Fair and Equitable Treatment - Essay Example

?Fair and Equitable Treatment Introduction The global economy has spurred the growth of foreign direct investments in host countries. Investors who export their capital to other countries in this manner do expose their assets to risks of abusive and unfair treatment in those countries whose legal framework and disposition are unlike that of the home country. Inevitably, claims of perceived injustices give rise to disputes between parties in home and host countries, necessitating a regime that allows for claims settlement and awards that has sufficient compulsive power to effect compliance. In order to address the issue of unfair and unjust practices involving foreign investments, the standard of fair and equitable treatment (FET) has evolved in bilateral treaties and multilateral agreements, to signify that level of protection which states should provide the investments covered under bilateral investment treaties (BITs) with other countries. The specification of the standard, however, has been subject to various interpretations through the years because of its reliance on principles of equity. Debates over the FET revolve around whether this standard should be based on other standards of law or whether it is an autonomous and self-contained standard in itself. The standard it is most commonly related to is the customary international law minimum standard, and sometimes it is measured against more general principles of international law. In this paper, the evolving meaning of what constitutes fair and equitable practice as contained in BITs and as interpreted by arbitral tribunals shall be discussed and critiqued. The bases and rationale for the continued development of the FET will provide implications into the continued growth of foreign direct investments in this increasingly globalized economy. The Meaning of Fair and Equitable Treatment Fair and Equitable Treatment (hereinafter referred to as FET) is a legal standard and not a reference to a decision ex aequo et bono,1 for which the tribunal may not adopt its own idiosyncratic definition, but which “must be disciplined by being based upon State practice and judicial or arbitral case law or other sources of customary or general international law.”2 Although FET’s definition is not precise, nevertheless it is capable of practical application by applying its specification in case law. The most important principles that attach to FET are transparency, stability, and the investor’s legitimate expectations, compliance with contractual obligations, procedural propriety and due process, action in good faith, and freedom from coercion and harassment.3 The FET appears consistently in investment treaty practice since it was first articulated in the Havana Charter of 19484 where it is stated in Article 11(2) (a) (i) thereof: ‘to assure just and equitable treatment for the enterprise, skills, capital, arts and technology brought from one Member country to another.’ While the Charter was never enforced, U.S. treaty practice was influenced by its reference to FET.5 It was thereafter included in codifications of investor rights, beginning with the 1959 Draft Convention on Investments Abroad,6 Article 1 of which states that ‘Each party shall at all times ensure fair and equitable treatment to the property of the nationals of other parties.’ The identical wording was adopted in the 1967 OECD Draft Convention on the Protection of Foreign Property.7 As a result of the lack of precision in its definition, various treaties accord different contexts to the application of FET. Some BITs link FET with a substantive norm such as nondiscrimination, such as the treaty between Bangladesh and Iran which provides that each party extend to covered investment ‘fair treatment not less favourable than that accorded to its own investors or investors of any third state, whichever is more favourable.’8 There are a host of cases that link FET with customary international law in a variety of ways, as shall be seen in the discussion of the use of FET in BITs in the following section. Despite the various wordings of FET, the tribunals have invariably interpreted and applied the standard consistently with each other, arriving, though unconsciously, at one coherent theory for some writers, or for others arriving at least at a consensus of the attributes of FET without articulating any grand theory.9 Application of FET in Bilateral Investment Treaties In 1959, Germany concluded the first BIT with Pakistan,10 and in the sixties other countries followed suit in inaugurating their own BITs.11 Switzerland was the first to include the FET standard in its BIT program in 1961.12 Many countries followed suit thereafter. The United States commenced its own BIT program in 1977, and the standard was included in every U.S. BIT. To date, more than 2,000 BITs required that