Department of Law

Spring Term 2017

Master Programme in Investment Treaty Arbitration

Master Thesis 15 ECTS

The Dual Role of Most-Favoured-Nation Clause in

Investment Treaty System

Author: Alice Bzovii

Supervisor: Professor Dr. Kaj Hobér

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TABLE of CONTENT

I.Introduction

1. Investment Law and Most Favoured Nation Treatment Standard in

the Context of Bilateral Investment Treaties: A Summary......................4

2. The questions Raised and the Structure of the Thesis..............................10

3. The Method and the Limitations............................................................... 11

II. The proposed balance in the Bilateral Investment Treaties.....................12

1. Why have states signed BITs?..............................................................12

2. The unbalanced balance: the BITs between developing

and developed states. Is it still applicable?........................................15

3. Investor’s direct rights and the double role of the state in

BIT-based arbitration...........................................................................17

4. Interpreting BITs and possible multilateralization of investment

Protection FTAs................................................................................... 20

III. The role of the Most-Favoured-Nation-Treatment in BITs

economics...........................................................................................................23

1. The function of Most Favoured Nation Clause...................................23

2. MFN clause: importing substantive or procedural provisions?........26

IV. Concluding remarks....................................................................................35

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LIST OF ABBREVIATIONS

ASEAN Association of Southeast Asian Nation

BIT Bilateral Treaty Investment

FCN Friendship Commerce and Navigation

FDI Foreign Direct Investment

FTA Free Trade Agreements

GATT General Agreement on Tariffs and Trade

ICSID International Centre for Settlement of Investment Disputes

MAI Multilateral Agreement on Investment

MFN Most-Favoured-Nation

NAFTA North American Free Trade Agreement

OECD The Organisation for Economic Co-operation and Development

UNCITRAL United Nations Commission on International Trade Law

VCLT Vienna Convention on the Law of Treaties

WTO World Trade Organization

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The Dual Role of the Most – Favoured – Nation Clause in the Investment

Treaty System

Chapter I

Introduction

1.1 Investment Law and Most Favoured Nation Treatment Standard in the

Context of Bilateral Investment Treaties: A Summary

From earlier times, the United States of America (US) began enter into treaties for

the promotion and protection of investment called treaties of ‘Friendship,

Commerce and Navigation’ (FCNs)1, - considered to be the precursor to the

Bilateral Investment Treaties (BIT). After the end World War II, the role of FCNs

in the promotion of trade was replaced by the General Agreement on Tariffs and

Trade (GATT)2. Almost simultaneously, the developed countries proposed a new

tool for the promotion and protection of foreign investments – the BIT. The

decision taken by the developed countries to adhere to a bilateral instrument in

order to protect the investment made on the territory of developing countries came

after a long period of failure to conclude a multilateral treaty.

During the twentieth century, all attempts at concluding a multilateral treaty that

would establish multilateral standards of protection for investors faced the

opposition of capital importing states. At the international level, this opposition

means the conflict between state sovereignty and investment protection.

1 The main difference between BITs and FCNs is that the later does not contain

dispute settlement provisions. 2 General Agreement on Tariffs and Trade (GATT) was a multilateral agreement regulating international trade. Its purpose was the ‘substantial reduction of tariffs and other trade barriers and the elimination of preference, on a reciprocal and mutually advantageous basis’. GATT was signed by 23 nations in Geneva on October 30, 1947 and took effect on January 1, 1948. It lasted until 1994, the year of the Uruguay Round Agreements.

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Developed countries were trying to favour the investment and the investor, while

developing countries were trying to favour state interests and state regulation.

This conflict of interests between developed states and developing states, and the

political need of the latter to enter into investment treaties settled the today’s

system of investment treaty law. The threat from the host state acting as a

sovereign made it clear that a bilateral cooperation was required for the creation of

the investment treaty arbitration system.

In 1959, the Abs-Shawcross Draft Convention on Investments Abroad - called

‘Magna Carta’, intended to introduce specific standards of protection and to

address the notion of investors with a view of the investor being able to bring a

treaty claim against a state before an arbitral tribunal. This proposal was the most

important one, from all the previous attempts, but did not achieve the final version

of a multilateral treaty due to the opposition of capital importing states. The

attempts to create a multilateral framework for investments continued in 1967,

with the Draft Convention on the Protection of Foreign Property of the

Organization for the Economic Co-operation and Development (OECD)3. Once

again, these efforts remained unsuccessful. Under these circumstances, where a

multilateral treaty it was most unlikely to be concluded capital exporting countries

changed their strategy to adhere to bilateral negotiations. It was obvious that, the

developing countries would still continue to oppose a multilateral treaty proposal

because they felt that their sovereignty would be threatened if they were forced to

put the natural resources in the hands of the investor. Therefore, starting with the

middle of the twentieth century, the number of BITs concluded has grown

significantly.

However, in the 1980s, another proposal for a multilateral investment treaty at the

Uruguay Round of GATT negotiations4 was also rejected because it faced the

3 The Organisation for Economic Co-operation and Development (OECD) is an

intergovernmental economic organisation with 35 member countries. It was founded in 1960 to stimulate economic progress and world trade. 4 The Uruguay Round was the 8th round of multilateral trade negotiations (MTN) taking place between 1986 and 1994. The Round came into effect in 1995 with deadlines ending in 2000. The Uruguay Round’s Agreement on Trade Related Investment Measures (TRIMS), the Agreement on Trade Related Aspects of

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opposition of the developing states once more. The efforts of the capital exporting

countries to establish a high level of investor protection at international level

achieved their highest point with the Multilateral Agreement on Investment

(MAI)5, which was drafted by the OECD Secretariat. The next trade round, - the

Doha Development Round6, tried to bring together developing and developed

countries at the same trade negotiation table again. This time, the Doha

Ministerial Declaration expressly included the relationship between trade and

investment. However, in 2004, the General Council decided, for various reasons,

that the negotiation’s agenda would not include investments’ discussions7.

Therefore, all the proposals related to this subject were dropped. In 2003, at the

WTO’s Cancun Session, the intention to include investments as one of the four

‘Singapore issues’ brought to the light the old conflict between developed and

developing countries. The negotiation did not achieve a positive result due to the

fact that, developing countries expressed their fear that investment rules would

affect their industrial and development policies. Facing so many failures of

multilateral negotiations, developing countries were forced to change their

mindset and adhere to the negotiations of bilateral investment treaties and of

regional investment treaties. The need for a bilateral cooperation with the

sovereign state placed in the centre stage became clear. This laid down the

groundwork for the future regime characterized by the lack of a universal treaty

Intellectual Property Rights (TRIPS) and the General Agreement on Trade in Service (GATS) addressed only part of investment related issues and did not provide enough security for investors. 5 www.oecd.org/Multilateral Investment on Investment: ‘Negotiations on a proposed multilateral agreement on investment (MAI) were launched by governments at the Annual Meeting of the OECD Council at Ministerial level in May 1995. The objections were to provide a broad multilateral framework for international investment with high standards for the liberalisation of investment regimes and investment protection, and with effective dispute settlement procedures, open to non-OECD countries. Negotiations were discontinued in April 1998 and will not be resumed. 6 The Doha Development Round beginning in 2001 is still unresolved after missing

its official deadline of 2005. 7 Doha Work Programme, WT/L/597 2004: ‘investment issues will not form part of the Work Programme set out in that Declaration and therefore no work towards negotiations on any of these issues will take place within the WTO during the Doha Round’.

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and the dominance of bilateral treaties.8 In 1959, Germany’s intention to have its

investment protected took the concrete form of the first bilateral investment treaty

(‘BIT’)9 which was signed between Germany and Pakistan10. In the years to come,

- the number of bilateral investment treaties (‘BITs’) grew significantly: by 1970

there were 72 BITs, by 1980 there were 165 BITs, and by 1990 the number

reached 385 BITs11. Since 1990, the number of BITs has increased even faster

and, at the end of 2005, it reached 2,495.12

From the bilateral perspective, the relationship between states is governed by the

interests of the more powerful. In investment law, the developed states were

pursuing their interests to promote and protect their investment and the investors

in the developing countries. In this sense, they concluded BITs contained

provisions with a higher standard of protection for the investor, as compared to

the international minimum standard provided for by customary international law.

Finally, the developed countries transformed years of unsuccessful negotiations

on a multilateral treaty into a network of BITs, within which they could promote

and protect investments13. These bilateral investment agreements build upon on

common principles and rules14 form a complex intertwined network of BITs15.

