International Investment Law

A CHANGING LANDSCAPE
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International
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A COMPANION VOLUME TO INTERNATIONAL INVESTMENT PERSPECTIVES

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International investment agreements reinforce domestic liberalisation and underpin
Investment Law

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legal security for investment. Recently, a “new generation” of bilateral and regional
investment agreements has emerged, together with a growing body of jurisprudence.

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Analysis undertaken by the OECD Investment Committee of their core provisions and
arbitration procedures contributes to a common understanding of their implications, A CHANGING LANDSCAPE

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and ultimately better and more predictable outcomes for governments and investors.

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A COMPANION VOLUME TO INTERNATIONAL

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The present publication includes four surveys which have been developed to support
INVESTMENT PERSPECTIVES

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the work programme of the OECD Investment Committee on legal and policy issues

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INTERNATIONAL INVESTMENT LAW A Changing Landscape
arising from international investment agreements. The first survey deals with the
role of transparency and third party participation in investor-state dispute settlement

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procedures. It examines the current rules and recent steps taken to improve An r
transparency.
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The survey on “Fair and Equitable Treatment Standard” reviews the concept and
the elements of its content, based on jurisprudence and state practice. The survey
on “Indirect Expropriation and the Right to Regulate” touches upon one of the
most frequently contested provisions in investor-state arbitration in recent years.
It identifies main criteria found in investment agreements and used by tribunals to
articulate the difference between the two concepts. The survey on “Most-Favoured
Nation Treatment” reviews accepted principles to interpret the application of this long
standing provision in investment agreements.

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 e _it E d it
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International

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Investment Law:
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A Changing Landscape
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A COMPANION VOLUME TO INTERNATIONAL
INVESTMENT PERSPECTIVES

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

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ORGANISATION FOR ECONOMIC
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AND DEVELOPMENT

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information economy and the challenges of an ageing population. The Organisation

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common problems, identify good practice and work to co-ordinate domestic and

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Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand,
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Publié en français sous le titre :

Le droit international de l’investissement : un domaine en mouvement
Complément aux Perspectives d’investissement international

© OECD 2005

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 FOREWORD

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Foreword

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nternational investment agreements reinforce domestic liberalisation and underpin

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legal security for investment. Recently, a new generation of bilateral and regional

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investment agreements has emerged, together with a growing body of jurisprudence.

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The OECD serves as an effective forum for international discussions in this field. It
engages in thorough analysis of the core provisions of investment treaties and systemic

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issues related to investor-state dispute settlement in co-operation with the
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International Centre for Settlement of Investment Disputes (ICSID), other institutions,
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academics and practitioners. The goal of this work is to enhance com mon
understanding of their implications, and ultimately better and more predictable
outcomes for governments and investors.
The OECD has been at the centre of the discussion on investment agreements
since the beginning of its existence: in the 1960s, the draft OECD Convention on the
Protection of Foreign Property provided the basis for future bilateral investment
treaties; in the 1980s, it reported on OECD members’ positions on main features of
investment agreements; and, in the 1990s, the work on a Multilateral Agreement on
Investment, whilst not reaching a successful conclusion, advanced the understanding
of issues facing treaty negotiators.
I am very pleased that we are able to share the OECD’s most recent work with a
broader audience. The present publication includes four surveys. The first survey
examines the current rules relating to transparency and third party participation in
investor-state dispute settlement procedures, as well as recent steps taken to improve
transparency. The work has given rise to a public statement by the Investment
Committee on additional transparency which is also included in this publication.
The survey on “Indirect Expropriation and the Right to Regulate” touches upon
one of the most frequently contested provisions in investor-state arbitration. It
identifies main criteria found in investment agreements and used by tribunals to
articulate the relationship between the two concepts. The survey on “Fair and
Equitable Treatment Standard” reviews the concept and the elements of its content,
based on jurisprudence and state practice. The survey on “Most-Favoured-Nation

INTERNATIONAL INVESTMENT LAW: A CHANGING LANDSCAPE – ISBN 92-64-01164-1 – © OECD 2005

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FOREWORD

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s the application of thisiolong
Treatment” reviews accepted principles to interpret
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Manfred Schekulin

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Chair, OECD Investment Committee

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 NOTE BY THE EDITOR

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Note by the Editor

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his publication has been developed as an input to the Investment

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Committee’s work aimed at enhancing understanding of international

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investment law. The material in this publication benefited from discussions and

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a variety of perspectives in the Committee. The publication as a collection of
factual surveys, however, does not necessarily reflect the views of the

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Organisation for Economic Co-operation and Development or those of its
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member governments. It cannot be construed as prejudging ongoing or future

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negotiations or disputes pertaining to international investment agreements.
International Investment Law – A Changing Landscape is a companion volume
to the 2005 edition of International Investment Perspectives. Queries concerning
this annual publication should be addressed to the Investment Division of the
OECD Directorate for Financial and Enterprise Affairs (Hans Christiansen, Editor,
tel: 33-1 45 24 88 17; email: [email protected]; Pamela Duffin,
Publications Officer, email: [email protected]).

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 TABLE OF CONTENTS

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Table of Contents

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Chapter 1. Transparency and Third Party Participation

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in Investor-state Dispute Settlement Procedures . . . . . . 9

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Annex 1.A1. NAFTA Free Trade Commission’s Interpretations

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and Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Annex 1.A2. The Multilateral Agreement on Investment:

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Draft Consolidated Text . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
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Annex 1.A3. Provisions on Transparency of Proceedings
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in US Free Trade Agreements with Chile, Singapore,
Dominican republic-Central America (DR-CAFTA) Lect
and Morocco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Annex 1.A4. Model Bilateral investment Treaties . . . . . . . . . . . . . . . . 36
Annex 1.A5. Suggested Changes to the ICSID Rules
and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Chapter 2. “Indirect Expropriation” and the “Right to Regulate”

in International Investment Law . . . . . . . . . . . . . . . . . . . . 43

Chapter 3. Fair and Equitable Treatment Standard in International

Investment Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Chapter 4. Most-Favoured-Nation Treatment in International

Investment Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Annex 4.A1.Vienna Convention on the Law of Treaties . . . . . . . . . . . 160

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International Investment Law: A Changing Landscape

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Chapter 1

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Transparency and Third Party Participation

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in Investor-state Dispute Settlement O
Procedures*

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The system of investment dispute settlement has borrowed its
main elements from the system of commercial arbitration.
However, investor-state disputes often raise public interest issues
which are usually ab sent from internationa l comm ercial
arbitration. As a result, the traditional manner in which
governmental measures are reviewed for compliance with
international law in a private setting, i.e. confidential in-camera
proceedings has come under increased scrutiny and criticism.
This survey examines the current rules related to transparency and
third party participation in investor-state dispute settlement
procedures, steps taken to improve transparency and the perceived
advantages as well as the challenges of additional transparency.

* This survey was prepared by Catherine Yannaca-Small, Investment Division, OECD

Directorate for Financial and Enterprise Affairs, and benefited from discussions,
comments and a variety of perspectives in the OECD Investment Committee. The
document as a factual survey, however, does not necessarily reflect the views of the OECD
or those of its member governments. It cannot be construed as prejudging ongoing or
future negotiations or disputes pertaining to international investment agreements.

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TRANSPARENCY AND THIRD PARTY PARTICIPATION IN INVESTOR-STATE DISPUTE SETTLEMENT…

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Statement by the Investment Committee

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June 2005

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here is a general understanding among the members of the Investment

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Committee that additional transparency, in particular in relation to the

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publication of arbitral awards, subject to necessary safeguards for the
protection of confidential business and governmental information, is

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desirable to enhance effectiveness and public acceptance of international
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investment arbitration, as well as contributing to the further development of a
public body of jurisprudence. Members of the Investment Committee
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generally share the view that, especially insofar as proceedings raise
important issues of public interest, it may also be desirable to allow third party
participation, subject however to clear and specific guidelines.

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 TRANSPARENCY AND THIRD PARTY PARTICIPATION IN INVESTOR-STATE DISPUTE SETTLEMENT…

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Introduction s io
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The system of investment dispute settlement has borrowed its main

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elements from the system of commercial arbitration. However, investor-state

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disputes often raise public interest issues which are usually absent from

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international commercial arbitration. As a result, the traditional manner in
w hi ch g ove r n me n t a l m e as u re s a re revi ewe d for co mp li an c e w it h

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international law in a private setting, i.e. confidential in camera proceedings
has come under increased scrutiny and criticism.

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The present document surveys the issues related to transparency and

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third party participation in investor-state dispute settlement procedures.
Section 1 examines the way in which the current rules apply to these issues.

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Section 2 describes the steps taken to improve the transparency of the system
at the governmental level, by the arbitral Tribunals and the International

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the perceived advantages as well as the challenges of additional transparency.
The last section sums up.
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1. Current arbitration rules provide for limited transparency

International arbitration can provide the advantage of impartial and
competent decision making. A traditional commercial arbitration, between
two private companies for instance, may run its course without public
disclosure even of the existence of the dispute. Under the existing rules in this
area, hearings are treated as entirely private matters and publication of the
resulting award often depends on the decision of one or both parties. There
are cases in which published awards are edited to obscure the identity of the
parties.1 The policy of confidentiality serves to expedite arbitrations, as well
as to protect the confidentiality of information and reputation. There is no
mechanism ensuring that the public will ever know about the claim brought,
the positions taken by the parties, the decisions issued by the tribunals and
the precise reasons for them. The notion that arbitrators (usually three) decide
a purely commercial dis pute be hin d closed doors “doe s not offen d
fundamental principles of justice”.2 That the same three arbitrators may
decide in the same way whether the measures taken by a government – which

1. See Jack J. Coe, Jr., Symposium: International Commercial Arbitration: “Taking Stock of
NAFTA Chapter 11 in its Tenth year: An Interim Sketch of Selected Themes, Issues
and Methods”, 36 Vanderbilt Journal of Transnational Law, 1381, October 2003.
2. Nigel Blackaby “Public Interest and Investment Treaty Arbitration”, Investment Treaties
and Arbitration, ASA Swiss Arbitration Association, Conference in Zürich on
25 January 2002.

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TRANSPARENCY AND THIRD PARTY PARTICIPATION IN INVESTOR-STATE DISPUTE SETTLEMENT…

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s – are compatible with
may raise sensitive issues of public policies 3
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investment treaty could be more problematic. Current arbitration procedures

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1.1. Registration of disputes

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In treaties such as BITs or Energy Charter, for instance, which do not

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require investors to publicly manifest their intention to launch a dispute
settlement process, public disclosure depends on the arbitral rules chosen by

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the Parties or the will of the Parties to make such a disclosure where the rules

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do not control the matter.

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When ICSID4 is chosen as the arbitration facility, the ICSID Secretariat

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applies a policy of registering all cases (the register can also be found in its
Web site). The register includes the name of the Parties involved in the

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dispute, the date of registration and a short description of the dispute. r
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On the other hand, if another institution is chosen (ICC or SCC), there is
no publication of registered cases. Since investment disputes account for a
small part of the submitted disputes, it is also difficult to have exact
knowledg e of the existence, the number and general nature of these
investment disputes.
Ad hoc (non-institutional) arbitration, for its part, may take place
anywhere without any requirement for registration. The most common rules
used in an ad hoc arbitration are the UNICTRAL5 rules. An increasing number
of cases based on UNCITRAL rules are offered nowadays the administrative
support of the ICSID Secretariat.

1.2. Access to the proceedings and submissions by non-disputant parties

Confidentiality may also apply to the arbitration proceedings. NAFTA in
its Articles 1128 and 1129 provides for access to the documents and
submissions on issues of interpretation by non-disputant parties (but only by
the two other governments party to NAFTA). These submissions are regularly
posted on the Web. Non-disputant private parties have no access to the

3. In the NAFTA context for instance: In SD Myers, Canada was required to pay
damages for blocking the export to the US of hazardous waste products; in
Metalclad, Mexico did not allow the construction of a toxic waste processing plant by
issuing a decree to protect the area in question for environmental reasons; Methanex
(a Canadian company) challenges California’s decision to ban the use of gasoline
additive containing methanol.
4. See worldbank.org/icsid. Two thirds of all cases brought to ICSID since 1966 were filed
within the last five years. Fourteen NAFTA proceedings have been brought to ICSID
since 1994 and six under the UNCITRAL rules.
5. Although UNCITRAL has a Secretariat, its Secretariat has no mandate to register
cases or keep data of the use of its rules by investors.

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 TRANSPARENCY AND THIRD PARTY PARTICIPATION IN INVESTOR-STATE DISPUTE SETTLEMENT…

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s to open or the Tribunalioin its
proceedings unless there is consent of the parties
discretion opens up the proceedings w to amici curiæ, i.e. friends of the court.

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However, new developments are taking place in this regard and some new

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third parties to participate in the proceedings and submit written submissions

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related to the case (see Section 2).

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1.3. Access to the awards

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There is no general binding rule for the publication of awards and they

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remain generally confidential unless the parties to the dispute agree to

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disclose them. However, NAFTA’s Annex 1137.4 provides for the possibility of

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making the awards public. This Annex stipulates that if Canada and the US
are the disputing Parties, either they (whoever is the disputing party in the

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specific case) or the disputing investor that is a party to the arbitration may
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make the award public. If Mexico is the disputing Party, the applicable
arbitration rules apply to the publication of an award. Le
According to the ICSID Convention,6
the Centre may publish an award
only when both parties give their consent. The ICSID Secretariat encourages
the parties to the dispute to make the awards public by posting them on the
Web and circulating them through its Foreign Investment Law Journal.
Statistically, in about fifty per cent of the cases, ICSID obtains consent of the
parties to publish the award. However, when one of the parties does not
consent to the publication of the award by ICSID, the other party commonly
releases it for publication by such other sources as International Legal
Materials, the Journal du Droit International or ICSID Reports. If the Centre does
not have the required consent of both parties for publication of the full text
of the award and it is not published by another source, ICSID publishes (on
its Web site and in the ICSID Review – Foreign Investment Law Journal) excerpts
from the legal holdings of the award, pursuant to ICSID Arbitration
Rule 48(4). In short, all ICSID arbitral awards, or at least their key legal
holdings, are published.
The UNCITRAL rules7 provide that an award may be made public “only
with the consent of the parties” and the same confidentiality requirements
apply under the other institutional rules.
Today, several arbitration institutions, as well as independent publishers,
have started to regularly publish arbitral awards. For example the ICC
publishes sanitised extracts of awards (the names of the parties as well as

6. Article 48(5) of the ICSID Convention.

7. Article 32(5) of the UNCITRAL Rules.

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relevant details are always omitted) in itssregular periodical bulletin.i Such
publication of awards is done regularlyw
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unless the parties desire otherwise.
8

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2. Steps towards additional transparency

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The principle of public hearings in judicial proceedings is embodied in
national laws. The closed doors approach of investment arbitration on issues

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of public interest, including the non-publication of awards in many cases, has
engendered pressure from the public and interest groups to allow them access

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not only to the final arbitral award, but also to proceedings similar to those

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which they would have in national adjudication. Some States – in particular in

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the context of NAFTA – have taken steps in this direction, reflecting

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commitmen ts to ope nnes s and transpare ncy in dispute s ettle ment
procedures. In some cases, the existence of national laws related to freedom

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of information has brought in new developments which entail lower levels of
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confidentiality in existing processes. While tribunals’ practice is also evolving,
ICSID, as the main institutional body administering investment disputes has Le
offered some reflections on improvements on both publication of awards and
access of third parties.

2.1. States’ interpretations and declarations

In 2 0 0 1 , t h e NA F TA Fre e Tra d e C om m i s s i on 9 ( F T C ) is sue d a n
Interpretation clarifying that “nothing in the NAFTA” imposes a general duty
of confidentiality precluding the parties from providing public access to
documents submitted to or issued by a Chapter Eleven Tribunal, “apart from
the limited specific exceptions set forth expressly in the relevant arbitral
rules”. In addition, each NAFTA country agreed to make available to the public
“in a timely manner”10 all documents submitted to and issued by Chapter
Eleven Tribunals other than confidential business information protected from
disclosure under the relevant arbitral and domestic law rules.
The NAFTA FTC issued a second Statement in October 2003 by which it
confirmed that no provision of NAFTA limits a Tribunal’s discretion to receive
submissions from a third non-disputing party. The Statement also set forth
guidelines for the procedures to be followed by prospective interested parties.

8. Bulletins are available at the International Court of Arbitration Web site

www.iccbooks.com/TopBannerSites/bulletin.asp.
9. NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter 11
P r ov i si o n s , 3 1 J u ly 20 01 , a va il a bl e a t w w w. d f a it -m a ec i . g c . c a / t n a -n a c /
NAFTA-Interpr-en.asp. Or see, NAFTA Free Trade Commission, Clarifications
Related to NAFTA Chapter 11, 31 July 2001, available at www.ustr.gov/regions/
whemisphere/nafta-chapter11.PDF.
10. Idem.

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The NAFTA FTC at its joint statement ofs io
16 July 2004 made a special mention
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Statement. It also welcomed the fact that Mexico joined the United States and

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(The three NAFTA statements are reproduced in Annex 1).

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2.2. International Agreements

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Draft Multilateral Agreement on Investment (MAI)

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Already in the 1990s, the draft Multilateral Agreement on Investment did

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not include a limitation in the publication of awards and provided that the

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award should be a publicly available document. However, appropriate

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safeguards for the protection of business confidential information were
incorporated into the proposed publication criteria (see Annex 2).

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New generation of investment agreements: Free Trade Agreements
and New Model BITs
Renewed efforts towards a more transparent investment arbitration
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system are reflected in the investment provisions of the most recent US Free
Trade Agreements as well as the new model US Bilateral Investment Treaty
and Canada’s Foreign Investment Promotion and Protection Agreements (FIPA)
Negotiating Programme.
Like NAFTA Article 1128, under the US FTAs with Chile, 11 Singapore, 12
Domin ic an Republic-Ce ntral Ame rica (DR-CAF TA) 1 3 and M orocco, 1 4
non-disputing State parties to these agreements may make oral and written
submissions to the Tribunal on issues of interpretation. The latter FTAs also
provide that Tribunals also have the authority to accept and consider written
amicus curiæ submissions from a person or entity that is not a party to the dispute.
In terms of transparency of arbitral proceedings, the main documents15 related to

11. US-Chile Free Trade Agreement, signed on 6 June 2003, entered into force on
1 January 2004.
12. US-Singapore Free Trade Agreement signed on 6 May 2003, entered into force on
1 January 2004.
13. Dominican Republic-Central America – Free Trade Agreement (DR-CAFTA) signed
on 5 August 2004. The countries parties to the Agreement are: Costa Rica,
Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua and the
United States.
14. US-Morocco Free Trade Agreement signed on 15 June, 2004.
15. These documents include:
a) the notice of intent;
b) the notice of arbitration;
c) pleadings, memorials, and briefs submitted to the tribunal by a disputing party
and any written submissions;
d) minutes or transcripts of hearings of the tribunal, where available; and
e) orders, awards, and decisions of the tribunal.

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TRANSPARENCY AND THIRD PARTY PARTICIPATION IN INVESTOR-STATE DISPUTE SETTLEMENT…

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the dispute settlement procedures must be s made public and the hearings iomust
w
be open to the public. However, a safeguard is included for sensitive information

n
o
which is protected accordingly (see Annex 3 for the relevant provisions).

D Br

y
The same provisions are found in the most recent version of the

nl
US Model Bilateral Investment Treaty (Articles 28 and 29).
Canada’s new FIPA contains similar provisions. It promotes transparency

u le
by providing that “all documents submitted to or issued by the Tribunal,
including transcripts of hearings, will be promptly made available to the

d
EC
public, subject to redaction for […] privileged information”. It also provides for

ea
all hearings to be open to the public and institutionalises the possibility for the

se
acceptance of written amicus curiæ submissions. The provisions in these

R
O
agreements are compatible with ICSID and UNCITRAL rules which require the
consent of both parties; the State parties have conditioned their consent upon

e
An
transparency and therefore the investor/party to the dispute consents to the r
c tu
transparency provisions by initiating the proceedings pursuant to that
Le
agreement. (The relevant provisions of the US and Canada model agreements
are reproduced in Annex 4.)

2.3. Arbitral Tribunals

Publication of documents

Loewen case. The first NAFTA Chapter 11 case brought against the United
States (Loewen case)16 required the arbitral tribunal to consider the United
States obligation under its domestic law to release documents related to the
arbitration proceedings. Indeed, the US Freedom of Information Act (FOIA)17

16. Loewen Group, Inc. and Raymond Loewen v. United States of America, ICSID Case
No. ARB(AF)/98/3 (Award) (26 June 2003). The Loewen Group, Inc. (“TLGI”), a
Canadian corporation involved in the death-care industry, and Raymond L. Loewen,
its chairman and CEO at the time of the events at issue, had filed claims under the
ICSID Additional Facility Rules in their individual capacities and on behalf of
Loewen Group International, Inc., TLGI’s US subsidiary (collectively “Loewen”).
Loewen sought damages for alleged injuries arising out of litigation in which the
company was involved in Mississippi state courts in 1995-96. Loewen alleged
violations of three provisions of NAFTA – the anti-discrimination principles set forth
in Article 1102, the minimum standard of treatment required under Article 1105,
and the prohibition against uncompensated expropriation set forth in Article 1110.
Loewen requested damages in excess of USD 600 million. On 26 June 2003, the
tribunal dismissed the claims against the United States in their entirety.
17. At present, some 50 countries, including developing countries, have passed laws
equivalent to FOIA and more have laws either in the drafting stage or with
legislatures; see www.freedominfo.org. Margrete Stevens, “The Right to Information
and Investor-State Disputes: the Development of a New Procedural Framework in NAFTA
Chapter 11 Arbitrations”, Presentation in the Conference “International Economic
Disputes-A Wider Perspective” St John’s College, Cambridge, 1-3 April 2004.

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 TRANSPARENCY AND THIRD PARTY PARTICIPATION IN INVESTOR-STATE DISPUTE SETTLEMENT…

e _it E d it
io
s to federal agency records subject
provides that any person has a right of access
only to some specific exemptions. This w right is enforceable in court. The

n
o
Loewen Tribunal considered the United States request to release the

D Br
documents and decided that there were no implied rules under the ICSID

y
Additional Facility Rules and no general obligation of confidentiality in NAFTA

nl
arbitrations. 18 In addition, based on the Loewen Group’s request for

O
clarification of this decision, the tribunal noted that neither of its decisions

u le
was intended to affect any statutory obligation of disclosure by which any

d
party might be bound. 19 Following these decisions, the United States,

EC

ea
complying with the FOIA, gradually released documents related to the case.

se
R
Amici Curiæ submissions and open hearings

O
Two NAFTA Tribunals concluded in principle that they have the authority

e
An
to accept amici curiae briefs: the Methanex and the UPS Tribunals. Open
r
c tu
hearings were also allowed in these two cases and in a recent third case, Canfor
v. United States of America. Le
Methanex case. The second NAFTA case against the United States was
brought by a Canadian investor, Methanex. 20 In this case, the Parties agreed
that orders, pleadings and awards could be made public by either side. A few
months later, the Methanex Tribunal took a decision on public participation
that is of groundbreaking relevance to UNCITRAL arbitrations, if not to all
future investor-state arbitrations.21

18. Idem.
19. Idem.
20. This case concerns a USD 1 billion claim against the United States by a Canadian
company, a major producer of methanol, a key component of a gasoline additive
called MTBE. Methanex launched an international arbitration in response to the
March 1999 order by the state of California to ban the use of MTBE by the end
of 2002 because the additive was contaminating drinking water supplies, and was
therefore posing a significant risk to human health and safety, and the
e nv ir o n m en t . M e t h a n ex a r gu es t h a t t h e i n ef fec t ive r eg u l a t io n a n d
non-enforcement of domestic environmental laws including the US Clean Water
Act, is responsible for the presence of MTBE in California water supplies. It argues
that the planned ban is tantamount to an expropriation of the company’s
investment: a violation of NAFTA’s Article 1110 and was enacted in breach of the
national treatment (Article 1102) and minimum international standards of
treatment (Article 1105) provisions.
21. Methanex Corporation v. United States of America, Decision of the Tribunal on
Petitions from Third Persons to intervene as “amici curiæ”, 15 January 2001. The
petitions and all the documents relevant to this case can be found on
www.state.gov/s/l/c5818.htm.

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TRANSPARENCY AND THIRD PARTY PARTICIPATION IN INVESTOR-STATE DISPUTE SETTLEMENT…

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io a
s raised in August 2000 through
The public participation issue was first
w
“Petition”, seeking amicus curiae status
23
for 22
the International Institute for

n
o
Sustainable Development (IISD). This was followed in September by a
s ubmis sion from Earthjustice, 24 a US legal NGO, on be half of oth er

D Br

y
California-based environmental groups. The two NGOs were seeking the

nl
following results:

u le
i) permission to make written submissions in the case
ii) an order for the hearings to be made open to the public;

d
EC

ea
iii) an order of disclosure to IISD of all documents for purposes of making

se
the submissions;

R
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iv) an order allowing for oral arguments to be made.
In its decision, the Tribunal accepted the first three requests but did not

e
allow for oral arguments to be made by amici.
An r
c tu
In an important part of its reasons to allow amici curiæ submissions, the
Le
Tribunal noted the large distinction between the substantive issues at stake in
the arbitration before it as compared to traditional commercial arbitration. It
stated that the present type of issues:
“… extend far beyond those raised by the usual transnational arbitration
between commercial parties […] the public interest in this arbitration arises from
its subject-matter, as powerfully suggested in the Petitions.”25
At the same time, Canada and the United States recognised in their
submissions that the closed nature of Chapter 11 proceedings was damaging
to the public credibility of the process itself.
The Methanex Tribunal issued a press release on 30 January 2004
indicating its decision to allow NGOs or other interested non-parties to apply
to make submissions. In March 2004, the IISD and Earthjustice submitted their
briefs to the Tribunal. Open hearings, broadcast live, took place in the World
Bank headquarters on 7-17 June 2004.

United Parcel Services (UPS) case. In the United Parcel Services of America v.
Canada case, 26 the Canadian Union of Postal Workers27 and the Council of

22. For the history of these amici curiæ submissions see Howard Mann’s “Opening the
Doors, at Least a Little: Comment on the Amicus Decision in Methanex v. United
States” RECIEL 10(2, 2002):241-245.
23. The IISD is a Canadian-based NGO www.iisd.org/investment.
24. See Earthjustice’s Web site: www.earthjustice.org.
25. Decision of the Tribunal, par. 49, see op. cit., No. 21.
26. Decision of the Tribunal on Petitions for Intervention and Participation as amici
curiæ (17 October 2001), available at www.state.gov/documents/organisation/6033.pdf.
27. The Canadian Union of Postal Workers is a labour union which represents
approximately 46 000 operational employees and 40 000 retirees of Canada Post.

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Canadians28 s interest in the subject imatter
made a case about having a direct
o
of the claim and in the broader public wpolicy implications of the dispute. In 29

n
o
addition, they noted their interest in addressing the lack of transparency that

D Br
has historically attended international arbitral processes and based their

y
request on Article 15(1)30 of the UNCITRAL Arbitration Rules which gives

nl
discretion to the arbitral tribunal to conduct the arbitration in a manner it

O
finds appropriate. They petitioned the Tribunal requesting:31

u le
i) standing as parties to any proceedings related to the case;

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EC
ii) in case of denial, the right to intervene as amici curiae in such

ea
proceedings to be accorded on terms that are consistent with the

se
principles of fairness, equality and fundamental justice;

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iii) disclosure of the main documents32 related to the proceedings;

e
iv) the right to make submissions concerning the place of arbitration;
An r
c tu
v) the right to make submissions concerning the jurisdiction of this
Le
Tribunal, and once they are fully known the arbitrability of the matters
the disputing investor has raised; and
vi) an opportunity to amend the Petition as further details of the claim
become known to the petitioners.

28. The Council of Canadians, founded in 1985, is a non-governmental organisation

with more than 100 000 members which lobbies members of parliament, conducts
research and runs national programmes related to the future of Canada’s social
programmes, the protection of public health and the environment and the
functioning of public institutions.
29. UPS claims that Canada Post, which UPS alleges is a letter mail monopoly, engages
in anti-competitive practices: in providing its non-monopoly courier and parcel
services (Express post and Priority Courier), it, allegedly, unfairly uses its postal
monopoly infrastructure to reduce the costs of delivering its non-monopoly
services. UPS alleges that Canada has breached its obligations under the NAFTA
1) to supervise a “government monopoly” and “state entity” [Arts. 1502(3)(a) and
1503(2)]; 2) to accord treatment no less favourable than it accords, in like
circumstances, to its own investors (Article 1102); and 3) to accord treatment in
accordance with international law (Article 1105). UPS seeks USD 160 million in
damages.
30. Article 15(1) of the UNCITRAL Rules provides: “Subject to these Rules the arbitral
tribunal may conduct the arbitration in such a manner as it considers appropriate,
provided that the parties are treated with equality and that at any stage of the proceedings
each party is given a full opportunity of presenting his case.”
31. See op. cit., No. 29, par. 1.
32. Disclosure of the statement of claim and defence, memorials, counter-memorials,
pre-hearing memoranda, witness statements and expert reports, including
appendices and exhibits to such submissions, and any applications or motions to
the Tribunal.

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Canada and the US supported in their iothe
s submissions the view that
w
Tribunal is authorised to accept written submissions
33
from third parties as

n
o
amici curiæ, while Mexico disagreed.

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The Tribunal considered that it was indeed within the scope of

nl
article 15(1) of the UNCITRAL rules to receive submissions offered by the third
parties with the purpose of assisting the Tribunal in that process and found

u le
that it had power to accept such written amicus briefs from the Petitioners. In
its decision it also recalled “the emphasis placed on the value of greater

d
EC
transparency for proceedings such as these. Such proceedings are not now, if

ea
they ever were, to be equated to the standard run of international commercial

se
arbitration between private parties”.34

R
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In addition, both parties agreed to make publicly available, subject to the
protection of confidential information: “pleadings, and submissions of any

e
An
disputing party or NAFTA Party, together with their appendices and attached r
c tu
exhibits, including the note of intent, notice of arbitration, amended
Le
statement of claim, statement of defense, memorials, affidavits, responses to
tribunal questions, transcripts of public hearings, correspondence to or from
the Tribunal, and any awards, in cludin g procedural orders, rulings,
preliminary and final awards.”
Parties to the dispute also agreed to make the hearings open to the public,
subject to the protection of confidential information. The public hearings,
broadcast live, took place in the World Bank headquarters on 29-31 July 2002.35

Canfor v. United States of America. In Canfor v. United States of America

case,36 the arbitral tribunal allowed and parties to the dispute agreed to make
the hearings open to the public. The public hearings, broadcast live, were held
on 7-9 December 2004 in the World Bank headquarters.

33. See op. cit., No. 29, par. 8, 9, 10.

34. See op. cit., No. 29, par. 70.
35. ICSID Press Release: www.worldbank.org/icsid/ups.htm.
36. Canfor Corporation, a Canadian forest products company, has delivered a notice of
arbitration under the countervailing duty and material injury determinations on
softwood lumber. The US Department of Commerce issued final antidumping and
countervailing duty determinations on softwood lumber in March 2002. In
May 2002, the US International Trade Commission issued a final determination that
the US softwood lumber industry was threatened with material injury by reason of
imports from Canada of softwood lumber. As a result of those determinations, a
Canfor subsidiary is required to pay increased duties on softwood lumber products
imported to the United States. Canfor’s notice alleges that the United States, by
virtue of these determinations, has breached NAFTA Chapter Eleven by not
according it national treatment (Art. 1102) or most-favoured-nation treatment
(Art. 1103); by not according it treatment in accordance with international law
(Art. 1105); and by expropriating its investment without compensation (Art. 1110).
The notice claims damages of not less than USD 250 million.

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ioand
s de Aguas de Barcelona, S.A.
Aguas Argentinas, S.A., Suez, Sociedad General
Vivendi Universal, S.A. v. the Argentine w
Republic. In the Aguas Argentinas,

n
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S.A., Suez, Sociedad General de Aguas de Barcelona, S.A. and Vivendi

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Universal, S.A., v. the Argentine Republic case, it was the first time a Tribunal

y
in an ICSID Convention case under a BIT, ruled that it had the power to

nl
entertain legal arguments from interested non-parties.37

u le
On 28 January 2005, five non-governmental organisations, Asociación
Civil por la Igualdad y la Justicia (ACIJ), Centro de Estudios Legales y Sociales

d
EC
(CELS), Center for International Environmental Law (CIEL), Consumidores

ea
Libres Cooperativa Ltda. de Provisión de Servicios de Acción Comunitaria, and

se
Unión de Usuarios y Consumidores, filed a “Petition for Transparency and

R
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Participation as Amicus Curiæ” in the above ICSID case. Asserting that the case
involved matters of public interest and the fundamental rights of people living

e
in the area affected by the dispute in the case, the petitioners requested the
An r
c tu
Tribunal to grant three requests
i) to allow them access to the hearings;38 Le
ii) to allow them the opportunity to present legal arguments as amicus
curiæ;39 and
iii) to allow them timely, sufficient, and unrestricted access to all of the
documents in the case.40

37. Aguas Argentinas, S.A., Suez, Sociedad General de Aguas de Barcelona, S.A. and
Vivendi Universal, S.A. v. The Argentine Republic, Order in Response to a Petition
for Transparency and Participation as Amicus Curiae, of 19 May 2005.
38. The Petitioners cited the NAFTA cases of Methanex v. United States of America and
UPS v. Canada. By “access to hearings” they did not only request the right to attend
hearings but also to be given the opportunity to make oral presentations to the
Tribunal, asserting the “right of every person to participate and make their voices
heard in cases where decisions may affect their rights”. Idem, par. 4.
39. The Tribunal noted that the Petitioners did not define in detail the role and nature
of an amicus curiæ or “friend of the court” but it assumed that “the amicus curiæ role
the Petitioners seek to play […] is similar to that of a friend to the court recognised
in certain legal systems and more recently in a number of international
proceedings. In such cases, a non-party to the dispute, as a ‘friend’, offers to
provide the court or tribunal its special perspectives, arguments, or expertise on
the dispute, usually in the form of a written amicus curiæ brief or submission”.
Idem, par. 8.
40. Petitioners requested the Tribunal “[…] to concede […] timely, sufficient, and
unrestricted access to the documents of the arbitration, namely the parties
submissions, transcripts of hearings, statements of witnesses and experts, and
any other documents produced in this arbitration”. Idem, par. 30.

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The Tribunal rejected the first request to s io
have the arbitral hearings open to the
public founding its decision on the ICSIDw Rule 32(2) which requires the consent of
41

n
o
the parties. Noting that while in the previous cases under NAFTA – Methanex and

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UPS – the Tribunals allowed open hearings, this was done with the consent of both

y
parties, which was a missing element in the present case. It stated that:

nl
“Although the Tribunal […] does have certain inherent powers with respect to

u le
arbitral procedure, it has no authority to exercise such power in opposition to a
clear directive in the Arbitration Rules, which both Claimants and Respondents

d
EC
have agreed will govern the procedure in this case.”42

ea
On the question of allowing the submission of amicus curiæ briefs, the

se
Tribunal responded in the affirmative. Although the Claimant argued against

R
O
such a submission, the Tribunal founded its decision on Article 44 of the ICSID
Convention43 and unanimously concluded that the Convention grants it the

e
An
power to admit amicus curiæ submissions from suitable non-parties in r
c tu
appropriate cases. It found further support for this decision in international
Le
arbitration proceedings in the practices of NAFTA, the Iran-US Claims Tribunal
and the WTO. It then stated that:
“The exercise of the power conferred on the Tribunal by Article 44 to accept
amicus submissions should depend on three basic criteria: a) the appropriateness
of the subject matter of the case; b) the suitability of a given non-party to act as
amicus curiæ in that case; and c) the procedure by which the amicus submission
is made and considered.”44
On the first point, the Tribunal unanimously concluded that the case was
an appropriate one in which non-parties may make amicus curiæ submissions
since it involved “matters of public interest of such a nature that have
traditionally led courts and other tribunals to receive amicus submissions from
suitable non-parties”.45 It added that:
“The acceptance of amicus submissions would have the additional desirable
consequence of increasing the transparency of investor-state arbitration. Public

41. ICSID Arbitration Rule 32(2) states: “The Tribunal shall decide, with the consent of the
parties, which other persons besides the parties, their agents, counsel and advocates,
witnesses and experts during their testimony, and officers of the Tribunal may attend the
hearings.”
42. Order op. cit., No. 37, par. 6.
43. Article 44 of the ICSID Convention states: “Any arbitration proceeding shall be
conducted in accordance with the provisions of his Section and, except as the parties
otherwise agree, in accordance with the Arbitration Rules in effect of the date on which the
parties consented to arbitration. If any question of procedure arises which is not covered by
this Section or the Arbitration Rules or any rules agreed by the parties, the Tribunal shall
decide the question.”
44. Order op. cit., No. 37, par. 17.
45. Idem, par. 20.

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acceptance of the legitimacy of internationals iothey
arbitral process, particularly when
w
involve states and matters of public interest, is strengthened by increased openness

n
o
and increased knowledge as to how these processes function […] Through the

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participation of appropriate representatives of civil society in appropriate cases, the

y
public will gain increased understanding of ICSID processes.”46

nl
The Tribunal chose to set out a procedure whereby interested interveners

u le
will need to petition the tribunal for leave to make such submissions. As part
of this screening process, the Tribunal will assess the bona fide and expertise

d
EC
of the amici and determine whether they should be given leave to submit legal

ea
briefs in the case.47

se
Finally, the Tribunal deferred the decision on the request that all

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documentation related to the case be disclosed to the public. Observing that
the ICISD Convention, Rules and the practice of the Centre present certain

e
An
constraints, the Tribunal elected to wait to address the request “until such a r
c tu
time as it may grant leave to a particular non-disputing party to file an amicus
curiæ brief”.48 Le
2.4. ICSID Secretariat proposal
In 2004, ICSID Secretariat presented draft proposals on possible
improvements of the framework for ICSID arbitration, including in relation to
transparency and third party participation.49 Following comments received by
various interested constituencies, amendments to these draft proposals were
presented in May 2005 (see Annex 5).
As mentioned above, the main legal holdings of all ICSID arbitral awards
are now published. An important consideration is, however, the timeliness of
publication when many cases involving similar issues are pending. It is not
until several months have passed that ICSID receives the consent of both
parties for it to publish an award. In the meantime, ICSID might publish
excerpts of the main holdings, while it awaits the consents for publication of
the full text. ICSID Secretariat proposes to amend Arbitration Rule 48(4) and

46. Idem, par. 22.

47. The information required by the Tribunal should include (idem, par. 25):
“a. The identity and background of the petitioner, the nature of its membership if
it is an organisation, and the nature of its relationships, if any, to the parties in the
dispute;
b. The nature of the petitioner’s interest in the case.;
c. Whether the petitioner has received financial or other material support from
any of the parties or from any person connected with the parties in this case.;
d. The reasons why the Tribunal should accept petitioner’s amicus curiæ brief.”
48. Order, op. cit., No. 37, par. 30-31.
49. “Possible Improvements of the Framework for ICSID Arbitration: ICSID Secretariat
Discussion Paper”, 22 October 2004. Full text is available at: www.worldbank.org/
icsid/improve-arb.htm.

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s Facility Arbitration iRules,
the corresponding provision of the Additional
o
Article 53(3) to make it mandatory for w
ICSID to publish promptly the excerpts

n
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of the legal conclusions or the Tribunal.

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As for the acceptance of submissions from third parties, ICSID Secretariat

nl
proposes by amendments of ICSID Arbitration Rule 37 and Article 41 of the
Additional Facility Arbitration Rules regarding evidence, that tribunals would

u le
have the authority, after consulting both parties as far as possible, to accept
and consider submissions from third parties. The amendments set out

d
EC
conditions for the submissions – for example, the demonstration by the

ea
non-disputing party that its submission brings a particular knowledge or

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insight, addresses a matter within the scope of the dispute and that the

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non-disputing party has a significant interest in the proceedings.
According to the ICSID and Additional Facility Arbitration Rules, the

e
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tribunal may allow other persons to attend the hearings only “with the r
c tu
consent of the parties”.50 Hearings open to the public have been consented to
Le
by the parties in two cases administered by ICSID under the UNCITRAL Rules.
ICSID Secretariat proposes that Arbitration Rule 32(2) and Article 39(2) of the
Additional Facility Arbitration Rules be amended so that the consent of both
parties would no longer be obligatory for decisions of the tribunal to permit
additional categories of persons to attend the hearings or even to open them
to the public. According to the ICSID draft proposal, after consultation with
the Secretary General and with the parties as far as possible, the Tribunal may
allow other persons to attend or observe all or part of the hearings by
establishing procedures for the protection of proprietary information and the
making of appropriate logistical arrangements.

3. Perceived advantages and challenges of additional transparency

This section examines the case for additional transparency as well as the
need for careful consideration of its modalities, based on the results of
stakeholder consultations held in OECD, ICSID and other fora.

3.1 Publication of awards

Investment arbitral awards may have a significant impact on the State’s
future conduct, the national budget and the welfare of the people, so the
public interest in investment disputes is understandable. Increased
transparency can contribute to enhancing effectiveness and continued
acceptance of the system of investment arbitration.
There are a growing number of arbitration awards which are likely to
influence future cases and this has argued for their systematic and quick

50. ICSID Arbitration Rule 32(2); Additional Facility Arbitration Rules, Art. 39(2).

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publication. This is considered to enhancesthe equality of the parties,i since
o
w
today some parties and their representatives do not have the same knowledge

n
o
of and access to the most recent and yet unpublished opinions. The

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publication of arbitral awards would contribute to the further development of

y
a public body of jurisprudence which would allow investors and host states to

nl
understand how investment agreements are interpreted and applied and

O
ultimately contribute to a more predictable and consistent system. States

u le
reading an award are also free to consider whether there is anything in the

d
EC
award that needs to be taken into account in their future negotiations.

ea
At the same time, it is understood that any publication of awards should

se
take into account the protection of confidential business and governmental

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information. The business community has made known its expectation that
full clarity would be provided about which parts of the arbitration proceedings

e
would be covered by extended transparency requirements under a reformed
An r
c tu
ICSID framework. There is also a view that the consent of the parties for the
publication of the award should be requested at the close of the oral Le
proceedings, rather than after the award is rendered. In this case however, this
would mean that the parties may be willing to consent to the publication of
the award before they know the outcome.
In addition to any possible changes of the ICSID Rules and in order to
have increasing transparency, the question has been raised as to whether it
might also be necessary to include or modify language in the Bilateral
Investment Treaties involving as many countries as possible. Some consider a
consistent practice defendable on a case-by-case basis preferable than any
new rules on this matter. It has also been suggested that a common approach
among treaty partners would be preferable to having dispersed provisions, as
this would also ensure that arbitration awards may be published under the
other applicable arbitration rules, e.g. UNCITRAL, ICC, SCC or ad hoc. There is
also a view that when the institutional rules, such as the ICC for example,
require confidentiality, the institutional rules should prevail.

3.2. Third Party Participation

The issues of allowing third party submissions and access to hearings,
require a more qualified approach. Although in principle there is merit in
allowing interested parties to provide submissions and also allow open
hearings, a widely-held view is that it would be preferable that third party
participation be subject to specific rules and guidelines and close monitoring
based on the following considerations:
● It is important to have a threshold showing of substantive and
legitimate interest by the third parties and also have them demonstrate

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25
TRANSPARENCY AND THIRD PARTY PARTICIPATION IN INVESTOR-STATE DISPUTE SETTLEMENT…

e _it E d it
io by
s and transparent themselves
that they are accountable, professional
w
disclosing the origin of the funds with which they operate. 51

n
o
● Ensure that they are independent and not backed by any of the

D Br

y
disputing parties.

nl
● Ensure that the terms of their participation do not enable them to either
dictate the outcome or change the rules in the middle of the case.

u le
● Avoid giving non-governmental organisations a higher standing than

d
the non-disputing governments; allow them to submit amicus briefs

EC

ea
but not to call witnesses, nor to have the possibility to amend the

se
claims or independently affect the process.

