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Contenttype: BookContentPublishedinprint: 15November2012

Product: OxfordScholarlyAuthoritiesonInternationalLaw[OSAIL]ISBN: 9780199651795

VIIStandardsofProtectionFrom:PrinciplesofInternationalInvestmentLaw(2ndEdition)RudolfDolzer,ChristophSchreuer

Subject(s):InternationaleconomiclawFairandequitabletreatmentstandardNationaltreatmentMost-favoured-nationtreatment(MFN)FullprotectionandsecuritySettlementofdisputesUmbrellaclause

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(p.130)VIIStandardsofProtection

1.FairandequitabletreatmentMostbilateralinvestmenttreaties(BITs)andotherinvestmenttreatiesprovideforfairandequitabletreatment(FET)offoreigninvestments. Forinstance,theBITbetweenArgentinaandtheUnitedStatesinArticleII(2)a)states:InvestmentshallatalltimesbeaccordedfairandequitabletreatmentToday,thisconceptisthemostfrequentlyinvokedstandardininvestmentdisputes.Itisalsothestandardwiththehighestpracticalrelevance:themajorityofsuccessfulclaimspursuedininternationalarbitrationarebasedonaviolationoftheFETstandard.Itisonlysince2000thatinvestmenttribunalshavestartedgivingcontenttothemeaningofthestandard.Theyhavesinceappliedittoabroadrangeofcircumstances.Theevolutionofthisjurisprudenceistracedinsomedetailbelow.

(a)HistoryoftheconceptTheconceptofFETisnotnewandhasappearedininternationaldocumentsforsometime.Someofthesedocumentswerenon-binding,othersenteredintoforceasmultilateralorbilateraltreaties.TheoriginoftheclauseseemstodatebacktothetreatypracticeoftheUnitedStatesintheperiodoftreatiesonfriendship,commerce,andnavigation(FCN). Forinstance,ArticleIsection1ofthe1954TreatybetweenGermanyandtheUnitedStatesreads:EachPartyshallatalltimes(p.131)accordfairandequitabletreatmenttothenationalsandcompaniesoftheotherPartyandtotheirproperty,enterprisesandotherinterests.AreferencetoajustandequitabletreatmentstandardappearedinArticle11(2)oftheHavanaCharterforanInternationalTradeOrganizationof1948. TheAbsShawcrossDraftConventiononInvestmentAbroadof1959initsArticleIreferredtofairandequitabletreatmenttothepropertyofthenationalsoftheotherParties, andthesubsequentOrganisationforEconomicCo-operationandDevelopment(OECD)DraftConventionontheProtectionofForeignPropertyof1967initsArticle1containedsimilarlanguage.Also,thedraftforaUnitedNationsCodeofConductonTransnationalCorporationsinits1983versionprovidedthattransnationalcorporationsshouldreceivefairandequitabletreatment. TheGuidelinesontheTreatmentofForeignDirectInvestmentadoptedbytheDevelopmentCommitteeoftheBoardofGovernorsoftheInternationalMonetaryFund(IMF)andtheWorldBankin1992intheirSectionIIIdealingwithTreatmentprovidedthat2.EachStatewillextendtoinvestmentsestablishedinitsterritorybynationalsofanyotherStatefairandequitabletreatmentaccordingtothestandardsrecommendedintheseGuidelines.TheOECDDraftNegotiatingTextforaMultilateralAgreementonInvestment(MAI)of1998containedthefollowingtextinitssectiononinvestmentprotection:

1.1.EachContractingPartyshallaccordtoinvestmentsinitsterritoryofinvestorsofanotherContractingPartyfairandequitabletreatmentandfullandconstantprotectionandsecurity.InnocaseshallaContractingPartyaccordtreatmentlessfavourablethanthatrequiredbyinternationallaw.

TheconceptofFEThasalsoenteredintoanumberofmultilateraltreatiescurrentlyinforce.Forinstance,theConventionEstablishingtheMultilateralInvestmentGuaranteeAgencyof1985requirestheavailabilityoffairandequitabletreatmentasapreconditionforextendinginsurancecover.Article12dealingwithEligibleInvestmentsprovidesinpart:

(d)Inguaranteeinganinvestment,theAgencyshallsatisfyitselfasto:(iv)theinvestmentconditionsinthehostcountry,includingtheavailabilityoffairand

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equitabletreatmentandlegalprotectionfortheinvestment.

(p.132)TheNorthAmericanFreeTradeAgreement(NAFTA)of1992containstheFETprincipleinitsArticle1105,paragraph1. Thisprovisionisdiscussedinmoredetailbelow.TheEnergyCharterTreaty(ECT)of1994containselaboratelanguagearoundtherequirementofFETinitsArticle10(1):

(1)EachContractingPartyshall,inaccordancewiththeprovisionsofthisTreaty,encourageandcreatestable,equitable,favourableandtransparentconditionsforInvestorsofotherContractingPartiestomakeinvestmentsinitsarea.SuchconditionsshallincludeacommitmenttoaccordatalltimestoInvestmentsofInvestorsofotherContractingPartiesfairandequitabletreatment.

(b)HeterogeneityoftreatylanguageGeneralizationsaboutthestandardoffairandequitabletreatmentshouldbetreatedwithcaution.Aswithotherstandardclausesininvestmenttreaties,nosinglefrozenversionexists.Indeed,thevariationsinthisareaarequitesignificant. EverytypeofclausehastobeinterpretedinaccordancewithArticle31oftheViennaConventionontheLawofTreaties(VCLT),dulytakingintoaccountitscontextand,asappropriate,itshistory.Thediscussiononthedifferenttypesoflinkagetocustomarylawisagoodexampleofthesevariations.Sometreatiesrefertoequitableandreasonableratherthanfairandequitable.Thisvariationdoesnotappeartoreflectadifferenceinmeaning.

(c)NatureandfunctionEssentially,thepurposeoftheclauseasusedinBITpracticeistofillgapswhichmaybeleftbythemorespecificstandards,inordertoobtainthelevelofinvestorprotectionintendedbythetreaties. TheoperationofFETclausesininvestmenttreatiesisreminiscentofcodesincivillawcountrieswhichsetforthanumberofspecificrulesandcomplementthesewithageneralclauseofgoodfaithasanoverarchingprinciplewhichfillsgapsandinformstheunderstandingofspecificclauses.Indeed,thesubstanceofthestandardoffairandequitabletreatmentoverlapswiththemeaningofgoodfaithinitsbroadersetting,includingtherelatednotionsofvenirecontrafactumpropriumandestoppel.InpracticetheFETstandardmayofferredresswherethefactsdonotsupportaclaimforexpropriation.

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(p.133)DoesFETcontaintwostandards,namelyfairandequitable,withindependentmeaningsforeachconcept?Whileitwouldnotbeimpossibletoarguealongthoselines,noevidenceofpracticeseemstopointinthatdirection.Thegeneralassumptionappearstobethatfairandequitablemustbeconsideredtorepresentasingle,unifiedstandard.AttimesithasbeensuggestedthattheFETstandardismerelyanoverarchingprinciplethatembracestheotherstandardsoftreatmenttypicallyfoundininvestmenttreaties. Whileitisundeniablethatthereisacertaindegreeofinteractionandoverlapwithotherstandards,itiswidelyacceptedthatFETisanautonomousstandard. InthemajorityofcasestribunalshavedistinguishedFETfromotherstandardsandhaveexaminedseparatelywhethertherehasbeenaviolationoftherespectivestandards. ThereisnodoubtthattheFETstandardismeantasaruleofinternationallawandisnotdeterminedbythelawsofthehoststate.TribunalshaverepeatedlyemphasizedtheindependenceoftheFETstandardfromthenationaltreatmentstandard. TheFETstandardmaybeviolatedeveniftheforeigninvestorreceivesthesametreatmentasinvestorsofthehoststatesnationality.Forthesamereason,aninvestormayhavebeentreatedunfairlyand

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inequitablyevenifitisunabletobenefitfromamost-favoured-nation(MFN)clausebecauseitcannotshowthatinvestorsofothernationalitieshavereceivedbettertreatment.SometribunalshavepointedtothevaguenessandlackofdefinitionoftheFETstandard andtheEuropeanParliamenthasdeploredtheuseofvaguelanguageinthiscontext. Infact,thelackofprecisionmaybeavirtueratherthanashortcoming.Inactualpracticeitisimpossibletoanticipateintheabstracttherangeofpossibletypesofinfringementsupontheinvestorslegalposition.TheprincipleofFETallowsforindependentandobjectivethirdpartydeterminationofthistype

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(p.134)ofbehaviouronthebasisofaflexiblestandard. Therefore,itisnotdevoidofindependentlegalcontent.Likeotherbroadprinciplesoflaw,itissusceptibletospecificationthroughjudicialpractice.AsProsperWeilwrotein2000:

Thestandardoffairandequitabletreatmentiscertainlynolessoperativethanwasthestandardofdueprocessoflaw,anditwillbeforfuturepractice,jurisprudenceandcommentarytoimpartspecificcontenttoit.

StephanSchillhaspointedoutthatfairandequitabletreatmentcanbeunderstoodasembodyingtheruleoflawasastandardthatthelegalsystemsofhoststateshavetoembraceintheirtreatmentofforeigninvestors.Althoughfairandequitablemaybereminiscentoftheextralegalconceptsoffairnessandequity,itshouldnotbeconfusedwithdecisionsexaequoetbono. TheTribunalinADFGrouppointedoutthattherequirementtoaccordfairandequitabletreatmentdoesnotallowatribunaltoadoptitsownidiosyncraticstandardbutmustbedisciplinedbybeingbaseduponstatepracticeandjudicialorarbitralcaselaworothersourcesofcustomaryorgeneralinternationallaw.

(d)FairandequitabletreatmentandcustomaryinternationallawConsiderabledebatehassurroundedthequestionofwhethertheFETstandardmerelyreflectstheinternationalminimumstandard,ascontainedincustomaryinternationallaw,oroffersanautonomousstandardthatisadditionaltogeneralinternationallaw.Asamatteroftextualinterpretationitseemsimplausiblethatatreatywouldrefertoawell-knownconceptsuchastheminimumstandardoftreatmentincustomaryinternationallawbyusingtheexpressionfairandequitabletreatment.Ifthepartiestoatreatywanttorefertocustomaryinternationallaw,onewouldassumethattheywouldrefertoitassuchratherthanusingadifferentexpression.AnumberofcommentatorshaveexpressedtheviewthatFETconstitutesanindependenttreatystandardthatgoesbeyondamererestatementofcustomaryinternationallaw. Prominentamongthesupportersofanindependentconceptof

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(p.135)fairandequitabletreatmentisFAMann.WritingaboutBritishBITsin1981hesaid:

Itissubmittedthatnothingisgainedbyintroducingtheconceptionofaminimumstandardand,morethanthis,itispositivelymisleadingtointroduceit.Thetermsfairandequitabletreatmentenvisageconductwhichgoesfarbeyondtheminimumstandardandaffordprotectiontoagreaterextentandaccordingtoamuchmoreobjectivestandardthananypreviouslyemployedformofwords.Atribunalwouldnotbeconcernedwithaminimum,maximumoraveragestandard.Itwillhavetodecidewhetherinallcircumstancestheconductinissueisfairandequitableorunfairandinequitable.Nostandarddefinedbyotherwordsislikelytobematerial.Thetermsaretobeunderstoodandapplied

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independentlyandautonomously.