8 See R. Dolzer, Ch. Schreuer, Principles of International Investment Law, 2nd edition, p 9. 9 S. Franck, Foreign Direct Investment, Investment Treaty Arbitration and the Rule of Law, Mc George Global Bus.&Dev. L.J. 337 2006: ‘An investment treaty is an agreement made between two or more sovereigns that safeguards investments made in the territory of the signatory countries’. 10 Pakistan and Federal Republic of Germany, Treaty for the Promotion and Protection of Investments No. 6575, (with Protocol and exchange of notes). Signed at Bonne, 25 November, 1959. 11 See C. McLachlan, L. Shore, M. Weiniger, International Investment Arbitration: Substantive Principles, Part I Overview 2. The Basic Features of Investment Treaties, p 26, 2008 ed. 12 UNCTAD, World Investment Report 2006 - FDI for Developing and Transition Economics Implications for Development (2006). 13

See Schill, Multilateralization of International Investment Law, Chapter II The dynamics of multilateralism and bilateralism in international investment relations: ‘Multilateralism failed because States were unable and unwilling to agree on the appropriate standards of treatment of foreign investor, shows a stable consensus which is reflected in the proliferation of bilateral’, p.23-65, Cambridge University Press 2009. 14 Ibid. 13. 15See J.W. Salause, in The Emerging Global Regime for Investment, Harvard International Law Journal/ Vol. 51, Number 2, Summer 2010, argues that the body

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However, the intention to achieve the construction of a multilateral investment

system based on principles of non-discrimination and the same standard of

protection was still pursued by the developed countries. One solution at hand was

the inclusion of the most-favoured-nation (‘MFN’) clause16 within the provisions

of the treaty. In this sense, BITs represent a common base of uniform substantive

and procedural principles, enforced by the inclusion of the most favoured nation

treatment standard (MFN) clause with a view of the need of the states to

coordinate the international relations on a bilateral basis. This clearly emphasizes

the previous intention of the state to order international relations, but they could

only manage this on a bilateral basis17. It is fair to say that, the underling intention

of the states, was to introduce through the back door of the MFN clause18,

common rules of trade, in order to achieve economic liberalization and economic

of investment treaties constitutes a regime. ‘The problem with the term ‘network’ is that it suggests the existence of a structural connection between the constituent parts of the network. However, no structural connection exists, among investment treaties, each is separate, independent, and freestanding. Consequently, using the term ‘network’ to describe the work of nations in the investment field since the end of World War II would seem to be inappropriate’. 16 Germany Pakistan BIT 1959, MFN Clause was mentioned i.e. Article 2, which stated that: ‘Neither Party shall subject to discriminatory treatment any activities carried on in connection with investments including the effective management, use and enjoyment of such investments by the nationals or companies of either Party on the territory of the other Party, unless specific stipulations are made in the documents of admission of an investment’. See also New Britannica Academic, Most-Favoured-Nation Treatment (MFN) - ’In the early 17th century commercial treaties incorporated most-favoured-nation provisions. The Anglo-French treaty negotiation of 1860 by Richard Cobden and Michel Chevalier, which established interlocking tariff concessions that extended most- favoured-nation treatment worldwide, became the model for many later agreements’. 17 See S. Schill, Ordering paradigms in international investment law: bilateralism, multilateralism, multilateralization: ‘MFN clause multilateralize the bilateral interstate treaty relationships and harmonize the protection of foreign investments in each state’, in Z. Douglas, The Foundation of International Investment Law: Bringing Theory into Practice, p 110, Oxford, 2014. 18 See E. Chalamish, The Future of Bilateral Investment Treaties: A de Facto Multilateral Agreement?, J. Int’L 303 2008-2009: ‘thanks to the MFN mechanism, developing countries are now able to sign such agreements with international consent, something that cannot currently be achieved through participation in the multilateral negotiation regime’

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growth, as one of the most important elements securing and protecting

investments19.

The MFN clause promotes the principles of equality established a long time ago

in the field of trade. This clause was imported in the investment treaty system in

order to impose the party treaty states a specific conduct, based upon the principle

of non discrimination20. To put it simply, this meant evaluating the host state

conduct towards the investor at the post-investment stage. However, the MFN

clause is a treaty provision which establishes a treaty obligation between the host

state and the investor. The MFN clause is an obligation between the two states

that, neither state will give the investor from any third state treaty a more

favourable treatment than that which was given to the investor from the basic state

treaty. Throughout the MFN clause, the most–favoured-nation treatment is

established; it is forms part of the treatment of protection of the investor21. Faced

with a discriminatory situation, the investor can invoke his right to a treatment

which is the most favoured one granted to another foreign investor by the host

state. The MFN principles are one of the most venerable standards of treatment in

international economic law22. Usually, a typical MFN clause combines the MFN

standard and the national standard, and it reads as following: ‘Neither Contracting

State shall subject investors of other Contracting States as regards their activity in

19 See J.W.Salacuse, ‘BIT by BIT: The Growth of Bilateral Investment Treaties and their Impact on Foreign Investment in Developing Countries, The International Lawyer, Vol. 24, No.3, p.655-675, 1990: ‘in other word, even without a multilateral code, capital exporting states have managed to achieve, through the networks of bilateral and regional treaties, the high level of protection for foreign investors that they long sought on behalf of international business 20 Snyder, R.C., Most-Favored- Nation Treatment Clause a Analysis with reference to Recent Treaty Practice and Tariffs 1 1948, Chapter 2, p 9-15, See also Chapter 1: ‘ Having being incorporated into a vast and complex international treaty structure under widely varying conditions and in many forms, the clause has solved certain problems and created others. It has been alternately hailed and denounced, practiced and discarded, by individual nations’. 21See, A. Newcombe, L. Paradell, Law and Practice of Investment Treaties: Standard of Treatment, Kluwer Law International 2009, Chapter 5- Most Favoured Nation Treatment, pp 193-232. See Pia Acconci, Chapter 10 Most-Favoured Nation Treatment in P. Muchlinski, F. Ortino, Ch. Schreuer The Oxford Handbook of International Investment Law, Part II. Substantive Issues, p 363, Oxford University Press, 2008 22

See Ch. Dugan, Chapter XV Discrimination, in Ch. Dugan, D. Wallance, Investor- State Arbitration, p 397, Oxford University Press, 2008

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connection with investments in its territory, to treatment less favourable than it

accords to its own investors or to investors of any third State’.23

1.2 The Questions Raised and the Structure of the Thesis

The main question addressed during the forgoing analysis is the following: Is the

MFN clause a tool for the multilateralization and harmonization of the treatment

of protection of the foreign investor? Or, is it a disruptive mechanism for

disturbing the balance in the BITs?

The First Chapter will take a brief look at the historical evolution of investment

law and will analyse how and why the bilateral investment treaties came to be an

international legal instrument for the protection and promotion of the investment.

Then, it describes the notion of most-favoured-nation-treatment and offers a

concise commentary related on the application of the standard. The Second

Chapter presents the image of the BIT and investigates the reasons why the

developed and developing countries have signed bilateral investment treaties. It

shows the flexible and delicate balance of the BIT constituted between the interest

and the rights of the investor and the state parties. It analyse the consequences of

the treaty interpretation and offers a short comparison with the FTAs. The Third

Chapter brings an insightful analysis of the function and application of the MFN

clause in international economic treaties, particularly in investment treaties. It

presents from a critical point of view, the relevant jurisprudence related to the

MFN mechanism of importing substantive and procedural provisions from a host

state’s third treaty. Finally, Chapter Four foregrounds the conclusion of the

research and the answers to the main questions raised. It sums up the

consequences of the positive or negative effects, which the MFN clause might

have in the investment law framework.

23 Germany Mode Treaty, Article 3,

https://www.italaw.com/sites/default/files/achive/ita1025.pdf.

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1.3. The Method and the Limitations

The method applied is involving investigation of the current state of the law, i.e.

the BITs and any relevant law and treaty. The study has also implied

documentation on Journal articles, as an important source of information on

current academic debates, on legal issues and legal theory. The reference to this

variety of sources was required for an in-depth understanding of the research

carried out for this thesis. Then, attention was given to the relevant law case, to

understand how the MFN mechanism was applied in practice. This legal issue is

approached from different perspectives, using all sources of information such as:

books, Journal Articles, arbitral awards, official reports, so as to underline the

multiple facets it can take in practice. These findings are then used in answering

the main research questions of the Thesis. The conclusions are drawn after

comparing opposite points of view on the answers provided by the research.

There are inherent limitations to any paper of this size, and the focus, as such, will

only be on the core question raised above. The thesis will not address an analysis

of the importance of the consequences of foreign direct investment (FDI) in the

decision of signing the BITs. The discussion on the rights of the investor does not

concern the theory of indirect right, for example. The arbitral decisions analyzed

are only related to the function of the MFN mechanism, therefore the discussion

does not imply comments on other legal issues contained in the awards.

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Chapter II

The proposed balance in the Bilateral Investment Treaties

The bilateral investment treaties, as an international legal instrument, offer

equilibrium, established between the rights and obligations of two states.

