3. Metal Clad vs. Mexico – Page 150 (bridge Making)
4. Techmed vs. Mexico (BIT between spain and mexico)
5. Waste Management Case – Transparency and Reliance as elements of FET standard
contained in Article 1105(1) of NAFTA.

Compliance with Contractual Obligations

1. What extent this protection extends to observance of obligations arising from contracts?
2. Legitimate expectations are actually made on contractual arrangements with the host state?
3. Parkerings vs. Lithuania- A simple breach of contract by a state would not trigger a violation
of the FET standard.
4. Need sovereign powers

DUE PROCEDURE SHOULD BE FOLLOWED

GOOD FAITH

1. Good faith is a board principle that is one of the foundations of International Law and
Foreign Law
2. Good Faith is inherit in FET
3. Waste Management Case- Obligation to act in good faith was a basic obligation under FET
standard as contained in Article 1105 of NAFTA.
4. Saluka vs. Czech Republic- Central Role to requirement of good faith in its description of FET.

FREEDOM FROM COERCION AND HARASSMENT

1. Tecmed vs. Mexico Case – Investor’s were forced to relocate to another site, bearing the
costs and the risks of a new business

NATIONAL TREATMENT

Meaning:

1. Provide level playing field between foreign investor and local competitor.
2. Foreign investors and investments are given treatment, no less than that which the host
state accords to its own investors.
3. Foreign Investor = National Investor ( in applying rules and regulations)
4. Using the words no less favourable
5. All national treatment clauses apply once a business is established.

Application:

Three steps need to be followed:

1. Whether the foreign investor and the domestic investor are placed in a comparable setting.
(Like Situations/ Circumstances)
1.1. Same Business or Economy Sector
1.2. Feldman vs. Mexico – The “Like circumstances” was interpreted to refer to the same
business, that is exporting of cigarettes.
2. Treatment to the foreign investors = Treatment to Domestic Investors
2.1 Lauder vs. Czech Republic – A discriminatory measure is simply the one that fails to
provide national treatment.
3. In case of treatment which is less favourable, it must be determined whether the
differentiation was justified.
3.1. Differentiation are justifiable if rational grounds are shown
3.2. SD Myers vs. Canada- The tribunal seems to have assumed that subsidies are allowed to
promote national policies.
3.3. More relevance has been given to practical impact than the intent.

MOST FAVOURED NATION TREATMENT- FROM BOOK

1. MFN treatment is not required under customary law.

2. The main goal of the MFN clause in a BIT is to widen the rights of the investor.
3. Parties should treat each other as favourable as they treat third parties.
4. The clause may not have practical significance if the states concerned fails to grant any
relevant benefit to third party.
 5. The United Kingdom has in some of its recent treaties spelled out the scope of the MFN
clause for the avoidance of doubt.

Methods of Interpretation:

1. The rules of interpretation laid down in the VCLT will also apply to an MFN clause.
2. The meaning of the clause should be indentified in the light of object and purpose of the
treaty.
3. Intention of the parties should be considered while interpreting the MFN clause
4. Bavindir vs. Pakistan - The tribunal found that a MFN clause would permit the invocation of
an FET clause contained in another BIT.
5. CME vs. Crezh Republic - MFN clauses have been invoked in the context of defining the
standard of compensation in expropriation cases.

SOURCES OF INTERNATIONAL LAW - The domestic rules on nationality may determine jurisdiction in
a particular case.

