Introduction:
The standard of fair and equitable treatment has been one of the most controversial clauses of bilateral investment treaties (BITs). This paper investigates the relationship between the minimum standard of treatment and the FET standard as well as when states began referring to the former in their BITs. It also considers whether FET can be considered an autonomous norm under BITs. Refuting the contentious claim that the FET principle can now be considered a precept of customary international law, we have tried to demonstrate that states’ practice of incorporating FET clauses in their BITs is not universal and clear enough and that states still lack the requisite opinio Juris.
Most investment treaties require states to include FET or MST to foreign investors. It has been a contentious law because it has the potential to serve as a “catch-all” provision for developers enabling them to prosper when their expropriation and other claims have suffered. Typically, the treaty’s wording would not include detailed instructions about how conflict resolution agencies can interact. A special issue in this regard is the concept of investors’ legitimate expectations which has been used by many tribunals to overturn the refusal of environmental permits claiming that the plaintiff has a legitimate expectation of being awarded such a permit. General environmental and health laws have also been questioned for possible FET violations. To avoid the risk of excessively broad conceptions of the scope of FET, some states have excluded it entirely from the foreign treaties[1]. In the framework of the FET standard, the investor’s due diligence goes beyond the risk – based business due diligence done by a foreign investor for its own benefit. It has consequences for the ability of a state to govern in the general interest as well as a wider understanding of the company’s obligations. Before investing in a host country, investors are required to perform adequate due diligence by showing their fair efforts to gather knowledge regarding the rules and regulations that are relevant to the proposed investment[2]. The duty of investment agreements to offer fair and equal treatment to each other’s assets has been interpreted differently by government authorities, arbitrators and academics. The debate about this requirement has centred on whether the required standard of care is calculated by a customary international law minimum standard, a wider international law standard that includes other sources such as investor security requirements commonly found in treaties and general principles or whether the standard is an autonomous self – contained a definition of treaties which do not explicitly link it with the international law[3].
This paper will mainly focus on fair and equitable treatment and its relation to the min. Standard of international customary law and meaning and elements as defined by the arbitral tribunal.
Page Contents
Fair and equitable treatment and its relation to the minimum standard of international customary law:
The term “equitable treatment” appears for the first time in the 1948 Havana Charter for an international trade organization. Article 11(2) contemplated that foreign investors should be treated “justly and equitably”. The article stated that the ITO could:
1. Make proposals for and encourage bilateral or multilateral agreements on initiatives deriving from trade
2. To ensure fair and equal treatment of business, expertise, skills, capital and technology.
The fair treatment obligation first emerged as a significant concern in a NAFTA investor – filed arbitration case. In this case, the NAFTA tribunal viewed the requirement as relating to treatment in addition to or above customary international law minimum requirements completely upholding the investor’s arguments. Subsequently, this interpretation was rejected. Apart from NAFTA, a series of arbitral adjudications recognised a host government’s responsibility for ensuring equal treatment and these rulings, unlike those by NAFTA tribunals, tended to view fair treatment clauses as treatment in addition to or above customary international law minimum requirements[4].
According to article 1105(1), each party shall accord to the investments of another party treatment in compliance with international law including fair and equitable treatment as well as maximum protection and security. At the time of the arbitration, developments in arbitral tribunal rulings favoured viewing fair and equitable treatment clauses as either a standalone treaty clause or a concept contained in customary international law. The tribunal favoured the former ruling in favour of the investor but holding the issue of damages to be decided by a separate tribunal at a later date[5].
As defined by OECD:
“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”.
It goes on to compare this rule of customary international law to the concept of national treatment, another important standard saying: “While the principle of national treatment foresees that aliens should only assume equality if treatment with nationals, the international minimum standard established a range of fundamental rights defined by international law that states must extend to aliens, independent of their nationality. Violation of this convention entails the host state’s international obligation which can pave the way for international intervention on behalf of the injured alien assuming that the alien has exhausted all the local remedies.
