THE PRINCIPLE OF FAIR AND EQUITABLE TREATMENT IN INVESTMENT LAW

ABSTRACT

Phrased as “just and equitable treatment” and having its origin in the 1948 Havana Charter for an International Trade OrganizationThe principle of fair and equitable treatment has gained significant importance in the economic world. This is intended to protect foreign investors against host nation policies that are unfair, arbitrary, or abusive. However, many parts of its comprehension are hazy due to its broad definition. This article explores FET’s historical origin, significance, and predominantly contentious applicability. It examines how this standard’s application is influenced by public demands, investor’s interest and host state expectations. The article delves into the ongoing controversies about the relationship of FET with the minimum standard of treatment in international investment law. By analyzing a few case studies, the article aims to understand and dictate the key interpretations of this principle. The article explores the symbiotic relationship of FET with the Rule of Law and Human Rights. It concludes by supporting a few policy options aimed at enhancing the predictability of FET and advocating for escalating the frameworks to strengthen FET’s assertiveness in a positive direction.

KEYWORDS

Fair & Equitable, Controversy, FET Interpretations, Rule of Law, International Investment Law, Investor, Host State, Human Rights, Customary International Law.

INTRODUCTION

In today’s international investment agreements (IIAs), the fair and equitable treatment (FET) requirement is integral. However, equality and fairness-based standards of treatment existed before contemporary IIAs. FET provisions, which are utilized in BITs and other IIAs, first emerged in early international economic accords including the Economic Agreement of Bogotá (1948) and the Havana Charter for an International Trade Organization (1948), as well as in the Friendship, Commerce, and Navigation (FCN) treaties of the United States. Article I of the Draft Convention on Investments Abroad, which Hermann Abs and Lord Shawcross presented in 1959, is where the FET clause was first used in the framework of the IIA. Slowly and gradually, the widely used standard of FET was developed drastically in Bilateral Investment Treaties (BITs) from 1960 onwards. Subsequently, these early treaties included FET standards without any specific definition in place and were favoured mostly by developed countries. Moving forward, the principle of fair and equitable treatment became a subject of controversy and confusion due to its vague definition and differing interpretations, particularly after 1997.

KEY ELEMENTS OF FET WHICH COULD BE CONSIDERED AS BREACH OF THE OBLIGATIONS

Prohibition of Manifest Arbitrariness: It needs to be pointed out that state behaviour and measures are tempered by the rational ground of decisions and are not by any prejudice or bias. Measures taken without an ostensible purpose or rational explanation could well fall under the category of manifestly arbitrary and thereby breach the FET requirements.
Denial of Justice: FET has included the obligation not to deny justice in any judicial or administrative proceeding. This includes both civil and criminal matters, to guarantee that investors have fair access to the whole process.
Due Process and Procedural Fairness: The host states ought to respect basic tenets of due process, including public hearing and compliance with due process of law. A grave breach of due process may be found to have breached the FET.
Targeted Discrimination: FET prohibits such discrimination against foreign investors on manifestly wrongful grounds such as race, gender, or religion. Therefore such targeted discriminatory measures negatively affecting foreign investments may breach the FET standard.
Abusive Treatment: The standard affords protection against abusive treatment of investments, including coercion, duress, and harassment by the state authorities. Such treatment undermines the fairness that should be obtained under the FET.
Protection of Legitimate Expectations: The legitimate expectations of investors partake in representations made either by the host state or established practices which must be honoured. This aspect emphasizes that investors ought to be able to rely upon the legal and regulatory framework when making investment decisions.
Good Faith and Transparency: The host states are bound to act in good faith with and be transparent toward foreign investors. Transparency entails providing clear information regarding regulations and policies that affect investments.
Ensuring Balance: The principle of proportionality requires that measures taken by the host state should be appropriate, necessary, and proportional, and should not disproportionately affect the investor’s rights.

IMPORTANT FACTORS INFLUENCING ‘FAIR AND EQUITABLE TREATMENT’

Public demands-

Public demand often drives the regulatory landscape within which foreign investments operate. Governments may implement regulations that reflect societal needs, such as environmental protection, public health, or labour rights. For instance, when public health concerns arise, states may impose stricter regulations that could influence foreign investments, as seen in tobacco control measures in the context of the WHO Framework Convention on Tobacco Control (FCTC). Obtaining a social license from local communities sometimes becomes important for the effective operation of a firm in such circumstances. This creates a conflict between meeting public interests and committing to treating investors reasonably with due respect.