covered investment be accorded fair and equitable treatment.13 There are a variety of contexts in which the FET appears in these BITs. In majority of cases, a BIT requires parties to provide covered investment with fair and equitable treatment, but is silent in so far as defining the FET standard in terms of any other standard.14 Where the standard is given its context, there are four main approaches that are prevalent in the formulation of the standard’s meaning: (1) the FET standard is equated to the international minimum standard that is present in international customary law; (2) the FET standard is measured against international law, including all sources of the law; (3) the FET standard is considered as an independent standard based on the plain-meaning approach; and (4) the FET standard is an independent rule of customary international law and is subsumed under it.15 Link to customary international law. The earlier BITs specified the FET linked with customary international law. An example is the France-Mexico BIT which specified that ‘Each Contracting Party shall undertake to accord in its territory and maritime zone just and equitable treatment, in accordance with the principles of international law, to the investments made by investors of the other Party and to ensure that the exercise of the right so granted is not impeded either de jure or de facto.’16 Sometimes, FET is related to customary law only in so far as it specifies a minimum standard of treatment, but which is not limited thereto and which may therefore exceed it. This is the case with the BIT between the US and Grenada providing that: “Investments shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded treatment less than that required by international law.”17 The NAFTA approach to customary international law. The BIT between the U.S. and Uruguay also links the FET with customary international law pursuant to the North American Free Trade Agreement (NAFTA), although it clarifies that the FET is a component of customary law: ‘Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security.’18 The NAFTA represents a very special situation in the definition of the standard, Article 1105 of NAFTA relating to the minimum standard specifically states that investments of another party shall be treated in accordance with international law, including FET and full protection and security. In the subsequent rulings by arbitrators, however, a different view was articulated for each of the rulings such that the Free Trade Commission took measures to restrict the meaning by which international law should be comprehended, which therefore also restricts the meaning of the FET standard. The Free Trade Commission’s Interpretative Note obligates future arbitral tribunals to abide by the minimum standard of treatment accorded to investments of another NAFTA party as ‘the customary international law standard of treatment of aliens.’ Whereas formerly the general interpretation of customary international law reflected the basic rights of fairness and due process, both administratively and judicially,19 the subsequent interpretative note limited the ampleness of the standard and was subject to criticism: ‘…the NAFTA parties regard article 1105 as no more protective than custom, a qualification apparently designed to confine host state responsibility to settings in which the offending conduct is unmistakably outrageous.’20 The construed intention was to prevent any investor from resorting to other sources of international law which might enforce stricter requirements to the treatment granted to the foreign investors by the host state. New Generation BITs. A more recent approach to defining the FET standard is that specified in the Free Trade Agreement between the U.S. and Chile,21 signed in 2003 and promulgated in 2004. The Agreement expressly provides that the minimum standard is in accordance with customary international law.22 The text of the US-Chile Free Trade Agreement bears greater specificity with which FET was described in this Agreement, since it has bearing on the original interpretation given under NAFTA. Compared to Article 1105, Chapter 11 of NAFTA, as discussed earlier, only referred to international law generally. On the other hand, the stipulations under the US-Chile Free Trade Agreement specifically provides that the minimum standard to be observed by the parties is in accordance with customary international law. It defines those aspects that should be included in the terms of Fair and Equitable Treatment and Full Protection and Security to a more narrow and specific scope; specifically, the US-Chile Free Trade Agreement specifies that: (1) The parties to the agreement will apply the standards of customary international law with specific reference to fair and equitable treatment and full protection and security; it is evident at this point that