Sometimes, this delicate balance reflects back the conduct of the state exercising

its power in pursuing its own contradictory interests. From a multilateral

perspective, it is the balance of a dynamic system achieved through the treaty text

and through the arbitral award. The complex dynamic of the interest balancing in

the BITs and in arbitral proceedings goes to the heart of the investment treaty

system. It brings to light the way in which the fundamental mechanisms analysed

below interact in order to create legitimacy of the system.

2.1. Why have states signed BITs?

The BITs filled the gap of legal vacuum generated by the conflict between the

developing and developed countries. Most importantly, both types of countries

have reached a compromise in order to achieve their goals, developing to attract

investment and developed to protect investment. Willing to sign BITs, the

developing countries adhere to economic interests, which cannot be settled in a

multilateral treaty. Several failures to multilateral negotiations allowed developing

countries to resist standards of protection, which could not be rejected once they

agreed signing bilateral agreements.

After the end of World War II, the number of expropriation cases24 and the

disputes over expropriation has increased. At the same time, developing countries

argued against the Hull Rule25, complaining about the right to determine the

24

After the end of War World II, the number of nationalisation measures increased, mostly in Eastern and Central European countries. These measures affected both nationals and foreigners. 25 During the first half of the twentieth century, the Mexican government also took expropriation measures against the American investor’s properties. Under a

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amount of compensation in a case of expropriation. Their arguments were not

totally unfounded since there were no procedures or dispute mechanisms in force

to settle the conflict between the developing or developed countries. Adopting a

collective conduct,26 acting as a group, developing countries were trying to

establish a regime which would have allowed them to take expropriation measures

against the investor without any international constrains. Developed countries

supported the Hull Rules, as internationally valid ones, because they wanted their

investment and the investor in the host state territory to be protected under

customary international law. At the international level, this conflict lasted for

several years. Finally, developing countries won the battle, when, around the

middle of the twentieth century, the Hull Rule was no longer a rule under

customary law27. This conflict made both the developing and the developed

countries face an impasse: there was no international binding instrument to

regulate the investment in a foreign country. However, both categories of

countries became aware of the fact that they definitely needed an international

legal tool to credibly bind themselves under a set of rules governing the

investment. This shift made the developed countries seek practical solutions and

come up with a new proposal for the developing countries. Thus, a few years

later, in 1977, the US launched the American BIT programme, which proposed

the BIT Model, as a standard BIT form, used in signing subsequent BITs. Now,

negotiations were concretized in an international binding agreement aimed to

diplomatic communication, the American Secretary of state, Cordell Hull put forth a formula in case of expropriation, namely the requirement of ‘prompt, adequate and effective’ compensation, which later became the full compensation standard under the customary international law. 26 A.T. Guzman, Why LDCs Sign Treaties that Hurt Them: Explaining the Popularity of Bilateral Investment Treaties, J. Int’l L. 639 1997-1998. 27

The United Nation General Assembly adopted Resolution 3201, on 1 May 1974; it was named The Declaration on the Establishment of a New International Economic Order. Article 4 posits that: The new international economic order should be founded on full respect for the principles stated at point e) ‘(...) Each State is entitled to exercise full control over the ....( resources)...., including the right to nationalization or transfer of ownership to its nationals(...). No State may be subject to economic, political or any other type of coercion to prevent the free exercise of this inalienable right’. Emphasis added.

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promote and to protect the investment28. In the doctrine, different opinions were

expressed in connection with the reasons why states negotiated and signed the

BITs29. In pursuing their economic interests, developing countries, who not long

ago rejected the Hull Rule, were now negotiating and signing BITs, which

provided standards of protection that were in all forms superior to those of

customary international law. This paradoxical choice made by the developing

countries was explained throughout economic arguments.30 Without any doubt,

developing countries were signing the BITs with a single goal: that of attracting

investments. The following years proved that the purpose of the BIT was

achieved: the foreign direct investment was promoted in the host state. Even if it

is generally accepted that BITs increase Foreign Direct Investment (‘FDI’),

substantial contradictory literature have been developed in this regard.31

28 See Bilateral Investment Treaties, Office of the United States Trade Representative: ‘to protect investment abroad, to encourage the adoption of market-oriented domestic policies and to support the development of international law standards consistent with these objects’. 29 See M. Sornarajah, The International Law of Foreign Investment, ed 3, Cambridge University Press, 2010: ‘Knowing the confused status of law entered into such treaties so that, they could clarify the rules that they would apply in case of any dispute which may arise between them’. 30 See Ibid 25. Guzman characterized the situation as ‘ prisoner’s dilemma’ and he was explained it in the following terms: ‘it is optimal for LDCs as a group, to reject the Hull Rule, but each individual LDC is better off ‘defecting’ from the group by signing a BIT that gives it an advantage over other LDCs in the competition to attract foreign investors’ 31 See M. Hallaward-Driemeier in Do Bilateral Investment Treaties Attract FDI? Only a BIT...And They Could Bite, Oxford University Press, 2009, p. 368, considered that the importance of BIT to increase FDI is not significant, while other changes trigger a more conclusive determination of FDI: ‘Such changes could include lowering trade barriers, increasing the likelihood of investing overseas, so if the BIT variable is capturing some of these effects, one would expect it to bias up the coefficient’. See E. Neumayer, L. Spess, Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?, Chapter 7, in The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties, and Investment Flows, K Sauvant, Oxford University Press 2009, p 248, which conclude that the relationship between developing and developed countries increases the FDI., ‘Developing countries that sign more BITs with developed countries receive more FDI inflows’. See J. W Salacuse, N.P. Sullivan, Do BITs Really Work?: An Evaluation of Bilateral Investment Treaties and their Grand Bargain, Chapter 5, in The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties, and Investment Flows, p.110, K Sauvant, Oxford University

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However, the issue may also be seen from another perspective, and a closer look

maybe taken at the content of the BIT. The provisions contained in the US Model

BIT regulating the standards of protection, or substantive provisions, were used as

a core legal basis in almost all of the BITs, which were signed later on. It is

obvious that, starting from the very beginnings, the BITs had a bilateral form and

a multilateral content because they contain the same standards of protection: fair

and equitable treatment, most-favoured-nation treatment, for example. The little

difference in the wording of the text of the BITs providing for these standards

does not have enough influence to make any distinction in this regard. Thus, it is

obvious that the US Model BIT created a uniformity of the BITs signed by the

state parties and explained in this manner the bases for the network of BITs and

the tendency towards multilateralism.

2.2 The unbalanced balance: the BITs between developing and developed

states. Is it still applicable?

The balance of the BIT is influenced by the balance of the substantive provisions

provided therein. The unbalance arises between the protection of the investment

and the interests of the host state. A proper balance can be achieved throughout

the dispute settlement mechanism contained in the BITs at the disposal of the

investor, when faced with an unacceptable situation. In the absence of a BIT, a

sovereign state cannot bind itself to a particular set of international rules. In order

to attract investments, the host state can give assurance to the investor about a

certain protection of that particular investment, but in the eyes of the later a

sovereign can never do this credibly because a state can, at any time change its

domestic law in pursuing its own purpose. Moreover, in the absence of a BIT or in

the absence of the Hull Rule, an investor has no legal tools to use so as to protect

Press 2009. p 155, which concludes that BITs faster FDI: ‘BITs have a particularly strong effect on encouraging FDI in developing countries’. See Jason Yackee, Do BITs Really Work? Revisiting the Empirical Link Between Investment Treaties and Foreign Direct Investment, Chapter 14 in The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaaties, and Investment Flows, p 381, K Sauvant, Oxford University Press 2009, mentioning that a weak relationship between BITs and FDI was founded: ‘ I suspect that the presence or absence of a BIT is rarely, if ever, a particular salient issue in most investment decisions’.

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his investment. The solution to this situation can only be found at international

level. Thus, it is obvious that, keeping the BITs in balance, also means leaving

ample space for the host state to take measures for public interest: in area like

environment, health etc. Developing countries favour the state regulation of

international investment through its own national legislation, whereas developed

countries favour the international protection of the investment. The unbalanced

situation created was due mostly to the fact that developing countries were

actually trying to assert state interest. On the other hand, developed countries

imposed a line to be followed at international level, namely to adhere to the

standards of protection and not to foster state interests. Sometimes, the regulatory

measures taken by the host state breach the standards of protection provided by

the provisions of the BITs32. Under customary international law, investors did not

have direct access to a procedural remedy in case his rights were breached. The

investor was totally depended on his home state. Accordingly, the only way to

follow was the diplomatic protection provided by his home state. In this case, the

investor was at the discretionary power of the state, which, in most cases, included

political considerations, also. Diplomatic protection constantly generated

problems between developing and developed countries33.

