Analysis of the Concept of Fair and Equitable Treatment in Investment Treaties - Essay Example

?Critical Analysis of the Concept of “Fair and Equitable Treatment” in Investment Treaties: Recent Investment Treaty Practice and Arbitration Cases Introduction The growth of bilateral investment treaties (BITs) since the 1990s corresponds with a growth in legal developments at international law.1 The fact is, BITs have developed in such a way that they encapsulate their own laws under the broader application of customary international law.2 Ultimately, the principle of fair and equitable treatment occupies an important place under BITs and international foreign investment generally. The principle represents the fundamental standard by which investor/state disputes are resolved.3 At its heart, the doctrine of fair and equitable treatment has as its main objective the assessment of host governments’ obligations and treatment relative to foreign investors and their investments.4 The problem however, arises out of the fact that the doctrine of fair and equitable treatment is not defined by any universally applicable instrument and is therefore capable of diverse construction.5 A review of current and recent practices it has become clear that arbitrators and adjudicators in general are typically forced to choose between ascertaining whether or not the host state has a specific duty to guarantee the foreign investor fair and equitable treatment as a separate duty, or whether or not this duty compliments the minimum treatment standard.6 This juxtaposition has given way to a great deal of uncertainty as adjudicators have largely been unable to agree on one approach over the other.7 Making matters worse, there is no general consensus on whether or not there is in fact an agreed upon minimum treatment standard at international law. This research study provides a critical analysis of the application and interpretation of the doctrine of fair and equitable treatment by reference to recent foreign investment treaty practices and decisions by arbitrators. I. The Doctrine of Fair and Equitable Treatment Today’s BITs typically contain a clause providing that the host state guarantee the protection contained in the doctrine of fair and equitable treatment to foreign investors from the other state party to the BIT.8 Unfortunately, since there is no agreed upon interpretation of the doctrine, arbitrators and adjudicators in general have interpreted the doctrine in diverse ways. The result is, despite the wide use of the doctrine of fair and equitable treatment, it is difficult to identify what this doctrine actually means. 9 The minimum standard treatment requires that the host state provide basic protection to foreign investment.10 BIT’s built on the minimum standard treatment by introducing the doctrine of fair and equitable treatment which embodies concepts such as security and protection together with compensation in cases of expropriation.11 Other concepts contained in the doctrine of fair and equitable treatment include non-discrimination and in some BITs, the scope is broadened to include most-favoured nation treatment, national treatment and a wide array of protective measures that reflect the nature of the BIT.12 The majority of BITs call for the doctrine of fair and equitable treatment to be constructed around the concept of the minimum treatment standard. The problem is that at international law, there is no precise definition of what the minimum treatment standard. The best that can be said at this point is that the minimum treatment standard arose out of concepts tied to ideas of natural justice which is by itself capable of diverse interpretation. Another view is that the minimum treatment standard is measured by reference to the conduct that once could expect of a “reasonable state” by the standards of “modern civilization”.13 Again, much is left to interpretation and different ideas of what amounts to the reasonable state and modern civilization. The United Nations Conference on Trade and Development (UNCTAD) accepted that it is difficult to identify the main principles contained in the doctrine of fair and equitable treatment.14 UNCTAD identified two different interpretative approaches to applying the doctrine of fair and equitable treatment. They are “the plain meaning approach” and reliance on customary international law.15 By virtue of the plain meaning approach adjudicators do no more than simply give the words fair and equitable their ordinary meaning.16 The problem here is that there is no universal definition of what is fair and equitable. This approach is therefore unlikely to bring about a universal standard for judging host states’ application of the doctrine of fair and equitable treatment. In fact this much has been evidenced by arbitration awards and decisions.17 It is also true that what might be considered fair and equitable in one case will not necessarily be so in another. Therefore the plain meaning approach will not render the application and interpretation of fair and equitable treatment any more concise and certain. Taking the minimum treatment standard approach does not help either. The minimum treatment standard approach takes the position that foreign investors are accorded a certain level of treatment and failure to do so on the part of the host state will provide the foreign investor with an actionable remedy.18 In other words, the minimum treatment standard assumes that the doctrine of fair and equitable treatment is virtually the same as the minimum standard treatment.19 However, BITs do not make this clear as many of these treaties either suggest that the doctrine of fair and equitable treatment is a separate standard or a complimentary standard.20 Therefore, there is a considerable degree of uncertainty as to whether or not the minimum treatment standard and the doctrine of fair and equitable treatment are two separate standards or essentially the same. As