The Neer case, along with the Roberts case, was landmark cases for the international minimum standard in 1926. Following revolutionary activity at the turn of the 20th century, Mexico concluded treaties with European countries and the United States. The United States will determine lawsuits involving injuries sustained by their citizens in previous years. The United States – Mexico Commission was granted jurisdiction to decide the cases.
The fair treatment obligation is a common example of arbitration that has revealed new meaning for BITs. At this point, the following points can be made in summary of the multiple arbitral adjudications to date. First, although the general concept of fair treatment obligation varies between NAFTA and other international agreements, the distinction is attributed to the differences in the agreements. Foreign investors are entitled to a certain extent of treatment under customary law and any treatment that falls short of this level entails an obligation on the part of the state. Some have defined fair and equitable treatment of foreigners and their property as one of the components of the universal standard of treatment required by international law. Furthermore, there is also a school of thought that fair and equitable treatment is not limited to the minimum standard found in the customary international law but takes into account the whole spectrum of international law references including general standards, current treaties and other conventional obligations. This point of view was articulated in a 1984 OECD report as well as by the NAFTA tribunals in the Metalclad and S.D. Myers case[6].
Fair and equitable treatment as a part of international law includes all sources including state practice and judicial precedents. It does not need to only comply with the International customary law but should take into account various principles of different treaties. As per the OECD, it was here that fair and equitable treatment introduced a substantial legal standard referring to the general principles of international law and it also provides a general guideline for interpretation of agreement resolving disputes. It considers the principles of international law to provide a basic fair understanding of the just and equitable treatment provided to the nation. The treatment should also protect the security of the investors along with their investment.
Meaning And Elements As Defined By Arbitral Tribunal
The tribunals have contributed in making the understanding of fair and equitable treatment clear. Most of the tribunal while speaking about fair and equitable treatment Focus upon two types of clauses. The first being an unqualified fair and equitable treatment clause whereas the second is clause is linked to international law. Most of the awards state that fair and equitable treatment should be independent and have its own interpretation, which is different from the minimum standard of treatment. As per the case of Asian agriculture products Ltd versus the Republic of Sri Lanka, a dissenting opinion proved to be of great value. The judge quotes that Fair and equitable treatment along with full protection and security stands at the same level of treatment and should comply with the international minimum standards as per the OECD draft convention. Later on, in the case of the United States of America versus Italy, the International Court of Justice pronounced the judgement on July 20, 1989, and held that constant protection and security did not act as a warranty or the US investor to restrict disturbance in any circumstances whatsoever. The Restatement of The Foreign Relations Law of the United States defines an “arbitrary act” as “an act that is unfair and unreasonable and inflicts serious injury to established rights of foreign nations, though falls short of an act that would constitute an expropriation[7].
It was also held that there was no violation of the requirement by the US investors in the partially owned Italian company. The requirement here should be satisfied by the minimum international standard. the treaty was reviewed and the term equitable treatment was given significance. It was concluded that the requisite orders issued by the Italian authority against ELIS deprives shareholders of Control and also violates the principle of equitable. The ELSI case is a prime example of a disastrous transnational investment amidst host government efforts to preserve the status quo at home. Despite the fact that the US established that the Italian government had broken its own legislation by requisitioning ELSI before its parent corporations could implement a scheme of orderly liquidation, an ICJ Chamber ruled against the US. At first sight, the case’s conclusion shows that bilateral arrangements aimed at preventing conflict with such investments are ineffective[8].
In the case of oil platforms, Iran vs. US[9] It was held that “the key terms fair and equitable treatment to nationals and companies and unreasonable and discriminatory measures and legal terms of art well-known in the field of overseas investment protection”. This was a dissenting opinion expressed by Judge Higgins. The opinion shared by other judges along with the core of the judgement was that there was no violation by the US on the basis of fair and equitable treatment as a complaint by Iran. The main question was whether the 1955 treaty of amity, economic relations and consular rights between Iran and the US firms fall in the ICJ jurisdiction.
