Thursday, March 7, 2013


FOR  Position
Mongolia – Oyu Tolgoi Mining Project

by Unentugs Shagdar



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.


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.

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
National Treatment has become a well-established principle among adhering countries. Exceptions are typically limited to certain sectors, notably mining, transport, fisheries, broadcasting and telecommunications. Even there, many exceptions are of a limited nature and exceptions are reduced in scope or deleted as a result of unilateral measures by the countries themselves, or as a result of the examinations.

MFN 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 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.


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


[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.


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.

Unentugs Shagdar

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