a result the minimum standard treatment interpretative approach is also unsatisfactory. It is therefore hardly surprising that arbitrators have developed a tendency to interpret the doctrine of fair and equitable treatment as either complimentary to or building on the minimum treatment standard.21 To this end, the minimum standard treatment was introduced into international law discourse by the case Neer Claim United States v Mexico General Claims Commission (1926). In Neer, the minimum standard treatment was determined to a be a tool for judging whether or not the host government acted with “propriety” as measured against internationally accepted standards.22 It was for the complainant to prove the host government’s conduct contravened internationally accepted standards. In this regard, the complainant ought to prove that the conduct of the host government was such that it was outrageous, or was in “bad faith” or that is was manifest “willful neglect of duty” or simply inadequate in the context of internationally accepted or recognized standards of conduct.23 Only then would the conduct complained of, qualify as contravening what can be characterized as prudent state behaviour.24 It was from this interpretation of the minimum treatment standard as enunciated in the Neer case, that the doctrine of fair and equitable treatment emerged. The underlying concept takes the position that the minimum standard treatment applied to foreign investors regardless of what treatment was accorded nationals in like cases.25 It is against this background that the doctrine of fair and equitable treatment emerged. The United Nations Conference on Trade and Development sheds some light on the developments and legal discourse surrounding the doctrine of fair and equitable treatment in its report Latest Developments in Investor-State Dispute Settlement, 2008. In this report the United Nations observed that legal developments support the conclusion that there is indeed a great potential for varied and vague interpretations of the doctrine of fair and equitable treatment.26 The UN’s 2008 report revealed that there were a number of methods used to interpret what constitutes fair and equitable treatment. In some instances, tribunals would emphasize that the host state was required to apply the law in a consistent manner. This would entail a degree of stability and certainty relative to the legal framework within the host state. This stability and certainty should be such that it corresponded with the reasonable expectations of the foreign investor as the foreign investor’s expectations typically come into play prior to investing in the host state.27 In other words, tribunals have taken the position that the legal regime that encouraged the foreign investor to invest in the host state should remain in place pursuant to the doctrine of fair and equitable treatment. Arguably, this kind of an interpretive approach is no more than an enhancement of the minimum treatment standard at international law. However, when a BIT incorporates both the minimum treatment standard and the doctrine of fair and equitable treatment, there is confusion as to whether or not they create separate standards of treatment or are merely complimentary to one another. Regardless, a number of disputes involving BITs have been adjudicated by virtue of arbitration and the majority of these BIT disputes have involved the interpretation and application of the doctrine of fair and equitable treatment.28 In this regard, there is a significant body of case law permitting an assessment of the current practice relative to the interpretation and application of the doctrine of fair and equitable treatment under the auspices of investor-state arbitration.29 The interpretation of Article 1105 of the North American Free Trade Agreement (NAFTA) in Pope and Talbot Inc and the Government of Canada Award on the Merits of Phase 2 sheds some light on the challenges of compiling a cohesive and certain body of case law relative to the interpretation and application of the doctrine of fair and equitable treatment. To this end, Article 1105 of NAFTA requires its contracting states to ensure that each state provide the other with fair and equitable treatment.30 Article 1105 describes the duty as follows: 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.31 Article 1105 therefore proceeds on the assumption that there is an international standard of fair and equitable treatment. However, since there is no such universal standard or law, Article 1105 has a number of possibilities. The tribunal in Pope and Talbot Inc, therefore interpreted Article 1105 as therefore an addition to existing norms at international customary law.32 Therefore according to the Pope and Talbot Inc tribunal, fair and equitable treatment is separate and apart from the minimum treatment standard. Therefore it was not interpreted by reference to that standard.33 There is in fact controversy among academics and jurists as to whether the doctrine of fair and equitable treatment is simply an extension of the minimum treatment standard or a separate standard which merely compliments customary international law.34 The Pope case, rather than clarify the issue, merely complicates it by leaving open the question as to where the fair and equitable treatment doctrine stands in relations to the minimum standard treatment. The tribunal in Noble Ventures, Inc v Romania ISCID Case No. Arb/01/11 [2005] demonstrated the difficulties involved in referring to customary international law in the application and interpretation of the doctrine of fair and equitable treatment. In this case the tribunal took the position that treaties should be interpreted in “good faith in accordance with the ordinary meaning” employed in the treaty and by reference to its context and purpose.35 It may be necessary to refer to other factors such as the negotiation stage of the treaty formation and the circumstances involved in