Department of Law Spring Term 2017
Master Programme in Investment Treaty Arbitration Master Thesis 15 ECTS
The Dual Role of Most-Favoured-Nation Clause in Investment Treaty System
Author: Alice Bzovii
Supervisor: Professor Dr. Kaj Hobér
2 TABLE of CONTENT
I.Introduction
1. Investment Law and Most Favoured Nation Treatment Standard in
the Context of Bilateral Investment Treaties: A Summary...4
2. The questions Raised and the Structure of the Thesis...10
3. The Method and the Limitations... 11
II. The proposed balance in the Bilateral Investment Treaties...12
1. Why have states signed BITs?...12
2. The unbalanced balance: the BITs between developing and developed states. Is it still applicable?...15
3. Investor’s direct rights and the double role of the state in BIT-based arbitration...17
4. Interpreting BITs and possible multilateralization of investment Protection FTAs... 20
III. The role of the Most-Favoured-Nation-Treatment in BITs economics...23
1. The function of Most Favoured Nation Clause...23
2. MFN clause: importing substantive or procedural provisions?...26
IV. Concluding remarks...35
3 LIST OF ABBREVIATIONS
ASEAN Association of Southeast Asian Nation BIT Bilateral Treaty Investment
FCN Friendship Commerce and Navigation FDI Foreign Direct Investment
FTA Free Trade Agreements
GATT General Agreement on Tariffs and Trade
ICSID International Centre for Settlement of Investment Disputes
MAI Multilateral Agreement on Investment MFN Most-Favoured-Nation
NAFTA North American Free Trade Agreement
OECD The Organisation for Economic Co-operation and Development UNCITRAL United Nations Commission on International Trade Law VCLT Vienna Convention on the Law of Treaties
WTO World Trade Organization
4 The Dual Role of the Most – Favoured – Nation Clause in the Investment Treaty System
Chapter I Introduction
1.1 Investment Law and Most Favoured Nation Treatment Standard in the Context of Bilateral Investment Treaties: A Summary
From earlier times, the United States of America (US) began enter into treaties for the promotion and protection of investment called treaties of ‘Friendship, Commerce and Navigation’ (FCNs)1, - considered to be the precursor to the Bilateral Investment Treaties (BIT). After the end World War II, the role of FCNs in the promotion of trade was replaced by the General Agreement on Tariffs and Trade (GATT)2. Almost simultaneously, the developed countries proposed a new tool for the promotion and protection of foreign investments – the BIT. The decision taken by the developed countries to adhere to a bilateral instrument in order to protect the investment made on the territory of developing countries came after a long period of failure to conclude a multilateral treaty.
During the twentieth century, all attempts at concluding a multilateral treaty that would establish multilateral standards of protection for investors faced the opposition of capital importing states. At the international level, this opposition means the conflict between state sovereignty and investment protection.
1 The main difference between BITs and FCNs is that the later does not contain dispute settlement provisions.
2 General Agreement on Tariffs and Trade (GATT) was a multilateral agreement regulating international trade. Its purpose was the ‘substantial reduction of tariffs and other trade barriers and the elimination of preference, on a reciprocal and mutually advantageous basis’. GATT was signed by 23 nations in Geneva on October 30, 1947 and took effect on January 1, 1948. It lasted until 1994, the year of the Uruguay Round Agreements.
5 Developed countries were trying to favour the investment and the investor, while developing countries were trying to favour state interests and state regulation.
This conflict of interests between developed states and developing states, and the political need of the latter to enter into investment treaties settled the today’s system of investment treaty law. The threat from the host state acting as a sovereign made it clear that a bilateral cooperation was required for the creation of the investment treaty arbitration system.
In 1959, the Abs-Shawcross Draft Convention on Investments Abroad - called
‘Magna Carta’, intended to introduce specific standards of protection and to address the notion of investors with a view of the investor being able to bring a treaty claim against a state before an arbitral tribunal. This proposal was the most important one, from all the previous attempts, but did not achieve the final version of a multilateral treaty due to the opposition of capital importing states. The attempts to create a multilateral framework for investments continued in 1967, with the Draft Convention on the Protection of Foreign Property of the Organization for the Economic Co-operation and Development (OECD)3. Once again, these efforts remained unsuccessful. Under these circumstances, where a multilateral treaty it was most unlikely to be concluded capital exporting countries changed their strategy to adhere to bilateral negotiations. It was obvious that, the developing countries would still continue to oppose a multilateral treaty proposal because they felt that their sovereignty would be threatened if they were forced to put the natural resources in the hands of the investor. Therefore, starting with the middle of the twentieth century, the number of BITs concluded has grown significantly.
However, in the 1980s, another proposal for a multilateral investment treaty at the Uruguay Round of GATT negotiations4 was also rejected because it faced the
3 The Organisation for Economic Co-operation and Development (OECD) is an intergovernmental economic organisation with 35 member countries. It was founded in 1960 to stimulate economic progress and world trade.