Nowadays, the unbalanced balance of the BIT is no longer a legal issue. This is

due to the fact that, the inconsistency problem was effectively solved by the

dispute settlement clause contained in the BITs. The dispute resolution clause

allowed the disputes to be settled in a binding procedure and in a neutral forum34.

Against a breach of the BIT provisions by the host state, the investor can now

bring a direct claim for damages or for compensation in front of an independent

and neutral arbitral Tribunal. The award rendered is final and binding upon the

32

See Katia Yannaca Small, Indirect Expropriation and the Right to Regulate: How to Draw the Line? Chapter 18, in Arbitration under International Investment Agreements: A Guide to the Key Issues, Katia Yannaca Small, Oxford University Press, 2010. 33 See Calvo Doctrine, according to which, in international investment law, the jurisdiction lies with the country in which the investment is located. The investor has recourse to the host state’s courts. It was adopted in Latin American countries. 34 See Gus van Harten, Investment Treaty Arbitration and Public Law, Chapter 1: ‘the arbitration have a new found power to review and discipline the states’, Oxford University Press, p.10, 2009.

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parties and above all, enforceable under the New York Convention. To put it

simply, through the dispute resolution clause, the investor started having, and later

on, gaining more control over its own arbitral proceedings. From a bilateral

perspective, the BITs put in the hands of the investors the same international legal

tool, a dispute resolution mechanism, to be used directly, and unconditionally, if

needed, against a possible manifestation of discriminatory power on the part of

the host state. With this, the investor’s rights were preserved at the international

level. Therefore, the most important element of the investment treaty arbitration,

namely the dispute settlement mechanism, fulfils a multilateral function in the

network of the BITs and, underlines the aspiration towards a multilateral level of

the states as signatories of the BIT.

2.3 Investor’s direct rights and the double role of the state in BIT-based

arbitration

The BITs contain two important elements, known as: substantive provisions –

setting out standards by which each state promises to treat the investor of the other

state, - and a procedural mechanism – which allows bringing claims directly

against the host state before an international arbitral Tribunal. As part of the

investment law principle, the BITs grant investors direct rights such as: fair and

equal treatment, nation treatment, most- favoured-nation-treatment, expropriation.

These rights also govern the relationship between the investor and the host state,

and the relationship between the two state treaty parties. In the case of an investor

state dispute, these rights will show how far the investor can go to protect its

investment and how far the host state can go on restricting their sovereignty.

The international investment arbitration system has its own specific features,

where the state has, according to the ICSID Convention, the right to submit a

claim; however, in practice, the state is almost all the time the respondent. But,

above everything else, there is no need to have a contractual relationship between

the state and the investor35. Thus, the investor can directly invoke and enforce its

35

See Jan Paulsson in Arbitration Without Privity, ICSID review, Foreign Investment Law Journal, Vol 10, no 2, Fall 2015, ICSID argues against the idea that

18

rights during the arbitral proceedings. In pursuing its own claim, the investor is

under no obligation to inform its national state of the existence of proceedings

against the host state, or nor to consult with the state on the substantive and

procedural issues that arise in the proceedings36. The only possible temporary

limitations of the investor right are those related with the pre-arbitration stage. For

example, most BITs require negotiations between the investor and the host state,

while other BITs require expiry of waiting periods or exhaustion of local

remedies. However, the home state is under no obligation to consent to the

content or type of the claim submitted by the investor. Under a bilateral

agreement, there is no need for a special consent or arbitration agreement at the

time of the initiating of the investor state proceedings. Therefore, in the

investment treaty arbitration system investor enjoys direct rights37. This scenario

cannot be duplicated in a multilateral agreement because then, the investors would

have a wide range of discretion. In this case, the diversity of the claimants

invoking rights in their own interpretation might clash with the discretion of the

Tribunal and lead to unpredictable situations. For example, under NAFTA

arbitration at the time of initiating the proceedings, the investor must consent to

arbitration38.

BITs contain two types of dispute resolution clause: a state-investor arbitration

clause for investment disputes, and a state-to-state arbitration resolution clause for

disputes concerning the treaty’s interpretation and application. Recent doctrine

the right of the investor will exist only if there is a specific agreement concluded in this regard. 36 See Z. Douglas, The Hybrid Foundations of Investment Treaty Arbitration, British Yearbook of International Law, Vol. 74, p 151-289, 2004. 37

Ibid. Douglas also mentioned that: ‘the functional assumption underlying the investment regime makes it clear that the investor is bringing a cause of action upon the vindication of its own rights rather that those of its national State’. 38 See, NAFTA Article 1121: ‘1. A disputing investor may submit a claim under Article 1116 to arbitration only if: a) The investor consents to arbitration in accordance with the procedures set out in

this Agreement’. See Loewen v. US Case No ARB (AF)/98/3, the Lowen Group, a Canadian firm filled an ICSID claim against the US government. The Tribunal stated that the NAFTA treaty operates on a derivative right basis;https://www.italaw.com/sites/default/files/case-documents/ita0470.pdf.

19

has formulated the idea that a new era of investment arbitration has to emerge

based on these two dispute resolution clauses provided in BITs. As mentioned

above, the investor has the right to initiate investor-state arbitration about

investment disputes. The states, parties to the BIT, are the beneficiaries of the

same right of bringing a state-to-state arbitration claim on the application and

interpretation of the treaty. The two settlement dispute mechanisms can be put in

practice at the same time, as they reflect the object and purpose of any investment

treaty, namely to promote and to protect the investment39. For example, when an

investor invokes a discriminatory situation created by the host state in its

disfavour and it is about to make an investor state claim, a state-to-state claim on

the interpretation of the provisions of the BIT might create a new perspective over

the arbitral proceedings. These two proceeding might be formulated as two

separate arbitral proceeding, without any res judicata effect of one over the other.

Through this mechanism, treaty parties can exercise their right in order to correct

the unbalance of the BIT from within which definitely falls within the object and

purpose of the BIT to protect the investment. In short, investment treaties create

rights and obligations for the states treaty parties and for a non state actor, the

investor. In order to increase the confidence in, and the enforcement of those

rights, states have delegated the power to resolve investor state and state-to-state

disputes to arbitral Tribunals. The commitments undertaken by the state treaty

parties are vague; in general, they promise to treat the investor fairly and

equitably, or no less favourably than the other foreign investor etc. In this

situation, the arbitral Tribunal has to interpret the provisions of the treaty which,

in general, adhered towards a broad interpretation, in order to safeguard the

purpose of the BITs: the promotion and protection of the investment40. The states

39 See Anthea Roberts, State-to-State Investment Treaty Arbitration: A Hybrid Theory of Independent Rights and Shared Interpretive Authority, Vol. 55, Number 1, Winter 2014: ‘In the Matter of Cross Border Trucking Service case, Mexico brought a state to state claim seeking a declaration that the US had breached its national treatment and most-favoured-nation treatment obligation with respect to Mexico and potential Mexican investor by Mexican owned trucking firms. The United States argued that Mexico could not make a claim on behalf of unidentified Mexican investor. The panel upheld Mexico’s claim’. 40

See, Anthea Roberts, Clash of paradigms;Actors and Analogies Shaping the Investment Treaty System : ‘Although imprecision is normally associated with state

20

negotiate and agree on the content of the treaty by signing it. Thus, the home state

signs the treaty and ensures that its investor has the rights protected, but it also

reserves a right to ensures that the enforcement of these rights is made on

international-level. This right can be invoked by the state in a state-to-state

arbitration, by asking the arbitral Tribunal to interpret the BIT based on common

rules and methods of the treaty’s interpretation at the international level. In this

way, a legal situation is re-created, which responds to the need for a multilateral

approach to serve the state’s wider purpose of building an investment system of

protection. The state sign the BIT and then, it reserves the right to be part of the

arbitral proceeding, seeking enforcement of its own rights. Therefore, the tools for

multilateralization remain at the disposal of the states.

2.4. Interpreting BITs and a possible multilateralization of investment

protection– FTAs

The substantive law applied in treaty arbitration is the treaty itself’41. In

interpreting BIT, arbitral Tribunals apply the Vienna Convention on the Law of

Treaties (VCLT)42.

The general rule of interpreting the BITs is provided by Article 31VCLT43 and

Article 32 VCLT44. In general, Tribunals adhered towards a broad interpretation

discretion when is coupled with a high degree of obligation and delegation the opposite is true: the body charged with interpreting and applying the standard is afforded a wide discretion’, The American Journal of International Law, Vol.107, No 1, p. 45-94, 2013. 41 See C. McLachlan, International Investment Arbitration: Substantive Principles, Chapter 3, Dispute Resolution Provisions, p 66, Oxford Series, 2008 42 The Vienna Convention on the Law of Treaties was adopted on 22May 1969 and it is a treaty concerning the international law on treaties between states. 43 Article 31 VCLT: ‘1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. 2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes: a) Any agreement relating to the treaty which was made between all the parties in connexion with the conclusion of the treaty. b) Any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by other parties as an instrument related to the treaty. 3. There shall be taken into account, together with the context:

21

of the provisions of the BITs, and sometimes towards contradicting decisions.