Take for instance the case of India. In response to public demand for economic security and protection against opportunistic takeovers during the COVID-19 pandemic, India passed Press Note 3 (2020) which mandated governmental clearance before any Flow of Foreign Direct Investment (FDI) from countries sharing a land border with India, especially aimed at controlling potential hostile takeovers. National security and economic stability were public concerns reflected in the demand for societal protection against global instabilities. Since then, India has approved 124 FDI proposals, while rejecting 201, a sign of caution concerning foreign investments amid public concern about their influence in the critical sectors.

Investor-host relationship-

The host-investor relations dictate a significant relationship concerning Fair and Equitable Treatment (FET) standards in international investment law based on mutual expectations and the balancing of rights. With these expectations determined based on state representations concerning the stability of regulations and protection of investments while entering an FDI-host country, investors will claim violations of the FET whenever such expectations are compromised—for instance, regulatory unexpected changes. Conversely, host states expect compliance with local laws and protection of the public interest; thus the relation to balance the interests of both sides has to be carefully settled.

The partnership tries to strike a mutually beneficial balance between a state’s right to regulate and the protection of foreign investment. While states have the authority to enact legislation for public health and safety, any of these measures may be considered arbitrary or discriminatory, giving rise to a FET violation claim. The presence of arbitration-worthy dispute resolution options indicates that the rule of law process is committed to upholding investor protections while allowing states to justify regulatory actions.

CONTROVERSIES AND/OVER DIVERGENT INTERPRETATIONS OF FET

Customary International Law Status –

In a sustained controversy, FET faces the interesting question of whether it has reached the status of customary international law. Some argue that it is outlined in enough bilateral investment treaties (BITs) and international investment agreements (IIAs) that there is sufficient state practice for it to be established as a customary norm. In this case, the standard would, therefore, bind all states, even with no separate covenant. However, many scholars and most tribunals reject this proposition, claiming that state practice on the matter is neither consistent nor binding. The argument is also made on the view that if FET were customary law, states would not need to include it in treaties.

Take for example the Paushok v. Mongolia case. The imposition of a windfall profit tax on gold sales above a specific price was the subject of the UNCITRAL arbitration in Paushok v. Mongolia, which was conducted under the Russia-Mongolia BIT. The tribunal determined in 2011 that the windfall profit tax did not violate the BIT. However, by assuming possession of the gold, exporting it overseas for refinement, and depositing it or its value in an unallocated account in England to boost the nation’s currency reserves, the tribunal did conclude that Mongolia had violated the BIT’s principle of fair and equal treatment. Although the claimants were instructed by the tribunal to express their desire to pursue damages, no such claim was ever filed.

Disagreement between developed countries and developing countries over some time concerning the minimum standard of treatment (MST) also adds difficulty to the acceptance of FET as customary law. Besides, there is no firm indication from the developing countries that they consider themselves bound to offer FET as a matter of international law.

Relationship of FET with Minimum Standard of Treatment-

Another important controversy involves the relationship between FET and the minimum standard of treatment (MST) under customary international law. Some observers argue that FET is simply a component of, or at least complementary to, the MST. Others assert that FET represents an autonomous standard distinct from the MST. This debate is further complicated by the fact that there is no clear definition of what MST means; arbitral tribunals diverge on what this means. Some tribunals have attempted to treat the two standards in this regard as one while other tribunals have treated them as separate concepts thus complicating the scenario.

In an interpretation issued by the NAFTA Free Trade Commission, it was stated that FET is part of the customary minimum standard for the treatment of aliens in international law. However, the different interpretation and application of treaty language by many BIT tribunals cannot but make it more difficult to arrive at an integrated interpretation. The S.D. Myers v. Canada case exemplifies the contrasting views that different tribunals take by interpreting FET as part of the MST whereas other cases distinguish the two. Such divergences meant there was no consensus on the relationship between the two standards.

Unqualified FET-

In investment treaties, particularly in so-called old-generation agreements, the unqualified FET is the most frequently employed method. The host state must treat everyone fairly and equally, according to the unqualified FET. There are differing interpretations due to the unqualified FET formulation and the intrinsic absence of a precise definition.

