FAIR AND EQUITABLE TREATMENT IN INTERNATIONAL

INVESTMENT LAW
AUTHOR :SIMRAN KAPLISH

https://taxguru.in/corporate-law/fair-equitable-treatment-international-investment-law.html

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:
 Meaning And Elements As Defined By Arbitral Tribunal
Elements For Violation Of FET Clause
Conclusion:

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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