Article 31(1) includes the primacy of the text and its balance by object and

purpose. The principles contained in the VCLT allow the arbitral tribunal a wide

range of interpretation. The teleological method of treaty interpretation plays an

important role in creating uniformity among different investment treaties45. Its

main function is to level differences in the wording of the provisions of the BIT.

This method is recognized to have an important contribution in clarifying

different issues in investment.46 In applying the MFN clause, the arbitral Tribunal

is required to interpret third party treaties, not only the basic treaty. Thus, the

classical method of interpretation is the shift from the traditional bilateral to the

multilateral. The arbitral Tribunal is then forced to interpret the connections

between the bilateral treaties as a network of international agreements.

This analysis would not be complete without a brief look at the interpretation of

Free Trade Agreements (‘FTA’). They represent regional agreements signed by

the parties that became aware of the advantages to carry out negotiation within a

limited group. Yet, FTAs are not separated from the World Trade Organization

(‘WTO’)47, which is based on the idea of multilateralism and principles such as:

a) Any subsequent agreement between the parties reading the interpretation of the treaty or the application of its provisions b) Any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation. c) Any relevant rules of international law applicable in the relations between the parties. 4. A special meaning shall be given to a term if it is established that the parties so intended. 44 Article 32 VCLT: ‘Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: a)Leaves the meaning ambiguous or obscure, or b)Leads to a result which is manifestly absurd or unreasonable.

See S. Schill, Multilateralization of International Investment Law, Chapter VII, Conclusion- Multilateralization-Universalization-Constitutionalization, p 278-362, Cambridge University Press, 2009. 46

Ibid. The author considers that the teleological method fulfil different roles, such as: ‘defining and clarifying the scope of the application of BITs, the object and purpose of the BIT etc’. 47 The WTO commenced on 1 January 1995 under the Marrakesh Agreement replacing the General Agreement on Tariff and Trade (GATT).

22

non discrimination, reciprocity and transparency. In the current doctrine, there are

debates regarding multilateralized regionalism,48 based upon the interpretation of

the FTAs.

This short parallel mirrors the features of the network of the BITs and its

background tendency for multilateralism. The extended interpretation of the treaty

adopted by the arbitral tribunal, to ensure the protection and promotion of the

investment, underlines the influence of mutilateralization of the bilateral

investment treaties. This is achieved with the state’s decision to put part of their

power in the hands of the arbitral tribunals. Thus, states are confident that,

following this path, they will create a uniform mindset of interpreting the network

of BITs. This underlines what is more than obvious, namely the background

thinking from a multilateral perspective.

This analysis shows the way in which states have created a balance between the

form of the multilateral and the bilateral background of investment treaty

arbitration system. The most important aspect, which has to be underlined at this

point is that this build-up mechanism confers states important tools like those

presented above, meant to sustain and preserve their creation. These tools are used

in various modalities in order to achieve the final purpose: namely the

enforcement of their interests. As will be presented in the foregoing, elements

like: the rights of the investor, the dispute resolution mechanism, the

interpretation of the treaty, interact with the MFN mechanism in a specific way.

These connections create the basis of the investment treaty arbitration, and at the

same time, underline its specific features. But, it also raises important, still

debateable, legal issues.

48 See Lena Lindberg, The Ambiguous Role of the WTO in Times of Stalled Multilateral Negotiations and Proliferating FTAs in East Asia., International Negotiation 17 (2012) 163-187. See also: ’This can be done in a step-by-step approach starting at the regional or even bilateral level, by harmonizing a gradually growing number of FTAs. In other words, again make use of cuisine language, this could create ‘sticky rice’ in the process towards the final goal of achieving a homogenous ‘rice dumpling’ within the WTO’.

23

CHAPTER III

The role of the Most-Favoured-Nation-Treatment in the BITs economics

The most-favoured-nation clause is one of the most important legal mechanisms

of the investment treaty arbitration system. It is mentioned in a wide range of

economic and investment treaties. This fact leads to different interpretation of the

MFN clause. The MFN clause in investment treaties sustains the

multilateralization of bilateral relations between states. It introduces a new

influence in the establishment of a competitive structure between foreign

investors. The relationship between the MFN clause and the dispute settlement

mechanism raises unique legal issues.

3.1. The function of the Most Favoured Nation clause

The MFN clause has been used for centuries49 as an instrument of commercial

policy, being in essence a rule of law of equality of treatment50. In fact, the MFN

clause encapsulates de principles of non-discrimination, and of a uniform regime

with an equal competition structure. These principles, coupled with the principle

of anti-protectionism, ensure the function of a global market. After the end of

World War II, due to the circumstances and the necessities of that time, a strong

idea of an open and non-discriminatory trade system became prevalent. It was

considered a way of avoiding international conflict and promoting peace. The

underlying purpose of policy promoted was to maximize the trade as much as

possible, over a short a period of time, based on multilateral agreements. This is

what the MFN clause is still doing in the trade sector: promoting a non-

discriminatory trade policy according to which all benefits will be extended

immediately and unconditionally to all the trade participants51. Accordingly, the

49

See E. Ustor, First Report on the most-favoured-nation clause, Yearbook of International Law Commission, 1969, vol II. 50 See Snyder, R. C., Most-Favored-Nation Clause an Analysis with Reference to Recent Treaty Practice and Tariffs, Chapter 1, p 7, 1948. 51See W. Maruyama, Preferential Trade Arrangements and the Erosion of the WTO’s MFN Principle, 46 Stan. J. Int’L., 177, 2010.

24

principles of MFN established equilibrium and a new order of international trade

market.

The most-favoured-nation clause is mentioned in the NAFTA Agreement and in

other international agreements, as part of international economic treaties. Under

NAFTA Article 1103, MFN treatment applies to the investor and investment at

pre and post investment stage, and covers a broad range of activities52. Other

Chapters of NAFTA contain most-favoured-nation provisions regulating, for

example, service providers from another Party53, or financial services54.

Throughout these several provisions, MFN clause succeeds in fulfilling its main

purpose - to avoid economic distortions that would occur through more selective

country-by-country liberalisation55. Thus, the economic policy has been to create

a common market and to keep the tariffs at a lower level between countries. The

most-favoured-nation clause was also mentioned in ASEAN agreement56 related

to trade in goods. In this context, the MFN is a conditional clause which allows

negotiation to begin, with the only purpose of receiving further preferences. The

most-favoured-nation clause was included as reciprocal and indeterminate clause

in two important agreements, namely GATS Agreement57 and Energy Charter

52 See NAFTA Article 1103: ‘Each Party shall accord to investments of investors of another Party treatment no less favourable than that it accords, in like circumstances, to investments of investors of any other Party or of a non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments’. 53

See NAFTA Chapter 12, Article 1203: ‘Each Party shall accord to service providers of another Party treatment no less favourable than that it accords, in like circumstances, to service providers of any other Party or of a non Party’. 54 See NAFTA Chapter 14, Article 1406: ’Each Party shall accord to investor of another Party, financial institutions of another Party, investments of investor in financial institutions and cross-border financial service providers of another Party treatment no less favourable than that it accords to the investors, financial institutions, investments of investors in financial institutions and cross border financial service providers of any other Party or of a non-Party, in like circumstances’. 55 See M. Kinnear, A Bjorklund, Investment Disputes under NAFTA: An Annotated Guide to NAFTA Chapter 11, Supplement No1, Article 1103- Most-Favored-Nation Treatment, p1103, Kluwer Law International, 2006 56 See Association of Southeast Asian Nation (‘ASEAN’) Agreement was signed on 28 January 1992 in Singapore. The main purpose was to increase competition by eliminating tariffs and non-tariff barriers. 57 The General Agreement on Trade in Service (GATS) entered into force in January 1995. It is considered the first multilateral agreement on foreign investment. Article