4 The Uruguay Round was the 8th round of multilateral trade negotiations (MTN) taking place between 1986 and 1994. The Round came into effect in 1995 with deadlines ending in 2000. The Uruguay Round’s Agreement on Trade Related Investment Measures (TRIMS), the Agreement on Trade Related Aspects of
6 opposition of the developing states once more. The efforts of the capital exporting countries to establish a high level of investor protection at international level achieved their highest point with the Multilateral Agreement on Investment (MAI)5, which was drafted by the OECD Secretariat. The next trade round, - the Doha Development Round6, tried to bring together developing and developed countries at the same trade negotiation table again. This time, the Doha Ministerial Declaration expressly included the relationship between trade and investment. However, in 2004, the General Council decided, for various reasons, that the negotiation’s agenda would not include investments’ discussions7. Therefore, all the proposals related to this subject were dropped. In 2003, at the WTO’s Cancun Session, the intention to include investments as one of the four
‘Singapore issues’ brought to the light the old conflict between developed and developing countries. The negotiation did not achieve a positive result due to the fact that, developing countries expressed their fear that investment rules would affect their industrial and development policies. Facing so many failures of multilateral negotiations, developing countries were forced to change their mindset and adhere to the negotiations of bilateral investment treaties and of regional investment treaties. The need for a bilateral cooperation with the sovereign state placed in the centre stage became clear. This laid down the groundwork for the future regime characterized by the lack of a universal treaty
Intellectual Property Rights (TRIPS) and the General Agreement on Trade in Service (GATS) addressed only part of investment related issues and did not provide enough security for investors.
5 www.oecd.org/Multilateral Investment on Investment: ‘Negotiations on a proposed multilateral agreement on investment (MAI) were launched by governments at the Annual Meeting of the OECD Council at Ministerial level in May 1995. The objections were to provide a broad multilateral framework for international investment with high standards for the liberalisation of investment regimes and investment protection, and with effective dispute settlement procedures, open to non-OECD countries. Negotiations were discontinued in April 1998 and will not be resumed.
6The Doha Development Round beginning in 2001 is still unresolved after missing its official deadline of 2005.
7 Doha Work Programme, WT/L/597 2004: ‘investment issues will not form part of the Work Programme set out in that Declaration and therefore no work towards negotiations on any of these issues will take place within the WTO during the Doha Round’.
7 and the dominance of bilateral treaties.8 In 1959, Germany’s intention to have its investment protected took the concrete form of the first bilateral investment treaty (‘BIT’)9 which was signed between Germany and Pakistan10. In the years to come, - the number of bilateral investment treaties (‘BITs’) grew significantly: by 1970 there were 72 BITs, by 1980 there were 165 BITs, and by 1990 the number reached 385 BITs11. Since 1990, the number of BITs has increased even faster and, at the end of 2005, it reached 2,495.12
From the bilateral perspective, the relationship between states is governed by the interests of the more powerful. In investment law, the developed states were pursuing their interests to promote and protect their investment and the investors in the developing countries. In this sense, they concluded BITs contained provisions with a higher standard of protection for the investor, as compared to the international minimum standard provided for by customary international law.
Finally, the developed countries transformed years of unsuccessful negotiations on a multilateral treaty into a network of BITs, within which they could promote and protect investments13. These bilateral investment agreements build upon on common principles and rules14 form a complex intertwined network of BITs15.
8 See R. Dolzer, Ch. Schreuer, Principles of International Investment Law, 2nd edition, p 9.
9 S. Franck, Foreign Direct Investment, Investment Treaty Arbitration and the Rule of Law, Mc George Global Bus.&Dev. L.J. 337 2006: ‘An investment treaty is an agreement made between two or more sovereigns that safeguards investments made in the territory of the signatory countries’.
10 Pakistan and Federal Republic of Germany, Treaty for the Promotion and Protection of Investments No. 6575, (with Protocol and exchange of notes). Signed at Bonne, 25 November, 1959.
11 See C. McLachlan, L. Shore, M. Weiniger, International Investment Arbitration:
Substantive Principles, Part I Overview 2. The Basic Features of Investment Treaties, p 26, 2008 ed.
12 UNCTAD, World Investment Report 2006 - FDI for Developing and Transition Economics Implications for Development (2006).
13 See Schill, Multilateralization of International Investment Law, Chapter II The dynamics of multilateralism and bilateralism in international investment relations:
‘Multilateralism failed because States were unable and unwilling to agree on the appropriate standards of treatment of foreign investor, shows a stable consensus which is reflected in the proliferation of bilateral’, p.23-65, Cambridge University Press 2009.
14 Ibid. 13.
15See J.W. Salause, in The Emerging Global Regime for Investment, Harvard International Law Journal/ Vol. 51, Number 2, Summer 2010, argues that the body
8 However, the intention to achieve the construction of a multilateral investment system based on principles of non-discrimination and the same standard of protection was still pursued by the developed countries. One solution at hand was the inclusion of the most-favoured-nation (‘MFN’) clause16 within the provisions of the treaty. In this sense, BITs represent a common base of uniform substantive and procedural principles, enforced by the inclusion of the most favoured nation treatment standard (MFN) clause with a view of the need of the states to coordinate the international relations on a bilateral basis. This clearly emphasizes the previous intention of the state to order international relations, but they could only manage this on a bilateral basis17. It is fair to say that, the underling intention of the states, was to introduce through the back door of the MFN clause18, common rules of trade, in order to achieve economic liberalization and economic
of investment treaties constitutes a regime. ‘The problem with the term ‘network’ is that it suggests the existence of a structural connection between the constituent parts of the network. However, no structural connection exists, among investment treaties, each is separate, independent, and freestanding. Consequently, using the term
‘network’ to describe the work of nations in the investment field since the end of World War II would seem to be inappropriate’.
16 Germany Pakistan BIT 1959, MFN Clause was mentioned i.e. Article 2, which stated that:
‘Neither Party shall subject to discriminatory treatment any activities carried on in connection with investments including the effective management, use and enjoyment of such investments by the nationals or companies of either Party on the territory of the other Party, unless specific stipulations are made in the documents of admission of an investment’.
See also New Britannica Academic, Most-Favoured-Nation Treatment (MFN) - ’In the early 17th century commercial treaties incorporated most-favoured-nation provisions. The Anglo-French treaty negotiation of 1860 by Richard Cobden and Michel Chevalier, which established interlocking tariff concessions that extended most- favoured-nation treatment worldwide, became the model for many later agreements’.