Ontheotherhand,theNotesandCommentstotheOECDDraftConventionontheProtectionofForeignPropertyof1967indicatethattheFETstandardissetbycustomaryinternationallaw.Similarly,theEuropeanParliamentinaresolutionadoptedin2011statedthatininvestmentagreementstobeconcludedbytheEU,fairandequitabletreatmentshouldbedefinedonthebasisoftheleveloftreatmentestablishedbyinternationalcustomarylaw.ToacertaindegreethisdebatedependsontheexactwordingofthetreatyclausesprovidingforFET.Uponcloserexaminationtheseprovideinvaryingdegreesforlinkagewithcustomaryinternationallaw.Sometreatiessimplyprescribefairandequitabletreatmentwithoutreferencetocustomaryinternationallaw;German,Dutch,Swedish,andSwissBITsgenerallyfollowthispattern.OtherclausesdealingwithFETtreatthestandardasanelementofthegeneralrulesofinternationallaw;theUnitedStates andCanadahavefollowedthisapproach.Also,Article1105oftheNAFTAtreatsFETaspartofinternationallaw.SometreatiesstatethatFETistobeaffordedinaccordancewithinternationallaw.TheFrenchModelTreatyprovidesthatthestatespartiesshallextendfairandequitabletreatmentinaccordancewiththeprinciplesofInternationalLaw.Some

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(p.136)treatiesstatethatfairandequitabletreatmentmustinnocaseprovideforlessprotectionthantherulesofinternationallaw.Yetanotherversionlistsfairandequitabletreatmentinadditiontotherulesofinternationallaw.ByfarthemostintensivediscussionontherelationshipoftheFETstandardtocustomaryinternationallawtookplaceinthecontextofArticle1105(1)oftheNAFTA. Thatprovision,includingitstitle,readsasfollows:

Article1105:MinimumStandardofTreatment1.EachPartyshallaccordtoinvestmentsofinvestorsofanotherPartytreatmentinaccordancewithinternationallaw,includingfairandequitabletreatmentandfullprotectionandsecurity.

ThisprovisionhasbeenthesubjectofanofficialinterpretationbytheNAFTAFreeTradeCommission(FTC),abodycomposedofrepresentativesofthethreestatespartieswiththepowertoadoptbindinginterpretations. TheFTCinterpretationstatesthatArticle1105(1)reflectsthecustomaryinternationallawminimumstandardanddoesnotrequiretreatmentinadditiontoorbeyondthatwhichisrequiredbycustomaryinternationallaw. NAFTAtribunalshaveacceptedtheFTCinterpretation. Inaddition,subsequentBITpracticeoftheUnitedStates andofCanada hasfollowedtheFTCinterpretation.TheUSModelBITsof

References

(p.137)2004andof2012,intheirrespectiveArticles5(2),statethatFETprescribesthecustomaryinternationallawminimumstandardoftreatmentandthatitdoesnotrequiretreatmentinadditiontoorbeyondthatrequiredbythatstandard.Theauthorityofthispractice,developedintheNAFTAcontext,isoflimitedrelevancefortheinterpretationofothertreatiesbecausetheNAFTAhasfeaturesnotsharedbyothertreaties:Article1105referstotheMinimumStandardofTreatmentinitstitle.Italsoreferstointernationallaw,includingfairandequitabletreatment.Inaddition,itwastheobjectofabindinginterpretationbyanauthorizedtreatybodyforthepurposesofthattreaty.

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IncontrasttotheNAFTApractice,arbitraltribunalsapplyingothertreatiesnotcontainingstatementsabouttherelationshipofFETtocustomaryinternationallawhavetendedtointerprettherelevantprovisionsautonomouslyonthebasisoftheirrespectivewording. Someofthesetribunalshave,however,insistedthatFETisnotdifferentfromtheinternationalminimumstandardrequiredbyinternationallaw.InAzurixvArgentina, theTribunalhadtointerpretArticleII(2)oftheArgentina-USBITguaranteeingFETandfullprotectionandsecurity.Theprovisionaddsthatinvestmentsshallinnocasebeaccordedtreatmentlessthanthatrequiredbyinternationallaw.AccordingtotheTribunal:

Theclause,asdrafted,permitstointerpretfairandequitabletreatmentandfullprotectionandsecurityashigherstandardsthanrequiredbyinternationallaw.Thepurposeofthethirdsentenceistosetafloor,notaceiling,inordertoavoidapossibleinterpretationofthesestandardsbelowwhatisrequiredbyinternationallaw.

InVivendivArgentina, theapplicableBITprovidedforfairandequitabletreatmentaccordingtotheprinciplesofinternationallaw.TheTribunalfoundthattherewasnobasisfortheviewthatFETwaslimitedtotheinternationalminimumstandardandthatsuchaninterpretationwouldruncountertothetextsordinarymeaning. TheTribunalsaid:

Article3referstofairandequitabletreatmentinconformitywiththeprinciplesofinternationallaw,andnottotheminimumstandardoftreatment.TheTribunalseesnobasisforequatingprinciplesofinternationallawwiththeminimumstandardoftreatment.First,

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(p.138)thereferencetoprinciplesofinternationallawsupportsabroaderreadingthatinvitesconsiderationofawiderrangeofinternationallawprinciplesthantheminimumstandardalone.Second,thewordingofArticle3requiresthatthefairandequitabletreatmentconformtotheprinciplesofinternationallaw,buttherequirementforconformitycanjustasreadilysetafloorasaceilingontheTreatysfairandequitabletreatmentstandard.

Therearegrowingdoubtsabouttherelevanceofthiswholedebate. TribunalshaveindicatedthatthedifferencebetweenthetreatystandardofFETandthecustomaryminimumstandardwhenappliedtothespecificfactsofacase,maywellbemoreapparentthanreal. TheTribunalinElPaso pointedoutthatthediscussionwassomewhatfutilesincethecontentoftheinternationalminimumstandardisaslittledefinedastheBITsFETstandard.Dependingonthespecificwordingofaparticulartreaty,itmayoverlapwithorevenbeidenticaltotheminimumstandardrequiredbyinternationallaw.Thefactthatthehoststatehasbreachedaruleofinternationallawmaybeevidenceofaviolationofthefairandequitablestandard, butthisisnottheonlyconceivableformofbreach.TheemphasisonlinkagesbetweenFETandcustomaryinternationallawisunlikelytorestraintheevolutionoftheFETstandard.Onthecontrary,thismayhavetheeffectofacceleratingthedevelopmentofcustomarylawthroughtherapidlyexpandingpracticeonFETclausesintreaties.TheTribunalinChemturavCanada saidinthisrespect:

theTribunalnotesthatitisnotdisputedthatthescopeofArticle1105ofNAFTAmustbedeterminedbyreferencetocustomaryinternationallaw.Suchdeterminationcannotoverlooktheevolutionofcustomaryinternationallaw,northeimpactofBITsonthisevolution.[I]ndeterminingthestandardoftreatmentsetbyArticle1105ofNAFTA,theTribunalhastakenintoaccounttheevolutionofinternationalcustomarylawasaresultinteraliaoftheconclusionofnumerousBITsprovidingforfairandequitabletreatment.

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References

(p.139)TheTribunalinMerrill&RingwentonestepfurtherandstatedthatFEThadbecomepartofcustomaryinternationallaw:

Arequirementthataliensbetreatedfairlyandequitablyinrelationtobusiness,tradeandinvestmentistheoutcomeofthischangingrealityandassuchithasbecomesufficientlypartofwidespreadandconsistentpracticesoastodemonstratethatitisreflectedtodayincustomaryinternationallawasopiniojuris.

(e)TheevolutionofthefairandequitabletreatmentstandardObviously,thestandardofFETisabroadone,anditsmeaningwilldependonthespecificcircumstancesofthecaseatissue. TheTribunalinMondevvUnitedStatespointedoutthat[a]judgmentofwhatisfairandequitablecannotbereachedintheabstract;itmustdependonthefactsoftheparticularcase. Similarly,theTribunalinWasteManagementvMexiconotedthatthestandardistosomeextentaflexibleonewhichmustbeadaptedtothecircumstancesofeachcase.NAFTAtribunalshavebeeninclinedtoseethestandardagainstahistorical-evolutionarybackground.Othertribunalshavedealtwithitmoredirectlyfromacontemporaryperspective.ThehistoricalstartingpointforadiscussiononthestandardoftreatmentforforeignersisoftenseenintheNeercaseof1926. ThecasedidnotconcernaninvestmentbutthemurderofaUScitizeninMexico.ThechargewasthattheMexicanauthoritieshadshownalackofdiligenceininvestigatingandprosecutingthecrime.TheCommissionsaid:

thetreatmentofanalien,inordertoconstituteaninternationaldelinquency,shouldamounttoanoutrage,tobadfaith,towilfulneglectofduty,ortoaninsufficiencyofgovernmentalactionsofarshortofinternationalstandardsthateveryreasonableandimpartialmanwouldreadilyrecognizeitsinsufficiency.

TheCommissionfoundthatthefactsdidnotshowsuchalackofdiligenceaswouldrenderMexicoliableanddismissedtheclaim.

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(p.140)AnotherfrequentlycitedcaseisELSI(UnitedStatesvItaly) decidedbyaChamberoftheInternationalCourtofJustice(ICJ).Whiletherelevanttreatyinthatcaseprohibitsarbitraryaction,thistenetmayalsoshedlightontheFETstandard.ThecaseconcernedthetemporaryrequisitioningbythemayorofPalermoofanindustrialplantbelongingtoanItaliancompanyownedbyUSshareholders.TheICJstated:

Arbitrarinessisnotsomuchsomethingopposedtoaruleoflaw,assomethingopposedtotheruleoflaw.Itisawilfuldisregardofdueprocessoflaw,anactwhichshocks,oratleastsurprises,asenseofjudicialpropriety.

TheCourtfoundthattherequisitionorderdidnotviolatethatstandard.SubsequenttribunalshavespecificallydistancedthemselvesfromtheveryhighthresholdforaviolationofinternationallawformulatedinNeer.TheyhaverepeatedlyembracedthelessstringentstandardoftheELSIcaseandhaveemphasizedthattheyweredealingwithanevolvingconcept. ADFvUnitedStates concerneddomesticcontentsrequirementsinrespectofgovernmentprocurementforaconstructionproject.IninterpretingArticle1105oftheNAFTA,theTribunalagreed:

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thatthecustomaryinternationallawreferredtoinArticle1105(1)isnotfrozenintimeandthattheminimumstandardoftreatmentdoesevolve.[W]hatcustomaryinternationallawprojectsisnotastaticphotographoftheminimumstandardoftreatmentofaliensasitstoodin1927whentheAwardintheNeercasewasrendered.Forbothcustomaryinternationallawandtheminimumstandardoftreatmentofaliensitincorporates,areconstantlyinaprocessofdevelopment.

Againstthisbackgrounditissurprisingthatin2009aNAFTAtribunalrevertedtotheNeerstandard.InGlamisGold theTribunaltooktheNeerdecisionasestablishingtheinternationalminimumstandard.Itfoundthattheburdenofproofforanychangeofcustomaryinternationallawlaywiththeclaimant,aburdenthatithadbeenunabletodischarge.ItfollowedthatthefundamentalsoftheNeerstandardstillapplytoday.

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(p.141)MercifullytheGlamisGoldTribunalrestricteditsfindingtoArticle1105oftheNAFTAandnotedthatitsviewdidnotextendtoothertreatyclausesonFET. TheTribunaldidnotexplainwhyaterseawardrenderedin1926dealingwithamurdercaseshouldestablishthestandardforcontemporaryinvestmentlaw.NordoesitexplainwhyNeershouldbeauthoritativewhilethepracticeofcontemporaryinvestmenttribunalsisnot.AsubsequentNAFTAtribunal,inMerrill&Ring,clearlydistanceditselffromanundifferentiatedrelianceonNeer:

theTribunalfindsthattheapplicableminimumstandardoftreatmentofinvestorsisfoundincustomaryinternationallawandthat,exceptforcasesofsafetyanddueprocess,todaysminimumstandardisbroaderthanthatdefinedintheNeercaseanditsprogeny.