25

Treaty58. In the former agreement, the MFN is an unconditional clause, while in

the latter it is a conditional clause. In the multilateral GATT/WTO system 1947,

the MFN clause was used as a fundamental principle59. In this context, the MFN

clause ensures that countries will extend to other countries the same trade

treatment as that granted to their most favoured partners60. In the GATT/WTO

system, MFN clause requires that the equal treatment will be observed by all

signatory countries. Each GATT/WTO country is under the obligation to grant

MFN to each other61. The MFN clause performs different functions and can be

characterized as unilateral-reciprocal and conditional-unconditional. In general,

reciprocity is a basic feature of any bilateral relationship which takes the form of

an agreement. It is more common in the commercial and trade field. Unilateral

clauses are less common because they imply one side obligation. In international

investment, this kind of clause is unsuited to regulate a relationship between two

sovereign states. The unconditional form of the clause, as its name suggests,

implies no condition upon the states’ performance. On the other hand, a

conditional form implies that the conduct of the state shall be evaluated under

certain criteria62. In investment treaty, the MFN takes the form of an

II of GATS stipulates that ’With respect to any measure covered by this Agreement, each Member shall accord immediately and unconditionally to service and service suppliers of any Member treatment no less favourable than that it accords to like services and service suppliers of any other country’. 58 Energy Charter Treaty (ECT) establishes legal rules for cross-border cooperation in the energy sector. Last consolidated version 20 May, 2015. 59 See J. Kurtz, The Delicate extension of Most-Favoured-nation Treatment to Foreign Investor: Maffezini v. Kindgdom of Spain, Arbitration under International Investment Agreements: A Guide to the Key Issues, Katia Yannaca-Small, Oxford University Press, 2010. The author suggests that ‘it is worth emphasising a fundamental tension within the operation of MFN treatment in GATT. Article I.1 does not outlaw all the forms of tariff discrimination between foreign suppliers as the concept of ‘ like product’ offers an important flexibility.(...) Thus, governments are not prohibited from establishing different tariffs levels for different kinds of goods’. 60 See M. Ghosh, C Perroni, John Whalley, Developing-Country Benefits from MFN Relative to Regional/ Bilateral Trade Agreements, Review of International Economics, 11(4), p.712-728, 2003. 61 See K. Saggi, F. Sengul, On the Emergence of an MFN Club: Equal Treatment in an Unequal World, The Canadian Journal of Economics, Vol. 42, No 1, 2009, pp. 267-299. 62

Synder, R.C., Most-Favored-Nation Clause an Analysis with Reference to Recent Treaty Practice and Tariffs, Chapter5, p.50, 1948.

26

unconditional, reciprocal clause. The MFN clause must be in accordance with its

function to create and support a harmonized international investment system.

Therefore, it cannot impose unilateral or conditional obligations between states.

The inclusion of MFN principles makes the most important difference between

the multilateral agreements, the regional, or bilateral agreements, such as the

preferential ones63. These uniform rules impose a standard of conduct for the

states-parties acting in the international investment treaty system. The states must

refrain from taking measures which will create different treatment protection

based on the national origin of the investor. The purpose is to implement

international relationships between states on the basis of equality, and to

harmonize the level of investment protection64. In this way, the MFN creates

equal competition and a level playing field65 in investment regime.

3.2 MFN clause: importing substantive or procedural treaty provisions?

The application and interpretation of the most-favoured-clause raised important

legal debates based on contradictory decisions rendered by the arbitral Tribunals.

It is generally accepted that, the MFN clause can import more substantive

provisions from the host state’s third-country treaties66. It has also been

The author explains two types of conditions, such as: a) a special condition- in which what must be fulfilled is to give birth to the right of most-favored-nation treatment, in which case the condition relates only to the favoured interest and must be accomplished to create this interest and b) separate from the favoured interest and relating only to something the other party must do or not do to qualify as the most-favoured-nation. 63 See C. Bown, Trade Policy under the GATT/WTO: Empirical Evidence of the Equal Treatment Rule, The Canadian Journal of Economics, Vol. 37, No 3, 2004, pp 678-720. 64 Ibid. 65 See S. Schill, The Multilateralization of International Investment Law, Chapter IV The multilateralization through most-favored-nation treatment, p 121-241, Cambridge University Press, 2009. 66 See P. Muchlinski, F. Ortino, Ch. Schreuer, The Oxford Handbook of International Investment Law, 2008, Part II Substantive Issues, Ch. 10 Most-Favoured-Nation Treatment; M. Kinnear, A. Bjorklund, Investment Disputes under NAFTA: An Annotated Guide to NAFTA Chapter 11, Supplement No1, Kluwer International 2006, Article 1103-Most-Fvoured-Nation Treatment, p 1103-72; R. Dolzer, T. Myers, After Tecmed: Most-Favoured-Nation Clauses in Investment Protection Agreements, ICSID Review, Vol 19, 1, 2004; P. Dumberry, Shopping for a better deal: the use of MFN clauses to get ‘better’ fair and equitable treatment protection, Arbitration International, 2017, 33 ,1-16; P. Dumberry, The imporation

27

established that, the MFN clause can be used to circumvent restrictions regarding

the admissibility of investor-state disputes. Nevertheless, there are conflicting

decisions in investment jurisprudence regarding whether the MFN clause can

broaden the jurisdiction of arbitral tribunals67. The core problem is whether

of the FET Standard through MFN Clause: An Empirical Study of BITs, ICSID Review, Vol. 32, No 1 (2017), pp 116-137; A. F.Rodriguez, The Most-Favored-Nation Clause in International Investment Agreements, Journal of International Arbitration 25 (1): 89-102, 2008; T. Cole, The Boundaries of Most Favored Nation Treatment in International Investment Law, Cole FTP4. Doc, 5/22/2012;

67 See S. Schill, The Multilateralization of International Investment Law, Chapter IV,

The Multilateralization through most-favored-nation treatment, Cambridge University

Press, 121-241,2009; S. Parker, A BIT at a Time: The Proper Extansion of the MFN

Clause to Dispute Settlement Provisions in Bilateral Investment Treaties, Arbitration

Brief, Volume 2, Issue 1, 2012; S. Vessel, Clearing a Path Through a Tangled

Jurisprudence: Most Favored-Nation Clauses and Disputes Settlement Provisions in

Bilateral Investment Treaties, 32 Yale J. Int’L. 125, 2007; Z. Douglas, The MFN

Clause in Investment Arbitration: Treaty Interpretation Off the Rails, Journal of

International Dispute Settlement, December 2010, 2:1, 97-113; Elgi, G., Don’t Get Bit:

Addressing ICSID’s Inconsistent Application of Most-Favored-Nation Clause to

Dispute Resolution Provisions, Pepperdine Law Review, Vol.34: 1045, 2007; E.

Gaillard, Establishing Jurisdiction Through a Most-Favored-Nation Clause,

International Arbitration Law, Volume 233-No 105; P. Sturma, Goodbye, Maffezini?

On the Recent Developments of Most-Favoured-Nation Clause Interpretation in

International Investment Law; J. Maupin, MFN-based Jurisdiction in Investor- State

Arbitration: Is There Any Hope for a Consistent Approach? Journal of International

Economic Law, March 2011, 14:1 157-190; Radi Y., The Application of the Most-

Favoured-Nation Clause to the Dispute Settlement Provisions of Bilateral Investment

Treaties: Domesticating the Trojan Horse’, European Journal of International Law,

September 2007, 18:4, 757-774; M. Valenti, The Most Favoured Nation Clause in BITs

as a Basis for Jurisdiction in Foreign Investor-Host State Arbitration, Arbitration

International, Vol. 24, No 3, LCIA, 2008; R. Teitelbaum, Who’s Afraid of Maffezini?

Recent Developments in the Interpretation of Most Favored Nation Clauses, Journal of

International Arbitration 22 (3): 225-238, 2005; S. Schill, Most- Favored-Nation

Clauses as a Basis of Jurisdiction in Investment Treaty Arbitration, Arbitral

Jurisprudence at a Crossroads. 10 J. World Inv.&Trade 189-225 (2009).

28

investors can invoke the MFN clause in order to incorporate the host state’s

broader consent to arbitration under investment treaties with third countries.

3.2.1 Invoking Substantive Provisions: Relevant Cases

In Asia Agriculture Products v SRI Lanka LTD (AAPL), the Tribunal accepted,

initially that, in principle, under the provisions of the basic treaty, the investor

could rely on more favourable conditions granted by the host state’s third treaty.

However, the Tribunal rejected the claim because it found that the investor could

‘not prove that the Sri Lank/Switzerland Treaty contain rules more favourable

than those provided for under the Sri Lanka/ U.K. Treaty’68.

In Pope&Tabot v. Canada, the Tribunal agreed that Article 1103 and Article 1102

of NAFTA provided for the MFN protection to the NAFTA investors, who were

entitled to the border interpretation of fair and equitable treatment. Furthermore, it

considered that ‘the fairness in the BIT is distinct form customary international

law’, and that a per a contrario interpretation would ‘do violence to the BIT

language’69. The Tribunal decided that, the MFN clause mentioned in the NAFTA

Agreement could import the more favourable fair and equitable treatment

standards from other Canadian BITs.