17 See S. Schill, Ordering paradigms in international investment law: bilateralism, multilateralism, multilateralization: ‘MFN clause multilateralize the bilateral interstate treaty relationships and harmonize the protection of foreign investments in each state’, in Z. Douglas, The Foundation of International Investment Law:
Bringing Theory into Practice, p 110, Oxford, 2014.
18 See E. Chalamish, The Future of Bilateral Investment Treaties: A de Facto Multilateral Agreement?, J. Int’L 303 2008-2009: ‘thanks to the MFN mechanism, developing countries are now able to sign such agreements with international consent, something that cannot currently be achieved through participation in the multilateral negotiation regime’
9 growth, as one of the most important elements securing and protecting investments19.
The MFN clause promotes the principles of equality established a long time ago in the field of trade. This clause was imported in the investment treaty system in order to impose the party treaty states a specific conduct, based upon the principle of non discrimination20. To put it simply, this meant evaluating the host state conduct towards the investor at the post-investment stage. However, the MFN clause is a treaty provision which establishes a treaty obligation between the host state and the investor. The MFN clause is an obligation between the two states that, neither state will give the investor from any third state treaty a more favourable treatment than that which was given to the investor from the basic state treaty. Throughout the MFN clause, the most–favoured-nation treatment is established; it is forms part of the treatment of protection of the investor21. Faced with a discriminatory situation, the investor can invoke his right to a treatment which is the most favoured one granted to another foreign investor by the host state. The MFN principles are one of the most venerable standards of treatment in international economic law22. Usually, a typical MFN clause combines the MFN standard and the national standard, and it reads as following: ‘Neither Contracting State shall subject investors of other Contracting States as regards their activity in
19 See J.W.Salacuse, ‘BIT by BIT: The Growth of Bilateral Investment Treaties and their Impact on Foreign Investment in Developing Countries, The International Lawyer, Vol. 24, No.3, p.655-675, 1990: ‘in other word, even without a multilateral code, capital exporting states have managed to achieve, through the networks of bilateral and regional treaties, the high level of protection for foreign investors that they long sought on behalf of international business
20 Snyder, R.C., Most-Favored- Nation Treatment Clause a Analysis with reference to Recent Treaty Practice and Tariffs 1 1948, Chapter 2, p 9-15, See also Chapter 1:
‘ Having being incorporated into a vast and complex international treaty structure under widely varying conditions and in many forms, the clause has solved certain problems and created others. It has been alternately hailed and denounced, practiced and discarded, by individual nations’.
21See, A. Newcombe, L. Paradell, Law and Practice of Investment Treaties:
Standard of Treatment, Kluwer Law International 2009, Chapter 5- Most Favoured Nation Treatment, pp 193-232.
See Pia Acconci, Chapter 10 Most-Favoured Nation Treatment in P. Muchlinski, F. Ortino, Ch. Schreuer The Oxford Handbook of International Investment Law, Part II. Substantive Issues, p 363, Oxford University Press, 2008
22 See Ch. Dugan, Chapter XV Discrimination, in Ch. Dugan, D. Wallance, Investor- State Arbitration, p 397, Oxford University Press, 2008
10 connection with investments in its territory, to treatment less favourable than it accords to its own investors or to investors of any third State’.23
1.2 The Questions Raised and the Structure of the Thesis
The main question addressed during the forgoing analysis is the following: Is the MFN clause a tool for the multilateralization and harmonization of the treatment of protection of the foreign investor? Or, is it a disruptive mechanism for disturbing the balance in the BITs?
The First Chapter will take a brief look at the historical evolution of investment law and will analyse how and why the bilateral investment treaties came to be an international legal instrument for the protection and promotion of the investment.
Then, it describes the notion of most-favoured-nation-treatment and offers a concise commentary related on the application of the standard. The Second Chapter presents the image of the BIT and investigates the reasons why the developed and developing countries have signed bilateral investment treaties. It shows the flexible and delicate balance of the BIT constituted between the interest and the rights of the investor and the state parties. It analyse the consequences of the treaty interpretation and offers a short comparison with the FTAs. The Third Chapter brings an insightful analysis of the function and application of the MFN clause in international economic treaties, particularly in investment treaties. It presents from a critical point of view, the relevant jurisprudence related to the MFN mechanism of importing substantive and procedural provisions from a host state’s third treaty. Finally, Chapter Four foregrounds the conclusion of the research and the answers to the main questions raised. It sums up the consequences of the positive or negative effects, which the MFN clause might have in the investment law framework.
23 Germany Mode Treaty, Article 3,
https://www.italaw.com/sites/default/files/achive/ita1025.pdf.
11 1.3. The Method and the Limitations
The method applied is involving investigation of the current state of the law, i.e.
the BITs and any relevant law and treaty. The study has also implied documentation on Journal articles, as an important source of information on current academic debates, on legal issues and legal theory. The reference to this variety of sources was required for an in-depth understanding of the research carried out for this thesis. Then, attention was given to the relevant law case, to understand how the MFN mechanism was applied in practice. This legal issue is approached from different perspectives, using all sources of information such as:
books, Journal Articles, arbitral awards, official reports, so as to underline the multiple facets it can take in practice. These findings are then used in answering the main research questions of the Thesis. The conclusions are drawn after comparing opposite points of view on the answers provided by the research.
There are inherent limitations to any paper of this size, and the focus, as such, will only be on the core question raised above. The thesis will not address an analysis of the importance of the consequences of foreign direct investment (FDI) in the decision of signing the BITs. The discussion on the rights of the investor does not concern the theory of indirect right, for example. The arbitral decisions analyzed are only related to the function of the MFN mechanism, therefore the discussion does not imply comments on other legal issues contained in the awards.