American Manufacturing & Trading (AMT) (US), Inc. v. Republic of Zaire, was another case that that made the interpretation clear. As a result of AMT investment losses incurred by widespread looting in Zaire, the ICSID Tribunal found a violation of the US-Zaire 1989 BIT’s provisions of equal and egalitarian care, maximum privacy, and stability. Zaire has “manifestly refused to respect the basic quality demanded of it by international law,” according to the tribunal.
“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”.
A NAFTA dispute, Methanex V. The United States revolved around a Canadian claimant who challenged California legislation that had banned the production of gasoline because it contained methanol-based addictive. It was banned due to environmental concerns. As per the claimant, violation of fair and equitable treatment given under NAFTA. The tribunal rejected the claim And stated That no representation had been given and hence tribunal concluded that regulatory changes would not occur.
In the case of occidental exploration and Production Company versus Republic of Ecuador[10], OEPC was a company registered in California which entered into an agreement with petro Ecuador. This was a state-owned company and the main objective of the agreement was the production and exploration of oil. SRI Had denied the company regularly reimbursement of value-added tax and contended that this was already accounted in the agreement and hence no payment needs to be made separately. OEPC Claimed that the fair and equal table treatment clause has been violated as The Company did not treat them as national exporters and meetings arbitrary. As per this case, the tribunal considered the standard equitable to international law similar to providing fair and equitable treatment. Hence there was a breach on behalf of the respondent of the fair and equitable treatment clause. A stable and predictable legal and business environment is necessary[11]. The tribunal had correctly applied the rule of interpretation of the Vienna Convention on the Law of treaties. As per this treaty, the Interpretation should be done on the basis of good faith and the ordinary meaning of the clause, considering the purpose and objective. If the interpretation is not parallel to the standards of fair and equitable treatment then it shall violate the clause
Elements For Violation Of FET Clause
Fair and equitable treatment tries to restrict the abuse of authority threats, harassment, caution and intimidation from the host nation. It also tries to remove arbitrariness, unfair and unjust Environment based upon individual discretion, discrimination or prejudice. Any action that goes against the rule of law considers being arbitrary in nature irrespective of being illegal in the domestic regime. Moreover, this clause helps states and nations to get justice without any denial or delay. The only condition it implements is that first all the remedies of the lower court should be exhausted. It tries to remove discrimination by handling everyone at the same level and giving the same treatment. Any failure to exercise due diligence in the protection of investors of the foreign state along with the investment can also be protected by the fair and equitable treatment clause. It includes the concept of due process that needs to be followed by proceedings. If the due process is not followed, it would be Violate the clause. Any inconsistency shown by the courts where the decision taken is arbitrary or in favour of a specific party breaches the clause. Besides, if there is a lack of transparency in the legal framework that is affecting the investor of the foreign state, then this clause can be approached. It also considers any failure to ensure a stable and predictable legal and business environment. All of these points were mentioned by the investment treaty tribunal. In all of the above situations, it would be considered as a breach of the fair and equitable treatment clause.
The obligation to exercise due diligence to protect foreign investors proves to be a very necessary element of the fair and equitable clause. Generally to understand the due diligence the fair and equitable treatment is analysed with the full protection and security clause. The full protection and security clause is generally included in treaties as a separate obligation but helps in the interpretation of the Fair and equitable treatment laws. In the case of Asian agriculture products Ltd versus the Republic of Sri Lanka, article 2 clause 2of a treaty created an obligation of strict liability on both parties. The question here is whether the government give assurance of full protection and security under article 2 clause 2. Article 2(2) establishes a basic standard for foreign investment security. The requirements for equal and equitable treatment, complete privacy and security, and nondiscriminatory treatment all highlight the host state’s general duty to secure foreign investment in its territories, which stems from customary international law. The lack of any particular case or compensation requirements reflects the general existence of the defence standard in Article 2(2)[12].
