{"id":2818,"date":"2013-03-22T10:40:07","date_gmt":"2013-03-22T15:40:07","guid":{"rendered":"http:\/\/itn.mattrock.ca\/?p=2818"},"modified":"2017-06-16T15:26:59","modified_gmt":"2017-06-16T20:26:59","slug":"a-distinction-without-a-difference-the-interpretation-of-fair-and-equitable-treatment-under-customary-international-law-by-investment-tribunals","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2013\/03\/22\/a-distinction-without-a-difference-the-interpretation-of-fair-and-equitable-treatment-under-customary-international-law-by-investment-tribunals\/","title":{"rendered":"A Distinction Without a Difference? The Interpretation of Fair and Equitable Treatment Under Customary International Law by Investment Tribunals"},"content":{"rendered":"

Broad interpretations of the standard for fair and equitable treatment (FET<\/span>) by investment tribunals have become a source of increasing controversy.[1]<\/a>\u00a0 Some countries\u2014including the United States and Canada\u2014have responded by attempting to limit FET to the standard of protection under customary international law (CIL), which is formed through the \u201cgeneral and consistent practice of states\u201d that they follow out of a sense of legal obligation (opinio juris<\/i>).[2]<\/a> \u00a0<\/b>The European Union, in contrast, appears to be committed to preserving a standard for FET that is not limited to CIL in exercising its new authority over investment under the Lisbon treaty.\u00a0 These diverging approaches to FET are a point of contention in the negotiations on the Canada \u2013 EU<\/span> Comprehensive Economic and Trade Agreement (CETA<\/span>), and will <\/b>also need to be addressed in the U.S. \u2013 EU Transatlantic Trade and Investment Partnership negotiations that will likely begin later this year.<\/p>\n

In theory, linking FET to CIL results in a standard of protection that is more deferential to the regulatory authority of governments than the EU\u2019s \u201cautonomous\u201d standard.\u00a0 A CIL-linked standard should also have greater legitimacy given that it is rooted in the actual practice of states that they believe to reflect their international legal obligations rather than simply the pronouncements of investment tribunals.<\/p>\n

In practice, however, investment tribunals continue to construe even CIL-based FET provisions to impose broad limits on government authority by accepting, without any evidence of state practice or opinio juris<\/i>, the pronouncements of previous tribunals as definitive evidence of the standard under CIL.\u00a0 The award in Railroad Development Corp. v. Guatemala<\/i>[3]<\/a> <\/i>(RDC<\/i>) is an example of this approach, which renders the linkage of FET to CIL largely meaningless.\u00a0 The reluctance of investment tribunals to base their interpretations of CIL on actual state practice and opinio juris<\/i> suggests that more aggressive approaches may be necessary to deter tribunals from adopting increasingly broad interpretations of FET.<\/p>\n

Linking fair and equitable treatment to customary international law<\/b><\/p>\n

Fair and equitable treatment provisions have been a standard element of investment treaties since Germany and Pakistan signed the first BIT<\/span> 1959.[4]<\/a>\u00a0 These provisions\u2014usually included within \u201cminimum standard of treatment\u201d articles\u2014have been construed broadly by investment tribunals to include a right to a \u201cstable and predictable\u201d business and regulatory environment, allowing investors to seek compensation for changes in tax and regulatory standards.[5]<\/a> As a result of these broad interpretations, FET provisions have become both the most frequently invoked and the most controversial substantive standard of protection in investor-state arbitration.<\/p>\n

Much of the debate over FET has concerned its relationship to the customary international law standard of protection for aliens.\u00a0 Although there has always been some inconsistency among investment treaties regarding the language of FET provisions, the contrast between the CIL-linked and autonomous approaches to FET came into sharper focus in 2001when the United States, Canada and Mexico issued a formal interpretation of NAFTA<\/span>\u2019s minimum standard of treatment article, clarifying that the minimum standard and its FET component were limited to the customary international law standard of protection of aliens.[6]<\/a><\/p>\n