12 Chapter II
The proposed balance in the Bilateral Investment Treaties
The bilateral investment treaties, as an international legal instrument, offer equilibrium, established between the rights and obligations of two states.
Sometimes, this delicate balance reflects back the conduct of the state exercising its power in pursuing its own contradictory interests. From a multilateral perspective, it is the balance of a dynamic system achieved through the treaty text and through the arbitral award. The complex dynamic of the interest balancing in the BITs and in arbitral proceedings goes to the heart of the investment treaty system. It brings to light the way in which the fundamental mechanisms analysed below interact in order to create legitimacy of the system.
2.1. Why have states signed BITs?
The BITs filled the gap of legal vacuum generated by the conflict between the developing and developed countries. Most importantly, both types of countries have reached a compromise in order to achieve their goals, developing to attract investment and developed to protect investment. Willing to sign BITs, the developing countries adhere to economic interests, which cannot be settled in a multilateral treaty. Several failures to multilateral negotiations allowed developing countries to resist standards of protection, which could not be rejected once they agreed signing bilateral agreements.
After the end of World War II, the number of expropriation cases24 and the disputes over expropriation has increased. At the same time, developing countries argued against the Hull Rule25, complaining about the right to determine the
24After the end of War World II, the number of nationalisation measures increased, mostly in Eastern and Central European countries. These measures affected both nationals and foreigners.
25 During the first half of the twentieth century, the Mexican government also took expropriation measures against the American investor’s properties. Under a
13 amount of compensation in a case of expropriation. Their arguments were not totally unfounded since there were no procedures or dispute mechanisms in force to settle the conflict between the developing or developed countries. Adopting a collective conduct,26 acting as a group, developing countries were trying to establish a regime which would have allowed them to take expropriation measures against the investor without any international constrains. Developed countries supported the Hull Rules, as internationally valid ones, because they wanted their investment and the investor in the host state territory to be protected under customary international law. At the international level, this conflict lasted for several years. Finally, developing countries won the battle, when, around the middle of the twentieth century, the Hull Rule was no longer a rule under customary law27. This conflict made both the developing and the developed countries face an impasse: there was no international binding instrument to regulate the investment in a foreign country. However, both categories of countries became aware of the fact that they definitely needed an international legal tool to credibly bind themselves under a set of rules governing the investment. This shift made the developed countries seek practical solutions and come up with a new proposal for the developing countries. Thus, a few years later, in 1977, the US launched the American BIT programme, which proposed the BIT Model, as a standard BIT form, used in signing subsequent BITs. Now, negotiations were concretized in an international binding agreement aimed to
diplomatic communication, the American Secretary of state, Cordell Hull put forth a formula in case of expropriation, namely the requirement of ‘prompt, adequate and effective’ compensation, which later became the full compensation standard under the customary international law.
26 A.T. Guzman, Why LDCs Sign Treaties that Hurt Them: Explaining the Popularity of Bilateral Investment Treaties, J. Int’l L. 639 1997-1998.
27The United Nation General Assembly adopted Resolution 3201, on 1 May 1974;
it was named The Declaration on the Establishment of a New International Economic Order. Article 4 posits that: The new international economic order should be founded on full respect for the principles stated at point e) ‘(...) Each State is entitled to exercise full control over the ....( resources)...., including the right to nationalization or transfer of ownership to its nationals(...). No State may be subject to economic, political or any other type of coercion to prevent the free exercise of
this inalienable right’. Emphasis added.
14 promote and to protect the investment28. In the doctrine, different opinions were expressed in connection with the reasons why states negotiated and signed the BITs29. In pursuing their economic interests, developing countries, who not long ago rejected the Hull Rule, were now negotiating and signing BITs, which provided standards of protection that were in all forms superior to those of customary international law. This paradoxical choice made by the developing countries was explained throughout economic arguments.30 Without any doubt, developing countries were signing the BITs with a single goal: that of attracting investments. The following years proved that the purpose of the BIT was achieved: the foreign direct investment was promoted in the host state. Even if it is generally accepted that BITs increase Foreign Direct Investment (‘FDI’), substantial contradictory literature have been developed in this regard.31
28 See Bilateral Investment Treaties, Office of the United States Trade Representative: ‘to protect investment abroad, to encourage the adoption of market- oriented domestic policies and to support the development of international law standards consistent with these objects’.
29 See M. Sornarajah, The International Law of Foreign Investment, ed 3, Cambridge University Press, 2010: ‘Knowing the confused status of law entered into such treaties so that, they could clarify the rules that they would apply in case of any dispute which may arise between them’.
30 See Ibid 25. Guzman characterized the situation as ‘ prisoner’s dilemma’ and he was explained it in the following terms: ‘it is optimal for LDCs as a group, to reject the Hull Rule, but each individual LDC is better off ‘defecting’ from the group by signing a BIT that gives it an advantage over other LDCs in the competition to attract foreign investors’
31 See M. Hallaward-Driemeier in Do Bilateral Investment Treaties Attract FDI?
Only a BIT...And They Could Bite, Oxford University Press, 2009, p. 368, considered that the importance of BIT to increase FDI is not significant, while other changes trigger a more conclusive determination of FDI: ‘Such changes could include lowering trade barriers, increasing the likelihood of investing overseas, so if the BIT variable is capturing some of these effects, one would expect it to bias up the coefficient’.
