Fair and Equitable Treatment in Investment Arbitration - Aceris Law

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Fair and Equitable Treatment in Investment Arbitration • Aceris Law
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Fair and Equitable

Treatment in Investment
Arbitration
23/01/2022 BY ACERIS LAW LLC (HTTPS://WWW.ACERISLAW.COM/AUTHOR/ACERIS/)
Fair and equitable treatment is a prominent standard of protection in investment

arbitration disputes, which is present in most bilateral investment treaties (“BITs”).
[1]
The standard has evolved in post-World War II treaties. The 1948 Havana Charter
for an International Trade Organization (https://www.acerislaw.com/wp-
content/uploads/2022/01/1948-Havana-Charter-for-an-International-Trade-
Organization.pdf) is said to be the first treaty to include “just and equitable
treatment” for investments, although the treaty never came into force.[2]
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 (https://www.acerislaw.com/wp-
https://www.acerislaw.com/fair-and-equitable-treatment-in-investment-arbitration/ 1/16
8/8/22, 12:35 μ.μ. Fair and Equitable Treatment in Investment Arbitration • Aceris Law
content/uploads/2022/01/1967-OECD-Draft-Convention-on-the-Protection-of-
Foreign-Property.pdf), which served as a model for early European BITs.[3]
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.[4]
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.[5]
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.[6]
This formulation can be found in the 2009 Canadian-Czech BIT

(https://www.acerislaw.com/wp-content/uploads/2022/01/2009-Canadian-Czech-
BIT.pdf) (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
(https://www.acerislaw.com/wp-content/uploads/2022/01/NEER-AND-NEER-U.S.A.-
V.-UNITED-MEXICAN-STATES.pdf)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.[7] 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:[8]
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 (https://www.acerislaw.com/wp-

content/uploads/2022/01/Waste-Management-II-v.-Mexico.pdf) (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:[9]
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
(https://www.acerislaw.com/wp-content/uploads/2022/01/Article-1105-of-the-
NAFTA.pdf). The NAFTA Free Trade Commission (https://www.acerislaw.com/wp-
content/uploads/2022/01/NAFTA-Free-Trade-Commission.pdf) 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 (https://www.acerislaw.com/wp-

content/uploads/2022/01/1998-France-Mexico-BIT.pdf) (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.[10]
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 (https://www.acerislaw.com/wp-
content/uploads/2022/01/1999-USA-Bahrain-BIT.pdf) 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

(https://www.acerislaw.com/wp-content/uploads/2022/01/UNCTAD-Series-on-
Issues-in-International-Investment-Agreements.pdf), 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.[11]
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

(https://www.acerislaw.com/wp-content/uploads/2022/01/1969-Vienna-
Convention-on-the-Law-of-Treaties.pdf) 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.[12]
For example, in Azurix Corp. v. Argentina (https://www.acerislaw.com/wp-

content/uploads/2022/01/Azurix-Corp.-v.-Argentina.pdf) (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:[13]
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.[14] For instance, the 2009
China-Switzerland BIT (https://www.acerislaw.com/wp-
content/uploads/2022/01/2009-China-Switzerland-BIT.pdf) (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.[15]
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

(https://www.acerislaw.com/wp-content/uploads/2022/01/Arbitral-tribunals-have-
considered-that-fair-and-equitable-treatment.pdf) “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.”[16]
In Indian Metals v. Indonesia (https://www.acerislaw.com/wp-

content/uploads/2022/01/Indian-Metals-v.-Indonesia.pdf) (PCA Case No. 2015-40),
the tribunal noted that fair and equitable treatment encompasses, inter alia, the
following core principles:[17]
(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.[18] 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).[19]
Many tribunals have accepted legitimate expectations as a subcategory of fair and

equitable treatment. In Southern Pacific Properties (SPP) v. Egypt
(https://www.acerislaw.com/wp-content/uploads/2022/01/Southern-Pacific-
Properties-SPP-v.-Egypt.pdf) (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.”[20]
In Duke Energy v. Ecuador (https://www.acerislaw.com/wp-

content/uploads/2022/01/Duke-Energy-v.-Ecuador.pdf), 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:[21]
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:[22]
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;
foreseeability;
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 (https://www.acerislaw.com/wp-content/uploads/2022/01/EDF-

v.-Romania.pdf) (ICSID Case No. ARB/05/13), the tribunal defined as “arbitrary”:[23]
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
(https://www.acerislaw.com/wp-content/uploads/2022/01/Joseph-Charles-Lemire-
v.-Ukraine.pdf) (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.”[24]
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.’”[25]
2. Transparency
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.”[26]
In Emilio Agustín Maffezini v. Spain (https://www.acerislaw.com/wp-

content/uploads/2022/01/Emilio-Agustin-Maffezini-v.-Spain.pdf) (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.”[27]
In the NAFTA case, Metalclad Corporation v. Mexico

