Introduction to the Fair and Equitable Treatment Standard

The obligation of host countries to accord fair and equitable treatment is a widespread principle in investment treaties. Tribunals have identified numerous elements encom-passed in the fair and equitable treatment standard including transparency²⁴⁰, the protec-tion of legitimate expectaprotec-tions²⁴¹, stability and predictability of the legal and business en-vironment²⁴², procedural propriety and due process requirements prohibiting inter alia denial of justice²⁴³, arbitrariness²⁴⁴, good faith²⁴⁵ and freedom from coercion and harass-ment²⁴⁶.²⁴⁷

240 Tecmed S.A. v. Mexico, Award, 29 May 2003, ICSID Case No. ARB (AF)/00/2, para. 154; MTD v.

Chile, Award, 25 May 2004, ICSID Case No. ARB/01/7, paras 114, 115; Metalclad v. Mexico, Award, 30 August 2000, ICSID Case No. ARB(AF)/97/1, para. 99.

241 See eg Saluka v. The Czech Republic, Partial Award, 17 March 2006, UNCITRAL arbitration (Permanent Court of Arbitration), para. 302; Metalclad v. Mexico, Award, 30 August 2000, ICSID Case No.

ARB(AF)/97/1, paras 76, 99; Maffezini v. Argentina, Award, para. 83; Tecmed S.A. v. Mexico, Award, 29 May 2003, ICSID Case No. ARB (AF)/00/2, para 154; MTD v. Chile, Award, 25 May 2004, ICSID Case No. ARB/01/7, paras 114, 115.

242 CMS v. Argentina, Award, 12 May 2005, ICSID Case No. ARB/01/8, para. 274.

243 Mondev v. United States of America, Award, 11 October 2002, ICSID Case No. ARB(AF)/99/2, para. 126; Waste Management v. Mexico, Award, 30 April 2004, ICSID Case No. ARB(AF)/00/3, para. 98.

244 Loewen v. United States of America, Award, 26 June 2003, ICSID Case No. ARB(AF)/98/3, para.

132; Waste Management v. Mexico, Award, 30 April 2004, ICSID Case No. ARB(AF)/00/3, para. 98.

245 Tecmed S.A. v. Mexico, Award, 29 May 2003, ICSID Case No. ARB (AF)/00/2, para. 153; Genin v. Estonia, Award, 25 June 2001, Case No. ARB/99/2, para. 371.

246 Pope and Talbot Inc. v. Canada, Award on the Merits of Phase 2, 10 April 2001, para. 181; Tec-med S.A. v. Mexico, Award, 29 May 2003, ICSID Case No. ARB (AF)/00/2, para. 163.

247 For details on the fair and equitable treatment standard see UNCTAD, Fair and equitable treat-ment; Mayeda, Playing Fair: The Meaning of Fair and Equitable Treatment in Bilateral Investment Treaties;

Schreuer, Fair and Equitable Treatment in Arbitral Practice; Westcott, Recent Practice on Fair and Equita-ble Treatment; Behrens, Towards the Constitutionalization of International Investment Protection, pp. 169-176; Schill, „Fair and Equitable Treatment“ as an Embodiment of the Rule of Law, in Hofmann/ Tams (eds), The International Convention on the Settlement of Investment Disputes, pp. 41-55. According to Schill, the fair and equitable treatment standard can be interpreted as an embodiment of the rule of law en-compassing the requirement of stability, predictability and consistency of the legal framework, the principle of legality, the protection of investor confidence or legitimate expectations, procedural due process and

de-65 Discussion on the fair and equitable treatment standard has mainly focused on whether the treatment required should be measured against the customary international law mini-mum standard or whether the standard is an autonomous self-contained concept.²⁴⁸ De-pending on whether one accepts that certain fair and equitable treatment clauses may con-tain elements going beyond what is required by the customary international law minimum standard, there may or may not be room for the invocation of more favourable fair and equitable treatment clauses in conjunction with MFN clauses. The possibility to construe the fair and equitable treatment standard as going beyond the international minimum standard of treatment depends on the formulation of the standard²⁴⁹, which differs in par-ticular with regard to the inclusion or non-inclusion of a reference to international law, and in case there is such a reference, with regard to the relationship between the fair and equitable treatment clause and international law as expressed in the wording of the clause.