R
O
● Transparency in the proceedings could be enhanced by having at least part
of the hearings held in the country or area where the problem has arisen.

e
There is an important linkage between third party participation and access
An r
c tu
to all documents related to the dispute, including notices of intent and
Le
arbitration, pleadings, memorials and briefs if third party submissions are
required to demonstrate a substantive interest and address all matters within
the scope of the dispute. At present, several countries52 allow for access to such
documents, subject to safeguards for the protection of confidential information.
As mentioned above, examples of such access linked to amici curiæ submissions
and/or open hearings are the three NAFTA cases (Methanex, UPS and Canfor) and
one BIT case (Aguas Argentinas, S.A., Suez, Sociedad General de Aguas de Barcelona,
S.A. and Vivendi Universal, S.A.). For international investment agreements that do
not provide for third party participation including access to documents and
open hearings, tribunals will continue to deal with requests for access on an
ad hoc basis, respecting the intent of the parties.

4. Summing up
Investment arbitration and in particular investor/state, has borrowed its
main elements from commercial arbitration. Whether confidentiality at all
stages – from the registration of the dispute to the publication of awards –
should be applied for matters of general public interest found in investment
arbitration has been questioned.

51. In a recent WTO case, the WTO Tribunal refused to consider an amicus brief which
made public certain information ordered by the WTO to be kept confidential. The
Tribunal found that this was not appropriate behaviour for a “friend of the
tribunal”.
52. These countries include: the NAFTA countries, based on the Free Trade
Commission’s Interpretation of 2001; Canada and the United States based on their
model BITs and Chile, Singapore, Dominican Republic-Central America and
Morocco, based on their FTAs with the United States.

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 TRANSPARENCY AND THIRD PARTY PARTICIPATION IN INVESTOR-STATE DISPUTE SETTLEMENT…

e _it E d it
s
Public interest groups have been advocating more transparency ioand
w
participation in the proceedings in order to enhance the acceptability and

n
o
credibility of arbitral decisions. A few governments, committed to openness

D Br
and transparency – often called for by their freedom of information acts – are

y
publishing the arbitration proceedings and awards and are inserting relevant

nl
provisions in their new model investment agreements. ICSID is proposing to

O
modify its rules in order to take into account these new developments. Finally,

u le
breakthrough developments occurred recently with four tribunals’ decisions

d
EC
to allow interested parties to submit briefs and/or to allow for open hearings.

ea
Although there is support among governments for the publication of

se
arbitral awards subject to necessary safeguards for the protection of

R
O
confidential business and governmental information, there is a more qualified
reaction to third party participation including public access to other documents

e
submitted to or issued by a tribunal. Monitoring as well as specific rules and
An r
c tu
guidelines are considered by many members important to guide third party
Le
participation either in the form of amici curiæ submissions or open hearings.

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27
 D Br
EC o
O
w
s

An R
e

ea
d
O
Le

nl
y
_it E d it

c tu
r
io

e n
se
u le
 ANNEX 1.A1

e _it E d it
s io
w

n
o
D Br

y
nl
ANNEX 1.A1

u le
d
EC

ea

se
NAFTA Free Trade Commission’s

R
O
Interpretations and Statements

e
An r
c tu
1. Access to documents (31 July 2001)
Le
Having reviewed the operation of proceedings conducted under Chapter
Eleven of the North American Free Trade Agreement, the Free Trade
Commission hereby adopts the following interpretations of Chapter Eleven in
order to clarify and reaffirm the meaning of certain of its provisions:

A. Access to documents
1. Nothing in the NAFTA imposes a general duty of confidentiality on the
disputing parties to a Chapter Eleven arbitration, and, subject to the
application of Article 1137(4), nothing in the NAFTA precludes the Parties
from providing public access to documents submitted to, or issued by, a
Chapter Eleven tribunal.
2. In the application of the foregoing:
a) In accordance with Article 1120(2), the NAFTA Parties agree that nothing
in the relevant arbitral rules imposes a general duty of confidentiality or
precludes the Parties from providing public access to documents
submitted to, or issued by, Chapter Eleven tribunals, apart from the
limited specific exceptions set forth expressly in those rules.
b) Each Party agrees to make available to the public in a timely manner all
documents submitted to, or issued by, a Chapter Eleven tribunal, subject
to redaction of:
i) business information;
ii) information which is privileged or otherwise protected from
disclosure under the Party’s domestic law; and
iii) information which the Party must withhold pursuant to the relevant
arbitral rules, as applied.

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29
ANNEX 1.A1

e _it E d it
io
s may disclose to other persons
c) The Parties reaffirm that disputing parties
w
in connection with the arbitral proceedings such unredacted documents

n
o
as they consider necessary for the preparation of their cases, but they

D Br
shall ensure that those persons protect the confidential information in

y
such documents.

nl
d) The Parties further reaffirm that the Governments of Canada, the United

u le
Mexican States and the United States of America may share with
officials of their respective federal, state or provincial governments all

d
EC
relevant documents in the course of dispute settlement under Chapter

ea
Eleven of NAFTA, including confidential information.

se
3. The Parties confirm that nothing in this interpretation shall be construed to

R
O
require any Party to furnish or allow access to information that it may
withhold in accordance with Articles 2102 or 2105.

e
An r
2. Statement of the Free Trade Commission on non-disputing
party participation (October 2003) Le c tu
A. Non-disputing party participation
1. No provision of the North American Free Trade Agreement (“NAFTA”) limits
a Tribunal’s discretion to accept written submissions from a person or
entity that is not a disputing party (a “non-disputing party”).
2. Nothing in this statement by the Free Trade Commission (“the FTC”)
prejudices the rights of NAFTA Parties under Article 1128 of the NAFTA.
3. Considering that written submissions by non-disputing parties in
arbitrations under Section B of Chapter 11 of NAFTA may affect the
operation of the Chapter, and in the interests of fairness and the orderly
conduct of arbitrations under Chapter 11, the FTC recommends that
Chapter 11 Tribunals adopt the following procedures with respect to such
submissions.

B. Procedures
1. Any non-disputing party that is a person of a Party, or that has a significant
presence in the territory of a Party, that wishes to file a written submission
with the Tribunal (the “applicant”) will apply for leave from the Tribunal to
file such a submission. The applicant will attach the submission to the
application.
2. The application for leave to file a non-disputing party submission will:
a) be made in writing, dated and signed by the person filing the application,
and include the address and other contact details of the applicant;
b) be no longer than 5 typed pages;

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 ANNEX 1.A1

e _it E d it
s relevant, its membershipioand
c) describe the applicant, including, where
w
legal status (e.g., company, trade association or other non-governmental

n
o
organisation), its general objectives, the nature of its activities, and any

D Br
parent organisation (including any organisation that directly or

y
indirectly controls the applicant);

nl
d) disclose whether or not the applicant has any affiliation, direct or

u le
indirect, with any disputing party;
e) identify any government, person or organisation that has provided any

d
EC
financial or other assistance in preparing the submission;

ea

se
f) specify the nature of the interest that the applicant has in the
arbitration;

R
O
g) identify the specific issues of fact or law in the arbitration that the

e
applicant has addressed in its written submission;
An r
c tu
h) explain, by reference to the factors specified in paragraph 6, why the
Tribunal should accept the submission; and Le
i) be made in a language of the arbitration.
3. The submission filed by a non-disputing party will:
a) be dated and signed by the person filing the submission;
b) be concise, and in no case longer than 20 typed pages, including any
appendices;
c) set out a precise statement supporting the applicant’s position on the
issues; and
d) only address matters within the scope of the dispute.
4. The application for leave to file a non-disputing party submission and the
submission will be served on all disputing parties and the Tribunal.
5. The Tribunal will set an appropriate date by which the disputing parties
may comment on the application for leave to file a non-disputing party
submission.
6. In determining whether to grant leave to file a non-disputing party
submission, the Tribunal will consider, among other things, the extent to
which:
a) the non-disputing party submission would assist the Tribunal in the
determination of a factual or legal issue related to the arbitration by
bringing a perspective, particular knowledge or insight that is different
from that of the disputing parties;
b) the non-disputing party submission would address matters within the
scope of the dispute;
c) the non-disputing party has a significant interest in the arbitration; and

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31
ANNEX 1.A1

e _it E d it
s of the arbitration. i
d) there is a public interest in the subject-matter
o
7. The Tribunal will ensure that: w

n
o
a) any non-disputing party submission avoids disrupting the proceedings;

D Br

y
and

nl
b) neither disputing party is unduly burdened or unfairly prejudiced by

O
such submissions.

u le
8. The Tribunal will render a decision on whether to grant leave to file a

d
non-disputing party submission. If leave to file a non-disputing party

EC

ea
submission is granted, the Tribunal will set an appropriate date by which

se
the disputing parties may respond in writing to the non-disputing party

R
53 may, pursuant to
O
submission. By that date, non-disputing NAFTA Parties
Article 1128, address any issues of interpretation of the Agreement

e
presented in the non-disputing party submission.
An r
c tu
9. The granting of leave to file a non-disputing party submission does not
Le
require the Tribunal to address that submission at any point in the
arbitration. The granting of leave to file a non-disputing party submission
does not entitle the non-disputing party that filed the submission to make
further submissions in the arbitration.
10.Access to documents by non-disputing parties that file applications under
these procedures will be governed by the FTC’s Note of 31 July 2001.

3. NAFTA Free Trade Commission Joint Statement on the Decade

of achievement (San Antonio, 16 July 2004)
“[…] We are pleased that the transparency initiatives we took during our
October 2003 meeting have already begun to improve the operation of the
investment chapter investor-state dispute-settlement mechanism. Earlier this
year, for the first time a tribunal accepted written submissions from a
non-disputing party and adopted the procedures that we recommended
following our 7 October 2003 meeting in Montreal, for the handling of such
submissions.
We were pleased Mexico has now joined Canada and the United States in
supporting open hearings for investor-state disputes. In addition, we have
agreed that the same degree of openness should apply to proceedings under
the Dispute Settlement provisions of Chapter 20 of the NAFTA, and asked
officials to develop rules governing open hearings for such proceedings […]”.

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 ANNEX 1.A2

e _it E d it
s io
w

n
o
D Br

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nl
ANNEX 1.A2

u le
d
EC

ea

se
The Multilateral Agreement on Investment:

R
Draft Consolidated Text53 O

e
An r
c tu
Investor-state procedures
Le
Article 16. Final awards
d) The award shall be drafted consistently with the requirements of
paragraph 17 and shall be a publicly available document. A copy of the
award shall be delivered to the Parties Group by the Secretary-General of
ICSID, for an award under the ICSID Convention or the Rules of the ICSID
Additional Facility; by the Secretary-General of the ICC International
Court of Arbitration, for an award under its rules; and by the tribunal, for
an award under the UNCITRAL rules.

Article 17. Confidential and Proprietary Information

Parties and other participants in proceedings shall protect any
confidential or proprietary information which may be revealed in the course of
the proceedings and which is designated as such by the party providing the
information. They shall not reveal such information without written
authorisation from the party which provided it.

53. See www1.oecd.org/daf/mai/pdf/ng/ng987r1e.pdf.

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ANNEX 1.A3

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s io
w

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D Br

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ANNEX 1.A3

u le
d
EC

ea
Provisions on Transparency of Proceedings

se
in US Free Trade Agreements with Chile,

R
Singapore, Dominican Republic- O

e
Central America (DR-CAFTA) and Morocco r An u
An example: CAFTA-DR
Lect
Article 10.20: Conduct of the Arbitration
1. The disputing parties may agree on the legal place of any arbitration under
the arbitral rules applicable under Article 10.16.3. If the disputing parties
fail to reach agreement, the tribunal shall determine the place in
accordance with the applicable arbitral rules, provided that the place shall
be in the territory of a State that is a party to the New York Convention.
2. A non-disputing Party may make oral and written submissions to the
tribunal regarding the interpretation of this Agreement.
3. The tribunal shall have the authority to accept and consider amicus curiae
submissions from a person or entity that is not a disputing party.
[…]

Article 10.21: Transparency of Arbitral Proceedings

1. Subject to paragraphs 2 and 4, the respondent shall, after receiving the
following documents, promptly transmit them to the non-disputing Parties
and make them available to the public:
a) the notice of intent;
b) the notice of arbitration;
c) pleadings, memorials, and briefs submitted to the tribunal by a disputing
party and any written submissions submitted pursuant to Article 10.20.2
and 10.20.3 and Article 10.25;
d) minutes or transcripts of hearings of the tribunal, where available; and
e) orders, awards, and decisions of the tribunal.

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 ANNEX 1.A3

e _it E d it
2. The tribunal shall conduct hearings open io
sto the public and shall determine,
in consultation with the disputing w parties, the appropriate logistical

n
o
arrangements. However, any disputing party that intends to use

D Br
information designated as protected information in a hearing shall so

y
advise the tribunal. The tribunal shall make appropriate arrangements to

nl
protect the information from disclosure.

u le
3. Nothing in this Section requires a respondent to disclose protected
information or to furnish or allow access to information that it may

d
EC
withhold in accordance with Article 21.2 (Essential Security) or Article 21.5

ea
(Disclosure of Information).

se
4. Any protected information that is submitted to the tribunal shall be

R
O
protected from disclosure in accordance with the following procedures:
a) subject to subparagraph d), neither the disputing parties nor the tribunal

e
An
shall disclose to any non-disputing Party or to the public any protected r
Le
information where the disputing party that provided the information
clearly designates it in accordance with subparagraph b);
c tu
b) any disputing party claiming that certain information constitutes
protected information shall clearly designate the information at the time
it is submitted to the tribunal;
c) a disputing party shall, at the same time that it submits a document
containing information claimed to be protected information, submit a
redacted version of the document that does not contain the information;
only the redacted version shall be provided to the non-disputing Parties
and made public in accordance with paragraph 1; and
d) the tribunal shall decide any objection regarding the designation of
information claimed to be protected information. If the tribunal
determines that such information was not properly designated, the
disputing party that submitted the information may i) withdraw all or
part of its submission containing such information, or ii) agree to
resubmit complete and redacted documents with corrected designations
in accordance with the tribunal’s determination and subparagraph c). In
either case, the other disputing party shall, whenever necessary,
resubmit complete and redacted documents which either remove the
information withdrawn under i) by the disputing party that first
submitted the information or re-designate the information consistent
with the designation under ii) of the disputing party that first submitted
the information.
5. Nothing in this Section requires a respondent to withhold from the public
information required to be disclosed by its laws.

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ANNEX 1.A4

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s io
w

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o
D Br

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ANNEX 1.A4

u le
d
EC

ea

se
Model Bilateral Investment Treaties

R
1. Draft United States Model BIT
O

e
An r
Article 28: Conduct of the Arbitration
Le c tu
1. The disputing parties may agree on the legal place of any arbitration under
the arbitral rules applicable under Article 24(3). If the disputing parties fail
to reach agreement, the tribunal shall determine the place in accordance
with the applicable arbitral rules, provided that the place shall be in the
territory of a State that is a party to the New York Convention.
2. A non-disputing Party may make oral and written submissions to the
tribunal regarding the interpretation of this Treaty.
3. The tribunal shall have the authority to accept and consider amicus curiæ
submissions from a person or entity that is not a disputing party.

Article 29: Transparency of Arbitral Proceedings

1. Subject to paragraphs 2 and 4, the respondent shall, after receiving the
following documents, promptly transmit them to the non-disputing Parties
and make them available to the public:
a) the notice of intent referred to in article 24(2);
b) the notice of arbitration referred to in article 24(4);
c) pleadings, memorials, and briefs submitted to the tribunal by a disputing
party and any written submissions submitted pursuant to Article 28(2)
(Non-Disputing Party submissions) and (3) (Amicus Submissions) and
Article 33 (Consolidation);
d) minutes or transcripts of hearings of the tribunal, where available; and
e) orders, awards, and decisions of the tribunal.
2. The tribunal shall conduct hearings open to the public and shall determine,
in consultation with the disputing parties, the appropriate logistical

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 ANNEX 1.A4

e _it E d it
arrangements. However, any disputing s party that intends toiouse
information designated as protected w information in a hearing shall so

n
o
advise the tribunal. The tribunal shall make appropriate arrangements to

D Br
protect the information from disclosure.

y
nl
3. Nothing in this Section requires a respondent to disclose protected
information or to furnish or allow access to information that it may

u le
withhold in accordance with Article 18.

d
EC
(Essential Security Article) or Article 19 (Disclosure of Information

ea
Article)

se
4. Protected information shall, if such information is submitted to the

R
O
tribunal, be protected from disclosure in accordance with the following
procedures:

e
An
a) Subject to subparagraph 4(d), neither the disputing parties nor the r
tribunal shall disclose to the non-disputing Party or to the public any
Le
protected information where the disputing party that provided the
c tu
information clearly designates it in accordance with paragraph 4(b).
b) Any disputing party claiming that certain information constitutes
protected information shall clearly designate the information at the time
it is submitted to the tribunal.
c) A disputing party shall, at the same time that it submits a document
containing information claimed to be protected information, submit a
redacted version of the document that does not contain the information.
Only the redacted version shall be provided to the non-disputing Parties
and made public in accordance with paragraph 1.
d) The tribunal shall decide any objection regarding the designation of
information claimed to be protected information. If the tribunal
determines that such information was not properly designated, the
disputing party that submitted the information may i) withdraw all or
part of its submission containing such information, or ii) agree to
resubmit complete and redacted documents with corrected designations
in accordance with the tribunal’s determination and 4(c). In either case,
the other disputing party shall, whenever necessary, resubmit complete
and redacted documents which either remove the information
withdrawn under i) by the disputing party that first submitted the
information or redesignate the information consistent with the
designation under ii) of the disputing party that first submitted the
information.
5. Nothing in this Section requires a respondent to withhold from the public
information required to be disclosed by its laws.

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s
2. Canada’s Draft Foreign Investment Protection io
and Promotion
Agreement w

n
o
Article 38. Public Access to Hearings and Documents

D Br

y
nl
1. Hearings held under this Section shall be open to the public. To the extent
necessary to ensure the protection of confidential information, including

u le
business confidential information, the Tribunal may hold portions of
hearings in camera.

d
EC
2. The Tribunal shall establish procedures for the protection of confidential

ea
information and appropriate logistical arrangements for open hearings, in

se
consultation with the disputing parties.

R
O
3. All documents submitted to, or issued by, the Tribunal shall be publicly
available, unless the disputing parties otherwise agree, subject to the

e
deletion of confidential information. An r
u
t shall
L e cSection
4. Notwithstanding paragraph 3, any Tribunal award under this
be publicly available, subject to the deletion of confidential information.
5. A disputing party may disclose to other persons in connection with the
arbitral proceedings such unredacted documents as it considers necessary
for the preparation of its case, but it shall ensure that those persons protect
the confidential information in such documents.
6. The Parties may share with officials of their respective federal and
sub-national governments all relevant unredacted documents in the course
of dispute settlement under this Agreement, but they shall ensure that
those persons protect any confidential information in such documents.
7. As provided under Article 10(4) and (5), the Tribunal shall not require a
Party to furnish or allow access to information the disclosure of which
would impede law enforcement or would be contrary to the Party’s law
protecting Cabinet confidences, personal privacy or the financial affairs
and accounts of individual customers of financial institutions, or which it
determines to be contrary to its essential security.
8. To the extent that a Tribunal’s confidentiality order designates information
as confidential and a Party’s law on access to information requires public
access to that information, the Party’s law on access to information shall
prevail. However, a Party should endeavour to apply its law on access to
information so as to protect information designated confidential by the
Tribunal.

Article 39. Submissions by a Non-Disputing Party

1. Any non-disputing party that is a person of a Party, or has a significant
presence in the territory of a Party, that wishes to file a written submission

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 ANNEX 1.A4

e _it E d it
io to
s for leave from the Tribunal
with a Tribunal (the “applicant”) shall apply
w
file such a submission, in accordance with Annex C.39. The applicant shall

n
o
attach the submission to the application.

D Br

y
2. The applicant shall serve the application for leave to file a non-disputing party

nl
submission and the submission on all disputing parties and the Tribunal.
3. The Tribunal shall set an appropriate date for the disputing parties to

u le
comment on the application for leave to file a non-disputing party submission.

d
4. In determining whether to grant leave to file a non-disputing party

EC

ea
submission, the Tribunal shall consider, among other things, the extent to

se
which:

R
O
a) the non-disputing party submission would assist the Tribunal in the
determination of a factual or legal issue related to the arbitration by

e
r
bringing a perspective, particular knowledge or insight that is different
An
from that of the disputing parties;
u
c twithin the
scope of the dispute;
L
b) the non-disputing party submission would address e
a matter

c) the non-disputing party has a significant interest in the arbitration; and

d) there is a public interest in the subject-matter of the arbitration.
5. The Tribunal shall ensure that:
a) any non-disputing party submission does not disrupt the proceedings; and
b) neither disputing party is unduly burdened or unfairly prejudiced by
such submissions.
6. The Tribunal shall decide whether to grant leave to file a non-disputing
party submission. If leave to file a non-disputing party submission is
granted, the Tribunal shall set an appropriate date for the disputing parties
to respond in writing to the non-disputing party submission. By that date,
the non-disputing Party may, pursuant to Article 34 (Participation by the
Non-Disputing Party), address any issues of interpretation of this
Agreement presented in the non-disputing party submission.
7. The Tribunal that grants leave to file a non-disputing party submission is
not required to address the submission at any point in the arbitration, nor
is the non-disputing party that files the submission entitled to make
further submissions in the arbitration.
8. Access to hearings and documents by non-disputing parties that file
applications under these procedures shall be governed by the provisions
pertaining to public access to hearings and documents under Article 38
(Public Access to Hearings and Documents).

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ANNEX 1.A5

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s io
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D Br

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ANNEX 1.A5

u le
d
EC

ea

se
Suggested Changes to the ICSID Rules

R
and Regulations O

e
An r
c tu
Working Paper of the ICSID Secretariat
12 May 2005 Le
Publication of Awards – Suggested changes to ICSID Arbitration
Rule 48

Rule 48 – Rendering of the Award

[…]
4. The Centre shall not publish the award without the consent of the parties.
The Centre may shall, however, promptly include in its publications
excerpts of the legal rules applied by conclusions of the Tribunal.
Note: As stated in the Discussion Paper of 22 October 2004, Article 48(5) of
the ICSID Convention and the first sentence of Arbitration Rule 48(4) preclude
the Centre from publishing a Convention award without the consent of the
parties. However, the Centre may publish excerpts from the legal holdings of
the award.
The suggested changes would facilitate the prompt release of excerpts, by
making their early publication mandatory, and clarify the wording of the
provision. Prompt publication of the excerpts is particularly important in view
of the increase in the number of pending cases at the Centre.
Similar changes would be made to the corresponding provisions in the
Additional Facility Arbitration Rules, Article 53(3).

40 INTERNATIONAL INVESTMENT LAW: A CHANGING LANDSCAPE – ISBN 92-64-01164-1 – © OECD 2005

 ANNEX 1.A5

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io
s to ICSID Arbitration
Access of Third Parties – Suggested changes
Rule 32 w

n
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Rule 32 – The Oral Procedure

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nl
[…]
2. After consultation with the Secretary-General and with the parties as far as

u le
possible, the Tribunal shall decide, with the consent of the parties, which

d
may allow other persons, besides the parties, their agents, counsel and

EC
advocates, witnesses and experts during their testimony, and officers of the

ea
Tribunal may, to attend or observe all or part of the hearings. The Tribunal

se
shall for such cases establish procedures for the protection of proprietary

R
O
information and the making of appropriate logistical arrangements.
[…]

e
An r
c tu
Note: In certain cases, it could be useful to have hearings open to persons

Le
other than those directly involved in the proceeding. The suggested changes
would make clear that this might be considered by a tribunal after
consultation with the Secretary-General and both parties as far as possible.
Such consultation with the parties would ensure that any objection or concern
they may have will be taken into account by the tribunal in considering
whether to allow any third parties to attend or observe the hearings. The
changes would also require the tribunal for such cases to prescribe procedures
to protect proprietary information and make the appropriate logistical
arrangements.
Similar changes would be made to the corresponding provisions in the
Additional Facility Arbitration Rules, Article 39(2).

Access of Third Parties – Suggested changes to ICSID Arbitration

Rule 37

Rule 37 – Visits and Inquiries; Submissions of Non-disputing Parties

1. If the Tribunal considers it necessary to visit any place connected with the
dispute or to conduct an inquiry there, it shall make an order to this effect.
The order shall define the scope of the visit or the subject of the inquiry, the
time limit, the procedure to be followed and other particulars. The parties
may participate in any visit or inquiry.
2. After consulting both parties as far as possible, the Tribunal may allow a
person or a State that is not a party to the dispute (hereafter called the
“non-disputing party”) to file a written submission with the Tribunal. In
determining whether to allow such a filing, the Tribunal shall consider,
among others things, the extent to which:

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41
ANNEX 1.A5

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a) the non-disputing party submissions would assist the Tribunal iin the
o
w
determination of a factual or legal issue related to the proceeding by

n
o
bringing a perspective, particular knowledge or insight that is different

D Br
from that of the disputing parties;

y
nl
b) the non-disputing party submission would address a matter within the
scope of the dispute;

u le
c) the non-disputing party has a significant interest in the proceeding. The
Tribunal shall ensure that the non-disputing party submission does not

d
EC
disrupt the proceeding, unduly burden or unfairly prejudice either party,

ea
and that both parties are given an opportunity of presenting their

se
observations on the non-disputing party submission.

R
O
Note: The suggested changes would make clear that ICSID tribunals may
accept and consider written submissions from a non-disputing person or a

e
An
State, after consulting both parties as far as possible. The tribunal would have r
Le
to be satisfied that any such submissions would assist the tribunal in the
c tu
determination of a factual or legal issue within the scope of the dispute, that
the non-disputing party has a significant interest in the dispute and that this
would not disrupt the proceeding or unfairly burden either party.
Similar changes would be made to the Additional Facility Arbitration
Rules, by introducing a new paragraph to Article 41.

42 INTERNATIONAL INVESTMENT LAW: A CHANGING LANDSCAPE – ISBN 92-64-01164-1 – © OECD 2005

 ISBN 92-64-01164-1
International Investment Law: A Changing Landscape

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A Companion Volume to International Investment Perspectives_it E d it
© OECD 2005
s io
w

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Chapter 2

u le
d
EC

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se
“Indirect Expropriation”

R
O
and the “Right to Regulate”
in International Investment Law *

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An r
Le c tu
In recent times, disputes related to nationalisation of investments that marked
the 70s and 80s have been replaced by disputes related to foreign investment
regulation and indirect expropriation. Foreign investors increasingly make
claims for compensation based on governmental regulations, such as placing
restrictions on the legal use of property that do not actually remove the owner’s
title to the property but nevertheless substantially affect its value or the
owner’s control. There is some concern that concepts such as indirect
expropriation may be applicable to regulatory measures aimed at protecting
the environment, health and other welfare interests of society.
How has state practice defined and articulated the difference between an
indirect expropriation requiring compensation and a governmental measure
impacting an investment but not requiring compensation? How have arbitral
tribunals drawn the line? Has the doctrine shed any additional light on this
distinction?
This survey provides factual elements of information on jurisprudence, state
practice and literature related to “Indirect Expropriation” and the “Right to
Regulate”. It presents the issues at stake and describes the basic concepts of the
obligation to compensate for indirect expropriation, reviews whether and how
legal instruments and other texts articulate the difference between indirect
expropriation and the right of the governments to regulate without
compensation and attempts to identify a number of criteria emerging from
jurisprudence and state practice for determining whether an indirect
expropriation has occurred.

* This survey was prepared by Catherine Yannaca-Small, Investment Division, OECD

Directorate for Financial and Enterprise Affairs, and benefited from discussions,
comments and a variety of perspectives in the OECD Investment Committee. The
document as a factual survey, however, does not necessarily reflect the views of the
OECD or those of its member governments. It cannot be construed as prejudging ongoing
or future negotiations or disputes pertaining to international investment agreements.

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“INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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Introduction s io
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It is a well recognised rule in international law that the property of aliens

n
o
cannot be taken, whether for public purposes or not, without adequate

D Br

y
compensation. Two decades ago, the disputes before the courts and the

nl
discussions in academic literature focused mainly on the standard of
compensation and measuring of expropriated value. The divergent views1 of

u le
the developed and developing countries raised issues regarding the formation
and evolution of customary law. Today, the more positive attitude of countries

d
EC
around the world toward foreign investment and the proliferation of bilateral

ea
treaties and other investment agreements requiring prompt, adequate and

se
effective compensation for expropriation of foreign investments have largely

R
O
deprived that debate of practical significance for foreign investors.
Disputes on direct expropriation – mainly related to nationalisation

e
An
that marked the 70s and 80s – have been replaced by disputes related to r
Le
foreign investment regulation and “indirect expropriation”. Larg ely
prompted by the first cases brought under NAFTA, there is increasing
c tu
concern that concepts such as indirect expropriation may be applicable to
regulatory measures aimed at protecting the environment, health and
other welfare interests of society. The question that arises is to what extent
a government may affect the value of property by regulation, either general
in nature or by specific actions in the context of general regulations, for a
legitimate public purpose without effecting a “taking” and having to
compensate for this act. One leading commentator suggests that the issue

1. A number of developed countries endorsed the “Hull formula”, first articulated by

the United States Secretary of State Cordell Hull in response to Mexico’s
nationalisation of American petroleum companies in 1936. Hull claimed that
international law requires “prompt, adequate and effective” compensation for the
expropriation of foreign investments. Developing countries supported the Calvo
doctrine during the 1960s and 1970s as reflected in major United Nations General
Assembly resolutions. In 1962, the General Assembly adopted its Resolution on
Permanent Sovereignty over Natural resources which affirmed the right to
nationalise foreign owned property and required only “appropriate compensation”.
This compensation standard was considered an attempt to bridge differences
between developed and developing states. In 1974, the UN General Assembly
decisively rejected the Hull formula in favour of the Calvo doctrine in adopting the
Charter of Economic Rights and Duties of States. While Article 2(c) repeats the
“appropriate compensation” standard, it goes on to provide that “in any case where
the question of compensation gives rise to a controversy, it shall be settled under
the domestic law of the nationalising State and by its tribunals…”. Nowadays, the
Hull formula and its variations are often used and accepted and considered as part
of customary international law.

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 “INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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io
s may become the dominant
of definition of expropriation in this context
issue in international investment law.w 2

n
o
Despite a number of decisions of international tribunals, the line between

D Br

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the concept of indirect expropriation and governmental regulatory measures

nl
not requiring compensation has not been clearly articulated and depends on
the specific facts and circumstances of the case. However, while case-by-case

u le
consideration remains necessary, there are some criteria emerging from the
examination of some international agreements and arbitral decisions for

d
EC
determining whether an indirect expropriation requiring compensation has

ea
occurred.

se
The present survey provides factual elements of information on

R
O
jurisprudence, state practice and literature on this matter. It presents the
issues at stake and describes the basic concepts of the obligation to

e
An
compensate for indirect expropriation (Section 1), reviews whether and how r
c tu
legal instruments and other texts articulate the difference between indirect
expropriation and the right of the governments to regulate without Le
compensation (Section 2) and attempts to identify a number of criteria which
emerge from jurisprudence and state practice for determining whether an
indirect expropriation has occurred (Section 3).

1. Basic concepts of the obligation to compensate for indirect

expropriation
Customary international law does not preclude host states from
expropriating foreign investments provided certain conditions are met. These
conditions are: the taking of the investment for a public purpose, as provided
by law, in a non-discriminatory manner and with compensation.
Expropriation or “wealth deprivation” 3 could take different forms: it
could be direct where an investment is nationalised or otherwise directly
expropriated4 through formal transfer of title or outright physical seizure.
In addition to the term expropriation, terms such as “dispossession”,
“taking”, “deprivation” or “privation” are also used.5 International law is

2. Dolzer, “Indirect Expropriations: New Developments?” Article of the Colloquium on

Regulatory Expropriation organised by the New York University on 25-27 April 2002;
11 Environmental Law Journal 64.
3. “Wealth deprivation” is a term which according to Weston avoids most, if not all, of
the major ambiguities and imprecision of the traditional terminology. See
B. Weston “‘Constructive Takings’ under International Law: A Modest Foray into the
Problem of “Creeping Expropriation”, Virginia Journal of International Law, 1975,
Vol. 16, pp. 103-175 at 112.
4. In general, expropriation applies to individual measures taken for a public purpose while
nationalisation involves large-scale takings on the basis of an executive or legislative act
for the purpose of transferring property or interests into the public domain.
5. Dolzer and Stevens, “Bilateral Investment Treaties”, ICSID, 1995 at 98.

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“INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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io
s constitutes a compensable
clear that a seizure of legal title of property
expropriation. w

n
o
Expropriation or deprivation of property 6 could also occur through

D Br

y
interference by a state in the use of that property or with the enjoyment of the

nl
6. In the context of international law, “property” refers to both tangible and intangible

u le
property. Under Article 1139 of the NAFTA, the definition of “investment” covers,
among other things, “real estate or other property, tangible or intangible [emphasis

d
supplied], acquired in the expectation or used for the purpose of economic benefit

EC
or other business purposes.” Likewise, most BITs contain a relatively standard

ea
definition of investment that also covers intangible forms of property: “intellectual

se
property and contractual rights.” Source UNCTAD “Bilateral Investment Treaties in

R
the Mid-1990s” 1998. See also the recently concluded US FTAs with Australia, Chile,

O
Dominican Republic-Central America, Morocco and Singapore: “An action or series
of actions by a Party cannot constitute an expropriation unless it interferes with a

e
tangible or intangible property right or property interest in an investment.” The
An r
c tu
Iran-United States Claims Tribunal stated that “[the claimants] rely on precedents

Le
in international law in which case measures of expropriation or takings, primarily
aimed at physical property, have been deemed to comprise also rights of a
contractual nature closely related to the physical property…” It has consistently
rejected attempts made by Iranian respondents for a narrow interpretation of
“property” and has confirmed that shareholder rights and contractual rights can be
the object of expropriation Starret Housing Corp. v. Islamic Republic of Iran, 4, Iran-US
Cl. Trib. Rep. 122, 156-57 (1983), Amoco International Finance Corporation v. Iran, Award
No. 310-56-3 (14 July 1987), 15 Iran-US C.T.R. 189-289. Under the Protocol 1 of the
European Convention on Human Rights, the concept of property is very broadly
defined by reference to all the proprietary interests of an individual. It covers a
range of economic interests: “movable or immovable property, tangible and
intangible interests, such as shares, patents, an arbitration award, the entitlement
to a pension, a landlord’s entitlement to rent, the economic interests connected
with the running of a business and the right to exercise a profession…”
One of the first instances in which the violation of an intangible property right was
held to be an expropriation, was the Norwegian Ship-owners’ case. Although the United
States contended that it had requisitioned only ships and not the underlying
contracts, the Tribunal found that a taking of property rights ancillary to those
formally taken had occurred and required compensation. Nor. v. US, 1 R.I.A.A. 307,
332 (Perm. Ct. Arb. 1922). In the 1926 case of German Interests in Polish Upper Silesia – the
Chorzow Factory case – the Permanent Court of International Justice found that the
seizure by the Polish government of a factory plant and machinery was also an
expropriation of the closely interrelated patents and contracts of the management
company, although the Polish government at no time claimed to expropriate these.
F.R.G. v. Pol., 1926 P.C.I.J. (ser. A) No. 7 (May 1925).
However, certain intangible property rights or interests, by themselves, may not
be capable of being expropriated, but may be viewed instead, as elements of value
of business. In the 1934 Oscar Chinn case, the Permanent Court did not accept the
c onten tion th at good will is a prope rty r ig ht ca pable, by itse lf, of being
expropriated. The P.C.I.J. found that a granting of a de facto monopoly did not
constitute a violation of international law, stating that “it was unable to see in
[claimant’s] original position – which was characterised by the possession of
customers – anything in the nature of a genuine vested right” and that “favourable
business conditions and good will are transient circumstances, subject to
inevitable changes”. 1934 P.C. I. J. Ser A/B, No. 63. In two more recent NAFTA cases,

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 “INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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io
s and the legal title to the property
benefits even where the property is not seized
is not affected. The measures takenw by the State have a similar effect to
7

n
o
expropriation or nationalisation and are generally termed “indirect”, “creeping”,

D Br
or “de facto” expropriation, or measures “tantamount” to expropriation.

y
nl
However, under international law, not all state measures interfering with
property are expropriation. As Brownlie has stated, “state measures, prima

u le
facie a lawful exercise of powers of governments, may affect foreign interests
considerably without amounting to expropriation. Thus, foreign assets and

d
EC
their use may be subjected to taxation, trade restrictions involving licenses

ea
and quotas, or measures of devaluation. While special facts may alter cases, in

se
p r in c ip l e such m e a sur es are n ot u n lawfu l a n d do n ot c o n sti tute

R
O
expropriation”.8 Similarly, according to Sornarajah,9 non-discriminatory
m e as ure s 10 re lated to a nti-trust, c ons umer protec tion, sec urities ,

e
environmental protection, land planning are non-compensable takings since
An r
c tu
they are regarded as essential to the efficient functioning of the state.
Le
6. the NAFTA Tribunals addressed claims concerning market access and market
share and sugg ested that these might be property rights for purposes of
expropriation. In neither case, however, did the tribunal find that market access
or market share could be capable themselves of being expropriated, nor did either
tribunal find that an expropriation took place. See Pope & Talbot, Inc v. Canada,
I nte r im Award (26 Ju ne 20 0 0), par. 9 6 -98 an d S.D. Myers, Inc . v. Canada ,
(13 November 2000) Partial Award, 232. International Legal Materials 408, par. 232.
See also e.g. G. White “Nationalisation of Foreign Property” 49 (1961); The Iran-United
States Claims Tribunal: Its contribution to the Law of State Responsibility 196-97 No. 33
(Richard Lillich and Daniel Magraw editors, 1998).
7. On this point, Dolzer notes that, “‘creeping expropriation' suggests a deliberate
strategy on the part of the state, which may imply a negative moral judgement”.
See Dolzer, "Indirect Expropriation of Alien Property", ICSID Review, Foreign
Investment Law Journal, (1986) pp. 41-59 at 44.
8. Ian Brownlie, “Public International Law”, Oxford University Press, 6th Edition, 2003 at 509.
9. M. Sornarajah, “The International Law on Foreign Investment” (1994) at 283,
Cambridge University Press.
10. It is an accepted principle of customary international law that where economic
injury results from a bona fide non-discriminatory regulation within the police
powers of the State, compensation is not required. A state measure will be
discriminatory if it results “in an actual injury to the alien […] with the intention
to harm the aggrieved alien” to favour national companies. See Dolzer and
Stevens, op. cit. No. 5. The Restatement Third recognises the non-discrimination
rule: “One test suggested for determining whether regulation and taxation
program are intended to achieve expropriation is whether they are applied only to
alien enterprises” “Restatement of the Law Third, the Foreign Relations of the
United States”, American Law Institute, Vol. 1, 1987, Section 12. The Iran-US Claims
Tribunal recognised in the Amoco case that Iran owed compensation for
expropriatory measures, and also acknowledged the rule of non-discrimination.
The Award specifically states that: “discrimination is widely prohibited by
customary international law in the field of expropriation”, although the Tribunal
found no discrimination in this case. Amoco, see op. cit., No. 6.

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“INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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s accepted and clear definition
As mentioned above, there is no generally io
w
of the concept of indirect expropriation and what distinguishes it from

n
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non-compensable regulation, although this question is of great significance to

D Br
both investors and governments. As Dolzer and Stevens wrote:

y
nl
“To the investor, the line of demarcation between measures for which no
compensation is due and actions qualifying as indirect expropriations

u le
(that require compensation) may well make the difference between the
burden to operate (or abandon) a non-profitable enterprise and the right to

d
EC
receive full compensation (either from the host State or from an insurance

ea
contract). For the host State, the definition determines the scope of the

se
State’s power to enact legislation that regulates the rights and obligations

R
O
of owners in instances where compensation may fall due. It may be argued
that the State is prevented from taking any such measures where these

e
cannot be covered by public financial resources.”11
An r
c tu
As Higgins wrote in her study on the taking of property by the state, the
Le
issue can be further refined as the determination of who is to pay the
economic cost of attending to the public interest involved in the measure in
question. Is it to be the society as a whole, represented by the state, or the
owner of the affected property?12
Nouvel has pointed out that in the case of nationalisation or direct
expropriation, the dispossession to the detriment of a private person
coincides with the appropriation to the profit of a public person; the measures
tantamount to expropriation do not have this linkage. In the latter case, the
reduction of the value of private property is not necessarily accompanied by
an increase in public wealth.13

2. Legal instruments and other texts

Protection against indirect expropriation has been included in various
forms of international instruments. Literally all relevant treaties and draft
treaties provide for indirect expropriation or measures tantamount to
expropriation. However, most of them stay mute on the treatment of the
non-compensable regulatory measures, with the exception of: the European
Convention on Human Rights and Fundamental Freedoms (hereafter the
European Convention on Human Rights), the recently concluded US-Free

11. Dolzer and Stevens, op. cit., No. 5 at 99.

12. R. Higgins “The Taking of Property by the State: Recent Developments in
International Law” Recueil des cours – académie de Droit international, 1982, Vol. 176
at 276-77.
13. Yves Nouvel, “Les mesures équivalant à une expropriation dans la pratique
récente des tribunaux arbitraux”, Revue Générale du Droit International Public,
2002-1, pp. 80-102 at 89.

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 “INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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Trade Agreements and the new model US s
and Canada BITs. The OECD ioDraft
w
Convention on the Protection of Foreign Property and the draft OECD

n
o
Multilateral Agreement on Investment, while themselves silent on the

D Br
non-compensable regulatory measures, were accompanied by commentaries

y
which did address the issue. Other texts which addressed it are the Harvard

nl
Draft Convention on International Responsibility, and the Third Restatement

O
of Foreign Relations of the United States which, while the work of scholars, not

u le
state practice, constitute an influential element of doctrine.

d
EC

ea
2.1. Legal texts which include indirect expropriation without
addressing non-compensable regulation

se
R
Bilateral Investment Treaties contain brief and general indirect expropriation

O
provisions which focus on the effect of the government action and do not address

e
the distinction between compensable and non-compensable regulatory actions.
An r
c tu
For example, treaties entered by France refer to “measures of expropriation or

Le
nationalisation or any other measures the effect of which would be direct or indirect
dispossession”. The UK treaties provide that expropriation also covers measures
“having effect equivalent to nationalisation or expropriation”. Other treaties, such
as some of those concluded by Sweden, refer to “any direct or indirect measure”
or “any other measure having the same nature or the same effect against
investments”. The former United States Model BIT mentions “measures
tantamount to expropriation or nationalisation”. Several United States treaties are
more specific on these measures: “any other measure or series of measures,
direct or indirect, tantamount to expropriation (including the levying of taxation,
the compulsory sale of all or part of an investment, or the impairment or
deprivation of its management, control of economic value…”14
The 1992 World Bank Guidelines section IV(1) on “Expropriation and
Unilateral Alterations or Termination of Contracts”, state that : “A state may
not expropriate or otherwise take in whole or in part a foreign private
investment in its territory, or take measures which have similar effects, except
where this is done in accordance with applicable legal procedures, in
pursuance in good faith of a public purpose, without discrimination on the
basis of nationality and against the payment of appropriate compensation.”
T he 19 9 4 En ergy C harter Treaty in its Ar ti cle 13 provid es th at:
“investments of investors of a Contracting Party in the Area of any other
Contracting Party shall not be nationalized, expropriated or subjected to a
measure or measures having effect equivalent to nationalization or expropriation”
e xc ept wh ere such me asure complies w ith the rule s of customary
i n te r n a t i o n a l l a w i n t h i s m a t t e r ( p u b l i c p u r p o s e , d u e p r o c e s s ,
non-discrimination and compensation).

