The Extent of Application of the MFN Treatment Clause in Investment Treaties - Essay Example

The Extent of Application of the MFN Treatment Clause in Investment Treaties I. Introduction The Most-Favoured-Nation (MFN) clause indicates that the preferences conferred to a foreign investor must also be conferred to all other foreign investors. This signifies that a foreign investor be conferred the highest standard of treatment obtainable from any foreign country (Fietta 2005). The MFN clauses connect investment accords by making sure that the parties to a treaty confer treatment favorably no less than the treatment they confer under other treaties in matters embraced by the clause. Thus, MFN clauses have become an essential tool for economic liberalization in the matter of investment.1 Further, by granting the investors the right in a country's MFN clause for the same treatment no less favourable than that of a country's major partners, MFN forestalls economic changes that would arise by way of more country-by-country liberalization. MFN clause has been beneficial in generating parity in trading opportunity among states by converting bilateral accords into multilateral agreements. As a matter of public international law, MFN clause provides the sovereign equality of states relative to trading policy. While as a tool for economic policy, it establishes a basis for international treaty in relation to competitive dealings.2 The establishment of Most-Favoured-Nation dealing has quite a long record. Before the GATT (General Agreement on Tariffs and Trade), bilateral trade agreements often include an MFN clause, and by itself contributed a great deal to trade liberalization. Nevertheless, various measures in the '30s were carried out that constrained the operation of the MFN initiative. These measures were viewed to result in the splitting up of the world economy into trade blocs.3 Realizing from this mistaken view, the unqualified MFN clause on a multilateral footing was subsequently integrated in the GATT following the ending of World War II, and has led to trade stability all over the world. The dual purpose of the MFN principle is removing the economic disparities by equally treating all investments and fortifying the liberalisation process by necessarily extending the broadest treatment to foreign investments that is contained in agreements covering the MFN clause. The MFN clauses ensure that protected investments via treaty will obtain favourable treatment no less than the agreement the host country bestows to investments from any other state firms or nationals. The Netherlands-Philippines Bilateral Investment Treaty is one distinctive example wherein it formulated that "each contracting party shall extend to investments, in its territory, of nationals of the other contracting party treatment no less favourable than that granted to investment by any third state."4 II. Procedural and Substantive Rights of Investors Maffezini v. Kingdom of Spain5 The issue being dealt with in the Maffezini case was to find out in what permissible conditions that an investor can apply the MFN clause covered in a Bilateral Investment Treaty (BIT) that is valid to its dispute as a way of establishing the arbitral's jurisdiction. In resolving this issue, the tribunal presented the difference between the rightful extension of rights and privileges by way of the operation of the MFN clause, and the bothersome treaty-shopping that could disrupt policy objectives of the essential explicit treaty provisions.6 Case Facts: An investment dispute between the Kingdom Spain and an Argentine petitioner submitted to adjudication by the petitioner under the Spain-Argentine BIT. The terms of the treaty provide that any dispute arising from the BIT has to be submitted to a competent tribunal in Spain when the procedures for amicable settlement fail (Art.-X.2). Further, that a dispute could only be elevated for international arbitration if the competent tribunal in Spain delivered a decision on the merits that fall short of resolving the dispute, or a decision has not been made on the merits within a period of eighteen months from the start of the domestic proceedings (Art.-X.3). The Argentine petitioner did not pass this treaty provision before submitting the case for international arbitration. The petitioner contended before the ICSID (International Centre for the Settlement of Investment Disputes) tribunal that jurisdiction should be on the basis of the MFN provision covered in Art.IV of the Spain-Argentina BIT. The said treaty provision stipulates that in all matters subject to the agreement, the treatment shall be favourably no less than that extended by each party to the investments made in its territory by a third country's investors (Art. IV, Par. 2). The BIT of Chile and Spain, however, do not include any condition precedent to international arbitration parallel to that covered in Art.