See E. Neumayer, L. Spess, Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?, Chapter 7, in The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties, and Investment Flows, K Sauvant, Oxford University Press 2009, p 248, which conclude that the relationship between developing and developed countries increases the FDI., ‘Developing countries that sign more BITs with developed countries receive more FDI inflows’.
See J. W Salacuse, N.P. Sullivan, Do BITs Really Work?: An Evaluation of Bilateral Investment Treaties and their Grand Bargain, Chapter 5, in The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties, and Investment Flows, p.110, K Sauvant, Oxford University
15 However, the issue may also be seen from another perspective, and a closer look maybe taken at the content of the BIT. The provisions contained in the US Model BIT regulating the standards of protection, or substantive provisions, were used as a core legal basis in almost all of the BITs, which were signed later on. It is obvious that, starting from the very beginnings, the BITs had a bilateral form and a multilateral content because they contain the same standards of protection: fair and equitable treatment, most-favoured-nation treatment, for example. The little difference in the wording of the text of the BITs providing for these standards does not have enough influence to make any distinction in this regard. Thus, it is obvious that the US Model BIT created a uniformity of the BITs signed by the state parties and explained in this manner the bases for the network of BITs and the tendency towards multilateralism.
2.2 The unbalanced balance: the BITs between developing and developed states. Is it still applicable?
The balance of the BIT is influenced by the balance of the substantive provisions provided therein. The unbalance arises between the protection of the investment and the interests of the host state. A proper balance can be achieved throughout the dispute settlement mechanism contained in the BITs at the disposal of the investor, when faced with an unacceptable situation. In the absence of a BIT, a sovereign state cannot bind itself to a particular set of international rules. In order to attract investments, the host state can give assurance to the investor about a certain protection of that particular investment, but in the eyes of the later a sovereign can never do this credibly because a state can, at any time change its domestic law in pursuing its own purpose. Moreover, in the absence of a BIT or in the absence of the Hull Rule, an investor has no legal tools to use so as to protect
Press 2009. p 155, which concludes that BITs faster FDI: ‘BITs have a particularly strong effect on encouraging FDI in developing countries’.
See Jason Yackee, Do BITs Really Work? Revisiting the Empirical Link Between Investment Treaties and Foreign Direct Investment, Chapter 14 in The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaaties, and Investment Flows, p 381, K Sauvant, Oxford University Press 2009, mentioning that a weak relationship between BITs and FDI was founded: ‘ I suspect that the presence or absence of a BIT is rarely, if ever, a particular salient issue in most investment decisions’.
16 his investment. The solution to this situation can only be found at international level. Thus, it is obvious that, keeping the BITs in balance, also means leaving ample space for the host state to take measures for public interest: in area like environment, health etc. Developing countries favour the state regulation of international investment through its own national legislation, whereas developed countries favour the international protection of the investment. The unbalanced situation created was due mostly to the fact that developing countries were actually trying to assert state interest. On the other hand, developed countries imposed a line to be followed at international level, namely to adhere to the standards of protection and not to foster state interests. Sometimes, the regulatory measures taken by the host state breach the standards of protection provided by the provisions of the BITs32. Under customary international law, investors did not have direct access to a procedural remedy in case his rights were breached. The investor was totally depended on his home state. Accordingly, the only way to follow was the diplomatic protection provided by his home state. In this case, the investor was at the discretionary power of the state, which, in most cases, included political considerations, also. Diplomatic protection constantly generated problems between developing and developed countries33.
Nowadays, the unbalanced balance of the BIT is no longer a legal issue. This is due to the fact that, the inconsistency problem was effectively solved by the dispute settlement clause contained in the BITs. The dispute resolution clause allowed the disputes to be settled in a binding procedure and in a neutral forum34. Against a breach of the BIT provisions by the host state, the investor can now bring a direct claim for damages or for compensation in front of an independent and neutral arbitral Tribunal. The award rendered is final and binding upon the
32See KatiaYannaca Small, Indirect Expropriation and the Right to Regulate: How to Draw the Line? Chapter 18, in Arbitration under International Investment Agreements: A Guide to the Key Issues, Katia Yannaca Small, Oxford University Press, 2010.
33 See Calvo Doctrine, according to which, in international investment law, the jurisdiction lies with the country in which the investment is located. The investor has recourse to the host state’s courts. It was adopted in Latin American countries.
34 See Gus van Harten, Investment Treaty Arbitration and Public Law, Chapter 1:
‘the arbitration have a new found power to review and discipline the states’, Oxford University Press, p.10, 2009.
17 parties and above all, enforceable under the New York Convention. To put it simply, through the dispute resolution clause, the investor started having, and later on, gaining more control over its own arbitral proceedings. From a bilateral perspective, the BITs put in the hands of the investors the same international legal tool, a dispute resolution mechanism, to be used directly, and unconditionally, if needed, against a possible manifestation of discriminatory power on the part of the host state. With this, the investor’s rights were preserved at the international level. Therefore, the most important element of the investment treaty arbitration, namely the dispute settlement mechanism, fulfils a multilateral function in the network of the BITs and, underlines the aspiration towards a multilateral level of the states as signatories of the BIT.
2.3 Investor’s direct rights and the double role of the state in BIT-based arbitration
The BITs contain two important elements, known as: substantive provisions – setting out standards by which each state promises to treat the investor of the other state, - and a procedural mechanism – which allows bringing claims directly against the host state before an international arbitral Tribunal. As part of the investment law principle, the BITs grant investors direct rights such as: fair and equal treatment, nation treatment, most- favoured-nation-treatment, expropriation.
These rights also govern the relationship between the investor and the host state, and the relationship between the two state treaty parties. In the case of an investor state dispute, these rights will show how far the investor can go to protect its investment and how far the host state can go on restricting their sovereignty.