The United States and Canada have continued to link FET to CIL in subsequent international investment agreements and have been joined in this practice by other countries, including Australia and New Zealand.[7]<\/a>\u00a0 In theory, a standard for FET that is actually rooted in customary state practice should be relatively uncontroversial, given that it would be limited to the level of protection that states generally and consistently provide to foreign investors.<\/p>\n

The BITs of the major European capital exporting countries, however, typically contain autonomous fair and equitable treatment provisions that are not limited to the customary international law standard of protection.[8]<\/a>\u00a0 Although the European Parliament has expressed support for linking the standard for FET to CIL in future EU investment agreements,[9]<\/a> the European Commission has indicated that such agreements should incorporate the highest standards of protection of Member States\u2019 BITs, presumably including autonomous FET provisions.[10]<\/a>\u00a0 The U.S.- EU High Level Working Group on Jobs and Growth has similarly called for a U.S. – EU agreement that includes \u201cinvestment liberalization and protection provisions based on the highest levels of liberalization and highest standards of protection that both sides have negotiated to date.\u201d[11]<\/a><\/p>\n

The debate over the relationship between FET and CIL will likely be a significant issue in the U.S. – EU FTA<\/span> negotiations.\u00a0 The issue has already become a source of controversy in the negotiations on the Canada – EU Comprehensive Economic and Trade Agreement (CETA).\u00a0 <\/b>A leaked document from the European Commission indicates that Canada\u2019s insistence that the CETA contain a FET standard that is limited to CIL \u201cis a problem for the EU, as it may significantly reduce the level or protection for investment afforded by the FET standard itself.\u201d[12]<\/a><\/p>\n

Does linking FET to CIL effectively constraint its interpretation?<\/b><\/p>\n

Although CIL is supposed to be based on actual state practice and opinio juris<\/i>, in practice arbitrators tend to define the CIL-linked standard for FET in exactly the same manner as the autonomous standard: by reference to previous arbitral awards and academic writings, without any evidence of either state practice or opinio juris<\/i>.[13]<\/a>\u00a0 This phenomenon is well-illustrated by the recent award in RDC v. Guatemala, <\/i>in which the tribunal rejected the arguments of not only Guatemala, but also three other CAFTA parties including the United States, that CAFTA\u2019s CIL-linked FET standard should be defined by reference to actual evidence of state practice and opinio juris<\/i>.<\/p>\n

The dispute arose out of a 50-year contract that RDC entered into in 1997 with FEGUA, a Guatemalan state-owned enterprise, to provide railway services in the country.\u00a0 RDC charged in 2005 that FEGUA has breached its contractual obligations to remove squatters from the railway right of way and to make payments to a Railway Trust Fund.\u00a0 In 2006, Guatemala terminated the contract granting RDC the right to use FEGUA\u2019s railway equipment on the grounds that it was contrary to the national interest.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 RDC brought a claim under the Dominican Republic – Central America – United States Free Trade Agreement (CAFTA), arguing that Guatemala had violated several provisions of CAFTA\u2019s investment chapter.[14]<\/a>\u00a0 The tribunal concluded that in terminating the contract Guatemala had failed to provide RDC with fair and equitable treatment in violation of Article 10.5 of CAFTA, which states that \u201ceach Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment . . . .\u201d[15]<\/a><\/p>\n

The tribunal\u2019s approach to identifying the relevant standard of protection under CIL was much more interesting than its decision concerning Guatemala\u2019s breach of the standard.\u00a0 Guatemala argued that RDC had the burden of demonstrating the relevant standard under CIL, and that in discharging that burden it could not simply rely on previous awards of investment tribunals as either constituting or proving state practice.[16]<\/a>\u00a0 Three other CAFTA Parties\u2014the United States, El Salvador and Honduras\u2014made \u201cnon-disputing Party\u201d submissions in which they supported Guatemala\u2019s position that RDC had the burden of demonstrating the relevant standard under CIL based on state practice and opinio juris<\/i> rather than arbitral awards.[17]<\/a><\/p>\n

