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Negotiating CARICOM Investment Agreements:
State of Play and the Way Forward
Fair and Equitable Treatment
Alejandro Faya-Rodríguez
Consultant, Counsellor-at-law, MJur, MPP
Professor of International Law on Foreign Investment
Grenada, June 2009
Jamaica-UK BIT (1987)
Article 2
Promotion and Protection of Investment
1…
2. Investment of nationals or companies of either
Contracting Party shall at all times be accorded
fair and equitable treatment and shall enjoy
full protection and security in the territory of
the other Contracting Party…
Article II Grenada-US BIT (1989)
1…
2. Investments shall at all times be accorded fair and
equitable treatment, shall enjoy full protection and
security and shall in no case be accorded treatment
less than that required by international law. Neither
Party shall in any way impair by arbitrary and
discriminatory measures the management, operation,
maintenance, use, enjoyment, acquisition, expansion,
or disposal of investments. Each Party shall observe
any obligation it may have entered into with regard to
investments.
3-8…
Barbados-Venezuela BIT (1999)
ARTICLE 2
Promotion and Protection of Investment
1…
2. Investments of nationals or companies of each
Contracting Party shall at all times be accorded
fair and equitable treatment in accordance
with the rules and principles of international
law and shall enjoy full protection and security
in the territory of the other Contracting Party…
The concept – origins
• Treaties on Friendship, Commerce and Navigation (1950’s)
• Havana Charter (1959)
• OECD Draft Convention on the Protection on Foreign
Property (1967)
• World Bank Guidelines (1992)
• BIT’s (1990’s)
The concept – object and purpose
• Provide for an absolute standard of treatment
• NT and MFN treatment are not enough
• Filling in gaps
The concept – meaning?
• Highly equivocal clause
• Language matters!
• Approaches from jurisprudence:
1. self-contained standard of justice and equity
2. linked to the fulfillment of other treaty obligations
3. “autonomous standard” linked to the concept of
“legitimate expectations”
4. minimum standard of treatment of aliens under
customary international law (CIL)
The concept – a self-contained
standard of justice and equity
ex at equo bono clause?
Highly discretionary function
No jurisprudence clearly backing this
approach, out of some “suggestions”
The concept – linked to the fulfillment
of other obligations
A breach of a different obligation may lead to a breach of
the FET standard
“The absence of a clear rule as to the requirement or not of a municipal
construction permit, as well as the absence of any established practice or
procedure as to the manner of handling applications for a municipal
construction permit, amounts to a failure on the part of Mexico to ensure the
transparency required by [NAFTA’s objectives].”
Metalclad v Mexico
“In some cases, the breach of a rule of international law by a host Party may
not be decisive in determining that a foreign investor has been denied “fair
and equitable treatment”, but the fact that a host Party has breached a rule
of international law that is specifically designed to protect investors will tend
to weigh heavily in favour of finding a breach of Article 1105. . . . [O]n the
facts of this particular case the breach of Article 1102 [national treatment]
essentially establishes a breach of Article 1105 as well.”
SD Myers v Canada
The concept – autonomous standard
linked to legitimate expectations
•
•
•
•
Legitimate, basic or just expectations
Stable regulatory framework
Good governance
Treatment in an even-handed manner
Tecmed v Mexico, Eureko v Poland, MTD Equity v Chile,
Azurix/Enron/Sempra/CMS/LG&E/Siemens v Argentina,
Occidental v Ecuador, Saluka v Czech Republic
The concept – autonomous standard
linked to legitimate expectations
“The Arbitral Tribunal considers that this provision of the
Agreement, in light of the good faith principle established by
international law, requires the Contracting Parties to provide to
international investments treatment that does not affect the basic
expectations that were taken into account by the foreign investor
to make the investment. The foreign investor expects the host
State to act in a consistent manner, free from ambiguity and
totally transparently in its relations with the foreign investor, so
that it may know beforehand any and all rules and regulations that
will govern its investments, as well as the goals of the relevant
policies and administrative practices or directives, to be able to plan
its investment and comply with such regulations…The foreign
investor also expects the host State to act consistently, i.e. without
arbitrarily revoking any preexisting decisions or permits issued by
the State that were relied upon by the investor to assume its
commitments as well as to plan and launch its commercial and
business activities...”
Tecmed v Mexico
The concept – autonomous standard
linked to legitimate expectations
“[FET] is an autonomous Treaty standard and must be
interpreted, in light of the object and purpose of the Treaty,
so as to avoid conduct that clearly provides disincentives to
foreign investors. Without undermining its legitimate right to
take measures for the protection of the public interest, the
State has therefore assumed an obligation to treat a foreign
investor’s investment in a way that does not frustrate the
investor’s underlying legitimate and reasonable
expectations. A foreign investor whose interests are
protected under the Treaty is entitled to expect that the
[State] will not act in a way that is manifestly inconsistent,
non-transparent, unreasonable (i.e. unrelated to some
rational policy), or discriminatory (i.e. based on unjustifiable
distinctions).”
Saluka v Czech Republic
The concept – minimum standard of
treatment under CIL
“Outrage, bad faith, wilful neglect of duty or
an insufficiency of governmental action so far
short of international standards that every
reasonable and impartial person would readily
recognise its insufficiency”
Neers Claim (1926)
The concept – minimum standard of
treatment under CIL
“Case law points to a number of areas across which the notion of an
international minimum standard applies. They include:
a) the administration of justice in cases involving foreign nationals, usually
linked to the notion of denial of justice…;
b) the treatment of aliens under detention…;
c) full protection and security, which is usually understood as the
obligation for the host State to adopt all reasonable measures to physically
protect assets and property from threats or attacks which may target
particularly foreigners or certain groups of foreigners . . .;
d) . . . minimum standards have been invoked concerning the way in which
expulsion is carried out . . .”