For disputes arising under NAFTA, the issue whether the fair and equitable treatment standard is independent from the minimum standard of customary international law has been resolved in the binding interpretation of the Free Trade Commission (FTC)²⁵⁰ of Ju-ly 21, 2001. The note clarified that the fair and equitable treatment standard of NAFTA

nial of justice, substantive due process or protection against discrimination and arbitrariness, the require-ment of transparency and the requirerequire-ment of reasonableness and proportionality.

248 Equating the fair and equitable treatment standard with the minimum standard required by interna-tional law means that its scope depends on the existing body of customary internainterna-tional law. The content of that minimum standard was first described in a ruling of the Mexico-United States General Claims Com-mission in the case of Neer v. Mexico. According to this decision, a violation of the minimum standard of treatment of aliens under international customary law occurs only in cases where the treatment amounts to gross misconduct, i.e. “to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of gov-ernmental action so far short of international standards that every reasonable and impartial man would read-ily recognize its insufficiency”, see Neer v. Mexico, R.I.A.A., vol. IV, pp. 61, 62. However, it has been rec-ognised by arbitral tribunals that the content of the minimum standard is not limited to the interpretation given to it in the early 20^th century in the context of the Neer case but is constantly in a process of develop-ment. See Pope & Talbot v. Canada, Award on Damages, paras 58–61; Mondev v. United States of Ameri-ca, Award, 11 October 2002, ICSID Case No. ARB(AF)/99/2, paras 116, 123; ADF v. U.S., Award, 9 Janu-ary 2003, ICSID Case No. ARB(AF)/00/1, para. 179.

249 See Saluka v. The Czech Republic, Partial Award, 17 March 2006, UNCITRAL arbitration (Per-manent Court of Arbitration), para. 294.

250 The Free Trade Commission is established under NAFTA Article 2001 (1) and consists of the cab-inet-level representatives of the three Contracting Parties of NAFTA. Its interpretations of NAFTA Chapter 11 provisions are binding on NAFTA tribunals, NAFTA Article 1131 (2).

did not go beyond the international minimum standard²⁵¹, rejecting the interpretation giv-en by the Pope & Talbot Tribunal, which had interpreted the clause as covering a fairness requirement going beyond the international law minimum standard²⁵².

While the interpretation of the FTC is binding on the NAFTA Contracting Parties, it is not necessarily valid for other investment treaties. Moreover, there are two features in which NAFTA Article 1105 deviates from most other investment treaties. First its heading is not

“Fair and Equitable Treatment” but “Minimum Standard of Treatment”, which explicitly refers to the minimum standard of customary international law, and second it requires to accord to investments treatment “in accordance with international law, including fair and equitable treatment”, which suggests that the fair and equitable treatment standard is a subsidiary element of customary international law.²⁵³ In reaction to the Pope & Talbot case and the FTC’s Note on Interpretation, several recent BITs have adopted a more pre-cise approach to the fair and equitable treatment standard, explicitly linking the fair and equitable treatment standard to the minimum standard which is part of customary interna-tional law.²⁵⁴ In contrast, the majority of fair and equitable treatment clauses does not make reference to the minimum standard of international law.²⁵⁵ In that case, the content of the standard leaves room for autonomous interpretation, leaving the possibility to

251 According to the FTC interpretation, “Article 1105 (1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to invest-ments of investors of another party. The [concept] of ‘fair and equitable treatment’ […] do[es] not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens. A determination that there has been a breach of another provision of the NAFTA, or of a separate international agreement, does not establish that there has been a breach of Article 1105 (1).” NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter 11 provisions of July 31, 2001, available at < http://www.worldtradelaw.net/nafta/chap11interp.pdf>.

252 Pope and Talbot Inc. v. Canada, Award on the Merits of Phase 2, 10 April 2001, para. 113.

253 Article 1105 NAFTA provides that “Each party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protec-tion and security.”