The RDC tribunal, however, did not base its conclusions concerning the relevant standard for FET on a review of state practice and opinio juris<\/i>.\u00a0 Instead, it simply adopted the broad formulation applied by the tribunal in Waste Management II<\/i>, an investment arbitration under Chapter 11 of NAFTA, which indicated that FET encompassed due process, transparency, and \u201cnatural justice.\u201d[18]<\/a>\u00a0 The RDC<\/i> tribunal acknowledged that the Waste Management II<\/i> characterization of FET was itself based on previous NAFTA awards rather than state practice.<\/p>\n

The tribunal conceded that \u201carbitral awards do not constitute state practice,\u201d[19]<\/a> but characterized their use to define CIL as \u201cefficient.\u201d \u00a0This rationale for reliance on arbitral awards to determine the content of CIL is unpersuasive. Although arbitral awards may be an \u201cefficient\u201d source of opinion evidence concerning the content of CIL, they are of limited probative value when, as in RDC<\/i>, they are not based on or supported by evidence of state practice and opinio juris<\/i>.[20]<\/a>\u00a0 Moreover, if the relevant standard under CIL for FET can be established based on arbitral awards without reference to relevant state practice and opinio juris<\/i>, it would make the distinction between CIL-linked and autonomous FET standards largely irrelevant.<\/p>\n

Options for avoiding excessively broad interpretations of FET <\/b><\/p>\n

RDC<\/i> and similar awards <\/b>could create pressure for negotiators to consider alternative approaches for constraining interpretations of FET.\u00a0 Potential options including the following:<\/p>\n

a.\u00a0FET provisions could include language stating that an investor claiming that a state has violated a customary international law obligation has the burden of demonstrating that the obligation exists based on evidence of actual state practice and opinio juris<\/i>, and that such an obligation may not be established solely through arbitral awards or secondary sources.<\/p>\n

b.\u00a0FET provisions could clarify that assertions by states in arbitral proceedings (both as respondents and non-disputing parties) concerning the standard of protection under CIL constitute relevant opinio juris<\/i> and are therefore highly probative of the relevant standard.<\/p>\n

c.\u00a0FET provisions could include \u201can exhaustive list of State obligations under FET,\u201d as the United Nations Conference on Trade and Development (UNCTAD<\/span><\/span>) has suggested.[21]<\/a><\/p>\n

d.\u00a0FET provisions could be omitted altogether from future investment agreements (another option identified by UNCTAD).[22]<\/a><\/p>\n

Given the different approaches taken to FET by the United States and the EU, the U.S. – EU TTIP negotiations present an opportunity to explore some of these options.\u00a0 It seems unlikely that an FET provision would be omitted altogether from a U.S.-EU agreement, but one or more of the other alternatives noted above could both impose needed restraint on the interpretation of FET by tribunals and restore some measure of state control over its content.<\/p>\n

Author: Matthew C. Porterfield is a Senior Fellow and Adjunct Professor at the Georgetown University Law Center\u2019s Harrison Institute for Public Law.<\/p>\n

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[1]<\/a> See<\/i> UNCTAD, World Investment Report 2012: Towards a New Generation of Investment Policies, <\/i>available at http:\/\/www.unctad-docs.org\/files\/UNCTAD-WIR2012-Full-en.pdf<\/a>\u00a0 at 139 (\u201cSome tribunals have read an extensive list of disciplines into the FET clause, which are taxing on any State, but especially on developing and least-developed countries; lack of clarity persists regarding the appropriate threshold of liability.\u201d)<\/p>\n<\/div>\n

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[2]<\/a> See<\/i> International Court of Justice, Continental Shelf case (Libyan Arab Jamahiriya v. Malta)<\/i>, Judgment, para. 27 (June 3 1985) (\u201cIt is of course axiomatic that the material of customary international law is to be looked for primarily in the actual practice and opinio juris of States . . .\u201d), available at<\/i> www.icj-cij.org\/docket\/files\/68\/6415.pdf.<\/p>\n<\/div>\n