Inrecentyearsthereareindicationsofanapproachbytribunalsthatstressestheneedforstatestomaintainaregulatoryspace. TribunalshavestressedthatthehostStatesrighttoregulatedomesticmattersinthepublicinteresthastobetakenintoconsiderationandthatabalancebetweentheinvestorsrightsandthehoststatespublicinterestshastobeestablished. TheTribunalinLemirevUkraine said:

TheprotectionofthelegitimateexpectationsmustbebalancedwiththeneedtomaintainareasonabledegreeofregulatoryflexibilityonthepartofthehostStateinordertorespondtochangingcircumstancesinthepublicinterest.

(f)MethodologicalissuesAcentralmethodologicalissuefortheresolutionofthesequestionsconcernstheprocessofreasoningbywhichfact-specificconclusionsaredrawnfromthestandardinindividualcases.Onelineofreasoningderivesadefinitionoftheessentialelementsofthestandardonthebasisofabstractreasoning.Asecondapproachresistsanattemptatabroaderdefinitionandwilldecideadhocwhethercertainconductsatisfiestherequirementsofthestandard. Yetathirdapproachattemptsprimarilytobaseitsdecisionsonpreviousdecisionsandwillbuilduponrelevantprecedentstoidentifytypicalsituationsinwhichthestandardhasbeenapplied.Obviously,thelatterapproachwasnotavailabletothefirsttribunalswhichappliedthestandard.Thenexttwosectionswillexplorethefirstandthethirdapproaches.

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(p.142)AruleoflawapproachtotheconceptofFETwouldhavetoconcentrateonacomparativeanalysisofdomesticlegalsystemsandofinternationallegalregimes.

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InexaminingthestatesbehaviourforcompliancewiththeFETstandardsometribunalshavenotonlylookedatindividualactsbuthavealsolookedattheoverallcumulativeimpactofthemeasures.TheTribunalinElPasoadoptedtheconceptofacompositeactfromArticle15oftheInternationalLawCommissionsArticlesonStateResponsibilityandsaid:

Althoughtheymaybeseeninisolationasreasonablemeasurestocopewithadifficulteconomicsituation,themeasuresexaminedcanbeviewedascumulativestepswhichindividuallydonotqualifyasviolationsofFET,aspointedoutearlierbytheTribunal,butwhichamounttoaviolationiftheircumulativeeffectisconsidered.AcreepingviolationoftheFETstandardcouldthusbedescribedasaprocessextendingovertimeandcomprisingasuccessionoranaccumulationofmeasureswhich,takenseparately,wouldnotbreachthatstandardbut,whentakentogether,doleadtosucharesult.

(g)AttemptstodefinefairandequitabletreatmentInanumberofcasesthetribunalshavetriedtogiveamorespecificmeaningtotheFETstandardbyformulatinggeneraldefinitionsordescriptions.GeninvEstonia concernedthewithdrawalofabankinglicence.TheTribunalstatedthatactsviolatingthefairandequitablestandard:

wouldincludeactsshowingawilfulneglectofduty,aninsufficiencyofactionfallingfarbelowinternationalstandards,orevensubjectivebadfaith.

Themostcomprehensivedefinition,mostoftencited,wassetoutinTecmed, whichconcernedthewithdrawalofalicenceforalandfillforhazardouswaste.TheTribunalfoundthatithadtointerprettheconceptofFETautonomouslytakingintoaccountitstextaccordingtoitsordinarymeaning,internationallaw,andthegoodfaithprinciple.Theintentionbehindtheconceptwastostrengthenthesecurityandtrustofforeigninvestorstherebymaximizingtheuseofeconomicresources.Thisgoalwasexpressedinthepreamble. TheTribunaldefinedFETinthefollowingterms:

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(p.143)TheArbitralTribunalconsidersthatthisprovisionoftheAgreement,inlightofthegoodfaithprincipleestablishedbyinternationallaw,requirestheContractingPartiestoprovidetointernationalinvestmentstreatmentthatdoesnotaffectthebasicexpectationsthatweretakenintoaccountbytheforeigninvestortomaketheinvestment.TheforeigninvestorexpectsthehostStatetoactinaconsistentmanner,freefromambiguityandtotallytransparentlyinitsrelationswiththeforeigninvestor,sothatitmayknowbeforehandanyandallrulesandregulationsthatwillgovernitsinvestments,aswellasthegoalsoftherelevantpoliciesandadministrativepracticesordirectives,tobeabletoplanitsinvestmentandcomplywithsuchregulations.TheforeigninvestoralsoexpectsthehostStatetoactconsistently,i.e.withoutarbitrarilyrevokinganypreexistingdecisionsorpermitsissuedbytheStatethatwererelieduponbytheinvestortoassumeitscommitmentsaswellastoplanandlaunchitscommercialandbusinessactivities.TheinvestoralsoexpectstheStatetousethelegalinstrumentsthatgoverntheactionsoftheinvestorortheinvestmentinconformitywiththefunctionusuallyassignedtosuchinstruments,andnottodeprivetheinvestorofitsinvestmentwithouttherequiredcompensation.

MTDvChile concernedaforeigninvestmentcontractsignedonbehalfofChilefortheconstructionofalargeplannedcommunitywhichfailedbecauseitturnedouttobeinconsistentwithzoningregulations.TheTribunalappliedaprovisionintheBITbetweenChileandMalaysia

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requiringthatInvestmentsofinvestorsofeitherContractingPartyshallatalltimebeaccordedfairandequitabletreatment. Indoingso,theTribunalagreedwithalegalopinionbyJudgeSchwebelthatfairandequitabletreatmentencompassedsuchfundamentalstandardsasgoodfaith,dueprocess,non-discrimination,andproportionality.TheTribunalreliedonthestandardasdefinedinTecmed. Itemphasizedadutytoadoptproactivebehaviourinfavouroftheinvestor,andstated:

fairandequitabletreatmentshouldbeunderstoodtobetreatmentinaneven-handedandjustmanner,conducivetofosteringthepromotionofforeigninvestment.Itstermsareframedasapro-activestatementtopromote,tocreate,tostimulateratherthanprescriptionsforapassivebehavioroftheStateoravoidanceofprejudicialconducttotheinvestors.

Onthebasisofthisstandard,theTribunalfoundthattheFETstandardhadbeenviolatedbyChile.TheadhocCommitteeinMTDvChile upheldtheAwardbutcriticizeditsrelianceontheTecmedstandard:

theTECMEDTribunalsapparentrelianceontheforeigninvestorsexpectationsasthesourceofthehostStatesobligations(suchastheobligationtocompensateforexpropriation)isquestionable.TheobligationsofthehostStatetowardsforeigninvestorsderive

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(p.144)fromthetermsoftheapplicableinvestmenttreatyandnotfromanysetofexpectationsinvestorsmayhaveorclaimtohave.

InSalukavCzechRepublic anailingbankinwhichtheclaimantshadinvestedwastakenoverbyacompetitorthathadreceivedfinancialassistancefromthestateforthepurposeofthetakeover.Bycontrast,thebankhadnotreceivedsimilaraidwhentheclaimantsattemptedtonegotiatetheconditionstomaintaintheviabilityofthebank.TheTribunalfoundthattherewasaviolationofFETanddescribedtherequirementsoftheFETstandardintermsofconsistency,transparency,andreasonableness:

AforeigninvestorwhoseinterestsareprotectedundertheTreatyisentitledtoexpectthatthe[hoststate]willnotactinawaythatismanifestlyinconsistent,non-transparent,unreasonable(i.e.unrelatedtosomerationalpolicy),ordiscriminatory(i.e.basedonunjustifiabledistinctions).

TheNAFTAcase,WasteManagementvMexico, arosefromafailedconcessionforthedisposalofwastethatinvolvedanumberofgrievances,includingthemunicipalitysfailuretopayitsbills,failuretohonourexclusivityofservices,difficultieswithalineofcreditagreement,andproceedingsbeforetheMexicancourts.TheTribunalsummarizeditspositionontheFETstandardinArticle1105oftheNAFTAinthefollowingterms:

theminimumstandardoftreatmentoffairandequitabletreatmentisinfringedbyconductattributabletotheStateandharmfultotheclaimantiftheconductisarbitrary,grosslyunfair,unjustoridiosyncratic,isdiscriminatoryandexposestheclaimanttosectionalorracialprejudice,orinvolvesalackofdueprocessleadingtoanoutcomewhichoffendsjudicialproprietyasmightbethecasewithamanifestfailureofnaturaljusticeinjudicialproceedingsoracompletelackoftransparencyandcandourinanadministrativeprocess.InapplyingthisstandarditisrelevantthatthetreatmentisinbreachofrepresentationsmadebythehostStatewhichwerereasonablyreliedonbytheclaimant.

Discriminationagainstforeignershasbeenregardedasanimportantindicatoroffailuretograntfair

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andequitabletreatment. Awardshavealsoincludedthestandardofimproperanddiscreditable orunreasonableconduct, orhavereferredtointernationalorcomparativestandards.

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(p.145)(h)SpecificapplicationsofthefairandequitabletreatmentstandardBroaddefinitionsordescriptionsarenottheonlywaytogaugethemeaningofanelusiveconceptsuchasFET.Anothermethodistoidentifytypicalfactualsituationstowhichthisprinciplehasbeenapplied. Anexaminationofthepracticeoftribunalsdemonstratesthatseveralprinciplescanbeidentifiedwhichareembracedbythestandardoffairandequitabletreatment.Thecasesdiscussedbelowclearlyspeaktothecentralroleofstability,transparency,andtheinvestorslegitimateexpectationsforthecurrentunderstandingoftheFETstandard.Othercontextsinwhichthestandardhasbeenappliedconcerncompliancewithcontractualobligations,proceduralproprietyanddueprocess,actingingoodfaith,andfreedomfromcoercionandharassment.

aa.StabilityandtheprotectionoftheinvestorslegitimateexpectationsTheinvestorslegitimateexpectationsarebasedonthehoststateslegalframeworkandonanyundertakingsandrepresentationsmadeexplicitlyorimplicitlybythehoststate. Thelegalframeworkonwhichtheinvestorisentitledtorelyconsistsoflegislationandtreaties,assurancescontainedindecrees,licences,andsimilarexecutivestatements,aswellascontractualundertakings.Specificrepresentationsplayacentralroleinthecreationoflegitimateexpectations.Undertakingsandrepresentationsmadeexplicitlyorimplicitlybythehoststatearethestrongestbasisforlegitimateexpectations.Areversalofassurancesbythehoststatethathaveledtolegitimateexpectationswillviolatetheprincipleoffairandequitabletreatment.Tribunalshaveemphasizedthatthelegitimateexpectationsoftheinvestorwillbegroundedinthelegalorderofthehoststateasitstandsatthetimetheinvestoracquirestheinvestment. GAMIvMexicoruledcategorically:NAFTAarbitrationshavenomandatetoevaluatelawsandregulationsthatpredatethedecisionof

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(p.146)aforeigninvestortoinvest. Numeroustribunalshavestressedthatthelegalframeworkasitexistedatthetimeofmakingtheinvestmentwasdecisiveforanylegitimateexpectations.InNationalGridvArgentina theTribunalsaid:

thisstandardprotectsthereasonableexpectationsoftheinvestoratthetimeitmadetheinvestmentandwhichwerebasedonrepresentations,commitmentsorspecificconditionsofferedbytheStateconcerned.Thus,treatmentbytheStateshouldnotaffectthebasicexpectationsthatweretakenintoaccountbytheforeigninvestortomaketheinvestment.

