"Fair and Equitable Treatment" in Investment Treaties: Function of general provisions

Author Name KOTERA Akira  (Faculty Fellow)
Creation Date/NO. June 2008 08-J-026
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Bilateral investment treaties (BITs) typically obligate a contracting country to grant "fair and equitable treatment" (hereinafter referred to as "fair treatment") to the investments of other contracting country's investors, such as their subsidiaries. In the past, the fair treatment obligation attracted scant attention due to the abstractness of the provision; such was certainly the case in Japan. However, the fair treatment obligation in recent years jumped into the spotlight as the provision is now frequently invoked in arbitration pursuant to BITs (also called "investor-state arbitration" or "BIT arbitration"). This is because certain investors filed arbitration cases claiming that their host government violated its fair treatment obligation and the arbitral tribunal broadly supported these claims.

Unlike national treatment and most-favored-nation treatment obligations, the fair treatment obligation is an independently set standard with no consideration given to the circumstances of the host country. The wording of BIT fair treatment provisions is also generally unclear as to what obligation is being imposed. One interpretation is that the fair treatment obligation is meant to be the contracting governments' consent to grant foreigners the "minimum standard" as required under customary international law, while another interpretation is that it is meant to assure treatment in addition to or beyond that required by the minimum standards of international law. However, it should be noted that the obligation is provided for in individual BITs and the specific wording of the fair treatment provision differs from one treaty to another (particularly on whether or not references are made to customary international law).

The fair treatment obligation first became a major issue in an investor-filed arbitration case under the North American Free Trade Agreement (NAFTA). The NAFTA arbitral tribunal in the case interpreted the obligation as referring to treatment in addition to or beyond customary international law minimum standards, thereby fully supporting the investor's claim. This interpretation was denied by subsequent NAFTA tribunals. On the other hand, through the accumulation of arbitral adjudications, the specific implications have emerged in which a contracting government is considered as having breached the fair treatment obligation if its "conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety."

Apart from NAFTA, a series of arbitral adjudications acknowledged a host government's responsibility for assuring fair treatment and these decisions, unlike those by NAFTA tribunals, continued to interpret fair treatment provisions as treatment in addition to or beyond the customary international law minimum standards. However, certain specific standards applied by non-NAFTA tribunals were also found to be in substance quite similar to those applied by NAFTA tribunals.

The fair treatment obligation is a typical example of arbitration that uncovered new significance for BITs. Summarizing the various arbitral adjudications to date, the following statements can be made at this stage. First, although the general definition of the fair treatment obligation differs among NAFTA and other international agreements, the difference is considered attributable to the differing BIT provisions under NAFTA and those agreements (see Saluka Investments BV v. The Czech Republic). Second, the specific content of the fair treatment obligation, which has been gradually clarified, is that a host government is considered as having breached its obligation if it "fail(s) to ensure a transparent and predictable framework" for investors (see Metalclad Corporation v. The United Mexican States) or if the government's "conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety" (see Waste Management, Inc. v. United Mexican States). As such, this definition barely reflects differences, in theory, in the application of the fair and equitable treatment standard. Investors' expectations stemming from BITs play a key role in deriving these specific criteria. The fair treatment obligation is interpreted as prohibiting a host government, as a contracting party to a BIT, from treating an investor in an "unreasonable" way in view of the basic expectations of the investor. This can be defined as an expansion of the BIT's effect.

In international treaties that leave the interpretation of obligations to each contracting party, general provisions such as the fair treatment obligations have been seen as having little meaning (particularly in Japan). However, things are completely different when a third-party dispute settlement body, such as an arbitral tribunal, applies and interprets provisions under the treaty. It attempts to settle the dispute by reference to general obligations if it is unable to find a proper solution based on specific obligations. The fair treatment provision has been fulfilling this role. Arbitration adjudications hitherto made concerning the fair treatment obligation indicate that a government, in drafting a treaty that assumes dispute settlement through a third-party, needs a different approach than drafting a treaty that does not assume such settlement.

The above considerations demonstrate that the fair treatment provision is meant to elevate the level of investment protection and such a provision must be included in investment treaties.