fair and equitable Treatment

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R E V I S T A D E E S T U D I O S I N T E R N A C I O N A L E S

INTRODUCTION

s a result of globalization, Stateshave realized that the attraction offoreign investment into their terri-

tories is a decisive element in their eco-nomic growth. States alone are not capa-

Fair and Equitable Treatment:an Evolving Standard*

Marcela Klein Bronfman

The growing concern of States in order to attract foreign investment into theirterritories has led to the formulation of a legal structure aimed at encouraginginvestment through the granting of a secure and stable environment for theinvestor in the host State. In the core of this structure is the Fair and EquitableTreatment standard which, as a non – contingent standard, constitutes anindependent and reliable system for the protection of the investor. However,the application of the true fairness concept underlying the standard seems attimes in jeopardy, due to a serious lack of precision regarding its true meaning.Arbitrators and scholars have wandered from one interpretation to another,trying in occasions to fit the standard in existing legal concepts such as theinternational minimum standard of customary international law or simplycreating a whole new meaning by means of self-contained legal figure. Thearticle examines the latest and most decisive attempts to define the standardwithin modern international law, all of which have contributed to a dynamicbut controversial discussion around the topic.

ble of generating sufficient economic ac-tivity to sustain a steady growth in theireconomy. This is true mainly among de-veloping countries or capital-importingcountries.

There is concern among States as tothe method of stimulating these invest-

A* Este artículo es parte de la tesis «Fair and equitable treatment: An evolving Standard», presentada por

la autora en el Magíster en Derecho Internacional, Inversiones y Comercio, de la Universidad deHeidelberg y la Universidad de Chile, aprobada en Heidelberg, Alemania el 21/03/2005.


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ment flows into their countries. On theother hand, the investor’s decision tomake an investment depends on a secureand stable environment in the host State.On this basis, States have agreed upon aset of basic standards for the purpose ofgranting the investor the security he ex-pects and assuring its continuance overtime.

Classical standards such as nationaltreatment or non-discrimination have be-come insufficient. The reason is based onthe concern of investors that becausethose standards are contingent in nature,the protection granted to them may notreach their basic expectations as the treat-ment provided by the State to its own na-tionals –which is the basis of the latterstandards– is deficient. Thus, althoughtreated in a non-discriminatory way in re-lation to the host State’s nationals, thattreatment violates basic rights that areconsidered essential for an investment todevelop effectively. Therefore, the latterprotection is not only a concern of capi-tal-importing countries, but also of capi-tal-exporting countries that desire to pro-tect their investors worldwide.

In order to grant non-contingent pro-tection to the foreign investor, States have,since the 1960’s, agreed on bilateral ini-tiatives to assure this protection, consti-tuting a worldwide network of investmentagreements. These agreements estab-lished a set of standards to grant the for-eign investor a safety net for his invest-ment. Some of these standards of protec-tion are the Most-Favored Nation, NoExpropriation without due compensationand Fair and Equitable Treatment, the lat-

ter being the object of the present analy-sis.

There is a worldwide net of bilateralagreements for the protection of

the foreign investor.

The fair and equitable treatment stand-ard has become the center of discussion invarious forums, and most of all among ar-bitrators who have applied it. It constitutesone of the most important elements avail-able to a foreign investor to protect his in-vestment in a foreign country because itprovides him with a certain treatment thatthe host State must grant regardless of thetreatment given to its own nationals.

It is the discussion regarding the truemeaning of the standard that has becomea main focus in international investmentlaw. Although most investment agreementsgrant this standard, they do not provide anindication as to what its exact meaning isand what the criterion is by which it mustbe applied.

Developed countries have becomeconcerned about the real effect this pro-tection will have on their nationals that in-vest in capital-importing countries. Theirworry is based on the fact that the stand-ard has been given many different inter-pretations in arbitral cases (more prolifi-cally within the scope of Nafta), which isacknowledged in many studies, such asthose of the OECD. However, this is notgood news, considering that instead ofpromoting stability and certainty amonginvestors, this situation produces exactlythe opposite effect.

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There have been, however, some ini-tiatives from States to define the meaningof the standard through an interpretationof the agreements they have signed. Suchis the case of Nafta, where the Free TradeCommission issued an interpretationequating the standard to the minimumstandard of customary international law.Although an important initiative, it did notcontribute to clarifying the meaning of thestandard and, moreover, lowered the pro-tection granted to the investor.

THE SEARCH FOR A MEANING

The manner in which a treaty struc-tures the standard and its association withother standards will be decisive in defin-ing its meaning.

The latter structure differs from onetreaty to another. And due to the vague-ness of this structure, which provides noenlightenment in resolving the true mean-ing of the standard, different treaties andinvestment agreements have evolvedthroughout the years with the aim of hand-ing over a greater set of tools for the pur-pose of using this standard in a more uni-form way. It is not clear whether the ideaof the parties is to completely elucidatethe standard’s definition. The fact is that«The attempts to clarify the normativecontent of the standard itself have, untilrecently, been relatively few. There is aview that the vagueness of the phrase isintentional to give arbitrators the possibil-

ity to articulate the range of principlesnecessary to achieve the treaty’s purposein particular disputes. However, a numberof governments seem to be concerned thatthe less guidance is provided for arbitra-tors, the more discretion is involved, andthe closer the process resembles decisionsex aequo et bono,. i.e. based on the arbi-trators notions of ‘fairness’ and ‘equity’1.