FET and full protection and security are alluded to as standards of treatment, which are further elaborated on in the next paragraphs. (2) The Agreement details that what the first paragraph refers to as ‘customary international law’ is not some vague arbitrary reference to what international protocols are customarily being observed, but as a definitive standard specified by international law as the “Minimum Standard Treatment of Aliens.” This refers to how aliens should be treated within another country’s territory, which for most purposes is measured against the rights of citizens within their own country, but in certain instances there are certain fundamental privileges and immunities which cannot be violated without violating international law, and which the alien’s state can claim on his behalf. Thus a state may impose excesses against its own citizens, but which it may not do to foreigners within its borders under international law.23 (3) The standards of FET and full protection and security, while understood not to extend the rights of foreign investors beyond the substantial treatment they can expect from the minimum standard explained in (2) above, are nevertheless assured that they may not be denied access to remedies under the law in compliance with due process consistent with the legal systems of the world, not the sole interpretation in the national law of the country where the investment is made. Also, full protection and security is accorded to the foreign party not in accordance with the national law of the country where the investment is made, but according again to customary international law as it is understood in the legal systems of the world. (4) While Articles 10.4 and 10.9 of the US-Chile Agreement do not specify in detail the acts or omissions included in the observance of customary international law, they do place a standard of limit by specifying the general and consistent practice of states, thereby taking the purview away from the local courts for imposing local standards of law that are allegedly imposed upon its own citizens. This is where the minimum standard of customary international law departs from the equality principle that the state shall treat aliens in the same manner it treats its citizens, because the standard which the state is compelled to apply is that customarily and consistently practiced in the legal systems of the world.24 Interestingly, Bronfman25 notes that as the US transitions from a capital-exporting to a capital-importing economy, it has begun to favor a more definitive construction of the standard. This is likely because formerly the general construction favored the US which as capital exporter was more likely to be pursuing claims against the other party. Recently, the US has become more the respondent in international dispute cases, and favors a narrower formulation of the standard in order to protect it from the possible claims against it. BITs would tend not only to protect its citizens who invest internationally, but also to protect itself from claims by foreign investors. Subsequent Free Trade Agreements which employs the new formulation include the US-Australia,26 US-Cafta,27 US-Morocco,28 and US-Singapore.29 The Application of the FET by Arbitral Tribunals The application of the FET standard in judicial practice has been as complicated as it had been to define the FET standard in the bilateral and multilateral agreements. Although the definition of FET is still imprecise, there appears to develop a more specific meaning to the standard, as evidenced by the situations wherein the standard has been found to be violated. There is some agreement among the judgments of tribunals which are consistent in some broad principles in the application of the FET. Judicial practice shows a clear progression over time in the development of more exacting standards of FET. Although some authors cite the absence of a definitive body of jurisprudence upon which stare decisis may apply,30 there are certain judgments arrived at by arbitral tribunals which illustrate the broad principles that have built up around the FET standard. Neer v Mexico31 involved the murder of a US citizen in Mexico. The action charged that Mexican authorities showed a lack of diligence in investigating and prosecuting the crime. Although the case was not on an investment dispute and it did not directly involve FET because it was prior to the existence of the standard, it provided a springboard by which subsequent discussion on what constituted a violation of international standards. According to the US-Mexico General Claims Commission which heard the case, in order for the treatment of an alien to constitute an international delinquency, the act or omission should ‘amount to an outrage, to bad faith, to willful neglect of duty, or to an insufficiency of government