InSDMyersvCanada,theTribunalmadethesamepointwhenitstatedthatthepartiesactedonthebasisofthelawasitappearedtoexistatthetimeoftheinvestments. Also,FeldmanvMexicoreflectsthesameprinciplebyexplainingthataregulationhadexistedatalltimesrelevanttotheinvestorandthatnodejurechangehadbeenmade. AndinMondevvUnitedStatesaclaimwasrejectedonthebasisthataruleonimmunitythatwaslawfulbeforetheNAFTAenteredintoforcecouldnotthereafterbeconsideredtobearbitraryordiscriminatory.Thesedecisionsareconsistentwiththerightofthehoststatetodetermineitsownlegaland

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economicorder,subjecttotheinternationalminimumstandard.Atthesametime,theyrecognizetheinvestorsconcernforplanningandstabilitybasedonthatorderatthetimeoftheinvestment.Whereastheprudentinvestorwill,inlightoftheserulings,carefullyexaminethelawsbeforeinvesting,thehoststatemustatalltimesbeawarethatitslegalorderformsthebasisoflegitimateexpectationswhichmustbetakenintoaccountinfuturereforms.TheseconsiderationsindicatethatwhiletheprincipleoflegitimateexpectationsinherentinFEThasanobjectivecore,itsapplicationwilldependupontheexpectationsnurturedandfosteredbythelocallawsastheystandspecificallyatthetimeoftheinvestment.InOccidentalvEcuador theclaimwasdirectedattheinconsistentpracticeoftherespondentsauthoritiesinreimbursingvalueaddedtax(VAT)paidonpurchasesinconnectionwiththeclaimantsactivities.TheclaimantreliedontheprovisionintheEcuador-USBITguaranteeingfairandequitabletreatment.The

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(p.147)Tribunalnotedthattheframeworkunderwhichtheinvestorhadbeenoperatinghadbeenchangedinanimportantmannerandthattheclarificationssoughtbytheinvestorhadevokedawhollyunsatisfactoryandthoroughlyvagueanswer.Thetaxlawwaschangedwithoutprovidinganyclarityaboutitsmeaningandextentandthepracticeandregulationswerealsoinconsistentwithsuchchanges.AfterquotingfromMetalcladandTecmed,theTribunalreachedtheconclusionthattherequirements,asdescribedinthesecases,werenotmetinthecasebeforeit. TheTribunalsaid:

TherelevantquestionforinternationallawinthisdiscussionisnotwhetherthereisanobligationtorefundVAT,whichisthepointonwhichthepartieshavearguedmostintensely,butratherwhetherthelegalandbusinessframeworkmeetstherequirementsofstabilityandpredictabilityunderinternationallaw.ItwasearlierconcludedthatthereisnotaVATrefundobligationunderinternationallaw,butthereiscertainlyanobligationnottoalterthelegalandbusinessenvironmentinwhichtheinvestmenthasbeenmade.Inthiscaseitisthelatterquestionthattriggersatreatmentthatisnotfairandequitable.

InCMSvArgentina therespondenthadgivenguaranteesforpriceadjustmentsforthetransportationofnaturalgasinlegislation,regulations,andunderalicence.Subsequently,anemergencylawandotherlawsandregulationsfirstsuspendedandthenterminatedtheseguarantees.TheTribunalreferredtothepreambleoftheArgentina-USBITandsaid:

Therecanbenodoubt,therefore,thatastablelegalandbusinessenvironmentisanessentialelementoffairandequitabletreatment.Themeasuresthatarecomplainedofdidinfactentirelytransformandalterthelegalandbusinessenvironmentunderwhichtheinvestmentwasmade.Ithasalsobeenestablishedthattheguaranteesgiveninthisconnectionunderthelegalframeworkanditsvariouscomponentswerecrucialfortheinvestmentdecision.InadditiontothespecifictermsoftheTreaty,thesignificantnumberoftreaties,bothbilateralandmultilateral,thathavedealtwiththisstandardalsounequivocallyshowsthatfairandequitabletreatmentisinseparablefromstabilityandpredictability.Manyarbitraldecisionsandscholarlywritingspointinthesamedirection.

TheTribunalfoundthatArgentinasactionshadbreachedtheFETstandard.EurekovPoland concernedasharepurchaseagreementbetweentheinvestorandthePolishstateunderwhichtheinvestoracquiredaminorityparticipationinaPolishcompany.Arelatedagreementguaranteedtotheinvestortherighttoacquirefurthersharesthatwouldhavegivenitcontroloverthecompany.Subsequently,Polandchangeditsprivatizationpolicyandwithdrewitsconsenttotheacquisitionoffurthersharesbytheinvestor.TheTribunalfounditabundantlyclear

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thatEurekohadbeentreatedunfairlyandinequitablybyPoland.Theorgansoftherespondent

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(p.148)statehadconsciouslyandovertlybreachedEurekosbasicexpectations. Therefore,theTribunalhadnohesitationinconcludingthattheFETstandardoftheNetherlands-PolandBIThadbeenviolatedbytherespondent.OthertribunalshavesimilarlyfoundthattheFETprincipleinvolvedthegovernmentsobligationnottofrustratetheinvestorslegitimateexpectationsbyarbitrarilychangingthelegalframeworkunderwhichtheinvestmenthadbeenmade. Accordingtooneview,theinvestorslegitimateexpectationswillbeseriouslyreducedifthereisgeneralinstabilityinthepoliticalconditionsofthecountryconcerned.Legitimateexpectationsarenotsubjectivehopesandperceptions;rather,theymustbebasedonobjectivelyverifiablefacts.Expectationsareprotectedonlyiftheyarelegitimateandreasonableinthecircumstances.TheTribunalinSuezvArgentina said:

onemustnotlooksingle-mindedlyattheClaimantssubjectiveexpectations.TheTribunalmustratherexaminethemfromanobjectiveandreasonablepointofview.

Morerecently,tribunalshaveincreasinglyemphasizedthattherequirementofstabilityisnotabsoluteanddoesnotaffectthestatesrighttoexerciseitssovereignpowertolegislateandtoadaptitslegalsystemtochangingcircumstances. Whatmattersiswhethermeasuresexceednormalregulatorypowersandfundamentallymodifytheregulatoryframeworkfortheinvestmentbeyondanacceptablemarginofchange. Inotherwords,changestogenerallegislation,intheabsenceofspecificstabilizationpromisestotheforeigninvestor,reflectalegitimateexerciseofthehoststatesgovernmentalpowersthatarenotpreventedbyaBITsfairandequitabletreatmentstandard. TheTribunalinEDFvRomania statedinthisrespect:

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(p.149)Theideathatlegitimateexpectations,andthereforeFET,implythestabilityofthelegalandbusinessframework,maynotbecorrectifstatedinanoverly-broadandunqualifiedformulation.TheFETmightthenmeanthevirtualfreezingofthelegalregulationofeconomicactivities,incontrastwiththeStatesnormalregulatorypowerandtheevolutionarycharacterofeconomiclife.ExceptwherespecificpromisesorrepresentationsaremadebytheStatetotheinvestor,thelattermaynotrelyonabilateralinvestmenttreatyasakindofinsurancepolicyagainsttheriskofanychangesinthehostStateslegalandeconomicframework.Suchexpectationwouldbeneitherlegitimatenorreasonable.

Indecidingbetweentheinvestorsrighttostabilityandthestatesrighttoregulate,sometribunalshaveweighedtheinvestorslegitimateexpectationsagainstthestatesdutytoactinthepublicinterest.Particularlyimportantinthecreationoflegitimateexpectationsarespecificassurancesandrepresentationsmadebythehoststateinordertoinduceinvestorstomakeinvestments. Butevenheresometribunalshavefoundthatmerepoliticalstatementswerenotcapableofcreatingreasonableexpectations.

bb.TransparencyTransparencyiscloselyrelatedtoprotectionoftheinvestorslegitimateexpectations.Transparencymeansthatthelegalframeworkfortheinvestorsoperationsisreadilyapparentandthatanydecisionsaffectingtheinvestorcanbetracedtothatlegalframework.

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ThereisauthoritytotheeffectthattransparencyandtheinvestorslegitimateexpectationsareprotectedevenwithoutatreatyguaranteeofFET.InSPPvEgypt therespondentcontendedthatcertainactsofEgyptianofficials,uponwhichtheclaimantsrelied,werenullandvoidbecausetheywereinconflictwiththeinalienablenatureofthepublicdomainandbecausetheywerenottakenpursuanttotheproceduresprescribedbyEgyptianlaw.TheTribunalrejectedthisargumentandemphasizedthattheinvestorwasentitledtorelyontheofficialrepresentationsofthegovernment:

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(p.150)ItispossiblethatunderEgyptianlawcertainactsofEgyptianofficialsincludingevenPresidentialDecreeNo.475,maybeconsideredlegallynonexistentornullandvoidorsusceptibletoinvalidation.However,theseactswerecloakedwiththemantleofGovernmentauthorityandcommunicatedassuchtoforeigninvestorswhoreliedontheminmakingtheirinvestments.WhetherlegalunderEgyptianlawornot,theactsinquestionweretheactsofEgyptianauthorities,includingthehighestexecutiveauthorityoftheGovernment.Theseacts,whicharenowallegedtohavebeeninviolationoftheEgyptianmunicipallegalsystem,createdexpectationsprotectedbyestablishedprinciplesofinternationallaw.

InMetalcladvMexico theissueoftransparencyplayedacentralrole.TheFederalGovernmentofMexicoandthestategovernmenthadissuedconstructionandoperatingpermitsfortheinvestorslandfillproject.Theinvestorwasassuredthatithadallthepermitsitneeded,butthemunicipalityrefusedtograntaconstructionpermit.Theclaimantcomplainedaboutalackoftransparencysurroundingtheprocess.IninterpretingArticle1105oftheNAFTA,theTribunalsaid:

ProminentinthestatementofprinciplesandrulesthatintroducestheAgreementisthereferencetotransparency(NAFTAArticle102(1)).TheTribunalunderstandsthistoincludetheideathatallrelevantlegalrequirementsforthepurposeofinitiating,completingandsuccessfullyoperatinginvestmentsmade,orintendedtobemade,undertheAgreementshouldbecapableofbeingreadilyknowntoallaffectedinvestorsofanotherParty.Thereshouldbenoroomfordoubtoruncertaintyonsuchmatters.OncetheauthoritiesofthecentralgovernmentofanyParty(whoseinternationalresponsibilityinsuchmattershasbeenidentifiedintheprecedingsection)becomeawareofanyscopeformisunderstandingorconfusioninthisconnection,itistheirdutytoensurethatthecorrectpositionispromptlydeterminedandclearlystatedsothatinvestorscanproceedwithallappropriateexpeditionintheconfidentbeliefthattheyareactinginaccordancewithallrelevantlaws.

TheTribunalheldthattheinvestorwasentitledtorelyontherepresentationsofthefederalofficials. ItconcludedthattheactsofthestateandthemunicipalitywereinviolationoftheFETstandardunderArticle1105oftheNAFTA.IntheviewoftheTribunal:

MexicofailedtoensureatransparentandpredictableframeworkforMetalcladsbusinessplanningandinvestment.ThetotalityofthesecircumstancesdemonstratesalackoforderlyprocessandtimelydispositioninrelationtoaninvestorofaPartyactingintheexpectationthatitwouldbetreatedfairlyandjustlyinaccordancewiththeNAFTA.

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(p.151)InMaffezinivSpain oneofthecomplaintsconcernedaloanthathadbeentransferredbyagovernmentinstitutionfromtheinvestorspersonalaccountwithouthisconsent.TheTribunalfoundthatthelackoftransparencyassociatedwiththeloantransactionwasincompatiblewithfair

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andequitabletreatment.Itsaid:

thelackoftransparencywithwhichthisloantransactionwasconductedisincompatiblewithSpainscommitmenttoensuretheinvestorafairandequitabletreatmentinaccordancewithArticle4(1)ofthesametreaty.Accordingly,theTribunalfindsthat,withregardtothiscontention,theClaimanthassubstantiatedhisclaimandisentitledtocompensation

InTecmedvMexico, thedisputeconcernedthereplacementofanunlimitedlicencebyalicenceoflimiteddurationfortheoperationofalandfill.TheTribunalappliedaprovisionintheBITbetweenMexicoandSpainguaranteeingfairandequitabletreatment.TheTribunalfoundthatthisprovisionrequiredtransparencyandprotectionoftheinvestorsbasicexpectations. TheTribunalexplainedthat:

theClaimantwasentitledtoexpectthatthegovernmentsactionswouldbefreefromanyambiguitythatmightaffecttheearlyassessmentmadebytheforeigninvestorofitsreallegalsituationorthesituationaffectingitsinvestmentandtheactionstheinvestorshouldtaketoactaccordingly.

