FOR Position
Mongolia – Oyu Tolgoi Mining Project
Mongolia – Oyu Tolgoi Mining Project
by Unentugs Shagdar
2011.10.11
NATIONAL TREATMENT AND MOST-FAVOURED-NATION TREATMENT
IN INTERNATIONAL INVESTMENT AREA
Thank you for all that you did for us to make presentation. I
appreciate your presentation and I hope more and more Mongolians may benefit from
your excellent work. In this topic, Bilateral and
regional investment agreements have proliferated in the last decade and new
ones are still being negotiated. National Treatment (NT) and Most-Favoured-Nation
(MFN) clauses link investment agreements by ensuring that the parties to one
treaty provide treatment no less favourable than the treatment they provide
under other treaties in areas covered by the clause. MFN clauses have thus
become a significant instrument of economic liberalisation in the investment
area.
MFN
To provide MFN treatment under investment agreements is
generally understood to mean that an investor from a party to an agreement, or
its investment, would be treated by the other party “no less favourably” with
respect to a given subject-matter than an investor from any third country, or
its investment. MFN treatment clauses are found in most international
investment agreements. Although the text of the MFN clause, its context and the
object and purpose of the treaty containing it need to be considered whenever
that clause is being interpreted, it is the “multilateralisation” instrument par
excellence of the benefits accorded to foreign investors and their
investments.
While MFN is a standard of treatment which has been
linked by some to the principle of the equality of States, the prevailing view
is that a MFN obligation exists only when a treaty clause creates it.3 In the
absence of a treaty obligation (or for that matter, an MFN obligation under
national law), nations retain the possibility of discriminating between foreign
nations in their economic affairs.
NT
National treatment is a key element of a favourable
investment climate. It provides to nonresident foreign investors and foreign
controlled enterprises established in the country, treatment no less favourable
than that accorded to domestic enterprises in like circumstances. ("National
Treatment" is the commitment by a country to treat enterprises operating
on its territory, but controlled by the nationals of another country, no less
favourably than domestic enterprises in like situations.)
This principle is embodied in numerous bilateral
investment treaties and the OECD Investment Instruments. The application of the
national treatment principle in all countries of the Region represents a
tangible medium-term goal for most of countries as part of their reform agenda
to create a high-quality investment environment. Success here will constitute a
strong message to the investor community of the political will of the countries
of the Region to match recognised international standards of investor treatment
and to provide for equality of competitive conditions.
National treatment in pre-establishment is the commitment
of a (host) country to accord to the investment by non-resident enterprises in
its territory, including the right of establishment, treatment no less
favourable than that accorded in like situations to resident enterprises.
Deviations from national treatment in pre-establishment includes any
limitations on non-resident (as opposed to resident) investors affecting their
operations and other requirements set at the time of entry or establishment;
for instance, prohibition of foreign investment in certain sectors, ceilings of
foreign equity share, prohibition of foreign acquisitions, prohibition of
foreign investment in certain geographical areas, authorization procedures,
specific corporate organisation requests, etc
Deviations from national treatment in pre-establishment includes any
limitations on non-resident (as opposed to resident) investors affecting their
operations and other requirements set at the time of entry or establishment;
for instance, prohibition of foreign investment in certain sectors, ceilings of
foreign equity share, prohibition of foreign acquisitions, prohibition of
foreign investment in certain geographical areas, authorization procedures,
specific corporate organisation requests, etcMFN treatment means that policy discriminates among nationals and foreigners but treats all foreigners equally. National treatment extends the same privileges to foreigners and nationals alike.
Equal treatment in general is known as Non-Discrimination. That is, benefits are not conferred freely.
FAIR AND EQUITABLE TREATMENT
Background
Fair and equitable treatment is currently the most important standard in
investment disputes. Most treaties dealing with the protection of investments
contain this standard. It seems to be invoked in the majority of cases brought
to arbitration. Over the last few years, a number of awards have dealt with
this standard and have yielded a fair amount of practice shedding light on it. Although
more clarification is likely to emerge in the future, it seems appropriate to
take stock of the authority at this time.