1. The ICSID Convention

1.1. The Convention on the Settlement of Investment Disputes
1.2.It is a multilateral treaty
1.3. Provides procedural framework for dispute settlement through conciliation and
arbitration.
1.4.Participation in ICSID convention does not amount to consent to arbitration.
2. Bilateral Investment Treaties (BITs)
2.1. It is the most important source of international investment law
2.2. It provides guarantee for the investment of the investor
2.3. It consist of three parts:
a. Definitions- Investment and Investor
b. Substantive standards for protection of Investor and Investments like FET, MFN,
Expropriation, Free Trade Agreement (FTA)
c. Dispute Settlement – Investor State Arbitration & State-State Arbitration

3. The Energy Charter Treaty and NAFTA

3.1. The scope of ECT is not limited to investments but covers a wide range of issues such as
trade, transit, energy etc.
3.2. The objective of Article 102 of the NAFTA is to increase investment opportunities in the
territories of the parties.
3.3. The trade provisions of NAFTA are largely built on the rules of WTO.
3.4. In practise, the rules of expropriation (Article 1110) and Minimum standard of treatment
(Article 1105) have received most attention.
3.5. Investor may bring the suit under ICSID convention but both the party states should have
rectified the ICSID convention.

Customary International Law

4.1.Customary International Law remains highly relevant for the practise of investment
arbitration.
4.2.Article 31(3)(c) of the VCLT says that relevant rules of the International Law should be taken
into account, with the treaty’s context.
General Principles of Law:
5.1.More attention has been given to Article 38(1)(C) of the ICJ.
 5.2.There are lacunae in the text of the treaties where general principle of laws applies, like onus
probandi, right to be heard, natural justice etc.
Unilateral Statements
6.1.Unilateral Statements have also binding effect
6.2.The ICJ and its predecessor have recognised that unilateral declarations will be binding if the
circumstances are the wordings are such,that can be relied upon.
Case Laws- Not bound but still can refer

Interpretation & Application of Investment Treaties:

The interpretation of treaties is most done by the Ad Hoc Tribunal.

1. Methods of Treaty Interpretation

- Mostly done with the help of Article 31 of VCLT (Siemens vs. Argentina)
- Sometimes Article 32 of VCLT is also used.
- In Investment treaties, the object and purpose is often sought in their preambles.
- Lauder vs. Czech Republic- Tribunals have interpreted investment treaties in light of their
object and purpose, often looking at their preambles.
2. Preparatory Work
- Preparatory work is only a supplementary means of interpretation under Article 32 of
VCLT.
- Such as the drafting history of the ICSID Convention
- Methanex vs. United States- Limited relevance of the negotiating history of NAFTA in the
light of Article 32.
3. Interpretative Statements
- The NAFTA has a mechanism whereby the Free Trade Commission (FTC), can adopt
binding interpretation of the treaty.
- BITs do not normally have institutional mechanisms to obtain authentic interpretations
of their meaning but US Model BIT, 2012 provides so.
4. Precedents
- Tribunals do rely on previous decisions by other tribunals.
- They are not bound by the precedents
- Saipem vs. Bangladesh- It is the duty of the tribunal to contribute to the harmonious
development of law.

INVESTORS

1. Private Foreign Investor

- International investment law is designed to promote and protect the activities of private
foreign investors.
- Investors are either individuals or companies
- The investor’s nationality determines from which treaties it may benefit.
- The investor must show the nationality of the particular state party, if he wants to get
benefitted from the BIT/ NAFTA/ICSID
2. Nationality of Individuals
Importance of Investor’s Nationality?
1. The substantive standards guaranteed will only be applied on those nationals.
2. Jurisdiction of the tribunal will be decided according to the nationality.

 Nationality is determined by the law of country whose nationality is at issue

  Certificate of nationality is a strong evidence
 Flakes vs. Turkey- Dutch and Jordanian Nationality, BIT between Netherlands and Turkey.
3. Nationality of Corporations
 They are the Legal Personality, if not incorporated then no legal protection. ‘
 Incorporation/main seat of the business
 Saluka vs. Czech Republic- Page 20
 Article 25 (2) (b) of ICSID- Meaning of national of another contracting state.
4. Shareholder as Investor
 Investments often take place through the acquisition of shares in a company that has
a nationality different from the investors
 Barcelona Traction Case – Page 24
 Even though the local company may not persue the claim internationally, the foreign
shareholders in the company may persue the claim in its own name.

INVESTMENTS

The method of interpreting “investment” must follow Article 31 of the VCLT on Law of Treaties.

EXPROPRIATION- PROJECT