Inconsequence,theTribunalconcludedthattheinvestorsfairexpectationswerefrustratedbythecontradictionanduncertaintyinMexicosbehaviourwhichwas:

characterizedbyitsambiguityanduncertaintywhichareprejudicialtotheinvestorintermsofitsadvanceassessmentofthelegalsituationsurroundingitsinvestmentandtheplanningofitsbusinessactivityanditsadjustmenttopreserveitsrights.

InMTDvChile therespondenthadsignedaninvestmentcontractfortheconstructionofalargeplannedcommunitywiththecountrysForeignInvestmentCommission(FIC)buttheprojectfailedbecauseitturnedouttobeinconsistentwithzoningregulations.TheTribunalfoundthattheguaranteeofFETintheBITbetweenChileandMalaysiahadbeenviolatedbywhatitdescribedastheinconsistencyofactionbetweentwoarmsofthesameGovernmentvis--visthesameinvestor. Itwentontostatethatwhileitwastheinvestorsdutytoinformitselfofthecountryslawandpolicyinprinciple:

Chilealsohasanobligationtoactcoherentlyandapplyitspoliciesconsistently,independentlyofhowdiligentaninvestoris.Underinternationallaw(thelawthatthisTribunalhastoapplytoadisputeundertheBIT),theStateofChileneedstobeconsideredbythe

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(p.152)Tribunalasaunit.TheTribunalissatisfied,basedontheevidencepresentedtoit,thatapprovalofaninvestmentbytheFICforaprojectthatisagainsttheurbanpolicyoftheGovernmentisabreachoftheobligationtotreataninvestorfairlyandequitably.

cc.CompliancewithcontractualobligationsCloselyrelatedtotheissueofprotectionoftheinvestorslegitimateexpectationsisthequestiontowhatextentthisprotectionextendstoobservanceofobligationsarisingfromcontracts.Contractualagreementsaretheclassicalinstrumentinmost,ifnotall,legalsystemsforthecreationoflegalstabilityandpredictability.Therefore,pactasuntservandawouldseemtobeanobviousapplicationofthestabilityrequirementthatissoprominentintheFETstandard.TheconnectionbetweenthisaspectofFETandtheumbrellaclause isevident.Inanumberofcasesdealingwiththeprotectionoftheinvestorslegitimateexpectations,theseexpectationswereactuallybasedoncontractualarrangementswiththehoststate.Butitdoesnot

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followthateverybreachofacontractualobligationbyahoststateoroneofitsentitiesautomaticallyamountstoaviolationoftheFETstandard.SometribunalsseemedtoholdtheviewthatfailuretoobservecontractualobligationsonthepartofagovernmentwouldbecontrarytotheFETstandard. TheTribunalinMondev founditclearthattheprotectionofArticle1105(1)oftheNAFTAextendedtocontractclaims.TheTribunalsaid:

agovernmentalprerogativetoviolateinvestmentcontractswouldappeartobeinconsistentwiththeprinciplesembodiedinArticle1105andwithcontemporarystandardsofnationalandinternationallawconcerninggovernmentalliabilityforcontractualperformance.

Similarly,inSGSvParaguay, acaseinvolvingunpaidinvoicesforpre-shipmentinspections,theTribunalspokeofabaselineexpectationofcontractualcompliance.Itnotedthat:

aStatesnon-paymentunderacontractis,intheviewoftheTribunal,capableofgivingrisetoabreachofafairandequitabletreatmentrequirement,suchas,perhaps,wherethenon-paymentamountstoarepudiationofthecontract,frustrationofitseconomicpurpose,orsubstantialdeprivationofitsvalue.

Mosttribunalshaveadoptedamorerestrictiveapproach.TheyhavefoundthatasimplebreachofcontractbyastatewouldnottriggeraviolationoftheFET

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(p.153)standard. Rather,abreachofFETrequiresconductintheexerciseofsovereignpowers. However,aterminationofthecontract,broughtaboutthroughtheemploymentofsovereignprerogative,wouldleadtoaviolationoftheFETstandard. Thesamewouldapplytogovernmentinterferencewithacontractbetweenaninvestorandastateentity.InConsortiumRFCCvMorocco thedisputehadarisenfromacontractfortheconstructionofamotorway.TheTribunalheldthatonlymeasurestakenbyMoroccoinitssovereigncapacitywerecapableofbreachingtheFETstandard.AviolationofcontractualobligationsthatcouldhavebeencommittedbyanordinarycontractpartnerwouldnotrisetothelevelofaviolationoftheFETstandard.Asimplefailuretopaysumsdueunderacontractisnotasovereignactandmaynotamounttoabreachofthetreaty-basedFETstandard. InWasteManagement, theTribunaldescribedtransparencyandrelianceaselementsoftheFETstandardcontainedinArticle1105(1)oftheNAFTA.OneoftheclaimsconcernedthefailureofthecityofAcapulcotomakepaymentsunderaconcessionagreement. TheTribunaldidnotfindthatthisamountedtoaviolationofFET:

eventhepersistentnon-paymentofdebtsbyamunicipalityisnottobeequatedwithaviolationofArticle1105,providedthatitdoesnotamounttoanoutrightandunjustifiedrepudiationofthetransactionandprovidedthatsomeremedyisopentothecreditortoaddresstheproblem.

ImpregilovPakistanconcernedacontractfortheconstructionofhydroelectricpowerfacilities.TheTribunalfoundthatasimplebreachofcontractdidnotamounttoabreachoftheFETstandard.Responsibilityunderthetreatywouldonlybecausedbyamisuseofpublicpower.InDukeEnergyvEcuador theclaimantreliedonpower-purchaseagreementsbetweenitslocalsubsidiaryandastateentity.TheTribunalpointedoutthataviolationofacontractdoesnotassuchamounttoaviolationofthetreatystandardoffairandequitabletreatment:

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(p.154)Establishingatreatybreachisadifferentexercisefromshowingacontractbreach.Subjecttotheparticularquestionoftheumbrellaclause,inordertoproveatreatybreach,theClaimantsmustestablishaviolationdifferentinnaturefromacontractbreach,inotherwordsaviolationwhichtheStatecommitsintheexerciseofitssovereignpower.

PracticedemonstratesthattheviewthatasimplebreachofcontractisinsufficienttoamounttoabreachoftheFETstandardisclearlyprevalent.Butthisseeminglysimpletestleadstofurtherquestions.Thedistinctionbetweensovereignandcommercialacts,whichisacceptedinthefieldofstateimmunity,isofunclearvalidityintheareaofstateresponsibility. Also,eveniftheunderlyingrelationshipandthebreachareclearlycommercial,themotivesofagovernmentforacertainactmaystillbegovernmental.

dd.ProceduralproprietyanddueprocessFairprocedureisanelementaryrequirementoftheruleoflawandavitalelementofFET.Itincludesthetraditionalinternationallawconceptofdenialofjustice. Unlikeotheraspectsofinvestmentprotection,itisgenerallyacceptedthataclaimfordenialofjusticeisconditionedonapriorexhaustionoflocalremedies.TheUSModelBITof2012specificallyclarifiesthattheFETstandardcoversprotectionfromdenialofjusticeandguaranteesdueprocess.Article5(2)(a)providesthat:

fairandequitabletreatmentincludestheobligationnottodenyjusticeincriminal,civil,oradministrativeadjudicatoryproceedingsinaccordancewiththeprincipleofdueprocessembodiedintheprincipallegalsystemsoftheworld

Tribunalshaveheldinanumberofcasesthatlackofafairprocedure,orseriousproceduralshortcomings,wereimportantelementsinfindingaviolationoftheFETstandard.Mostofthesecasesrelatetotherighttobeheardinjudicialoradministrativeproceedings.InMetalcladvMexico themunicipalityhadrefusedtograntaconstructionpermit.TheTribunalfoundthattherehadbeenaviolationoftheFETguaranteeinArticle1105oftheNAFTA.Anelementinthisfindingwaslackofproceduralpropriety,specificallyafailuretoheartheinvestor:

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(p.155)Moreover,thepermitwasdeniedatameetingoftheMunicipalTownCouncilofwhichMetalcladreceivednonotice,towhichitreceivednoinvitation,andatwhichitwasgivennoopportunitytoappear.

InTecmedvMexico, thedisputearosefromrevocationofalicencefortheoperationofalandfillandinvolvedaprovisionintheBITbetweenMexicoandSpainguaranteeingfairandequitabletreatmentaccordingtointernationallaw.TheTribunalfoundthatthisstandardhadbeenviolated,interalia,becausetheenvironmentalregulatoryauthorityhadfailedtonotifytheclaimantofitsintentions,therebydeprivingtheclaimantoftheopportunitytoexpressitsposition.InMiddleEastCementvEgypt oneofthecomplaintsconcernedtheseizureandauctionoftheclaimantsshipandthelackofpropernotificationoftheauctiontotheowner.TheTribunalappliedprovisionspromisingFETandfullprotectionandsecurityintheBITbetweenGreeceandEgypt.Itfoundthatamatterasimportantastheseizureandauctioningofashipbelongingtotheclaimantshouldhavebeennotifiedbydirectcommunication.Therefore,itfoundthattheprocedureapplieddidnotmeettherequirementsoftheFETandfullprotectionandsecuritystandards.

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LoewenvUnitedStates concernedtheproprietyofproceedingsintheMississippistatecourtsagainstaCanadianundertaker.Thetrialexhibitedagrossabsenceofdueprocessandofprotectionoftheinvestorfromprejudiceonaccountofhisnationality,andtheTribunalfoundthattheconductofthetrialwassoflawedthatitconstitutedamiscarriageofjustice. WithregardtoArticle1105oftheNAFTA,theTribunalalsorecognizedthesignificanceofdueprocess:

Manifestinjusticeinthesenseofalackofdueprocessleadingtoanoutcomewhichoffendsasenseofjudicialproprietyisenough Thewholetrialanditsresultantverdictwereclearlyimproperanddiscreditableandcannotbesquaredwithminimumstandardsofinternationallawandfairandequitabletreatment.