action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency…’ The tribunal found that the facts did not support a finding that Mexico was negligent, and therefore dismissed the charges and released Mexico from any liability related to the claim. Evidently, the tribunal set an extremely high threshold of proof which succeeding tribunals avoided in determining what constituted a violation of international standards.32 In another case, the parties involved were Elettronica Sicula or ELSI, the United States and Italy.33 The case was heard and decided by a Chamber of the International Court of Justice, and it concerned an industrial plant belonging to an Italian company owned by U.S. shareholders. The Mayor of Palermo temporarily requisitioned the industrial plant to the detriment of the US shareholders. The case per se did not involve FET so much as it necessitated the application of a treaty clause prohibiting arbitrary or discriminatory measures adopted by the Mayor of Palermo. The case has on this basis become a doctrinal case in the context of FET. In the ELSI case, the U.S. argued that the plant was seized for political purposes regardless of social unrest, and on that basis was arbitrary. In its decision, the ICJ ruled: ‘Arbitrariness…is a willful disregard of due process of law, an act which shocks, or at least surprises, a sense of judicial propriety.’34 The Court ruled in favor of the defendant, stating that the seizure of the property did not violate the standard of due process of law and of arbitrariness. In the S.D. Myers case,35 the FET standard was applied by the tribunal as it was framed under Article 1105(1) of NAFTA, earlier discussed. Claimant S.D. Myers argued that an export ban by Canada of polychlorinated biphenyl waste to the US, purportedly for remediation purposes, was in actuality not for environmental reasons but was implemented in an unfair and discriminatory manner. The Tribunal found in favor of a violation committed on the part of Canada, because of a showing 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.’36 The ruling explained that the decision took into account the ‘high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders.’37 Thus, what the Tribunal is stating that is much leeway is given to local authorities to resolve the claim within the framework of its national laws, i.e. normally the Tribunal would refrain from interfering except in a case such as this where the violation is so blatant and unmistakable that interference by an international arbiter is necessary. In contrast, the case of Genin et al. v Estonia38 which was based on a claim that Estonia acted in violation of the FET for the withdrawal of the banking license which arbitrarily compromised the plaintiffs. In this case, the Tribunal decided that the claimants did not prove that the respondent acted with ‘willful neglect of duty, an insufficiency of action falling far below international standards, or even subjective bad faith.’39 The Tribunal deduced from the evidence that Estonian authorities had ample ground to take the action it did, therefore there was no violation of the EFT standard. Another doctrinal case, Pope and Talbot,40 dealt with the allocation of export quotas under the Canada-US Softwood Lumber Agreement which claimants challenged. In this case, the Tribunal found that Canada was in breach of the FET standard under Article 1105 NAFTA. The Tribunal ruled that ‘compliance with the fairness elements must be ascertained free of any threshold limitation that the conduct be complained of be ‘egregious,’ ‘outrageous’ and ‘shocking’ or otherwise extraordinary.’41 This draws a sharp contrast between the threshold required in Neer and the ELSI decision. The Tribunal noted that the ICJ has departed from Neer in its ELSI decision. It will be recalled that the standard set by Neer was so high in requiring the infraction should be shocking or surprising? that it should amount to an outrage, and should show a willful disregard of due process of law that is evident to ‘every reasonable and impartial man.’ The ruling in Pope and Talbot observed that the formulation in the later cases have abandoned the high threshold standard requiring those extraordinary circumstances set by Neer. It furthermore shifted the standards to the state to show that it had complied with ‘due process’ rather than the neutral ‘government action,’ imposing more rigorous standards in assessing the effects of government actions to people and companies.42 In Mondev43 the Tribunal said, ‘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 an open-ended standard, but it may be that in practice no more precise formula can be offered to cover the range of possibilities.’44 There were some useful observations articulated in the GAMI case,45 which dealt with the expropriation of sugar mills that belonged to a Mexican Company in which the claimant in the case was a