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[3]<\/a> Railroad Development Corporation (RDC) v. Republic of Guatemala<\/i>, ICSID<\/span> CASE NO. ARB\/07\/23, Award (June 29, 2012) (hereinafter \u201cRDC<\/i> Award\u201d), available at<\/i> https:\/\/icsid.worldbank.org\/ICSID\/FrontServlet?requestType=CasesRH&actionVal=viewCase&reqFrom=Home&caseId=C116.<\/p>\n<\/div>\n

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[4]<\/a>\u00a0 See<\/i> Agreement Between the Federal Republic of Germany and the Islamic Republic of Pakistan on the Encouragement and Reciprocal Protection of Investments, art. 2.2 (1959), available at http:\/\/www.pakistanembassy.de\/index.php?id=198<\/a>.<\/p>\n<\/div>\n

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[5]<\/a> See, e.g., Occidental Exploration & Prod. Co. v. Republic of Ecuador, Final Award, paras. 180-92 (July 1, 2004) (Ecuador\u2019s change in policy regarding assessment of a value-added tax violated Occidental\u2019s rights to a stable and predictable legal environment as an \u201cessential element\u201d of FET).<\/p>\n<\/div>\n

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[6]<\/a> NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter 11 Provisions<\/i> (July 31, 2001), available at http:\/\/www.sice.oas.org\/tpd\/nafta\/Commission\/CH11understanding_e.asp.<\/p>\n<\/div>\n

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[7]<\/a> See, e.g., <\/i>Agreement Establishing the ASEAN<\/span>-Australia-New Zealand Free Trade Area, ch. 11, art. 6(2)(c) (Feb. 27, 2009), available at<\/i> http:\/\/www.dfat.gov.au\/fta\/aanzfta\/chapters\/chapter11.html#fr6<\/a>. (\u201c[T]he concepts of \u2018fair and equitable treatment\u2019 and \u2018full protection and security\u2019 do not require treatment in addition to or beyond that which is required under customary international law, and do not create additional substantive rights.\u201d)<\/p>\n<\/div>\n

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[8]<\/a> See<\/i> Mahnaz Malik, Best Practices Series Bulletin #3 \u2014 Fair and Equitable Treatment\u00a0 (September 2009) (\u201cEuropean countries have traditionally opted for the unqualified \u2018fair and equitable\u2019 treatment standard which is at the nub of the uncertainty.\u201d), available at<\/i> http:\/\/www.IISD<\/span>.org\/pdf\/2009\/best_practices_bulletin_3.pdf.<\/i><\/p>\n

Some EU Members, however, have linked FET to CIL in their recent BITs.\u00a0 See<\/i> European Parliament, Directorate-General for External Policies, Policy Department, The EU Approach to International Investment Policy After the Lisbon Treaty, <\/i>at 35\u00a0 <\/i>(Oct. 2010) (noting that FET has been linked to CIL in \u201c[t]he recent BITs from Germany and those between Canada and Latvia, Slovakia, Czech and Romania . . . .\u201d), available at<\/i> http:\/\/www.europarl.europa.eu\/committees\/en\/studiesdownload.html?languageDocument=EN&file=33990<\/a>.<\/p>\n<\/div>\n

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[9]<\/a> European Parliament resolution of 6 April 2011 on the future European international investment policy<\/i> at 4 (2010\/2203(INI)) (\u201cfuture investment agreements concluded by the EU should be based on the best practices drawn from Member State experiences and include . . . fair and equitable treatment, defined on the basis of the level of treatment established by international customary law\u201d), available at<\/i> http:\/\/www.europarl.europa.eu\/sides\/getDoc.do?pubRef=-\/\/EP\/\/NONSGML+TA+P7-TA-2011-0141+0+DOC+PDF+V0\/\/EN<\/a>.<\/p>\n<\/div>\n