The international investment arbitration system has its own specific features, where the state has, according to the ICSID Convention, the right to submit a claim; however, in practice, the state is almost all the time the respondent. But, above everything else, there is no need to have a contractual relationship between the state and the investor35. Thus, the investor can directly invoke and enforce its
35 See Jan Paulsson in Arbitration Without Privity, ICSID review, Foreign Investment Law Journal, Vol 10, no 2, Fall 2015, ICSID argues against the idea that
18 rights during the arbitral proceedings. In pursuing its own claim, the investor is under no obligation to inform its national state of the existence of proceedings against the host state, or nor to consult with the state on the substantive and procedural issues that arise in the proceedings36. The only possible temporary limitations of the investor right are those related with the pre-arbitration stage. For example, most BITs require negotiations between the investor and the host state, while other BITs require expiry of waiting periods or exhaustion of local remedies. However, the home state is under no obligation to consent to the content or type of the claim submitted by the investor. Under a bilateral agreement, there is no need for a special consent or arbitration agreement at the time of the initiating of the investor state proceedings. Therefore, in the investment treaty arbitration system investor enjoys direct rights37. This scenario cannot be duplicated in a multilateral agreement because then, the investors would have a wide range of discretion. In this case, the diversity of the claimants invoking rights in their own interpretation might clash with the discretion of the Tribunal and lead to unpredictable situations. For example, under NAFTA arbitration at the time of initiating the proceedings, the investor must consent to arbitration38.
BITs contain two types of dispute resolution clause: a state-investor arbitration clause for investment disputes, and a state-to-state arbitration resolution clause for disputes concerning the treaty’s interpretation and application. Recent doctrine
the right of the investor will exist only if there is a specific agreement concluded in this regard.
36 See Z. Douglas, The Hybrid Foundations of Investment Treaty Arbitration, British Yearbook of International Law, Vol. 74, p 151-289, 2004.
37 Ibid. Douglas also mentioned that: ‘the functional assumption underlying the investment regime makes it clear that the investor is bringing a cause of action upon the vindication of its own rights rather that those of its national State’.
38 See, NAFTA Article 1121:
‘1. A disputing investor may submit a claim under Article 1116 to arbitration only if:
a) The investor consents to arbitration in accordance with the procedures set out in this Agreement’.
See Loewen v. US Case No ARB (AF)/98/3, the Lowen Group, a Canadian firm filled an ICSID claim against the US government. The Tribunal stated that the NAFTA treaty operates on a derivative right
basis;https://www.italaw.com/sites/default/files/case-documents/ita0470.pdf.
19 has formulated the idea that a new era of investment arbitration has to emerge based on these two dispute resolution clauses provided in BITs. As mentioned above, the investor has the right to initiate investor-state arbitration about investment disputes. The states, parties to the BIT, are the beneficiaries of the same right of bringing a state-to-state arbitration claim on the application and interpretation of the treaty. The two settlement dispute mechanisms can be put in practice at the same time, as they reflect the object and purpose of any investment treaty, namely to promote and to protect the investment39. For example, when an investor invokes a discriminatory situation created by the host state in its disfavour and it is about to make an investor state claim, a state-to-state claim on the interpretation of the provisions of the BIT might create a new perspective over the arbitral proceedings. These two proceeding might be formulated as two separate arbitral proceeding, without any res judicata effect of one over the other.
Through this mechanism, treaty parties can exercise their right in order to correct the unbalance of the BIT from within which definitely falls within the object and purpose of the BIT to protect the investment. In short, investment treaties create rights and obligations for the states treaty parties and for a non state actor, the investor. In order to increase the confidence in, and the enforcement of those rights, states have delegated the power to resolve investor state and state-to-state disputes to arbitral Tribunals. The commitments undertaken by the state treaty parties are vague; in general, they promise to treat the investor fairly and equitably, or no less favourably than the other foreign investor etc. In this situation, the arbitral Tribunal has to interpret the provisions of the treaty which, in general, adhered towards a broad interpretation, in order to safeguard the purpose of the BITs: the promotion and protection of the investment40. The states
39 See Anthea Roberts, State-to-State Investment Treaty Arbitration: A Hybrid Theory of Independent Rights and Shared Interpretive Authority, Vol. 55, Number 1, Winter 2014: ‘In the Matter of Cross Border Trucking Service case, Mexico brought a state to state claim seeking a declaration that the US had breached its national treatment and most-favoured-nation treatment obligation with respect to Mexico and potential Mexican investor by Mexican owned trucking firms. The United States argued that Mexico could not make a claim on behalf of unidentified Mexican investor. The panel upheld Mexico’s claim’.
40 See, Anthea Roberts, Clash of paradigms;Actors and Analogies Shaping the Investment Treaty System : ‘Although imprecision is normally associated with state
20 negotiate and agree on the content of the treaty by signing it. Thus, the home state signs the treaty and ensures that its investor has the rights protected, but it also reserves a right to ensures that the enforcement of these rights is made on international-level. This right can be invoked by the state in a state-to-state arbitration, by asking the arbitral Tribunal to interpret the BIT based on common rules and methods of the treaty’s interpretation at the international level. In this way, a legal situation is re-created, which responds to the need for a multilateral approach to serve the state’s wider purpose of building an investment system of protection. The state sign the BIT and then, it reserves the right to be part of the arbitral proceeding, seeking enforcement of its own rights. Therefore, the tools for multilateralization remain at the disposal of the states.
2.4. Interpreting BITs and a possible multilateralization of investment protection– FTAs
The substantive law applied in treaty arbitration is the treaty itself’41. In interpreting BIT, arbitral Tribunals apply the Vienna Convention on the Law of Treaties (VCLT)42.