minority shareholder. The claimant charged the failure of Mexico to properly implement its own decrees, to the detriment of GAMI. The Tribunal drew four conclusions concerning the interpretation of FET, as quoted from the ruling: (1) The failure to fulfill the objectives of administrative regulations without more does not necessarily rise to a breach of international law’; (2) A failure to satisfy requirements of national law does not necessarily violate international law; (3) Proof of a good faith effort by the Government to achieve the objectives of its law as and regulations may counter-balance instances of disregard of level or regulatory requirements; (4) The record as a whole – not isolated events – determines whether there has been a breach of international law.46 In summary, the following major points were identified by Schreuer47 from the case law that has fleshed out the evolution of a general standard for fair and equitable treatment: The high threshold articulated in Neer that required an outrageous act of bad faith and willful neglect of duty was rejected consistently in more recent cases; The ICJ’s standard in ELSI specifying willful disregard of due process of law, an act which shocks or at least surprises a sense of judicial property has been accepted; Some tribunals have used the standard of ‘improper and discreditable’; Discrimination against foreigners is regarded as an important indicator of failure to grant fair and equitable treatment; A definition used by some tribunals referred to international or comparative standards; A failure to effectively implement aspects of domestic law is not necessarily a breach of the fair and equitable treatment standard; and Other criteria employed by tribunals included arbitrariness, idiosyncrasy, injustice, lack of good faith, lack of due process and proportionality. Conclusion Throughout the years, nations and multilateral organizations have relied on the FET as a standard of legal application, but have constantly avoided restricting its definition in proviso, until the recent US-Chile Free Trade Agreement that marked the new generation of BITs. For the most part, the rather liberal interpretations given the standard in the early years reflect the uncertainties encountered in conflicts between the legal frameworks of different nations, and necessarily such conflicts should be worked out in the context of the times. The Neer case, for instance, appears to reflect the then paramount principle of sovereignty, where the state is given vast powers and protections on the presumption that states have unlimited jurisdiction over their territory. Thus, at the time the standard of proof that the state has committed an injustice was placed so high as to be hardly attainable. With the development of increased foreign investment, the FET concept was articulated, with a view towards limiting the power of host countries and affording greater protection to foreign investors. This protection is necessary to instill greater confidence in the system and enable the transfer of capital to countries in need of it to further their development. However, earlier treaties were generally vague about specifying the exact meaning of the standard (which calls to question its effectiveness as a standard). It is understandable that in the early years, specifying FET too narrowly is not ideal because of the close connotation of ‘fairness’ and ‘equitability’ with the generally undefined concept of equity. After all, in many instances what is considered fair and equitable is determined by the specific circumstances of the dispute, and it is impossible to provide for all types of situations in proviso. Through the years, however, the decisions of arbitral tribunals have contributed to a clarification of the nature and situations under which claims arise in covered investments, enabling the narrower definition contained in the US-China agreement, without fear of being too restrictive to exclude other important applications. Customary international law has remained an important reference for FET among the new generation BITs, allowing for consistency of application between and among standards. The decisions of arbitral tribunals resolving specific issues in actual disputes, although varied in their interpretation of FET, have nevertheless shed light on the causes of disputes and the circumstances surrounding them, sufficient to provide insight into a refining of the standard. For instance, the conclusions arrived at by the Tribunal in GAMI and in the case of Waste Management48 specified what may and what may not be included in FET. As it presently stands, the FET standard affords greater protection to investors, having eliminated the excessively high threshold of proof required in earlier decisions, in more definitively linking the standard to the minimum standard of customary international law, and