Somecasesconcernthefrustrationbyastateofjudgmentsrenderedbyitsowndomesticcourts. InSiagvEgypt theclaimantshadobtainedaseriesofjudicialrulingsintheirfavourbyEgyptiancourtsbutthegovernmentfailedtocomplywiththeserulings.TheTribunalfoundthatEgyptsactionsconstitutedadenialofjusticeandaviolationoftheFETstandard.Inanumberofcasestheclaimantshadcomplainedaboutthelengthofjudicialproceedingsindomesticcourtswhichhadinsomecasestakenmanyyears.Thetribunals,whilecriticalofdelays,didnotfindthattheseamountedtoaviolationof

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(p.156)theFETstandard. Theycitedspecialcircumstancesrelatingtothecomplexityoftheissues ortothepoliticalsituationinthecountryconcerned.DenialofjusticeistraditionallyassociatedwiththeadministrationofjusticebydomesticcourtsbutinvestmenttribunalshaveacceptedthattheproceduralguaranteesinherentintheFETstandardextendtotheactivitiesofthehoststatesadministrativeauthorities. Ontheotherhand,therequirementtoaffordfairprocedureonthebasisoftheFETstandarddoesnotextendtoastateentitysmanagementofitscontractualrelationshipwiththeinvestor.InThunderbirdvMexico theTribunalheldthatthestandardsofdueprocessandproceduralfairnessapplicableinadministrativeproceedingsarelowerthaninajudicialprocess.IntheparticularcaseitfoundnoviolationoftheFETstandard,explainingthattheclaimanthadbeengivenfullopportunitytobeheardandtopresentevidenceandthattheproceedingsweresubjecttojudicialreviewbythecourts.

ee.GoodfaithAsexplainedabove,goodfaithisabroadprinciplethatisoneofthefoundationsofinternationallawingeneralandofforeigninvestmentlawinparticular. ArbitraltribunalshaveconfirmedthatgoodfaithisinherentinFET. ItisthecommonguidingbeacontotheobligationunderBITs;itisattheheartoftheconceptofFET,andpermeatesthewholeapproachtoinvestorprotection.TheTribunalinTecmed, interpretingaBITprovisiononFET,said:

TheArbitralTribunalfindsthatthecommitmentoffairandequitabletreatmentisanexpressionandpartofthebonafideprinciplerecognizedininternationallaw

TheFETstandardingeneral,andtheobligationtoactingoodfaithinparticular,includetheobligationnottoinflictdamageuponaninvestmentpurposefully. TheTribunalinWasteManagement foundthattheobligationtoactingoodfaithwasabasicobligationundertheFETstandardascontainedinArticle1105of

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(p.157)theNAFTA.Inparticular,adeliberateconspiracybygovernmentauthoritiestodefeatthe

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investmentwouldviolatethisprinciple:

TheTribunalhasnodoubtthatadeliberateconspiracythatistosay,aconsciouscombinationofvariousagenciesofgovernmentwithoutjustificationtodefeatthepurposesofaninvestmentagreementwouldconstituteabreachofArticle1105(1).AbasicobligationoftheStateunderArticle1105(1)istoactingoodfaithandform,andnotdeliberatelytosetouttodestroyorfrustratetheinvestmentbyimpropermeans.

InBayindirvPakistan theinvestorclaimedthatitsexpulsionwasbasedonlocalfavouritismandonbadfaith,sincethereasonsgivenbythegovernmentdidnotcorrespondtoitsactualmotivation. TheTribunalinitsDecisiononJurisdictionfoundthattheallegedlyunfairmotivesofexpulsion,ifproven,arecapableoffoundingafairandequitabletreatmentclaimundertheBIT.InSalukavCzechRepublic theTribunalalsogaveacentralroletotherequirementofgoodfaithinitsdescriptionofFET:

AforeigninvestorprotectedbytheTreatymayinanycaseproperlyexpectthattheCzechRepublicimplementsitspoliciesbonafidebyconductthatis,asfarasitaffectstheinvestorsinvestment,reasonablyjustifiablebypublicpoliciesandthatsuchconductdoesnotmanifestlyviolatetherequirementsofconsistency,transparency,even-handednessandnon-discrimination.

InChemturavCanada theclaimantshadcomplainedaboutaspecialreviewoftheirproduct,claimingthattheinvestigationhadbeeninbadfaith.TheTribunal,afterexaminingthecircumstancesinsomedetail,concludedthatthespecialreviewhadbeenlaunchedoutoflegitimateregulatoryconcernsandinaccordancewithCanadasinternationalcommitments.InFrontierPetroleumvCzechRepublic theTribunalgavethefollowingdescriptionofviolationsofthegoodfaithprinciple:

Badfaithactionbythehoststateincludestheuseoflegalinstrumentsforpurposesotherthanthoseforwhichtheywerecreated.Italsoincludesaconspiracybystateorganstoinflictdamageuponortodefeattheinvestment,theterminationoftheinvestmentforreasonsotherthantheoneputforthbythegovernment,andexpulsionofaninvestmentbasedonlocalfavouritism.Reliancebyagovernmentonitsinternalstructurestoexcusenon-compliancewithcontractualobligationswouldalsobecontrarytogoodfaith.

ItfollowsfromtheseauthoritiesthatactioninbadfaithagainsttheinvestorwouldbeaviolationofFET.Badfaithactionbythehoststateincludestheuseoflegal

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(p.158)instrumentsforpurposesotherthanthoseforwhichtheywerecreated.Italsoincludesaconspiracybystateorganstoinflictdamageuponortodefeattheinvestment.ArelatedbutdifferentquestioniswhethereveryviolationofthestandardofFETrequiresbadfaith.Putdifferently,isitavaliddefenceforthehoststatetoarguethat,althoughitsactionsmayhavecausedharmtotheinvestor,thoseactionswerebonafideandhencecouldnothaveviolatedtheFETstandard?ArbitralpracticeclearlyindicatesthattheFETstandardmaybeviolated,evenifnomalafidesisinvolved. Forinstance,theTribunalinMondev said:

Tothemoderneye,whatisunfairorinequitableneednotequatewiththeoutrageousortheegregious.Inparticular,aStatemaytreatforeigninvestmentunfairlyandinequitablywithoutnecessarilyactinginbadfaith.

TheAwardinOccidental expressesthesameidea.InthecontextoftransparencyandconsistencyaspartoftheFETstandardtheTribunalsaid:

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thisisanobjectiverequirementthatdoesnotdependonwhethertheRespondenthasproceededingoodfaithornot.

InCMSvArgentina theTribunal,afterfindingthatFETwasinseparablefromstabilityandpredictability,stated:

TheTribunalbelievesthisisanobjectiverequirementunrelatedtowhethertheRespondenthashadanydeliberateintentionorbadfaithinadoptingthemeasuresinquestion.Ofcourse,suchintentionandbadfaithcanaggravatethesituationbutarenotanessentialelementofthestandard.

Similarly,theTribunalinElPasovArgentina saidthataviolationcanbefoundevenifthereisamereobjectivedisregardoftherightsenjoyedbytheinvestorundertheFETstandard,andthatsuchaviolationdoesnotrequiresubjectivebadfaithonthepartoftheState.Othertribunalshaveconsistentlyadoptedthesameapproach.

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(p.159)ff.FreedomfromcoercionandharassmentTheFETstandardalsoappliesinsituationsofcoercionandharassmentdirectedattheinvestor.InPope&TalbotvCanada SLD,agovernmentregulatoryauthority,hadlaunchedaverificationreviewagainsttheinvestorthatwasconfrontationalandaggressive.TheTribunalheldthatthisinvestigationwasmorelikecombatthancooperativeregulation. Itfoundthattheseactionsbytheregulatoryauthoritywerethreatsandmisrepresentation,burdensomeandconfrontational,andhenceaviolationoftheFETstandard.InTecmedvMexico, anunlimitedlicencefortheoperationofalandfillhadbeenreplacedbyalicenceoflimitedduration.TheTribunalappliedaprovisionintheBITbetweenMexicoandSpainguaranteeingFETaccordingtointernationallaw.TheTribunalfoundthatthedenialofthepermitsrenewalwasdesignedtoforcetheinvestortorelocatetoanothersite,bearingthecostsandrisksofanewbusiness.TheTribunalsaid:

Undersuchcircumstances,suchpressureinvolvesformsofcoercionthatmaybeconsideredinconsistentwiththefairandequitabletreatmenttobegiventointernationalinvestmentsunderArticle4(1)oftheAgreementandobjectionablefromtheperspectiveofinternationallaw.

InTotalvArgentina theinvestorhadbeenforcedtoacceptconditionsmuchlessfavourablethatoriginallyagreed,includinganarrangementunderwhichithadtosurrenderreceivablesinexchangeforshares.TheTribunalstated:

Thisschememustbeconsideredasakindofforced,inequitable,debt-for-equityswap,notduetounfavourablemarketconditionsoracompanyscrisis(asisusuallythepremiseofsuchswapsintheprivatemarket),butduetogovernmentalpolicyandconductbyArgentina.Assuch,intheviewoftheTribunalitrepresentsaclearbreachofthefairandequitabletreatmentobligationoftheBITforwhichArgentinaisliabletopaydamages.

DesertLinevYemen concernedcontractsfortheconstructionofasphaltroads.Adisputebetweenthepartiesinvolvedarmedthreatsandarrestofsometheinvestorspersonnel.Localarbitrationresultedinanawardofcertainsumstotheclaimantwhowas,however,subsequentlyforcedtoacceptamuchreducedamountinasettlementagreement.TheTribunalfoundthatthesettlementagreementhadbeenimposedupontheclaimantunderphysicalandfinancialduress.Itsaid:

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(p.160)thesubjectionoftheClaimantsemployees,familymembers,andequipmenttoarrestandarmedinterference,aswellasthesubsequentperemptoryadvicethatitwasin[his]interesttoacceptthattheamountawardedbeamputatedbyhalf,fallswellshortofminimumstandardsofinternationallawandcannotbetheresultofanauthenticfairandequitablenegotiation.

Intheresultingaward,theTribunaltooktheunusualstepofawardingnotonlydamagesfortheviolationoftheFETstandardbutadditionallyawardedmoraldamagesintheamountofUS$1million.Inanumberofcasestribunalshavefoundthattheinvestorsallegationswerenotproven.Theseincludecomplaintsofacampaigntopunishtheinvestorforpublishingmaterialcriticaltotheregime, ofaggressivetaxinspections, andgenerallyofcoercionandharassment.

(i)ConclusionAsdemonstratedabove,tribunalshaveappliedtheFETstandardtoanumberoftypicalfactsituationsandhavenowdevelopedconsiderablecaselawinthisarea.ThecategoriesoutlinedabovebynomeansexhaustthepossibilitiesoftheFETstandard.Withtheprogressionofarbitralpractice,tribunalsarelikelytodevelopthesecategoriesfurtherandtoaddnewones.Meetingtheinvestorscentrallegitimateconcernsoflegalconsistency,stability,andpredictabilityremainsamajor,butnottheonly,ingredientofaninvestment-friendlyclimateinwhichthehoststateinturncanreasonablyexpecttoattractforeigninvestment.Thus,noinconsistencybetweentheinterestsofthehoststateandthoseoftheinvestorinregardtothecreationofastablelegalframeworkofthehoststatewillbediagnosed.Builtuponthisjointperspectiveofhoststateandinvestorwhichinformstheagreementlaiddowninaninvestmenttreaty,thestandardoffairandequitabletreatmentwillneverthelessnotbeunderstoodtoamounttoastabilizationclausebutwillleaveameasureofgovernmentalspaceforregulation.Presumably,thedegreeoffreedomgenerallyconsideredappropriateindomesticlegalorderswillnotbeaffected.Nevertheless,itistruethatineffectthestandardwillnarrowthediscretionaryspaceavailabletothehoststate.Butitisalsotrue,inprinciple,thatthisspecificsortoflimitationisindeednecessarytoattractforeigninvestmentandtomakeitviableinpractice.

2.Fullprotectionandsecurity

(a)ConceptAtfirstsight,thetraditionalnotionoffullprotectionandsecurityisamorphousandnotreadilyamenabletooperationalapplicability.However,asisthecasefor

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(p.161)otherstandardscontainedinBITs,arbitraljurisprudencehasgraduallyrefinedtheunderstandingoftheterm.Thisistruebothinlightofthespecificityoftheparticularwordingofvarioustreatyclausesprovidingprotectionandinregardtotheparticularissuesfallingunderthisconcept.Treatypracticehasreliedondifferentformulationsandpatterns.Whereasthetraditionalversion(foundinaseriesofUSFCNtreatiesgoingbacktothenineteenthcentury) reliesontheclassicalversionofaguaranteewhichprovidesforfullprotectionandsecurity,othertreatieshavedeletedthewordfull.Anothervariationensuresprotectioninaccordancewithfairandequitabletreatment.Asimpleapproachisrestrictedtothegrantingofprotection(andnot

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security),andyetanotherwordingreliesonthepromiseoflegalsecurity.Otherphrasesandcombinationswillalsobefound.Thesedifferentwordingshavetobeappliedchieflytothreedifferentsettings.Inanumberofearliercases,theactswhichhadharmedtheforeigninterestwerethoseofinsurgentsorriotinggroups.Inasecondgroupofcases,thegovernmentalpoliceauthoritiesormilitaryunitswereinvolved.Thirdly,morerecentcaseshaveaddressedgovernmentalregulatoryactswhichdisturbthelegalstabilitysurroundingtheinvestorsbusiness.Thebreadthoftheclauseraisesissuesofdelimitationinrelationtothescopeofothertreatyclauses,forinstancefairandequitabletreatmentortheumbrellaclause.Especiallywhenitcomestoprotectionagainsttheapplicationoflawsaffectingthesecurityandprotectionoftheinvestment,thestandardmayacquirespecialimportanceifthetreatydoesnotcontainotherclauseswithabroadscope.Sometribunalshaveequatedthestandardsoffullprotectionandsecuritywithfairandequitabletreatment. Othertribunalshavefoundthatthetwostandardswereseparate.