Some governments are concernedthat the less guidance provided forarbitrators, the more dicretion is

involved.

Different formulations in different in-vestment agreements and different inter-pretations by arbitrators have led to a va-riety of expressions in relation to its truemeaning, which ultimately do not contrib-ute to a secure environment for invest-ment.

Recent treaties, such as Nafta (par-ticularly in light of the Free Trade Com-mission’s interpretation that narrowed itsmeaning) and the United States-Chile FreeTrade Agreement, have made importantprogress in narrowing the scope of thedefinition of its meaning in their investmentChapters. Nonetheless, this latest ten-dency has not sufficed for Tribunals todevelop a uniform jurisprudence on themeaning of the term. Although Tribunalsincreasingly rely on other Tribunals’ find-ings, there are still important differencesin the approach.

1 ORCD, Fair and Equitable Treatment Standard in Internacional Investment Law, 2004, p. 2.


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Of particular interest are the views ofinvestors with regard to the standard, aswell as that of host States. Investors gen-erally argue the more expansive view, thatis, conceiving the standard as a self-con-tained concept, which will extend far be-yond the minimum standard approach thatlimits it to outrageous behavior by the hostState, as was established in the Neer case2

in the 1920´s. On the other hand, the hostState’s argument will tend to limit its li-ability precisely to the Neer case under-standing.

The main approaches that have beenformulated regarding the meaning of thestandard are (i) equating it to the interna-tional minimum standard that is present ininternational customary law, (ii) measur-ing it against international law, includingall sources; (iii) considering it as an inde-pendent standard based on the plain-meaning approach; or (iv) considering itas an independent rule of customary in-ternational law.

THE INTERNATIONAL MINIMUM

STANDARD APPROXIMATION:A DOOR TO CUSTOMARY LAW

When States agree upon the fair andequitable treatment standard and includeit in an investment agreement, they aredealing with the fairness and equity con-

cept that is already present in their ownlegal systems, which they view as a com-mon standard. However, and for the pur-pose of attaining the status of a commonstandard at the level of international obli-gations, an important deal of uniformity inrelation to its significance is decisive, whichwill be achieved through the determina-tion of its main elements.

States are dealing with the fairnessand equity concept already present

in their legal systems.

One of the main theories that existsto define the Fair and Equitable Treatmentstandard is the one that considers thestandard to be a part of the internationalminimum standard required by interna-tional law, which, for many States, is a partof customary international law.

The latter conclusion derives from aset of sources in which there is a capital-exporting State perspective on the issue.And although at the doctrinal level this isan approximation on which there is im-portant literature, it is salient to point outthat «it cannot readily be argued that mostStates and investors believe fair and equi-table treatment is implicitly the same asthe international minimum standard.»3

That is, at the empirical level there is nota general acknowledgment of countries in

2 Neer Claim, United Nations, Reports of International Arbitral Awards, 1926, IV, p. 60. In OECD.The International Minimum Standard in Customary International Law. Annex to Fair and EquitableTreatment Standard in International Investment Law, OECD, 2004.

3 UNCTAD, Fair and Equitable Treatment. UNCTAD Series on issues in international investmentagreements. United Nations. Geneva. 1999. Volume III, p 13.


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relation to this approach, as we will es-tablish.

The International Minimum Standard

The international minimum standard isa rule of customary international law whichgoverns the treatment of aliens, by pro-viding for a minimum set of principleswhich States, regardless of their domes-tic legislation and practices, must respectwhen dealing with foreign nationals andtheir property4. Moreover, «the interna-tional minimum standard sets a number ofbasic rights established by internationallaw that States must grant to aliens, inde-pendent of the treatment accorded to theirown citizens»5.

The violation of this standard mayengender international responsibility forthe host State.

The international minimum standard isrelated to the protection of foreign nation-als or aliens in general, and has, due to theremarkable growth in international invest-ment instruments, mainly BIT’s, gained animportant representation in the area of in-vestment.

This standard had been already rec-ognized by Vattel in the 18th century andwas referred to during the 19th and 20thcenturies. The decisive ruling regardingthis standard was the Neer Claim,6 whichdefined the type of treatment of an alien

that would constitute an international crime(«outrage, bad faith, willful neglect of duty,an insufficiency of governmental action sofar short of international standards thatevery reasonable and impartial man wouldreadily recognize its insufficiency»).

The international minimun standardis a rule of customary international

law that States must respectwhen dealing with foreign nationals

and their property.

Since the 20th century, however, thestandard’s existence was challenged byLatin American countries and other de-veloping countries that asserted the ruleof national treatment instead. After WorldWar II, the significance of this standardas an autonomous rule of customary in-ternational law has persisted only to theextent of the protection of foreign prop-erty and investments (in its relationship tothe Fair and Equitable Treatment stand-ard).

FAIR AND EQUITABLE TREATMENT. PART

OF CUSTOMARY INTERNATIONAL LAW?

