Fair and equitable treatment is a prominent standard of protection in investment arbitration disputes, which is present in most bilateral investment treaties (“BITs”).
The standard has evolved in post-World War II treaties. The 1948 Havana Charter for an International Trade Organization is said to be the first treaty to include “just and equitable treatment” for investments, although the treaty never came into force.
In the following decades, the standard was included as a term in several draft investment conventions, such as the 1967 OECD Draft Convention on the Protection of Foreign Property, which served as a model for early European BITs.
Today, fair and equitable treatment is expressed in different ways. As a result, different interpretations have been given to the term. The hottest debate, however, is whether these different constructions can lead to variations in the substance of the content of the standard.
I. The Different Constructions of Fair and Equitable Treatment in Investment Arbitration
There are several variations in the drafting of fair and equitable treatment provisions, although arbitral tribunals have been keen on interpreting fair and equitable treatment as an autonomous and independent treaty standard.
That said, three main approaches to interpreting fair and equitable treatment based on the BIT’s language have been identified.
1. Fair and Equitable Treatment Subject to the Minimum Standard of Treatment
The minimum standard of treatment is understood as a standing body of customary rules agreed by the host states of investment to protect an alien from another country.
This formulation can be found in the 2009 Canadian-Czech BIT (Article III 1(a)(b)), for instance, which prescribes a treatment not exceeding the treatment required “by the customary international law minimum standard of treatment of aliens” for the concept of fair and equitable treatment:
Investments or returns of investors of either Contracting Party shall at all times be accorded treatment in accordance with the customary international law minimum standard of treatment of aliens, including fair and equitable treatment and full protection and security.
The concepts of “fair and equitable treatment” and “full protection and security” in subparagraph (a) do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.
The seminal case on the minimum standard of treatment was the Neer case before the USA-Mexico Claims Commission, where the United States claimed that Mexico failed to prosecute those responsible for the death of an American citizen. While the Commission did not hold Mexico liable for the failure to prosecute the murders, it provided an explanation of the minimum standard of treatment:
The propriety of governmental acts should be put to the test of international standards, and […] the treatment of an alien, in order to constitute an international delinquency, should amount to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.
Today, Neer’s definition is seen as the lowest standard of conduct that a state can afford to aliens. In this respect, arbitral tribunals have confirmed, on several occasions, that the minimum standard of treatment has been continually “evolving” after Neer.
In Waste Management II v. Mexico (ICSID Case No. ARB(AF)/00/3), under Chapter 11 of the NAFTA, the arbitral tribunal noted that a host state breaches the minimum standard if the treatment accorded to an investor or investment is “arbitrary”, “grossly unfair, unjust or idiosyncratic” or “discriminatory” or if it involves a lack of due process leading to an outcome which offends judicial propriety:
Taken together, the S.D. Myers, Mondev, ADF and Loewen cases suggest that the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety – as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process.
Thus, the Waste Management tribunal addressed several elements that are likely to breach the minimum standard of treatment, such as a denial of justice, a lack of due process, a lack of due diligence, amongst others. This is particularly important with respect to the interpretation of Article 1105 of the now-defunct NAFTA. The NAFTA Free Trade Commission equated Article 1105 with the “customary international law minimum standard”. Therefore, the interpretation of Article 1105, given by NAFTA tribunals, addressed the notion of the minimum standard of treatment under customary law.
2. Fair and Equitable Treatment Subject to the Principles of International Law
A second group combines fair and equitable treatment with international law in general, describing the standard as an obligation to be carried out “in accordance with” the sources of international law.
For example, the 1998 France-Mexico BIT (Article 4(1)) provides for fair and equitable treatment in accordance with the principles of international law:
Either Contracting Party shall extend and ensure fair and equitable treatment in accordance with the principles of International Law to investments made by investors of the other Contracting Party in its territory or in its maritime area, and ensure that the exercise of of [sic] the right thus recognized shall not be hindered by law or in practice.
This formulation may suggest that tribunals should take into account the whole spectrum of international law, including general principles and other conventional obligations, but not only customary international law.
Another formulation linked to international law prohibits the host state to accord fair and equitable treatment less favourable than that required by international law. Article 2(3)(a) of the 1999 USA-Bahrain BIT is an example of this formulation:
Each Party shall at all times accord to covered investments fair and equitable treatment and full protection and security; and shall in no case accord treatment less favourable than that required by international law.
According to the UNCTAD Series on Issues in International Investment Agreements, a tribunal facing such a formulation may go beyond the stipulations of international law, as this obligation sets the floor of protection an investor can claim, and not the ceiling.
3. Fair and Equitable Treatment as an Autonomous Standard
The autonomous interpretation of fair and equitable treatment is the preferred construction amongst arbitral tribunals. This interpretation is based on the ordinary meaning of the treaty wording combined with the typical expressed purpose of BITs.