(b)StandardofliabilityThereisbroadconsensusthatthestandarddoesnotprovideabsoluteprotectionagainstphysicalorlegalinfringement.Intermsofthelawofstateresponsibility,thehoststateisnotplacedunderanobligationofstrictliabilitytopreventsuchviolations.Rather,itisgenerallyacceptedthatthehoststatewillhavetoexerciseduediligenceandwillhavetotakesuchmeasurestoprotecttheforeigninvestmentasarereasonableunderthecircumstances.

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(p.162)Atthesametime,thestandardwouldbeevisceratedanddowngradedtoameaninglessrequirementifitwereassumedaswasthecaseinLESIvAlgeria thatitaccordsnomoreprotectionthanclausesonnationaltreatmentormost-favoured-nationtreatment.Lackofresourcestotakeappropriateactionwillnotserveasanexcuseforthehoststate. Wheneverstateorgansthemselvesactinviolationofthestandard,orsignificantlycontributetosuchaction,noissuesofattributionorduediligencewillarisebecausethestatewillthenbehelddirectlyresponsible.Thestandardwillnotbeviolatedifastateexercisesitsrighttolegislateandregulateandtherebytakesreasonablemeasuresunderthecircumstances. Recognitionofastatespolicepowerwillnotinitselfleadtodifferentconclusions;theexistenceofthispowerisconsumedinthesovereignrighttoregulate,withintheboundariesofinternationallaw,anddoesnotinitselfjustifymorefar-reachingmeasuresaffectingtherightsoftheinvestor.

(c)ProtectionagainstphysicalviolenceandharassmentThedutytograntphysicalprotectionandsecuritymayoperateinrelationtoencroachmentbystateorgansorinrelationtoprivateacts.ViolencebystateorganswasunderreviewinAAPLvSriLanka, acaseinwhichsecurityforceshaddestroyedtheinvestmentinthecourseofacounter-insurgencyoperation.TheTribunalreviewedallcircumstancesandheldthattheseactionswereunwarrantedandexcessive.InWenaHotelsvEgypt, theTribunalfoundEgyptliableunderthestandardbecauseemployeesofastateentityhadseizedthehotelinquestionandbecausethepoliceauthoritieshadbeenawareoftheseizureandhadnotactedtoprotecttheinvestorbeforeoraftertheinvasiveaction.InAMTvZaire, thehostcountrywasheldliableunderaprotectionandsecurityclauseintheapplicableBITafterincidentsoflootingbyelementsofthearmedforces.InEurekovPoland, therewasanallegationofharassmentoftheinvestorssenior

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representatives.TheTribunalfoundthattherewasnoviolationofthestandardsincetherewasnoevidencethatthestatehadauthoredorinstigated

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(p.163)theseacts.However,thepositionmighthavebeendifferenthadsuchactionsoccurredrepeatedlywithoutprotectivemeasuresonthepartofthestate.Othercaseshaveconcernedprivateviolence. IntheELSIcase, aChamberoftheICJappliedaprovisioninanFCNtreatythatgrantedthemostconstantprotectionandsecurity.OnechargebytheclaimantswasthattheItalianauthoritieshadallowedworkerstooccupythefactory.TheCourtfoundthattheresponseoftheItalianauthoritieshadbeenadequateunderthecircumstances. TheCourtstatedthatThereferenceinArticleVtotheprovisionofconstantprotectionandsecuritycannotbeconstruedasthegivingofawarrantythatpropertyshallneverinanycircumstancesbeoccupiedordisturbed.InTecmedvMexico, theclaimantallegedthattheMexicanauthoritieshadnotactedefficientlyagainstsocialdemonstrationsanddisturbancesatthesiteofthelandfillunderdispute.TheTribunalappliedatreatyprovisionguaranteeingfullprotectionandsecuritytotheinvestmentsinaccordancewithInternationalLaw.ItfoundthattherewasnotsufficientevidencetoprovethattheMexicanauthoritieshadencouraged,fostered,orcontributedtotheactionsinquestionandthattherewasnoevidencethattheauthoritieshadnotreactedreasonably.Similarly,NobleVenturesvRomania involveddemonstrationsandprotestsbyemployees.TherelevanttreatyprovisionstipulatedthattheInvestmentshallenjoyfullprotectionandsecurity.TheTribunalrejectedtheclaim,findingthatitwasdifficulttoidentifyanyspecificfailureonthepartofRomaniatoexerciseduediligenceinprotectingtheclaimant.

(d)LegalprotectionThereisalsoauthoritytotheeffectthattheprincipleoffullprotectionandsecurityreachesbeyondphysicalviolenceandrequireslegalprotectionfortheinvestor. Sometreatiesexplicitlyprovideforfullprotectionandlegalsecurity. However,caselawsupportstheviewthattheusualformulaoffullprotectionandsecurityalsoprovidesprotectionagainstinfringementsoftheinvestorsrights.IntheELSIcase, theguaranteeofthemostconstantprotectionandsecuritywasalsothebasisforacomplaintconcerningthetimetaken(16months)foradecisiononanappealagainstanorderrequisitioningthefactory.TheICJs

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(p.164)Chamberexaminedthisargumentandfoundthatthetimetaken,thoughundoubtedlylong,didnotviolatethetreatystandardinviewofotherproceduralsafeguardsunderItalianlaw.InCMEvCzechRepublic, aregulatoryauthorityhadcreatedalegalsituationthatenabledtheinvestorslocalpartnertoterminatethecontractonwhichtheinvestmentdepended.TheTribunalsaidthatThehostStateisobligatedtoensurethatneitherbyamendmentofitslawsnorbyactionsofitsadministrativebodiesistheagreedandapprovedsecurityandprotectionoftheforeigninvestorsinvestmentwithdrawnordevalued.ThetribunalinLaudervCzechRepublic,however,deniedaviolationofthestandardonthebasisofthesamefacts.Itreachedtheresultthattheonlydutyofthehoststateundertheprotectionandsecurityclausehadbeentogranttheinvestoraccesstoitsjudicialsystem.InAzurixvArgentina, theTribunalconfirmedthatfullprotectionandsecuritymaybebreachedevenifnophysicalviolenceordamageoccurs:

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Thecasesreferredtoaboveshowthatfullprotectionandsecuritywasunderstoodtogobeyondprotectionandsecurityensuredbythepolice.Itisnotonlyamatterofphysicalsecurity;thestabilityaffordedbyasecureinvestmentenvironmentisasimportantfromaninvestorspointofview.ThetribunalisawarethatinrecentfreetradeagreementssignedbytheUnitedStates,forinstance,withUruguay,fullprotectionandsecurityisunderstoodtobelimitedtothelevelofpoliceprotectionrequiredundercustomaryinternationallaw.However,whenthetermsprotectionandsecurityarequalifiedbyfullandnootheradjectiveorexplanation,theyextend,intheirordinarymeaning,thecontentofthisstandardbeyondphysicalsecurity.

InSiemensvArgentina, theTribunalderivedadditionalauthorityforthepropositionthatfullprotectionandsecuritygoesbeyondphysicalsecurityandextendstolegalprotectionfromthefactthattheapplicableBITsdefinitionofinvestmentalsoappliedtointangibleassets:

Asageneralmatterandbasedonthedefinitionofinvestment,whichincludestangibleandintangibleassets,theTribunalconsidersthattheobligationtoprovidefullprotectionandsecurityiswiderthanphysicalprotectionandsecurity.Itisdifficulttounderstandhowthephysicalsecurityofanintangibleassetwouldbeachieved.

InVivendivArgentina, theTribunalhadtoapplyaclauserequiringfullprotectionandsecurityinaccordancewiththeprincipleoffairandequitable

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(p.165)treatment.TheTribunalfoundthatthescopeofsuchaprovisionisnotlimitedtosafeguardingphysicalpossessionorthelegallyprotectedtermsoftheoperationoftheinvestment.SempravArgentina recognizedthatthestandardhastraditionallydevelopedinthecontextofphysicalprotectionoftheinvestment,butthatexceptionallyabroaderinterpretationwouldbepossible.Theinvestormayalsohavetotakeactivemeasurestoprotecttheinvestment.InGEAvUkraine, theclaimantarguedthatthehoststateshouldhaveinitiatedproceedingstoinquireintoatheftoftheclaimantsproperty.TheTribunalrejectedtheclaimbecausetheclaimantitselfhadnotbroughtacriminalcomplaint.BiwaterGauffvTanzania confirmedthattheguaranteeoffullsecurityextendstoactionsbothofthehoststateandofthirdparties. Duediligenceisnotobservedinthecaseoffailuretotakereasonable,precautionaryandpreventiveactiontoprotectaninvestment. FullprotectionimpliesaStatesguaranteetostabilityinasecureenvironment,bothphysical,commercialandlegal.Sometribunalshavedeniedtheapplicabilityofthisstandardtolegalprotection.AccordingtoSuezvArgentina, theconceptoffullprotectionandsecuritywouldnotcoverissuesoflegalsecurity.TheTribunalassumed,asdidRumelivKazakhstan, thatthetraditionalinterpretationgiventothistermstandsinthewayofanunderstandingthatwouldextendtoabroaderconstruction;withoutfurtherexplanation,theSuezTribunalalsostatedthatthisviewissupportedbyatextualmethodofinterpretation.Inthiscontextitisdoubtfulwhetheritisusefultodistinguishfullprotectionandsecurityfromprotectionandsecurityandtoassumethattheabsenceofthewordfullmeansthatthestandardmustbegivenanarrowermeaningwhichextendstophysicalsecurityonly.TheTribunalinParkeringsvLithuania ruledthatfullprotectionandsecuritynotonlyrequiresthepreventionofdamage,butalsorequiresthehoststatetorestoretheprevioussituationandtopunishtheauthoroftheinjury.

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(p.166)(e)RelationshiptocustomaryinternationallawSometreatyprovisionsonprotectionandsecuritytiethestandardtogeneralinternationallaw(fullprotectionandsecurityinaccordancewithinternationallaw),paralleltothepracticeonfairandequitabletreatment.Othertreatiesrefertoprotectionandsecurityandtotreatmentinaccordancewithinternationallawasseparatestandards,suggestingthatthetwoarenotidentical.Thequestionremainswhetheranunqualifiedreferencetofullprotectionandsecurityprovidesanautonomoustreatystandardormerelyservestoincorporatecustomarylaw.ToclarifytheissueforpurposesoftheNAFTA,thethreepartieshavestatedinaNoteofInterpretationthattheprovisiononfullprotectionandsecurityinArticle1105(1)embodiescustomarylaw, astheyalsodidinregardtofairandequitabletreatment.Inotherwords,theNAFTApartiesassumethatthestandardreflectsthoserequirementsembodiedintheconceptoftheminimumstandardonthelevelofgeneralinternationallawasappliedtoaliens.IntheELSIcase,theICJsuggestedthatthestandardmaygofurtherthangeneralinternationallaw, eventhoughtheclauseintherelevanttreatycontainedareferencetointernationallaw(fullprotectionandsecurityrequiredbyinternationallaw).Bycontrast,sometribunalshaveexpressedtheviewthatthisstandardisnomorethanthetraditionalobligationtoprotectaliensundercustomaryinternationallaw.