The relationship between the fair andequitable treatment standard and the in-ternational minimum standard of custom-

4 OECD, The International Minimum Standard in Customary International Law, Annex to Fair andEquitable Treatment Standard in International Investment Law, OECD, 2004, p. 26.

5 OECD, The International Minimum Standard in Customary International Law, p. 26.6 Neer Claim, p. 60. In OECD, The International Minimum Standard in Customary International Law,

p. 27.


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ary international law has been regardedby some investment agreements as tanta-mount, i.e., as equivalent terminology. Forothers, the standard is a part of the inter-national minimum standard of customaryinternational law. However, and with theexception of Nafta (through its Free TradeCommission’s interpretation of the issue)and those investment instruments that ex-pressly equate the Fair and EquitableTreatment standard to the internationalminimum standard, such as the US andUK BIT Model, « the vast majority ofthose containing such clause (Fair andEquitable), about 88 percent, make nomention of international law in connectionwith it … In my sample of that approxi-mately 12 percent that mentions interna-tional law in connection with fair and eq-uitable treatment, almost half designateinternational law only as a floor, implyingthat fair and equitable treatment may re-quire more, but never less, than interna-tional law»7. Moreover, «bearing in mindthat the international minimum standardhas itself been an issue of controversybetween developed and developing Statesfor a considerable period, it is unlikely thata majority of States would have acceptedthe idea that this standard is fully reflectedin the fair and equitable standard withoutclear discussion … both standards mayoverlap significantly with respect to issuessuch as arbitrary treatment, discriminationand unreasonableness, but the presence

of a provision assuring fair and equitabletreatment in an investment instrumentdoes not automatically incorporate the in-ternational minimum standard for foreigninvestors»8.

The true intention of State partieswould have been to accord a higherlevel of treatment to the investor.

As a basis for the analysis, it must benoted that equating the fair and equitabletreatment standard with the internationalminimum standard of customary interna-tional law involves that the standard oftreatment provided by the State parties isbelow the one that may be provided if weconsider the standard to be self-contained.When the Free Trade Commission in Naftaissued its Interpretative Note, it prohibitedonly the most extraordinary forms of gov-ernment misconduct (a conclusion thatcomes from the Neer case, which relieson egregious, outrageous and shockingconduct). The latter was an interpretationfor the specific case of Nafta that mustbe applied in that context. Nevertheless,in the general area of investment agree-ments, it becomes difficult to believe thatconsidering the evolution in the investmentattraction policy in most States, all thoseagreements in which the equating of thefair and equitable treatment standard withthe international minimum standard is not

7 Coe, Jack J., Fair and Equitable Treatment Under Nafta’s Investment Chapter, American Society ofInternational Law, Proceedings of the Ninety-Sixth Annual Meeting, March 16, 2002.

8 Vasciannie, Stephen, The Fair and Equitable Treatment Standard in International Investment Law andPractice, The British Yearbook of International Law, 1999, Oxford, Volume 70 1999 (2000), p. 144.


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expressly stipulated, the intention of theState parties was to minimize the treat-ment that must be granted by the hostState in order to commit this most «outra-geous» conduct. Such was the Pope andTalbot9 arbitral tribunal’s conclusion, priorto the Free Trade Commission’s Note,which although fairly criticized on someissues, in consideration of the Model BITof 1987 of the United States, which af-forded a higher level of protection to theinvestor, expressed a very valid opinion inthe sense that the true intention of the Stateparties was to accord a higher level oftreatment to the investor. The latter con-clusion is even more relevant if we takeinto account that through the Most-Favored Nation Clause included in invest-ment agreements, the investor may de-mand this high degree conduct from thehost State, since it is more favorable treat-ment.

Currently and «More contemporarily,an ICSID tribunal recently stated that inorder to amount to a violation of [a] BIT[guarantee of fair and equitable treatment],any procedural irregularity would have toamount to bad faith, willful disregard ofdue process of law or an extreme insuffi-ciency of action such that the act in ques-tion amounted to an arbitrary act that vio-lates the tribunal’s sense of juridical pro-priety. While some tribunals might not takea position quite as extreme, it does appear

that something close to this standard isgenerally applied»10. This is an arbitralaward (Alex Genin, Eastern Credit Lim-ited, Inc. and A.S. Baltoil Genin v. Re-public of Estonia) based on a self-con-tained standard. However, as expresslystated in the treaty, Nafta arbitrators hadto deal with the standard equated to inter-national minimum standard of treatmentaccording to customary international law.States have acknowledged that the inter-pretation imposed by the Free Trade Com-mission did not equate fair and equitabletreatment to the customary internationallaw as defined in the Neer case. In fact, itreferred to what customary internationallaw meant at this time, i.e., in its evolvedform.

The extent to which customaryinternational has evolved is debatable.

Did the findings of the arbitrators inthe above case comply with the definitionof this standard as stated by the Free TradeCommission, or did they exceed it? Towhat extent has customary internationallaw evolved? What is the limit betweencustomary international law as it hasevolved to this date and a wholly self-con-tained standard?

In this sense, «while tribunals differas to whether they refer to a minimum

9 Pope and Talbot Inc. vs. Government of Canada, UNCITRAL case (Award April 10, 2001) http://ita.law.uvic.ca/documents/PopeandTalbot-Merit.pdf.