Article 31(1) of the 1969 Vienna Convention on the Law of Treaties provides that “[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.” Article 31(1), therefore, indicates that the standard should be read in accordance with its ordinary meaning and with regard to the overall purpose of BITs.
For example, in Azurix Corp. v. Argentina (ICSID Case No. ARB/01/12), the tribunal relied on the BIT’s purpose to “promote” and “stimulate” foreign investments to interpret the fair and equitable treatment provision:
It follows from the ordinary meaning of the terms fair and equitable and the purpose and object of the BIT that fair and equitable should be understood to be treatment in an even-handed and just manner, conducive to fostering the promotion of foreign investment. The text of the BIT reflects a positive attitude towards investment with words such as ‘promote’ and ‘stimulate.’ Furthermore, the parties to the BIT recognize the role that fair and equitable treatment plays in maintaining ‘a stable framework for investment and maximum effective use of economic resources.’
Some BITs refer to fair and equitable treatment delinked from international law or the minimum standard of treatment. These provisions imply that fair and equitable treatment is an autonomous and separate standard. For instance, the 2009 China-Switzerland BIT (Article 4(1)) stipulates an autonomous formulation of fair and equitable treatment:
Investments and returns of investors of each Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party.
Such clauses give significant discretion to arbitrators in interpreting fair and equitable treatment. This may lead to the inclusion of types of governmental actions that, in the past, fell outside the scope of fair and equitable treatment.
II. The Content and Scope of Fair and Equitable Treatment in Investment Arbitration
As explained above, fair and equitable treatment is a broad and overarching standard, which contains several elements of protection, including those traditionally associated with the minimum standard of treatment under customary international law.
Arbitral tribunals have considered that fair and equitable treatment “basically ensures that the foreign investor is not unjustly treated, with due regard to all surrounding circumstances, and that it is a means to guarantee justice to foreign investors.”
In Indian Metals v. Indonesia (PCA Case No. 2015-40), the tribunal noted that fair and equitable treatment encompasses, inter alia, the following core principles:
(1) the host state must respect the investor’s reasonable and legitimate expectations; (2) the host state cannot act in [sic] arbitrary or discriminatory; (3) the host state must act in a transparent and consistent manner; (4) the host state is obliged to act in good faith; (5) the host state must respect due process and procedural propriety; (6) the principle of proportionality.
1. Foreign Investors’ Legitimate Expectations
Investors’ legitimate expectations are generally perceived as one’s reliance on a legal and administrative framework when making an initial investment, or expanding an existing one. It is also accepted that investors’ legitimate expectations may be based on the host state’s conduct and representations (typically, in the form of oral or written statements).
Many tribunals have accepted legitimate expectations as a subcategory of fair and equitable treatment. In Southern Pacific Properties (SPP) v. Egypt (ICSID Case No. ARB/84/3), the tribunal held that certain acts of the state’s officials “were cloaked with the mantle of Governmental authority and communicated as such to foreign investors who relied on them in making their investments. Whether legal under Egyptian law or not, the acts in question […] created expectations protected by established principles of international law.”
In Duke Energy v. Ecuador, the tribunal observed that legitimate expectations must be assessed in relation to its existence at the time the investment was made, and in relation to other circumstances of the host state:
To be protected, the investor’s legitimate expectations must be legitimate and reasonable at the time when the investor makes the investment. The assessment of reasonableness or legitimacy must take into account all circumstances, including not only the facts surrounding the investment, but also the political, socioeconomic, cultural and historical conditions prevailing in the host State.
In summary, tribunals tend to assess the following criteria when assessing investors’ legitimate expectations:
- the timing the representation was made;
- if the state made any disclaimer with respect to its undertakings;
- the level of authority of the person making the representation;
- the level of expertise of the parties in assessing the representation;
- changes in circumstances surrounding the investment and the representation;
- the possibility of wrong assumptions on the part of the investor;
- whether the investor sought to protect itself;
- the investor’s conduct.
2. Arbitrary and Discriminatory Measures
Arguably, it can be said that arbitrary measures fail, by definition, to be fair and equitable.
In EDF v. Romania (ICSID Case No. ARB/05/13), the tribunal defined as “arbitrary”:
a measure that inflicts damage on the investor without serving any apparent legitimate purpose;
a measure that is not based on legal standards but on discretion, prejudice or personal preference;
a measure taken for reasons that are different from those put forward by the decision maker;
a measure taken in wilful disregard of due process and proper procedure.
This definition was later adopted by the Joseph Charles Lemire v. Ukraine (ICSID Case No. ARB/06/18) tribunal, which added that “the underlying notion of arbitrariness is that prejudice, preference or bias is substituted for the rule of law.”
With respect to discrimination, the Lemire tribunal made the following observation based on previous case law: “to amount to discrimination a case must be treated differently from similar cases without justification; a measure must be ‘discriminatory and expose[s] the claimant to sectional or racial prejudice’; or a measure must ‘[target] Claimant’s investments specifically as foreign investments.’”