3.Theumbrellaclause

(a)MeaningandoriginAnumbrellaclauseisaprovisioninaninvestmentprotectiontreatythatguaranteestheobservanceofobligationsassumedbythehoststatevis--vistheinvestor.Theseclausesarereferredtoasumbrellaclausesbecausetheybringcontractualandothercommitmentsunderthetreatysprotectiveumbrella.Attimestheyarealsoreferredtoasobservanceofundertakingsclauses. Themostcontentiousissueinrelationtoclausesofthiskindiswhether,andinwhatcircumstances,theyplacecontractsbetweenthehoststateandtheinvestorunderthetreatysprotection.AtypicalumbrellaclauseinacontemporaryversionisArticle2(2)oftheBritishModelTreaty:EachContractingPartyshallobserveanyobligationitmay(p.167)haveenteredintowithregardtoinvestmentsofnationalsorcompaniesoftheotherContractingParty.TheGermanModelTreatycontainsasimilarclauseinArticle8(2).Many,butbynomeansall,BITscontainclausesofthistype.TheECTofferssuchaclauseinArticle10(1), buttheNAFTAdoesnotcontainanumbrellaclause.Thewordingofumbrellaclausesininvestmenttreatiesisnotuniform.Ageneraldiscussionmustallowforthevariationinlanguageoftheseclausesandtheresultingdifferencesininterpretation.SometreatiesfollowtheBritishmodelquotedabove,whereasothertreatiesusemoredetailedwording.TheinvestmentprotectiontreatyconcludedbetweenFranceandHongKongin1995statesinArticleIII:

WithoutprejudicetotheprovisionsofthisAgreement,eachContractingPartyshallobserveanyparticularobligationitmayhaveenteredintowithregardtoinvestmentsofinvestorsoftheotherContractingParty,includingprovisionsmorefavourablethanthoseofthisAgreement.

Aprovisionthataddressesthefuturelegalorderofthehoststateisnotanumbrellaclauseproperlyspeaking:

EachcontractingPartyshallcreateandmaintaininitsterritoryalegalframeworkaptto

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guaranteetoinvestorsthecontinuityoflegaltreatment,includingthecompliance,ingoodfaith,ofallundertakingsassumedwithregardtoeachspecificinvestor.

Umbrellaclausesarebynomeansofrecentvintage. TheBITbetweenGermanyandPakistanof1959thefirstmoderninvestmenttreatyalreadycontainedaclauseofthesamekindasthecurrentGermanModelTreaty.In1959,theGermanGovernmentinformedtheGermanParliamentabouttheeffectofanumbrellaclause:Theviolationofsuchanobligation[ofaninvestmentagreement]accordinglywillalsoamounttoaviolationoftheinternationallegalobligationcontainedinthepresentTreaty.Thehistorical-legalcontextinwhichtheoriginoftheclausemustbeassessedpertainstothepost-1945controversiesaboutthestatusofinvestmentagreementsascontractssubjecttothedomesticlawsofthehoststateor,alternatively,asundertakingsonthelevelofinternationallaw. In1929,thePCIJruledintheSerbianLoanscasethat[a]nycontractwhichisnotacontractbetweenStatesin(p.168)theircapacityassubjectsofinternationallawisbasedonthemunicipallawofsomecountry.Contractclaimsmaybeputundertheprotectionofatreatyandbereferredtointernationaladjudication.ThispointismadeinOppenheimsInternationalLawinthefollowingwords:

Itisdoubtfulwhetherabreachbyastateofitscontractualobligationswithaliensconstitutesperseabreachofaninternationalobligation,unlessthereissomesuchadditionalelementasdenialofjustice,orexpropriation,orbreachoftreaty,inwhichcaseitisthatadditionalelementwhichwillconstitutethebasisforthestatesinternationalresponsibility.However,eitherbyvirtueofaterminthecontractitselforofanagreementbetweenthestateandthealien,orbyvirtueofanagreementbetweenthestateallegedlyinbreachofitscontractualobligationsandthestateofwhichthealienisanational,disputesastocompliancewiththetermsofcontractsmaybereferredtoaninternationallycomposedtribunal,applying,atleastinpart,internationallaw.

After1945,projectsforlarge-scaleforeigninvestmentspromptedthequestionwhetherguaranteesgivenunderthedomesticlawofthehoststateprovidedsufficientlegalstabilitytojustifytherequiredexpendituresforsuchprojects.Umbrellaclauseswereseenasabridgebetweenprivatecontractualarrangements,thedomesticlawofthehoststate,andpublicinternationallawallowingformoreinvestorsecurity.Oneeffectoftheseclausesistoblurthedistinctionbetweeninvestmentarbitrationandcommercialarbitration.Anumbrellaclauseinatreatyprotectsacontractthataninvestorhasenteredintowiththehoststateandisanexpressionofthemaximpactasuntservanda.Itfollowsthatinthepresenceofanumbrellaclauseabreachbythehostcountryofaninvestmentcontractwiththeforeigninvestorconstitutesaviolationofthetreatyandcanberaisedininternationalarbitration.Until2003,theumbrellaclausereceivedlittleattentioninacademicdiscussionorarbitralpractice,althoughitwasoftenreflectedintreaties.ThosefewauthorswhodrewattentiontotheclauseessentiallysharedtheGermanviewofthepurposeoftheclauseasameanstoelevateviolationsofinvestmentcontractstothelevelofinternationallaw. However,thisphaseofunanimitycametoanendwiththe(p.169)arbitraldecisioninSGSvPakistanin2003 whichdepartedfundamentallyfromtheconventionalunderstandingoftheclause.Eversincethisruling,thepurpose,meaning,andscopeoftheclausehavecausedcontroversyandgivenrisetodisturbinglydivergentlinesofjurisprudence.

(b)EffectiveapplicationofumbrellaclausesOnelineofdecisionsgivesfulleffecttoumbrellaclauses.ThispracticeisbestrepresentedbyNobleVenturesvRomania wheretheTribunalhadtointerpretandapplythefollowingclauseinArticleII(2)(c)oftheBITbetweentheUnitedStatesandRomania:Eachpartyshallobserveanyobligationitmayhaveenteredintowithregardtoinvestments.TheUSclaimantinthiscase

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argued,interalia,thatRomaniahadbreachedtheumbrellaclausebyfailingtoabidebyitscontractualobligationtorenegotiatethedebtsofaformerlystate-ownedcompanyacquiredbytheinvestor.TheTribunalinsistedonthespecificityofeachumbrellaclause,distinguishingearliercasesonthisbasis.Therulingemphasizedthatthewordingobviouslyreferredtoinvestmentcontracts. ConsistentwithArticle31oftheVCLT,itemphasizedtheobjectandpurposeofinvestmenttreaties. IntheviewoftheTribunal:

twoStatesmayincludeinabilateralinvestmenttreatyaprovisiontotheeffectthat,intheinterestofachievingtheobjectsandgoalsofthetreaty,thehostStatemayincurinternationalresponsibilitybyreasonofabreachofitscontractualobligationstowardstheprivateinvestoroftheotherParty,thebreachofcontractbeingthusinternationalized,i.e.assimilatedtoabreachofthetreaty.[I]nincludingArt.II(2)(c)intheBIT,thePartieshadastheiraimtoequatecontractualobligationsgovernedbymunicipallawtointernationaltreatyobligationsasestablishedintheBIT.ByreasonthereforeoftheinclusionofArt.II(2)(c)intheBIT,theTribunalthereforeconsiderstheClaimantsclaimsofbreachofcontractonthebasisthatanysuchbreachconstitutesabreachoftheBIT.

Intheevent,theTribunalfoundthatRomaniahadnotviolateditscontractualobligation,andtheTribunalleftopenthequestionwhetherthewidescopeofanumbrellaclausehastobenarrowedinsomeway.TheNobleVenturesTribunalwasnotthefirsttoaccordabroadorfullscopetotheclause.InSGSvPhilippines, theTribunal,initsDecisiononJurisdiction,

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(p.170)alsoruledthatinthepresenceofanumbrellaclauseinthePhilippines-SwissBIT,aviolationofaninvestmentagreementwillleadtoaviolationoftheinvestmenttreaty:ArticleX(2)[theumbrellaclause]meanswhatitsays. TheTribunalstated:

ArticleX(2)makesitabreachoftheBITforthehostStatetofailtoobservebindingcommitments,includingcontractualcommitments,whichithasassumedwithregardtospecificinvestments.Butitdoesnotconverttheissueoftheextentorcontentofsuchobligationsintoanissueofinternationallaw.Thatissue(inthepresentcase,theissueofhowmuchispayableforservicesprovidedundertheCISSAgreement)isstillgovernedbytheinvestmentagreement.

However,SGSvPhilippinesdidnotcarrythisapproachtoitslogicalconclusion.InsteadtheTribunalassumedthat,duetotheexistenceofaforumselectionclauseinfavourofthecourtsofthehoststate,thePhilippinecourtsweretoruleontheobligationscontainedintheinvestmentcontract.InEurekovPoland theTribunalhadtoruleontheumbrellaclauseinArticle3.5ofthetreatybetweentheNetherlandsandPoland.TheTribunalconsideredtheordinarymeaning,thecontextoftheclause,andthemaximofeffetutile.ItconcludedthatbreachesbyPolandofitsobligationsunderthecontractscouldbebreachesoftheBITsumbrellaclause,eveniftheydidnotviolatetheBITsotherstandards. TheTribunalsaid:

TheplainmeaningtheordinarymeaningofaprovisionprescribingthataStateshallobserveanyobligationitmayhaveenteredintowithregardtocertainforeigninvestmentisnotobscure.Thephrase,shallobserveisimperativeandcategorical.Anyobligationsiscapacious;itmeansnotonlyobligationsofacertaintype,butanythatistosay,allobligationsenteredintowithregardtoinvestmentsofinvestorsoftheotherContracting

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From: Oxford Public International Law (http://opil.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber:Chinese University of Hong Kong; date: 06 January 2016

Party.ThecontextofArticle3.5[theumbrellaclause]isaTreatywhoseobjectandpurposeistheencouragementandreciprocalprotectionofinvestment,atreatywhichcontainsspecificprovisionsdesignedtoaccomplishthatend,ofwhichArticle3.5isone.Itisacardinalruleoftheinterpretationoftreatiesthateachandeveryoperativeclauseofatreatyistobeinterpretedasmeaningfulratherthanmeaningless.

Intheevent,theTribunalfoundthatPolandhadviolateditsobligationsarisingfromaprivatizationschemevis--vistheinvestor.

References

(p.171)InSGSvParaguaytheclaimwasforunpaidbillsunderacontractbetweentheinvestorandthestateforthepre-shipmentinspectionofgoods.TheBITbetweenSwitzerlandandParaguayprovidedinArticle11that[e]itherContractingPartyshallconstantlyguaranteetheobservanceofthecommitmentsithasenteredintowithrespecttotheinvestmentsoftheinvestorsoftheotherContractingParty.TheTribunalrejectedarestrictiveinterpretationofthisumbrellaclausebasedeitheronthenatureofthecontractoronthenatureofitsbreach.Itsaid:

Article11doesnotexcludecommercialcontractsoftheStatefromitsscope.Likewise,Article11doesnotstatethatitsconstantguaranteeofobservanceofsuchcommitmentsmaybebreachedonlythroughactionsthatacommercialcounterpartycannottake,throughabusesofstatepower,orthroughexertionsofunduegovernmentinfluence. Article11requirestheobservanceofcommitments.Alsoasamatteroftheordinarymeaningoftheterm,afailuretomeetonesobligationsunderacontractisclearlyafailuretoobserveon