Whatever the report may be, it is certain that there is a great deal of
overlap between these two investment standards. This presentation introduce to
examine what the distinction between the fair and equitable standard, and the
customary international law is, while establishing whether such a distinction
has any relevance in the settlement of investment disputes.
FAIR AND EQUITABLE TREATMENT
The
words ‘Fair and Equitable Treatment’ describe the standard of treatment which
is expected under international investment law, to be accorded to foreign
investors by host governments.
Provisions
requiring host governments to treat investments fairly and equitably are found
in the majority of bilateral investment treaties, and in those containing
investment provisions.
The
development of the standard has led to its use as an alternative means of providing
investment protection in cases where there are no clear grounds for
expropriation. The FET standard is fast becoming “the most invoked treaty
standard in investor-State arbitration”.
For
example Article 11(2) of
the Havana Charter of 1948 provides, “the key terms fair and equitable treatment to nationals
and companies….are legal terms of art of art well known in the field of overseas
investment protection….” Also he said always, “Each Party shall accord to covered
investments treatment in accordance with customary international law, including
fair and equitable treatment and full protection and security”.
The
development of the standard is rooted in the desire of capital exporting states
to ensure that their nationals investing in foreign countries are treated with
equity and justice. The FET standard can be traced as far back as the Havana
Charter of 1948 in which its article 11(2) prescribed that foreign investments
should be assured ‘just and equitable treatment.
This served
as a precedent for the inclusion of the standard in various subsequent FCN
treaties, and in the OECD Draft Convention on the Protection of Foreign Investments.
The standard is also included in the failed Multilateral Agreement on
Investment (MAI), the UN Draft Code of Conduct on Transnational Corporations,
NAFTA and the Energy Charter Treaty. The FET standard is also recognised by
capital importing states as illustrated by its incorporation into the Lome IV
convention (an agreement on trade and aid signed between the EU, African, Caribbean
and Pacific Countries).
The Fair
and equitable treatment is an absolute standard, which ensures that a minimum
level of protection is accorded to the foreign investor regardless whether
nationals of the host state are treated the same way.
The FET
standard is usually included in investment treaties to cover governmental
actions which do not fall within the scope of other provisions. In essence the
provision is there to ensure that a minimum standard of investment protection
exists even in situations not contemplated by the specific treaty provisions.
This objective was acknowledged in the preamble of the US-Argentina BIT which
states that “fair and equitable treatment is desirable in order to
maintain a stable framework”[1].
An
examination of various BITs shows that there is no uniform way of drafting the
FET clause. The typical formulations are:
-
A plain prescription of FET. This is illustrated by the
German Model BIT which provides: Each Contracting Party….shall in any case accord such
investments fair and equitable treatment.
-
Prescription of FET with a reference to international
law. An example is Article 4(1) of the 1996 BIT between Spain and Mexico which
provided that Each Contracting Party will guarantee in its territory
fair and equitable treatment, according to international law, for the
investments made by investors of the other Contracting Party.
-
Prescription of FET combined with other standards of
treatment such as Full Protection and Security, NT and MFN treatment. For
example the US Model BIT provides in Article 5: Each Party shall accord to
covered investments treatment in accordance with customary international law,
including fair and equitable treatment and full protection and security.[2]
The
significance of the way the clause is phrased, lies in the interpretation of
what the standard entails when a dispute arises. In the absence of a link to international
law, tribunals may adopt a literal interpretation in the determination of the
unfairness of a governmental action. This often leads to diverse results as
awards can be based on the arbitrators’ notions of fairness and equity.
Even
where there is a link to international law tribunals usually adopt two views in
interpretation namely (i) that the
FET standard does not require any addition to the customary international law
MST or (ii) the FET standard is an
expansion of the customary international law minimum standard.