-X.3 of the BIT of Argentina and Spain. The Argentine claimant contended that investors from Chile were treated more favourably in Spain than investors from Argentina, and hence the MFN provision in the BIT of Argentina and Spain granted him the alternative of elevating the dispute to the ICSID tribunal with no prior submission to the domestic courts in Spain. The tribunal acknowledged this as a conditional application of the principle of the MFN limited only to the overriding considerations of public policy with regard to all parties to the negotiations. The tribunal applied this basis to affirm the procedure for a more favourable treatment. The case of Maffezini raises the issue as to whether substantive rights that are notable in a Bilateral Investment Treaty with another country can presently be trusted by any foreign investor in any BIT arbitration. In short, the tribunal held that the MFN clause implies that any third party provision should not be of such a nature as to affect the fundamental agreement in the Bilateral Investment Treaty wherein the claim is based.7 While MFN clauses advocate equality and fairness among countries, they also incline to generally support free trade (Davey and Pauwelyn 2000). Trade agreements, however, typically permit for particular exceptions as MFN clauses may be at odds with regional objectives for economic integration such as, for instance, in NAFTA (North American Free Trade Agreement) or the European Union. Siemens v. Argentina8 The decision in the general provision of MFN in the Maffezini case had an effect on a number of succeeding arbitral tribunals, such as that arbitrating in Siemens v. Argentina. Case Facts: A substantive claim was sought after by the claimant against Argentina under the 1991 negotiated Bilateral Investment Treaty between Argentina and Germany. That International Investment Agreements (IIA), like the Spain-Argentina BIT applicable in the case of Maffezini, provided for a period of 18 months wherein domestic courts in Argentina could render a decision on the dispute. The MFN principle was invoked by the claimant in seeking to avoid this condition precedent and apply the 1991 Chile-Argentina BIT, which has no requirement of a prior submission to domestic courts. The MFN clause in the BIT between Argentina and Germany provides that any of the contracting parties shall not commit an agreement in its territory to companies or nationals or their investments of the other contracting party a favourable treatment no less than the treatment conferred to companies, nationals, or their investments of its own nationals, companies, or to the investments of companies or nationals of third states. The arbitral tribunal went along with the decision in the Maffezini case, and affirmed that the mechanisms for accessing the settlement of disputes is part of the safeguard provided under the Treaty. Further, it is part of the treatment of foreign investors and investments and of the benefits available by way of an MFN clause.9 The decisions in Maffezini and Siemens created a number of controversies within certain governments who did not deem MFN to be applied to procedures in settling disputes.10 The response opposing the expansion of MFN treatment procedures in settling disputes is demonstrated in the proposal drafted by several participating countries in the working negotiations of the FTAA (Free Trade of the Americas), noting that: the decision in the Maffezini v. Kingdom of Spain by the arbitral tribunal rendered an unusually expansive MFN clause in a BIT agreement between Argentina and Spain to cover procedures in the resolution of an international dispute. This clause does not embrace mechanisms in resolving international dispute and thus, could not fairly result to a conclusion analogous to that of Maffezini.11 Moreover, the trend in construing MFN principle diverged essentially in two succeeding investment disputes (in the cases of Salini Costruttori and Plama Consortium Limited) in which a more limiting approach was upheld by arbitral tribunals. Salini Costruttori S.p.A and Italstrade S.p.A. v. Jordan12 Case Facts: A dispute involving a claim by Italian investors under the 2001 Italy-Jordan BIT founded on contract performance. The BIT explicitly provides that contract disputes had to be submitted to the procedures for dispute settlement as provided for in the contracts. Based on the provisions for dispute settlement in the 1979 Jordan-UK BIT and 1997 Jordan-US BIT which permits investors to submit to ICSID a contract-related claim, the Italian investors invoked the MFN clause of the Italy-Jordan BIT to substantiate their claim before the ICSID. In this particular case, the arbitral tribunal also deliberated if the MFN clause can be called upon for purposes of dispute settlement. The arbitral tribunal shares the apprehensions conveyed in various sectors regarding the decision held in the case of Maffezini, and clearly showed its apprehension that, in spite of the forewarnings formulated by the tribunal in the Maffezini case, in actual application such a wide-ranging interpretation of the MFN principle add further uncertainties to the possibility of treaty-shopping. The tribunal in Salini v. Jordan consequently adopted a more restrictive approach, and desisted from employing MFN to settle dispute based on the different situations of that particular dispute. The tribunal held that in Salini v. Jordan the circumstances are different. The Italy-Jordan BIT (Article 3) does not provide any clause broadening its range of application to settle a dispute. The BIT does not envisage all matters or rights covered by the agreement. Moreover, nothing have been presented by the claimants that could prove that the common purpose of the parties was to apply the MFN clause to the settlement of dispute. Rather, the intention was to exclude from the jurisdiction of the ICSID any disputes in contract between an investor and State Party entity so that such disputes could be resolved in conformity with the procedures laid down in the investment agreements. The claimants have not as well given any allusion of any applications in Italy or Jordan to back up their claims.13 Plama Consortium Limited v. Bulgaria14 The issue of the application of the MFN principle