254 For example, the Canadian Model BIT provides in Article 5 (2): “The concepts of ‘fair and equita-ble 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.” Similarly, the US Model BIT in its Article 5 (2), second sentence and the AUSFTA in its Article 11.5 (2), first sen-tence provide: “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 mini-mum standard] and do not create additional substantive rights.” Compare in contrast the 1994 US Model BIT and the 1991 Argentina-US BIT, which contain broader formulations.

255 Coe, Fair and equitable treatment under NAFTA’s investment chapter, p. 18.

67 hibit administrative measures that would not necessarily be illegal under customary inter-national law.²⁵⁶

Whether fair and equitable treatment clauses which do not make reference to international law can be interpreted autonomously, i.e. independently from the international minimum standard, is highly disputed. While some affirm the possibility and thus an opportunity to apply the principle of most-favoured-nation treatment to import more favourable fair and equitable treatment clauses,²⁵⁷ other tribunals have rejected the inclusion of fairness re-quirements beyond the international minimum standard despite variations in the lan-guage.²⁵⁸ Under the narrower interpretation of the fair and equitable treatment standard, there is no room for application of the MFN principle.

Comparable to the fair and equitable treatment standard, the full protection and security standard, which is a common standard in bilateral investment treaties and dates back to Treaties of Friendship, Commerce and Navigation, raises the question whether it only provides an obligation for the host state to comply with the customary international law minimum standard, or whether it imposes an obligation going beyond the minimum standard. Some BITs expressly provide that full protection and security shall be enjoyed

256 The Saluka tribunal came to that conclusion with regard to a clause that did not contain a reference to international law (Saluka v. The Czech Republic, Partial Award, 17 March 2006, UNCITRAL arbitration (Permanent Court of Arbitration), para. 292). With regard to a series of British BITs that contained a fair and equitable treatment clause (with no reference to international law), Mann wrote: “[U]nfair and inequita-ble treatment is a much wider conception [than customary international law] which may readily include such administrative measures […] as are not plainly illegal in the accepted sense of international law. […]

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 previ-ously employed form of words. […] The terms are to be understood and applied independently and auton-omously.” (Mann in 52 BYIL, 243, 244) See also Dolzer/ Stevens, Bilateral Investment Treaties, p. 60, Vasciannie, The Fair and Equitable Treatment Standard in International Investment Law and Practice, p.

144; Schreuer, Fair and Equitable Treatment in Arbitral Practice, p. 364; Westcott, Recent Practice on Fair and Equitable Treatment, p. 429.

257 Pope and Talbot Inc. v. Canada, Award on the Merits of Phase 2, 10 April 2001, para. 113. See also Vasciannie, The Fair and Equitable Treatment Standard in International Investment Law and Practice, p. 149; Westcott, Recent Practice on Fair and Equitable Treatment, p. 430.

258 ADF v. U.S., Award, 9 January 2003, ICSID Case No. ARB(AF)/00/1, para. 194; Rumeli v. Ka-zakhstan, Award, 29 July 2008, ICSID Case No. ARB/05/16, para. 611; Azurix v. Argentina, Award, 14 July 2006, ICSID Case No. ARB/01/12, para. 361; CMS v. Argentina, Award, 12 May 2005, ICSID Case No. ARB/01/8, para. 284. See also Orakhelashvili, The normative basis of “fair and equitable treatment”, p.

105.

in a manner consistent with international law.²⁵⁹ A number of BITs combine the full pro-tection and security standard with the fair and equitable treatment standard, which sug-gests that both expressions contemplate compatible standards of treatment.²⁶⁰ The full protection and security standard has been interpreted by the tribunal in AAPL v. Sri Lanka as adopting the customary international law standard²⁶¹, according to which State respon-sibility generally arises when a State has failed to apply due diligence in the protection of foreigners against violation of their rights and interests²⁶², as opposed to creating strict liability, under which States are under an absolute obligation to guarantee that no damag-es will be suffered²⁶³. Yet the tribunal left open the possibility that the full protection and security standard could refer to a standard higher than the international law minimum standard.²⁶⁴