OECD Working Paper 2004/3
The NAFTA story - FET provision
Article 1105
Minimum Standard of Treatment
1. Each Party shall accord to investments of
investors of another Party treatment in
accordance with international law, including
fair and equitable treatment and full protection
and security.
2. …
The NAFTA story
“first generation” cases
• Breach of a supposedly transparency obligation =
breach of FET
Metalclad v Mexico (2000)
• Breach of TN = breach of FET
SD Myers v Canada (2000)
• FET = minimum standard under CIL plus the
“fairness elements”
Pope&Talbot v Canada (2001)
The NAFTA story
FTC Interpretation (July 2001)
1. Article 1105 prescribes the customary international law minimum
standard of treatment of aliens as the minimum standard of
treatment to be afforded to investments of investors of another
Party.
2. The concepts of “fair and equitable treatment” and “full protection
and security” do not require treatment in addition to or beyond
that which is required by the customary international law
minimum standard of treatment of aliens.
3. A determination that there has been a breach of another provision
of the NAFTA, or of a separate international agreement, does not
establish that there has been a breach of Article 1105(1).
The NAFTA story
“second generation” cases
No violation found after the interpretation
 Mondev v USA (2002), UPS v Canada (2002),
ADF v USA (2003), Loewen v USA (2003),
Waste Management II v Mexico (2004), Gami
v Mexico (2004), Methanex v USA (2005),
Thundebird v Mexico (2006)
The NAFTA story
“second generation” cases
“Article 1105(1) did not give a NAFTA Tribunal
unfettered discretion to decide for itself, on a
subjective basis, what was ‘fair’ or ‘equitable’ in the
circumstances of each particular case . . . the Tribunal
is bound by the minimum standard as established in
State practice and in the jurisprudence of arbitral
tribunals. It may not simply adopt its own
idiosyncratic standard of what is ‘fair’ or ‘equitable’
without reference to established sources of law.”
Mondev v USA (2002)
The NAFTA story
“second generation” cases
“…if the conduct is arbitrary, grossly unfair, unjust or
idiosyncratic, is discriminatory and exposes the claimant
to sectional or racial prejudice, or involves a lack of due
process leading to an outcome which offends judicial
propriety—as might be the case with a manifest failure
of natural justice in judicial proceedings or a complete
lack of transparency and candour in an administrative
process...”
Waste Management II v Mexico (2004)
The NAFTA story
“second generation” cases
“...something more than simple illegality or lack of authority under
the domestic law of a State is necessary to render an act or
measure inconsistent with the customary international law
requirement of Article 1105(1)”.
ADF Group v USA (2003)
“...whether the conduct of the trial amounted to a breach of
municipal law as well as international law is not for us to determine.
A NAFTA claim cannot be converted into an appeal against the
decisions of municipal courts”.
Loewen v USA (2003)
“…a gross denial of justice or manifest arbitrariness falling below
acceptable international standards”.
Thunderbird v Mexico (2006)
The NAFTA story
“second generation” cases
– addressing the absence of “any relevant State practice to
support its contention that States are obligated under
international law to provide a transparent and predictable
framework for foreign investment.” pp. 226-27
– addressing the absence of “of any customary international law
rule requiring States to regulate in such a manner – or refrain
from regulating – so as to avoid upsetting foreign investors’
settled expectations with respect to their investments.” pp.
230-33
US Counter-Memorial in Glamis Gold v. USA, Sept. 19, 2006
CIL – why it matters
• High degree of predictability, because the CIL represents
general practice of States and opinio juris
• Basic content defined (e.g. denial of justice, due process)
•
Even though the content of the CIL may be subject of
discussion:
 It requires evidence
 It sets forth a high threshold
 It does not cover all areas
 It evolves gradually and slowly
CIL – why it matters
“……the minimum standard of “fair and equitable treatment” may in fact
provide no more than “minimal” protection. Consequently, in order to
violate that standard, States’ conduct may have to display a relatively
higher degree of inappropriateness…investors’ protection by the “fair and
equitable treatment” standard is meant to be a guarantee providing a
positive incentive for foreign investors. Consequently, in order to violate
the standard, it may be sufficient that States’ conduct displays a relatively
lower degree of inappropriateness”.
“Whichever the difference between the customary and the treaty
standards may be, this Tribunal has to limit itself to the interpretation of
the “fair and equitable treatment” standard as embodied in Article 3.1 of
the Treaty. That Article omits any express reference to the customary
minimum standard…This clearly points to the autonomous character of a
“fair and equitable treatment” standard…”
Saluka v Czech Republic (2006)
T&T-Mexico BIT (2007)
Article 5
Minimum Standard of Treatment
1. Each Contracting Party shall accord to investments of investors of the other
Contracting Party treatment in accordance with customary international
law, including fair and equitable treatment and full protection and
security.
2. For greater certainty:
(a) the concepts of “fair and equitable treatment” and “full protection and
security” do not require treatment in addition to or beyond that which is
required by the customary international law minimum standard of
treatment of aliens; and
(b) a determination that there has been a breach of another provision of this
Agreement, or of a separate international Agreement, does not establish
that there has been a breach of this Article.
Conclusions
1. The manner on which FET is defined in the treaty does not
affect the ability of the latter to foster investment
2. On the other hand, it may weaken or facilitate greatly the
legal defense of the State in the context of a particular claim
3. FET is the most used provision by investors when they
submit a claim
4. Need to keep track of other experiences such as that of the
NAFTA and use them for the benefit of negotiations
5. Tying the FET standard to the CIL = GOOD PRACTICE
Thanks!
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