14. See Dolzer and Stevens, op. cit., No. 5.

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“INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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io
s the expropriation of foreign
Article 1110 of NAFTA protects against
w
investments with the following language:

n
o
1. No Party may directly or indirectly nationalise or expropriate an investment

D Br

y
of an investor of another Party in its territory or take a measure tantamount to

nl
nationalisation or expropriation of such an investment, except:
a) for a public purpose;

u le
b) on a non-discriminatory basis;

d
c) in accordance with due process of law and Article 1105(1);15 and

EC

ea
d) on payment of compensation in accordance with [subsequent paragraphs

se
specifying valuation of expropriations and form and procedure of

R
O
payment].

e
2.2. Legal texts which address non-compensable regulation
An r
c tu
The relevant principles for the purposes of the European Convention of
Le
Human Rights are included in Article 1 of Protocol 1, concluded in 1952 and
entered into force in 1954. Though this article, does not say so explicitly, it
strongly implies that the duty to compensate is not applicable to normal
regulation:16
“Every natural or legal person is entitled to the peaceful enjoyment of its
possessions. No one should be deprived of his possessions except in the
public interest and subject to the conditions provided for by the law and
by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of a
state to enforce such laws as it deems necessary to control the use of property in
accordance with the general interest or to secure the payment of taxes or other
contributions or penalties” [italics added].
In 1961, the Harvard Draft Convention on the International Responsibility of
States for Injuries to Aliens, drafted by Sohn and Baxter, assumed a taking to
occur in the case of any “unreasonable interference with the use, enjoyment
or disposal of property as to justify an interference that the owner thereof will
not be able to use, enjoy or dispose of the property within a reasonable period
of time after the inception of such interference”. In its Article 10(5) it
recognised the existence of a category of non-compensable takings:
“An uncompensated taking of an alien property or a deprivation of the
use or enjoyment of property of an alien which results from the execution

15. Article 1105(1) 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.”
16. The jurisprudence attached to the Convention by the European Court of Human
Rights has consistently taken this line.

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 “INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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of tax laws; from a general change in sthe value of currency; fromiothe
action of the competent authoritiesw of the State in the maintenance of

n
o
public order, health or morality; or from the valid exercise of belligerent

D Br
rights or otherwise incidental to the normal operation of the laws of the

y
State shall not be considered wrongful.”

nl
Article 3 of the 1967 OECD17 Draft Convention on the Protection of Foreign

O
Property,18 states that “no Party shall take any measures depriving, directly or

u le
indirectly, of his property a national of another Party…” unless four conditions

d
EC
are met according to recognised rules of international law.19 An accompanying

ea
note on the nature of obligation and its scope states the duty to compensate

se
in a broad way:

R
O
“Article 3 acknowledges, by implication, the sovereign right of a State,
under international law, to deprive owners, including aliens, of property

e
An
which is within its territory in the pursuit of its political, social or r
c tu
economic ends. To deny such a right would be attempt to interfere with
Le
its powers to regulate – by virtue of its independence and autonomy,
equally recognised by international law – its political and social
existence. The right is reconciled with the obligation of the State to
respect and protect the property of aliens by the existing requirements
for i ts e xe rc is e – be fo re al l, th e req uire me n t t o p ay t h e alie n
compensation if his property is taken.”
However, subsequent notes make clear that the concept of “taking” is not
intended to apply to normal and lawful regulatory measures short of direct
taking of property rights, but rather, to misuse of otherwise lawful regulation to
deprive an owner of the substance of his rights:
4(a) “… By using the phrase ‘to deprive […] directly or indirectly […]’ in the text
of the Article it is, however, intended to bring within its compass any
measures taken with the intent of wrongfully depriving the national
concerned of the substance of his rights and resulting in such loss
(e.g. prohibiting the national to sell his property of forcing him to do so at
a fraction of the fair market price)” (emphasis in original).

17. The OECD Code of Liberalisation of Capital Movements, through its provisions on
the free disposal of blocked accounts and other non-resident owned assets,
includes a dimension of preventing confiscation measures, in addition to the
liberalisation disciplines per se of the Code. However, the Code is silent on the
issue of the “right to regulate” in the context of this note.
18. OECD Draft Convention on Foreign Property, 12 October 1967, pp. 23-25.
19. The measures in question must be taken: i) in the public interest; ii) under due
process of law; iii) not be discriminatory; and furthermore, iv) just and effective
compensation must be paid.

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“INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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4(b) “… Thus in particular, Article 3 s is meant to cover ‘creepingio
nationalisation’ recently practicedw
by certain states. Under it, measures

n
o
otherwise lawful are applied in such a way:

D Br

y
[…] as to deprive ultimately the alien of the enjoyment of value of his

nl
property, without any specific act being identifiable as outright
deprivation. As instances may be quoted excessive or arbitrary taxation;

u le
prohibition of dividend distribution coupled with compulsory loans;
imposition of administrators; prohibition of dismissal of staff; refusal of

d
EC
access to raw materials or of essential export or import licences.”

ea
The commentary to the American Law Institute’s Restatement Third of

se
Foreign Relations Law of the United States, 20 was designed to assist in

R
O
determining, inter alia, how to distinguish between an indirect expropriation
and valid government regulation:

e
An
“A state is responsible as for an expropriation of property when it subjects r
Le c tu
alien property to taxation, regulation, or other action that is confiscatory,
or that prevents, unreasonably interferes with, or unduly delays, effective
enjoyment of an alien’s property or its removal from the state’s territory…
A state is not responsible for loss of property or for other economic disadvantage
resulting from bona fide general taxation, regulation, forfeiture for crime, or other
action of the kind that is commonly accepted as within the police power of states,
if it is not discriminatory…” [italics added].
The MAI Negotiating Text was almost identical to the NAFTA provision.
However, the MAI Commentary noted that by extending protection to
“measures having equivalent effect” to expropriation, the text was intended to
cover “creeping expropriation”. MAI negotiators addressed the distinction
between indirect expropriation and general regulations in the Report by the
Chairman of the Negotiating Group (Chairman’s Report) 21 which was put
forward at the later stage of the negotiations. In its Annex 3, Article 3 (Right to
Regulate) and an interpretative note to Article 5 (Expropriation and
Compensation)22 it is stated:
Article 3 “Right to Regulate”
“[a] a Contracting Party may adopt, maintain, or enforce any measure that
it considers appropriate to ensure that investment activity is undertaken in
a manner sensitive to health, safety or environmental concerns provided
that such measures are consistent with this agreement.”

20. “Restatement of the Law Third, the Foreign Relations Law of the United States,”
American Law Institute, Vol. 1, 1987, Section 712, Comment g.
21. The Multilateral Agreement on Investment (Report by the Chairman of the
Negotiating Group) DAFFE/MAI(98)17, 4 May 1998, available at www1.oecd.org/daf/
mai/pdf/ng/ng9817e.pdf.
22. Idem, pp. 13-15.

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 “INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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s and Compensation”io
Interpretative note to Article 5 “Expropriation
“This Article […] [is] intended to wincorporate into the MAI existing

n
o
i n te r n a t i o n a l n o r m s . T h e r e f e re n c e [ … ] to e x p r o p r i a t i on or

D Br

y
nation alisation and ‘me asures tan tamoun t to expropriation or

nl
nationalisation’ reflects the fact that international law requires
compensation for an expropriatory taking without regard to the label

u le
applied to it, even if title to the property is not taken. It does not
establish a new requirement that Parties pay compensation for losses

d
EC
which an investor or investment may incur through regulation, revenue

ea
raising and other normal activity in the public interest undertaken by

se
governments.”

R
O
A Declaration adopted by the OECD Council of Ministers on 28 April
199823 states that “the MAI would establish mutually beneficial international

e
An
rules which would not inhibit the normal non-discriminatory exercise of r
c tu
regulatory powers by governments and such exercise of regulatory powers
would not amount to expropriation”.24 Le
3. Criteria determining whether an indirect expropriation has
occurred
As discussed above, few legal texts attempted to address directly how to
distinguish legitimate non-compensable regulations having an effect on the
economic value of foreign investments and indirect expropriation, requiring
compensation. Scholars recognised the existence of the distinction but did not
shed much light on the criteria for making the distinction. This may reflect
reluctance to attempt to lay down simple, clear rules in a matter that is subject
to so many varying and complex factual patterns and a preference to leave the
resolution of the problem to the development of arbitral decisions on a

23. See OECD document C/MIN(98)16/FINAL.

24. For a discussion on regulatory expropriations in the MAI, see the article by R.
Geiger “Regulatory Expropriations in International Law: Lessons from the
Multilateral Agreement on Investment”, N.Y.U. Environmental Law Journal, 2002,
Vol. 11, No .1, pp. 94-109 at 104.

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“INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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case-by-case basis.25 s sources of such decisionsiowere
The two most prominent
the Iran-United States Claims Tribunalw 26
and decisions arising under Article 1,

n
o
Protocol 1 of the European Convention for the Protection of Human Rights.

D Br
The recent period has seen a further body of jurisprudence, from cases based

y
on NAFTA and bilateral investment agreements. At the same time, a new

nl
generation of investment agreements, including investment chapters of Free

O
Trade Agreements has developed, which include criteria to articulate the

u le
difference between indirect expropriation and non-compensable regulation.

d
EC

ea
3.1. Jurisprudence

se
Although there are some “inconsistencies”27 in the way some arbitral

R
O
tribunals have distinguished legitimate non-compensable regulations having
an effect on the economic value of foreign investments and indirect

e
expropriation requiring compensation, a careful examination reveals that, in
An r
c tu
broad terms, they have identified the following criteria which look very similar
Le
to the ones laid out by the recent agreements: i) the degree of interference
with the property right, ii) the character of governmental measures, i.e. the
purpose an d the context of th e gove rn me ntal measure, and iii) the
interference of the measure with reasonable and investment-backed
expectations.

25. Christie wrote in 1962 that “it is evident that the question of what kind of interference
short of outright expropriation constitutes a ‘taking’ under international law presents
a situation where the common law method of case by case development is
pre-eminently the best method, in fact probably the only method, of legal
development”. G. Christie, “What Constitutes a Taking of Property under
International Law?”, British Yearbook of International Law, 1962, pp. 307-338. Sornarajah
noted that the difficulty is “in the formulation of a theory that could be used as a
predictive device so that there could be guidance as to whether the taking is a
compensable or not. Here, though several efforts have been made at devising a theory
capable of making the distinction, none has been successful”. See op. cit., No. 9. Dolzer
acknowledged after an extensive review of judicial precedent and state practice that
“one cannot but admit at this stage that the law of indirect expropriation can be
established, at this moment, on the basis of primary sources of international law,
only in a very sketchy and rough manner”. See op. cit., No. 7.
26. The Iran-United States Claims Tribunal was established in 1981 in order to
adjudicate claims by nationals of each country following the Iranian revolution.
Its creation was pursuant to the Algiers Declarations which resolved the hostage
crisis between Iran and the United States.
27. There is a view that the “inconsistent” case law which has been developed may
simply reflect the different approaches of different treaties. According to this
view, for example, the practice of the European Court of Human Rights on what
“indirect expropriation” means could well be expected to differ from that of
NAFTA tribunals, given the different wording, overall purpose and history of the
treaties they have to refer to (European Convention of Human Rights on the one
hand, and NAFTA on the other hand).

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 “INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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s right
3.1.1. Degree of interference with the property io
w decisions treat the severity of
Severe economic impact. Most international

n
o
the economic impact caused by a government action as an important

D Br

y
element in determining whether it rises to the level of an expropriation

nl
requiring compensation. International tribunals have often refused to
require compensation when the governmental action did not remove

u le
essentially all or most of the property’s economic value. There is broad
support for the proposition that the interference has to be substantial in

d
EC
order to constitute expropriation, i.e. when it deprives the foreign investor

ea
of fundamental rights of owners hip, or w hen it interferes with the

se
investment for a significant period of time. Several international tribunals

R
O
have found that a regulation may constitute expropriation whe n it
substantially impairs the investor’s economic rights, i.e. ownership, use,

e
An
enjoyment or management of the business, by rendering them useless.
r
c tu
Without such substantial impairment, mere restrictions on the property
rights do not constitute takings. The European Court of Human Rights Le
(ECHR)28 has found an expropriation where the investor has been definitely
and fully deprived of the ownership of his/her property. If the investor’s
rights have not disappeared, but have only been substantially reduced, and
the situation is not “irreversible”, there will be no “deprivation” under
Article 1, Protocol 1 of the European Convention of Human Rights.29

28. The European Court of Human Rights is the Court established by the Council of
Europe under the Protection of Human Rights and Fundamental Freedoms
Convention, to determine questions brought before it by individual petitioners or
signatory states concerning violations of human rights by signatory states. It does
not distinguish between foreign and domestic owners, but its distinctions as to
compensable and non-compensable takings on a human rights basis is relevant.
29. See cases: Handyside v. United Kingdom, 24 Eur. Ct. H.R. (ser.A) at 29 (1976); Poiss v.
Austria, 117 Eur. Ct.H.R. (ser. A)84, 108 (1987); Matos e Silva, Lda v. Portugal App.
No. 15777/89, 24 Eur. Ct. H.R. rep. 573, 600-01 (1996). See for discussion H. Ruiz
Fabri, “The Approach Taken by the European Court of Human Rights to the
Assessment of Compensation for “Regulatory Expropriations of the Property of
Foreig n Investors”, N.Y.U. Environmenta l Law Journal, Vol. 11 , No. 1, 20 02,
pp. 148-173.

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The first case under the Iran-UnitedsStates Claims Tribunal i was
o 30, 31
32
w
Starrett Housing, which dealt with the appointment of Iranian managers to

n
o
an American housing project. The Tribunal concluded that an expropriation

D Br
had taken place:

y
nl
“[It] is recognised by international law that measures taken by a State can
interfere with property rights to such an extent that these rights are

u le
rendered so useless that they must be deemed to have been expropriated,
even thought the State does not purport to have expropriated them and

d
EC
the legal title to the property formally remains with the original owner.”

ea
In the Sea-Land33 case one of the issues was alleged expropriation of a

se
bank account. The Tribunal did not find any substantial deprivation of or

R
O
interference with the claimant’s rights to his account and rejected the claim
by noting that the “account remains in existence and available in rials, at

e
Sea-Land’s disposal”.
An r
In the Tippetts 34 case, the Tribunal found an indirect expropriation
because of the actions of a government-appointed manager, rather than Le c tu
because of his appointment per se,35 and equated that deprivation of property
rights with a taking of property.36 The Tribunal said:
“While assumption of control over property by a government does not
automatically and immediately justify a conclusion that the property has
been taken by the government, thus requiring compensation under

30. Sornarajah suggests that “although the awards of the Iran-United States Claims
Tribunal have been a fruitful recent source for the identification of indirect
takings, they dealt with takings that took place in the context of a revolutionary
upheaval and the propositions the tribunal formulated may not have relevance
outside the context of the events that attended the Iranian upheaval following the
overthrow of the Shah of Iran”. See op. cit. No. 9 at 282. For instance, these actions
and the context in which they occurred are, in many ways, different from the
sorts of environmental and land-use regulations that have been the subjects of
NAFTA claims.
31. For details on these cases see Seddigh and G. H. Aldrich, “What Constitutes a
Compensable Taking of Property? The Decisions of the Iran-United States Claim
Tribunal”, The American Journal of International Law, Vol. 88, pp. 585-609.
32. Starret Housing Corp. v. Iran, 4 Iran-United States Cl. Trib. Rep. 122, 154 (1983).
33. Sea-Land Service Inc. v. Iran, 6 Cl. Trib. Rep.149 (1984). See Seddigh and Aldrich p. 656,
op. cit., No. 31.
34. Tippetts v. TAMS-AFFA Consulting Engineers of Iran, 6 Cl. Trib. 219 (1984).
35. While Tippetts was able to work with the Iranian appointed manager for some
months and re-established its rights as a partner, its personnel left Iran following
t he se izu re of t he A me ric an E mbassy a nd t he new man ag e r broke off
communications with Tippetts by refusing to respond to its letters and telexes.
36. In this case, the Tribunal said that it “prefers the term “deprivation’ to the term
“taking”, although they are largely synonymous, because the latter may be
understood to imply that the government has acquired something of value, which
is not required”.

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international law, such a conclusion sis warranted whenever ievents
o
demonstrate that the owner was w deprived of fundamental rights of

n
o
ownership and it appears that the deprivation is not merely ephemeral…”

D Br
In the NAFTA context, in the Pope & Talbot v. Canada case,37 the Tribunal

y
nl
found that although the introduction of export quotas resulted in a reduction
of profits for the Pope & Talbot company, sales abroad were not entirely

u le
prevented and the investor was still able to make profits. It stated: “… mere
interference is not expropriation; rather, a significant degree of deprivation of

d
EC
fundamental rights of ownership is required.”38

ea
In S.D. Myers v. Canada,39 a United States company, which operated a PCB

se
remediation facility in the United States, alleged that Canada violated NAFTA

R
O
Chapter 11 by banning the export of PCB waste to the United States. The
Tribunal also distinguished regulation from expropriation primarily on the

e
An
basis of the degree of interference with property rights: “expropriations tend r
c tu
to involve the deprivation of ownership rights; regulations [are] a lesser
interference”.40 Le
In Marvin Roy Feldman Karpa (CEMSA) v. United Mexican States,41 CEMSA, a
registered foreign trading company and exporter of cigarettes from Mexico,
was allegedly denied the benefits of the law that allowed certain tax refunds
to exporters and claimed expropriation under NAFTA Article 1110. The
Tribunal found that there was no expropriation since “the regulatory action
has not deprived the Claimant of control of his company, interfered directly in
the internal operations of the company or displaced the Claimant as the
controlling shareholder. The Claimant is free to pursue other continuing lines
of business activity… Of course, he was effectively precluded from exporting
cigarettes… However, this does not amount to Claimant’s deprivation of
control of his company”.
In GAMI v. The United Mexican States,42 the case concerned the impact of
Mexico’s expropriation of several sugar mills on GAMI, a minority shareholder

37. Pope & Talbot Inc. v. Canada, see op. cit., No. 6.
38. In addition, the Tribunal stated that: “Regulations can indeed be characterised in
a way that would constitute creeping expropriation… Indeed, much creeping
expropriation could be conducted by regulation, and a blanket exception for
regulatory measures would create a gaping loophole in international protection
against expropriation”, see Award, par. 99.
39. S.D. Myers Inc. v. Government of Canada, see op. cit., No. 6.
40. The Tribunal added that: “the distinction between expropriation and regulation
screens out most potential cases of complaints concerning economic intervention
by a state and reduces the risk that governments will be subject to claims as they
go about their business of managing public affairs.”
41. In this case, Marvin Feldman, a United States citizen, submitted claims on behalf of
CEMSA. ICSID Case No. ARB(AF)/99/1, Award of 16 December 2002, pp. 39-67 at 59.
42. Gami v. The Government of the United Mexican States, Award, 15 November 2004.

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“INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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in some of those mills. GAMI proceeded on io
sthe basis that “Mexico’s conduct
w
impaired the value of its shareholding to such an extent
43
that it must be

n
o
considered tantamount to expropriation”. The Tribunal found that:

D Br

y
“With knowledge of the magnitude of diminution one might be in a

nl
position to consider whether a line is to be drawn beyond which the loss
is so great as to constitute a taking. But GAMI has staked its case on the

u le
proposition that the wrong done to it did in fact destroy the whole value
of its investment. GAMI seeks to lend credibility to its posture by agreeing

d
EC
to relinquish its shares in GAM as a condition of the award it seeks. It

ea
suggests that any residual value is therefore of no moment. This posture

se
is untenable. The Tribunal cannot be indifferent to the true effect in the

R
O
real value of the investment of the allegedly wrongful act. GAMI has not
proved that its investment was expropriated for the purposes of

e
Article 1110.”44
An r
c tu
The European Court of Human Rights, in the most widely cited case
Le
under Article 1, Protocol 1 of the European Convention of Human Rights (see
above), Sporrong and Lönnroth v. Sweden 45 (1982), did not find indirect
expropriation to have occurred as a result of land use regulations that affected
the claimant’s property because:
“… although the right [of peaceful enjoyment of possessions] lost some of
its substance, it did not disappear […] The Court observes in this
conne ction th at the [claimants] could con tinue to utilise their
possessions and that, although it became more difficult to sell properties
[as a result of the regulations], the possibility of selling subsisted.”
Another relevant decision is the Revere Copper46 case (1980). The case
arose from a concession agreement – which was to last for twenty five years –
made by a subsidiary of the Revere Copper company with the government of
Jamaica. The government, despite a stabilisation clause in the agreement
ensuring that taxes and other financial liabilities would remain as agreed for
the duration of the concession, increased the royalties. The company found it

43. Idem, par. 35.

44. Idem, par. 133.
45. In this case, long-term expropriation permits (23 and 8 years) had been granted by
the city of Stockholm in respect of the applicant’s properties. These did not of
themselves expropriate the property, but gave local authorities the power to do so,
should they so decide in the future. Sporrong and Lönnorth complained that it
was impossible for them to sell these properties and that it amounted to an
interference with their right to peaceful enjoyment of possessions. The Swedish
government, by contrast, emphasised the public purpose of the permits system
and the intentions of the city of Stockholm to make improvements for the general
good. See R. Higgins, op. cit., No. 12 at 276-77.
46. Revere Copper & Brass Inc. v. Overseas Private Investment Corporation, 56 International
Legal Materials 258.

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io
s and claimed compensation
difficult to continue operations, closed operations
w
under its insurance contract. The Arbitral Tribunal, assuming that 47
the

n
o
contract was governed by international law, found that there had been a
taking by the government and observed:48

D Br

y
nl
“In our view, the effects of the Jamaican Government’s actions in
repudiating its long term commitments to RJA [the subsidiary of RC], have

u le
substantially the same impact on effective control over use and operation
as if the properties were themselves conceded by a concession contract

d
EC
that was repudiated…”

ea
Although the insurance agency (OPIC) argued that RJA still had all the

se
rights and property and that it could operate as it did before, the Tribunal

R
O
responded that “this may be true […] but […] we do not regard RJA’s ‘control’ of
the use and operation of its properties as any longer ‘effective’ in view of the

e
An
destruction by Government action of its contract rights”. r
Le c tu
Several BIT Tribunals, in particular in recent years, have retained the criterion
of the severity of the impact to qualify an act by state as an expropriation.
In the case CME v. the Czech Republic.49 CME, the Claimant, had purchased
a joint venture media company in the Czech Republic and alleged, inter alia,
breach of the obligation of the [host country] not to deprive the investor of its
investment 50 because of the actions of the national Media Council. The
Tribunal, citing inter alia, the Tippets and Metalclad cases, found that an
expropriation had occurred because “the Media Council’s actions and
omissions…caused the destruction of the [joint-venture’s] operations, leaving
the [joint venture] as a company with assets, but without business”.51 It stated
also that although “regulatory measures are common in all types of legal and
economic systems in order to avoid use of private property contrary to the
general welfare of the host state”52 the administrative measures taken by the
host country did not fall under this category. It therefore concluded that,
“Expropriation of [the company’s] investment is found a consequence of
the [host country’s] actions and inactions as there is no immediate
prospect at hand that the [joint venture] will be reinstated in a position to
enjoy an exclusive use of the license…”53

47. The Tribunal was set up under the American Arbitration Association.
48. For discussion see R. Higgins, pp. 331-37, op. cit., No. 12; Sornarajah, p. 301, op. cit.,
No. 9 at 301; and R. Dolzer, op. cit., No. 7 at 51-52.
49. CME (Netherlands) v. Czech Republic (Partial Award) (13 September 2001) available at
www.mfcr.cz/scripts/hpe/default.asp.
50. Article 5 of the 1991 Bilateral Investment Treaty between the Netherlands and the
Czech Republic.
51. See CME, par. 591, p. 166.
52. Idem, par. 603, p. 170.
53. Idem, par. 607, p. 171.

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In Generation Ukraine v. Ukraine,54 s of acts or omissions by theioKyiv
a series
City State Administration, culminatingw with its failure to provide lease

n
o
agreements for a construction project of an office building did not constitute a

D Br
creeping expropriation since according to the Tribunal:

y
nl
“… the conduct of the Kyiv City State Administration […] does not come
close to creating a persistent or irreparable obstacle to the Claimant’s use,

O
enjoyment or disposal of its investment”.55

u le
The Tribunal explained further:

d
EC
“A plea of creeping expropriation must proceed on the basis that the

ea
investment existed in a particular point in time and that subsequent acts

se
attributable to the State have eroded the investor’s rights to its

R
O
investment to an extent that is violative of the relevant international
standard of protection against expropriation. It is conceptually possible

e
An
to envisage a case of creeping expropriation where the investor’s r
c tu
interests in its investment develop in parallel with the commission of the
Le
acts complained of. But such a plea, in order to be successful, would
demand a high level of analytical rigorousness and precision that is
absent from the submissions before this Tribunal.”56
In Occidental Exploration and Production Company v. the Republic of Ecuador,57
Occidental claimed that Ecuador authorities’ refusal to refund to Occidental
the value added tax, which it was entitled under Ecuadorian law, constituted
an expropriation. The Tribunal made reference to the Metalclad 58 and CME
cases 59 and held that “Ecuador did not adopt measures that could be
considered as amounting to direct or indirect expropriation” since:
“In fact, there has been no deprivation of the use […] of the investment,
let alone measures affecting a significant part of the investment. The
criterion of ‘substantial deprivation’ under international law identified in
Pope & Talbot is not present in this case.”60

54. The Claimant, a US corporation, sought damages in excess of USD 9.4 billion, for
alleged harm to its investment in commercial property in Kyiv, Ukraine, namely the
“Parkview Office Building Project.” The Claimant contended that it was encouraged
by the Ukrainian Government in late 1992 to invest in Ukraine; that it established a
local investment company and that, after obtaining approval of the project, it found
itself blocked by interference from local administrative authorities over the course
of the next six years. Such interference included, inter alia, the alleged final
expropriatory act or measure: the Kyiv City State Administration’s “failure to
produce revised land lease agreements with valid site drawings”. Generation Ukraine
Inc. v. Ukraine, Award, par. 20.1, 20.21, 16 September 2003.
55. Idem, par. 20.32.
56. Idem, par. 20.26.
57. Occidental Exploration and Production Co. v. Ecuador, Award, 1 July 2004. at 80-92.
58. Metalclad Corporation v. United Mexican States (Tribunal Decision 30 August 2000).
59. See op. cit., No. 54.
60. See op. cit., No. 62, par. 89.

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 “INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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In CMS v. Argentina61 s
the indirect expropriation claim concernediothe
w
suspension by Argentina of a tariff adjustment formula for gas transportation

n
o
applicable to an enterprise in which the claimant had an investment. The

D Br
Tribunal described its task as follows:

y
nl
“[…] the essential question is […] to establish whether the enjoyment of
the property has been effectively neutralised. The standard that a

u le
number of tribunals have applied in recent cases where indirect
expropriation has been contended is that of substantial deprivation.”

d
EC
Although the Tribunal recognised that the measures under dispute had

ea
an important effect on the Claimant’s business, it found no substantial

se
deprivation , and thus no breach of the expropriation article in the

R
O
US-Argentina BIT, had occurred, noting that “the investor is in control of the
investment; the government does not manage the day-to-day operations of

e
An
the company; and the investor has full ownership and control of the r
c tu
investment”.62
Le
In the first case under the Energy Charter Treaty, Nykomb Synergetics
Technology Holding AB, Stockholm v. The Republic of Latvia 63 the Claimant
contended that the non-payment of double tariffs constituted an indirect
expropriation, since it allegedly resulted in a substantial loss of sales income
making the enterprise economically non-viable and its investment worthless.
The Tribunal found that:
“[…] ‘regulatory takings’ may under the circumstances amount to
expropriation or the equivalent of an expropriation. The decisive factor
for drawing the border line towards expropriation must primarily be the
degree of possession taking or control over the enterprise the disputed
measures entail. In the present case, there is no possession taking of
[Windau] or its assets, no interference with the shareholder’rights or with
the management’s control over and running of the enterprise – apart
from ordinary regulatory provisions laid down in the production license,
the off-take agreement, etc.”
Duration of the regulation. The duration of the regulation could be another
criterion of whether the regulation has had a severe enough impact on
property to constitute a taking.64, 65

61. CMS Gas Transmission Company v. Argentine Republic, Award, 12 May 2005, at par. 262.
62. Idem, par. 263.
63. Nykomb Synergetics Technology Holding AB, Stockholm v. The Republic of Latvia, Award,
16 December 2003, at 4.3.1.
64. J.M. Wagner, “International Investment, Expropriation and Environmental Protection”,
Golden Gate University Law Review (1999), Vol. 29, No. 3, pp. 465-538.
65. Prof Christie, in its 1962 article, discusses when a “temporary seizure” ripens into
an expropriation, op. cit. No. 25.

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“INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

e _it E d it
io an
s has acknowledged this was
The Iran-United States Claims Tribunal
issue but it has had little difficultyw
in finding that the appointment of

n
o
“temporary” managers may constitute a taking of property, when the

D Br
consequent deprivation of property rights is not “merely ephemeral” (in

y
Tippetts, Phelps Dodge and Saghi cases).

nl
A widely cited example where the temporal factor has played an

O
important role is the 1979 case of Hauer v. Land Rheinland-Pfalz, 66 The facts

u le
relate to a German winegrower who had to apply for a state permit for

d
EC
planting new vines. While the application was pending, the European

ea
Commission issued an order prohibiting the planting of that type of vine for

se
three years. The plaintiff brought her claim before the European Court of

R
O
Justice which found that there was no violation of Hauer’s property rights
emphasising in particular that the EEC order was to be valid only for a

e
transitory period of three years.
An r
c tu
In S.D. Myers v. Canada,67 the NAFTA Tribunal accepted that “in some
Le
contexts and circumstances it would be appropriate to view a deprivation as
amounting to an expropriation even if it were partial and temporary”.
However, it concluded that Canada’s initiative “was only valid for a time”.
Under these circumstances, “an opportunity was delayed” but no indirect
expropriation could be found.
Economic impact as the exclusive criterion. There is no serious doubt that
the severity of the impact upon the legal status and the practical impact on
the owner’s ability to use and enjoy his/her property is one of the main factors
i n d e t e rm in in g w h eth e r a re g ula t ory m e asure e ffe c ts an in di re ct
expropriation. What is more controversial “is the question of whether the
focus on the effect will be the only and exclusive relevant criterion – ‘sole
effect doctrine’ – or whether the purpose and the context of the governmental
measure may also enter into the takings analysis”.68 The outcome in any case
may be affected by the specific wording of the particular treaty provision.
From the doctrine and the case examination, it seems however that the
balanced approach is pre-dominant.
A few cases have focused on the effect of the owner as the main factor in
discerning a regulation from a taking. In the Tippetts case, the Iran-United
States Tribunal held that:
“the intent of the government is less important than the effects of the
measures on the owner, and the form of the measures of control or
interference is less important than the reality of their impact.”

66. See R. Higgins, op. cit., No. 12; Dolzer, op. cit., No. 7; Ruiz Fabri, op. cit., No. 29.
67. See op. cit., No. 6.
68. Dolzer, see op. cit., No. 2. at 79.

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 “INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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In the Phelps Dodge a transfer ofs
case,69 management was made pursuantio
to a pre-revolutionary law designed to w
prevent the closure of factories, ensure

n
o
payments due to the workers, and protect any debts owed to the Government,

D Br
which in this case included loans made by a bank that had been nationalised

y
in 1979. Citing Tippetts, the Iran-United States Tribunal stated that:

nl
“The Tribunal fully understands the reasons why the respondent felt

u le
compelled to protect its interests through this transfer of management,
and the Tribunal understands the financial, economic and social

d
EC
concerns that inspired the law pursuant to which it acted, but those

ea
reasons and concerns cannot relieve the Respondent of the obligation to

se
compensate Phelps Dodge for its loss.”

R
O
In the Metalclad case,70 in the context of the NAFTA, Metalclad alleged that its
subsidiary COTERIN’s attempt to operate a hazardous waste landfill that it

e
An
constructed in the municipality of Guadalcázar, had been thwarted by measures r
c tu
attributable to Mexico. Metalclad commenced an action under the NAFTA,
Le
claiming that an ecological decree promulgated after the claim was made,
violated Article 1110 requiring compensation for expropriation. The Tribunal
found a violation of NAFTA Article 1110 and stated that in order to decide on an
indirect expropriation, it “need not decide or consider the motivation, nor intent
of the adoption of the Ecological Decree”. The Tribunal stated:
“Expropriation under NAFTA includes not only open, deliberate and
acknowledged takings of property, such as outright seizure or formal or
obligatory transfer of title in favour of the host State, but also covert or
incidental interference with the use of property which has the effect of
depriving the owner, in whole or in significant part, of the use of
reasonably-to-be-expected economic benefit of property even if not
necessarily to the obvious benefit of the host State.”
The case Compañía del Desarrollo de Santa Elena v. Costa Rica,71 although
referred to a direct expropriation, not an indirect taking, has attracted
p a rti c ul ar at t e n t io n be c a use t h e p a n e l e x pre s s ly s t a te d t h a t t h e
environmental purpose had no bearing on the issue of compensation. In this
case, the claimant (Company Santa Elena) was formed primarily for the
purpose of purchasing Santa Elena – a 30 kilometre terrain in Costa Rica – with
the intention of developing it as a tourist resort. In 1978, Costa Rica issued an
expropriation decree for Santa Elena aiming at declaring it a preservation site.
Twenty years of legal proceedings between the Parties finally ended with a
decision by an ICSID panel. While this case concerns a direct expropriation

69. Phelps Dodge, 10 Iran-United States Cl. Trib. Rep. at 130.

70. See op. cit., No. 63.
71. Compañía del Desarrollo de Santa Elena S.A. v. Republic of Costa Rica, ICSID Case
No. ARB/96/1. (17 February 2000).

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io
s for purposes of determining
where the issue was the day of the taking
w
compensation , the pane l, citing the Tippetts case, indicated that a

n
o
compensable expropriation could occur through measures of a state which

D Br
deprives the owner of “access to the benefit and economic use of his property”

y
or “has made those [property] rights practically useless”. The panel held that:

nl
“While an expropriation or taking for environmental reasons may be

u le
classified as a taking for a public purpose, and thus be legitimate, the fact
that the property was taken for this reason does not affect either the

d
EC
nature or the measure of the compensation to be paid for the taking. That

ea
is, the purpose of protecting the environment for which the Property was

se
taken does not alter the legal character of the taking for which adequate

R
O
compensation must be paid.72 The international source of the obligation
to protect the environment makes no difference.”

e
It also added that:
An r
Le
“Expropriatory environmental measures – no matter how laudable and
c tu
beneficial to society as a whole – are, in this respect, similar to any other
expropriatory measures that a state may take in order to implement its
policies: where property is expropriated, even for environmental
purposes, whether domestic or international, the state’s obligation to pay
compensation remains.”

3.1.2. Character of governmental measures, i.e. the purpose

and the context of the governmental measure
A very significant factor in characterising a government measure as falling
within the expropriation sphere or not, is whether the measure refers to the
State’s right to promote a recognised “social purpose”73 or the “general welfare”74
by regulation. “The existence of generally recognised considerations of the public
health, safety, morals or welfare will normally lead to a conclusion that there has
been no ‘taking’.”75 As one commentator has noted, “non-discriminatory
measures related to anti-trust, consumer protection, securities, environmental
protection, land planning are non-compensable takings since they are regarded
as essential to the functioning of the state”.76

72. For this reason, the Tribunal did not analyse the detailed evidence submitted
regarding what Costa Rica referred to as its international obligations to preserve
the unique Santa Elena ecological site.
73. The Iran-US Claims Tribunal: Its contribution to the Law of State Responsibility,
see op. cit., No. 6 at 200.
74. See B.H. Weston, op. cit., No. 3 at 116.
75. Christie, see op. cit., No. 25 at 338.
76. M. Sornarajah, op. cit., No. 9.

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 “INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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sEuropean Court of HumaniRights
In the context of the jurisprudence of the
o
w
the State may affect control on activities by individual by imposing restrictions

n
o
which may take the form of planning controls, environmental orders, rent
controls, import and export laws, economic regulation of professions, [and] the

D Br

y
seizure of properties for legal proceedings or inheritance laws”.77

nl
In the context of the Article 1 of Protocol 1 of the European Convention of

O
Human Rights, the European Court has given States a very wide margin of

u le
appreciation concerning the establishment of measures for the public interest

d
and has recognised that it is for national authorities to make the initial

EC

ea
assessment78 of the existence of a public concern warranting measures that

se
result in a “deprivation” of property. The Court held that the state’s judgement
should be accepted unless exercised in a manifestly unreasonable way.

R
O
In addition, the Court has adopted a common approach to “deprivations”
and “controls” of use of property. In either case, there has to be a reasonable

e
An r
c tu
and foreseeable national legal basis for the taking, because of the underlying
principle in stability and transparency and the rule of law.79 In relation to
either deprivation or control of use, the measures adopted must be Le
proportionate. The Court examines whether the interference at issue strikes a
reasonable balance between the demands of the general interest of the
community and the private interests of the alleged victims of the deprivation
and whether an unjust burden has been placed on the claimant. In order to
make this assessment, the Court proceeds into a factual analysis insisting that
precise factors which are needed to be taken into account vary from case to
case. In the James case80 for example, the Court said that:
“The taking of property in pursuance of a policy calculated to enhance
social justice within the community can properly be described as being ‘in
the public interest’. In particular, the fairness of a system of law governing
the contractual or property rights of private parties is a matter of public
concern and therefore legislative measures intended to bring about such
fairness are capable of being in the ‘public interest’, even if they involve the
compulsory transfer of property from one individual to another.”

77. See D.J. Harris et al., referring to the jurisprudence of the European Court of
Human Rights in the “Law of the European convention on Human Rights”, (1995) at 535.
78. The state margin of appreciation is justified by the idea that national authorities
have better knowledge of their society and its needs, and are therefore “better
placed than [an] international [court] to appreciate what is in the public interest’”.
See James v. United Kingdom, 98 Eur. Ct. H.R. (ser. A) 9, 32 (1986).
79. See H. Mountfield, “Regulatory Expropriations in Europe: the Approach of the European Court
of Human Rights”, N.Y.U. Environmental Law Journal, Vol. 11, No. 1, 2002, pp. 136-147.
80. This case concerns a reform undertaken by the United Kingdom regarding the
right of individuals with long leases to acquire the freehold of their leasehold
property. This reform, according to James, the Claimant, “deprived” the
freeholders of their property since they could neither refuse to sell nor set the
price for it. See op. cit. No. 82.

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“INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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io 1
s the Court stated that Article
In the Sporrong and Lönnroth v. Sweden case,
contains “three distinct rules”: w

n
o
“The first rule, which is of a general nature, enounces the principle of

D Br

y
peaceful enjoyment of property; it is set out in the first sentence of the

nl
first paragraph. The second rule covers deprivation of possessions and
subjects it to certain conditions; it appears in the second sentence in the

u le
same paragraph. The Third rule recognises that the States are entitled,
amongst other things, to control the use of property in accordance with

d
EC
the general interest, by enforcing such laws as they deem necessary for

ea
the purpose; it is contained in the second paragraph.”

se
The European Court of Human Rights found no expropriation as a result

R
O
of the first test, yet found compensation to be required as a result of the
second test. Under the “fair balance test”, it found that over the years the state

e
An
had failed to take proper account of individual interests involved. Since the r
c tu
state had neither shortened the temporal effect of the rules nor paid
Le
compensation, the court rules that the State had placed “an individual and
excessive burden” on plaintiffs and therefore acted in violation of Article 1.
In the NAFTA context, in the S.D. Myers case,81 the Tribunal found that the
expression “tantamount to expropriation” in NAFTA’s Article 1110(1), was
understood as “equivalent to expropriation” and added:
“Both words require a tribunal to look at the substance of what has
occurred and not only at form. A tribunal should not be deterred by
technical or facial considerations from reaching a conclusion that an
expropriation or conduct tantamount to an expropriation has occurred. It
must look at the real interests involved and the purpose and effect of the
government measure.”
In Marvin Roy Feldman Karpa v. United Mexican States82 the Tribunal
explained that:
“… the ways in which governmental authorities may force a company out
of business, or significantly reduce the economic benefits of its business,
are many. In the past, confiscatory taxation, denial of access to
infrastructure or necessary raw materials, imposition of unreasonable
regulatory reg imes , amon g oth ers, have been considered to be
expropriatory actions. At the same time, governments must be free to act
in the broader public interest through protection of the environment, new
or modified tax regimes, the granting or withdrawal of government
subsidies, reductions or increases in tariff levels, imposition of zoning
restrictions and the like. Reasonable governmental regulation of this type

81. See op. cit. No. 6.

82. See op. cit. No. 41, par. 103.

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 “INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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s is adversely affected mayioseek
cannot be achieved if any business that
compensation, and it is safe to sayw
that customary law recognises this”.

n
o
In the case of Técnicas Medioambientales Tecmed S.A, v. The United Mexican

D Br
States,83 the investor, Técnicas Medioambientales Tecmed, S.A., filed a claim

y
nl
with ICSID alleging that the Mexican government’s failure to re-license its
hazardous waste site contravened various rights and protections set out in the

u le
bilateral investment treaty (BIT) between Spain and Mexico and was an
expropriatory act. The Tribunal in order to determine whether the acts

d
EC
undertaken by Mexico were to be characterised as expropriatory, citing the

ea
ECHR’s practice, considered “w he ther such actions or measure s are

se
proportional to the public interest presumably protected thereby and the

R
O
protection legally granted to investments, taking into account that the
significance of such impact plays a key role in deciding the proportionality”.84

e
It added that: “there must be a reasonable relationship of proportionality
An r
c tu
between the charge or weight imposed to the foreign investor and the aim
sought to be realised by an expropriatory measure.”85 Le
“Police Powers” of the State. The notion that the exercise of the State’s
“police powers” will not give rise to a right to compensation has been widely
accepted in international law. However, the “police powers” doctrine is viewed
by some not as a criterion which is weighed in the balance with other factors,
but as a controlling element which exempts automatically the measure from
any duty for compensation.
One commentary on the law on expropriation and the State’s “police
powers” is the commentary to the American Law Institute’s Restatement
(Third) of Foreign Relations Law of the United States86 which was designed to
assist, inter alia, in determining how to distinguish between an indirect
expropriation and valid governmental regulation: “… a state is not responsible
for loss of property or for other economic disadvantage resulting from
bona fide general taxation, regulation, forfeiture for crime, or other action of
the kind that is commonly accepted as within the police power of the states, if
it is not discriminatory…”
In the context of the Iran-United States Claims Tribunal, the only award
in which an allegation of taking was rejected on the grounds of police power
regulations was Too v. Greater Modesto Insurance Associates, 87 where the

83. Tecnicas Medioambientales Tecmed S.A, v. The United Mexican States, ICSID Award Case
No. ARB (AF)/00/2.
84. Idem, par. 122.
85. Idem.
86. Restatement of the Law Third, op. cit., No. 20, Section 712, Comment g.
87. Award, 29 December 1989, 23 Iran-United States Cl. Trib. Rep.378. See also Seddigh
and G. H. Aldrich, op. cit., No. 31.

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“INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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s of his liquor licence ibyothe
claimant sought compensation for the seizure
w Tribunal said:
United States Internal Revenue Service. The

n
o
“… A State is not responsible for loss of property or for other economic

D Br

y
disadvantage resulting from bona fide general taxation or any other action

nl
that is commonly accepted as within the police power of States, provided
it is not discriminatory and is not designed to cause the alien to abandon

u le
the property to the State or to sell it at a distress price…”
The Tribunal in the Lauder v. The Czech Republic88 case said about the

d
EC
interference with property rights that, “… Parties to [the Bilateral] Treaty are

ea
not liable for economic injury that is the consequence of bona fide regulation

se
within the accepted police powers of the State”.

R
O
In the case of Técnicas Medioambientales Tecmed S.A, v. The United Mexican
States,89 although the Tribunal found an expropriation, it has stated that: “the

e
An
principle that the State’s exercise of its sovereign power within the framework r
Le
of its police power may cause economic damage to those subject to its powers
as administrator without entitling them to any compensation whatsoever is
c tu
undisputable.”