As the
interpretation of tribunals on the normative contents of the standard continues
to expand, and tribunals continue to create ‘new’ elements of the standard in
‘new’ situations of unfair treatment, it is safe to say that the FET standard has
acquired a certain amount of elasticity. At times this elasticity appears to be
limited when there is a link of the standard to international law in the
formulation of the clause. In essence the FET standard is broad and its meaning
will depend on the circumstances of the case.
As stated
in the Mondev award
.., “judgment of what is fair and equitable cannot be reached in abstract; it
must depend on the facts of the particular case”[3].
Due to
this apparent inexhaustibility of the substantive contents of the standard it
is difficult to firmly establish what the standard precisely encompasses. An
examination of the jurisprudence of arbitral tribunals highlights some main
elements which singly or together form the normative content of the FET
standard.
Elements of the FET standard
The FET
concept has been described as ‘an embodiment of a rule of law standard which
the legal systems of Host States have to accept in their dealings with foreign
investors’.[4]
In making
this analogy, his points out that the FET standard is similar to the rule of
law in national systems based on the facts that (i) the contents and requirements of the rule of law under
municipal law are often debated, and (ii)
the rule of law can be traced to certain common principles which can be
transferred to the international level. Support for this analogy lies in the
jurisprudence of investment tribunals over the years, from which certain recurrent
principles which are similar to municipal rule of law principles, have been
accepted as elements of the FET standard. Some of the most prominent elements
are:
²
The protection of the investor’s legitimate expectations
²
Due process and denial of justice
²
Obligation of vigilance and protection
²
Transparency and Stability
²
Lack of arbitrariness and non discrimination
²
Proportionality
²
Abuse of Authority.[5]
[1]
US-Argentina Treaty Concerning The Reciprocal Encouragement and Protection
of Investment, 1991 U.S.T. LEXIS 176
[3] http://www.state.gov/documents/organization/14442.pdf
[4]
Marcus Peter, Multilateral Rules on Cross-Border Investment and the World Trade
Organization, Saarbrucken Univ., 2008
[5]
Protection of Investors Legitimate Expectations
An investor’s legitimate expectations are derived from the legal
framework, representations and undertakings, made explicitly or implicitly by
the host state’s government at the time of acquiring the investment. Any
reversal of such assurances or contractual undertakings by the host state will
be considered to be a breach of the FET standard. The protection of legitimate
interests is said to be the dominant element of the FET standard[5].
Denial of Justice and Due Process
This is a fundamental rule of law as well as a vital element of the FET
standard. Denial of justice and due process is usually concerned with the
improper administration of civil and criminal justice to the investor. The US
Model BIT’s definition of FET includes the obligation not to deny justice or
due process. Justice and due process can be denied as denial of access to courts,
and the subjection of the investor to inadequate and unjust procedures.[5]
Obligation of Vigilance and Protection
This principle has arisen in cases where the FET standard was used in
conjunction with the full protection and security obligation. It is a duty to
exercise due diligence in protecting a foreign investor. In Occidental v
Ecuador26[5],
the tribunal was of the view that a treatment which is not fair and equitable
automatically entails an absence of full protection and security.
Transparency and Stability
Transparency as an element of FET was raised in the Metalclad case.
The principle centres on the idea that all the requirements for investing
should be made known to investors and host states should be totally transparent
in all dealings with the investor, so that the investor can plan its
investments accordingly.
Proportionality
The proportionality
principle exists as a measure of the extent of the host state’s interference
with foreign investments. The principle allows for the balancing of state and
investor interest as it helps to reconcile investor interests with the states
right to regulate.
CONCLUSION (first part)
In my view, the Fair and Equitable Treatment standard is one which is crucial
in the Host State – Investor relationship. Provisions requiring that foreign
investments be treated accorded with ‘fair and equitable treatment’ are found
in almost, if not all investment treaties, and the majority of disputes arising
from these treaties consist of a claim alleging violations of the fair and
equitable standard. Yet there is still an element of vagueness surrounding the
meaning of the phrase ‘Fair and equitable treatment’. There are those who
assert that the standard is higher than the international minimum standard,
while others interpret to be an example of the international minimum standard.
P.R,
Unentugs Shagdar
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