1 0 Gross Stuart G., Inordinate Chill: Bit’s, Non–Nafta MITs, and Host State Regulatory Freedom – AnIndonesian Case Study, Michigan Journal of International Law, Spring 2003. Referring to the AlexGenin, Eastern Credit Limited, Inc. and A.S. Baltoil Genin vs. Republic of Estonia case.


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international standard, the bulk of the BITand NAFTA cases which have dealt withthe issue appear to apply a standard closeto a minimum international standard. In thesituations where a violation was found,evidence was presented showing badfaith, discriminatory intent, and/or ultravires actions on the part of host-State gov-ernment officials. In all other instances,including instances where host-State ac-tions were not the model of clarity or fair-ness but which were legally justified andnon-discriminatory, no violation wasfound.»11. The latter is a fact, tribunals tendto apply a standard close to the interna-tional minimum standard; despite this, manyawards, due to the vagueness of the agree-ment on the issue, have exceeded it.

Tribunals tend to apply astandard close to the international

minimun standard.

In the Metalcald case12, the Tribunalfound a violation of article 1105 (1) due toa lack of transparency in the Mexican le-gal process. In reviewing the award of the

tribunal, the Supreme Court of BritishColumbia considered that «the tribunal hasinaccurately read transparency provisionsof Nafta Chapter 18 into Chapter 11 andthat transparency is not a requirementunder customary international law.»13

Moreover, «it is clear that the Tribu-nal proceeded on the basis that the scopeof Article 1105 extended beyond normsthat have become an accepted part ofcustomary international law. This is evi-dent insofar as its decision does not in-voke customary international law as thebasis for imposing transparency require-ments on Mexico; rather, in its view, theserequirements flowed from conventionalinternational law, namely the NAFTA …The Tribunal had misstated the applicablelaw to include transparency obligations andit then made its decision on the basis ofthe concept of transparency»14.

The Metalcald15, Myers16 and Popeand Talbot17 awards «proceed on the ba-sis that a breach of article 1105 can befound for acts that would not be found tohave breached the minimum standard oftreatment at customary internationallaw»18.

1 1 Gross Stuart G., op. cit.1 2 Metalclad Corporation vs. The United Mexican States. ICSID Case No. ARB (AF)/97/1. (Award

August 30, 2000). <http://ita.law.uvic.ca/documents/MetacladAward-English.pdf>.1 3 Nanda Ved P., Fair and Equitable Treatment Under Nafta’s Investment Chapter, American Society of

International Law, Proceedings of the Ninety–Sixth Annual Meeting, March 16, 2002.1 4 Tollefson Chris, Metalclad vs. United Mexican States Revisited: Judicial Oversight of Nafta’s Chapter

Eleven Investor–State Claim Process, Minnesota Journal of Global Trade, Summer 2002.1 5 Metalclad Corporation vs. The United Mexican States.1 6 S.D. Myers Inc. vs. Canada. UNCITRAL Case (Second Partial Award 21 October 2002). <http://

ita.law.uvic.ca/documents/SDMeyers-secondPartialAward.pdf>.1 7 Pope and Talbot Inc. vs. Government of Canada.1 8 Thomas J. C., Fair and Equitable Treatment Under Nafta´s Investment Chapter, American Society of

International Law, Proceedings of the Ninety–Sixth Annual Meeting, March 16, 2002.


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Moreover, in the Maffezini case19,Spain was held responsible for violatingthe treatment clauses in its BIT with Ar-gentina when it conducted a loan transac-tion without enough transparency so as tobe fair and equitable to the investor, al-though the applicable BIT did not refer tointernational law; therefore, there was nodiscussion of international custom by thetribunal.

In general, «an analysis of the opin-ions of the arbitral tribunals, which haveattempted to interpret and apply the ‘fairand equitable treatment’ standard, identi-fied a number of elements which, singlyor in combination, they have treated asencompassed in the definition of the ‘fairand equitable standard’: due diligence anddue process, including non-denial of jus-tice and lack of arbitrariness, transparencyand good faith. There is a common un-derstanding among OECD countries thatdue diligence and due process, includingnon-denial of justice and lack of arbitrari-ness, are elements well grounded in cus-tomary international law which could beaccepted as part of the definition of fairand equitable treatment. There are differ-ing views as of the role of transparencyas a new or a possible element of a fairand equitable standard linked to evolvingcustomary law. Most OECD countries’agreements define it as an obligation un-der a separate provision. OECD countriesseem to consider good faith to be more a

principle underlying the general obligationrather than a distinct obligation to inves-tors pursuant to the ’fair and equitabletreatment’ standard»20.

For OECD countries, due diligenceand due process could be accepted as a

part of the definition of fair andequitable treatment.