3.1.3. Interference of the measure with reasonable investment-backed

expectations
Another criterion identified is whether the governmental measure affects
the investor’s reasonable expectations. In these cases the investor has to prove
that his/her investment was based on a state of affairs that did not include the
challenged regulatory regime. The claim must be objectively reasonable and
not based entirely upon the investor’s subjective expectations.
In the 1934 Oscar Chinn90 case, the Permanent Court of International
Justice (P.C.I.J.) did not accept the contention of indirect taking91 noting that, in
those circumstances, a granting of a de facto monopoly did not constitute a
violation of international law and that “favourable business conditions and
good will are transient circumstances, subject to inevitable changes”:92
“No enterprise […] can escape from the chances and hazards resulting
from general economic conditions. Some industries may be able to make large

88. Lauder (U.S.) v. Czech Republic (Final Award) (3 September 2002), available at
www.mfcr.cz/scripts/hpe/default.asp.
89. See op. cit., No. 88.
90. See op. cit., No. 6.
91. The P.C.I.J. employed “effective deprivation”, as the standard for determining if
the interference was sufficiently serious to constitute a compensable taking.
92. H. Seddigh, “What level of Host State Interference Amounts to a Taking under
Contemporary International Law? Journal of World Investment, 2001, Vol. 2, No. 4,
pp. 631-84 at 646.

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 “INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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ioof a
s or else by taking advantage
profits during a period of general prosperity,
treaty of commerce or of an alteration w in customs duties; but they are also

n
o
exposed to the danger of ruin or extinction if circumstances change. Where

D Br
this is the case, no vested rights are violated by the State.”

y
nl
The Iran-US Claims Tribunal in Starett Housing Corp. v. Iran93 took into
account the reasonable expectations of the investor:

u le
“Investors in Iran, like investors in all other countries, have to assume a
risk that the country might experience strikes, lock-outs, disturbances,

d
EC
changes of economic and political system and even revolution. That any

ea
of these risks materialised does not necessarily mean that property rights

se
affected by such events can be deemed to have been taken.”

R
O
The Tribunal in Metalclad v. The United Mexican States stated that:
“… Metalclad was led to believe, and did believe, that the federal and state

e
An
permits allowed for the construction and operation of the landfill”94. It held r
Le
that expropriation includes deprivation in whole or in significant part of the
use or “reasonably to-be-expected economic benefit of property”95.
c tu
In Marvin Roy Feldman Karpa (CEMSA) v. The United Mexican States 96 the
NAFTA Tribunal noted as part of its reasoning denying the expropriation
claim:
“Governments, in their exercise of regulatory power, frequently change
th ei r law s an d reg ulation s i n res po ns e to cha ng ing e con omi c
circumstances or changing political, economic or social considerations.
Those changes may well make certain activities less profitable or even
uneconomic to continue…”
In Técnicas Medioambientales Tecmed S.A, v. The United Mexican States,97 the
Tribunal attempted to determine whether the Mexican government’s
measures were “reasonable with respect to their goals, the deprivation of
economic rights and the legitimate expectations of who suffered such
deprivation”. “… Even before the Claimant made its investment, it was widely
known that the investor expected its investments in the Landfill to last for a
long term and that it took this into account to estimate the time and business
required to recover such investment and obtain the expected return upon
making its tender offer for the acquisition of the assets related to the Landfill.
To evaluate if the actions attributable to the Respondent – as well as the
Resolution98 – violate the Agreement, such expectations should be considered

93. See op. cit., No. 32.

94. See Metalclad v. Mexico, op. cit., No. 63, par. 100.
95. Idem, par. 103.
96. See op. cit., No. 41.
97. See op. cit., No. 88.
98. Resolution was the decision not to re-new the license.

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“INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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leg itimate and should be evaluated ins light of the Agreement and io of
international law.” Based on this andw
99
the fact that the “Resolution” was not
100

n
o
proportionate to the “infringements” by Tecmed, the Tribunal found that

D Br
the “Resolution” and its effects amounted to an expropriation.

y
nl
In Occidental v. Ecuador, 101 the Tribunal acknowledge the reasonable
expectations by the investor as a factor for determining an expropriatory act:

u le
“… there has been no deprivation of the use or reasonably expected economic
benefit of the investment…” [emphasis added].

d
EC

ea
3.2. State practice

se
As a response to the growing jurisprudence in this field, the recently

R
O
concluded US-Free Trade Agreements with Australia, 102 Chile, 103 Dominican
Republic-Central America, 104 Morocco 105 and Singapore 106 and the new

e
An
US model BIT107 provide explicit criteria of what constitutes an indirect r
expropriation. In the Annexes on Expropriation, they state that:
Le c tu
The determination of whether an action or series of actions by a Party, in
a specific fact situation, constitutes an indirect expropriation, requires a
case-by-case, fact-based inquiry that considers, among other factors:
i) the economic impact of the government action, although the fact that an
action or series of actions by a Party has an adverse effect on the
economic value of an investment, standing alone, does not establish that
an indirect expropriation has occurred;
ii) the extent to which the government action interferes with distinct,
reasonable, investment-backed expectations; and
iii) the character of the government action.

99. See op. cit., No. 88, par. 50.

100. All the infringements committed were either remediable or remediated or
subject to minor penalties”. Idem par. 148.
101. See op. cit. No. 62.
102. US-Australia Free Trade Agreement signed on 1 March 2004, [Annex 11-B,
Article 4(b)].
103. The US-Chile Free Trade Agreement was signed on 6 June 2003 (Annex 10-D).
104. US – Dominican Republic-Central America Free Trade Agreement signed on
5 August 2004, (Annex 10-C). The countries Parties to the Agreement are: Costa
Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and the
United States.
105. US-Morocco Free Trade Agreement signed on 15 June 2004 (Annex 10-B).
106. US Trade representative Robert Zoellick to Singapore Minister of Trade and
Industry, George Yeo on 6 May 2003.
107. For the text of the model BIT see www.state.gov/documents/organization/38710.pdf.

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s
In addition, they address indirect expropriation io
and the right to regulate:
w
Except in rare circumstances, non-discriminatory regulatory actions by a

n
o
Party that are designed and applied to protect legitimate public welfare

D Br

y
objectives, such as public health, safety and the environment, do not

nl
constitute indirect expropriations.
The updated Canada’s model Foreign Investment Promotion and Protection

u le
Agreement (FIPA)108 stipulates that it:

d
“incorporates a clarification of indirect expropriation which provides

EC

ea
that, except in rare circumstances, non-discriminatory measures

se
designed and applied to protect legitimate public welfare objectives, such
as health, safety and the environment, do not constitute indirect

R
O
expropriation and are not subject, therefore, to any compensation
requirements.”

e
An r
c tu
It defines as an example of the “rare circumstances”, “when a measure or

Le
series of measures are so severe in the light of their purpose that they cannot
be reasonably viewed as having been adopted and applied in good faith”.

4. Summing up
● Expropriation (direct and indirect) requires compensation, based on
clearly set rules of customary international law. However, while
determination of a direct expropriation is relatively straightforward to
make, determining whether a measure falls into the category of
indirect expropriation has required tribunals to undertake a thorough
case-by-case examination and a careful consideration of the specific
wording of the treaty.
● The line between the concept of indirect expropriation and
non-compensable regulatory governmental measures has not been
systematically articulated. However, a close examination of the
relevant jurisprudence reveals that, in broad terms, there are some
criteria that tribunals have used to distinguish these concepts: i) the
degree of interference with the property right, ii) the character of
governmental measures, i.e. the purpose and the context of the
governmental measure, and iii) the interference of the measure with
reasonable and investment-backed expectations.
● Tribunals, instead of focusing exclusively on the “sole effect” on the
ow n er, h ave als o ofte n take n into accoun t th e purpos e an d
proportionality of the governmental measures to determine whether

108. For the text of the new FIPA model see www.dfait-maeci.gc.ca/tna-nac/
what_fipa-en.asp.

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“INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

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s of cases were determined
compensation was due. Thus a number io on
w
the basis of recognition that governments have the right to protect,

n
o
through non-discriminatory actions, inter alia, the environment,

D Br
human health and safety, market integrity and social policies without

y
providing compensation for any incidental deprivation of foreign

nl
owned property.

u le
● Up to now only a handful of international agreements articulated this
difference. Recently, new generation of investment agreements,

d
EC
including investment chapters of Free Trade Agreements, have

ea
introduced specific language and established criteria to assist in

se
d e t e r m i n i n g w h e t h e r a n i n d i r e c t e x p ro p r i a ti o n r e q u i r i n g

R
O
compensation has occurred. These criteria are consistent with those
emerging from arbitral decisions.

e
●
An
At the same time, prudence requires to recognise that the list of r
c tu
criteria which can be identified today from state practice and existing
Le
jurisprudence is not necessarily exhaustive and may evolve. Indeed,
new investment agreements are being concluded at a very fast pace
and the number of cases going to arbitration is growing rapidly.
Case-by-case consideration which may shed additional light will
continue to be called for.

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 ISBN 92-64-01164-1
International Investment Law: A Changing Landscape

e
A Companion Volume to International Investment Perspectives_it E d it
© OECD 2005
s io
w

n
o
D Br

y
nl
Chapter 3

u le
d
EC

ea

se
Fair and Equitable Treatment Standard

R
in International Investment Law *O

e
An r
The obligation of the parties to investment agreements to provide to each
Le
other’s investments “fair and equitable treatment” has been given various c tu
interpretations by governmental officials, arbitrators and scholars. Discussion
of this standard has focused mainly on whether the standard of treatment
required is measured against the customary international law minimum
standard, a broader international law standard including other sources such
as investment protection obligations generally found in treaties and general
principles or whether the standard is an autonomous self-contained concept in
treaties which do not explicitly link it to international law.
Because of the differences in its formulation, the proper interpretation of
the “fair and equitable treatment” standard depends on the specific
wording of the particular treaty, its context, negotiating history or other
indications of the parties’ intent. The attempts to clarify the normative
content of the standard itself have, until recently, been relatively few.
This document provides factual elements of information on jurisprudence,
literature and state practice related to the fair and equitable treatment
standard. It examines the origins of the standard and its use in
international agreements and state practice, its relationship with the
minimum standard of international customary law and the elements of its
normative content as identified by arbitral tribunals.

* This survey was prepared by Catherine Yannaca-Small, Investment Division, OECD

Directorate for Financial and Enterprise Affairs, and benefited from discussions,
comments and a variety of perspectives in the OECD Investment Committee. The
document as a factual survey, however, does not necessarily reflect the views of the OECD
or those of its member governments. It cannot be construed as prejudging ongoing or
future negotiations or disputes pertaining to international investment agreements.

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FAIR AND EQUITABLE TREATMENT STANDARD IN INTERNATIONAL INVESTMENT LAW

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s io
w

n
o
D Br

y
nl
Introduction

u le
The obligation to provide “fair and equitable treatment” is often stated,

d
together with other standards, as part of the protection due to foreign direct

EC

ea
investment by host countries. It is an “absolute”, “non-contingent” standard of

se
treatment, i.e. a standard that states the treatment to be accorded in terms

R
whose exact meaning has to be determined, by reference to specific

O
circumstances of application, as opposed to the “relative” standards embodied

e
in “national treatment” and “most-favoured-nation” principles which define
An r
the required treatment by reference to the treatment accorded to other
u
L e c t in the
1
investment. Although some references to the standard can be found
first negotiating attempts of multilateral trade and investment instruments, it
became established as a principle mainly through the increasing network of
bilateral investment treaties.
The obligation of the parties to investment agreements to provide to each
other’s investments “fair and equitable treatment”2 has been given various
interpretations by governmental officials, arbitrators and scholars. Discussion
of this standard has focused mainly on whether the standard of treatment
required is measured against the customary international law minimum
standard, a broader international law standard including other sources such as
investment protection obligations generally found in treaties and general
principles or whether the standard is an autonomous self-contained concept in
treaties which do not explicitly link it to international law. The implications of
this discussion could be very broad, in particular given the growing number of
arbitral awards which examine claims of denial of fair and equitable treatment.
The meaning of the “fair and equitable treatment” standard may not
necessarily be the same in all the treaties in which it appears. The proper

1. See UNCTAD, Bilateral Investment Treaties in the Mid 1990s, 1998. See also
A.A. Fatouros, “Government Guarantees to Foreign Investors”, Columbia University
Press (1962), pp. 135-141, 214-215.
2. Investment treaties vary in their precise drafting. Some expressly define the
standard by reference to international law: treaties concluded by France, US,
Canada, others do not make reference to international law, for instance treaties
concluded by the Netherlands, Sweden, Switzerland and Germany. For example,
The German model BIT states: “Each Contracting Party […] shall in any case accord
such investments fair and equitable treatment” and the Swiss model BIT states:
“Investments and returns of investors of each Contracting Party shall at all times
be accorded fair and equitable treatment…” See UNCTAD, op. cit., No. 1.

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 FAIR AND EQUITABLE TREATMENT STANDARD IN INTERNATIONAL INVESTMENT LAW

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s wording of a particularitreaty,
interpretation may be influenced by the specific
o
w
its context, negotiating history or other indications of the parties’ intent. The

n
o
attempts to clarify the normative content of the standard itself have, until

D Br
recently, been relatively few. There is a view that the vagueness of the phrase

y
is intentional to give arbitrators the possibility to articulate the range of

nl
principles necessary to achieve the treaty’s purpose in particular disputes.

O
However, a number of governments seem to be concerned that, the less

u le
guidance is provided for arbitrators, the more discretion is involved and the

d
EC
closer the process resembles decisions ex aequo et bono, i.e. based on the

ea
arbitrators’ notions of “fairness” and “equity”.

se
The OECD has on two occasions in the past referred to the “fair and

R
O
equitable treatment standard” by linking it to the minimum standard required
by international law3 and general principles of international law 4 without

e
however comprehensively analysing its specific content.5 Since then, a
An r
c tu
growing case law has been developed, which could shed light on the
normative content of the standard. Le
The present survey provides factual elements of information on
jurisprudence, literature and state practice related to the fair and equitable
treatment standard. It examines the origins of the standard and its use in
international agreements and state practice (Section 1), its relationship with
the minimum standard of international customary law (Section 2) and the
elements of its normative content as identified by arbitral tribunals (Section 3).

1. The origins of the fair and equitable treatment standard and its
current use in international agreements and state practice

1.1. The origins of the standard

The first reference to “equitable” treatment is found in the 1948 Havana
Charter for an International Trade Organisation. Its Article 11(2) contemplated
that foreign investments should be assured “just and equitable treatment”.
The Article provided that the International Trade Organisation (ITO) could:
1. make recommendations for and promote bilateral or multilateral
agreements on measures designed…
2. … to assure just and equitable treatment for the enterprise, skills, capital,
arts and technology brought from one member country to another.

3. “Draft Convention on the Protection of Foreign Property and Resolution of the

Council of the OECD on the Draft Convention”, OECD (1967), pp. 13-15.
4. “Intergovernmental Agreements Relating to Investment in Developing Countries”
OECD, 1984.
5. In 1967 and 1984, the OECD countries based their work essentially on state practice
and literature.

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FAIR AND EQUITABLE TREATMENT STANDARD IN INTERNATIONAL INVESTMENT LAW

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ioote
sor ised , in te r a lia , to p rom
T h e orga n isa tion wa s to be a uth
w
arrangements which would facilitate “an equitable distribution” of skills, arts,

n
o
technology, materials and equipment, with due regard to the needs of all

D Br
member States. Also, the member States were to recognise the right of each

y
State to determine the terms of admission of foreign investors on its territory,

nl
to give effect to “just terms” on ownership of investment, and to apply “other

O
reasonable requirements” with respect to existing and future investments.6

u le
Because of a number of unresolved issues, some major developed countries

d
EC
did not ratify the Charter, bringing the first post-war multilateral effort on

ea
trade and investment to an unsuccessful conclusion.

se
At the regional level, in 1948, the Ninth International Conference of

R
O
American States adopted the Economic Agreement of Bogotá,7 an agreement
covering among other things, the provision of adequate safeguards for foreign

e
investors. Article 22 of the agreement included the following language:
An r
c tu
“Foreign capital shall receive equitable treatment. The States therefore agree not
Le
to take unjustified, unreasonable or discriminatory measures that would impair
the legally acquired rights or interests of nationals of other countries in the
enterprises, capital, skills, arts or technology they have supplied.”8
Like the Havana Charter, the Bogotá Agreement failed to come into force
due to lack of support.
At the bilateral level, the US treaties on Friendship, Commerce and Navigation
(FCN), developed after the First World War, contained a standard reference to
international law in connection with protection of the persons and property of
aliens. In the period following the preparation of the Havana Charter, the terms
“equitable” and “fair and equitable treatment” started to appear in certain of the

6. Although this provision is valuable as precedent, it did not itself guarantee this
standard of treatment for investors; it merely authorised the International Trade
Organisation to recommend that this standard be included in future agreements.
7. See Stephen Vasciannie in “The Fair and Equitable Treatment Standard in
International Investment Law and Practice” in the British Yearbook of International
Law, (2000), Vol. 70, pp. 99-164.
8. In addition, it provided that Parties would not set up “unreasonable or unjustified
impediments that would prevent other States from obtaining on equitable terms
the capital, skills, and technology needed for their economic development”.

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US FCN treaties.9
The proponents of the standard io
s considered it as a safeguard
w
against state action that violated internationally accepted norms. 10

n
o
In 1959, the Draft Convention on Investments Abroad, developed under the

D Br

y
leadership of Herman Abs, the Director-General of the Deutsche Bank and Lord

nl
Shawcross, the UK Attorney General, in its Article 1 stipulated that “each Party shall
at all times ensure fair and equitable treatment to the property of the nationals of

O
the other Parties”.11 This effort led to the German proposal to the OECD that it

u le
develop a convention on the international protection of private property.

d
EC
Intensive discussions started in the OECD in the early 60’s and culminated

ea
in the adoption of the Draft Convention on the Protection of Foreign Property by

se
the OECD Council on 12 October 1967.12 Under the Article 1(a) “Treatment of

R
O
Foreign Property: “Each Party shall at all times ensure fair and equitable
treatment to the property of the nationals of the other Parties…” The Draft

e
An
Convention, although never opened for signature, represented the collective r
c tu
view and dominant trend of OECD countries on investment issues and
Le
influenced the pattern of deliberations on foreign investment in that period.
The requirement to “ensure fair and equitable treatment” in the Draft
Convention placed greater emphasis on the standard than earlier instruments.

1.2. The current use of the standard in international agreements

and state practice

Bilateral Treaties. The influence of the OECD Draft Convention is obvious in

the growing number of bilateral investment treaties which were negotiated
between developed and developing countries beginning in the late 60s. One of
the main features which gained a position of prominence was the reference to
“fair and equitable treatment”. However, while the standard appears in the

9. US FCN treaties with Ireland (1950), Greece (1954), Israel (1954), France (1960),
Pakistan (1961), Belgium (1963) and Luxembourg (1963), contained the express
assurance that foreign persons, properties, enterprises and other interests would
receive “equitable treatment” while others including those with the Federal
Republic of Germany, Ethiopia and the Netherlands used the terms “fair and
equitable treatment” for a similar set of items involved in the foreign investment
process. K. Vandevelde suggests that the term “fair and equitable treatment” as
used by the US is the equivalent of the “equitable treatment” set out in various
FCN treaties; see Vandevelde “The Bilateral Treaty Program of the United States”,
Cornell International Law Journal, 21 (1988), pp. 201-76.
10. J.C. Thomas “Reflection on Article 1105 of NAFTA: History, State Practice and the
Influence of Commentators”, ICSID Review – Foreign Investment Law Journal (2002),
17 (1), pp. 21-101.
11. Abs and Shawcross, “The Proposed Convention to Protect Foreign Investment: A
Round Table: Comment on the Draft Convention by its Authors”, Journal of Public
Law, 9 (1960), pp. 119-24.
12. See op. cit., No. 3.

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streaties concluded by certainio
majority of BITs, it is not always mentioned in Asian
w
countries (e.g. some treaties signed by Pakistan, Saudi Arabia and Singapore). In 13

n
o
recent years, even countries which traditionally were in favour of national control

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over foreign investments and therefore favoured the use of national treatment

y
over the fair and equitable standard have incorporated the “fair and equitable”

nl
standard in their bilateral investment treaties. Bilateral investment treaties of

O
Chile14 and China15 as well as between Peru and Thailand, Bulgaria and Ghana,

u le
the United Arab Emirates and Malaysia, include the fair and equitable standard.16

d
EC
In this category it is worth noting the Latin American countries, which had

ea
embraced the Calvo doctrine since the beginning of the XXth century17 and had

se
firmly avoided the terms “fair and equitable”.

R
O
The recently concluded new generation agreements, the Free Trade
Agreements between the United States and Australia,18 Dominican Republic-Central

e
America),19 Chile,20 Morocco,21 and Singapore,22 in their Investment Chapters,
An r
c tu
provide with greater specificity that each Party has the obligation to “accord to the
Le
covered investments treatment in accordance with customary international law,
including fair and equitable treatment and full protection and security”.
The Free Trade Agreement between Australia and Thailand, 23 in its
Article 909, also provides that each Party has the obligation to “ensure fair and
equitable treatment” of foreign investment in its own territory.

Multilateral instruments. In the multilateral context, the Draft United Nations

Code of Conduct on Transnational Corporations, in its Article 48,24 stated that:
“Transnational corporations should receive [fair and] equitable [and non-
discriminatory] treatment [under] [in accordance with] the laws, regulations and

13. See UNCTAD, Bilateral Investment Treaties in the Mid-1990s, 1998, op. cit., No. 1, p. 54.
14. Model Treaty, Article 4 on the Treatment of Investments (1994), see UNCTAD,
op. cit., No. 1, p. 54.
15. Article 3 of the Model Treaty, see UNCTAD, op. cit., No. 1.
16. See ICSID Investment Laws of the World: Bilateral Investment Treaties (1972-).
17. According to the Calvo doctrine, these countries were reluctant to enter into
treaty arrangements that would result in the transfer of jurisdiction over disputes
on property owned by foreigners in the country from domestic to international
courts.
18. US-Australia Free Trade Agreement signed on 1 March 2004.
19. US-Dominican Republic Central America Free Trade Agreement signed on
5 August 2004. The countries Parties to the Agreement are: Costa Rica, Dominican
Republic, El Salvador, Guatemala, Honduras, Nicaragua and the United States.
20. US-Chile Free Trade Agreement signed on 6 June 2003.
21. US-Morocco Free Trade Agreement signed on 15 June 2004.
22. US-Singapore Free Trade Agreement signed on 6 May 2003.
23. Australia-Thailand Free Trade Agreement signed on 19 October 2003, see text of
the Agreement on www.dfat.gov.au/trade/negotiations/aust-thai/aust-thai_fta.pdf.
24. UNCTC, The United Nations Code of Conduct on Transnational Corporations, Current
Studies, Series A (New York, 1986) UN Doc. ST/CTC/SER. A/4, Annex 1.

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administrative practices of the countriessin which they operate [as well io as
w
intergovernmental obligations to which the Governments of these countries have

n
o
freely subscribed] [consistent with their international obligations] [consistent

D Br
with international law].”

y
nl
Although most of the above issues had not reached consensus in the last
version of the text (1986), the negotiating States agreed that the Code should

u le
provide for “equitable” treatment of transnational corporations.
The 1985 Convention establishing the Multilateral Investment Guarantee

d
EC
Agency (MIGA) specifies in Article 12(d) that in order to guarantee an

ea
investment, MIGA must satisfy itself that fair and equitable treatment and

se
legal protection for the investment exist in the host country concerned.25 This

R
O
would appear to be not only a prudent standard for lowering the risk for
guaranteed investments, but also one of the means by which MIGA carries out

e
An
its mission under Articles 2 and 23 to promote investment flows to and among r
c tu
developing countries, which include promotion of investment protection.
T he 1992 World Bank Guideli nes on Treatm ent of Forei gn Direct Le
Investment26 stipulate in their article III(2) that: “each State will extend to
investments established in its territory by nationals of any other State fair and
equitable treatment according to the standards recommended in the
Guidelines.” It then in II(3) indicates the standards of treatment which are to
be accorded to foreign investors in matters such as security of person and
property rights, the granting of permits and licenses, the transfer of incomes
and profits, the repatriation of capital. The approach suggested is that fair and
equitable treatment is an over-arching requirement.
The standard can also be found in 1990 Lomé IV,27 the Fourth Convention
of the African, Caribbean and Pacific Group of States and the European
Economic Community (EEC) and in the 1987 ASEAN Treaty for the Promotion
and Protection of Investments, in its Article IV.28

25. See www.miga.org/screens/about/convent/convent.htm. Article 12(d) of the Convention

stipulates:
d)In guaranteeing an investment, the Agency shall satisfy itself as to:
i)the economic soundness of the investment and its contribution to the development of the
host country;
ii)compliance of the investment with the host country’s laws and regulations;
iii) consistency of the investment with the declared development objectives and priorities
of the host country; and
iv) the investment conditions in the host country, including the availability of fair and
equitable treatment and legal protection for the investment.
26. World Bank, “Legal Framework for the Treatment of Foreign Investment”, 1992.
27. Lomé IV entered into force for a ten-year period on 1 March 1990.
28. The ASEAN Treaty is the Agreement among the Governments of Brunei
Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand for the
Promotion and Protection of Investments.

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io
s and Protection of Investments
The Colonia Protocol on Reciprocal Promotion
signed by MERCOSUR member Statesw 29
in January 1994, expressly grants to

n
o
investors from each MERCOSUR country “at any moment, fair and equitable

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treatment”. An additional Protocol on the Promotion and Protection of Investments

y
from non-member States extends the same treatment to these investments.30

nl
Article 159 of the 1994 Treaty establishing the Common Market for Eastern

u le
and Southern Africa (COMESA) also requires COMESA member States to
“accord fair and equitable treatment to private investors”.

d
EC
Article 1105(1) of the NAFTA, which entered into force on 1 January 1994,

ea
stipulates under the rubric “Minimum Standard of Treatment” that:

se
“Each Party shall accord to investments of investors of another Party treatment in

R
O
accordance with international law, including fair and equitable treatment and full
protection and security.”

e
An r
c tu
The Draft OECD Multilateral Agreement on Investment (1998) in its

Le
preamble indicated that “fair, transparent and predictable investment regimes
complement and benefit the world trading system”, while under the “General
Treatment” Article it stipulated that:
“Each contracting Party shall accord fair and equitable treatment and full and
constant protection and security to foreign investments in their territories. In no
case shall a contracting Party accord treatment less favourable than that required
by international law.”
The Energy Charter Treaty (1995) provides also that fair and equitable
treatment shall be accorded at “all times”. Although the Treaty is limited to
one sector, it is significant in this context because it includes among its Parties
several economies in transition31 which embrace the standard.
Finally, the June 2002 Agreement between Singapore and EFTA establishing
a free-trade area among the Parties stipulates in its Article 39 that each Party
shall “accord at all times to investments of investors of another Party “fair and
equitable treatment”.

29. MERCOSUR was established in 1991 by the Asuncion Treaty. Its Member States
are: Argentina, Brazil, Paraguay and Uruguay.
30. UNCTAD, International Investment Instruments: A Compendium (1996), Vol. II,
pp. 527-34.
31. Parties to this Treaty include Armenia, Azerbaijan, Belarus, Bulgaria, Croatia,
Kazakhstan, Kyrgyzstan, Tajikistan and Turkmenistan.

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2. Fair and equitable treatment and its s io
relation to the minimum
standard of international customarywlaw

n
o
As mentioned above, the discussion on the “fair and equitable treatment”

D Br

y
has been mainly focused on whether the standard requires that the conduct

nl
of the host State be measured:

O
● against the international minimum standard required by customary

u le
international law;

d
● against international law including all sources;

EC

ea
● against an independent self-contained treaty standard.

se
R
2.1.Fair and equitable treatment as a part of the minimum standard32
required by customary international law O

e
An
Under customary law, foreign investors are entitled to a certain level of
r
c tu
treatment, and any treatment which falls short of this level, gives rise to
Le
32. The international minimum standard is a norm of customary international law
which governs the treatment of aliens, by providing for a minimum set of principles
which States, regardless of their domestic legislation and practices, must respect
when dealing with foreign nationals and their property. While the principle of
national treatment foresees that aliens can only expect equality of treatment with
nationals, the international minimum standard sets a number of basic rights
established by international law that States must grant to aliens, independent of the
treatment accorded to their own citizens. Violation of this norm engenders the
international responsibility of the host State and may open the way for
international action on behalf of the injured alien provided that the alien has
exhausted local remedies. The classical monograph on the principle is A. H. Roth,
The Minimum Standard of International Law Applied to Aliens, Leiden, 1949, where
it is defined as follows (p. 127): “… the international standard is nothing else than a
set of rules, correlated to each other and deriving from one particular norm of
general international law, namely that the treatment of alien is regulated by the law
of nations. See also I. Brownlie, “Principles of Public International Law”, Oxford,
Sixth Edition 2003, p. 502: “… legal doctrine has opposed an ‘international
minimum standard’, a ‘moral standard for civilized States’, to the principle of
national treatment.” Also C. Rousseau, “Droit International Public”, Paris, 1970, p. 46:
“La grande majorité de la doctrine estime qu’il existe à cet égard un standard
international minimum suivant lequel les États sont tenus d’accorder aux étrangers
certains droits, […] même dans le cas où ils refuseraient ce traitement à leurs
nationaux”: The great majority of the doctrine considers that it exists in this respect
an international minimum standard according to which the States have to accord to
aliens certain rights […] even in the case they would deny the same treatment to
their nationals [translation by the Secretariat]. The American Law Institute’s
Restatement (Second) of Foreign Relations Law of the United States, 1965, par. 165.2,
defines the standard in the following terms: “The international standard of justice
[…] is the standard required for the treatment of aliens by: a) the applicable
principles of international law as established by international custom, judicial and
arbitral decisions, and other recognized sources or, in the absence of such
applicable principles; b) analogous principles of justice generally recognized by
States that have reasonably developed legal systems”.

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responsibility on the part of the State.33
Fair io
sand equitable has been identified
by some as one of the elements of the w
34
minimum standard of treatment of

n
o
foreigners and of their property, required by international law. This view has

D Br

y
nl
32.

33. In the past, the existence of an international minimum standard for the

O
treatment of alien – owned property and investments has been repeatedly

u le
challenged. During most of the last century, it has been the object of tension
between developed and developing countries, with several countries challenging

d
EC
the existence (or persistence) of a customary norm of an international minimum

ea
standard. This tension had implications in several sectors, for example the League
of Nations and the UN International Law Commission was unable to reach

se
agreement on a codification of the law of State responsibility for injury to aliens.

R
O
The work of the UN centre and Commission on Transnational Corporations was
equally impaired by the fundamental differences on issues related to the
treatment of foreign property. With their overwhelming majority within the

e
An
UN General Assembly, the developing countries were able to assert the principle r
c tu
of national treatment as the rule in the case of expropriation, Charter of Economic
Le
Rights and Duties of States, Article 22 of Chapter II, UNGA, Res. 3281 (XXIX 1974)
adopted with 104 votes in favour, 16 against (most of the developed countries) and
6 abstentions. For a certain period this approach found support in doctrine,
especially from scholars in developing nations. See G. Roha “Is the Law of
Responsibility of States for Injuries to Aliens a Part of Universal International
Law? American Journal of International Law, 1961, pp. 863 ff. See also M. Sornarajah,
The International Law on Foreign Investment, Cambridge, 1994, pp. 126 ff., and
P. Juillard, “L’évolution des sources du droit des investissements”, Recueil des Cours,
Tome 250, 1994, p. 83.
34. Case law points to a number of areas across which the notion of an international
minimum standard applies. They include: a) the administration of justice in cases
involving foreign nationals, usually linked to the notion of denial of justice, (see US
and Mexico General Claims Commission, Janes Claim, United Nations, Reports of
International Arbitral Awards, 1926, IV, p. 82.); b) the treatment of aliens under
detention: in this case the United States and Mexico General Claims Commission
maintained that the equality of treatment with national detainees “is not the
ultimate test of the propriety of the acts of the authorities in the lights of
international law. That test is, broadly speaking, whether aliens are treated in
accordance with ordinary standard of civilisation” (see US and Mexico General
Claims Commission, Harry Roberts Claim, United Nations, Reports of International
Arbitral Awards, 1927, IV, 77); c) full protection and security, which is usually
understood as the obligation for the host State to adopt all reasonable measures
to physically protect assets and property from threats or attacks which may target
particularly foreigners or certain groups of foreigners, (see G. Sacerdoti, “Bilateral
Treaties and Multilateral Instruments on Investment Protection”, Recueil des Cours,
Tome 269, 1997, p. 347). Doctrine generally supports the view that the latter
standard provides “a general obligation for the host State to exercise due diligence
in the protection of foreign investment as opposed to creating “strict liability’
which would render a host State liable for any destruction of the investment even
if caused by persons whose acts could not be attributed to the State”. See R. Dolzer
and M. Stevens in Bilateral Investment Treaties, ICSID, 1995. d) although the
general right of expulsion by the host State has never been questioned, minimum
standards have been invoked concerning the way in which it is carried out, which
should be the least injurious to the person affected; the classical case is Boffolo,
United Nations, Reports of International Arbitral Awards, 1903, X, p. 528.

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been supported by a number of s Recently, the question hasiobeen
scholars.35, 36
w
raised whether the content of the minimum standard is limited to the

n
o
interpretation given to it in the early 20th century in the context of the Neer
and Roberts’ cases37 or refers to an evolving customary law which has been

D Br

y
influenced by the extensive network of BITs (see below Mondev, ADF and Waste

nl
Management cases).

u le
As noted in Section 1, fair and equitable treatment is spelled out in
several international instruments although in most of them – with certain

d
EC
exceptions including the NAFTA, the US Free Trade Agreements and the

ea
commentaries of the OECD Draft Convention – this is done without any

se
reference to an international law standard.38 However, international law is

R
O
referred to in relation to “fair and equitable treatment” in a number of BITs, in
particular those concluded by France, Japan, the UK and the US and the new

e
US and Canada model BITs.
An r
Le c tu
35. Gann, “The US Bilateral Investment Treaty Program”, Stanford Journal of
International Law, 21 (1985); Huu-Tru, “Le réseau suisse d’accords bilatéraux
d’encouragement et de protection des investissements”, Revue générale de droit
international public, 92 (1988); Paterson “Canadian Investment Promotion and
Protection Treaties”, Canadian Yearbook of International Law, 29 (1991).
36. A somewhat different but related view has been expressed by UNCTAD in its
study “Bilateral Investment Treaties in the Mid-1990s” (1998): “… this standard
covers an array of international legal principles, including non-discrimination,
the duty of protection of foreign property and the international minimum
standard.”
37. The 1926 decision on the Neer Claim became the landmark case for the
international minimum standard. This claim was presented to the US Mexico
Claim Commission by the United States on behalf of the family of Paul Neer, who
had been killed in Mexico in obscure circumstances. The claim held that the
M exican Government had shown lack of dilige nce in prosecuting those
responsible and that it ought to reimburse the family. The Commission found that
the failure by the Mexican authorities to apprehend or punish those guilty of the
murder of the American citizen did not per se violate the international minimum
standard on the treatment of aliens. In what has become a classical dictum, the
Commission expressed the concept as follows: “the propriety of governmental acts
should be put to the test of international standards […] 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 recognize
its insufficiency. Whether the insufficiency proceeds from the deficient execution of a
reasonable law or from the fact that the laws of the country do not empower the
authorities to measure up to international standards is immaterial” United Nations,
Reports of International Arbitral Awards, 1926, IV, pp. 60 ff.
38. Sacerdoti notes that this lack of reference to an international standard was
“… possibly a way of avoiding the divergence surrounding the latter and in order
to give to it a direct content”. See op. cit., No. 34.

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s In the Notes and Comments
International instruments and State practice. io to
Article 1 of the OECD Draft Convention w
on the Protection of Foreign Property, the

n
o
Committee responsible for the draft indicated that the concept of fair and

D Br
equitable treatment flowed from the “well established general principle of

y
international law that a State is bound to respect and protect the property of

nl
nationals of other States”. The Committee added:

u le
“The phrase ‘fair and equitable treatment’, customary in relevant bilateral
agreements, indicates the standard set by international law for the treatment due

d
EC
by each State with regard to the property of foreign nationals. The standard

ea
requires that – subject to essential security interests – protection afforded under

se
the Convention shall be that generally accorded by the Party concerned to its own

R
O
nationals, but, being set by international law, the standard may be more exacting
where rules of national law or national administrative practices fall short of the

e
requirements of international law. The standard required conforms in effect to the
An r
c tu
‘minimum standard’ which forms part of customary international law.”39
Le
Support for the proposition that “fair and equitable treatment” refers to
the minimum standard may be found in a 1979 statement issued by the Swiss
Foreign office.40
As noted above, NAFTA in its article 1105 clearly treats “fair and equitable
treatment” as part of the requirements of international law.
In the context of NAFTA, early arbitral tribunals gave different
interpretations of the “fair and equitable” provision of the NAFTA text. In order
to clarify the interpretation of Article 1105(1), the NAFTA Free Trade
Commission (FTC) issued a binding interpretation on 21 July 2001. According to
this interpretation:41
Article 1105(1) prescribes the customary international law minimum standard of
treatment of aliens as the minimum standard of treatment to be afforded to
investments of investors of another Party.
The concepts of “fair and equitable treatment” and “full protection and security”
do not require treatment in addition to or beyond that which is required by the
customary international law minimum standard of treatment of aliens.

39. See op. cit., No. 3.

40. “On se réfère ainsi au principe classique du droit des gens selon lequel les états
doivent mettre les étrangers se trouvant sur leur territoire et leurs biens au
bénéfice du ‘standard minimum’ international, c’est-à-dire leur accorder un
minimum de droits personnels, procéduraux et économiques”. Annuaire Suisse de
Droit International, 178 (1980), quoted by Dolzer and Stevens, op. cit., No. 34.
41. Such an interpretation was made pursuant to NAFTA Article 2001(2)c which
grants the FTC the power to resolve disputes that may arise regarding the
Agreement interpretation or application. Article 1131 (2) stipulates that an
interpretation by the Commission of a provision of the Agreement shall be
binding on a Tribunal established under Section B of Chapter XI.

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io
s of another provision of the NAFTA,
A determination that there has been a breach
w
or of a separate international agreement, does not establish that there has been a

n
o
breach of Article 1105(1).

D Br

y
In considering the meaning and implications of the FTC interpretation, in

nl
the context of the NAFTA case ADF Group Inc. v. United States of America42 the
United States expressed the view that the customary international law referred

u le
to in NAFTA Article 1105(1) is not “frozen in time” and that the minimum
standard of treatment does evolve. The FTC interpretation in the view of the

d
EC
United States refers to customary international law “as it exists today”.43

ea
The relationship between the “fair and equitable treatment” standard

se
and the international minimum standard was identified at the time the

R
O
NAFTA came into force, with Canada noting in its NAFTA Statement on
Implementation:44

e
An
“Article 1105, which provides for treatment in accordance with international law,r
Le c tu
is intended to assure a minimum standard of treatment of investments of NAFTA
investors […] this article provides for a minimum absolute standard of
treatment, based on long-standing principles of customary international law.”
Canada agreed with the US on the view that the minimum standard of
treatment does evolve. In the context of the ADF case, it noted that:
“Canada’s position has never been that the customary international law
regarding the treatment of aliens was ‘frozen in amber at the time of the Neer
decision’. Obviously, what is shocking or egregious in the year 2002 may
differ from that which was considered shocking or egregious in 1926.
Canada’s position has always been that customary international law can
evolve over time, but that the threshold for finding violation of the minimum
standard of treatment is still high”.45
In the same context, Mexico, corrected the interpretation of its
submission by the Pope & Talbot Tribunal. Although the test in Neer does
continue to apply and “the conduct of government toward the investment
must amount to gross misconduct, manifest injustice or in the classic words
of the Neer claim, an outrage, bad faith or the wilful neglect of duty”, Mexico
also agrees that “the standard is relative and that conduct which may have not

42. ADF Group Inc. v. United States of America, ICSID Case No. ARB(AF)/00/1, Award,
9 January 2003, par. 179, p. 86, referring to the Transcript of the Oral Hearing,
Vol. II, 16 April 2002, pp. 492-493. Also Post Hearing Transmission of the United
States, 27 June 2002, p. 20.
43. Transcript of the Oral Hearing, Vol. II, 16 April 2002, pp. 492-493. Also Post Hearing
Transmission of the United States, 27 June 2002, p. 20.
44. Canadian Statement of Implementation for NAFTA, Canada Gazette, Part I,
1 January 1994, at 149.
45. Second Submission of Canada Pursuant to NAFTA Article 1128, 19 July 2002,
par. 33.

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s very well be seen to ioffend
violated international law [in] the 1920s might
o
w
internationally accepted principles today”. 46

n
o
The Bilateral Investment Treaties negotiated up to now by the United

D Br

y
States have been approved by its Senate on the basis of submissions

nl
containing the notice that the general treatment provision incorporated a
minimum standard of treatment based on customary international law.47 In

u le
the 1994 US Model Treaty, Article II(3)(a) stipulated that:
“Each Party shall at all times accord to covered investments fair and equitable

d
EC
treatment and full protection and security, and shall in no case accord treatment

ea
less favourable than that required by international law.”

se
The new 2004 US Model BIT48 in its Article 5 and the recently concluded

R
O
US Free Trade Agreements49 in their Chapter on Investment go further and
attempt to define the minimum standard of treatment. They provide that:

e
An r
c tu
“Each Party shall accord to covered investments treatment in accordance with

Le
customary international law, including fair and equitable treatment and full
protection and security.
For greater certainty [the previous paragraph] prescribes the customary
international minimum standard of treatment of aliens as the minimum standard
of treatment to be afforded to covered investments …
… [This] obligation to provide ‘fair and equitable treatment’ includes the
obligation not to deny justice in criminal, civil, or administrative adjudicatory
proceedings in accordance with the principle of due process embodied in the
principal legal systems of the world…”
An additional interpretative provision in the US FTAs states the parties’
shared understanding of the meaning of “customary international law” as
“the general and consistent practice of States that they follow from a sense of
legal obligation […] the customary international law minimum standard of
treatment of aliens refers to all customary international law principles that
protect the economic rights and interests of aliens”. This confirms the parties’
view that the standard is a customary international law standard, not a
conventional standard.

46. Second Submission of the United Mexican States in the Matter of ADF Group Inc.
v. United States of America, 22 July, p 5.
47. Andrea Menaker, “Standards of Treatment: National Treatment, Most-Favoured-
Nation Treatment & Minimum Standard of Treatment”, APEC Workshop on Bilateral
and Regional Investment Rules and Agreements, APEC Committee on Trade and
Investment Experts Group, p. 107.
48. For the text of the model BIT see www.state.gov/documents/organization/38710.pdf.
49. FTAs with Australia, Central America, Chile, Morocco and Singapore, see op. cit.,
No. 19-23.