For instance, the tribunal in MTD Equity Sdn. Bhd. v. Chile evaluated the words “fair” and “equitable” in their ordinary meaning and determined that they stand for “just,” “evenhanded,” “unbiased,” and “legitimate,”. Whereas the tribunal in S.D. Myers, Inc. v. Government of Canada determined that they stand against “treatment in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective”.

Scope, Content, and Consistency of FET-

There is much debate surrounding the ambit and content of the FET doctrine, as to whether it is a stand-alone standard or simply the restatement of some existing principles of international law. Some tribunals have interpreted FET very liberally, having its application over a blend of factors, including transparency, consistency, and protection of legitimate expectations. Others are bound to interpret the exact text of the treaty or even consult its link with customary international law and might adopt the more conservative approach. There is no general acceptance of levels of specificity that the standard may assume and the kinds of state behaviour that should be included. The divergence of arbitral opinions on the import of FET has done little to create a uniform application of the doctrine.

For instance, cases such as Metalclad v. Mexico and Tecmed v. Mexico link each other in the interpretation of the Fair and Equitable Treatment (FET) standard with regard to transparency, predictability, and legitimate expectations. Metalclad established a need for the existence of a transparent and predictable legal framework. The Mexicans in Metalclad argued that the failure to provide proper and clear rules and processes violated FET standards. Tecmed used the notion of legitimate expectations as a condition; hence, they said states should act consistently and not arbitrarily, should be absolutely clear in their dealings with foreign investors, and should observe the laws and regulations concerning their actions. Both cases underlined the significance of procedural fairness and due process, including the right to be heard. The Tecmed tribunal also based its decision on good faith. Despite these similarities, the sweeping approach of Metalclad was overturned by another tribunal, which determined that arbitral decisions were inconsistent and that the definition of the scope of FET remained unresolved.

Legitimate Expectations-

The concept of “legitimate expectations,” while becoming very significant in the context of FET, has also raised much controversy. Most provisions of FET do not specifically mention it, but arbitral tribunals have developed the concept. Tribunals have used it in evaluating whether or not some action of the host state has adversely affected the investor’s reasonable expectations. However, there is disagreement as to what constitutes “legitimate expectations.” Some tribunals interpret this as requiring manifest and clear undertakings and representations by the state, while others may accept general and vague assertions made to the public. Such divergence leads to inconsistencies and unpredictability on what this standard requires.

In Bilcon v. Canada, the tribunal found that encouragement by the state was enough to create legitimate expectations while, in Charanne v. Italy, such encouragement was deemed insufficient. In CMS v. Argentina, LG&E v. Argentina, Enron v. Argentina, Sempra v. Argentina, and BG v. Argentina, tribunals concluded that Argentina had violated fair and equitable treatment once this country “seduced” investors with a regulatory framework designed to attract investment.

These judgments showcase the difficulty in establishing reasonably definitive standards for what amounts to a legitimate expectation, with the result that they can often lead to vastly different results. Other tribunals have applied a much lower standard based on legitimate expectations.

State’s Sovereign Right To Regulate-

Right of State to Regulate The impact of FET on the State’s right to regulate in the public interest is highly contested. The overly broad interpretation of FET by the tribunals may restrict a State’s ability to implement any regulatory change for fear that it may trigger an investor claim. This tension is heightened when states find it necessary to undertake actions which fall broadly under such headings as public health, environmental protection, and some other social objectives. Some commentators view FET as having turned into a catch-all clause that allows for frivolous claims without paying heed to the situation of developing countries and would undo the ability of states to cater to domestic needs. The recurring challenge nonetheless remains the balancing of investment protection and the regulatory power of the states.

To illustrate, in the case of Methanex v. United States, the Methanex Corporation, a Canadian company, brought arbitration under NAFTA Chapter 11, claiming $970 million in damages because of California’s ban on the gasoline additive MTBE (methyl tertiary-butyl ether). The ban was enacted against the backdrop of environmental concerns, especially concerning groundwater contamination. Methanex alleged that the ban violated several provisions of NAFTA which included national treatment (Article 1102), minimum standard of treatment (Article 1105), and expropriation without compensation (Article 1110).

The tribunal ruled in favour of the United States and found that the regulatory measures were not discriminatory and pursued legitimate public policy goals of protecting public health and the environment. In addition, it found that Methanex failed to prove that California officials intended to harm foreign investors or favour domestic producers. The importance of the case goes beyond its direct legal implications, creating precedent on the questions of amicus curiae submissions and public hearings in international investment arbitration, reiterating the necessity of balancing investor protections against the rights of states to regulate for the public good.