In MTD v. Chile, the Tribunal allowed the investor to invoke, through the MFN

clause provided in the Chile-Malaysia basic treaty, the better treatment contained

in the Chile-Denmark BIT and Chile-Croatia BIT.70 The more favoured treatment

concerned the fact that, the latter BITs provisions required ‘the authorities to grant

necessary permits subsequent to approval and the fulfilment of contractual

obligations’71. The permits were to be granted in accordance with the host state’s

laws. The basic BIT contained no provision in this regard. The Tribunal admitted

the claim.

68 ASIAN Agricultural Products LTD. (AAPL) v. Republic of Sri Lanka, Case No. ARB/87/3, para. 54, https://www.italaw.com/sites/default/files/case-documents/ita1034.pdf. 69 Pope Talbot Inc v. Canada, Award on the Merits of Phase 2, https://www. italaw.com/sites/default/files/case-documents/iato678.pdf 70

MTD Equity Sdn. Bhd. And MTD Chile S.A., ICSID Case no ARB/01/07, para. 100, https://www.italaw.com/sites/default/files/case-documents/ita0544pdf. 71 Ibid. para. 197.

29

These cases show that, the MFN clause extends more favourable substantive

provisions and creates uniform standards of investment protection. Thus, it is a

tool for the multilateralization and harmonization of substantive protection72.

3.2.3 Invoking Procedural Provisions: Relevant Cases

In Maffezini v. Spain73, the investor invoked the MFN clause in order to

circumvent the eighteen months waiting period contained in the Argentina-Spain

BIT and to rely on a shorter period of six months contained in the host state’s

third treaty, Spanish-Chilean BIT. The Tribunal adopted the teleological method

interpretation of the provisions of the treaty. The Maffezini Tribunal relied on

Article 31 of VCLT, based on the interpretation of the object and purpose of the

treaty, in order to establish whether the term ‘treatment’ included the dispute

settlement provisions. The Tribunal used in its analysis the principles of ejusdem

generis74, in order to determine the treatment accorded to the investor,

establishing whether the subject matter of the MFN clause might be narrower than

the subject matter of the basic treaty75. The Tribunal found no reason to make any

difference between the substantive and procedural provision of the treaty because

it considered that the investment protection was ‘inextricably related to the

protection of the foreign investors’76. The Maffezini Tribunal established four

situations77 related to the public policy as restrictions in the application of the

MFN clause, which cannot be overridden by the investor. The Tribunal mentioned

this exception in order to avoid the negative consequences of the hypothetical

situation of the broad application of the MFN clause, such as ‘disruptive treaty

shopping’. These public policy considerations were highly debated. The critique

72

See S. Schill, Multilateralization of International Investment Law, Chapter V Multilateralization and corporate structuring, Cambridge University Press, 2009 73Maffeziniv.Spain,ICSIDCaseno.ARB/97/7, http://www.italaw.com/sites/default/files/case-documents/ita0481.pdf.

75 Maffezini v. Spain, ICSID Case no ARB/97/7, Decision on Jurisdiction, paras. 54-55, hhttp://www.italaw.com/sites/default/files/case-documents/ita0479. 76 Ibid, para. 54. 77 Ibid para. 63, The Tribunal mentioned the following : ‘a) the exhaustion of local remedies; b) ‘fork in the road’ clause which prevented investor to submit a claim to arbitration while the same cause of action where pending in front of domestic Courts or vice versa; c) the establishment of a highly institutionalized system of arbitration; d)the consent to a particular forum’.

30

was mostly related to the theoretical aspect of the lack of clarification and the

practical aspect of how it can be applied. The Tribunal admitted the claim,

circumvented the waiting clauses, and allowed the investor to rely on more

favoured rights of a six month waiting period, provided for in the host state’s third

treaty.

In the Simens v. Argentina case, the Tribunal followed the rationale from the

previous case, Maffezini. The case concerned the investor’s claim to incorporate

benefits from a host state’s third treaty without being bound by the other

restrictive provisions of the same agreement. The basic Germany-Argentina

treaty, which contained the MFN clause, provided for a cool-off period of

eighteen months before submitting a claim to an arbitral tribunal. In order to avoid

such a restrictive situation, the investor invoked the treaty’s MFN clause to

benefit from a less restrictive cool of period, namely the six months provided for

in the Argentina-Chilean BIT. In this case, the Tribunal allowed the investor to

‘cherry pick’ the more favourable provisions. And, in fact, by doing this, it

emphasized that the MFN clause operates independently from the other provisions

of the BIT. The Tribunal interpreted the treaty provision in the light of its object

and purpose, in accordance with the disposition of Article 31 of VCLT. In this

sense, it reached the conclusion that the treatment accorded to the investor

necessarily includes the procedural provisions of dispute settlement78. In its

analysis, the Tribunal linked the notion of treatment with activities related to

investment. Consequently, the Siemens Tribunal allowed the investor to rely on

more favourable dispute settlement provision in other host state’s BIT. The

reasoning provided by the Tribunal was that ‘in fact, the purpose of the MFN

clause is to eliminate the effect of special provisions, unless they have been

excepted’79. It also noticed that, the MFN clause ‘complements the undertaking of

each State Party not to apply measures discriminatory to investment under Article

2’80. In this case, the Tribunal clearly emphasized that the MFN clause can

78

Siemens A.G. v. Argentina, ICSID Case No. ARB/02/08, para. 102. https://www.italaw.com/sites/default/files/case-documents/ita0788.pdf. 79 Ibid. para. 106. 80 Ibid.

31

selectively imports benefits, without importing other limitations form the third-

party treaty81.

In Gas Natural v. Argentina, the Tribunal reaffirmed the reasoning provided in the

Maffezini and Siemens case. The Tribunal considered that, the MFN clause should

not be subject to a specific treaty interpretation; instead, it has to be interpreted as

any other provisions of the treaty. Gas Natural Tribunal established that the right

of the investor to recourse to investor-Sate arbitration is essential to the treatment

of the foreign investor82.

In Salini v. Jordan, the investor invoked the MFN clause included in the Italian-

Jordanian BIT in order to import boarder consent to jurisdiction from the British-

Jordanian BIT and the US-Jordanian BIT. The investor sought to submit a

contractual claim under the ICSID arbitration for a final payment due to two

Italian construction companies. These two treaties allowed the investor to bring

claims for the breach of contractual obligation, and the claims for the breach of

treaty provisions. The basic treaty Italian-Jordan BIT, kept the investor in a

restricted jurisdiction position referring to the contractual disputes in a selected

forum83 and allowed the investor to bring a claim under the ICSID Convention

only for violation of the treaty provisions. The Tribunal rejected the claim on the

ground that it lacked jurisdiction and refused to rule on the merits of the case. The

81 Ibid. para. 108: ‘as regard the issue of whether the claim of a benefit under an MFN clause triggers application of whole treaty, it depends on the term of the clause, but only to the extent that it is advantageous to the beneficiary of the clause. The MFN clause would be of limited use otherwise. This understanding does not mean that the investor in Argentina will enjoy a more favourable treatment than the investor in Chile. The MFN clause works both ways. The investor in Chile will be able to claim similar benefits under Chile BIT’. 82

Gas Natural SDG SA v. Argentina, ICSID Case No. ARB/03/10, para 29: ‘The Tribunal considered that the crucial issue is whether or not the dispute settlement provisions of bilateral investment treaties constitutes part of the bundle of protections granted to foreign investors by the host states (...) it is a crucial element-indeed perhaps the most crucial element (...) as essential to a regime of protection of foreign direct investment’; https://www.italaw.com/sites/default/files/cas-documents/ita0354.pdf. 83 Salini v. Jordan ICSID Case, Decision on Jurisdiction, para. 66 provided for Article 9 (2) from Italian-Jordan BIT: ‘In case the investor and the entity of the contracting Parties have stipulated an investment Agreement, the procedure foreseen in such investment Agreement shall apply’; https://www.italaw.com/cases/documents/955.

32

Tribunal used the presumption that MFN clause applied only to what parties

specifically intended to apply. Therefore, the MFN clause could not import a

broader basis of jurisdiction from the host state’s third-country BITs84. The Salini

Tribunal qualified this situation as a possible ‘risk of treaty shopping’.

In Plama, the Claimant tried to swap an ad-hoc UNCITRAL arbitration with an

ICSID arbitration by importing provisions from a host state’s third treaty. The

investor claimed access to ICSID in order to benefit from its perceived advantages

of a self-contained system. The basic treaty Bulgarian-Cypriot BIT restricted the

investor to invoke only disputes related to the amount of compensation for

expropriation. Thus, the investor sought to import throughout the MFN clause

more favourable right related investor-State arbitration for any breach of the

treaty. The presumption adopted by the arbitral Tribunal in its reasoning was that:

the MFN clause has to have a clear language; that the parties intended to apply to

issues of investor-State dispute settlement85, and that the parties need to have the

host state’s consent in order to exercise jurisdiction86. Based on these main

arguments, the Tribunal rejected the extended jurisdiction based on the MFN

clause. The Plama Tribunal used the principles of esjusdem generis in order to

establish what parties intended treatment accorded to investor means. The

Tribunal was not clear whether the notion of treatment included substantive

provisions and, or procedural provisions. Therefore, the Tribunal noticed the

differences between two categories of provisions87 and pointed to the principle of

separability for a hypothetical application of the MFN clause88. The Plama

Tribunal concluded that MFN clause would not fulfil the ‘clear and unambiguous’

89requirement and decline to accept broader jurisdiction.