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s and Promotion Agreement
Canada’s new Foreign Investment Protection io
50
w
(FIPA) model, contains similar language and links the “fair and equitable

n
o
treatment” to the minimum standard:

D Br

y
“The Minimum Standard of Treatment ensures investments of investors, fair and

nl
equitable treatment and full protection and security in accordance with the
principles of customary international law. The minimum standard provides a

u le
‘floor’ to ensure that the treatment of an investment cannot fall below treatment
considered as appropriate under generally accepted standards of customary

d
EC
international law”.

ea

se
International Organisations. The United Nations Centre on Transnational

R
O
Corporations has issued a study which stated that “fair and equitable
tre atme nt is a class ical internation al law standard” and “class ical

e
international law doctrine considers certain elements to be firm ingredients of
An r
c tu
fair and equitable treatment, including non-discrimination, the international
Le
minimum standard and the duty of protection of foreign property by the host
State”.51
A document prepared by the WTO Secretariat for the Working Group on
the Relationship between Trade and Investment52 states that the principle of
“fair and equitable treatment” has its roots in customary international law
and it is generally considered “to cover the principle of non-discrimination,
along with other legal principles related to the treatment of foreign investors,
but in more abstract sense than the standards of MFN and national
treatment”. This paper recalls the difficulties of giving a precise meaning to
the principle and refers to documents and practice of the OECD (Draft
Convention on the Protection of Foreign Property) and UNCTAD (paper on fair
and equitable treatment).53

50. For the text of the new FIPA model, see www.dfait-maeci.gc.ca/tna-nac/documents/
2004-FIPA-model-en.pdf.
51. United Nations Centre on Transnational Corporations (UNCTC), Bilateral
Investment Treaties, (1988), p. 42.
52. WTO, Working Group on the Relationship between Trade and Investment,
Non-Discrimination, Most-Favoured-Nation Treatment and National Treatment, Note by
the Secretariat, WT/WGTI/W/118, 4 June 2002.
53. Another document, presented by the WTO Secretariat to the same Working Group
and dealing with the concept of transparency, expresses the view that the
principle of “fair and equitable treatment” has been in certain cases interpreted as
“requiring parties to adhere to basic norms of transparency” (WTO, Working
Group on the Relationship between Trade and Investment, Transparency, Note by
the Secretariat, WT/WGTI/W/109, 27 March 2002).

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Jurisprudence. s io
Cases arising under Bilateral Treaties54
w

n
o
D Br
In the Asian Agricultural Products Ltd. (AAPL) v. Republic of Sri Lanka 55

y
nl
case, Judge Asante, in his dissenting opinion, took the opportunity to make
specific comments on the meaning of fair and equitable treatment although

u le
the majority judgement did not make any reference to it. Noting the
juxtaposition of “fair and equitable treatment” with “full protection and

d
EC
security” Asante assumed that they each connoted the same level of

ea
treatment. He then considered the meaning of fair and equitable treatment,

se
and primarily by reference to the commentary on the OECD Draft Convention,

R
O
stressed that the fair and equitable standard conformed to the international
minimum standard.

e
An
In the case concerning Elettronica Sicula Spa (ELSI) (United States of r
Le
Judgement of 20 July 1989, held that the requirement for constant protection c tu
America v. Italy), the Chamber of the International Court of Justice (I.C.J.), in its

and security, as expressed in the FCN treaty between Italy and the United
States, was not a warranty to a US investor that no disturbance in any
circumstances would occur, and that the requisition by an Italian government
entity of an insolvent Italian company partially owned by the US investor did
not violate the requirement. The Court also ruled that the requirement was to
be measured by the “minimum international standard” and that a sixteen
month delay in a municipal judicial proceeding did not violate that standard.
However, a different approach was taken in a dissenting opinion by Judge
Schwebel. He reviewed the travaux préparatoires and preamble to the
Supplementary Agreement and deduced that one of the underlying principles
of this Agreement and the Treaty it supplemented was that “of equitable
treatment”.56 With this in mind, he concluded, inter alia, that a requisition
order issued by the Italian authorities against ELSI deprived the shareholders
of their rights of control, and constituted a violation of the principles of
equitable treatment.

54. Bilateral treaties in this case include Friendship, Commerce and Navigation (FCN)
Treaties, Treaties of Amity as well as modern Bilateral Investment Treaties.
55. In this case, the claimant’s (AAPL) shrimp farm was located in an area of Sri Lanka
that had come under the control of Tamil insurgents. During a counter insurgency
operation conducted by government security forces, the shrimp farm was
destroyed and the farm’s manager and staff members were killed. It was unclear
whether the government forces or the rebels caused the damage (this fact led
Dr Asante to dissent). International Legal Materials, 30 (1991), pp. 580-655.
56. Elettronic Sicula S.P.A. (ELSI) (US v. Italy), 1989, I.C.J. 15, reprinted in 28 International
Legal Materials 1109. See also Murphy, “The ELSI Case: An Investment Dispute at
the International Court of Justice”, Yale Journal of International Law, 16 (1991),
pp. 391-452.

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io
s Court of Justice, Oil Platforms
In another case before the International
57
w
(Iran v. United States), in the preliminary objection phase of the case, the

n
o
question before the Court was whether the 1955 Treaty of Amity, Economic

D Br
Relations and Consular Rights between Iran and the United States provided a

y
basis of I.C.J. jurisdiction. In the Judgement, the Court held that Article IV(1) of

nl
the Treaty, which included the obligation to treat companies of the other Party

O
in a “fair and equitable” manner, did not cover the actions of the United States

u le
complained of by Iran. Although the Court did not specifically address the

d
EC
meaning of the standard, Judge Higgins, in a separate opinion, expressed the

ea
following view:

se
“The key terms ‘fair and equitable treatment to nationals and companies’ and

R
O
‘unreasonable and discriminatory measures’ are legal terms of art well known in
the field of overseas investment protection, which is what is there addressed…”

e
An
In the case of American Manufacturing & Trading (AMT) (US), Inc. v. r
c tu
Republic of Zaire,58 the ICSID Tribunal found a violation of the standards of fair
Le
and equitable treatment and full protection and security as contained in the
US-Zaire 1989 BIT, as a result of loss to AMT investment caused by widespread
looting in Zaire. The tribunal found that Zaire has “manifestly failed to respect
the minimum standard required of it by international law”59and stated that:
“… These treatments of protection and security of investment required by the
provisions of the BIT of which AMT is beneficiary must be in conformity with its
applicable laws and must not be any less than those recognised by international
law. For the Tribunal, this last requirement is fundamental for the determination
of the responsibility of the [host state]. It is thus an objective obligation which
must not be inferior to the minimum standard of vigilance and of care required by
international law.”60
In Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil (US) v. Republic of
Estonia,61 the claimant sought to recover losses related to its investment in an
Estonian financial institution. The ICSID tribunal, after having considered
whether certain actions of the Bank of Estonia amounted to a violation of its
obligation to accord “fair and equitable treatment” and “non-discriminatory

57. Oil Platform (Iran v. United States), 1996, I.C.J. 803 (Preliminary Objection).
58. American Manufacturing & Trading, Inc. (AMT) (US) v. Republic of Zaire, ICSID case
No. ARB/93/1 Award, 21 February 1997, reprinte d in 36 International Legal
Materials 1531 (1997).
59. AMT, par. 6.10., p. 30.
60. Idem, par. 6.06, p. 29.
61. Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil Genin v. Republic of Estonia,
ICSID Case No. ARB/99/2 (Award) (25 June 2001) [rectification denied], available at
www.worldbank.org/icsid/cases/genin.pdf.

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s
and non-arbitrary treatment” under the US-Estonia iothe
1994 BIT, dismissed
claim. In its consideration, it describedw
the standard as follows:

n
o
“… Under international law, this requirement is generally understood to ‘provide a

D Br

y
basic and general standard which is detached from the host State’s domestic law’.

nl
While the exact content of the standard is not clear, the Tribunal understands it to
require an ‘international minimum standard that is separate from domestic law,

u le
but that is, indeed, a minimum standard. (Emphasis in the original).”
In the case CME (Netherlands) v. Czech Republic,62 CME, the claimant had

d
EC
purchased in the Czech Republic a joint venture media company. It alleged,

ea
inter alia, breaches of the “fair and equitable” treatment provisions of the

se
Netherlands-CSFR BIT because of the actions of the Czech Republic Media

R
O
Council. The Tribunal stated:
“The standard for actions being assessed as fair and equitable are not to be

e
An
determined by the acting authority in accordance with the standard used for its r
Le
own nationals. Standards acceptable under international law apply.”
To find the standard acceptable under international law the Tribunal
c tu
turned to suggestions by a leading academic.63
In Occidental Exploration and Production Company (OEPC) v. The Republic of
Ecuador,64 OEPC, a US company, claimed that the Ecuador authorities’ refusal
to refund to OEPC value added tax, which it was entitled to under Ecuadorian
law, violated the fair and equitable treatment provisions of Article II(3)(a) of

62. CME (Netherlands) v. Czech Republic (Partial Award) (13 September 2001) available at
www.mfcr.cz/scripts/hpe/default.asp.
63. The Tribunal cited Prof. Detlev Vagts’ arguments in his Article “Coercion and Foreign
Investment Rearrangements”, 72 A.J. I. L. 17 (1978) , to establish the appropriate
threshold to determine whether a coerced expropriation took place with respect
to CME’s rights:
“Cancellation of the franchise, permit, or authorisation to do business in which the investor
relies, except in accordance with its terms; and Regulatory Action without bona fide
government purpose (or without bona fide timing) designed to make the investor’s
business unprofitable.”
64. Occidental Exploration and Production Company (OEPC) v. The Republic of Ecuador (Case
No. UN 3467) Final Award, 1 July 2004, available at www.asil.org/ilib/ilib0713.htm.

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the US-Ecuador BIT. 65 s that in no case shalliothe
This Article provides
w
investment be accorded treatment less favourable than that required by

n
o
international law. The Tribunal examined “whether the fair and equitable

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treatment mandated by the Treaty is a more demanding standard than that

y
prescribed by customary international law” and concluded that in this case,

nl
the BIT standard was not different from the minimum standard required

O
under customary international law.66

u le
In CMS Gas Transmission Company v. The Argentine Republic,67 theTribunal

d
EC
considered whether the standard of fair and equitable treatment is separate

ea
and more expansive than that of customary international law, or whether it is

se
R
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65. Occidental Exploration and Production Company (“OEPC”), a US company
registered in California, entered into a participation contract in 1999 with

e
An
Petroecuador, a state-owned Ecuadorian corporation, to explore for and produce r
c tu
oil in the Republic of Ecuador (“Ecuador”). OPEC applied regularly to the “Servicio
Le
de Rentas Internas” (“SRI”) for reimbursement of Value AddedTax (“VAT”) paid by
OEPC on purchases necessary for its exploration and production activities under
the contract with Petroecuador. In 2001, SRI concluded that VAT reimbursement
had already been accounted for in the participation formula under the contract
with Petroecuador, and therefore denied all further applications by means of
Resolutions to OEPC and other companies in the oil sector. It further required the
return of the amounts previously reimbursed. As a result of these measures, OEPC
filed lawsuits in Ecuadorian tax courts claiming that SRI’s Resolutions denying
them VAT reimbursement were in contravention of Ecuadorian legislation. OEPC
also contended that the measures adopted by SRI were in violation of the Bilateral
Investment Treaty between the United States of America and the Republic of
Ecuador (hereinafter the “BIT”). It therefore initiated international arbitration
proceedings under the UNCITRAL Arbitration Rules.
66. Award see op. cit., No. 64, par. 188-190.
67. CMS Gas Transmission Company v. The Argentine Republic (Case No. ARB/01/8) Award,
1 2 May 20 05 . The ba ckg round t o t he c ase c once rn s A rg ent in a’s en ergy
privatization incentives in the early 1990s, which included allowing tariffs to be
calculated in dollars and then converted into pesos at the prevailing exchange
rate, and to adjust tariffs every six months to reflect changes in inflation. TGN was
one of the state-owned companies that was privatized. CMS’s acquisition of TGN
represented almost 30% TGN’s shares. Following a severe economic crisis towards
the end of the 1990s, the Argentine government called for a meeting with the
representatives of the gas companies in order to call for a temporary suspension
of the US PPI adjustment of the gas tariffs. They entered into an agreement with
the Argentine government for the temporary suspension, with the understanding
that this suspension would not be permanent nor affect the companies’ rights
under their license agreements. Soon afterwards it was apparent that the
agreement would not be implemented and the temporary suspension would not
be lifted. Also, in 2001, the Argentine government introduced decree No. 1570/
2001, which limited the right to withdraw deposits from bank accounts. Default
was declared and several presidents succeeded one another in a matter of a few
days. Argentina then enacted Emergency Law 25.561 on 6 January 2002, which
introduced a reform of the foreign exchange system. CMS claimed that the
aggregate of these measures harmed its investment, creating a cause of action by
virtue of the BIT and the ICSID Convention.

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e _it E d it
s law minimum standard.
identical with the customary international io It
w
concluded that it was not different from the customary international law

n
o
minimum standard:

D Br

y
“the Treaty standard of fair and equitable treatment and its connection with the

nl
required stability and predictability of the business environment, founded on
solemn legal and contractual commitments, is not different from the international

O
law minimum standard and its evolution under customary law.”68

u le
d
EC
NAFTA cases

ea
In the Mondev case,69 a subsidiary of Mondev, a Canadian real-estate

se
development company, brought a lawsuit against the City of Boston for breach

R
O
of a contract to develop a shopping mall in Boston. The subsidiary won in the
trial court but the State’s Judicial Court reversed the judgment in 1998 and

e
An
Mondev submitted the claim against the US under the NAFTA investment r
chapter. The Tribunal extensively interpreted the “fair and equitable
Le c tu
treatment” standard by specifically referring to the relationship between “fair
and equitable” and “minimum standard of treatment” in customary
international law and developed its reasoning on the evolutionary character of
the minimum standard. The award70 stated that “the Tribunal need not pass
upon all the issues debated before it as to the Free Trade Commission’s
interpretations of 31 July 2001”. But in its view,
“there can be no doubt that, by interpreting Article 1105(1) to prescribe the
customary international law minimum standard of treatment of aliens as the
minimum standard of treatment to be afforded to investments of investors of
another Party under NAFTA, the term ‘customary international law’ refers to
customary international law as it stood no earlier than the time at which NAFTA
came into force. It is not limited to the international law of the 19th century or even
of the first half of the 20th century, although decisions from that period remain
relevant. In holding that Article 1105(1) refers to customary international law, the

68. Idem, par. 284.

69. Mondev is a Canadian real-estate development company. In the 1970s, a Mondev
subsidiary agreed with the City of Boston and the Boston Redevelopment
Authority to develop a shopping mall in Boston. A bank foreclosed on the
shopping mall in 1990, and Mondev’s subsidiary later brought a lawsuit against
the City and the Authority for breach of contract, among other claims. The
subsidiary won in the trial court, but the Massachusetts Supreme Judicial Court
reversed the judgment in 1998. Mondev then submitted its claim to arbitration
against the United States under the North America Free Trade Agreement’s
(NAFTA) investment chapter, seeking USD 50 million in damages. The claimant
alleged violations of NAFTA Articles 1102 (National Treatment), 1105 (Minimum
Standard) and 1110 (Expropriations and Compensation).
70. See Mondev International LTD v. United States of America, ICSID Case No. ARB(AF)/99/
2 (Award) (11 October 2002).

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e _it E d it
s law, whose content isishaped
FTC interpretations incorporate current international
o
w
by the conclusion of more than two thousand bilateral investment treaties and

n
o
many treaties of friendship and commerce. Those treaties largely and concordantly

D Br
provide for ‘fair and equitable’ treatment of, and for ‘full protection and security’

y
for, the foreign investor and his investments.”71

nl
According to the Tribunal, “it would be surprising if this practice and the

u le
vast number of provisions it reflects were to be interpreted as meaning no
more than the Neer Tribunal (in a very different context) meant in 1927”.72

d
EC
At the same time, “Article 1105(1) did not give a NAFTA Tribunal an unfettered

ea
discretion to decide for itself, on a subjective basis, what was ‘fair’ or ‘equitable’

se
in the circumstances of each particular case […] the Tribunal is bound by the

R
O
minimum standard as established in State practice and in the jurisprudence of
arbitral tribunals. It may not simply adopt its own idiosyncratic standard of what

e
An
is ‘fair’ or ‘equitable’ without reference to established sources of law”.73 r
Le
In another NAFTA case, United Parcel Service of America Inc. v. Government
of Canada,74 in the award on jurisdiction (22 November 2002), the Tribunal
c tu
recognized the obligatory nature of the FTC’s interpretation on Chapter 11
Tribunals.75 It has also agreed that the “obligation to accord fair and equitable
treatment is not in addition to or beyond the minimum standard”. On the
contrary, “this obligation is included within the minimum standard”.76
In ADF Group Inc. v. United States of America,77 ADF, a steel producer, claimed
damages for alleged injuries resulting from federal legislation and implementing
regulations that required federally-funded state highway projects to use only

71. Idem, par. 125.

72. Idem, par. 117.
73. Idem, par. 119.
74. UPS claimed that Canada Post, which UPS alleged is a letter monopoly, engaged in
anti-competitive practices: in providing its non-monopoly courier and parcel
services (Xpresspost and Priority Courier), it allegedly, unfairly used its postal
monopoly infrastructure to reduce the costs of delivering its non-monopoly
services. UPS alleged that Canada had breached its obligations under the NAFTA,
1) to supervise a “government monopoly” and “state entity” (Arts. 1502(3)(a) and
1503 (2); 2) to accord treatment no les favourable than it accords, in like
circumstances, to its own investors (Article 1102); and 3) to accord treatment in
accordance with international law (Article 1105).
75. “… And in any event the FTC’s interpretation is binding on Chapter 11 Tribunals
including this one”. Award on Jurisdiction, par. 96.
76. Idem, par. 97.
77. The claimant in ADF, a steel producer, claimed damages for alleged injuries
resulting from federal legislation and implementing regulations that required
federally-funded state highway projects to use only domestically produced steel.
The claimant argued, inter alia, that the US breached its NAFTA obligation to
provide fair and equitable treatment, see op.cit., No. 43. For the NAFTA countries’
position in this case see par. 34-37.

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domestically produced steel. In its final Awards io
(9 January 2003), the ICSID Additional
Facility Tribunal recognised the obligatoryw nature of the FTC interpretation and

n
o
relied heavily of the Mondev case in order to address the question whether fair and

D Br
equitable treatment is a reference to customary international minimum standard as

y
well as to discuss the evolving nature of the standard.

nl
The Tribunal, referring to the NAFTA parties’ position with respect to an

u le
evolving customary law, expressed the view that:
“… what customary international law projects is not a static photograph of the

d
EC
minimum standard of treatment of aliens as it stood in 1927 when the Award in

ea
the Neer case was rendered. For both customary international law and the

se
minimum standard of treatment of aliens it incorporates, are constantly in a

R
O
process of development.”78
The question asked by the Tribunal was: “… are the US measures here

e
An
involved inconsistent with a general customary international law standard of r
Le
treatment requiring a host State to accord ‘fair and equitable treatment’ and
‘full protection and security’ to foreign investments in its territory”?79 The
c tu
Tribunal stated:
“We are not convinced that the Investor has shown the existence, in current
customary international law, of a general and autonomous requirement
(autonomous, that is, from specific rules addressing particular, limited contexts) to
accord fair and equitable treatment and full protection and security to foreign
investments. The Investor for instance, has not shown that such a requirement has
been brought into the corpus of present day customary international law by the many
hundreds of bilateral investment treaties now extant. It may be that, in their current
state, neither concordant state practice nor judicial or arbitral case law provides
convincing substantiation (or, for that matter refutation) of the Investor’s position.”80
In agreement with the Mondev Tribunal, the ADF Tribunal stated that: “any
general requirement to accord ‘fair and equitable treatment’ and ‘full protection
and security’ must be disciplined by being based upon State practice and
judicial or arbitral case law or other sources of customary or general
international law”.81 The Tribunal dismissed the Investor’s claims on this point.
In the Loewen Group, Inc. and Raymond L. Loewen v. United States of America82
case, the Loewen Group, Inc., a Canadian company involved in the death care
industry, and its former Chairman and CEO, Raymond Loewen, brought arbitration
claims in October 1998 against the United States under NAFTA, contending the US

78. Idem, par. 179, p. 86.

79. Idem, par. 186, p. 90.
80. Idem, par. 183, p. 88.
81. Idem, par. 184, p. 89.
82. See The Loewen Group, Inc. and Raymond L. Loewen v. United States of America, ICSID
case No. ARB(AF)/98/3.

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s resulted from a jury iverdict
was liable under NAFTA for damages that allegedly
o
w
against the company in a Mississippi state court 83
in 1995-1996. In its final award

n
o
(23 June 2003), the ICSID Tribunal recognised the obligatory nature of the FTC

D Br
interpretation by virtue of Article 1131(2). The Claimants in this case did not

y
challenge this interpretation but argued that the treatment of Loewen violated the

nl
minimum standard. The Tribunal in its decision stated:84

u le
“The effect of the Commission’s interpretation is that ‘fair and equitable
treatment’ and ‘full protection and security’ are not free-standing obligations.

d
EC
They constitute obligations only to the extent that they are recognised by

ea
customary international law. Likewise, a breach of Article 1105(1) is not

se
established by a breach of another provision of NAFTA. To the extent, if at all,

R
O
that NAFTA Tribunals in Metalclad, S.D. Myers and Pope & Talbot, may have
expressed contrary views, those views must be disregarded.”

e
An
The Tribunal noted that “the whole trial (in local courts) and its resultant r
c tu
verdict were clearly improper and discreditable and cannot be squared with
Le
minimum standards of international law and fair and equitable treatment”.85
However, the trial court conduct did not amount to a violation of “fair and
equitable treatment” by the United States because it was not established that
the US had failed to make adequate remedies reasonably available to the
complainants, i.e. the possibility of appeal. The Tribunal concluded that
Loewen had failed to demonstrate that those remedies, in particular resort to
the US Supreme Court, were not reasonably available to it.

Literature. Fatouros, in comparing contingent and non-contingent standards,

notes that “non-contingent standards present certain advantages in that the
treatment they prescribe is determined beforehand and thus, presumably,
does not fall below a minimum standard”.86 In an article on “Some Aspects of
the Australia-China Investment Protection Treaty”, Mo indicates that fair and
equitable treatment imposes an obligation on the contracting parties to
“implement the measures of treatment in accordance with international
standards”.87 Kohona suggests that the phrase “just and equitable treatment

83. Loewen alleged violations of three provisions of NAFTA – the anti-discrimination

principles (Article 1102), the minimum standard of treatment (Article 1105) and
the prohibition against uncompensated expropriation (Article 1110).
84. Idem, par. 128.
85. Idem, par. 137.
86. See Fatouros, op. cit., No. 1. He adds that “the generality and abstraction of these
standards, however, remains an important drawback. It is generally difficult to
determine whether a certain measure is in accordance with them, that is to say,
whether, in the usual treaty terms, it is ‘just’, ‘reasonable’, or ‘equitable’”.
87. Mo, “Some Aspects of the Australia-China Investment Protection Treaty, Journal of
World Trade Law, 25 (1991), No. 3, pp. 43-80, as quoted by Stephen Vasciannie in
“The Fair and Equitable Treatment Standard in International Investment Law and
Practice” op. cit., No. 7.

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io
s occurs, for instance in certain
in accordance with international law” which

88
w
Australian bilateral investment treaties, amounts to the international

n
o
minimum standard. Leben notes that “the fair and equitable treatment

D Br
should be considered as referring to the minimum standard of treatment of

y
aliens, the way this standard has been conceived by customary international

nl
law (from which results the clause “in conformity with international law)”.89

O
Sacerdoti, in its discussion on standards of treatment in BITS, affirms that

u le
“lawfully acquired property is protected by a minimum international

d
standard, which is often defined as fair and equitable”.90

EC

ea
Juillard, 91 commenting on the draft OECD Convention, notes that

se
although its reference to fair and equitable is blurry, there is no doubt about

R
O
the fact that “fair and equitable” is a principle; that this principle is a general
principle of international law; and that the general principle of international

e
law exists independently of the conventional support expressing it”. He
An r
c tu
maintains however that the inability of States to give content to the principle
Le
demonstrates that the common core is only a minimum core. And because the
minimum core is a minimum agreement (“accord minimum”) of States, the
notion of minimum standard arises. He then explains the concept of
minimum standard by making reference to the standard of justice. In support,
he cites the text of the Second Restatement which defines the international
standard of justice in the following terms:92
“The international standard of justice […] is the standard required for the
treatment of aliens by:
a) the applicable principles of international law as established by international
custom, judicial and arbitral decisions, and other recognised sources or, in the
absence of such applicable principles;
b) analogous principles of justice generally recognised by States that have
reasonable developed legal systems.”
Although writing from the perspective of developing countries, Robinson
indicated that fair and equitable treatment “is a classical example of the so-
called international minimum standard claimed by developed countries for
foreign investment”. In his view, during the negotiations on the Article 48 of

88. Kohona, “Investment Protection Agreements: An Australian Perspective”, Journal

of World Trade Law, 21 (1987), pp. 79-103.
89. Charles Leben “L’évolution du droit international des investissements”, in Journée
d’études « Un accord multilatéral sur l’investissement : d’un forum de négociation à
l’autre? » organised by the Société française pour le droit international (1999),
pp. 7-28.
90. G. Sacerdoti, op. cit., No. 34.
91. See Juillard, op. cit., No. 33, pp. 132-34.
92. American Law Institute’s Restatement (Second) of Foreign Relations Law of the United
States, 1965, par. 165.2.

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the Draft United National Code of Conduct s iothe
on Transnational Corporations,
w
Group of 77 collectively believed that the language of fair and equitable

n
o
treatment amounted to the international minimum standard advocated by
developed countries.93

D Br

y
nl
2.2. Fair and equitable treatment as a part of international law

O
including all sources

u le
There is also a view that the “fair and equitable treatment standard” is

d
EC
not expressly limited to the minimum standard as contained in the

ea
international customary law, but takes into account the full range of

se
international law sources, including general principles and modern treaties

R
O
and other conventional obligations. This view was expressed in a 1984 OECD
study and by two NAFTA Tribunals in the Metalclad and S.D. Myers cases.

e
An r
c tu
State practice. In a 1984 study,94 the OECD reviewed the experiences of OECD

Le
Member countries with the main types of intergovernmental agreements used
for the protection and promotion of foreign direct investment in developing
countries, i.e. friendship, commerce and navigation treaties (FCN), investment
guarantee agreements, investment protection treaties, general agreements for
economic co-operation with investment-related clauses and sector-or project-
related agreements. Contributions received from member countries in
response to a questionnaire formed the basis of this analysis.
According to all member countries which commented on this point, “fair
and equitable treatment introduced a substantive legal standard referring to
general principles of international law95 even if this is not explicitly stated and
is a general clause which can be used for all aspects of the treatment of

93. Robinson, “Guidelines for the Organisation of Eastern Caribbean States in

Negotiating Bilateral Investment Treaties” (undated). See also Robinson, “The
Question of a reference to International Law in the United Nations Code of
Conduct on Transnational Corporations” UNCTC Current Studies, Series A,
Number I (1986), p. 2. both as quoted by Vasciannie, op. cit., No. 7.
94. See op. cit., No. 4.
95. A large number and a wide variety of international legal rules are generated by
means other that the explicit consent of states expressed in treaties. “Sometimes
these other kinds of international law are grouped together under descriptive
rubrics like ‘general international law’ or ‘international common law’, but they are
usually better known by their more specific appellations: customary international
law, the general principles of international law, natural law, jus cogens and equity.
Despite diverse sources, international rules not based on treaties share certain
characteristics; among other things, they may sometimes be more generally
applicable to states than are rules emanating from international agreements;
however such rules are typically less definite in their formulation and thus often
more subject to doubt in practice.” An Introduction to International Law, Mark. W.
Janis, Second edition, Little, Brown and Company, 1993, p. 41.

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investments, in the absence of more specific io it
s guarantees. In addition
w
provides general guidance for the interpretation of the agreement and the

n
o
resolution of difficulties which may arise”.

D Br

y
According to the survey, in a considerable number of treaties the principle

nl
of fair and equitable treatment is contained in clauses which specifically refer
to the rules and principles of international law. The examples refer to some

u le
treaties concluded by France which provided for “just and equitable treatment
in conformity with international law or the general principles of international

d
EC
law”; treaties by the US, which stated that “the treatment, protection and

ea
security of the investment shall in no case be less than that required by

se
international law”; and treaties by the UK which provided that, “after

R
O
termination of the treaty, the investment will continue to be protected for a
stated number of years, without prejudice to the application thereafter of the

e
general principles of international law”.
An r
u
c t States,
L e
Jurisprudence. In the case Metalclad Corporation v. United Mexican
Metalclad alleged that its subsidiary COTERIN’s attempt to operate a
96

h azardous waste landfill that it constructed in the municipality of

Guadalcázar had been thwarted by measures attributable to Mexico. Metalclad
commenced an action under the NAFTA, claiming, inter alia, that the alleged
lack of transparency surrounding the municipality’s exercise of authority
breached Article 1105 of the NAFTA and that an ecological decree promulgated
after the claim was made violated Article 1110 on expropriation and
compensation.
In defining the scope and nature of Mexico’s oblig ations under
Article 1105, the Metalclad Tribunal cited a number of other NAFTA provisions
including the preamble and Chapter 18 on transparency requirements.97, 98

96. ICSID, case No. ARB/AF/97/1, Tribunal Decision 30 August 2000. The text of the
award is published in ICSID Review – FILJ (2001)16.
97. Mexico took the view that the Tribunal’s importation and expansion of
conventional transparency obligations not found in customary law amounted to
an excess of jurisdiction. Transparency is a conventional law concept which has
been developed in international trade law (GATT Article X), not the body of
international investment-protection law from which the concept of minimum
standard of treatment expressed in Article 1105 has been derived.
98. In order to avoid this kind of interpretation by arbitral tribunals, the recently
signed US FTAs and the new US model BIT provide in their Article on the
Minimum Standard of Treatment, that “a determination that there has been a breach
of another provision of this Agreement, or of a separate international agreement, does not
establish that there has been a breach of this Article”. The new Canada FIPA also
contains such a clarification: “… the fact that a Tribunal may find that a Party has
breached another obligation of the FIPA, such as National Treatment, does not mean that
that constitutes a violation of the minimum standard of treatment obligation.”

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s to ensure transparency iwas
In the Tribunal’s view, this obligation
oa
component of the duty to ensure that w investors received the minimum

n
o
standard of treatment as guaranteed under Article 1105. The Tribunal

D Br
concluded that “Mexico failed to ensure a transparent and predictable

y
framework for Metalclad’s business planning and investment”,99 and had

nl
accordingly violated Article 1105.

u le
Mexico sought judicial review of the Metalclad award in the deemed
place of arbitration, British Columbia. The Supreme Court of British

d
EC
Columbia found that the Tribunal in this case had exceeded its jurisdiction

ea
by basing its finding on the treaty obligations of transparency that were

se
outside the scope of Chapter 11 and the limited grant of subject matter

R
O
juris diction c on fe rre d up on a Cha pte r 1 1 tribun al by Artic les 1 11 6
and 1117.100 According to the Court, the Tribunal not only interpreted NAFTA

e
Article 1105(1) in a broad manner to include a transparency obligation found
An r
c tu
in NAFTA Chapter 18, but it did so without reference to any authority or
Le
evidence to establish that transparency is a principle that has become part of
c u s t o m a ry l aw. I n t h i s re g a rd , t h e Su p re m e C o u rt s t re s s e d t h a t
“ in ter n ati on a l law” re f e rre d to “cu s tom a ry in ter n at ion a l law” a s
distinguished from conventional international law. In its decision, the Court
of British Columbia also noted its disagreement with the Pope & Talbot
tribunal’s analysis (see below).
In S.D. Myers Inc. v. Canada,101 the US company alleged that Canada
violated Chapter 11 by banning the export of PCB waste to the United States
where S.D. Myers operated a PCB remediation facility. It submitted a claim
under the UNCITRAL Arbitration Rules. In its Article 1105 complaint,
S.D. Myers claimed that the promulgation of the export ban by Canada was
done in a discriminatory and unfair manner that constituted a denial of
justice and a violation of good faith under international law.
In its award, the Tribunal took the view that the terms “fair and
equitable” and “full protection and security” must be read in conjunction

99. Idem, at par. 101.

100. Article 1116 is on “Claim by an Investor of a Party on behalf of itself”. Article 1117
is on “Claim by an Investor of a Party on behalf of an Enterprise”.
101. S.D. Myers, Inc. v. Canada, (13 November 2000), Partial Award. International Legal
Materials 408.

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FAIR AND EQUITABLE TREATMENT STANDARD IN INTERNATIONAL INVESTMENT LAW

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s law. It affirmed that
with treatment according to international iothe
102

inclusion of a “minimum standard” w provision is necessary to avoid what

n
o
might otherwise be a gap. “A government might treat an investor in a harsh,

D Br
injurious and unjust manner, but do so in a way that is no different than the

y
treatment inflicted on its own nationals […] the ‘minimum standard’ is a floor

nl
below which treatment of foreign investors must not fall, even if a government were

O
not acting in a discriminatory manner”. Although it took this position with

u le
respect to the minimum standard, it then cited a statement by Dr. Mann with

d
respect to the content of the fair and equitable.103 Recognising that modern

EC

ea
commentators might consider this statement to be “an over-generalisation”,

se
the majority of two arbitrators nevertheless determined that on the facts of

R
O
this particular case¸ the breach of Article 1102 (National Treatment)
essentially established a breach of Article 1105. By taking this decision, the

e
Tribunal took a breach of a conventional international law rule (National
An r
c tu
Treatment) and equated that with a breach of the minimum standard

Le
although the form, contents and purposes of the two articles differ.104

2.3. Fair and equitable treatment as an independent self-contained

treaty standard
Jurisprudence. An expansive interpretation of Article 1105 was given by the
arbitral tribunal in the case Pope & Talbot Inc. v. Government of Canada.105 In
this case, Pope & Talbot challenged the implementation of the Canada-
US Softwood Lumber Agreement, and the allocations of export quota that had
been made under that Agreement and alleged multiple breaches of the
NAFTA. The Tribunal acknowledged that the text of Article 1105 “suggests that
those elements [of fair and equitable treatment and full protection and

102. Turning to the text of Article 1105, the Tribunal noted that the terms “fair and
equitable treatment” and “full protection and security” cannot be read in
isolation. Rather, the article “must be read as a whole”, and the terms “must be
read in conjunction wit the introductory phrase […] treatment in accordance
with international law”. In light of the general purpose of the article and its
wording the Tribunal stated:
“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 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. The determination must also take into account any specific rules of
international law that are applicable to the case.”
103. F.A. Mann, “British Treaties for the Formation and Protection of Investment”,
British Yearbook of International Law 24, 244 (1981).
104. See J.C. Thomas, op. cit., No. 10.
105. Pope & Talbot Inc. v. Government of Canada, Award on the Merits (10 April 2001).

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s of international i
security] are included within the requirements
o
law…”
However, it commented: w

n
o
Another possible interpretation of the presence of the fairness elements in

D Br

y
Article 1105 is that they are additive to the requirements of international law. That

nl
is, investors under NAFTA are entitled to the international law minimum, plus the
fairness elements. It is true that the language of Article 1105 suggests otherwise,

u le
since it states that the fairness elements are included in international law…
and it concluded that:

d
EC

ea
… the Tribunal interprets Article 1105 to require that covered investors and

se
investments receive the benefits of the fairness elements under ordinary
standards applied in the NAFTA countries, without any threshold limitation that

R
O
the conduct complained of be ‘egregious’, ‘outrageous’ or ‘shocking’ or otherwise
extraordinary.106

e
An r
c tu
No case has been found which applies the “fair and equitable treatment”

Le
standard of a bilateral investment treaty as an autonomous treaty standard. In
one case however, Tecmed S.A. v. The United Mexican States,107 the Tribunal
mentions that approach as one of the alternative approaches but it goes on to
judge the claim against the international law principle of good faith. Técnicas
Medioambientales Tecmed, S.A., filed a claim with the ICSID Additional
Facility alleging that the Mexican government's failure to re-license its
hazardous waste site contravened various rights and protections set out in the
bilateral investment treaty (BIT) between Spain and Mexico. In its Award, the
ICSID Tribunal stated:
“the scope of the undertaking of fair and equitable treatment under Article 4(1) of the
Agreement […] is that resulting from an autonomous interpretation, taking into
account the text of Article 4(1) of the Agreement according to its ordinary meaning
[Article 31(1) of the Vienna Convention], or from international law and the good faith
principle, on the basis of which the scope of the obligation assumed under the
Agreement and the actions related to compliance therewith are to be assessed.”

Literature. Dr. Mann,108 who wrote primarily with reference to UK Bilateral

Investment Treaties, is widely cited as the main dissident voice by most of the
commentators who wrote on this issue.
In his view, the proposition that investments shall have fair and equitable
treatment and full protection and security constitutes the “overriding obligation”.
This overriding obligation is wider than simply a prohibition on arbitrary,

106. By expressing this view, the Tribunal dismissed the criteria expressed in the
cases in the early 1920s which first articulated the minimum standard.
107. Técnicas Medioambientales Techmed S.A. v. the United Mexican States, ICSID, case
No. ARB(AF)/00/2 (Award) (29 May 2003).
108. F.A. Mann, see op. cit., No. 103.

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s
discriminatory or abusive treatment; it also embraces io“may
other standards as it
w
well be that other provisions of the Agreements affording substantive protection

n
o
are no more than examples or specific instances of this overriding duty”. Mann

D Br
goes on to say that it is misleading to equate the fair and equitable with the

y
minimum standard: this is because “the terms ‘fair and equitable treatment’

nl
envisage conduct which goes far beyond the minimum standard and afford

O
protection to a greater extent and according to a much more objective standard

u le
than any previously employed form of words. A tribunal would not be concerned

d
EC
with a minimum, maximum or average standard. It will have to decide whether

ea
in all circumstances the conduct in issue is fair and equitable or unfair and

se
inequitable. No standard defined by other words is likely to be material. The

R
terms are to be understood and applied independently and autonomously”.109
O
Mann110 addressed this in different and far less expansive terms in his

e
treatise published a year after the above mentioned one. He noted that:
An r
c tu
“In some cases, it is true, treaties merely repeat, perhaps in slightly different
Le
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 amount to more than a confirmation of the obligation to act in good faith, or to
refrain from abuse or arbitrariness.”
Dolzer and Stevens 111 state that “the fact that parties to BITS have
considered it necessary to stipulate this standard as an express obligation
rather than rely on a reference to international law and thereby invoke a
relatively vague concept such as the minimum standard is probably evidence
of a self-contained standard. Further, some treaties refer to international law
in addition to the fair and equitable treatment, thus appearing to reaffirm that
international law standards are consistent with, but complementary to, the
provision of the BIT”.

109. Patrick G. Foy and Robert J.C. Deane, commenting on this position noted that a
new argument was introduced during the NAFTA tribunals’ debate: “the
customary international law norms regarding fair and equitable treatment of
foreign nationals and their property are evolving. Dr Mann’s views represent
contemporary international law standards not required to have been found in
the claims brought before the Mexican Claims Commission, and not surprisingly
inconceivable in that era. On this view, Dr Mann’s perspective is not contrary to
the belief that ‘fair and equitable treatment’ is to be assessed according to
customary international law, but rather represents an expanded, contemporary
understanding of customary international law”, “Foreign Investment Protection
under Investment Treaties: Recent Developments under Chapter 11 of the North
American Free Trade Agreement” in ICSID Review – Foreign Investment lLaw
Journal, Vol. 16, No. 2, Fall 2001.
110. F.A. Mann, “The Legal Aspects of Money” (1982) p. 510, as quoted by J.C. Thomas,
op. cit., No. 10, p. 58.
111. See op. cit., No. 34.

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According to an UNCTAD112
Secretariat io an
s study, at the policy level,
w
approach that equates fair and equitable treatment with the international

n
o
minimum standard is problematic in certain respects:

D Br

y
If States and investors believe that the fair and equitable standard is entirely

nl
interchangeable with the international minimum standard, they could indicate
this clearly in their investment instruments; but most investment instruments do

u le
not make an explicit link between the two standards. Therefore, it cannot be
readily argued that most States and investors believe fair and equitable

d
EC
treatment is implicitly the same as the international minimum standard.

ea
Attempts to equate the two standards may be perceived as paying insufficient

se
regard to the substantial debate in international law concerning the international

R
O
minimum standard. More specifically, while the international minimum standard
has strong support among developed countries, a number of developing countries

e
An
have traditionally held reservations as to whether this standard is a part of r
c tu
customary international law.
Le
The UNCTAD study goes on to say that “fair and equitable treatment is
not synonymous with the international minimum standard. Both standards
may overlap significantly with respect to issues such as arbitrary treatment,
discrimination, and unreasonableness, but the presence of a provision
assuring fair and equitable treatment in an investment instrument does not
automatically incorporate the international minimum standard for foreign
investors. Where the fair and equitable standard is invoked the central issue
remains simply whether the actions in questions are in all circumstances fair
and equitable or unfair and inequitable.
On this point, Vasciannie113 notes that “the plain meaning approach is no
doubt, entirely consistent with canons of interpretation in international law”
according to the Article 31, par. 1 of the Vienna Convention on the Law of
Treaties (1969).114

3. Meaning and elements of the content of the standard as defined

by arbitral tribunals
The lack of general agreement on the content of the “fair and equitable”
standard has engendered debate as to the proper prescriptive role the

112. “Fair and equitable treatment”, UNCTAD series on issues in international investment
agreements, 1999.
113. Vasciannie, op. cit., No. 7.
114. Article 31(1) of the Vienna Convention on the Law of Treaties on the “General
Rule of Interpretation” stipulates that: “a treaty shall be interpreted in good faith
in accordance with the ordinary meaning to be given to the terms of the treaty in
their context and in light of its object and purpose”.

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io
s investment and constraints
principle plays in the protection of international
on state sovereignty. 115
w

n
o
T h oug h m os t inve s t m e n t prote c t i on ag re em e n t s re qu ire t h at

D Br

y
investments and investors covered receive “fair and equitable” treatment,

nl
there is no general agreement on the precise meaning of this principle.116 On
this point Professor Muchlinski117 has stated that:

u le
“The concept of fair and equitable treatment is not precisely defined. It offers a
general point of departure in formulating an argument that the foreign investor

d
EC
has not been well treated by reason of discriminatory or other unfair measures

ea
being taken against its interests. It is, therefore, a concept that depends on the

se
interpretation of specific facts for its content. At most, it can be said that the

R
O
concept connotes the principle of non-discrimination and proportionality in the
treatment of foreign investors.”

e
An
Professor Juillard118 suggested that the inclusion of the fair and equitable r
Le
standard in investment agreements provides a basic auxiliary element for the
c tu
interpretation of the other provisions in the agreement and for filling gaps in
the treaty. He also maintains that the interpretation of the fair and equitable
treatment, an imprecise notion – “notion aux contours imprécis” will be
progressively developed through the “praetorian” work of the arbitral
tribunals.
Arbitral tribunals have indeed done some work in this respect. In their
interpretation of the “fair and equitable standard”, they have gone beyond the
specific discussion on the relationship between the fair and equitable
treatment standard and the minimum standard as defined by customary
international law and attempted to identify the elements encompassed in this
standard. These elements can be analysed in four categories:119 a) Obligation
of vigilance and protection, b) Due process including non-denial of justice and
lack of arbitrariness, c) Transparency and respect of investor’s legitimate
expectations and d) Autonomous fairness elements.

115. Patrick G. Foy and Robert J.C. Deane, see op. cit., No. 109.
116. Rudolf Dolzer and Magrete Stevens, see op. cit., No. 34; Mahmoud Salem, in “Le
développement de la protection conventionnelle des investissements étrangers”,
Journal du Droit International, No. 3 (1986) pp. 579-626.
117. Peter Muchlinski, “Multinational Enterprises and the Law” (1995), p. 625.
118. P. Juillard, see op. cit., No. 33.
119. The Tribunals, in the first four of these categories examined in the present
survey, defined “fair and equitable” in accordance with international law, while
one Tribunal adopted an autonomous definition.