relative to procedures to settle disputes came up in 2005 in the case of Plama Consortium Limited v. Bulgaria. Case Facts: A dispute in connection with the 1987 Cyprus-Bulgaria BIT was submitted to ICSID. The BIT provides a limitation in the application of Investor-State dispute settlement (ISDS) procedures only to expropriation-related disputes and do not provide an allusion to the option of elevating the dispute to ICSID. The BIT covers an MFN clause stating that each contracting party shall apply a treatment (to investments in its territory by investors of the other contracting party) favourably no less than that conferred to investors' investments of third states. Based on this MFN provision, the claimant invoked the 1997 Bulgaria-Finland BIT which contained ISDS provisions covering all investments-related disputes. This case, in particular, tackled two fundamental issues relative to the MFN principle. Firstly, if the MFN clause in the BIT between Bulgaria and Cyprus could be applied to all facets of treatment; and secondly, if treatment included provisions for dispute settlement in other BITs to which Bulgaria was also a contracting party. The tribunal held in this particular case that MFN clause could not be construed as giving permission to elevate for ICSID adjudication any dispute arising from the BIT between Bulgaria and Cyprus. Setting aside the approach adopted by the arbitral tribunal in the Maffezini and Salini cases, the tribunal reasoned on the basis of two underlying grounds. Primarily, the arbitrators emphasized that the fundamental requirement for adjudication is a concurrence of the parties to arbitrate. The tribunal held that it is an entrenched rule in both domestic and international law that such an agreement be clear and free of any ambiguity. In a BIT context, the agreement to arbitrate is reached by the sanction to arbitration that a state confers beforehand regarding investment disputes covered under the BIT, and the investor's acknowledgment thereof if so desired by the latter. Questions can occur as to the clear and explicit intention of the parties when the agreement to arbitrate is to be arrived at through incorporation by reference. The secondary ground for the decision of the tribunal was the difficult application of an objective assessment to resolve which procedure for settling the dispute is more constructive and favorable. The arbitrators declared that the arguments of the claimant that it is apparently more beneficial for the investor to have an option among various procedures for dispute settlement and to have the whole dispute settled by arbitration as provided in the BIT between Bulgaria and Finland, than to be restricted to ad hoc arbitration confined to the preponderance of compensation for expropriation. The tribunal is predisposed to concur with the claimant that in this case a choice is more favorable than no choice. Based on the two grounds, the tribunal held in Salini v. Jordan that by way of an MFN clause it is not likely to incorporate by reference the provisions for the settlement of a dispute in its entirety or in part laid down in another treaty, except if the MFN provision in the fundamental treaty leaves no uncertainty that the contracting parties meant to incorporate them. III. Fair and Equitable Treatment Clause The Fair and Equitable Treatment clause is commonly directed at establishing a fundamental and general principle which is not connected with the domestic law of the host country. Almost all newly formulated Bilateral Investment Treaties conventionally entail that investments and investors be given fair and equitable treatment despite the fact that there is no definite understanding on the clear-cut meaning of the phrase.15 Even though a number of references to the standard can be obtained in the initial attempts of negotiation relative to investment instruments and multilateral trade, it developed as an established standard essentially by way of the growing networks of BITs.16 However, the extent of fair and equitable treatment is not commonly defined distinctly in Bilateral Investment Treaties. Foreign investors, under international law, are given the right to a particular degree of treatment and any treatment below this certain level give rise to responsibility17 on the side of the State.18 The minimum standard of treatment is described in Art. 5 of the US Model BIT (2004) such that each party shall concur to covered investments treatment in keeping with customary international law that includes fair and equitable treatment and full protection and security. Further, the responsibility to bestow fair and equitable treatment embraces the obligation not to repudiate justice in administrative, civil or criminal arbitrary proceedings in line with the standard of due process entrenched in the word's fundamental legal systems.19 This principle was upheld in S.D. Myers v. Canada. The tribunal held that a contravention of the standard of fair and equitable treatment (Art. 1105 of NAFTA) arises only when it is demonstrated that an investor has been accorded such an arbitrary or unfair manner that the treatment could be considered not acceptable from an international standpoint.20 The fundamental argument among practitioners and scholars is whether fair and equitable treatment is restricted to the international law's minimum standard, if it is an independent and impartial standard founded on the unambiguous approach of statutory interpretation, or whether it has developed into an independent standard of customary international law (Dolzer and Stevens 1995; Vasciannie 