Violations of the National Treatment standard are often alleged by claimants involved in investment arbitrations. The National Treatment standard has a simple theoretical purpose: to ensure that foreign investors or their investments will be treated no less favourably than domestic investors or their investments.
The application of the National Treatment standard can vary significantly depending on the wording of the clause incorporated in the BIT containing it, however, and in practice raises a number of issues.
Exceptions to National Treatment
The first question to be asked is whether the National Treatment provision applies to all types of investments. In other words, does the clause cover all types of sectors in which an investment has been made?
The answer is typically negative. Host States of investment frequently exclude the application of National Treatment for strategic industries or economic sectors. This is, for instance, the case in the US-Georgia BIT, which is fairly typical, where the National Treatment clause reads:
- With respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of covered investment, each Party shall accord treatment no less favorable than that it accords, in like situations, to investments in its territory or its own nationals or companies (hereinafter “national treatment”) or to investments in its territory or nationals or companies of a third country (hereinafter “most favored nation treatment”), whichever is most favorable (hereinafter “national and most favored nation treatment”). Each Party shall ensure that its state enterprises, in the provision of their goods or services, accord national and most favored nation treatment to covered investments.
- (a) A Party may adopt or maintain exceptions to the obligations of paragraph 1 in the-sectors or with respect to the matters specified in the Annex to this Treaty. In adopting such an exception, a Party mar not require the divestment, in whole or in part, of covered investments existing at the time the exception becomes effective[1].
The specific industries or economic sectors excluded from the application of the National Treatment standard are usually sensitive ones that are traditionally linked to host States’ prerogatives. Such industries include, for instance, government-supported loans, guarantees and insurance and ownership of rights to broadcast[2].
Another question arising out of the application of the National Treatment Standard is related to the moment it applies. A number of BIT’s grant host States a margin of discretion with respect to the conditions under which a foreign investment can be made.
This question is closely linked to the issue of whether the National Treatment standard applies only to the post-establishment phase of a foreign investment or also to the pre-establishment phase. Indeed, “Investment treaties vary as to whether they require national treatment to qualifying foreign investors only after an investment is established in the host state or in the pre-establishment phase as well. The majority of BITs extend such protection only to established investments”.[3]
The Application of the National Treatment Standard: Like Circumstances
The National Treatment standard usually applies only to investments and investors “in like circumstances”. Various arbitral tribunals have had the mission of extracting criteria to determine “like circumstances”.
Like Circumstances: “Direct Competition” Criteria
In many cases, such as in ADF Group, Inc. v. U.S, the issue of likeness is relatively simple, because the foreign investor and the local investor are in direct competition with one another.
For instance, if they are bidding on the same contract, they seem prima facie to be in like circumstances and National Treatment would typically be required.[4]
Like Circumstances: “Same Sector” Criteria
In S.D. Myers, Inc. V. Canada, the arbitral tribunal referred to a 1993 declaration by the Organization for Economic Cooperation and Development (OECD), which stated that “likeness” effectively meant the “same sector”. Consequently, the arbitral tribunal concluded that the “word ‘sector’ has to be taken widely and refers therefore to the concepts of ‘economic sector’ and ‘business sector’”.[5]
Legal and Factual Context in Determining Likeness: Legitimate Policy Measures
The competitive relationship between companies is not the only criteria to take into consideration when determining the applicability of the National Treatment standard, however. In Pope & Talbot Inc. v. Canada, the arbitral tribunal acknowledged the importance of the legal and factual context in determining likeness. In the tribunal’s opinion “treatment will presumptively violate article 1102(2), unless [there] is a reasonable nexus to rational government policies that […] do not distinguish, on their face or de facto, between foreign-owned and domestic companies”.[6]
Relevant Standard of National Treatment: No Less Favourable Treatment
The National Treatment Standard applies to two types of governmental measures:
- Measures that are de jure discriminatory: for instance, a law promulgated by a government that explicitly grants benefits to domestic investors or investments; such a measure could be a law promulgated by a government that explicitly grants benefits or subsidies only to local investors or investments; and
- Measures that are de facto discriminatory: for instance measures that are not discriminatory at first glance but nevertheless discriminate against foreign investors or investments that qualify for BIT protection.
Various arbitral tribunals have had the task of defining the meaning of “no less favourable”.
In Pope & Talbot, the arbitral tribunal found that “no less favorable” treatment means “treatment equivalent to the ‘best’ treatment accorded to domestic investors or investments in like circumstances” to domestic investors. Thus, the tribunal concluded that “no less favorable” had to mean “equivalent to, not better or worse than, the best treatment accorded to the comparator”.[7]
In Feldman v. Mexico, the arbitral tribunal addressed the meaning of less favourable treatment under Article 1102 of NAFTA. In the case, the tribunal stated that limited evidence was sufficient to establish “a presumption and prima facie case” of less favourable treatment. Thus, once a foreign investor provides sufficient evidence of less favourable treatment, the burden shifts to the host State of investment either to rebut that presumption or to provide a reasonable basis for the difference in treatment.[8]
In ADF Group INC. case, the arbitral tribunal failed to find a prima facie case of discrimination or less favourable treatment since under the bridge construction program contract in question all companies were treated identically, whether foreign or domestic.[9]
Proof of Discriminatory Intent Based on Nationality
Another issue is whether a government measure should, in addition to granting less favorable treatment, also discriminate in order to violate National Treatment. According to arbitral tribunals, proof of discriminatory intent is not essential to establishing a breach of the national treatment standard. For instance, in S.D. Myers, the arbitral tribunal concluded that although intent may be important, “protectionist intent is not necessarily decisive on its own”. Rather, “protectionist intent” is one of many factors that should be considered in analyzing a national treatment claim.[10]
However, it should be kept in mind that proof of discriminatory intent can nonetheless be helpful in proving a violation of National Treatment, when a measure is general in nature and ostensibly affects both domestic and foreign investors.
[1] Article II of the US-Georgia BIT.
[2] Annex 1 of the US-Georgia BIT.
[3] Noah Rubins & N. Stephan Kinsella, International Invesments, Political Risk and Dispute Resolution 227-228, Oceana 2005.
[4] ADF Group, Inc. v. U.S., ICSID Case No. ARB(AF)/00/1 (Final Award of Jan. 9, 2003).
[5] UNCITRAL Arbitration, First Partial Award of Nov. 13, 2000.
[6] UNCITRAL/NAFTA Arbitration, Final Merits Award, Apr. 10, 2001.
[7] UNCITRAL/NAFTA Arbitration, Final Merits Award, Apr. 10, 2001.
[8] Marvin Roy Feldman Karpa v. United Mexican States, ICSID Case No. ARB(AF)/99/1.
[9] ADF Group, Inc. v. U.S., ICSID Case No. ARB(AF)/00/1 (Final Award of Jan. 9, 2003).
[10] UNCITRAL Arbitration, First Partial Award of Nov. 13, 2000.