84 Ibid. para. 119: ‘ In the event that, in this case, the dispute is between a foreign investor and an entity of the Jordanian State, the contractual disputes between them must, in accordance with Article 9 (2), be settled under the procedure set forth in the investment agreement. The Tribunal has no jurisdiction to entertain them’. 85

Plama v. Bulgaria, ICSID Case NO.ARB/03/24, para. 199. https://www.italaw.com/sites/default/files/case-documents/ita0669.pdf 86 Ibid. 198. 87 Ibid para.209. 88 Ibid para. 212.

89

Ibid 223.

33

The decisions in Telenor, Berscader and Wintershall all accepted, with certain

nuances, the principled approach of jurisdictional decision in Plama90.

In the RosInvestCo case the investor invoked MFN in order to extend the dispute

resolution clause mentioned in Article 8(1) of the UK-Russia BIT from ‘any

dispute (...) concerning the amount or payment of compensation under Article 4 or

5 of this Agreement, or concerning any other matter consequential upon an act of

expropriation (...), or concerning the consequence of the non implementation, or

incorrect implementation, of Article 6 of this Agreement’ 91 to the more favoured

clause mentioned in Article 8 of the Denmark-Russia BIT, ‘any dispute which

may arise between an investor of one Contracting Party and the other Contracting

Party in connection with an investment on the territory of that other Contracting

Party shall be subject to negotiations between parties in dispute’.92

Put differently, by way of the MFN clause, the Claimant attempted to rely on a

jurisdiction which was not available in the applicable BIT, and have all its claims

heard. The Tribunal in RosInvestCo considered that, the consent to arbitrate the

dispute about the lawful expropriation includes ‘the notion of investor use,

enjoyment, or their disposal of their investments’ and qualifies it a more

favourable treatment93.The Tribunal noticed that, the effect of the MFN clause

was to extend the protection offered to the foreign investors94.

Then, the Tribunal considered the existence of explicit exceptions to MFN

treatment in Article 7 of the BIT, which indicated that the MFN clause was

90

Telenor Mobile Communications A.S. v. Hungary, ICSID Case No. ARB/04/15, Award 13 Sept. 2006, https://www.italaw.com/sites/default/files/case-documents/ita0858.pdf; Berschader v. Russian, SCC Case No. 080/2004 Award,https://www.italaw.com/sites/default/files/case-documents/ita0079_0.pdf; Wintershall v. Argentina ICSID Case No. ARB/04/14, Award, https://www.italaw.com/sites/default/files/case-documents/ita0907.pdf. 91 UK-Russia BIT, Article 8 (1), www.investmentpolicyhub.unctad.org/IIA/country/175/treaty/2861. 92 Denmark-Russia BIT Article 8 (1), www.investmentpolicyhub.unctad.org/IIA/country/175/treaty/1281. 93

RosInvestCo v.Russia, SCC case no V 079/2005, Award on Jurisdiction, para. 130, https://italaw. Com/sites/default/files/case-documents/ita0719.pdf.

94

Ibid. para.131-132:‘by transferring the protection accorded in another treaty...Tribunal sees no reason not to accept in the context of procedural clauses such as arbitral clauses. Quite on the contrary, it could be argued that, if it applies to substantive protection, then it should apply even more to ‘only procedural protection’.

34

understood broadly by the contracting parties and included all subject matters of

the basic treaty, unless explicitly excluded95.

The RosInvestCo case concerns the scope of application of the dispute settlement

clause and it is the first case where the MFN clause in a BIT has catapulted a

claimant from the dispute settlement mechanism in one BIT to that of another

BIT96. The Tribunal admitted that the MFN clause, coupled with the broader

consent to arbitration in third-country BITs establish jurisdiction.

The conclusion of the foregoing analysis expressly raises the tension between the

broad and the narrow interpretation and application of the notion of ‘treatment’.

The content of the notion of ‘treatment’ viewed in a restrictive manner

encompasses the substantive obligations granted by the State to the investor, while

the broad notion of ‘treatment’ also includes the dispute resolution mechanism. It

is clear that MFN incorporates more favourable provisions from home state’s

third treaty and that in this way it creates a uniform level of substantive

protection. It is also agreed that, the MFN clause can circumvent pre-arbitration

restriction, such as less favourable waiting periods, to other more favourable ones

mentioned in the host state’s third treaty. The arbitral jurisprudence supports the

conclusion that, the procedural protection of foreign investor is only partly

multilateralized by means of MFN clause.

This chapter covers how MFN works in practice. It is fair to say that, the MFN

clause in investment will guarantee the investor a uniform treatment of protection.

An investor who benefits from a BIT is also entitled to a most favourable

treatment accorded to a foreign investor from another country. Thus, the MFN

clause provides investors with the protection they need, creates a multilateral form

of treatment of foreign investors towards a universal system. The MFN

jurisprudence is making an important contribution to the multilateralization of the

investment.

95 Ibid. para 135.

96

K. Hober, Selected Writings on Investment Treaty Arbitration, MFN Clause and Dispute Resolution in Investment Treaties: Have we reached the end of the Road?, p 317 Graficas Cems, 2013

35

Chapter IV

Concluding Remarks

This thesis has sought to contribute to the analysis of the role of the MFN clause

through an examination of the ways in which it can possibly bring about

changes on the content and on the balance of the BIT and, consequently, offer

an answer to the questions raised: whether the MFN clause is a tool for

multilateralization of the treatment of protection of foreign investor or whether,

it is a disruptive mechanism.

The analysis revealed that the MFN is equipped to possibly change the content

of the BIT. It has to be underlined that, this does not imply disturbing the

balance of the BIT. On the other hand, the MFN clause multilateralizes

investment law by creating a uniform protection regime for the investor.

The BITs establish rights and obligations and coordinate State behaviour on a

bilateral basis. They are an expression of a uniform system of investment

protection, which orders the actions of investors and states. BITs establish a

regime that supports investment cooperation between states. Investment treaties

are designed to provide a legal framework for structuring investor-state relations

and reflect the state interest on having uniform rules regarding the standards of

treatment for the foreign investor. This is confirmed by the inclusion of the MFN

clause in every BIT. The role of this clause in investment treaties is that of

creating a level playing field for foreign investment. In this way, it regulates the

international investment relations between investors and states on principles of

non-discriminatory treatment. The MFN clause allows the foreign investor to

change his level of investment protection by opting for another protective regime,

included in an investment treaty between the host state and a third country. Thus,

invoking the MFN clause, the foreign investor might modify the content of the

BIT by changing its own regime of protection, established by the states party,

with another, more favourable one.

36

The BIT allows the investor to pursue his direct rights, and to use the dispute

settlement mechanism in view of contributing to the multilateralization of

international investment law. This arrangement is recognized by the arbitral

Tribunal in the way they resolve investor-State disputes. They have adopted a

manner of interpreting not only the BITs, but their functioning correlation as a

network of investment treaties also. This emerged especially when the arbitral

Tribunal are faced with interpreting the MFN clause and its application. This

conduct of the arbitral Tribunals reflects a multilateral rationale. Thus, arbitral

practice has shown that the MFN clause can import substantive provision from

third country BITs more favourably. Arbitral Tribunals also agree that the MFN

clause can circumvent restrictive pre arbitral conditions by more favourable ones

mentioned in third-country BITs. Only RosInvestCo Tribunal accepted that the

MFN clause can import broader consent to arbitration from third country BITs.

Even if this latter decision is still debatable, it reflects what kind of changes the

MFN clause may bring to the content of the BIT, and emphasizes the underling

rationale of creating a uniform level playing field for investors in any host state.

Finally, this interpretation and application of the MFN clause should not be

shadowed by concerns such as the disruptive effect of ‘treaty shopping’. These

arguments are incompatible with the principles of MFN treatment because they

contradict the benefits of non-discrimination and equal competition. These

critiques are based on policy arguments against the MFN treatment. Invoking the

MFN clause, the investor seeks the most favourable protection offered by the third

country BIT, without shopping for random advantages. There is no legal argument

to support such a position. The MFN application harmonizes the relation between

states to protect investment; in no way it does not harm it. Therefore, all the

arguments provided, support the application of the MFN clause and reinforces its

purpose – that of harmonizing the investment treaty arbitration.

37

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