The general rule of interpreting the BITs is provided by Article 31VCLT43 and Article 32 VCLT44. In general, Tribunals adhered towards a broad interpretation
discretion when is coupled with a high degree of obligation and delegation the opposite is true: the body charged with interpreting and applying the standard is afforded a wide discretion’, The American Journal of International Law, Vol.107, No 1, p. 45-94, 2013.
41 See C. McLachlan, International Investment Arbitration: Substantive Principles, Chapter 3, Dispute Resolution Provisions, p 66, Oxford Series, 2008
42 The Vienna Convention on the Law of Treaties was adopted on 22May 1969 and it is a treaty concerning the international law on treaties between states.
43 Article 31 VCLT:
‘1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.
2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:
a) Any agreement relating to the treaty which was made between all the parties in connexion with the conclusion of the treaty.
b) Any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by other parties as an instrument related to the treaty.
3. There shall be taken into account, together with the context:
21 of the provisions of the BITs, and sometimes towards contradicting decisions.
Article 31(1) includes the primacy of the text and its balance by object and purpose. The principles contained in the VCLT allow the arbitral tribunal a wide range of interpretation. The teleological method of treaty interpretation plays an important role in creating uniformity among different investment treaties45. Its main function is to level differences in the wording of the provisions of the BIT.
This method is recognized to have an important contribution in clarifying different issues in investment.46 In applying the MFN clause, the arbitral Tribunal is required to interpret third party treaties, not only the basic treaty. Thus, the classical method of interpretation is the shift from the traditional bilateral to the multilateral. The arbitral Tribunal is then forced to interpret the connections between the bilateral treaties as a network of international agreements.
This analysis would not be complete without a brief look at the interpretation of Free Trade Agreements (‘FTA’). They represent regional agreements signed by the parties that became aware of the advantages to carry out negotiation within a limited group. Yet, FTAs are not separated from the World Trade Organization (‘WTO’)47, which is based on the idea of multilateralism and principles such as:
a) Any subsequent agreement between the parties reading the interpretation of the treaty or the application of its provisions
b) Any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation.
c) Any relevant rules of international law applicable in the relations between the parties.
4. A special meaning shall be given to a term if it is established that the parties so intended.
44 Article 32 VCLT:
‘Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:
a)Leaves the meaning ambiguous or obscure, or
b)Leads to a result which is manifestly absurd or unreasonable.
See S. Schill, Multilateralization of International Investment Law, Chapter VII, Conclusion- Multilateralization-Universalization-Constitutionalization, p 278-362, Cambridge University Press, 2009.
46 Ibid. The author considers that the teleological method fulfil different roles, such as:
‘defining and clarifying the scope of the application of BITs, the object and purpose of the BIT etc’.
47 The WTO commenced on 1 January 1995 under the Marrakesh Agreement replacing the General Agreement on Tariff and Trade (GATT).
22 non discrimination, reciprocity and transparency. In the current doctrine, there are debates regarding multilateralized regionalism,48 based upon the interpretation of the FTAs.
This short parallel mirrors the features of the network of the BITs and its background tendency for multilateralism. The extended interpretation of the treaty adopted by the arbitral tribunal, to ensure the protection and promotion of the investment, underlines the influence of mutilateralization of the bilateral investment treaties. This is achieved with the state’s decision to put part of their power in the hands of the arbitral tribunals. Thus, states are confident that, following this path, they will create a uniform mindset of interpreting the network of BITs. This underlines what is more than obvious, namely the background thinking from a multilateral perspective.
This analysis shows the way in which states have created a balance between the form of the multilateral and the bilateral background of investment treaty arbitration system. The most important aspect, which has to be underlined at this point is that this build-up mechanism confers states important tools like those presented above, meant to sustain and preserve their creation. These tools are used in various modalities in order to achieve the final purpose: namely the enforcement of their interests. As will be presented in the foregoing, elements like: the rights of the investor, the dispute resolution mechanism, the interpretation of the treaty, interact with the MFN mechanism in a specific way.
These connections create the basis of the investment treaty arbitration, and at the same time, underline its specific features. But, it also raises important, still debateable, legal issues.
48 See Lena Lindberg, The Ambiguous Role of the WTO in Times of Stalled Multilateral Negotiations and Proliferating FTAs in East Asia., International Negotiation 17 (2012) 163-187.
See also: ’This can be done in a step-by-step approach starting at the regional or even bilateral level, by harmonizing a gradually growing number of FTAs. In other words, again make use of cuisine language, this could create ‘sticky rice’ in the process towards the final goal of achieving a homogenous ‘rice dumpling’ within the WTO’.
23 CHAPTER III
The role of the Most-Favoured-Nation-Treatment in the BITs economics
The most-favoured-nation clause is one of the most important legal mechanisms of the investment treaty arbitration system. It is mentioned in a wide range of economic and investment treaties. This fact leads to different interpretation of the MFN clause. The MFN clause in investment treaties sustains the multilateralization of bilateral relations between states. It introduces a new influence in the establishment of a competitive structure between foreign investors. The relationship between the MFN clause and the dispute settlement mechanism raises unique legal issues.
3.1. The function of the Most Favoured Nation clause
The MFN clause has been used for centuries49 as an instrument of commercial policy, being in essence a rule of law of equality of treatment50. In fact, the MFN clause encapsulates de principles of non-discrimination, and of a uniform regime with an equal competition structure. These principles, coupled with the principle of anti-protectionism, ensure the function of a global market. After the end of World War II, due to the circumstances and the necessities of that time, a strong idea of an open and non-discriminatory trade system became prevalent. It was considered a way of avoiding international conflict and promoting peace. The underlying purpose of policy promoted was to maximize the trade as much as possible, over a short a period of time, based on multilateral agreements. This is what the MFN clause is still doing in the trade sector: promoting a non- discriminatory trade policy according to which all benefits will be extended immediately and unconditionally to all the trade participants51. Accordingly, the
49 See E. Ustor, First Report on the most-favoured-nation clause, Yearbook of International Law Commission, 1969, vol II.