executing and concluding the treaty. However these references are only important for confirming the interpretation arrived at.36 This is how the tribunal in Noble Ventures Inc. decided to interpret the doctrine of fair and equitable treatment as it appeared in the BIT in question. In this regard, the BIT called upon the host state, Romania to provide the investor “with treatment in accordance with international law”.37 Moreover, Romania was required to act in good faith, ensure that the investor was accorded “fair treatment” and to “avoid arbitrary and discriminatory” treatment.38 The tribunal came to the conclusion that the duty to ensure provide fair and equitable treatment under the BIT emphasized a duty to “provide full protection and security” together with a duty not to act arbitrarily and with discrimination and to adhere to its “contractual obligations towards investors”.39 After a domestic crisis, the foreign investor’s property was expropriated by the Romanian government as the bank holding the investor’s funds was the subject of government confiscation. The foreign investor’s main concern was that the host state had failed to respond to its request to reschedule its debt and as a result the foreign investor could not discharge its own commitments as its assets were held up in the state-owned bank. The tribunal concluded that the host state’s failure to respond to the investor’s request to reschedule its debts did not amount to bad faith under the auspices of the fair and equitable doctrine. The host state had other interest to consider, including the employees of the banks in question, and that was not unreasonable in the circumstances. The fact that the debts had been recalled by the host state in a judicial process did not contravene the doctrine of fair and equitable treatment. This is because the standard as expressed in the BIT only called upon the host state not to act discriminatorily or arbitrarily. Therefor the host state had not acted in a manner inconsistent with the doctrine of fair and equitable treatment.40 In International Thunderbird Gaming Corporation v The United Mexican States (Jan 2006) Article 1105 once again arose for interpretation. In this case, an American company, International Thunderbird, providing certain gambling activities in Mexico. Those activities were subsequently closed down by host state despite a number of formal applications to prevent closures. As a result the matter was referred to arbitration by International Thunderbird.41 It was alleged by International Thunderbird Mexican officials conducted themselves in a such a way as to contravene, internationally recognized principles of “detrimental reliance”, “denial of justice” and “abuse of rights”.42 The complainant also argued that by contravening these principles of international law, the host state failed to provide the complainant with fair and equitable treatment. The host state maintained however, that its conduct was consistent with Mexican laws and that all gambling activities in Mexico that provided slot machines were closed as it constituted unlawful gambling activities in Mexico.43 The tribunal in its construction of Article 1105 referred to NAFTA Trade Commission’s Notes of Interpretation of Certain Chapter 11 Provisions. By virtue of this note, Article 1105(1) is required to be interpreted as consistent with minimum treatment standard at customary international law.44 Moreover, fair and equitable treatment together with the requirement to provide full security and protection is not the same as treatment In addition, both the concept of fair and equitable treatment and the concept of full protection and security does not mean treatment: in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.45 Ultimately, the tribunal determined whether the duty to provide fair and equitable treatment was breached by reference to the minimum standard of treatment pursuant to customary international law. Therefore, the tribunal determined that dictated that in ascertaining a breach of the minimum treatment standard, it was required to examine the specific facts and circumstances of the particular case before it. In taking this approach, the tribunal can determine whether or not the conduct complained of accords with a “gross denial of justice or manifest arbitrariness” so that it could be characterized as “below acceptable international standards.”46 With this interpretative guide, the tribunal came to the conclusion that the host state did not act arbitrarily. In addition, the foreign investors had ample opportunities to register its side of the issues at each of the court actions.47 Essentially, the tribunal came to the conclusion that the host state had not denied the foreign investors fair and equitable treatment under customary international law. Unlike the Pope case which also interpreted Article 1105 of NAFTA, International Thunderbird seemingly interpreted Article 1105 differently. The Pope case ruled that the fair and equitable treatment standard complimented the minimum treatment standard. However, the tribunal in the International Thunderbird seemingly took the position that the minimum treatment standard was the applicable test and assessed the host state’s accordingly. The Loewen Group, Inc and Raymond L. Loewen v United States of America Case No. ARB(AF)/98/3 Washington, (2003) took a more direct and concise approach. In this case the tribunal took the position that pursuant to the interpretive Note, the doctrine of fair and equitable treatment together with the concept of “full protection and security” are only obligations “to the extent that they are recognized by customary international law.”48 In this case the main issue relative to the doctrine of fair and equitable treatment was whether or not the foreign investors had been denied justice. To this the tribunal stated that justice is denied when there is: Manifest injustice in the sense of a lack of due process leading