IISD Best Practices Series: The Most-Favoured-Nation Clause in Investment Treaties

This IISD Best Practices paper studies the most-favoured-nation (MFN) clause in investment treaties and its interpretation by arbitral tribunals, drawing lessons for states.

By Suzy H. Nikièma on February 13, 2017

Most-favoured nation (MFN) is now a both common and controversial clause in investment treaties. It has been the object of differing and unexpected interpretations by treaty-based arbitral tribunals. 

Initially, the application of MFN in investment treaties did not raise much debate. Since 2000, however, with Maffezini v. Spain, an original interpretation of MFN led to a seismic shift in international investment law: the possibility for investors protected under a bilateral investment treaty (BIT) to import more favourable provisions from a third-party BIT made by their host state. This trend then accelerated and led to many criticisms, crystallized in one essential point: the latitude given to foreign investors to bring together elements from various treaties made by the host state and to custom tailor a treaty, ignoring the bilateral character of the commitments made by two states in the context of specific negotiations. 

The controversies around MFN raise fundamental questions in the context of current changes in the international investment law and arbitration regime. They require an examination of the content and scope of this clause in order to find solutions that strike a better balance of the rights and obligations involved without compromising current reforms towards a more balanced regime that is a vector of sustainable development. 

After reviewing the definition and background of the MFN clause, this study conducts a typology of investment treaties and then an analysis of the differing interpretations by the tribunals of several key issues. The issues surrounding certain interpretations of the MFN clause and the reactions of states in their recent treaties are reviewed in order to draw lessons for states.

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