2000). The provision of fair and equitable treatment provided a baseline of safeguard which will be valuable primarily in circumstances where other substantive provisions of national and international law grant no protection. It establishes a fundamental standard of equitable treatment to give direction in interpreting other BIT provisions (Vandevelde 1992). In essence, Vandevelde's viewpoint seeks to restrict the obligation of foreign investors. A broader view seeks for more expansive protection of investment. Mann (1981) contends that the term "fair and equitable treatment" envisage ways that goes above the minimum standard and provide a more expansive protection and consistent with a great deal more impartial standard than any formerly utilised form of words. Conclusion Foreign investment protection embraced in international has been a very contentious issue since the '70s, rousing various differing research and study on the subject. International law has to confront its own slackness in not establishing a body of law dealing with multinational investments and by so doing the law of nations fell short in keeping with the ever changing requirements of international law (Sornarajah 1994). This led to conflict of the state of customary law between less developed and developed countries. No other matter of international law, aside from the international law on the employment of armed force, has given rise to a great deal of controversy than the law affecting foreign investment in the middle of the 20th century. The ambiguity in customary international law resulted in States having resorted to bilateral treaties to promote and draw foreign direct investments. Regardless of the protections that may be provided to foreign investments, the host country continues to keep its right of territorial sovereignty and the right to choose whether investment be excluded or not. The principle of territorial sovereignty over economic activity that occurs within the state has not worn down in spite of the attempts on developed states to develop an external principle with which such sovereignty should conform. Presently there is a general supposition that a state should confer foreign investors with national and Most-Favoured Nation treatment. Sornarajah (1994) contends whether there is a parallel external standard of international treatment for foreign investors for which they can obtain benefit in the absence of local protections, for instance. Sornarajah recognized two directly related rules: the Hull Rule doctrine of timely, sufficient and effective protection; and the partial compensation principle. He concludes that these resolutions failed the requirements of host states under the Bilateral Investment Treaty agreements. There should be a more exacting standard of compensation. Bilateral Investment Treaties have distinctive significance to international law since BITs have generally given solution for the moment of what was until now a fundamentally private issue of international law. That is, the issue of contracting between the host country and investors. Bibliography Britannica Concise Encyclopedia (Encyclopedia Britannica 2006) W.J. Davey and J. Pauewelyn, MFN Unconditionality in T. Cottier and P.C. Mavroidis (eds.), Regulatory Barriers and the Principle of Non-Discrimination in World Trade Law: Past, Present and Future (University of Michigan Press 1998) 13-50 R. Dolzer and M. Stevens, Bilateral Investment Treaties (The Hague: Martinus Nijhoff 1995) A.A. Fatouros, Government Guarantees to Foreign Investors (Columbia University Press 1962) 135-141, 214-215 Stephen Fietta, 'Most Favoured Nation Treatment and Dispute Resolution under BITs: A Turning Point' [2005] IALR 131 FTAA Draft, Footnote 13 (21 November 2003). P. Juillard, L'volution des sources du droit des investissements (Recueil des Cours 1994), 250 Tome 83. Maffezini v Kingdom of Spain (Case No. ARB/97/7) ICSID 25 January 2000 F.A. Mann, British Treaties for the Promotion and Protection of Investments, 52 BRIT. Y.B. INT'L L.242, 244 (1981) METI, 'Report on Compliance by Major Trading Partners with Trade Agreements - WTO, FTA/EPA, BIT' (2008) White Papers and Reports accessed 31 March 2009 OECD Trade Policy Working Paper No. 36 (11 July 2006) OECD, 'Working Papers On International Investment (2006) Netherlands-Philippines Treaty Art.3 Note 46 accessed 29 March 2009 OECD Working Paper on International Investment No. 2004/3 (September 2004) Plama Consortium Limited v. Bulgaria, Decision on Jurisdiction (Case No. ARB/03/24) ICSID 8 February 2005 (Energy Charter). G. Roha, 'Is the Law of Responsibility of States for Injuries to Aliens a Part of Universal International Law [1961] AJIL 863 ff. Salini Costruttori S.p.A. and Italstrade S.p.A. v. Jordan, Decision on Jurisdiction (Case No. ARB/02/13) ICSID 9 November 2004 S.D. Myers Inc. v. Canada, ICSID Arbitral Tribunal (Case No. ARB/98/8) ICSID Siemens v. Argentina, Decision on Jurisdiction (Case No. ARB/02/8) ICSID 3 August 2004 M. Sornarajah, The International Law on Foreign Investment (Cambridge: Cambridge University Press 1994) 225-276 UNCTAD , Bilateral Investment Treaties in the Mid 1990s, 1998 (Geneva, United Nations 1998) K.J. Vandevelde, United States Investment Treaties: Policy and Practice (Deventer: Kluwer Law and Taxation 1992) 76-77 S. Vasciannie, The Fair and Equitable Treatment Standard in International Investment Law and Practice, 70 BRIT. Y.B. INT'L L.99,102-05 (2000) OECD, 'Working Papers on International Investment Number 2004/2' (2004) < www.oecd.org/dataoecd/21/33773085.pdf> accessed 29 March 2009 Read More