to an outcome which offends a sense of judicial propriety is enough, even if one applies the Interpretation according to its terms.49 The appropriate test was that put fourth in Mondev International Ltd. v United States of America ICSID Case No. ARB (AF)/99/2, Award October 11, 2002. In that case it was determined that the proper test was ascertaining whether from an international perspective, and taking account of the standards expected in the “administration of justice” a tribunal could conclude by reference to the circumstances and facts as he/she did conclude.50 Only then could the decision be examined for impropriety and credibility relative to whether or not the doctrine of fair and equitable treatment was denied.51 Thus far it has been established that there is a general tendency to connect the doctrine of fair and equitable treatment to the minimum treatment standard. This is particularly unavoidable in NAFTA cases since Article 1105 specifically draws attention to the minimum treatment standard. The tribunal in United Mexican States v Metalclad Corporation 2001 BCSC 664 provides an explanation. According to the tribunal, NAFTA’s Article 1102 of NAFTA makes provision for national treatment and Article 1103 makes provision for most-favoured national. 52 Article 1105 is therefore important for bridging any gaps left by Articles 1102 and 1103. This minimum treatment standard is necessary for ensuring that host states do not treat foreign investors in a manner that is decidedly “harsh” or harmful or “unjust”, although such conduct may not amount to discriminatory treatment since this might accord with national treatment.53 In other words, conduct falling under the scope and range of Article 1105 is required to be a contravention of customary international law. In this regard, the doctrine of fair and equitable treatment and concepts of full protection and security form parts of the minimum treatment standard under international law.54 Be that as it may, the tribunal argued that each of these standards are incapable of sustaining itself in isolation. To this end, treatment or conduct will not be defined as contrary to fair and equitable treatment without looking to customary international law for guidance. 55 Further guidance is found in S.D. Myers Inc. v Canada 2000-2002 NAFTA in which it was stressed that in ascertaining the doctrine of fair and equitable treatment it was necessary to determine whether or not the foreign investor’s treatment was such that it was arbitrary or unjust in such a way as to be inconsistent with international standards and expectations.56 Even so, the degree of respect accorded the notion of state sovereignty cannot be ignored. At the same time this must be balanced against international laws, norms, practices and standards.57 Conclusion In the final analysis, it would appear that the current practice as evidenced by the cases discussed, any determination of whether or not there has been a breach of the doctrine of fair and equitable treatment, some degree of proof of international law is required. This is virtually impossible as there is no cohesive and consistent body of international law relative to investor-state arbitration clarifying the standard applicable to the doctrine of fair and equitable treatment. The law as it currently stands is built upon treaty obligations and varying interpretations by tribunals so that emerging legal discourse is comprised on uncertainty. Bibliography Textbooks Dolzer, R. and C. Schreuer. Principles of International Investment Law. (Oxford, 2008). Subedi, S. International Investment Law: Reconciling Policy and Principle. (Oxford, 2008). Articles/Journals Cheng, T.; Aguilar-Alvarez, G.; Smit, R. and Reisman, W. ‘Is the Fair and Equitable Treatment Standard Fair and Equitable?’ (2006) International Law Weekend 2006/Panel Discussion, Association of the Bar of the City of New York, 1-7. Kill, T. ‘Note: Don’t Cross the Streams: Past and Present Overstatement of Customary International Law in Connection with Conventional Fair and Equitable Treatment Obligations.’ (2008)106 Michigan Law Review 853-880. Mayeda, G. ‘Playing Fair: The Meaning of Fair and Equitable Treatment in Bilateral Investment Treaties.’ (2007) 41(2) Journal of World Trade 273-291. Mutchlinkski, P. ‘Caveat Investor? The Relevance of the Conduct of the Investor Under Fair and Equitable Treatment Standard.’ (2006) 55 International and Comparative Law Quarterly 527-558, OECD. “Fair and Equitable Treatment Standard in International Investment Law.” (2004)3 Working Papers on International Investment No. 2004/3, 2. Porterfield, M. ‘An International Common Law of Investor Rights?’ (2006) 27 U. Pa. J. Int’l Econ. L. 79-113. Schill, S. “Fair and Equitable Treatment under Investment Treaties as an Embodiment of Rule of Law.” (2006)6 International Law and Justice Working Papers, New University School of Law, IILJ Working Paper 2006/6, Abstract. Schreuer, C. ‘Fair and Equitable Treatment in Arbitral Practice’. (2005) 6(3) Journal of World Investment and Trade, 357-386. United Nations Conference on Trade and Development. ‘Fair and Equitable Treatment’. (1999) UNCTAD/ITE/IIT/11 Vol. III, United Nations: New York and Geneva. Table of Cases International Thunderbird Gaming Corporation v The United Mexican States (Jan 2006) 10-15. Neer Claim United States v Mexico General Claims Commission (1926) 4 R.I. A.A. 60. Cited in G. Mayeda. ‘Playing Fair: The Meaning of Fair and Equitable Treatment in Bilateral Investment Treaties.’ (2007) 41(2) Journal of World Trade 273-291. Noble Ventures, Inc v Romania ISCID Case No. Arb/01/11 [2005], 61. Pope and Talbot Inc and The Government of Canada Award on the Merits of Phase 2, 50. S.D. Myers Inc. v Canada 2000-2002 NAFTA. The Loewen Group, Inc and Raymond L. Loewen v United States of America Case No. ARB(AF)/98/3 Washington, (2003). United Mexican States v Metalclad Corporation 2001 BCSC 664. Table of Statutes NAFTA 1992. Read More