In the scope of Nafta, the interpreta-tion granted by the Free Trade Commis-sion has not been helpful in clarifyingthings. «Now that in the light of the Notesof Interpretation, a customary internationallaw standard is to be applied by arbitraltribunals in interpreting minimum standardsof treatment, how will ’fair and equitabletreatment’ be construed? The basic con-cepts, of course, are fairness and due proc-ess, but as article 1105 stands, its languagesurely is not a model of clarity. Also, aswe have seen, no consistent body of juris-prudence has thus far been developed byarbitral tribunals. As the Metalclad tribu-nal and the British Columbia court’s deci-sion diverge in interpreting the pertinentconcepts, there is no certainty as to howfuture tribunals will construe the phrase.No reliance can therefore be placed onprecedent, for the rationale for tribunalawards is often conflicting and lacks co-herence»21.

1 9 Emilio Agustín Maffezini vs. The Kingdom of Spain, ICSID Case No. ARB/97/7. (Award November13, 2000).

2 0 OECD, Fair and Equitable Treatment Standard in International Investmen Law: Draft ConcludingObservations. OECD, September, 2004, p. 3.

2 1 Vid. P. Nanda, op. cit.


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The Free Trade Commission’s inten-tion, through the issuance of its Notes, wasto restrict the flexibility of arbitral tribu-nals. However, the international minimumstandard’s own vagueness as a term didnot allow even that, since Tribunals havein practice exceeded its intentional terms.

The whole divergence between mosttribunals’ decisions seems to confirm thatthe term is still subject to their own inter-pretations according to the facts of eachcase. To many, it seems that tribunalsshould maintain the opportunity to construetheir text. Relying on the principle behindthe investment agreement, which is togrant protection to the foreign investor, therestriction of the standard’s meaning tocustomary international law and, therefore,the restriction of the tribunals’ own func-tions, does not help in this respect. «Inter-pretation must begin with the rules thatappear in the Vienna Convention, but itcannot end with the Notes of Interpreta-tion»22.

The meaning of the fair and equitabletreatment standard is still mainly in

the hands of each tribunal.

In conclusion, although some invest-ment agreements do equate the fair andequitable treatment to the internationalminimum standard in customary interna-tional law, it cannot be concluded that thisis the general meaning that the standard

has adopted in international law. EvenNafta tribunals’ that were restricted intheir interpretation exceeded customaryinternational law, which leads us to con-clude that the meaning is still mainly in thehands of each tribunal, eventually apply-ing a plain-meaning approach to it.

A SELF CONTAINED STANDARD?

The fair and equitable treatmentstandard conceived as a self-containedstandard relies on the idea that the stand-ard of treatment is given its plain mean-ing, that is, each word contained in thestandard must be analyzed on the basis ofits own general definition. Therefore, theassessment to be carried out to determinethe content of the standard which will beafforded to the foreign investor is basedon the proper meaning of the terms «fair»and «equitable». Still, this is only the basison which the determination will be made.Other elements will be taken into account,most importantly, the facts and specialfeatures of the case. This plain meaningapproach is concordant with the canonsof interpretation of treaties surrendered byinternational law. It is «no doubt entirelyconsistent with canons of interpretation ininternational law»23.

A treatment will thus be Fair «when itis free from bias, fraud or injustice; equi-table, legitimate… not taking undue ad-vantage; disposed to concede every rea-

2 2 Brower, Charles H., Fair and Equitable Treatmen Under Nafta’s Investment Chapter. AmericanSociety of International Law. Proceedings of the Ninety-Six Annual Meeting, March 16, 2002.

2 3 Vasciannie Stephen, p. 103.


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sonable claim»; and by the same token,equitable treatment is that which is char-acterized by equity or fairness … fair, just,reasonable»24.

An important ruling concerning thistheory was issued in the Pope and Talbotcase, which established that the fairnesselement in article 1105 is additive to therequirements of international law. The lat-ter conclusion was not based on the word-ing of article 1105 since the Tribunal rec-ognized that such article suggested other-wise, but the interpretation was tackledon the basis of the consideration of BITssigned by the United States both beforeand after Nafta, which granted a higherstandard of treatment to the investor.

On the other hand, the Pope andTalbot case considered that if we take intoaccount the most-favored nation clause,it becomes absurd to deny an investor thebetter treatment granted in other invest-ment agreements, considering that throughthis clause, the investor will have accessto this improved treatment. The Pope andTalbot Tribunal considered that the stand-ard set by Nafta was equal to that grantedby BITS that preceded Nafta. The Tribu-nal did not approve the idea that the inten-tion of the parties would have been to denythe investors under Nafta the better treat-ment existent under BITs.

The plain-meaning approach entails aseries of advantages, such as «the con-

siderable advantages of uniformity». Af-ter all, why should «fair and equitable treat-ment» mean something different depend-ing on which BIT applies?25. This is not aminor issue. It seems that this approachwould surely improve the uniformity of theinterpretation of the standard issued byarbitral Tribunals. If we consider the stand-ard in its plain meaning, arbitral rulingswould become more uniform and may onlyvary in a little degree according to the factsof each case. It seems much easier to relyon the general meaning granted to a wordthan to determine what special standardsof customary international law are equiva-lent to the fair and equitable treatmentstandard. The decision, considering thecase’s facts, must simply be based onwhether the conduct at issue is fair andequitable or unfair and inequitable.

It is easier to rely on thegeneral meaning of a word than to

determine which standards ofcustomary international law areequivalent to that of the fair and

equitable treatment.