50 See Snyder, R. C., Most-Favored-Nation Clause an Analysis with Reference to Recent Treaty Practice and Tariffs, Chapter 1, p 7, 1948.
51See W. Maruyama, Preferential Trade Arrangements and the Erosion of the WTO’s MFN Principle, 46 Stan. J. Int’L., 177, 2010.
24 principles of MFN established equilibrium and a new order of international trade market.
The most-favoured-nation clause is mentioned in the NAFTA Agreement and in other international agreements, as part of international economic treaties. Under NAFTA Article 1103, MFN treatment applies to the investor and investment at pre and post investment stage, and covers a broad range of activities52. Other Chapters of NAFTA contain most-favoured-nation provisions regulating, for example, service providers from another Party53, or financial services54. Throughout these several provisions, MFN clause succeeds in fulfilling its main purpose - to avoid economic distortions that would occur through more selective country-by-country liberalisation55. Thus, the economic policy has been to create a common market and to keep the tariffs at a lower level between countries. The most-favoured-nation clause was also mentioned in ASEAN agreement56 related to trade in goods. In this context, the MFN is a conditional clause which allows negotiation to begin, with the only purpose of receiving further preferences. The most-favoured-nation clause was included as reciprocal and indeterminate clause in two important agreements, namely GATS Agreement57 and Energy Charter
52 See NAFTA Article 1103: ‘Each Party shall accord to investments of investors of another Party treatment no less favourable than that it accords, in like circumstances, to investments of investors of any other Party or of a non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments’.
53 See NAFTA Chapter 12, Article 1203: ‘Each Party shall accord to service providers of another Party treatment no less favourable than that it accords, in like circumstances, to service providers of any other Party or of a non Party’.
54 See NAFTA Chapter 14, Article 1406: ’Each Party shall accord to investor of another Party, financial institutions of another Party, investments of investor in financial institutions and cross-border financial service providers of another Party treatment no less favourable than that it accords to the investors, financial institutions, investments of investors in financial institutions and cross border financial service providers of any other Party or of a non-Party, in like circumstances’.
55 See M. Kinnear, A Bjorklund, Investment Disputes under NAFTA: An Annotated Guide to NAFTA Chapter 11, Supplement No1, Article 1103- Most-Favored-Nation Treatment, p1103, Kluwer Law International, 2006
56 See Association of Southeast Asian Nation (‘ASEAN’) Agreement was signed on 28 January 1992 in Singapore. The main purpose was to increase competition by eliminating tariffs and non-tariff barriers.
57 The General Agreement on Trade in Service (GATS) entered into force in January 1995. It is considered the first multilateral agreement on foreign investment. Article
25 Treaty58. In the former agreement, the MFN is an unconditional clause, while in the latter it is a conditional clause. In the multilateral GATT/WTO system 1947, the MFN clause was used as a fundamental principle59. In this context, the MFN clause ensures that countries will extend to other countries the same trade treatment as that granted to their most favoured partners60. In the GATT/WTO system, MFN clause requires that the equal treatment will be observed by all signatory countries. Each GATT/WTO country is under the obligation to grant MFN to each other61. The MFN clause performs different functions and can be characterized as unilateral-reciprocal and conditional-unconditional. In general, reciprocity is a basic feature of any bilateral relationship which takes the form of an agreement. It is more common in the commercial and trade field. Unilateral clauses are less common because they imply one side obligation. In international investment, this kind of clause is unsuited to regulate a relationship between two sovereign states. The unconditional form of the clause, as its name suggests, implies no condition upon the states’ performance. On the other hand, a conditional form implies that the conduct of the state shall be evaluated under certain criteria62. In investment treaty, the MFN takes the form of an
II of GATS stipulates that ’With respect to any measure covered by this Agreement, each Member shall accord immediately and unconditionally to service and service suppliers of any Member treatment no less favourable than that it accords to like services and service suppliers of any other country’.
58 Energy Charter Treaty (ECT) establishes legal rules for cross-border cooperation in the energy sector. Last consolidated version 20 May, 2015.
59 See J. Kurtz, The Delicate extension of Most-Favoured-nation Treatment to Foreign Investor: Maffezini v. Kindgdom of Spain, Arbitration under International Investment Agreements: A Guide to the Key Issues, Katia Yannaca-Small, Oxford University Press, 2010.
The author suggests that ‘it is worth emphasising a fundamental tension within the operation of MFN treatment in GATT. Article I.1 does not outlaw all the forms of tariff discrimination between foreign suppliers as the concept of ‘ like product’
offers an important flexibility.(...) Thus, governments are not prohibited from establishing different tariffs levels for different kinds of goods’.
60 See M. Ghosh, C Perroni, John Whalley, Developing-Country Benefits from MFN Relative to Regional/ Bilateral Trade Agreements, Review of International Economics, 11(4), p.712-728, 2003.
61 See K. Saggi, F. Sengul, On the Emergence of an MFN Club: Equal Treatment in an Unequal World, The Canadian Journal of Economics, Vol. 42, No 1, 2009, pp.
267-299.
62 Synder, R.C., Most-Favored-Nation Clause an Analysis with Reference to Recent Treaty Practice and Tariffs, Chapter5, p.50, 1948.