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3.1. Obligation of vigilance and protection io
w make reference to the obligation
In a number of decisions, the tribunals

n
o
of vigilance, also phrased as an obligation to exercise due diligence in

D Br
protecting foreign investment120 in order to define an act or omission of the

y
nl
State as being contrary to fair and equitable treatment and full protection and
security. In these cases, the standards of “fair and equitable treatment” and

u le
“full protection and security” have been interlocking and examined together
by tribunals. The latter standard, full protection and security, is often included

d
EC
in treaties as a separate obligation and it applies essentially when the foreign

ea
investment has been affected by civil strife and physical violence. The

se
R
O

e
An r
Le c tu

120. “Il est des devoirs internationaux qui consistent à exercer sur les individus
soumis à l’autorité de l’État une vigilance correspondante aux fonctions et aux
pouvoirs dont l’État est investi. Celui-ci n’est pas internationalement obligé
d’empêcher d’une façon absolue que certains faits se réalisent ; mais il est tenu
d’exercer, pour les empêcher, la vig ilance qui rentre dans ses fonctions
ordinaires. Le défaut de diligence est une inobservation du devoir imposé par le
droit international, sans qu’il y ait alors à parler de faute au sens propre du mot”:
It is one of the international duties consisting of exercising on the individuals
under the authority of the State, a vigilance corresponding to the functions and
the power vested by the State. The State does not have the international duty to
prevent – in an absolute way – certain facts from happening; but it is obliged to
exercise, in order to prevent them, a vigilance under its ordinary functions. The
lack of diligence is a failure to observe the duty imposed on the State by
international law, without necessary involving what would be fault in the usual
sense of the term. [Translation by the Secretariat]. Anzilotti, “La responsabilité
internationale des États – À raison des dommages soufferts par les étrangers”,
Revue Générale de Droit International Public (1906), p. 291. Brownlie sees the due
diligence standard as a version of national treatment “Circumstances, for
example the outbreak of war, may create exceptions to the international
treatment rule, even when this applies in principle. Where a reasonable care or
due diligence standard is applicable, then diligentia quam in suis might be
employed , and would represent a more sophisticated version of the national
treatment principle […] it would allow for the variations in wealth and
educational standards between the various states of the world and yet would not
be a mechanical national standard, tied to equality. Though the two are
sometimes confused, it is not identical with national treatment…” Jan Brownlie,
see op. cit., No. 32, p. 504. In the Harvard Draft Convention on the International
Responsibility of States for Injuries to Aliens, 1929, “due diligence is a standard
not a definition”, Hildebrando Accioly, Recueil des Cours, 1959, pp. 400, 401.

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s a standard derivingio
obligation of vigilance has been considered from
customary international law. w121

n
o
In Asian Agricultural Products Ltd. (AAPL) v. Republic of Sri Lanka122 (see

D Br

y
above), one of the main issues was whether a government assurance of “full

nl
protection and security” in Article 2(2) of the Sri Lanka/UK Bilateral
Investment Treaty created an obligation of strict liability for each State Party.

u le
Judge Asante, in his dissenting opinion, made the following comments on the
meaning of fair and equitable treatment:

d
EC
Article 2(2) prescribes the general standard for the protection of foreign

ea
investment. The requirement as to fair and equitable treatment, full protection

se
and security and non-discriminatory treatment all underscore the general

R
O
obligation of the host state to exercise due diligence in protecting foreign
investment in its territories, an obligation that derives from customary

e
An
international law. The general nature of the protection standard in Article 2(2) is r
c tu
reflected in the absence of any specific situation or specific compensation
Le
standards. Thus …it is distinguished from articles 4 and 5 which stipulate
specific standards to address special situations, namely losses incurred in civil
disturbances and expropriation respectively.

121. Alfred Verdross “… Dans toutes ses mesures de répression, l’État doit développer,
comme dans les mesures de prévention, l’activité d’un État normal. C’est donc
selon le principe du standard international qu’il faudra apprécier si les mesures de
prévention ou de réaction […] sont ou non suffisantes au point de vue de droit des
gens […] De l’avis des gouvernements [à la Société des Nations à l’occasion de la
préparation de la Conférence pour la codification du droit international] la
diligence à prendre en considération est celle qu’on peut attendre d’un État civilisé”:
In all its corrective measures, the State has to develop as in its preventive
measures, the activities of a normal State. It is therefore according to the principle
of the international standard that we will have to evaluate whether the preventive
measures or the responses […] are or not sufficient from the point of view of
international law […] According to the opinion of governments [in the Society of
Nations on the occasion of the preparation for the Conference on the codification
of international law] the diligence to take into consideration is the one, one can
expect from a civilized nation” [translation by the author] “Les Règles Internationales
concernant le Traitement des Étrangers”, 37, R.C.A.D.I. 325 (1931), p. 388.
122. Asian Agricultural Products Ltd. (AAPL) v. Republic of Sri Lanka, see op. cit., No. 55.
One of the main issues was whether a government assurance of “full protection
and security” in Article 2(2) of the Sri Lanka/United Kingdom Bilateral
Investment Treaty (1980) created and obligation of strict liability for each State
Party. Both the majority judgement and the dissent denied the strict liability
approach. The relevant Article 2(2) was as follows: “Investments or nationals or
companies of either Contracting Party shall at all times be accorded fair and
equitable treatment with full protection and security in the territory of the other
Contracting Party”.

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In the case of American Manufacturings io of
& Trading (AMT), INC. v. Republic
Zaire 123
(see above), the ICSID Tribunalw
found that Zaire has “manifestly failed

n
o
to respect the minimum standard required of it by international law” and

D Br
based its decision on the following reasoning:

y
nl
“The obligation [to accord fair and equitable treatment and protection and
security] […] constitutes an obligation of guarantee for the protection and

u le
security of the investments made by nationals and companies of one or the other
Party […] The obligation incumbent upon Zaire is an obligation of vigilance, in

d
EC
the sense that Zaire […] shall take all measures necessary to ensure the full

ea
enjoyment of protection and security of its [the US] investment and should not be

se
permitted to invoke its own legislation to detract from any such obligation. Zaire

R
O
must show that it has taken all measures of precaution to protect the investments
of AMT in its territory.”

e
An
In Wena Hotels LTD (UK) v. Arab Republic of Egypt,124 the claimant had r
c tu
entered into a lease agreement with the State-owned Egyptian Hotels
Company (“EHC”) for the management and improvement of two hotels. Le
Following a dispute with respect to the lease agreement, agents of the EHC
forcibly and illegally seized both hotels. The ICSID Tribunal in interpreting a
similar provision from the BIT between Egypt and the UK held that:
The obligation incumbent on the [host state] is an obligation of vigilance, in the
sense that the [host state] shall take all measures necessary to ensure the full
enjoyment of protection and security of its investments and should not be
permitted to invoke its own legislation to detract from any such obligation.
Finding that there was sufficient evidence that Egypt was aware of the
EHC’s intention to seize the hotels yet took no preventative action, did nothing
to protect Wena’s investment after the illegal seizures, made no attempts to
return the hotels to Wena following the illegal seizures, refused to compensate
Wena for its losses and failed to prosecute the EHC or its senior officials, “Egypt
violated its obligation [under the BIT] by failing to accord Wena’s investments
fair and equitable treatment and full protection and security”.

123. American Manufacturing & Trading), Inc. (AMT) (US) v. Republic of Zaire, see op. cit.,
No. 58.
124. Wena Hotels Ltd. (U.K.) v. Arab Republic of Egypt, ICSID Case No. ARB/98/4 (Award)
(8 December 2000), [annulment denied] reprinted in 41 I.L.M. 896 (2002).

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3.2. Due process/denial of justice/arbitrariness io
wof denial of justice in the matter of
The majority of the cases arise out 125

n
o
procedure, some deficiency in the vindication and enforcement of the

D Br
investor’s rights. The principle of “denial of justice”126 has been considered as

y
nl
being part of customary international law and is used in three senses.127 In
t h e broade st se ns e, it “ se em s to embrace t he w hole fie ld of Sta te

u le
responsibility, and has been applied to all types of wrongful conduct on the
part of the State towards aliens”128 it includes therefore acts or omissions of

d
EC
the authorities of any of the three branches of government, i.e. executive,

ea

se
R
O

e
An r
Le c tu
125. E. Borchard “Long before article 38 of the Permanent Court of International Justice
made the ‘general principles of law recognised by civilised states’ a source of
international law, foreign offices and arbitral tribunals had relied on such
general principles to work out a loose minimum which they applied constantly
in interstate practice […] It is well known that aliens may be denied numerous
privileges […] and may be restricted […] in municipal law. Yet the alien must
enjoy police and judicial protection for such rights as the local law grants and its
arbitrary refusal is a denial of justice [emphasis added]. Bad faith, fraud, outrage
resulting in injury, cannot be defended on the ground that it is custom of the
country to which nationals must almost submit”. He also adds that although it is
difficult to give a definition of the substantive content of the standard, on the
proce du ral side he is in le ss dou bt “fair cour ts, really ope n t o aliens,
administering justice honestly impartially, without bias or political control, seem
essential elements of a fair trial and objective justice required of all systems”.
“The ‘Minimum standard’ of the treatment of aliens’’ Michigan Law Review 1940,
Vol. 3, No. 4. pp. 445-461. Referring to the procedural aspects of the standard, Root
in 1910 characterised it as a “standard of justice, very simple, very fundamental
and of such general acceptance by all civilised countries as to form a part of the
international law of the world” Root, “The Basis for Protection to Citizens
Residing Abroad”, 4 PROC. AM. SOC.INT.L.16 at 21 (1910).
126. The principle of denial of justice encompasses both procedural and substantive
wrongdoing by the court – both improper procedures and unjust decisions. This
dual definition of denial of justice has become widespread in last century –
among scholars, in attempts to codify the law of state responsibility to aliens
and in arbitral decisions. See Alwyn V. Freeman “Steady international practice
[…] as well as the overwhelming preponderance of legal authority, recognises
that not only flagrant procedural irregularities and deficiencies may justify
diplomatic complaint, but also gross defects in the substance of the judgement
itself” in “The International Responsibility of States for Denial of Justice”, 309
(Kraus Reprint Co. 1970) (1938).
127. F.V. García-Amador et al., Recent Codification of the Law of State Responsibility for
Injuries to Aliens (180) 1974.
128. Idem.

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legislative or In the narrowests
judiciary.129 ioof a
sense, it is “limited to refusal
w
State to grant an alien access to its courts or a failure of a court to pronounce

n
o
a judgement”. There is also an intermediary sense, in which it is “employed in

D Br
connection with the improper administration of civil and criminal justice as

y
regards an alien, including denial of access to courts, inadequate procedures,

nl
and unjust decisions”.130, 131 The majority of the cases examined approach

O
fair and equitable treatment in the intermediate sense and many also address

u le
d
EC

ea

se
R
O

e
An r
Le c tu
129. Charles de Visser emphasizes the role of the judiciary: “Le déni de justice est toute
défaillance dans l’organisation ou dans l’exercice de la fonction juridictionnelle
[de l’État] qui implique manquement à son devoir international de protection
judiciaire des étrangers”, en ajoutant toutefois, “qu’il importe peu qu’à l’origine
de cette défaillance de la fonction juridictionnelle se trouve un fait qui, de point
de vue du droit interne, apparaît comme imputable à un autre pouvoir de
l’État…”: Denial of justice is any deficiency in the organisation or in the exercise
of the jurisdictional function which implies a deficiency in its [the State’s]
international duty to judicial protection of foreigners”, adding however, that “it is
not very important that this deficiency originated from a fact which from the
national law point of view, appears to draw from a different power of the
State…”. “La responsabilité des États”, Recueil des Cours (1923), as cited by
H. Accioly in Recueil des Cours (1959), op. cit., No. 120, p. 379. Hackworth in its Digest
of International Law indicated that, “in a wider sense, denial of justice can result
from acts or omissions of the authorities of any of the three branches of
government (executive, legislative or judiciary)”. A. Freeman shares the same
view in “The International Responsibility of States for Denial of Justice”, (1938) both as
cited by Accioly, op. cit., No. 120, p. 380.
130. See Garcia-Amador, op. cit., No. 127.
131. Brownlie describes the Harvard Research Draft on International Law as the “best
guide” to the meaning of denial of justice: “denial of justice exists where there is
a denial, unwarranted delay or obstruction of access to courts, gross deficiency
in the administration of judicial or remedial process, failure to provide those
guarantees which are generally considered indispensable to the proper
administration of justice or a manifestly unjust judgement. An error of a
national court which does not produce manifest injustice is not a denial of
justice”, See op. cit., No. 32 at 506. In Azinian v. the United Mexican States the
Tribunal held that: “A denial of justice could be pleaded if the relevant courts
refuse to entertain such a suit, if they subject it to undue delay, or if they
administer justice in a serious inadequate way […] There is a fourth type of
denial of justice, namely the clear and malicious misapplication of the law. This
type of wrong doubtless overlaps with the notion of ‘pretence of form’ to mark a
violation of international law”, ICSID case No. ARB(AF)/97/2, par. 102-103.

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s A significant numberiofothe
in their analysis the concept of arbitrariness. 132

w refer to the ELSI case (see below).

recent cases supporting this interpretation

n
o
Cases arising under BITS. In the case concerning Elettronica Sicula (ELSI) (US)

D Br

y
v. Italy133 (see above), the Chamber of the International Court of Justice (I.C.J),

nl
although it did not interpret the “fair and equitable treatment” provision of

O
the relevant international agreement, it nevertheless made an historical

u le
interpretation of the Article I of the Supplementary Agreement, which

d
proscribes certain arbitrary and discriminatory measures134 in the context of

EC

ea
due process of law. It rejected the argument that a finding by a local court of

se
an unlawful act necessarily implies that the act is arbitrary135 and described

R
arbitrariness at international law as follows:

O
“… it must be borne in mind that the fact that an act of a public authority may

e
have been unlawful in municipal law does not necessarily mean that that act was
An r
c tu
unlawful in international law, as a breach of treaty or otherwise […] To identify
Le
arbitrariness with mere unlawfulness would be to deprive it of any useful
meaning in its own right. Nor does it follow that an act was unjustified, or
unreasonable, or arbitrary that, that act is necessarily to be classed as arbitrary
in international law, though the qualification given to the impugned act by a
municipal authority may be a valuable indication.”

132. A. Verdross, “L’État viole le droit des gens s’il porte arbitrairement atteinte aux
droits privés des étrangers, fût-ce même par un acte de législateur. Et cela même
si de tels actes ne sont pas dirigés contre les personnes en raison de leur qualité
d’étranger, mais se fondent sur des lois générales, applicables aussi aux
nationaux”: The State violates international law if it arbitrarily impairs the
private rights of aliens, even through a legislative act. And this, even if such acts
are not directed against these persons because they are aliens, but are founded
on general laws, applicable to nationals as well [translation by the Secretariat].
See op. cit., No. 121, pp. 358-9. The Restatement (Third) of the Foreign Relations Law of
the Unites States defines “an arbitrary act” as “an act that is unfair and
unreasonable, and inflicts serious injury to established rights of foreign
nations…”, par. 712 reporter’s note 11 (1986).
133. Elettronic Sicula S.P.A. (ELSI) (US v. Italy), see op. cit., No. 56.
134. ELSI provides interesting elements as to the meaning of the terms minimum
standard in international customary law and fair and equitable treatment. In
applying a treaty describing the rules contained therein as “principles of
equitable treatment”, the Chamber equated “constant protection and security”
to the “international minimum standard”. Also, its formulation of arbitrariness
at international law declined to equate mere unlawfulness at domestic law,
without more, with arbitrariness.
135. The Chamber also noted that while local court findings may be relevant, the
standard of arbitrariness under international law may be quite different,
Judgement par. 29.

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Citing the ICJ’s judgement in the Asylumscase, the Chamber statediothat:
136

wopposed to a rule of law, as something

“Arbitrariness is not so much something

n
o
opposed to the rule of law137 […] It is a wilful disregard of due process of law, an

D Br

y
act which shocks, or at least surprises, a sense of judicial property.”

nl
In his dissent, Judge Schwebel concurred in the “Chambers’ classic
concept of what is an arbitrary act in international law”. He then interpreted

u le
Article I as creating an obligation of result (as opposed to an obligation of
conduct) and stated that “failure to correct an arbitrary measure constitutes a

d
EC
violation of the FCN treaty regardless of the existence of local remedies”.138

ea

se
In Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil (US) v. Republic of
Estonia 139 (see above), the ICSID tribunal connected the standard under

R
O
Article II(3)(a) of the Us-Estionia BIT to the minimum standard and described
its elements as follows:

e
An r
c tu
“Acts that would violate this minimum standard would include acts showing a

Le
wilful neglect of duty, an insufficiency of action falling far below international
standards, or even subjective bad faith.”
Regarding “arbitrariness” under Article II(3)(b), the Tribunal, having
regard to the totality of the evidence, regarded the decision by the Bank of
Estonia to withdraw Genin’s license as justified.140 It stated that:
“In light of this conclusion, in order to amount to a violation of the BIT, any
procedural irregularity that may have been present would have to amount to bad
faith, a willful disregard of due process of law or an extreme insufficiency of
action. None of these are present in the case at hand. In sum, the Tribunal does
not regard the license withdrawal as an arbitrary act that violates the tribunal’s
‘sense of judicial propriety’.”141

136. Asylum, Judgement, ICJ Reports, 1950, at p. 284.

137. According to Murphy, “this interpretation renders a previously useful standard of
protection less effective. Under this approach a local government could pass
various laws and administrative regulations that arbitrarily impugn the interest
of foreign investors. Yet so long as the government provides a judicial forum in
which a court applies those laws and regulations, then the measures will not be
deemed arbitrary under the FCN treaty”. Sean D. Murphy, see op. cit., No. 56.
138. This analysis of obligation of “conduct” and “result” originates in the
International Law Commission’s Draft Articles on State Responsibility.
139. Alex Genin, v. Republic of Estonia, see op. cit., No. 61.
140. It is interesting that, although the Tribunal examined separately these two
provisions of the US-Estonia BIT (obligations to accord “fair and equitable
treatment” and “non-discriminatory and non-arbitrary treatment”), it reached
the same conclusions on the interpretation of the standards.
141. Citing the ELSI case.

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In Compagnie Générale des Eaux (Vivendi) io
s v. Argentine Republic, Vivendi 142

w
instituted ICSID proceedings against Argentina, alleging that governmental

n
o
acts taken by the Province of Tucuman abrogated a concession agreement for

D Br
the provision of sewage services between Vivendi and Tucuman, and that the

y
failure of the Argentine government to prevent Tucuman’s acts or its failure to

nl
cause Tucuman to comply with the concession contract, were a violation of

O
the Argentine-French BIT. Vivendi argued, inter alia, that the acts of the

u le
government, or its failure to act, breached Argentina’s obligation to accord fair

d
EC
and equitable treatment to Vivendi’s investment. The Tribunal stated:

ea
“Because the Tribunal has determined that on the facts presented, Vivendi should

se
first have challenged the actions of the Tucumán authorities in its administrative

R
O
courts, any claim against the Argentine Republic could arise only if Claimants
were denied access to the courts of Tucumán to pursue their remedy under

e
Article 16.4 or if the Claimants were treated unfairly in those courts (denial of
An r
c tu
procedural justice) or if the judgment of those courts were substantively unfair
Le
(denial of substantive justice) or otherwise denied rights guaranteed to French
investors under the BIT by the Argentine Republic.
However, s in ce Vivendi failed to see k relie f from t he Tucumán
administrative courts and since there was no evidence before the Tribunal
that these courts would have denied Vivendi procedural or substantive justice,
the Tribunal found that there was no basis on this ground to hold the
Argentine Republic liable under the BIT.
In Middle East Cement Shipping and Handling Co S.A. (Greece) v. Egypt,143
Middle East Shipping instituted ICSID arbitration proceedings against Egypt
under the Greece-Egypt BIT to recover losses related to a concession
agreement.144 Relying on Article 2.2 of the BIT the Tribunal stated:
“The BIT requires that Investments by investors of a Contracting Party shall, at
all times, be accorded fair and equitable treatment and shall enjoy full protection
and security, in the territory of the other Contracting Party.” This BIT provision
must be given particular relevance in view of the special protection granted by
Art. 4 against measures “tantamount to expropriation”, and in the requirement
for “due process of law” in Art. 4.(a). ‘Therefore, a matter as important as the
seizure and auctioning of a ship of the Claimant should have been notified by a

142. Companie Générale des Eaux (Vivendi) (France) v. Argentine Republic, ICSID case
No. ARB/97/3 (Award) (21 November 2000).
143. Middle East Cement Shipping and Handling Co S.A. (Greece) v. Egypt ICSID Case
No. ARB/99/6 (Award) (12 April 2002).
144. The Claimant alleged that the actions of Egyptian authorities resulted in a
de facto revocation of its license to import and store cement, which in turn led to
substantial losses with respect to its cement supply agreements and other
damages. Among the damages were those caused by Egypt’s administrative
seizure and subsequent auction of a ship owned by the Claimant.

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dire ct communica tion for which thes law No. 3 08 pro vided under iot he
1st paragraph of Art. 7, irrespective ofw
whether there was a legal duty or practice

n
o
to do so by registered mail with return receipt requested as argued by Claimant

D Br
(CV 4). The Tribunal finds that the procedure in fact applied here does not fulfill

y
the requirements of Art. 2.2 and 4 of the BIT.

nl
Thus, the Tribunal concludes that the [Poseidon] was taken by a “measure the

u le
effects of which would be ‘tantamount to expropriation’ and that the claimant is
entitled to a compensation…”

d
EC
In Lauder (US) v. Czech Republic,145 the Claimant initiated UNCITRAL

ea
arbitration proceedings against the Czech Republic for alleged breaches of the

se
US-CSFR BIT, based on treatment accorded by the State’s Media Council to his

R
O
investment interest in a joint venture media company (CNTS).146 Lauder
argued that the Media Council failed to accord fair and equitable treatment to

e
An
his investment by 1) reversing prior approvals regarding CNTS’s exclusive right r
c tu
to use, benefit from and maintain a television broadcasting license; and
2) engaging in hostile conduct towards CNTS. The Tribunal stated: Le
“As with any treaty, the Treaty shall be interpreted by reference to its object and
purpose, as well as by the circumstances of its conclusion (Vienna Convention on
the Law of Treaties, Articles 31 and 32). The preamble of the Treaty states that
the Parties agree ‘that fair and equitable treatment of investment is desirable in
order to maintain a stable framework for investment and maximum effective
utilization of economic resources’. The Arbitral Tribunal notes that there is no
further definition of the notion of fair and equitable treatment in the Treaty.
The United Nations Conference on Trade and Development has examined the
meaning of this doctrine. Fair and equitable treatment is related to the traditional
standard of due diligence and provides a ‘minimum international standard which
forms part of customary international law’. 147 In the context of bilateral
investment treaties, the ‘fair and equitable’ standard is subjective and depends
heavily on a factual context. It ‘will also prevent discrimination against the
beneficiary of the standard, where discrimination would amount to unfairness or
inequity in the circumstances’.”148

145. Lauder (US) v. Czech Republic (Final Award) (3 September 2002) available at
www.mfcr.cz/scripts/hpe/default.asp.
146. The joint venture participants were CEDC (a German company owned by Lauder),
CET 21 (a Czech company), and the Czech Savings Bank.
147. UN Conference On Trade & Development: Bilateral Investment Treaties In The
Mid-1990s at 53, UN Doc. UNCTAD/ITE/IIT/7, UN Sales No. E.98.II.D.8 (1998)
(English version).
148. UN Conference On Trade & Development: Fair And Equitable Treatment, Vol. III
at 10,15, UN Doc. UNCTAD/ITE/IIT/II, UN Sales No. E.99.11.D.15 (1999) (English
version).

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The Tribunal determined that none s of the challenged measures io
amounted to breach of the obligation tow provide fair and equitable treatment,

n
o
referencing the earlier reasoning with respect to arbitrary and discriminatory

D Br
measures:

y
nl
“… most of the arguments denying the existence of any arbitrary and
discriminatory measure from the Czech Republic as from 1996 also apply to the

u le
Respondent’s compliance with the obligation to provide fair and equitable
treatment.”

d
EC
The Tribunal held that the Media Council acted consistently in its

ea
application of the law, and dismissed the fair and equitable treatment claim.

se
R
O
Cases arising under NAFTA. In S.D. Myers Inc v. Canada (see above), the
Tribunal took the view that the terms “fair and equitable” and “full protection

e
An
and security” must be read in conjunction with treatment according to
r
c tu
international law. It added that:
Le
“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…” 149
However, the S.D. Myers Tribunal decided not to examine the specific
application of Article 1105 to the facts of the case but to rely instead on its
finding regarding the breach of Article 1102 on National Treatment. It
concluded that, in the present case, the discrimination suffered by the
claimant in breach of the national treatment provision “essentially establishes
a breach of Article 1105 as well”.150
In the Mondev International LTD v. US151 case (see above), after having
shown the importance of the specific context in which an Article 1105(1) claim

149. The Tribunal finally added that in some cases, the breach of a rule of
international law by a host Party may not be decisive in determining that a
foreign investor has been denied “fair and equitable treatment”, but the fact that a
host Party has breached a rule of international law that is specifically designed to
protect investors will tend to weigh heavily in favour of finding a breach of
Article 1105.
150. Although the formulation of the test – a violation of the obligation to accord “fair
and equitable treatment” – seemed consistent with the NAFTA Parties’ stated
views, the NAFTA Parties criticised the decision on the ground that having set
out the content of Article 1105 by referring to customary international law
standards, the Tribunal then took a breach of a conventional international law
rule (National Treatment) and equated it with a breach of the minimum
standard. See J.C. Thomas, op. cit., No. 10 pp. 67-68.
151. Mondev International LTD v. United States of America, see op. cit., No. 69-73.

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is made, the Tribunal went on to apply thes io to
standard of denial of justice 152

the violation of the “fair and equitable w

standard. In connection to whether the

n
o
investor had the right to submit the claim to NAFTA tribunals it stated:

D Br

y
“The standard laid down in Article 1105(1) has to be applied in both situations,

nl
i.e., whether or not local remedies have been invoked. Thus under NAFTA it is not
true that the denial of justice rule and the exhaustion of local remedies rule ‘are

u le
interlocking and inseparable’ […] The Tribunal is thus concerned only with that
aspect of the Article 1105(1) which concerns what is commonly called denial of

d
EC
justice, that is to say, with the standard of treatment of aliens applicable to

ea
decisions of the host State’s courts or tribunals.”

se
It then referred to the ELSI case 153 and characterized the I.C.J. Chamber’s

R
O
criterion of arbitrary conduct as “useful also in the context of denial of justice
and it has been applied in that context”. The Tribunal went on to hold:

e
An
“The Tribunal would stress that the word ‘surprises’ does not occur in isolation.r
Le c tu
The test is not whether a particular result is surprising, but whether the shock or
surprise occasioned to an impartial tribunal leads, on reflection, to justified
concerns as to the judicial propriety of the outcome, bearing in mind on the one
hand that international tribunals are not courts of appeal, and on the other hand
that Chapter 11 of NAFTA (like other treaties for the protection of investments) is
intended to provide a real measure of protection. In the end the question is
whether, at an international level and having regard to generally accepted
standards of the administration of justice, a tribunal can conclude in the light of
all the available facts that the impugned decision was clearly improper and
discreditable, with the result that the investment has been subjected to unfair
and inequitable treatment. This is admittedly a somewhat open-ended standard,
but it may be that in practice no more precise formula can be offered to cover the
range of possibilities.”154

152. Canada, in its second submission on this case, noted that: “The standard to which
a NAFTA Party is to be held under Article 1105 is an international law standard,
which, is a standard that would be applied in a ‘reasonably developed legal
system’ […] It follows that a single NAFTA Party cannot claim that its system alone
should be the benchmark, but that the practice of NAFTA Parties collectively as
well as those of other ‘developed nations’ may provide some guidance as to what
meets the standards of a ‘reasonably developed legal system’”, p. 14.
153. Elettronica Sicula, op. cit., No. 56, ICJ Report, p. 15 at p. 76 (par. 128), citing the
judgment of the Court in the Asylum case, which referred to arbitrary action
being “substituted for the rule of law”.
154. The Tribunal commented on this point in a footnote, that one may compare the
rule stated in the Harvard Draft Convention on the International Responsibility of
States for Injuries to Aliens, Ar ticle8(b), referr ing to a decision which
“unreasonably departs from the principles of justice recognized by the principal
legal systems of the world”; reprinted in L.B. Sohn & R.R. Baxter, “Responsibility of
States for Injuries to the Economic Interests of Aliens” (1961), 55 AJIL 515 at p. 551.

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s
In ADF Group Inc. v. United States of America 155
io
(see above), ADF argued,
w
inter alia, that the US breached its NAFTA obligation to provide “fair and

n
o
equitable treatment”. In appraising the ADF’s claim according to NAFTA

D Br
Article 1105(1), the Tribunal looked at the argument of ADF that the

y
US measures [of domestic content and performance requirements in

nl
governmental procurement] are themselves “unfair and inequitable within

O
the context of NAFTA”. The Tribunal concluded on this point that, “domestic

u le
content and performance requirements in governmental procurement are by

d
EC
no means limited to the NAFTA Parties”. To the contrary, they are to be found

ea
in the internal legal systems or in the administrative practice of many States.

se
Thus, the US measures cannot be characterized as idiosyncratic or aberrant and

R
O
arbitrary. It also stated that:
“the Tribunal has no authority to review the legal validity and standing of the

e
US measures here in question under US internal administrative law. We do not
An r
c tu
sit as a court with appellate jurisdiction with respect to US measures. Our
Le
jurisdiction is confined by NAFTA Article 1131(1) to assaying the consistency of
the US measures with relevant provisions of NAFTA Chapter 11 and applicable
rules of international law. The Tribunal would emphasize, too, that even if the
US measures were somehow shown or admitted to be ultra vires under the
internal law of the United States, that by itself does not necessarily render the
measures grossly unfair or inequitable under the customary international law
standard of treatment embodied in Article 1105(1). An unauthorized or ultra
vires act of a governmental entity of course remains, in international law, the act
of the State of which the acting entity is part, if that entity acted in its official
capacity. But something more than simple illegality or lack of authority under the
domestic law of a State is necessary to render an act or measure inconsistent with
the customary international law requirements of Article 1105(1)…”
ADF also maintained that the United States failed to comply with
obligations under Article 1105(1) in good faith, and breached its duty under
customary international law to perform its obligations in good faith. The
Tribunal stated in this regard that: “An assertion of breach of a customary law
duty of good faith adds only negligible assistance in the task of determining or
giving content to a standard of fair and equitable treatment. At the same time
[…] the Investor did not try to prove, that the rejection of its request for waiver
of the Buy America requirements by the FHWA was flawed by arbitrariness”.156

155. ADF Group Inc. v. United States of America, see op. cit., No. 42.
156. “More generally, the Investor did not establish a serious basis for contending that
some specific treatment received by ADF International from either the FHWA or
the VDOT constituted a denial of the fair and equitable treatment and full
protection and security included in the customary international law minimum
standard embodied in Article 1105(1).”

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In the Loewen Group, Inc and Raymond io of
s L. Loewen v. United States
America, 157
the Tribunal made also anw attempt to define the “unfair and
158

n
o
inequitable treatment” in the context of denial of justice.

D Br

y
“Neither State practice, the decisions of international tribunals nor the opinion of

nl
commentators support the view that bad faith or malicious intention is an
essential element of unfair and inequitable treatment or denial of justice

u le
amounting to a breach of international justice. Manifest injustice in the sense of
a lack of due process leading to an outcome which offends a sense of judicial

d
EC
propriety is enough, even if one applies the Interpretation according to its terms.”

ea
The Tribunal after referring to the Mondev Tribunal’s conclusions, that:

se
“the question is whether, at an international level and having regard to generally

R
O
accepted standards of the administration of justice, a tribunal can conclude in the
light of all the facts that the impugned decision was clearly improper and

e
An
discreditable, with the result that the investment has been subjected to unfair r
and inequitable treatment.”
Le
noted that if that question be answered in the affirmative, then a breach
c tu
of Article 1105 is established.
“… whether the conduct of the trial amounted to a breach of municipal law as
well as international law is not for us to determine. A NAFTA claim cannot be
converted into an appeal against the decisions of municipal courts. However, the
whole trial and its resultant verdict were clearly improper and discreditable and
cannot be squared with minimum standards of international law and fair and
equitable treatment.”
In the Waste Management v. Mexico case159 Waste Management, Inc., a
US waste disposal company, filed claims against Mexico under the ICSID
Additional Facility Rules alleging breaches of NAFTA Articles 1105 and 1110.
The Tribunal issued an award on 2 June 2000 dismissing the investor’s claim
for lack of jurisdiction. Waste Management resubmitted its case and after

157. The Loewen Group, Inc and Raymond L. Loewen v. United States of America, see op. cit.,
No. 82-85.
158. “It is not in dispute between the parties that customary international law is
concerned with denials of justice in litigation between private parties. Indeed,
Respondent’s expert, Professor Greenwood QC, acknowledges that customary
international law imposes on States an obligation ‘to maintain and make available
to aliens, a fair and effective system of justice’ (Second Opinion, par. 79).”
159. The notice of arbitration asserted that the State of Guerrero and the municipality
of Acapulco granted a 15-year concession to Waste Management Inc.’s – then USA
Waste Services, Inc. – Mexican subsidiary, Acaverde, in 1995 for public waste
management services (street cleaning, landfilling, etc.), but failed to comply with
payment and other obligations set forth in the concession agreement despite full
performance by Acaverde. It also asserted that Banobras, a Mexican bank that had
issued an unconditional guarantee for the payment, arbitrarily refused to honor
the payment guarantee. Waste Management claimed damages of USD 60 million.

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s issued on 30 April 2004,
having accepted jurisdiction, the Tribunal io an
unanimous award dismissing Wastew
160
Management’s claims in their entirety.

n
o
The Tribunal in, having reviewed the decisions of former NAFTA tribunals,

D Br
such as S.D. Myers, Mondev, ADF and Loewen, noted on the fair and equitable

y
treatment standard:

nl
“… The search here is for the Article 1105 standard of review, and it is not

u le
necessary to consider the specific results reached in the cases discussed above.
But as this survey shows, despite certain differences of emphasis a general

d
EC
standard for Article 1105 is emerging. Taken together, the S.D. Myers, Mondev,

ea
ADF and Loewen cases suggest that the minimum standard of treatment of fair

se
and equitable treatment is infringed by conduct attributable to the State and

R
O
harmful to the claimant if the conduct is arbitrary,grossly unfair, unjust or
indiosyncratic, is discriminatory and exposes the claimant to sectional or racial

e
prejudice, or involves a lack of due process leading to an outcome which offends
An r
c tu
judicial propriety – as might be the case with a manifest failure of natural justice
Le
in judicial proceedings or a complete lack of transparency and candour in an
administrative process. In applying the standard it is relevant that the treatment
is in breach of representations made by the host State which were reasonably
relied on by the claimant”.161

3.3. Transparency, respect of the investor’s legitimate expectations and

good faith
In a few recent cases, Arbitral Tribunals have defined “fair and equitable
treatment” drawing upon a relatively new concept not generally considered a
customary international law standard: transparency. An additional element
linked sometimes to transparency, is the respect of the investor’s legitimate
expectations. Good faith was considered by one tribunal as an element
defining “fair and equitable treatment” and including the abovementioned
elements of transparency and respect of basic expectations.
In Metalclad Corporation v. United Mexican States,162 the Tribunal found
that the absence of a clear rule concerning construction permits requirements
in Mexico, had “failed to ensure a transparent and predictable framework for
Metalclad’s planning and investment”.163 It decided that this failure of the part of
Mexico to ensure the transparency required by NAFTA – in its Article 1802 on
transpare ncy – was a bre ach of fair and equitable tre atment un der
Article 1105.

160. Waste Management, Inc. v. The United Mexican States, ICSID Case No. ARB(AF)/00/3.
161. Idem, par. 98.
162. Metalclad v. Mexico, see op. cit., No. 96-97.
163. Metalclad, Award, at par. 99.

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T he Tribunal defin ed th e conceps iod in
t of “tran spa re ncy ” (state
w
Article 1802) as the idea that “all relevant legal requirements for the purpose

n
o
of investing should be capable of being readily known to all investors”. It also

D Br
held that in the event a Party would become aware of “confusion or

y
misunderstanding” among investors concerning the legal requirements to be

nl
fulfilled, the Party would have “the duty to ensure that the correct position

O
[would be] promptly determined and clearly stated so that the investors can

u le
proceed with all appropriate expedition in the confident belief that they are

d
acting in accordance with all relevant laws”.164 (This decision of the tribunal

EC

ea
was rejected in judicial review.)

se
In Maffezini (Argentina) v. Kingdom of Spain,165 the Tribunal addressed the

R
O
unauthorised transfer of the claimant’s funds by a Spanish official. It held that:
“… because the acts of SODIGA (public company) relating to the loan cannot be

e
An
considered commercial in nature and involve its public functions, responsibilityr
c tu
for them should be attributed to the Kingdom of Spain. In particular, these acts
Le
amounted to a breach by Spain of its obligation to protect the investment as
provided for in Article 3(1) of the Argentine-Spain Bilateral Investment Treaty.
Moreover, the lack of transparency with which this loan transaction was
conducted is incompatible with Spain’s commitment to ensure the investor a fair
and equitable treatment in accordance with Article 4(1) of the same treaty.
Accordingly, the Tribunal finds that, with regard to this contention, the Claimant
has substantiated his claim and is entitled to compensation…”
The Tribunal did not elaborate what it meant in referring to a “lack of
transparency”.
In the TECMED S.A. v. The United Mexican States166 case (see above), the
Tribunal interpreted the “fair and equitable treatment standard” as resulting
from the good faith principle.167 It is not clear however, whether the Tribunal
considered good faith as a source of obligation per se, i.e. a g eneral

164. Idem, at par. 76.

165. Maffezini v. Kingdom of Spain, ICSID case No. ARB/97/7, Award (13 November 2000).
166. See op. cit., No. 107.
167. According to Anthony d’Amato “The principle of good faith requires parties to a
transaction to deal honestly and fairly with each other, to represent their motives
and purposes truthfully and to refrain from taking unfair advantage that might
result from a literal an unintended interpretation of the agreement between them
[…] The principle of good faith [thus] owes its present authoritative status to the
natural law foundations of general international law, to customary international
law as derived from the articulation of that custom in numerous treaties and to its
explicit encapsulation in Article 31(1) of the Vienna Convention…” “Good Faith” in
Encyclopedia of Public International Law, 1984, pp. 107-109.

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obligation168 or as a principle which governs io to
s the creation of the obligation
accord “fair and equitable treatment”. w

n
o
The Tribunal found that the obligation of fair and equitable treatment is

D Br

y
an expression and part of the “bona fide principle recognised in international

nl
law”, although – citing the Mondev case169 – bad faith from the State is not
required for its violation. This principle encompasses the basic expectations

u le
of the investor to be treated by the State in a transparent, consistent, i.e. non
arbitrary manner which would not “conflict with what a reasonable and unbiased

d
EC
observer would consider fair and equitable”. The Tribunal elaborated its view by

ea
reference to the findings of the Neer and ELSI cases:

se
“The Arbitral Tribunal considers that this provision of the Agreement, in light of

R
O
the good faith principle established by international law, requires the Contracting
Parties to provide to international investments treatment that does not affect the

e
An
basic expectations that were taken into account by the foreign investor to make r
c tu
the investment. The foreign investor expects the host State to act in a consistent
Le
manner, free from ambiguity and totally transparently in its relations with the
foreign investor […] The foreign investor also expects the host State to act
consistently, i.e. without arbitrarily revoking any pre-existing decisions or
permits issued by the State that were relied upon by the investor to assume its
commitments as well as to plan and launch its commercial and business
activities. The investor also expects the State to use the legal instruments that

168. The International Court of Justice, however, has rejected this contention, holding
that the principle of good faith is, “one of the basic principles governing the
creation and performance of legal obligations” (Nuclear Tests, I.C.J. Reports 1974,
p. 268, par. 46; p. 473, par. 49); it is not in itself a source of obligation where none
would otherwise exist. A decade later, the International Court of Justice
reaffirmed the proper role of the principle of good faith in its decision on
competence in Land and Maritime Boundary (Cameroon v. Nig.), 1998 I.C.J. 275
(11 June). Nigeria argued that Cameroon violated the principle of good faith by
secretly preparing to invoke the Court’s compulsory jurisdiction even while it
maintained bilateral contact with Nigeria on border issues. Idem, at 296, par. 31.
The Court rejected Nigeria’s position, noting that “although the principle of good
faith is ’one of the basic principles governing the creation and performance of
legal obligations […] it is not in itself a source of obligation where none would
otherwise exist.” Idem, at 297, par. 39 (quoting Border and Transborder Armed
Actions). The Court further noted that there was “no specific obligation in
international law” applicable to the conduct at issue, and concluded: “In the
abse nce of any su ch oblig ations an d of any infr in g emen t of Nig er ia ’s
corresponding rights, Nigeria may not justifiably rely upon the principle of good
faith in support of its submissions.” Id em, 32. All above as cited in the
US Rejoinder Memorial on Jurisdiction, Admissibility and the Proposed
Amendment in the Methanex case, 27 June 2001, pp. 25-26.
169. To the modern eye, what is unfair or inequitable need not equate with the
outrageous or the egregious. In particular, a State may treat foreign investment
unfairly and inequitably without necessarily acting in bad faith”, Mondev case,
op. cit., No. 69-73.

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govern the actions of the investor or thesinvestment in conformity with iothe
w
function usually assigned to such instruments, and not to deprive the investor of

n
o
its investment without the required compensation. In fact, failure by the host

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State to comply with such pattern of conduct with respect to the foreign investor

y
or its investments affects the investor’s ability to measure the treatment and

nl
protection awarded by the host State and to determine whether the actions of the

O
host State conform to the fair and equitable treatment principle. Therefore,

u le
compliance by the host State with such pattern of conduct is closely related to the

d
EC
above-mentioned principle, to the actual chances of enforcing such principle, and

ea
to excluding the possibility that state action be characterized as arbitrary; i.e. as

se
presenting insufficiencies that would be recognized ‘… by any reasonable and

R
impartial man’,170 or, although not in violation of specific regulations, as being
O
contrary to the law because: ‘… (it) shocks, or at least surprises a sense of

e
juridical propriety’.”171
An r
c tu
The Tribunal ruled that Mexico's behaviour as well as the “deficiencies”
Le
drawn from this behaviour, amounted to a violation of the BIT guarantees to
provide “fair and equitable treatment”.
Since the TECMED Tribunal award, three Tribunals have embraced its
reasoning and adopted the same elements to define the fair and equitable
treatment standard.
In MTD Equity Sdn. Bhd and MTD Chile S.A. v. Republic of Chile172 the Tribunal
held that Chile breached its obligations under the fair and equitable treatment
provisions of the 1992 BIT between the Government of Malaysia and the
Government of the Republic of Chile in regard to MTD’s real estate project, in
Santiago, Chile .173 MTD based part of its claims on provisions of other BITs
and contended that these provisions apply by operation of the most favored
nation (“MFN”) clause of the Malaysia-Chile BIT. The first paragraph of

170. Neer v. Mexico, case (1929) R.I.A.A.

171. Referring to the ELSI case, see op. cit., No. 56.
172. The foreign investment at issue relates to the design of a mixed-use planned
community based on a Malaysian model to be built in Pirque, an area in
Santiago, Chile. MTD Equity, a Malaysian company, entered into a foreign
investment contract that would provide for the development of land and for the
creation of a Chilean corporation, MTD Chile S.A. which would be majority
owned by MTD Equity. After the foreign investment contract was signed and
approved by the Chilean Foreign Investment Commission in March 1997, and
after MTD invested several millions in capital contributions, problems occurred
related to obtaining zoning for the project. In November 1998, the MINVU
rejected the project on the grounds that it conflicted with existing urban
development policy and that the Mayor of Pirque no longer supported the
project. On 8 October 1999, MTD brought a claim against Chile pursuant to the
Malaysia-Chile BIT before ICSID.
173. MTD Equity Sdn. Bhd and MTD Chile S.A. v. Republic of Chile, ICSID case No. ARB/01/
7 (Award), 21 May 2004.