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[10]<\/a> \u201cThe Union should follow the available best practices to ensure that no EU investor would be worse off than they would be under Member States’ BITs.\u201d\u00a0 European Commission, Communication from the Commission to the Council, The European Parliament, The European Economic and Social Committee and the Committee of the Regions, Towards a comprehensive European international investment policy, <\/i>COM(2010) 343 final at 11 (July 7, 2010), available at<\/i> http:\/\/trade.EC<\/span>.europa.eu\/doclib\/docs\/2010\/july\/tradoc_146307.pdf.<\/p>\n<\/div>\n

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[11]<\/a> See Final Report \u2013 U.S-EU High Level Working Group on Jobs and Growth<\/i> at 3 <\/i>(February 11, 2013), available at<\/i> http:\/\/trade.ec.europa.eu\/doclib\/docs\/2013\/february\/tradoc_150519.pdf<\/a>.<\/i><\/p>\n<\/div>\n

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[12]<\/a> See<\/i> European Commission, EU Canada Comprehensive Trade Agreement — landing zones<\/i>, at 9, para. 7(6) (Nov. 6, 2012), available at<\/i> http:\/\/thetyee.ca\/Documents\/2012\/11\/27\/EU_Postion_Nov2012.pdf<\/a>.<\/p>\n<\/div>\n

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[13]<\/a>\u00a0 One significant exception is the award under NAFTA Chapter 11 in Glamis Gold v.\u00a0 United States, Award (June 8, 2009), available at<\/i> http:\/\/www.state.gov\/documents\/organization\/125798.pdf<\/a>.\u00a0 The tribunal in Glamis<\/i> indicated that the burden was on the claimant to establish the relevant standard of protection under CIL based on state practice and opinio juris<\/i>.\u00a0 See id.<\/i> paras. 600-605.<\/p>\n<\/div>\n

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[14]<\/a> The tribunal rejected RDC\u2019s assertions that Guatemala had indirectly expropriated its investment and denied it national treatment.\u00a0 RDC Award, paras. 152, 155.<\/p>\n<\/div>\n

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[15]<\/a>\u00a0 RDC Award, para. 212, quoting CAFTA, art. 10.5.<\/p>\n<\/div>\n

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[16]<\/a>\u00a0 RDC Award, paras. 159-60.<\/p>\n<\/div>\n

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[17]<\/a> \u00a0<\/i>RDC Award, paras. 207 – 211.<\/p>\n<\/div>\n

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[18]<\/a> RDC Award, para. 219, quoting Waste Management, Inc. v. United Mexican States<\/i>, ICSID Case No. ARB(AF)\/00\/3,\u00a0 Award of April 30, 2004, para. 98.<\/p>\n<\/div>\n

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[19]<\/a> RDC Award, para. 217.<\/p>\n<\/div>\n

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[20]<\/a> See<\/i> RESTATEMENT (THIRD) OF THE FOREIGN RELATIONS LAW OF THE UNITED STATES \u00a7 103, cmt. a\u00a0 (1987)\u00a0 (arbitral awards constitute merely \u201csecondary evidence. . . . [which] may be negated by primary evidence, for example, as to customary law, by proof as to what state practice is in fact.\u201d)<\/p>\n<\/div>\n

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[21]<\/a> See UNCTAD, World Investment Report 2012: Towards a New Generation of Investment Policies, <\/i>available at http:\/\/www.unctad-docs.org\/files\/UNCTAD-WIR2012-Full-en.pdf<\/a>\u00a0 at 139.<\/p>\n<\/div>\n

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[22]<\/a>\u00a0\u00a0 UNCTAD has also advocated consideration of this approach. Id.<\/i>\u00a0 See also<\/i> South African Development Community Model Bilateral Investment Treaty<\/i> Template with Commentary<\/i> (July 2012), available at <\/i>https:\/\/www.IISD<\/span>.org\/ITN<\/span>\/wp-content\/uploads\/2012\/10\/SADC<\/span>-Model-BIT-Template-Final.pdf<\/a>\u00a0 (\u201cThe fair and equitable treatment provision is . . . a highly controversial provision. The Drafting Committee recommended against its inclusion in a treaty due to very broad interpretations in a number of arbitral decisions.\u201d)<\/p>\n<\/div>\n<\/div>\n