Another approach to the issue is theview of F. A. Mann26, who considered thatthe obligation of fair and equitable treat-ment constitutes the overriding obligation.

2 4 Idem.2 5 Coe Jack C.2 6 F.A. Mann, British Treaties for the Promotion and Protection of Investments, 52 British Yearbook

of International Law, 1981. In Stuart G. Gross: Inordinate Chill: Bit’s, Non–Nafta MITs, and HostState Regulatory Freedom – An Indonesian Case Study. Michigan Journal of International Law,Spring 2003.


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This overriding obligation includes otherstandards, such as the most-favored na-tion clause and national treatment stand-ards. In his view, these standards aregranted to ensure that the fair and equita-ble treatment standard is not impeded.However, the latter is a minority position.Generally, the most-favored nation andnational treatment standards are independ-ent of the fair and equitable treatmentstandard.

A tribunal would not beconcerned with a minimun,

maximun or average standard.

Notwhistanding the latter, Mann statesthat «it is misleading to equate the fair andequitable standard with the internationalminimum standard: this is because theterms ‘fair and equitable treatment’ en-visage conduct that goes far beyond theminimum standard and afford protectionto a greater extent and according to a muchmore objective standard than any previ-ously employed form of words. A tribunalwould not be concerned with a minimum,maximum or average standard. It will haveto decide whether in all circumstances theconduct in issue is fair and equitable orunfair and inequitable. No standard definedby other words is likely to be material. Theterms are to be understood and appliedindependently and autonomously»27.

However, to others, «fair and equita-ble treatment is not to be assessed accord-ing to customary international law, butrather represents an expanded, contem-porary understanding of customary inter-national law»28.

If we analyze the facts, we will ap-preciate that even those arbitral rulings thatbased their findings on an investmentagreement that equates the standard wihtthe international minimum standard clearlyexceeded the terms of that investmentagreement, granting the standard a mean-ing that is beyond the international mini-mum standard as acknowledged at thistime. It seems that Tribunals are moreconfident in making use of the rules of in-terpretation of international law and de-fine the standard in consideration of thetreaty’s objectives and the facts of thecase. In conclusion, they have applied thetheory of the fair and equitable treatmentstandard as a self-contained standard. Thereason for this is that most investmentagreements, as stated in the precedingChapter, do not make the fair and equita-ble treatment standard interchangeablewith the international minimum standardwhile in those that do, there is no equatingit with the international minimum stand-ard of customary international law (withsome exceptions).

An important view is that of RudolfDolzer and Magrete Stevens, who say that«the fact that parties to BITS have con-

2 7 OECD, Fair and Equitable Treatment Standard in International Investment Law, p. 23.2 8 Foy Patrick G. and Robert J.C. Deane, Foreign Investment Protection under Investment Treaties:

Recent developments under Chapter 11 of the North American Free Trade Agreement. ICSID review– Foreign Investment Law Journal, Volume 16, Number 2, Fall 2001. In OECD, Fair and EquitableTreatment Standard in International Investment Law, p. 23.


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sidered it necessary to stipulate this stand-ard as an express obligation rather thanrely on a reference to international lawand thereby invoke a relatively vague con-cept such as the minimum standard isprobably evidence of a self-containedstandard. Further, some treaties refer tointernational law in addition to the fair andequitable treatment, thus appearing to re-affirm that international law standards areconsistent with, but complementary to, theprovision of the BIT»29.

In some circumstances, States andforeign investors view lack of

precision as a virtue.

The consideration of this theory isnevertheless not without difficulties. Aplain-meaning approach may become sub-jective and lack precision. However, «insome circumstances, both the States andthe foreign investors may view lack ofprecision as a virtue, for it promotes flex-ibility in the investment process». There-fore, it seems that many existent arbitralrulings have headed towards this self-con-tained standard theory anyway. It mightrequire some extra arbitral rulings to to-tally define the meaning’s standard on thebasis of the theory’s elements. ProfessorP. Julliard refers to this: «… the interpre-tation of the fair and equitable treatment,an imprecise notion –‘notion aux contours

imprécis’– will be progressively developedthrough the ‘praetorian’ work of thearbitral tribunals.»

Notwithstanding all the latter, whendefining the meaning of the fair and equi-table treatment standard, arbitral tribunalsmust take into account the real intentionof parties when signing an investmentagreement, which is to grant reliable pro-tection to the foreign investor to stimulateinvestment in their territory. This will cer-tainly avoid equating it to the internationalminimum standard, which takes away areal and efficient protection.

Professor Muchlinski states that: «Theconcept of fair and equitable treatment isnot precisely defined. It offers a generalpoint of departure in formulating an argu-ment that the foreign investor has not beenwell treated by reason of discriminatoryor other unfair measures being takenagainst its interests. It is, therefore, a con-cept that depends on the interpretation ofspecific facts for its content. At most, itcan be said that the concept connotes theprinciple of non–discrimination and pro-portionality in the treatment of foreign in-vestors»30.

It must be concluded that the fair andequitable treatment standard still remainsa vague and undetermined concept thatneeds further developing by arbitral tribu-nals. The point, however, is to determinethe starting point on the basis of whichthese arbitral tribunals must rule in the

2 9 Dolzer Rudolf and Magrete Stevens. In OECD Fair and Equitable Treatment Standard in InternationalInvestment Law, p. 23.