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s that: “Investments made
Article 3(1) of the Malaysia-Chile BIT provides io by
w
investors of either Contracting Party in the territory of the other Contracting

n
o
Party shall receive treatment which is fair and equitable, and not less

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favourable than that accorded to investments made by investors of any third

y
State.” MTD claimed that the provisions of the Croatia BIT and the Denmark

nl
BIT with Chile, dealing with Chile’s obligation to award permits subsequent to

O
the approval of foreign investment and to fulfill contractual obligations were

u le
part of the duty to provide fair and equitable treatment and that as such it

d
EC
could invoke them pursuant to the MFN clause of BIT.

ea
The Tribunal concluded that “under the BIT, the fair and equitable

se
standard of treatment has to be interpreted in the manner most conducive to

R
O
fulfill the objective of the BIT to protect investments and create conditions
favorable to investments. The Tribunal considered that to include as part of

e
the protections of the BIT those included in Article 3(1) of the Denmark BIT
An r
c tu
and Article 3(3) and (4) of the Croatia BIT is in consonance with this purpose.
The Tribunal held that: Le
“In terms of the BIT, fair and equitable treatment should be understood to be
treatment in an even-handed and just manner, conducive to fostering the
promotion of foreign investment. Its terms are framed as a pro-active statement
– ‘to promote’, ‘to create’, ‘to stimulate’, rather than prescriptions for a passive
behaviour of the State or avoidance of prejudicial conduct to the investors.”174
Making reference to the way the TECMED Tribunal described the concept
of fair and equitable treatment – see above – it concluded that this is the
standard it would apply as well.175
In Occidental Exploration and Production Company (OEPC) v. The Republic of
Ecuador176 the Tribunal referred to the preamble of the US-Ecuador BIT which
notes the agreement of the parties that such treatment “is desirable in order
to maintain a stable framework for investment and maximum effective
utilization of economic resources”, and concluded that “the stability of the legal
and business framework is thus an essential element of fair and equitable
treatment”.177 The Tribunal noted that “the tax law was changed without providing
clarity about its meaning and extent and the practice and regulations were also
inconsistent with such changes178”, and cited the Metalclad and TECMED awards
in which the Tribunals concluded that there was a violation of fair and
equitable treatment because the governments have acted in an inconsistent,
non-transparent and unpredictable manner. It then concluded that: “such

174. Idem, par. 113.

175. Idem, par. 114 and 115.
176. See op. cit. No. 64.
177. Idem, par. 183.
178. Idem, par. 184.

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iothat
s this is an objective requirement
requirements were not met by Ecuador. Moreover,
w
does not depend on whether the Respondent has proceeded in good faith or not.” 179

n
o
In CMS Gas Transmission Company v. The Argentine Republic,180 the Tribunal

D Br

y
upheld CMS’s claim for violations of fair and equitable treatment under Article

nl
II(2) of the US-Argentina BIT noting that fair and equitable treatment is
inseparable from stability and predictability. The Tribunal noted in this regard

u le
that there was no need to prove bad faith on the part of Argentina, rather, an
objective assessment of whether the legitimate expectations of the investor

d
EC
were met could be made, and in this case, as in the Metalclad and TECMED

ea
cases, the legitimate expectations that the host State act in a consistent

se
manner were not met. It referred to the preamble of the Treaty and stated that

R
O
its language makes it clear that:
“one principal objective of the protection envisaged is that fair and equitable

e
An
treatment is desirable to maintain a stable framework for investments and r
c tu
maximum effective use of economic resources. There can be no doubt therefore,
Le
that a stable legal and business environment is an essential element of fair and
equitable treatment.”181
“It is not a question of whether the legal framework might need to be frozen as it
can always evolve and be adapted to changing circumstances, but neither is it a
question of whether the framework can be dispensed with altogether when
specific commitments to the contrary have been made. The law of foreign
investment and its protection has been developed with the specific objective of
avoiding such adverse legal effects.”182

3.4. Autonomous fairness elements

In Pope & Talbot Inc. v. Canada,183 although the Tribunal acknowledged –
in the Award on the Merits (Second Award) – that the text of Article 1105
suggests that those elements (“fair and equitable treatment” and “full
protection and security”) are included in the requirements of international
law, it comme nted that the fairn ess elements were additive to the
requirements of international law (see paragraph 77).
Subsequent to the Tribunal’s Second Award, the NAFTA Free Trade
Commission delivered its notes of interpretation. The Tribunal then, in its
Award in Respect of Damages (Third Award),184 examined the compatibility of
its Second Award with the FTC’s interpretation and conceded that “it might

179. Idem, par. 186.

180. See op. cit., No. 67.
181. Idem, par. 274.
182. Idem, par. 277.
183. Pope & Talbot Inc. v. Canada, See op. cit., No. 105.
184. Award in Respect of Damages (31 May 2002).

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s from the one adoptedibyothe
appear” that its own interpretation was different
Commission. It nevertheless concluded w that this was not necessarily the case

n
o
and that the question of the consistency of these two interpretations would

D Br
depend on “whether the concept behind the fairness elements under

y
customary international law [was] different from those elements under

nl
ordinary standards applied in NAFTA countries”.185

u le
The Tribunal decided to verify the validity of its finding contained in its
Second Award by using the threshold standard of “egregious” unfair conduct

d
EC
that Canada had asserted should apply under Article 1105. It concluded that

ea
even applying this “restrictive interpretation” to the facts of the case, would

se
lead to the exact same conclusions it reached in its previous Award.

R
4. Summing up O

e
An
There is diversity in the way the “fair and equitable treatment” standard r
is formulated in investment agreements. Certain agreements, in particular
Le
some BITs, expressly define the standard by reference to international law c tu
while others do not make such reference to international law.
● Because of the differences in its formulation, the proper interpretation
of the “fair and equitable treatment” standard depends on the specific
wording of the particular treaty, its context, the object and purpose of
the treaty, as well as on negotiating history or other indications of the
parties’ intent. For example, some treaties include explicit language
linking or, in some cases limiting, fair and equitable treatment to the
minimum standard of international customary law. Other treaties
which either link the standard to international law without specifying
custom, or lack any reference to international law, could, depending on
the context of the parties’ intent, for example, be read as giving the
standard a scope of application that is broader than the minimum
standard as defined by international customary law.
● Independently of the way governments interpret the “fair and
equitable treatment” standard, it is understood that the minimum
standard refers to an evolving international customary law which is
not “frozen” in time, but may evolve over time depending on the
general and consistent practice of states and opinio juris, as may be
reflected in jurisprudence related to the interpretation and application
of these treaties.
● An analysis of the opinions of the arbitral tribunals which have
attempted to interpret and apply the “fair and equitable treatment”
standard identified a number of elements which, singly or in

185. Idem, par. 56.

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combination, have been treated assencompassed in the standard io of
w
treatment. Most of the arbitral opinions in the present survey mention

n
o
two elements, due diligence and due process (including non-denial of

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justice and lack of arbitrarine ss), wh ile only a few me ntion

y
transparency and good faith. Due diligence and due process including

nl
non-denial of justice and lack of arbitrariness are elements well

O
grounded in international customary law while transparency is an

u le
element which is often defined in international agreements as an

d
EC
obligation under a separate provision. Good faith seems to be

ea
considered more a basic principle underlying an obligation rather than

se
a distinct obligation owed to investors pursuant to the “fair and

R
O
equitable treatment” standard.
● The identified elements appear to have sufficient legal content to

e
allow cases to be judged on the basis of law in accordance with the
An r
c tu
Vienna Convention on the Law of Treaties, and decisions are not made
by a process approaching ex aequo et bono. Le
● It would be inappropriate at this stage to establish a definitive
interpretation of the “fair and equitable treatment” standard. The
jurisprudence which has applied it and identified elements of its
normative content is relatively recent and is not uniform, and
therefore does not allow for a firm and conclusive list.

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International Investment Law: A Changing Landscape

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A Companion Volume to International Investment Perspectives_it E d it
© OECD 2005
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Chapter 4

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ea

se
Most-Favoured-Nation Treatment

R
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in International Investment Law *

e
An r
Le c tu
Most-Favoured-Nation (MFN) treatment is one of the oldest standards of
international economic relations. It is central to WTO disciplines and is as
well a significant instrument of economic liberalisation in the investment
field by spreading more favourable treatment from one investment
agreement to another. The wording of MFN clauses varies, however, and
their interpretation and application requires a careful analysis, on a
case-by-case basis, in accordance with Articles 31 and 32 of the Vienna
Convention. The ejusdem generis principle provides that an MFN clause
can attract the more favourable treatment available in other treaties only
in regard to the “same subject matter”, the “same category of matter”, or
the “same class of matter”. Past arbitral findings show, however, that the
application of this principle has not always been simple or consistent. The
present survey reviews the jurisprudence and invites practitioners to pay
particular attention to the formulation of the MFN clauses in investment
agreements, taking into account established treaty interpretation rules.

* This survey was prepared by Marie-France Houde, Investment Division, OECD Directorate
for Financial and Enterprise Affairs, and Fabrizio Pagani, Legal Directorate, and benefited
from discussions, comments and a variety of perspectives in the OECD Investment
Committee. The document as a factual survey, however, does not necessarily reflect the
views of the OECD or those of its member governments. It cannot be construed as
prejudging ongoing or future negotiations or disputes pertaining to international
investment agreements.

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1. Introduction

u le
Bilateral and regional investment agreements have proliferated in the

d
last decade and new ones are still being negotiated. Most-Favoured-Nation

EC

ea
(MFN) clauses link investment agreements by ensuring that the parties to one

se
treaty provide treatment no less favourable than the treatment they provide

R
under other treaties in areas covered by the clause. MFN clauses have thus

O
become a significant instrument of economic liberalisation in the investment

e
area. Moreover, by giving the investors of all the parties benefiting from a
An r
u
country’s MFN clause the right, in similar circumstances, to treatment no less

L e c tnegotiate
favourable than a country’s closest or most influential partners can
on the matters the clause covers, MFN avoids economic distortions that would
occur through more selective country-by-country liberalisation. Such a
treatment may result from the implementation of treaties, legislative or
administrative acts of the country and also by mere practice.
The present document provides a factual survey of jurisprudence and
related literature on MFN treaty clauses in investment agreements with a view
to contributing a better understanding of the MFN interfaces between such
agreements.
● Section 2 defines the MFN clause, traces back its origins and provides
some examples of such provisions in the two major types of model
investment agreements in existence (the “North American model” and
the “European model”).
● Section 3 summarises the relevant aspects of the extensive work
carried out by the International Law Commission (ILC) between 1968
and 1978 on MFN clauses.
● Section 4 describes recent arbitral awards on the scope of application of
MFN treatment clauses resulting from disputes under investment
treaties.
● Section 5 provides a summing up.

2. Definition, origins and examples of MFN clauses

2.1. Definition
To provide MFN treatment under investment agreements is generally
understood to mean that an investor from a party to an agreement, or its

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investment, would be treated by the others party “no less favourably”iowith
respect to a given subject-matter thanw
an investor from any third country, or
1

n
o
its investment. MFN treatment clauses are found in most international

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investment agreements. Although the text of the MFN clause, its context and

y
the object and purpose of the treaty containing it need to be considered

nl
whenever that clause is being interpreted, it is the “multilateralisation”

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instrument par excellence of the benefits accorded to foreign investors and their

u le
investments.

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EC
While MFN is a standard of treatment which has been linked by some to

ea
the principle of the equality of States,2 the prevailing view is that a MFN

se
obligation exists only when a treaty clause creates it.3 In the absence of a

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treaty obligation (or for that matter, an MFN obligation under national law),
nations retain the possibility of discriminating between foreign nations in

e
their economic affairs.
An r
2.2. Origins4 Le c tu
MFN treatment has been a central pillar of trade policy for centuries. It can
be traced back to the twelfth century, although the phrase seems to have first
appeared in the seventeenth century. MFN treaty clauses spread with the
growth of commerce in the fifteenth and sixteenth centuries. The United States

1. The International Law Commission (ILC) has defined MFN treatment as follows:
“Most-favoured-nation treatment is a treatment accorded by the granting State to
the beneficiary State, or to persons or things in a determined relationship with that
State, not less favourable than treatment extended by the granting State or to a
third State or to persons or things in the same relationship with that third State”,
Article 5 of the Draft articles on most-favoured-nation clauses (ILC Draft), in
Yearbook of the international Law Commission, 1978, Vol. II, Part Two, p. 21.
2. See, especially, the comments of some socialist countries in “Comments of
Member States, organs of the United Nations, specialized agencies and other
intergovernmental organizations on the draft articles on the most-favoured-nation
clause adopted by the International Law commission at its twenty-eighth session”,
in Yearbook of the International Law Commission, 1978, Vol. II, Part Two, p. 162 ff.
3. See Article 7 of the ILC Draft, the related comments and the doctrine here referred
to, Ibidem, p. 24 ff. See also Oppenheim’s International Law, edited by R. Jennings and
A. Watts, and Vol. I, Harlow, 1992, p. 1 326 f.
4. For a thorough history of the MFN clause up to the Second World War, including the
work done by, or under the auspices of, the League of Nations, see the First Report
of the ILC’s Special Rapporteur, Yearbook of the International Law Commission, 1969,
Vol. II, p. 157 ff.

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s a 1778 treaty with France.
included an MFN clause in its first treaty, io In 5

the 1800s and 1900s the MFN clause wasw

included frequently in various treaties,

n
o
particularly in the Friendship, Commerce, and Navigation treaties. MFN

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treatment was made one of the core obligations of commercial policy under the

y
Havana Charter where members were to undertake the obligation “to give due

nl
regard to the desirability of avoiding discrimination as between foreign

O
investors”.6 The inclusion of MFN clauses became a general practice in the

u le
numerous bilateral, regional and multilateral investment-related agreements

d
EC
which were concluded after the Charter failed to come into force in 1950.

ea
Its importance for international economic relations is underscored by the

se
fact that the MFN treatment provisions of the GATT (Article I General

R
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Most-Favoured-Nation Treatment) and the GATS7 (Article II Most-Favoured-Nation
Treatment) provide that this obligation shall be accorded “immediately and

e
unconditionally” (although in the case of the GATS, a member may maintain a
An r
c tu
measure inconsistent with this obligation provided that such measure is listed
Le
in, and meets the conditions of, the Annex on Article II Exemptions).

2.3. Examples of MFN Clauses in Investment Agreements

A stock taking of MFN clauses in investment treaties will not yield a
uniform picture. In fact the universe of MFN clauses in investment treaties is
quite diverse. Some MFN clauses are narrow, others are more general.
Moreover, the context of the clauses varies, as does the object and the purpose
of the treaties which contain them. Following is a representative sample of
these clauses.

5. Treaty of Amity and Commerce, 6 February 1778, France-United-States, Article 3, 8

Stat. 12 (“The Subjects of the most Christian King shall pay in the Ports, Havens,
Roads, Countries, Islands, Cities or Towns, of the United States or in any part of
them, no other or greater Duties or Imposts … than those which the Nations most
favoured are or shall be obliged to pay; and they shall enjoy all the Rights, Liberties,
Privileges, Immunities and Exemptions in Trade, Navigation and Commerce …
which the said Nations do or shall enjoy.”); see also idem, Art. 4 (similar provision
with respect to US nationals in France).
6. United Nations Conference on Trade and Employment, Final Act and Related
Documents, April 1948, Article 12 (International Investment for Economic Development
and Reconstruction), par. 2(a)(ii).
7. Of all the WTO Agreements, the General Agreement on Trade in Services (GATS) is
generally considered as dealing more directly with investment issues. Mode 3
applies to the supply of trade in services through “commercial presence”, which is
in essence an investment activity.

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s of BITs. Article 3(1) andio(2) of
Germany has concluded the largest number
the German 1998 Model Treaty combines w the MFN obligation with the

n
o
national treatment obligation by providing that:

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“1) Neither Contracting State shall subject investments in its territory owned or

nl
controlled by investors of the other Contracting State to treatment less favourable
than it accords to investments of its own investors or to investments of investors

u le
of any third State.
2) Neither Contracting State shall subject investors of the other Contracting State, as

d
EC
regards their activity in connection with investments in its territory, to treatment

ea
less favourable than it accords to its own investors or to investors of any third State.”

se
This general MFN provision is not restricted in its scope to any particular

R
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part of the treaty containing it. It may also be noted that the 1998 German
model BIT contains another MFN provision which only relates to full

e
An
protection and security and to expropriation which are the matters dealt with r
by Article 4. Article 4(4) specifically provides that:
Le c tu
“Investors of either Contracting State shall enjoy most-favoured-nation treatment
in the territory of the other Contracting State in respect of the matters provided
for in this Article.”
The same approach is followed by the Netherlands Model BIT which in
addition combines in its Article 3 the MFN obligation with other standards of
treatment, i.e. national treatment (whichever of these two treatments is more
favourable), fair and equitable treatment and full protection and security. The
non-discriminatory treatment is formulated in Article 3(1) and 3(2) as follows:
“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 investments of its own nationals or to investments of nationals of any
third State, whichever is more favourable to the national concerned.”
Article 3 of the 1996 Albania/United Kingdom BIT provides that:
“National Treatment and Most-Favoured-Nation Provisions
1) Neither Contracting Party shall in its territory subject investments or returns of
nationals or companies of the other Contracting Party to treatment less favourable
than that which it accords to investments or returns of its own nationals or
companies or to investments or returns of nationals or companies of any third State.
2) Neither Contracting Party shall in its territory subject nationals or companies
of the other Contracting Party, as regards the management, maintenance, use,

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s to treatment less favourableiothan
enjoyment or disposal of their investments,
that which it accords to its own w nationals or companies or to nationals or

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companies of any third State.

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3) For the avoidance of doubt it is confirmed that the treatment provided for in

nl
paragraphs 1) and 2) above shall apply to the provisions of Articles 1 to 11 of this
Agreement.”

u le
Articles 1 to 11 cover all the provisions of the Agreement, except the final
clauses.

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The typical formulation of an MFN clause in the US and Canadian BITs

se
covers both the establishment and post establishment phases. It also lists the
various operations covered8 and is explicit in stating that the right only

R
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applies “in like circumstances”, unlike other BITs (particularly the “European
model BIT”) which make no reference to the comparative context against

e
An
which treatment is to be assessed. Recent examples are to be found in the r
investment chapter of US-Chile Free Trade Agreement9and the US-Singapore
Le
Free Trade Agreement10 concluded in 2003, and the 1997 Canada-Chile Free
c tu

8. The final draft text of the US-Central America Free Trade Agreement (CAFTA)
resulting from the negotiations concluded in December 2003 and dated 28 January
2004 contains an interpretation footnote on the scope of application of the MFN
treatment clause in the Investment Chapter of the Agreement (Chapter 10) which
reads:
“The Parties note the recent decision of the arbitral tribunal in Maffezini (Arg.) v.
Kingdom of Spain, which found an unusually broad most-favoured-nation clause
in an Argentina-Spain agreement to encompass international dispute resolution
procedures. See Decision of Jurisdiction §§38-64 (25 January 2000), reprinted in
16 ICSID Rev.-F.I.L.J. 212(2002). By contrast the Most-Favoured-Nation Treatment
Article of this Agreement is expressly limited in scope to matters “with respect to
the establishment, acquisition, expansion, management, conduct, operation, and
sale or other disposition of investments.” The Parties share the understanding
and intent that this clause does not encompass international dispute resolution
mechanisms such as those contained in Section C of this Chapter, and therefore
could not reasonably lead to a conclusion similar to that of the Maffezini case.”
This footnote would be deleted in the final text of the Agreement but the Parties
agreed that it is to be included in the negotiating history as a reflection of the
Parties’ shared understanding of the Most-Favoured-Treatment Article and the
Maffezini case.
The draft text of CAFTA is currently subject to legal review for accuracy, clarity and
consistency. Under the Trade Act of 1992, the Administration must notify
Congress at least 90 days before signing the Agreement. The Administration
expects to notify Congress in the near future of its intent to sign the CAFTA. See
www.ustr.gov/releases/2003/12/03-82.pdf.
9. www.ustr.gov/new/fta/chile.htm. This agreement entered into force on 1 January
2004.
10. www.ustr.gov/new/fta/Singapore/final.htm. This agreement entered into force on
1 January 2004.

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Trade Agreement, which are based on NAFTAs language. In the US-ChileioFTA,
w reads:
Article 10.3: Most-Favoured-Nation Treatment

n
o
“1) Each Party shall accord to investors of the other Party treatment no less favourable

D Br

y
than that it accords, in like circumstances, to investors of any non-Party with respect

nl
to the establishment, acquisition, expansion, management, conduct, operation, and
sale or other disposition of investment in its territory.

u le
2) Each Party shall accord to covered investments treatment no less favourable than
that it accords, in like circumstances, to investments in its territory of investors of

d
EC
any non-Party with respect to the establishment, acquisition, expansion,

ea
management, conduct, operation and sale or other disposition of investments.”

se
In the US-Singapore FTA, National Treatment and MFN treatment are

R
part of a same article:
O

e
“Article 15.4: National Treatment and Most-Favoured-Nation Treatment
An r
c tu
3) Each Party shall accord to investors of the other Party treatment no less favourable
Le
than it accords, in like circumstances, to investors of any non-Party with respect to
the establishment, acquisition, expansion, management, conduct, operation and
sale or other disposition of investments in its territory. Each Party shall accord to
covered investments treatment no less favourable than that it accords, in like
circumstances, to investments in its territory of investors of any non-Party with
respect to the establishment, acquisition, expansion, management, conduct,
operation, and sale or other disposition of investments. The treatment each Party
shall accord under this paragraph is “most-favoured-nation treatment”.
4) Each Party shall accord to investors of the other Party and to their covered
investments the better of national treatment or most-favoured-nation treatment.”
In the Canada-Chile FTA, Article G-03: Most-Favoured-Nation Treatment reads:
“1) Each Party shall accord to investors of the other Party treatment no less
favourable than that it accords, in like circumstances, to investors of any
non-Party with respect to the establishment, acquisition, expansion,
management, conduct, operation, and sale or other disposition of investments.
2) Each Party shall accord to investments of investors of the other Party
treatment no less favourable than that it accords, in like circumstances, to
investments of investors of any non-Party with respect to the establishment,
acquisition, expansion, management, conduct, operation, and sale or other
disposition of investments.”
The texts of these agreements are alike in that they make clear that the
intent to use the likeness of the circumstances in which the treatment is granted
as the basis for comparison. Jurisprudence from MFN clauses with a different
basis for comparison, and which focuses on categorizing industries affected by
treatment, or categorizing the types of treaties that require the treatment, may be
of little relevance to the analysis required by these agreements.

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2.4. Restrictions and Exceptions s io
w
Many MFN clauses in investment treaties contain specific restrictions

n
o
and exceptions, which exclude certain areas from their application. Such

D Br

y
areas may include inter alia regional economic integration, matters of taxation,

nl
subsidies or government procurement and country exceptions. Depending on
the way these exceptions are drafted, the fact that these limitations are

u le
specifically mentioned could be a factor in deciding whether certain other
matters are within the scope of an MFN clause. Consider the following

d
EC
examples.

ea
The 1998 German Model BIT provides in its Article 3, points 3) and 4)

se
that:

R
O
“3) Such treatment shall not relate to privileges which either Contracting State

e
accords to investors of third States on account of its membership of, or
An r
c tu
association with, a customs or economic union, a common market or a free
trade area.
Le
4) The treatment granted under this Article shall not relate to advantages which
either Contracting State accords to investors of third States by virtue of a
double taxation agreement or other agreements regarding matters of
taxation.”
The Dutch Model BIT contains the following exception to the MFN
obligation in the general treatment article (Article 3):
“3) If a Contracting Party has accorded special advantages to nationals of any third
State by virtue of agreements establishing customs unions, economic unions,
monetary unions or similar institutions, or on the basis of interim agreements
leading to such unions or institutions, that Contracting Party shall not be obliged
to accord such advantages to nationals of the other Contracting Party.”
In addition, Article 4 of the Model, which only deals with the treatment of
taxes, includes in its second part, some exceptions to the MFN treatment and
National treatment obligations provided by the first part of that article. This
article applies to nationals of Contracting Parties or nationals of any third
State which are “in the same circumstances”. The whole Article 4 reads as
follows:
“With respect to taxes, fees, charges and to fiscal deductions and exemptions,
each Contracting Party shall accord to nationals of the other Contracting Party
who are engaged in any economic activity in its territory, treatment not less
favourable than that accorded to its own nationals or to those of any third State
who are in the same circumstances, whichever is more favourable to the
nationals concerned. For this purpose, however, any special fiscal advantages
accorded by that Party, shall not be taken into account:
a) under an agreement for the avoidance of double taxation; or

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 MOST-FAVOURED-NATION TREATMENT IN INTERNATIONAL INVESTMENT LAW

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s union, economic union or isimilar
b) by virtue of its participation in a customs
o
institution; or w

n
o
c) on the basis of reciprocity with a third State.”

D Br

y
The MFN limitations in the Agreement between EFTA States and

nl
Singapore state:

O
“Article 40

u le
2. If a Party accords more favourable treatment to investors of any other State or

d
their investments by virtue of free trade agreement, customs unions or similar

EC

ea
agreement that also provides for substantial liberalization of investments, it

se
shall not be obliged to accord such treatment to investors of another Party or

R
O
their investments. However, upon request from another Party, it shall accord
adequate opportunity to negotiate the benefits granted therein…

e
Article 41: Taxation
An r
c tu
1. Except as otherwise provided for in this Article, nothing in this Chapter shall
Le
create rights or impose obligations with respect to taxation measures.
2. Article 40 shall apply to taxation measures subject to deviations from national
treatment that is necessary for the equitable or effective imposition or
collection of direct taxes.
3. If a Party accords special advantages to investors and their investments of any
other State by virtue of an agreement for the avoidance of double taxation, it
shall not be obliged to accord such advantages to investors of another Party
and their investments.”
The agreements concluded by Canada and the United States since the
early 1990s have followed the practice of listing “country” exceptions or
reservations to MFN treatment (and other standards) as “non-conforming
measures” in separate annexes to the Agreement. For example, Article 15.12
(Non-Conforming Measures) of the United States – Singapore Free Trade
Agreement reads as follows:
1. Articles 15.4 (National Treatment and Most-Favoured-Nation Treatment)…
do not apply to:
a) any existing non-conforming measure that is maintained by a Party at:
i) the central level of government, as set out by that Party in its Scheduled
to Annex 8A,
ii) a regional level of government, as set out by that Party in its Schedule to
Annex 8A, or
iii) a local level of government;
b) the continuation or prompt renewal of any non-conforming measure
referred to in sub-paragraph a); or

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s measure referred ito in
c) an amendment to any non-conforming
subparagraph a) to the extent w
o
that the amendment does not decrease the

n
o
conform ity of the measure, a s it existed immediately b efore the

D Br
amendment, with Article 15.4, 15.8, and 15.9.

y
nl
2. Articles 15.4, … do not apply to any measure that a Party adopts or maintains
with respect to sectors, sub-sectors, or activities, as set out in its Schedule to

u le
Annex 8B.
3. Neither Party may, under any measure adopted after the date of entry into

d
EC
force of this Agreement and covered by its Schedule to Annex 8B, require an

ea
investor of the other Party, by reason of its nationality, to sell or otherwise

se
dispose of an investment existing at the time the measure becomes effective.

R
O
4. Article 15.4 does not apply to any measures that is an exception to, or a
derogation from, the obligations under Article 16.1.3 (General provisions) as

e
specifically provided in that Article. An r
5. Articles 15.4 and 15.9 do not apply to:
Le c tu
a) government procurement; or
b) subsidies or grants provided by a Party, including government-supported
loans, guarantees, and insurance.
In addition to the measures listed in Annexes I-II, Annex IV of NAFTA is
specifically devoted to exceptions to Most-Favoured-Nation Treatment for
treatment accorded pursuant to all prior bilateral or multilateral international
agreements and for treatment accorded pursuant to all such future
agreements with respect to certain sectors only.11 The scope of the NAFTA and
that of its investment chapter limit its MFN treatment obligation in other
areas as well, including, for example, taxation12 and financial services.13 The
same kind of limitations to the scope of MFN protection appears in the
US-Chile and US-Singapore free trade agreements and the recently concluded
US-Australia free trade agreement.
Some US and Canadian BITs also contain limitations to the MFN clauses that
preclude coverage of the advantages accorded by virtue of multilateral

11. These MFN exceptions apply notably to a) international agreements in force or

signed prior to the entry into force of the NAFTA and b) international agreements
in force or signed after the date of the entry into force of NAFTA in the areas of
aviation, fisheries, maritime matters, telecommunications networks and
transport services (except for measures covered by the Telecommunications
chapter of NAFTA or to the production, sale, licensing or radio or televisions
programming) as well as c) certain state measures or aid programmes.
12. See NAFTA Art. 2103 (“Except as set out in this Article, nothing in this Agreement
shall apply to taxation measures”).
13. See NAFTA Art. 1101(3) [“This Chapter does not apply to measures adopted or
maintained by a Party to the extent that they are covered by Chapter Fourteen
(Financial Services)”].

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s
agreements or negotiations (such as the GATT/Uruguay ioBIT
Round) to which their
partners may or may not have adhered. w Language of this sort (the “GATT
14

n
o
exception”) appeared for the first time in the Article XII(2)(b) 1990 US-Poland BIT.

D Br
Another example is Article G-8 of the Canada-Chile Agreement which provides

y
that the MFN clause in the investment chapter of that agreement “does not apply

nl
to any measure that is an exception to, or derogation from, a Party’s obligations

O
under the TRIPS Agreement, as specifically provided for in that agreement”.

u le
The Understanding reached by the United States, the European Commission

d
EC
and certain acceding and candidate countries regarding their BITs with the

ea
United States on 22 September 2003 describes the means, through individual

se
protocols, of avoiding potential incompatibilities arising from MFN obligations in

R
O
the BITs and the obligations of membership in the European Union.
Finally, it may be noted that some WTO members have listed substantive

e
An
provisions in their bilateral investment treaties as involving exemptions to the r
c tu
MFN obligations of the GATS with a view of protecting a higher level of
treatment in such BITs in relation to GATS commitments.15 Le
14. Kenneth J. Vandevelde, US Bilateral Investment Agreements, the Second Wave, in
Michigan Journal of International Law, Summer 1993, p. 15.
15. Costa Rica has reserved for all sectors, “measures granted under bilateral treaties
for the promotion and protection of investment designed to encourage in a
preferential manner the investments of certain countries covered by such
agreements”. Jordan has notified that “measures extending preferential treatment
are pursuant to bilateral investment treaties”. Kuwait extends the exemption to
multilateral agreements related to the promotion and protection of investment by
notifying “measures taken to promote and protect investments applied in
conformity with bilateral, multilateral agreements and undertakings to which
Kuwait is a party”. Poland has notified provisions on “commercial presence contained
in promotion and protection of foreign investments agreements that go beyond
limitations embodied in Poland’s schedule of specific commitments. Trinidad and
Tobago pre-empted all existing and future bilateral investment and protection
treaties. The United Sates has an MFN exemption for BIT entry and stay obligations
pertaining to the movement of personnel.” Uruguay has notified as measure
inconsistent with Article II “the provisions of bilateral investment promotion and
protection agreements which guarantee investors from the other contracting party
freedom to transfer and invest capital and any other sum related to investments,
and also guarantee investors against the non-commercial risks to which their
investment is exposed”. Singapore has also listed exemptions for preferential
treatment resulting from Investment Guarantees Agreements.
Canada, Chile and Poland have, in addition, invoked an exemption for procedural
measures in their BITs. Chile’s exemption concerning measures establishing
dispute settlement procedures contained in existing or future bilateral treaties on
the protection of investment applies in principle to all countries. Canada and Poland
indicated that they “accept compulsory arbitration of investor/state investment
disputes brought by or in respect of service suppliers of countries with which
Canada/Poland have or may have agreements providing for such procedure”.
In some other cases, country exemptions to Article II of GATS refer to preferential
treatment under sectoral or regional agreements. Bulgaria has notified an MFN
exemption for present and future bilateral agreements concerning the provision

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sdoes not prevent, however,iany
GATS Article V(1) (Economic Integration)
o of
its members from being a party to or w entering into an agreement liberalising

n
o
trade in services between or among the parties to such an agreement, provided
that such an agreement meets the conditions set out in paragraph 1 of that

D Br

y
Article. GATS Article V(6) further provides that a service supplier of any Member

nl
that is a juridical person constituted under the law of a party to an agreement

O
meeting the conditions of paragraph 1 shall be entitled to treatment granted

u le
under such agreement, provided that it engages in substantive business

d
operations in the territory of the parties to such agreement. Examples of the

EC

ea
treatment accorded to enterprises of third party investors in accordance with
these provisions is to be found in NAFTA Article 1 101 and 1 139, EC Treaty

se
Articles 43-48, and Annex G of the draft Understanding between the EU and the

R
O
USA concerning Certain Bilateral Investment Treaties, dated 22 September 2003.
16, 17

e
3. International Law Commission Work16, 17
An r
c tu
In 1964 the International Law Commission (ILC) embarked on a
Le
m ul ti -ye a r p roj ec t to p rep ar e a set o f d ra ft a rt ic l es on the MF N

15. legal services through established presence; Thailand for the investment provisions
in the bilateral Treaty of Amity and Economic Relations with the United States; and
Venezuela for bilateral agreements relating to petroleum-related services.
With regard to regional agreements, Costa Rica, El Salvador, Guatemala, Honduras,
Nicaragua, Panama and Venezuela have notified entries for preferences accorded
under the General Treaty of Central American Economic Integration; Côte d’Ivoire for
preferences for insurance firms based in signatories of the CIMA and preferences for
financial service providers based in WAEMU Member States; Cyprus for market access
restrictions for firms based in the EU and EFTA countries; EC 12 for existing and future
Euro-Med agreements; Finland, Iceland, Norway, Sweden for measures aimed at
promoting Nordic co-operation; Pakistan for favourable treatment for financial
institutions set up to undertake Islamic financing transactions; Senegal for preferences
accorded to insurance and financial service providers based in signatories to ECOWAS,
WAEMU and WAMU; South Africa for an exemption on exchange controls for persons
based in the CMA; and the United Arab Emirates for preferential treatment for service
providers based in members of the Gulf Co-operation Council.
16.The following section is drawn from the Report of the International Law Commission to the
General Assembly on the Work of Its Thirtieth Session, [1978], Yearbook of the
International Law Commission, A/CN.4/SER.A/1978/Add.1 (Part 2) (“ILC Report”) and
“Most-Favoured-Nation Clause”, Yearbook of the International Law Commission, 1970,
Vol. II, pp. 201-213.
17.The International Law Commission was established by the General Assembly in 1947
to promote the progressive development of international law and its codification. The
Commission, which meets annually, is composed of 34 members who are elected by
the General Assembly for five-year terms and who serve in their individual capacity,
not as representatives of their Governments. Most of the Commission’s work involves
the preparation of drafts on topics of international law. Some topics are chosen by the
Commission and others referred to it by the General Assembly or the Economic and
Social Council. When the Commission completes draft articles on a particular topic,
the Gene ral A ssembly usually conve nes an inter national conference of
plenipotentiaries to incorporate the draft articles into a convention which is then
open to States to become parties: www.un.org/law/ilc.

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clause.18 sarose in the context of theioILC’s
The idea for the project originally
w in the introduction to the draft
work on the law of treaties, and, as noted

n
o
articles, they should be interpreted in light of the Vienna Convention on the
Law of Treaties (Vienna Convention).19 In determining to proceed with the

D Br

y
p roj e c t , t h e IL C ack n ow l e d g e d t h e i m po rta n c e of t h e ro le o f t h e

nl
most-favoured-nation treatment obligation in the sphere of international

O
trade.20 However, the ILC specifically did not confine its studies to that

u le
sphere, but rather explored the application of the clause in as many

d
spheres as possible.21

EC

ea
In 1978, the ILC adopted the Draft Articles on Most-Favoured-Nation

se
Clauses and recommended to the General Assembly of the United Nations

R
O
that they be used for a Convention on the subject. The General Assembly
did not act upon this recommendation and took no substantive action on

e
the draft articles. 22 The ILC’s work provides, nevertheless, a general
An r
c tu
analysis of MFN clauses and insight into the “ejusdem generis” principle,

Le
which has been used in their interpretation in several judicial and arbitral

18. See Introduction to the 1978 ILC Report, par. 15.

19. Idem, par. 59.
20. Idem, par. 17.
21. Idem, par. 61.
22. See the following acts of the General Assembly: Res. 33/139 (1978), 35/161 (1980),
and 40/65 (1985), and Decision 43/429 (1988).

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cases, including recent ones. 23, 24 The s iothe
present section summarises
most general aspects of this work.25 w

n
o
3.1. General principles of an MFN clause26

D Br

y
nl
In examining the ILC’s work, it is important to note first of all that the
Draft Articles elaborated by the Commission were intended to be “without

u le
prejudice to any provision on which the granting State and the beneficiary
State may otherwise agree” (Art. 29).27 Thus, the content of the treatment due

d
EC
in each specific case is defined by the actual language of the MFN clause in

ea
question. This text must be interpreted in accordance with the principles of

se
treaty interpretation, as codified in the Vienna Convention. Article 31.1 of the

R
O
Vienna Convention states that “a treaty shall be interpreted in good faith in

e
An r
Le c tu

23. The ILC’s work has been regarded by some countries as reflecting international law.
See, for example, the comments of Colombia, Netherlands, Sweden in “Comments of
Member States, organs of the United Nations, specialised agencies and other
intergovernmental organisations on the draft articles on the most-favoured-nation
clause adopted by the International Law Commission at its twenty-eighth session”, in
Yearbook of the International Law Commission, 1978, Vol. II, Part Two, and Germany in
“Analytical compilation of comments and observations from Governments, organs of
the United Nations which have competence in the subject-matter and interested
intergovernmental organizations: report of the Secretary-General”, UN A/35/443, p. 9.
However, it should be borne in mind that to grant MFN treatment is not an obligation
of customary international law.
24. Some OECD member countries, without denying the relevance of the ILC exercise,
stressed that the peculiarities of each MFN clause and of its context put into serious
question the utility of codification through a Convention. See, for example, the
comments by Luxembourg, in “Comments of member States, organs of the United
Nations, specialised agencies and other intergovernmental organisations on the draft
articles on the most-favoured-nation clause adopted by the International Law
Commission at its twenty-eighth session”, in Yearbook of the International Law
Commission, 1978, Vol. II, Part Two, p. 168 ff., or by the UK in “Analytical compilation of
comments and observations from Governments, organs of the United Nations which
have competence in the subject-matter and interested intergovernmental
organisations: report of the Secretary-General”, UN A/35/443, p. 11. Other countries,
for example the United States, supported the Commission’s draft articles and
favoured their adoption by the Commission, but they took position against their final
codification through an international convention (see ibidem, p. 14).
25. While the ILC studied practically all aspects of the MFN treatment clauses
including the issues of exceptions, and termination or suspension of MFN rights,
the present section focuses on the general interpretation of MFN clauses.
26. Unless otherwise stated, paragraphs 24-47 reproduce the views of the ILC.
27. In this sense, see also Oppenheim’s International Law, op. cit., p. 1 328.

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accordance with the ordinary meaning to be io in
sgiven to the terms of the treaty
w
their context and in the light of its object and purpose”. 28

n
o
In the ILC’s work, the MFN clause is described as taking the form of a

D Br

y
treaty provision whereby a State (the granting State) undertakes an

nl
“obligation” towards another State (the beneficiary State) to accord MFN
treatment in an agreed sphere of relations and that (beneficiary) State accepts

O
it.29 The clause may also determine the persons or things to whom and to

u le
which the MFN treatment is applicable. Ultimately, the extent of the benefits

d
EC
to which the beneficiary State may lay claim (for itself or for persons or things

ea
in determined relationship with it) is limited by the treatment extended by the

se
granting State to a third State (or to persons or things in the same relationship

R
O
with a third State).30
The MFN clause may be invoked if the third State (or persons or things in

e
An
the same relationship with the third State as are the persons or things r
c tu
mentioned in the clause with the beneficiary State) have been extended the
Le
favours that constitute the MFN treatment foreseen in the clause. The mere fact
of a more favourable treatment is what is required to set in motion the
operation of the clause. This treatment may be based upon a treaty, another
agreement or a unilateral, legislative or other act or mere practice.31 The
beneficiary State, on the strength of an MFN clause may invoke the clause to
also demand the same benefits as were extended to the third State. Depending
on the drafting of the MFN clause, the mere fact that the third State has not
availed itself of the benefits which were extended to it by the granting State
does not absolve the granting State from the obligation under the MFN clause.32
When two treaties exist, one between the granting State and the
beneficiary State containing the MFN clause, and the other between the

28. In Article 31.2, the word “context” is held to include the preamble and annexes of
the treaty as well as any agreement or instrument made by the parties in
connexion with the conclusion of the treaty. Article 31.3 further states that there
shall be taken into account, together with the context, any subsequent agreement
or practice relating to the treaty together with any relevant rules of international
law. According to Article 31.4, a special meaning can also be given to a term “if it is
established that the parties so intended”. Where the interpretation according to
the provisions of Article 31 needs confirmation, or determination since the
meaning is ambiguous or obscure or leads to a manifestly absurd or unreasonable
result, recourse can be made to the supplementary means of interpretation under
Article 32. These means include the preparatory works (travaux préparatoires) of
the treaty and the circumstances of its conclusion. The Annex reproduces the text
of Articles 31 and 32 in full.
29. Usually, the beneficiary State also makes an MFN pledge in a reciprocal way. See
Idem, Article 4 and Commentary (5).
30. Idem, Article 8(2), and Commentary (1).
31. Idem, Article 8 Commentary (1).
32. Idem, Article 5, Commentary (5).

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io
granting State and a third State, the treatysthat contains the MFN treatment
w
clause is considered to be the “basic” treaty. As was 33
held by the majority
34
of

n
o
the Court in the landmark Anglo-Iranian Oil Company case, “this is the treaty

D Br
which establishes the juridical link between the beneficiary State and a third

y
party treaty and confers upon that State the rights enjoyed by the third party.

nl
A third-party treaty, independent and isolated from the basic treaty, cannot

O
produce any legal effect as between […] the beneficiary State and […] the

u le
granting State (it is res inter alios acta)”.35 The beneficiary is entitled, to the

d
EC
extent provided by the MFN provision under its own treaty, to claim all rights

ea
and favours extended by the granting State to the third State. This extension

se
can be seen as “ingenious” legal shorthand to treaty process.36

R
O
The granting State and the beneficiary State can however limit in the
basic treaty the extent of the favours that can be claimed by the beneficiary. If

e
the clause contains a restriction, the beneficiary State cannot claim any
An r
c tu
favours beyond the limits set by the clause, even if this treatment does not
Le
reach the level of the favours extended by the granting State to a third State.37

3.2. The ejusdem generis principle

The ejusdem generis principle is the rule according to which a MFN clause
can only attract matters belonging to the same subject matter or the same
category of subject as to which the clause relates.

33. Idem, Article 8, Commentary (1).

34. Anglo-Iranian Oil Co. case (Preliminary objection), Judgment of 22 July 1952 (I.C.J.
Reports 1952, p. 109). The decision of the Court contributed greatly to the
clarification of the legal theory. Before the Court’s decision, several legal writers
presented the operation of the MFN treatment clause as an exception to the rule
pacta tertiis nec nocent nec prosunt (i.e. that treaties produce effects only as between
the contracting parties). Legal theory is now unanimous in endorsing the findings
of the majority of the Court in the Anglo-Iranian case. As the ILC said, rather than
being an exception to this ru le, it confirms it, see ILC Report, A rtic le 8,
Commentary (2).
35. Idem, Article 8, Commentary (2).
36. G. Schwarzenberger also wrote regarding the relation between the pacta tertiis rule
and the MFN clause: “This drafting device […] contributes greatly to the
rationalization of the treaty-making process and leads to the automatic
self-revision of treaties which are based on the most-favoured-nation standard. It
makes unnecessary the incorporation in the treaty between grantor and the
beneficiary of the most-favoured-nation treatment of any of the relevant treaties
between the grantor and third States and their deletion whenever such treaties
cease to be in force. So long as this last-mentioned aspect of the matter is kept in
mind, most-favoured-nation clauses are correctly described as drafting (and
deletion) by reference”. G. Schwarzenberger, International Law as applied by
International Courts and Tribunals, London, 3rd ed, 1957, p. 243 and Yearbook of the
International Law Commission, 1970, Vol. II, p. 204.
37. ILC Report, Article 8, Commentary (8).

