A Sustainability Toolkit for Trade Negotiators:

Trade and investment as vehicles for achieving the 2030 Sustainable Development Agenda

5.4.5 Fair and Equitable Treatment (FET) or Minimum Standard of Treatment (MST)

In most investment treaties, states commit to providing FET or MST to foreign investors. It has become a controversial provision, as it can become a “catch-all” clause for investors, allowing them to succeed where their expropriation, non-discrimination and other claims have failed. Typically the wording of the treaty does not offer detailed guidance on how dispute settlement bodies should interpret these provisions, resulting in widely differing interpretations—some of which are expansive—and lack of legal security for host states. A particular problem in this respect is the notion of investors’ “legitimate expectations,” pursuant to which several tribunals have struck down the denial of environmental permits, arguing that the investor had a legitimate expectation to be granted such a permit. Generally applicable environmental and health regulations have also been challenged for alleged violations of FET.31 To prevent the possibility of overly expansive interpretations of the scope of FET, some states have been excluding it altogether from their international agreements.

Others have continued to include some version of FET or MST in the agreement, but have tried to limit its scope. One approach has been to draft the standard or an interpretive note indicating that the treatment means no more than customary international law minimum standard of treatment of aliens, which sets a basic floor below which states may not go. This was the approach taken by NAFTA parties as evidenced by the binding interpretation issued through the NAFTA Free Trade Commission. This understanding has now been included in the Canadian Model BIT [Article 5], the U.S. Model BIT [article 5] and post-2004 investment treaties. Its use has spread well beyond North America.32 However, even such a refined approach has been subject to broad and unpredictable interpretations by international arbitral tribunals. Consequently, several states are becoming yet more specific. Some enumerate exhaustively the types of situations that amount to a breach of the FET or MST standard (for example, denial of justice, harassment, targeted discrimination based on race or gender, etc.); others clarify the threshold further (for instance, providing that state conduct must be outrageous or egregious in order to violate FET). In order to avoid expansive interpretations of tribunals in relation to FET, some treaties now avoid using the “fair and equitable” terminology.

Given the evolution of the different approaches, the language below emanates from one of the most recent types of approaches designed to respond to the past years of activist and expansive interpretations of the FET/MFN clauses through arbitral tribunals.

Option 1:Do not include provisions on FET in the agreement

Avoids expansive interpretations of tribunals in relation to FET

Examples

None of Brazil’s Cooperation and Facilitation Agreements include any reference to FET or MST. The India–Singapore Comprehensive Economic Cooperation Agreement also excludes such provisions.

How Commonly Used

Option 2:Specify which types of conduct amount to a violation of standard of treatment

Clarify the intent of the parties. Provide less room for future expansive interpretation.

Examples

“A Party breaches the obligation of fair and equitable treatment referenced in paragraph [previous] if a measure or series of measures constitutes:

(a)    denial of justice in criminal, civil or administrative proceedings;
(b)   fundamental breach of due process, including a fundamental breach of transparency, in judicial and administrative proceedings.
(c)    manifest arbitrariness;
(d)   targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief;
(e)   abusive treatment of investors, such as coercion, duress and harassment; or
(f)     a breach of any further elements of the fair and equitable treatment obligation adopted by the Parties in accordance with paragraph [next] of this Article.

The Parties shall regularly, or upon request of a Party, review the content of the obligation to provide fair and equitable treatment. The Committee on Services and Investment may develop recommendations in this regard and submit them to the Trade Committee for decision.” (CETA, Article 8.10, paras 2-3)

How Commonly Used

Examples

No Party shall subject investments made by investors of the other Party to measures which constitute a violation of customary international law1 through:

i.    Denial of justice in any judicial or administrative proceedings; or
ii.   fundamental breach of due process; or
iii.  targeted discrimination on manifestly unjustified grounds, such as gender, race or religious belief; or
iv.  manifestly abusive treatment, such as coercion, duress and harassment.

1. For greater certainty, it is clarified that ‘customary international law’ only results from a general and consistent practice of States that they follow from a sense of legal obligation.” (Indian Model BIT, Article 3)

How Commonly Used

Examples

The obligations in paragraph [X] to provide:

  1. “fair and equitable treatment” includes the obligation not to deny justice in criminal, civil or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world; and
  2. “full protection and security” requires each Party to provide the level of police protection required under customary international law.

A determination that there has been a breach of another provision of this Agreement, or of a separate international agreement, does not establish that there has been a breach of this Article.

For greater certainty, the mere fact that a Party takes or fails to take an action that may be inconsistent with an investor’s expectations does not constitute a breach of this Article, even if there is loss or damage to the covered investment as a result.

For greater certainty, the mere fact that a subsidy or grant has not been issued, renewed or maintained, or has been modified or reduced, by a Party, does not constitute a breach of this Article, even if there is loss or damage to the covered investment as a result.” (TPP, Article 9.6)

How Commonly Used

Examples

For some other options, see UNCTAD’s Investment Policy Framework for Sustainable Development (2015), pp. 97–98 (Policy Options for IIAs, Section 4.3).

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