Conclusion:
The debate about fair and equitable treatment has centred on whether the principle demands that the host state’s behaviour be measured against the international minimum standard required by customary international law:
- In violation of international law, including all sources
- Against an autonomous self – contained treaty standard.
General provisions such as fair treatment obligations have been seen as having no significance in international treaties that leave the understanding of obligations to each contracting party. However, where a third party dispute resolution authority, such as arbitral tribunal, applies and interprets treaty provisions, the situation is entirely different. If it is unable to find a proper remedy based on particular commitments, it tries to resolve the conflict by referring to general obligations. This role has been fulfilled by the fair treatment clause. Arbitration decisions concerning the fair treatment requirement have previously shown that a country, in drafting a treaty that expects dispute resolution by a third party, requires a different approach than drafting a treaty that does not assume such settlement. It would be premature to make a conclusive understanding of the “equal and equitable care” principle at this time. Since the jurisprudence that has applied it and established aspects of its normative substance is new and inconsistent, a firm and authoritative list is not possible. Regardless of how countries view the “fair and equal treatment” principle, it is recognized that the minimum standard applies to an emerging international customary law that is not “frozen” in time, but which change over time based on state experience and opinio Juris, as evidenced in jurisprudence applicable to the understanding.
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[1] A Sustainability Toolkit for Trade Negotiators, https://www.iisd.org/toolkits/sustainability-toolkit-for-trade-negotiators/5-investment-provisions/5-4-safeguarding-policy-space/5-4-5-fair-and-equitable-treatment-fet-or-minimum-standard-of-treatment-mst/ (last visited Apr 8, 2021)
[2] Fair and Equitable Treatment and Investor’s Due Diligence Under International Investment Law, https://link.springer.com/content/pdf/10.1007/s40802-020-00170-7.pdf/ (last visited Apr 8, 2021)
[3] FAIR AND EQUITABLE TREATMENT STANDARD IN INTERNATIONAL INVESTMENT LAW , https://www.oecd.org/investment/investment-policy/WP-2004_3.pdf/ (last visited Apr 9, 2021)
[4] “Fair and Equitable Treatment” in Investment Treaties: Function of general provisions RIETI, https://www.rieti.go.jp/en/publications/summary/08060009.html/ (last visited Apr 10, 2021)
[5] The International Minimum Standard and Investment Law: The Proof is in the Pudding EJIL Talk, https://www.ejiltalk.org/international-minimum-standard/ (last visited Apr 10, 2021)
[6] FAIR AND EQUITABLE TREATMENT STANDARD IN INTERNATIONAL INVESTMENT LAW , https://www.oecd.org/investment/investment-policy/WP-2004_3.pdf/ (last visited Apr 9, 2021)
[7] THE ELSI CASE: AN INVESTMENT DISPUTE AT THE INTERNATIONAL COURT OF JUSTICE, https://core.ac.uk/download/pdf/72837411.pdf (last visited Apr 13, 2021)
[8] The ELSI Case: An Investment Dispute at the International Court of Justice, https://core.ac.uk/download/pdf/72837411.pdf (last visited Apr 13, 2021)
[9] Oil Platform (Iran v. United States), 1996, I.C.J. 803
[10] occidental exploration and Production Company versus Republic of Ecuador, UN 3467
[11] FAIR AND EQUITABLE TREATMENT : AN EVOLVING STANDARD, https://www.mpil.de/files/pdf3/15_marcela_iii1.pdf (last visited Apr 13, 2021)
[12] FAIR AND EQUITABLE TREATMENT STANDARD IN INTERNATIONAL INVESTMENT LAW , https://www.oecd.org/investment/investment-policy/WP-2004_3.pdf/ (last visited Apr 9, 2021)
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