in the inclusion of more precise definitions of what constitutes not only FET, but also full protection and scrutiny, in recent BITs. Furthermore, the accumulating number and improving quality and consistency of decisions by arbitral tribunals are building a body of jurisprudence from which stare decisis may in the future apply – a necessary element in the development of a consistent FET standard which will always be partially based on the evolving principles of equity. Articles Abs, Herman & Lord Shawcross, Draft Convention on Investments Abroad, 9 J. PUB. L. 116 (1960), reprinted in U.N. Conference on Trade and Dev. (UNCTAD), International Investment Instruments: A Compendium Borchard, Edwin M. Minimum Standard of the Treatment of Aliens. Yale Law School Legal Scholarship Repository. Vol. 38, No. 4, 1 January 1940, pp. 445-461, Coe, J.J. ‘Fair and Equitable Treatment Under NAFTA’s Investment Chapter, ‘ American Society of International Law 9, Proceedings of the 96 Annual Meeting, 2002. Kill, Theodore. "Don't Cross the Streams: Past and Present Overstatement of Customary International Law in Connection with Conventional Fair and Equitable Treatment Obligations." 2008. Michigan Law Review 106, no. 5: 853-880. Business Source Complete, EBSCOhost (accessed April 17, 2013). Nanda, Ved P. ‘Fair and Equitable Treatment Under NAFTA’s Investment Chapter,’ American Society of International Law 9, Proceedings of the 96 Annual Meeting, 2002 Ryan, Margaret Clare."Glamis Gold, Ltd. V. The United States and the Fair and Equitable Treatment Standard." 2011. Mcgill Law Journal 56, no. 4: 919-958. Business Source Complete, EBSCOhost (accessed April 17, 2013). Schreuer, Charles ‘Fair and Equitable Treatment’. Available at: www.univie.ac.at/intlaw/wordpress/pdf/77.pdf [Accessed 17 April 2013] Vandevelde, Kenneth J., A Unified Theory of Fair and Equitable Treatment. 2010. 43 International Law and Politics 43-106 Provisions Agreement on Reciprocal Promotion and Protection of Investment, Bangl-Iran, art. 4, Apr. 29, 2001. Available at http://www.pca-cpa.org/showpage.asp?pag_id=1385 [Accessed 16 April 2013] Agreement on the Promotion and Reciprocal Protection of Investments, Czechoslovakia-Switz., Oct. 5, 1990, 1692 U.N.T.S. 365. Agreement on the Reciprocal Promotion and Protection of Investment, Fr.-Mex., art. 4(1), Nov. 12, 1994, 2129 U.N.T.S. Havana Charter for an International Trade Organization, Mar. 24,1948, 62 U.N.T.S. 26. Organization for Economic Co-operation and Development (OECD), Draft Convention on the Protection of Foreign Property, Oct. 12, 1967, 7 I.L.M. 117 Treaty Concerning the Reciprocal Encouragement and Protection of Investment, U.S.-Gren., art. II(2), May 2, 1986, S. Treaty Doc. No. 99-25 (1986) Treaty for the Promotion and Protection of Investments, F.R.G.-Pak., Nov. 25, 1959, 24 U.N.T.S. 1963. Treaty on the Encouragement and Reciprocal Protection of Investment, U.S.-Uru., art. 5(1), Nov. 4, 2005, 44 I.L.M. Treaty Relating to the Protection and the Encouragement of Investments of Capital, Switz.-Tunis., art. 1, Dec. 2, 1961, RO 1964 U.N. Doc. UNCTAD/DITE/2, Vol. 5, 2000. Available at: http://unctad.org/fr/Docs/poitem38r1.en.pdf [Accessed 17 April 2013] USA-Chile Free Trade Agreement, 2004. Available at: http://www.ustr.gov/trade-agreements/free-trade-agreements/chile-fta/final-text [Accessed 17 April 2013] US-Australia Free Trade Agreement, March 2004. Available at: http://www.ustr.gov/trade-agreements/free-trade-agreements/australian-fta/final-text [Accessed 17 April 2013]. US-CAFTA Free Trade Agreement, January 2004. Available at: http://www.ustr.gov/trade-agreements/free-trade-agreements/cafta-dr-dominican-republic-central-america-fta/final-text [Accessed 17 April 2013] US-Morocco Free Trade Agreement, June 2004. Available at: http://www.ustr.gov/trade-agreements/free-trade-agreements/morocco-fta/final-text [Accessed 17 April 2013] US-Singapore Free Trade Agreement, May 2003. Available at: http://www.ustr.gov/trade-agreements/free-trade-agreements/singapore-fta/final-text [Accessed 17 April 2013] Cases ADF Group Inc. vs United States of America, Award, 9 January 2003, 6 ICSID Reports 470 Elettronica Sicula S.p.A (ELSI) (United States of America v Italy), I.C.J. Reports 1989, p. 15 GAMI Investments, Inc. vs United Mexican States, Award, 15 November 2004 Genin, Eastern Credit Ltd., and AS Baltoil v Republic of Estonia, Award, 25 June 2001, 6 ICSID Reports 241 Mondev International Ltd. v USA, Award, 11 October 2002, 6 ICSID Reports 192 Neer v Mexico, Opinion, US-Mexico General Claims Commission, 15 October 1926, 21 AJIL555, 1927. Pope & Talbot v Canada, Award, 10 April 2001, 7 ICSID Reports 102 S.D. Myers v. Government of Canada, (S.D. Myers), Partial Award, 12 November 2000, 40 I.L.M. 1408, 2001. Waste Management vs United Mexican States, ICSID Case No ARB(AF)/00/3. Award. April 30, 2004, 43 ILM 967 Read More