Transparency means that “the legal framework for the investor’s activities and operations is clearly laid out and that any decisions affecting the investor can be traced back to that legal framework.”
In Emilio Agustín Maffezini v. Spain (ICSID Case No. ARB/97/7), the investor alleged that a loan had been transferred by a government institution without the investor’s consent. The tribunal acknowledged that the way the loan was treated lacked transparency and, thus, was “incompatible with Spain’s commitment to ensure the investor a fair and equitable treatment.”
In the NAFTA case, Metalclad Corporation v. Mexico (ICSID Case No. ARB(AF)/97/1), the tribunal interpreted “transparency” as follows:
The Tribunal understands this to include the idea that all relevant legal requirements for the purpose of initiating, completing and successfully operating investments made, or intended to be made, under the Agreement should be capable of being readily known to all affected investors of another Party. There should be no room for doubt or uncertainty on such matters.
3. Due Process
A lack of due process is often associated with the notion of a denial of justice. For some authors, however, due process “requires that one to whom the coercive power of the state is to be applied receive notice of the intended application and an opportunity to contest that application before an impartial tribunal”, whereas “a denial of justice occurs when a breach of due process in the administration of justice is not corrected by the judicial system”. (For more information on denial of justice, see Denial of Justice in International Arbitration.)
There is a consensus amongst scholars that a lack of due process will always be forbidden under international law. In Metalclad, the tribunal noted that the investor was not notified of the Municipal Town Council’s meeting in which its construction permit was rejected:
Moreover, the permit was denied at a meeting of the Municipal Town Council of which Metalclad received no notice, to which it received no invitation, and at which it was given no opportunity to appear
The actions of the Municipality following its denial of the municipal construction permit, coupled with the procedural and substantive deficiencies of the denial, support the Tribunal’s finding, for the reasons stated above, that the Municipality’s insistence upon and denial of the construction permit in this instance was improper.
While denial of justice may encompass due process, the former is perceived in a much broader sense which amounts to a maladministration of the host state’s judiciary. Due process, in turn, applies to all forms decision-making, including measures taken by the government on an administrative and legislative level.
 A. Newcombe and L. Paradell, Law and Practice of Investment Treaties: Standards of Treatment (2009), p. 255.
 P. Dumberry, The Fair and Equitable Treatment Standard: A Guide to NAFTA Case Law on Article 1105 (2013), pp. 29-30.
 Diehl, The Core Standard of International Investment Protection: Fair and Equitable Treatment (2012), p. 41
 R. Islam, The Fair and Equitable Treatment (FET) Standard in International Investment Arbitration: Developing Countries in Context (2018), p. 53.
 Newcombe and Paradell, supra note 1, pp. 264-265.
 Islam, supra note 4, p. 53.
 Newcombe and Paradell, supra note 1, p. 236.
 Neer and Neer (U.S.A.) v. United Mexican States, The Mexican-United States General Claim Commission, Decision dated 15 October 1926, para. 4 (emphasis added).
 Waste Management, Inc. v. United Mexican States (“Number 2”), ICSID Case No. ARB(AF)/00/3, Award dated 30 April 2004, para. 98 (emphasis added).
 Islam, supra note 4 p. 58.
 UNCTAD Series on the Issues in International Investment Agreements (2012), pp. 22-23.
 Newcombe and Paradell, supra note 1, p. 265.
 Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, Award dated 14 July 2006, para. 360 (emphasis added).
 Islam, supra note 4, p. 68.
 UNCTAD, supra note 16, p. 22.
 See Swisslion DOO Skopje v. The Former Yugoslav Republic of Macedonia, ICSID Case No. ARB/09/16, Award dated 6 July 2012, para. 273.
 Indian Metals & Ferro Alloys Limited v. The Government of the Republic of Indonesia, PCA Case No. 2015-40, Award dated 29 March 2019, para. 226.
 Newcombe and Paradell, supra note 1, p. 279.
 Newcombe and Paradell, supra note 1, p. 280.
 Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt, ICSID Case No. ARB/84/3, Award dated 20 May 1992, para. 82.
 Duke Energy Electroquil Partners & Electroquil S.A. v. Republic of Ecuador, ICSID Case No. ARB/04/19, Award dated 18 August 2008, para. 340.
 Newcombe and Paradell, supra note 1, p. 286.
 EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award dated 8 October 2009, para. 303.
 Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on Jurisdiction and Liability dated 14 January 2010, para. 263.
 Ibid, para. 261.
 Diehl, supra note 3, p. 369.
 Emilio Agustín Maffezini v. The Kingdom of Spain, ICSID Case No. ARB/97/7, Award dated 13 November 2000, para. 83; see also Diehl, supra note 3, p. 369.
 Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award dated 30 August 2000, para. 76.
 See, e.g., Dumberry, supra note 2, p. 231.
 Metalclad Corporation v. Mexico, supra note 29 at paras. 91 and 97.
 Dumberry, supra note 2, p. 232.