3 0 Muchlinski Peter. Multinational Enterprises and the Law. 1995, p. 625. In Fair and Equitable TreatmentStandard in International Investment Law. OECD, September, 2004, p. 24.


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future. Will we accept the rules of inter-pretation of international law and decidebased on facts, considering the best pro-tection to be granted to the foreign inves-tor, or will we limit its delimitation to astandard, such as the international mini-mum, that grants a very basic protectionto the investor which already exists in cus-tomary international law? Unless theagreement specifically orders the arbitralTribunal to equate the standard with theinternational minimum standard, the an-swer is a self-contained standard ap-proach. It seems that the current evolu-tion in the investment area regarding theprotection of foreign investors provides aclear statement: For the sake of the liber-alization of investments, investor protec-tion must not regress. This is the intentionbehind investment agreements, and theinterpretation of all standards establishedtherein (including the fair and equitabletreatment standard) must be oriented inthat direction.

Investor protection must not regress.

CONCLUSIONS

The fair and equitable treatmentstandard, present in international invest-ment law, has gained importance as amechanism against unfair and unequalbehavior of host States against foreign in-vestors. It has arisen as a fundamentalresponse to a new type of expropriation

(different from the traditional direct andcreeping types of expropriation) that couldbe enacted against the investor.

This new type of expropriation amo-unts to a behavior of the host State thatdoes not involve a physical taking of prop-erty (direct expropriation) or conduct thatmakes it impossible to make proper use ofthe property (creeping expropriation). Itconsists of a certain treatment by the hostState that would eventually impair the in-vestor’s ability to develop the investment,thus affecting his property rights in regardthereto. For example, a lack of transpar-ency by the host State which does not al-low the investor to learn of all regulationsthat must be complied with, resulting in theabove-mentioned impairment.

The fair and equitable treatmentstandard is often invoked by foreign in-vestors before arbitral tribunals, who claimthat although they are not affected by thetraditional forms of expropriation, they areincapable of developing their investmentdue to a host State’s conduct that doesnot allow it.

The main conflict in relation to thisstandard is the vagueness in which it isconceived. Views issued by scholars andarbitrators, as well as the expression ofwhat is contained in investment agree-ments, demonstrate that there is no uni-formity in the matter, a situation that ispresent to a greater degree in variouscases that have dealt with the issue ofdetermining its true meaning.

The OECD31 states in this regard that

3 1 OECD, Fair and Equitable Treatment Standard in International Investment Law: Draft ConcludingObservations, p. 2.


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«because of the differences in its formu-lation, the proper interpretation of the ’fairand equitable treatment standard’ is influ-enced by the specific wording of the par-ticular treaty, its context, negotiating his-tory or other indications of the party’s in-tent».

There is consensus as to the definingelements of the minimun standard in

customary international law.

Some investment treaties specificallylink the standard with the minimum stand-ard of customary international law. If thiswere the case, there is no doubt that thiswill be the interpretation to assign to thestandard. However, in the case of otheragreements, which constitute the major-ity, no such link is made, implying that thestandard may be considered to signify alot more than the minimum standard ofcustomary international law. There is acommon consensus as to what the defin-ing elements are in the minimum standardof customary international law (which, bythe way, evolves continuously). Neverthe-less, whenever there is no express equat-ing with the minimum standard, there isno general agreement as to what may weconsider the «Fair and Equitable Treat-ment» standard to mean.

In consequence, and although we mustawait further rulings by arbitral tribunalsto better shape the standard, we must as-sume that thus far to date, the majority of

investment agreements do not equate thestandard with the minimum standard ofcustomary international law, and, therefore,are not bound by that interpretation.Moreover, arbitral rulings have exceededin their interpretation the general elementsthat constitute that minimum standard ofcustomary international law (for example,reference to transparency), which leadsus to believe that they had the intention ofelevating the level of protection to the for-eign investor and not limiting it to custom-ary international law.

Although investment agreements thatequate the standard with the internationalminimum standard are obliged to make thatinterpretation, and the fact that there aresome arbitral rulings that establish thatnexus, these sparse cases do not sufficeto transform that interpretation into thegeneral approach to the meaning of thestandard. We must take into account in-ternational rules of interpretation, the in-tent of the parties, all of which leads us torealize that a plain-meaning approachmust be applied. In relation to the stand-ard’s meaning, «il suo contenuto nonsembrerebbe essere determinabile inmaniera assoluta e definitiva, essendo essoun principio astratto e relativo; iltrattamento giusto ed equo assume peròun significato concreto quando é inseritoin un contesto giuridico particolare.»32

It is true, there is a general concernthat this approach may not help in dealingwith the arbitrariness that may appearwhen there is no direct guidance for arbi-

3 2 María Rosaria Mauro, Gli accordi bilaterali sulla promozione e la protezione degli investimenti. G.Giappichelli Editore, Torino, p 193.


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trators. However, this is a view that willbe readily corrected through jurisprudence,which has so far established some recur-rent elements that are a part of the stand-ard, such as due diligence, due process,non-denial of justice and transparency.