SYMBIOTIC RELATIONSHIP OF FELT WITH “RULE OF LAW” & “HUMAN RIGHTS”

Rule Of Law-

The relationship between fair and equitable treatment and the rule of law is a critical aspect of international investment law, and a multitude of sources assert that fair and equitable treatment should be understood as, among other things, an epitome of the rule of law. This would have provided a basis upon which the often vague and flexible FET standard would be construed, such that all actions taken by the host state towards foreign investors would be within a legal framework that was ascertainable, rational, and fair.

The rule of law is not a single entity but encompasses many sub-elements that go to the substance of the FET standard, such as legality-in which actions by states must comply with existing laws; due process, whereby both administrative and judicial proceedings must adopt fair procedures; non-arbitrariness, general prohibition against state conduct that is arbitrary and; transparency, whereby all conduct by states would be open for scrutiny.

Further key areas would include legal certainty, predictability, and consistency, alongside the protection of legitimate expectations whereby a state is to respect reasonable expectations formed based on the legal framework, representations, and conduct. In that context, the requirement of non-discrimination asks for equal treatment of investors, oblivious of their nationality, and gives room to reasonableness and proportionality implicating that the state action must be an appropriate response to the public interests.

In general, the relationship between fair and equitable treatment and the rule of law aims to provide a predictable investment environment based on the principles of legality, due process, and transparency.

Human Rights-

The relationship between human rights and Fair and Equitable Treatment (FET) in international investment law is complex and further increasingly highlighted, particularly as it relates to the balance between investors’ protection and states’ obligations to their people.

A key argument is based on the level of international political morality that places a position, so highly higher than others, on a state’s human rights obligations to its citizens above its duties to foreign investors. This is because human rights are seen as fundamental to human dignity and are owed by a state not just to its people but to other states too, conferring a certain legitimacy. Overall, the duality of the issue arising between human rights and FET calls for a more elaborate approach toward appreciating how these two areas could co-exist within international law. While investment treaties develop, the call for integration of human rights concerns into investment arbitration procedures gains momentum so that both investor protection and human rights obligations receive their due attention.

POLICY IMPROVISING MECHANISMS

Not including FET in trade agreements-

Given the unpredictable and sometimes contradicting methods taken by the tribunals, states may consider just omitting (either implicitly or expressly) the general standard of treatment section from their IIAs. This solution is practised in the Brazil Model (2015) as well as in the Pan African Investment Code.

Including only limited elements of the FET principle-

To maintain clarity and protection of both the investor and host from the ambiguous nature of FET’s definition, major elements like a fundamental breach of due process; denial of justice in civil, criminal, or administrative matters; targeted/abusive discrimination; etc could be adopted separately. This would ensure protection against any kind of violation of the agreement.

Adopting and operationalizing FET with the ‘Rule of law’ approach-

The ‘Rule of Law’ approach could be helpful in the uniformity paradox of FET for the time being. The tribunals could decide the case by acknowledging elements such as due process, legitimate expectations from and by the state (explicitly stated though), legality, and arbitrariness, among many. Further, this process could also be based on the doctrine of proportionality and other balancing tests.

CONCLUSION

Standing as a critical, although contentious, milestone development in the field of IIAs, the idea of fair and equitable treatment strikes a difficult balance between protecting investors’ interests and satisfying the needs of a state’s sovereign authority to govern its economy. FET is an important safeguard in a worldwide economic environment. The standard acts as a guiding principle for securing justice against abusive, arbitrary, and discriminatory breaches of agreements throughout

Despite its initial success, there have always been questions regarding its ramifications. The primary disadvantage of FET is its inherent ambiguity, which is compounded by the fuzzy lines of other treaty formulations. This lack of uniformity creates a “regulatory chill” in which states are hesitant to enforce public regulations, which is damaging to both investors and host states.

In essence, there is an urgent need to address these difficulties and resolve the prevailing disagreements in order to meet the demand for the finest. Formulating a uniform FET framework on an international and national scale could help tribunals prepare for the difficult task of deciding the actual components of the problem in each case. Having more detailed treaties in place will thereby reduce misunderstanding concerning FET and meet the needs of an ever-increasing number of bilateral and multilateral trade agreements.

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