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s that the beneficiary State
Article 9 of the ILC Draft Articles provides ioof a
MFN clause should acquire, for itself orw for the benefit of persons or things in

n
o
a determined relationship with it, only those rights which fall within the

D Br
limits of the subject matter of the MFN clause, and only with respect to

y
persons or things which are specified in the clause or implied from its subject

nl
matter to benefit from it. Draft Article 10 goes on to suggest that the rights

O
acquired should be those that the granting State extends to a third State

u le
within the limits of the subject matter of the MFN clause and only if the

d
EC
beneficiary persons or things belong to same category of persons or things

ea
which benefit from the treatment extended to the third party and have the

se
same relationship with that State.38

R
a) What subject matter? O

e
The Commentary to Draft Articles 9 and 10 underlines that the rights of
An r
c tu
the beneficiary are limited, with respect to the subject matter, in two ways,
Le
namely by the clause itself, which refers to a certain matter, and secondly by
the rights conferred by the granting State on the third State. Although the
meaning of the rule is clear, its application is not always easy. The
Commission considered the following cases.
In the Anglo-Iranian Oil Company case (1952)39 – which resulted from the
nationalisation by the Government of Iran of the oil industry – the United
Kingdom invoked the MFN clauses of the agreements concluded with Iran
in 1857 and 1903 to seek the treatment foreseen in the Treaty of Friendship,
Establishment of Commerce of 1934 between Iran and Denmark and similar
agreements concluded with Switzerland and Turkey in 1934 and 1937 that
guaranteed the persons and property of the parties treatment in accordance
with international law. The Court dismissed the claim on the basis that it had
no jurisdiction.40
In the case concerning Rights of Nationals by the United States of America
in Morocco (1952)41 – which dealt in particular with the extent of the consular
jurisdiction which the United States could exercise in the French Zone of

38. Idem, p. 26.

39. ICJ Reports, 1952, p. 93 and www.icj-cij.org/icjwww/idecisions/isummaries/
ifussummary.
40. The Court found that it would have had jurisdiction only when a dispute related
to the application of a treaty or convention concluded by Iran after its Declaration
of acceptance of the jurisdiction of the Court, under Article 36(2) of its Statute.
This Declaration was made on 19 September 1932, i.e. after the UK/Agreements
of 1857 and 1903. This case was, nevertheless, mentioned by the ILC because it
analysed MFN clauses by comparing the rights of a beneficiary State under a basic
agreement with a granting State, with those provided by the granting State to
third States.
41. Morocco Case (France v. U.S.A), ICJ Pleadings, 1952, Vol. I.

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Morocco and the question of fiscal immunity io
sof US citizens – the International
w
Court of Justice concluded that the United States was not entitled, by virtue of

n
o
the MFN treatment clauses in its 1836 treaty with Morocco, to exercise

D Br
consular jurisdictional rights in the French zone of Morocco other than those

y
strictly included in that Agreement. The Court held in this connection that the

nl
United States had acquired additional consular jurisdiction by the effect of

O
such MFN clauses, but that those MFN-derived benefits had come to an end

u le
with the termination by Great Britain of all its rights and privileges of a

d
EC
capitulatory character by the Franco-British Convention of 1937. The Court

ea
also concluded that the MFN clause did not provide the basis for fiscal

se
immunity, given that no other State enjoyed it for the benefit of its nationals.42

R
O
The Court’s comments seemed to imply, however, that the scope of the MFN
clause in a treaty was confined to the matters dealt with in that Convention.

e
In the Ambatielos case (1952,43 1953,44 1956 45), the Greek government,
An r
c tu
relying upon Article X (MFN clause) and article XV (National treatment) of the
Le
Treaty of Commerce and Navigation concluded by Greece and the United
Kingdom in 1886 and a Declaration annexed to the Treaty of Commerce and
Navigation of 1926, invoked provisions embodied in earlier treaties between
the United Kingdom and third States (Denmark, Sweden and Bolivia) to claim
that Ambatielos, a Greek ship-owner, had suffered a denial of justice in regard
to a dispute it brought before the English courts. By its Judgments of 1 July
1952 and 19 May 1953, the International Court of Justice found that it had
jurisdiction to decide whether the United Kingdom was under the obligation
to submit to arbitration the difference as to the validity of Ambatielos’ claim,
in so far as it was based on the Anglo-Hellenic Treaty of 1886. At the same
time, the Court held that it had no jurisdiction to go into all the merits of the

42. The United States invoked the Peace Treaty between Morocco and the United Sates
of 1836. That treaty dealt with a variety of matters including navigation, trade and
consular jurisdiction. It explicitly provided for the United States consular jurisdiction
in all disputes between United States citizens or protégés. The United States claimed
additional rights to consular jurisdiction on the basis of an MFN clause in that Treaty,
for all cases in which a United States citizen or protégé was merely a defendant. The
third party treaties of Morocco, invoked by the United States, were the General Treaty
with Great Britain of 1856 and the Treaty of Commerce and Navigation with Spain
of 1861. These treaties granted jurisdiction in all cases in which the respective
nationals were merely defendants. The Court found that “the United States acquired
by virtue of the most-favoured nation clauses, civil and criminal jurisdiction in all
cases in which the United States were defendants,” but that those jurisdictional
benefits were extinguished upon termination by Spain and Great Britain of their
respective treaties with Morocco. See www.icj-cij.org/icjwww/idecisions/isummaries/
ifussummary520827.htm. The full text of the treaty is available at www.yale.edu/
lawweb/avalon/diplomacy/barbary/bar1836t.htm.
43. IC.J Reports 1952.
44. ICJ Reports 1953.
45. United Nations, Reports of International Arbitral Awards, Vol. XII, United Nations, 1963.

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case. The case was subsequently submitted io
s to a Commission of Arbitration
which ultimately rejected the claim, inw
its Award of 6 March 1956, on the basis

n
o
that the provisions contained in other Treaties invoked by the Greek

D Br
government provided for “privileges, favours or immunities” no more

y
favourable than those resulting from the national treatment clause. However,

nl
the ILC referred to this case because the Commission of Arbitration said:

u le
“The most-favoured-nation clause can only attract matters belonging to the same
category of subject as that to which the clause itself relates.” Regarding the

d
EC
specifics of the case, it held that: “… It is true that the administration of justice”,

ea
when viewed in isolation is a subject-matter other than “commerce and

se
navigation”, but this is not necessarily so when it is viewed in connection with the

R
O
protection of the rights of traders. Protection of the rights of traders naturally
finds a place among the matters dealt with by Treaties of commerce and

e
r
navigation. […] Therefore it cannot be said the administration of justice, in so far
An
c tu
as it is concerned with the protection of these rights, must necessarily be excluded
Le
from the application of the most-favoured-nation clause, when the latter includes
“all matters relating to commerce and navigation”.46
The International Law Commission also relied on decisions of national
courts.47 In a 1913 French case,48 the French Court of Cassation decided against
the invocation of certain procedural requirements for bringing suit found in a
French-Swiss Convention on jurisdiction and execution of judgment, in favour
of German nationals as a result of an MFN clause in an 1871 Franco-German
commercial treaty applying to the “admission and treatment of subjects of the
two nations.” The Court concluded that “these MFN provisions pertain
exclusively to the commercial relations between France and Germany,
considered from the point of view of the rights under international law, and
that they do not concern the rights under civil law and that “the most-

46. The submissions of the parties and the opinions expressed in this case also
provide useful insights into the operation of the MFN clause and the ejusdem
generis rule. For instance, in invoking this principle, the counsel for the United
Kingdom stated that “the clauses conferring most favoured nation rights in
respect of a certain matter, or class of matter, can only attract the rights conferred
by other treaties in regard to the same matter of class of matter. […] This
furnishes the conclusive answer to any suggestion that Article X can attract any
provisions in other treaties except provisions about commerce and navigation. It
cannot attract provisions dealing with the administration of justice and related
matters”. The Counsel of Greece argued on the other hand that access to the
courts and administration of justice in commercial matters is not outside the
“genus” of the favours referred to in the MFN clause of the Greek/UK treaty. They
a re part of “in all matters relat ing to commerce”. See Year book of the
International Law Commission, 1970, Vol. II, par. 69.
47. See “Digest of decisions of national courts relating to the most-favoured-nation
clause”, prepared by the UN Secretariat for the ILC, A/CN.4/269, 29 March 1973.
48. This description is drawn from the ILC Report, Article 10, Commentary (4).

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favoured-nation clause may be invokeds only if the subject of the itreaty
o
w
stipulating it is the same as the particularly favourable treaty the benefit of

n
o
which is claimed”.

D Br
In Lloyds Bank v. de Ricqlès and Gaillard (1930),49 the Commercial Tribunal

y
nl
of the Seine dismissed a claim by Lloyds Bank, which having been ordered to
give security for costs, invoked Article I of the Anglo-French Convention

u le
regulating commercial maritime relations of 28 February 1882 to benefit from
the provisions of a Franco-Swiss Treaty of 15 June 1889, which gave Swiss

d
EC
nationals the right to sue in France without being required to give security for

ea
costs. Lloyds argued that Article I of the Anglo-Convention engaged the

se
parties to give each other “immediately and unconditionally the benefit of

R
O
every favour, immunity or privilege in matters of commerce and industry
which have been conceded by one [of] the parties to any third nation

e
whatsoever, whether within or beyond Europe”. The Tribunal held that a party
An r
c tu
to a convention of a general character such as the Anglo-French Convention
Le
could not claim the MFN clause the benefits of a special convention such as
the Franco-Swiss Convention, which dealt with one particular subject, namely
freedom from the obligation to give security for costs.50
In reference to this case, the International Law Commission suggested
that, under the reasoning of this case, there would be a dilemma facing the
drafters of an MFN clause of either drafting the clause in too general terms,
risking the loss of its effectiveness through a strict interpretation of the
ejusdem generis rule, or of drafting it too explicitly, enumerating its specific
domains, in which cases the risk consists in the possible incompleteness of
the enumeration.51
The ILC Commentary stated that it is only the subject-matter of the clause,
not the treaty or agreement containing the clause that must belong to the same
category. In other words, it is not necessary that the treaty or agreement
including the clause be of the same category as that of the benefits that are
claimed under the clause. To hold otherwise would seriously diminish the value
of the MFN clause. However, the text of the treaty including the MFN clause does
serve as part of the context for its interpretation under Article 31(1) of the
Vienna Convention on the Law of Treaties.
In its Commentary (11) to Draft Articles 9 and 10, the Commission
observed that, since the effect of the MFN process is, by means of the
provisions of one treaty, to attract those of another, unless this process is

49. This summary of the case is based on the ILC Report, Article 10, Commentary (5).
50. In other words, in this case as well as the previous one, the Tribunals adopted the
view that MFN clauses could not be invoked to compare treatment provided under
two treaties dealing with different subjects.
51. Idem, Commentary (6) to articles 9 and 10.

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e _it E d it
strictly limited to cases where there is as
substantial identity betweeniothe
w
subject matter of the two sets of clauses concerned, the result could be to

n
o
impose upon the granting State obligations it never contemplated.

D Br

y
b) What categories of persons or things?

nl
A similar reasoning was proposed by the Commission for gauging the

u le
application of the MFN treatment to particular categories of persons or things.
In essence, the beneficiary State may claim MFN treatment only for the

d
EC
category of persons or things that receives or is entitled to receive certain

ea
treatment or certain favour, under the right of a third State. Furthermore, the

se
persons or things in respect of which the MFN treatment is claimed must be in

R
O
the same relationship with the beneficiary State as are the comparable
persons or things with the third States.52 There are cases where the MFN

e
clause is silent on the persons or things that may benefit from it. In such case,
An r
c tu
the ILC suggests, the subject matter of the clause – for instance customs
Le
duties, commerce, shipping – would implicitly determine the class of persons
or things that can benefit from it – importers, merchants, vessels.53

4. Recent cases
Among the numerous cases brought to ICSID in recent years,54 two cases,
Maffezini v. Kingdom of Spain and Tecnicas MedioAmbientales Tecmed S.A.
v. the United Mexican States stand out as raising issues concerning the MFN
clause. One issue is whether an MFN clause applies to dispute settlement
mechanisms and questions of jurisdiction. Five new cases have emerged since
Maffezini v. Kindgom of Spain and Tecnicas MedioAmbientales Tecmed S.A. v.
the United Mexican States, four under BITs and one under the Energy Charter
Treaty (ECT). None of the investor-State claims brought under NAFTA Chapter
Eleven has resulted in a finding of a breach of the MFN clauses.

4.1. BITs

Maffezini v. Spain (2000)

Maffezini v. Kingdom of Spain55 concerned a dispute arising from the
treatment allegedly received by the Argentine investor Emilio Agustin

52. Idem, Commentary (15) to articles 9 and 10.

53. Supra note 18, p. 27.
54. By the latest account, 32 new cases have been registered by the Centre in 2003
and 13 in 2004, as compared to 15 such claims in 2002 and only 12 and 5 in 2001
and 2000.
55. Emilio Agustin Maffezini v. Kingdom of Spain (ICSID No. Apr/97/7), Decision on
Jurisdiction of 25 January 2000 and Award of the Tribunal of 13 November 2000.
These decisions are available at www.worldbank.org/icsid/cases.

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s with his investmentio
Maffezini from Spanish entities, in connection in an
w
enterprise for the production and distribution of chemical products in the

n
o
Spanish region of Galicia. Spain (the Respondent) objected to the tribunal’s

D Br
jurisdiction since Mr. Maffezini (the Claimant) had failed to comply with an

y
exhaustion of local remedies requirements set forth in the Argentine-Spain

nl
BIT. Mr. Maffezini admitted that the dispute had not been referred to the

O
Spanish courts prior to its submission to ICSID, but he argued that the MFN

u le
clause in the Argentine-Spain BIT would allow him to invoke Spain’s

d
EC
acceptance of ICSID arbitration contained in the Chile-Spain BIT and that

ea
none of the exceptions from MFN in the Argentine-Spain BIT applied to the

se
dispute settlement provisions at issue in the case.

R
O
On 25 January 2000, the Tribunal decided that, 56 by virtue of the MFN
clause of the 1991 Argentine-Spain Bilateral Investment Treaty, the claimant

e
had the right to import the more favourable jurisdictional provisions of the
An r
c tu
1991 Chile-Spain Agreement and, as a result, to resort to international
Le
arbitration without being obliged to submit its dispute to Spanish courts for a
period of eighteen months beforehand.57 Paragraph 2 of Article IV of the
Argentina/Spain BIT provides that after guaranteeing a fair and equitable
treatment for investors (paragraph 1):
“In all matters subject to this Agreement, this treatment shall be no less
favourable than that extended by each Party to the investments made in its
territory by investors of a third country.”58
In this connection, the Tribunal referred to the ejusdem generis principle59
and the reasoning found in the Ambatielos case (namely that the MFN clause
can apply to provisions concerning the “administration of justice”). The
Tribunal also stated that today’s dispute settlement arrangements are
“inextricably related” to the protection of foreign investors as shown below:
“Notwithstanding the fact that the basic treaty containing the clause does not refer
expressly to dispute settlement as covered by the most-favoured-nation clause, the
Tribunal considers that there are good reasons to conclude that today dispute

56. Decision on Jurisdiction of 25 January 2000, www.worldbank.org/icsid/cases/

emilio_DecisiononJurisdiction.pdf.
57. The Tribunal noted that the Argentine-Spain BIT provides domestic courts with
the opportunity to deal with a dispute for a period of eighteen months before it
may be submitted to arbitration. Article 10(2) of the Chile-Spain BIT, however,
imposes no such condition. It provides merely that the investor can opt for
arbitration after the six-month period allowed for negotiations has expired. See
Supra note at paragraph 39.
58. Idem, at paragraph 38. The Spanish original of the clause reads as follows: “En
todas la materias regidas por el presente Acuerdo, este tratamiento no sera menos
favorable que el ortorgado por cada Parte a las inversions realizadas en su
territorio por inversores de un tercer pais.”
59. Idem, at paragraph 56.

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settlement arrangements are inextricably srelated to the protection of iforeign
o
investors, as they are also related tow
the protection of rights of traders under

n
o
treaties of commerce. Consular jurisdiction in the past, like other forms of

D Br
extraterritorial jurisdiction, were considered essential for the protection of rights of

y
traders and, hence, were regarded not merely as procedural devices but as

nl
arrangements designed to better protect the rights of such persons abroad.60 It

O
follows that such arrangements, even if not strictly a part of the material aspect of

u le
the trade and investment policy pursued by treaties of commerce and navigation,

d
EC
were essential for the adequate protection of the rights they sought to guarantee.

ea
International arbitration and other dispute settlement arrangements have

se
replaced these older and frequently abusive practices of the past. These modern

R
O
developments are essential, however, to the protection of the rights envisaged
under the pertinent treaties; they are closely linked to the material aspects of the

e
treatment accorded…”
An r
c tu
The Tribunal concluded that:
Le
“… if a third-party treaty contains provisions for the settlement of disputes that
are more favourable to the protection of the investor’s rights and interests than
those in the basic treaty, such provisions may be extended to the beneficiary of the
most-favoured-nation clause as they are fully compatible with the ejusdem
generis principle…”61
Under the broad MFN clause of the Argentine-Spain treaty, which
expressly referred to “all matters subject to the Agreement”62 the Tribunal did
not accept the respondent’s claim that “under the principle ejusdem generis the
most-favoured-nation clause can only operate in respect to […] substantive
matters or material aspects of the treatment granted to investors and not to
procedural or jurisdictional questions”.63
In rendering its decision, the Tribunal observed that in some BITs the
MFN clause explicitly embraces the provisions on dispute settlement.64 In
other treaties it refers to all rights contained in the agreement without
mentioning dispute settlement.65

60. Footnote omitted.

61. Supra, note 56 at 56.
62. The Tribunal also referred to the 1992 Agreement between Chile and the
Belgian-Luxembourg Economic Union as an example of other MFN treaty clauses
applying to “all rights contained in the present Agreement”. Supra Note 56 at 53,
footnote 21.
63. Idem, at 15.
64. The Tribunal cited in this connection the investment treaties concluded by the
United-Kingdom.
65. Idem at par. 52, 53.

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io of
s limits to its interpretation
However, the Tribunal stated the following
the clause: w

n
o
“… As a matter of principle, the beneficiary of the clause should not be able to

D Br

y
override public policy considerations that the contracting parties might not have

nl
envisaged as fundamental conditions for their acceptance of the agreement in
questions, particularly if the beneficiary is a private investor…

u le
Here it is possible to envisage a number of situations not present in the
instant case. First, if one contracting party has conditioned its consent to

d
EC
arbitration on the exhaustion of local remedies, which the ICSID Convention

ea
allows, this requirement could not be bypassed by invoking the most-favoured-

se
nation clause in relation to a third-party agreement that does not contain this

R
O
element since the stipulated condition reflects a fundamental rule of international
law. Second, if the parties have agreed to a dispute settlement arrangement which

e
An
includes the so-called fork in the road, that is, a choice between submission to r
c tu
domestic courts or to international arbitration, and where the choice once
Le
made becomes final and irreversible, this stipulation cannot be bypassed by
invoking the clause. This conclusion is compelled by the consideration that it
would upset the finality of arrangements that many countries deem important
as a matter of public policy. Third, if the agreement provides for a particular
arbitration forum, such as ICSID, for example, this option cannot be changed
by invoking the clause, in order to refer the dispute to a different system of
arbitration. Finally, if the parties have agreed to a highly institutionalized
system of arbitration that incorporates precise rules of procedure, which is the
case, for example, with regard to the North America Free Trade Agreement
and similar arrangements, it is clear that neither of these mechanisms could
be altered by the operation of the clause because these very specific provisions
reflect the precise will of the contracting parties. Other elements of public
policy limiting the operation of the clause will no doubt be identified by the
parties or tribunals. It is clear, in any event, that a distinction has to be made
between the legitimate extension of rights and benefits by means of the
operation of the clause, on the one hand, and disruptive treaty-shopping that
would play havoc with the policy objectives of underlying specific treaty
provisions, on the other hand.” 66

66. At pp. 23-24. Footnotes omitted.

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Tecmed v. Mexico (2003) 67,
67, 68
68 s io
w
In this case, decided on 29 May 2003, the Respondent was found to have

n
o
breached its obligations under the 1996 Mexico/Spain BIT as set forth in

D Br

y
Articles 4(1) (Fair and Equitable Treatment) and 5(1) (Nationalisation and

nl
Expropriation) in respect to the Mexican government’s failure to re-license the
Spanish investor Tecmed’s hazardous waste “Cytrar” in the state of Sonora. In

u le
considering the challenges made to the Arbitral Tribunal’s jurisdiction and the
timely submission by the Claimant of some of its claims, however, the

d
EC
Tribunal was called upon to decide whether the “most favourable conditions”

ea
foreseen in Article 8(1) of the Agreement entitled the claimant to a retroactive

se
application of its claim in view of a more favourable treatment in connection

R
O
with that matter which would be afforded to an Austrian investor under the
Austria/Mexico BIT of 29 June 1998. This article reads:69

e
An
“If the provisions of law of one of the Contracting Parties or obligations under r
Le c tu
international law at the margins of the present Agreement, current or future,
between the Contracting Parties, result in a general or specific regulation
according to which it should be given to investments of investor of the other
Contracting Party, a treatment more favourable than that it is envisaged in the
present Agreement, such regulation shall prevail over the present Agreement, to
the extent that it is more favourable.”70
In arguing for this result, the claimant referred to the Maffezini judgment.
The Tribunal did not examine the provisions of the Austria/Mexico BIT or the
MFN provisions of the Mexico-Spain BIT and, referring to paragraphs 62
and 63 of Maffezini, discussed above, it specifically ruled that:
“… matters relating to the application over time of the Agreement, which involve
more the time dimension of application of its substantive provisions rather than

67. Técnicas Medioambientales Tecmed, S.A. v. United Mexican States [ICSID Case
No. ARB(AF)/00/2] www.worldbank.org/icsid/cases/laudo-051903%20-English.pdf.
68. It has also been reported that the German investor claimant in Siemens AG v.
Argentine Republic, ICSID case No. ARB/02/08 may also use the Mafezzini
construction in this case. See “Investor-State Arbitration: A Hot Issue in Latin
America, Guido Santiago Tawil, M. & M. Bomchil, Buenos Aires. Horacio D. Rosatti
makes a similar observation on the implications of the Mafezzini case in “Bilateral
Investment Treaties, Binding International Arbitration and the Argentine
Constitutional System”, in La Ley, 15 October 2003.
69. Article 8(1) is a separate article from the MFN treatment clause in Article 4(2) of
the Agreement.
70. The Spanish original of the clause is as follows: “1. Si de las disposiciones legales
de una de las Partes Contratantes, o de las obligaciones emanadas del Derecho
Internacional al margen del presente Acuerdo, actuales o futuras, entre las Partes
Contratantes, resultare una reglamentación general o especial en virtud de la cual
deba concederse a las inversiones de inversores de la otra Parte Contratante un
trato más favorable que el previsto en el presente Acuerdo, dicha reglamentación
prevalecerá sobre el presente Acuerdo, en cuanto sea más favorable.”

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io go
matters of procedure or jurisdiction, due tostheir significance and importance,
w
to the core of matters that must be deemed to be specifically negotiated by the

n
o
Contracting Parties (emphasis added). These are determining factors for their

D Br
acceptance of the Agreement, as they are directly linked to the identification of the

y
substantive protection regime applicable to the foreign investor, and particularly,

nl
to the general (national or international) legal context within which such regime

O
operates, as well as to the access of the foreign investor to the substantive

u le
provisions of such regime. Their application cannot therefore be impaired by the

d
principle contained in the most favoured national clause.”71

EC

ea
Similarly, the Tribunal found that Title II(4) and (5) of the Appendix to the

se
Mexico/Spain Agreement (relating to dispute settlement):

R
O
“… contains requirements relating to the substantive admissibility of claims by
the foreign investor, i.e. its access to the substantive protection regime

e
An
contemplated under the Agreement. Consequently, such requirements are r
c tu
necessarily a part of the essential core of negotiations of the Contracting Parties;
Le
it should therefore be presumed that they would not have entered into the
Agreement in the absence of such provisions. Such provisions, in the opinion of
the Arbitral Tribunal, therefore fall outside the scope of the most-favoured-nation
clause contained in Article 8(1) of the Agreement.”72
In considering the substantive merits of the case, the Tribunal found no
violation of the MFN clause of the Agreement.73

74
Siemens A.G. v. Argentina (2004)74
On 3 August 2004, an ICSID Tribunal upheld jurisdiction in a claim filed in
May 2002 by Siemens A.G. under the Argentina-Germany bilateral investment
treaty for expropriation and alleged breaches by Argentina of said treaty with
respect to the termination of an agreement with a local Siemens subsidiary.
Argentina objected to ICSID jurisdiction on the ground, inter alia, that the
claimant had not complied with the requirement in the treaty that claimants
pursue domestic court remedies for 18 months before resorting to international
arbitration. The claimant argued that, under the MFN clause of the treaty, it was

71. Paragraph 69 ends with a footnote making a cross reference to paragraphs 25-26
and 62-63 of the Maffezini Decision on Jurisdiction.
72. Idem, p. 24, paragraph 74.
73. “The Claimant has failed to furnish convincing or sufficient evidence to prove, at
least prima facie, that the Claimant’s investment received, under similar
circumstances, less favourable treatment than that afforded to nationals of the
State receiving the investment of a third State, or that said investment was
subject to discriminatory treatment upon the basis of considerations relative to
nationality or origin of the investment or the investor.” Ibid, p. 73, paragraph 181.
74. Siemens A.G. v. The Argentine Republic (ICSID No. ARB/02/8), available at http://
ita.law.uvic.ca/documents/CMS_FinalAward.pdf.

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s provisioniof the
entitled to the treatment provided by the dispute-settlement
o
w
Argentine-Chile BIT, which did not impose any such requirement. The Tribunal

n
o
accepted this argument and rejected Argentina’s objections to the application of
the MFN clause.75 The Tribunal considered that the MFN clause should be

D Br

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interpreted in accordance with the plain meaning of its terms in their context

nl
and in the light of the object and purpose of the treaty which, as expressed in its

O
title and preamble, was “to protect” and “to promote” investment.76 The

u le
tribunal held that, on a plain and contextual reading, the terms “treatment” and

d
EC
the phrase “activities related to the investment” found in the treaty’s MFN

ea
clause “are sufficiently wide to include dispute settlement”.77 It also considered

se
that the treaty provision requiring that local remedies be pursued for 18 months

R
O
did not require the exhaustion of local remedies “as this rule has been
understood under international law”.78

e
An r
MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile (2004)79
79

On 21 May 2004, an ICSID Tribunal found that L

u
t its
cbreached
e
Chile had
obligations under the fair and equitable treatment provisions of the
Chile-Malaysia bilateral investment treaty (BIT) in regard to a real estate
project by MTD Equity, a Malaysian company, in Santiago, Chile. The claimants
based part of their claims on the argument that, by operation of the MFN
clause of the Chile-Malaysia treaty, they were entitled to benefit from the
treatment of the provisions of the Chile-Croatia BIT and the Chile-Denmark
BIT regarding the granting of permit awards. The Tribunal considered that “the
legal basis of the claim valid based on the wide scope of the MFN clause”80 in
the Chile-Malaysia BIT. It also agreed that “to include as part of the protections
of the Chile-Malaysia treaty those included in the Chile-Denmark BIT and the
Chile Croatia BIT “is in consonance” with the objective of the Chile-Malaysia
BIT “to protect investments and create conditions favorable to investments”.81
It concluded, however, the treatment foreseen in the Chile-Croatia BIT and the
Chile- Denmark BIT did not provide an entitlement to a change in Chilean

75. Supra Note, paragraph 110.

76. Supra Note, paragraphs 80-81.
77. Supra Note, paragraph 103.
78. Supra Note, paragraph 104.
79. MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile (ICSID Case No. ARB/
01/7), available at www.worldbank.org/icsid/cases/awards.htm.
80. Supra Note, paragraph 187. The first paragraph of the MFN clause of the
Chile-Malaysia BIT – Article 3(1) – reads as follows : “Investments made by
investors of either Contracting Pary in the territory of the other Contracting Party
shall receive treatment which is fair and equitable, and not less favorable than
that accorded to investments made by investors of any third State”.
81. Supra Note, paragraph 104.

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laws and regulations.82
The Respondent wass found to have breached iitsoBIT
w
obligations on the ground that Foreign Investment Committee’s approval of

n
o
MTD’s investment was made in full knowledge that this was against the urban

D Br
policy of the Government, constituting a breach of the fair and equitable

y
treatment obligation of the Chile-Malaysia treaty.83

nl
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Salini Costruttori and Italstrade v. Jordan-Argentina (2004)84
84

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On 9 November 2004, an ICSID Tribunal upheld jurisdiction in a claim filed

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in August 2002 by Salini Costruttori S.P.A. and Italstrade S.P.A. under the

ea
Jordan-Italy bilateral investment treaty (BIT) for alleged non performance of

se
Jordan’s obligations under a dam construction project. Jordan objected to ICSID

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jurisdiction on the ground that contractual disputes were governed by the
dispute settlement provisions of the contract and that claimants could not, by

e
virtue of the MFN clause of the Jordan-Italy BIT, avail themselves of the more
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c tu
advantageous dispute settlement provisions in other BITs such as that of
Le
Article IX of the Jordan-US BIT85 (Article IX gave to US investors in Jordan “the
right to submit investment disputes to ICSID regardless of any clause in the
investment agreemen t providing for a diffe rent dis pute settlement
mechanism”).86 The Tribunal rejected the latter claimants’ argument. It
observed that the circumstances of this case were different than that of the
Maffezini v. Spain case.87 Indeed, the MFN clause in the Jordan-Italy BIT does not
include any provision providing extending its scope of application to dispute
settlement. Furthermore, it considered that the Claimants had submitted
nothing from which it might be established that the common intention of the
Parties was to have the MFN clause apply to dispute settlement… On the
contrary the common intent of the Parties to exclude contractual claims from
ICSID jurisdiction was clear.88 From this the Tribunal concluded that the MFN
clause of the Italy-Jordan BIT did not apply in so far as dispute settlement
causes are concerned.89 It upheld jurisdiction on other grounds.90

82. Supra Note, paragraph 206.

83. Supra Note, paragraph 189.
84. Construttori S.p.A. and Italstrade S.p.A. v. the Hashemite Kingdom of Jordan,
(ICSID Case No. ARB/02/13), available at www.worldbank.org/icsid/cases/awards.htm.
85. Supra Note, paragraph 23.
86. Supra Note, paragraph 21.
87. Idem.
88. Supra Note, paragraph 118.
89. Supra Note 1, paragraph 119.
90. Supra Note, paragraph 179.

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 MOST-FAVOURED-NATION TREATMENT IN INTERNATIONAL INVESTMENT LAW

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s of Argentina (2005) io
Camuzzi International S.A. v. The Republic 91
91

wupheld jurisdiction in a claim filed in

On 10 June 2005, an ICSID Tribunal

n
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April 2003 by Camuzzi International S.A. under the Argentina-Belgium-

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Luxembourg Economic Union bilateral investment treaty (the treaty) for alleged

nl
breaches by Argentina of Camuzzi’s shareholder’s interests in three local
transport and distribution electrical companies as a result of the economic

u le
measures adopted by Argentina under the “Public Emergency Law of 2002”.
Argentina objected to ICSID jurisdiction on a number of grounds. Unlike the

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Siemens A.G. v Argentina case,92 however, Argentina did not object to Camuzzi’s

ea
claim that under the MFN clause of the treaty (Article 4), Camuzzi did not need

se
to comply with the requirement to pursue domestic court remedies for

R
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18 months before resorting to international arbitration. The claimant argued
that under this MFN clause – which covered “all matters subject to the

e
treaty”93 – it was entitled to the treatment provided by the dispute-settlement
An r
c tu
provision of the Argentine-United States BIT, which did not impose such
Le
requirement. The Tribunal concurred with this argument, stating that the
waiting period of 18 months foreseen in Article 12(2) and 12(3) of the treaty was
not applicable in this case94 and allowed the case to proceed on the merits.95

4.2. NAFTA
Two claimants under NAFTA’s investment chapter have relied on MFN
provisions. In the final awards of both cases, however, the tribunals rejected
the applicability of these MFN provisions. As a result, neither case illuminates
the principle subject of this article, i.e., the operation of MFN clauses.

ADF v. United States of America (2002)

The ADF case is the only completed NAFTA claim in which the claimant
alleged a breach of the MFN treatment clause, Article 1103. According to the
Tribunal’s 9 January 2003 award, ADF’s Article 1103 claim was an attempt to
mitig ate th e impact of the NAFTA Free Trade Commission ’s (F TC’s)
Interpretation on the Article 1105 claim.96 However, the Tribunal dismissed
the Article 1103 claim. It found that, pursuant to Article 1108(7)(a), the MFN
article did not apply to ADF’s claim because the case involved government

91. Camuzzi International S.A. v. The Republic of Argentina (ICSID No. ARB/03/7),
available at http://ita.law.uvic.ca/documents/Camuzzi2jurisdiction.pdf.
92. See summary above.
93. Supra Note, paragraph 19.
94. Camuzzi International S.A. v. The Republic of Argentina (ICSID No. ARB/03/7)
paragraph 28 and paragraph 34(iii).
95. Supra Note, paragraph 66.
96. ADF Group Inc. v. United States of America (Award, 9 January 2003), paragraph 136.
www.state.gov/documents/organization/16586.pdf.

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procurement.97 As a result, the tribunal did io
snot engage in a rigorous analysis
of ADF’s Article 1103 claim. w

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Pope & Talbot Inc. v. Canada (2001, 2002)

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nl
In Pope and Talbot, the claimant did not allege a breach of Article 1103, but
rather a breach of Article 1105. However, the Final Merits Award of Pope and

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Talbot rendered on 10 April 2001 suggested that an MFN clause could lead to
import into the NAFTA what the tribunal described as more favourable “fair and

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equitable treatment” provisions contained in some BITs.98 The Tribunal then

ea
observed that this formulation entitles investors to fair and equitable treatment

se
without regard to any limitations inherent in international law since these

R
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agreements provided that “investors must at all times be accorded fair and
equitable treatment […] and shall in no case be accorded treatment less than

e
required by international law”. The Tribunal then considered that, because
An r
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NAFTA investors could benefit from this more favourable treatment by virtue of
Le
Article 1103, it would make no sense for NAFTA Parties to deny those rights
under Article 1105 only to find them revived pursuant to Article 1103. The
Tribunal also stated that the NAFTA Parties were unlikely to have intended, in
article 1105, to treat each other’s investors less favourably than those from other
countries.99 On that basis, the Tribunal found a violation of Article 1105.

97. Idem, paragraph 196.

98. See Pope & Talbot Inc. v. Government of Canada (Tribunal Decision – 10 April 2001),
paragraphs 111, 115. The Tribunal appears to have relied on the BITs of “at least
Canada and the United States”. However it did not cite in the award any
provisions of Canadian BITs or any secondary sources that cite Canadian FIPA
p r o v i s i o n s w h i l e t h e U S B I T s t h a t i t c i t e d p r e d a t e d t h e N A F TA .
www.dfait-maeci.gc.ca/tna-nac/documents/Award_Merits-e.pdf. Since both the USA
and Canada have taken exceptions from MFN for all prior agreements, (NAFTA
Annex IV), it is not clear how prior BITs of the United States could be relevant to
interpreting the MFN clause in relation to Canada.
99. Idem, paragraphs 105-118.

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 MOST-FAVOURED-NATION TREATMENT IN INTERNATIONAL INVESTMENT LAW

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s Award, the NAFTA FreeiTrade
Shortly after the issuance of the Merits
oThis
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Commission (FTC) issued a binding interpretive note on Article 1105. 100

n
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was followed some months later by the Tribunal’s issuance of the Damages
Award. In that award, the Tribunal accepted, as a working basis,101 the FTC

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interpretation, which clarified that Article 1105 does not require treatment in

nl
addition to or beyond that which is required by customary international law

O
minimum standard of treatment, but maintained its prior award in favour of

u le
the claimant, concluding that Article 1105 was breached even under the FTC’s

d
EC
interpretation. The Tribunal, however, found it “unnecessary to consider

ea
issues relating to Articles 1102 or 1103 which had been raised following upon

se
the Interpretation”.102

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The Pope & Talbot Tribunal’s reasoning in the merits phase has not been
followed in subsequent NAFTA cases.103

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An r
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4.3. ECT

Plama Consortium Limited v. the Bulgaria (2005)104

104 Le
On 8 February 2005, an ICSID Tribunal upheld jurisdiction in a claim filed
in December 2002 by Plama Consortium Limited under the ICSID arbitration
provisions of the Energy Charter Treaty (ECT) and the MFN provision of the
Bulgaria-Cyprus bilateral investment treaty for alleged breaches by Bulgaria of
the ECT for misconduct as regard a Nova Plama oil refinery in Northern
Bulgaria. While the Tribunal rejected Bulgaria’s objections as to the
jurisdictional issues raised with respect to the ECT, it accepted Bulgaria’s

100. Paragraph 2 of the FTC’s Interpretation provides that 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 customary international law
minimum standard of treatment. Paragraph 3 states that 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 1 105.
101. While the Tribunal noted that “it might appear” that its own interpretation was
different from the one adopted by the FTC, it concluded that even applying this
“restrictive interpretation” to the facts of the case, would lead to the exact same
conclusions it reached in its previous Award. See Pope & Talbot Inc. v. Government
of Canada (Tribunal Decision – 31 May 2002, at 47, 56 and 69 www.dfait-maeci.gc.ca/
tna-nac/documents/damage_award.pdf.
102. Idem, at 66.
103. In the Loewen case, the Tribunal said that, to the extent that the Pope & Talbot
Tribunal had suggested an interpretation of Article 1 105 different from that
adopted by the FTC, it should be disregarded [The Loewen Group, Inc and Raymond
L. Loewen v. United States of America, ICSID case No. ARB (AF)98/3), Final Award,
23 June 2003, see www.state.gov/documents/organization/22094.pdf].
104. Plama Consortium Limited v. Republic of Bulgaria (ICSID Case No. ARB/03/24)
available at www.worldbank.org/icsid/cases/plama-decision.pdf.

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s treaty did notientitle
contention that the MFN provision of the Bulgaria-Cyprus
the claimant to invoke ICSID jurisdictionw
o
under broader investor-state arbitration

n
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clauses in other BITs – such as the Bulgaria-Finland BIT – as compared to the

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dispute settlement provisions in the Bulgaria-Cyprus treaty which are concerned

y
only with disputes relating to expropriation. The Tribunal based its finding, inter

nl
alia, on available evidence to the effect that “at the time of the conclusion of the

O
treaty, Bulgaria and Cyprus limited specific investor-state dispute settlement to

u le
the provisions set forth in the BIT and had no intention of extending those

d
provisions through the MFN provision”.105 The Tribunal also took the view that

EC

ea
the “intention to incorporate dispute settlement (in the scope of application of

se
the MFN) must be clearly and unambiguously expressed”106 and concluded

R
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accordingly that the MFN provision of the Bulgaria-Cyprus BIT to ICSID
arbitration cannot be interpreted as providing consent to submit a dispute under

e
the Bulgaria-Cyprus BIT to ICSID arbitration.
An r
5. Summing up
Le c tu
The main points in the present survey may be summarised as follows:
● MFN treatment has long been a core standard of international
economic relations. It provides for equal competitive opportunities
between nations in respect to the matters to which the particular MFN
clause applies, be they in the field of trade, investment, or any field of
economic co-operation. Although its application to international
investment is more recent than that for international trade, it is widely
accepted, together with national treatment, as one of the most
important standards of treatment for investors and their investments.
● Despite their prevalence in investment treaties, MFN clauses do not
have a universal meaning. Indeed, the formulation and application of
MFN clauses varies widely among investment treaties. In some cases,
the scope of application of the clauses extends to the entire content of
the treaty; in others, the clause is limited to only some of the matters
addressed by the treaty. The proper application and interpretation of a
particular MFN clause in a particular case requires a careful
examination of the text of that provision undertaken in accordance
w ith the treaty interpretation rules as se t out in the Vienn a
Convention
● The ejusdem generis principle has been applied in the jurisprudence of
international tribunals and national courts and by diplomatic practice.
According to this principle, an MFN clause can attract the more

105. Supra Note, paragraphs 195-197.

106. Supra Note, paragraph 204.

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 MOST-FAVOURED-NATION TREATMENT IN INTERNATIONAL INVESTMENT LAW

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s treaties only in regarditoothe
favourable treatment available in other
w
same “subject matter”, the same “category of matter” or the same

n
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“class of matter”. While the principle is clear, its application is not

D Br
always simple or consistent. This principle can provide some useful

y
guidance. However the interpretation and application of a particular

nl
MFN clause must be undertaken, as noted above, based on the text of

O
the provision and according to the general rules of interpretation as

u le
embodied in the Vienna Convention.

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ANNEX 4.A1

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ANNEX 4.A1

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Vienna Convention on the Law of Treaties107

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Article 31. General Rule of Interpretation
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1. A treaty shall be interpreted in good faith in accordance with the ordinary
An r
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meaning to be given to the terms of the treaty in their context and in light
of its object and purpose. Le
2. The context for the purpose of the interpretation of a treaty shall comprise,
in addition to the text, including its preamble and annexes:
– any agreement relating to the treaty which was made by one or more
parties in connexion with the conclusion of the treaty;
– Any instrument which was made by one or more parties in connexion
with the conclusion of the treaty and accepted by the other parties as an
instrument related to the treaty.
3. There shall be taken into account, together with the context:
– Any subsequent agreement between the parties regarding the
interpretation of the treaty or the application of its provisions;
– any subsequent practice in the application of the treaty which
establishes the agreement of the parties regarding its interpretation;
– any relevant rules of international law applicable in the relations
between the parties.
4. A special meaning shall be given to a term if it is established that the
parties so intended.

Article 32. Supplementary Means of Interpretation

Recourse may be had to supplementary means of interpretation,
including the preparatory work of the treaty and the circumstances of its

107. Concluded in Vienna on 23 May 1969. Came into force on 27 January 1990.
Ratified by 70 countries.

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 ANNEX 4.A1

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conclusion, in order to determine the meaning io
when the interpretation
according to article 31, or to determinew
the meaning when the interpretation

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according to article 31:

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a) leaves the meaning ambiguous or obscure; or

nl
b) leads to a result which is manifestly absurd or unreasonable.

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OECD PUBLICATIONS, 2, rue André-Pascal, 75775 PARIS CEDEX 16

PRINTED IN FRANCE
(20 2005 14 1 P) ISBN 92-64-01164-1 – No. 54189 2005
A CHANGING LANDSCAPE
se
International Investment Law
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«
International

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A COMPANION VOLUME TO INTERNATIONAL INVESTMENT PERSPECTIVES

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International investment agreements reinforce domestic liberalisation and underpin
Investment Law

nl
legal security for investment. Recently, a “new generation” of bilateral and regional
investment agreements has emerged, together with a growing body of jurisprudence.

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Analysis undertaken by the OECD Investment Committee of their core provisions and
arbitration procedures contributes to a common understanding of their implications, A CHANGING LANDSCAPE

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and ultimately better and more predictable outcomes for governments and investors.

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A COMPANION VOLUME TO INTERNATIONAL

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The present publication includes four surveys which have been developed to support
INVESTMENT PERSPECTIVES

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the work programme of the OECD Investment Committee on legal and policy issues
O

INTERNATIONAL INVESTMENT LAW A Changing Landscape

arising from international investment agreements. The first survey deals with the
role of transparency and third party participation in investor-state dispute settlement

e
An
procedures. It examines the current rules and recent steps taken to improve r
transparency.
Le c tu
The survey on “Fair and Equitable Treatment Standard” reviews the concept and
the elements of its content, based on jurisprudence and state practice. The survey
on “Indirect Expropriation and the Right to Regulate” touches upon one of the
most frequently contested provisions in investor-state arbitration in recent years.
It identifies main criteria found in investment agreements and used by tribunals to
articulate the difference between the two concepts. The survey on “Most-Favoured
Nation Treatment” reviews accepted principles to interpret the application of this long
standing provision in investment agreements.

The full text of this book is available on line via this link:
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