When signing an agreement, thereal intention of parties is generallyto grant the best protection to the

investor.

The real intention of the parties whensigning an investment agreement is, in mostcases, to grant the best protection to theinvestor, allowing the free-flow of invest-ment into its territory. The most importantbenefit of a plain-meaning approach is thatit allows the standard to be interpretedaccording to that real intention of the par-ties. In other words, it grants the best pro-tection to the investor, which implies thefairest and most equitable conduct by thehost State with regard to the specific factsof the case. Equating the standard withthe minimum standard of customary in-ternational law is lowering the protectionto the most basic elements of customaryinternational law. «In tal senso essopotrebbe essere inteso come il principio dibuona fede del diritto interno, per cuil`obbligo di concedere un trattamentogiusto ed equo imporrebbe alle Parti di

tenere un comportamento conforme agliobiettivi dell’ accordo e quindi, alle Particontraenti dei BIT’s un comportamentoche non ostacoli la promozione e laprotezione degli investimienti stranieri»33.In consequence, the aim of protecting for-eign investment is the fundamental issueto be taken into account in the interpreta-tion of the standard. Moreover, «It is in amore general way a functional minimumstandard of treatment of private business,quite different, however, from the tradi-tionally known legal minimum standard ofthe so-called civilized nations»34.

Finally, whatever the evolution of thegrowing jurisprudence of investor-stateTribunals called upon to explore the mean-ing of fair and equitable treatment maybe, other questions in regard to the stand-ard will surely arise. For example, whatwill be the criteria to determine the com-pensation to be granted to the affectedinvestor in the event a violation of thestandard is detected? Can we apply theelements that arbitrators use to determinethe compensation for a direct expropria-tion (Hull Formula)? Can we equate theviolation of the fair and equitable treat-ment standard with a direct type of ex-propriation and, therefore, apply fair mar-ket value criteria in order to compensatethe affected investor?

In this sense, the Chilean model ofBIT35 establishes that where the market

3 3 Mauro María Rosaria, p. 191.3 4 Preiswerk, New Developments in Bilateral Investment Protection. In María Rosaria Mauro, p. 191.3 5 Agreement between the Government of the Republic of Chile and the Government on the Reciprocal

Promotion and Protection of Investments, reprinted in UNCTAD, International InvestmentCompendium, Volume III, p. 143 – 50. In Stephen Vasciannie, p. 149.


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value or property compensation cannot beascertained, compensation may be deter-mined in accordance with «generally rec-ognized equitable principles of valuation,taking certain factors into account.» Al-though this is certainly not a clear rule, atleast it is dealt with. But what are the cri-teria when there is no conventional ortreaty guidance? The issue becomes evenmore problematic if we consider that de-veloping and developed countries have adifferent perspective as to whether theHull formula must be applied.

In the case of MTD Equity Sdn. Bhd.and MTD Chile S.A. vs. Republic ofChile36, in which the only argument bywhich the State of Chile was charged wasa violation of the fair and equitable treat-ment standard, the Tribunal recognized thatthe BIT between Malaysia and Chile doesnot establish the equivalent to the criteriaof prompt, adequate and effective com-pensation for expropriation in the case ofbreaches of the BIT on other grounds. Inthis case, the parties agreed to apply thecriteria of the Chorzow Factory case ruledby the Permanent Court of Justice thatstates «that compensation should wipe outall consequences of the illegal act and re-establish the situation which would, in allprobability, have existed if that had notbeen committed»37.

Although this is a reasonable and just

criterion, could it be applied in those claimsin which there is no agreement betweenthe parties and no reference is made to itby the investment agreement? Could theterm «adequate» compensation in the HullFormula amount to wiping out all conse-quences of the illegal act? Moreover, doesthe fair market value apply or not?

In the Marvin Feldman vs. Mexicocase, the Tribunal acknowledged that«Nafta does not provide further guidanceas to the proper measure of damages orcompensation for situations that do not fallunder article 1101 (expropriation); the onlydetailed measure of damages specificallyprovided in Chapter 11 is in article 1101(2-3) ‘fair market value’, which necessar-ily applies only to situations that fall withinthat Article 1101»38. Considering that thereis no criteria to adhere to, the tribunal fi-nally determined damages on a discretion-ary basis.

Finally, in relation to the amount of com-pensation to be granted to an investor thathas suffered a violation of the Fair andEquitable Treatment standard, a discussionwill certainly arise in regard to the possibil-ity that the compensation be calculated inregard to the fair market value of the wholeinvestment, considering that such a viola-tion made it impossible for the investor todevelop his investment, which, in practice,is equivalent to confiscating property.

3 6 MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, ICSID Case Nº ARB/01/7 (Award,May 25, 2004). <http://ita.law.uvic.ca/documents/MTD-Award_000.pdf>.

3 7 Case concerning the Chorzòw Factory. <http://www.worldcourts.com/pcij/eng/decisions/1927.07.26_chorzow/>.

3 8 Marvin Feldman vs. Mexico. ICSID Case No. ARB (AF) /99/1. (Award December 16, 2002). <http://ita.law.uvic.ca/documents/feldman_mexico-award-english>.

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