(https://www.acerislaw.com/wp-content/uploads/2022/01/Metalclad-Corporation-
v.-Mexico.pdf) (ICSID Case No. ARB(AF)/97/1), the tribunal interpreted
“transparency” as follows:[28]
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”.[29] (For more information on denial
of justice, see Denial of Justice in International Arbitration
(https://www.acerislaw.com/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:[30]
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.[31]
[1] A. Newcombe and L. Paradell, Law and Practice of Investment Treaties:
Standards of Treatment (2009), p. 255.
[2] P. Dumberry, The Fair and Equitable Treatment Standard: A Guide to
NAFTA Case Law on Article 1105 (2013), pp. 29-30.
[3] Diehl, The Core Standard of International Investment Protection: Fair and
Equitable Treatment (2012), p. 41
[4] R. Islam, The Fair and Equitable Treatment (FET) Standard in International
Investment Arbitration: Developing Countries in Context (2018), p. 53.
[5] Newcombe and Paradell, supra note 1, pp. 264-265.
[6] Islam, supra note 4, p. 53.
[7] Newcombe and Paradell, supra note 1, p. 236.
[8] 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).
[9] 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).
[10] Islam, supra note 4 p. 58.
[11] UNCTAD Series on the Issues in International Investment Agreements

(2012), pp. 22-23.
[13] Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, Award
dated 14 July 2006, para. 360 (emphasis added).
[14] Islam, supra note 4, p. 68.
[15] UNCTAD, supra note 16, p. 22.
[16] See Swisslion DOO Skopje v. The Former Yugoslav Republic of
Macedonia, ICSID Case No. ARB/09/16, Award dated 6 July 2012, para. 273.
[17] 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.
[20] Southern Pacific Properties (Middle East) Limited v. Arab Republic of
Egypt, ICSID Case No. ARB/84/3, Award dated 20 May 1992, para. 82.
[21] Duke Energy Electroquil Partners & Electroquil S.A. v. Republic of
Ecuador, ICSID Case No. ARB/04/19, Award dated 18 August 2008, para. 340.
[23] EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award
dated 8 October 2009, para. 303.
[24] Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on
Jurisdiction and Liability dated 14 January 2010, para. 263.
[25] Ibid, para. 261.
[26] Diehl, supra note 3, p. 369.
[27] 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.
[28] Metalclad Corporation v. The United Mexican States, ICSID Case No.
ARB(AF)/97/1, Award dated 30 August 2000, para. 76.
[29] See, e.g., Dumberry, supra note 2, p. 231.
[30] Metalclad Corporation v. Mexico, supra note 29 at paras. 91 and 97.
[31] Dumberry, supra note 2, p. 232.
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8/8/22, 12:35 μ.μ.

Fair and Equitable Treatment in Investment Arbitration • Aceris Law

Fair and Equitable

Fair and equitable treatment is a prominent standard of protection in investment

Today, fair and equitable treatment is expressed in different ways. As a result,

I. The Different Constructions of

1. Fair and Equitable Treatment

This formulation can be found in the 2009 Canadian-Czech BIT

Investments or returns of investors of either Contracting Party shall at all

The propriety of governmental acts should be put to the test of

In Waste Management II v. Mexico (https://www.acerislaw.com/wp-

2. Fair and Equitable Treatment

For example, the 1998 France-Mexico BIT (https://www.acerislaw.com/wp-

According to the UNCTAD Series on Issues in International Investment Agreements

3. Fair and Equitable Treatment as

Article 31(1) of the 1969 Vienna Convention on the Law of Treaties

For example, in Azurix Corp. v. Argentina (https://www.acerislaw.com/wp-

Investments and returns of investors of each Contracting Party shall at all

Such clauses give significant discretion to arbitrators in interpreting fair and

II. The Content and Scope of Fair

As explained above, fair and equitable treatment is a broad and overarching

Arbitral tribunals have considered that fair and equitable treatment

In Indian Metals v. Indonesia (https://www.acerislaw.com/wp-

1. Foreign Investors’ Legitimate

Many tribunals have accepted legitimate expectations as a subcategory of fair and

In Duke Energy v. Ecuador (https://www.acerislaw.com/wp-

To be protected, the investor’s legitimate expectations must be legitimate

In summary, tribunals tend to assess the following criteria when assessing

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

In EDF v. Romania (https://www.acerislaw.com/wp-content/uploads/2022/01/EDF-

a measure that inflicts damage on the investor without serving any

a measure that is not based on legal standards but on discretion, prejudice

a measure taken in wilful disregard of due process and proper procedure.

‘discriminatory and expose[s] the claimant to sectional or racial prejudice’; or a

In Emilio Agustín Maffezini v. Spain (https://www.acerislaw.com/wp-

In the NAFTA case, Metalclad Corporation v. Mexico

an opportunity to contest that application before an impartial tribunal”, whereas “a

Moreover, the permit was denied at a meeting of the Municipal Town

The actions of the Municipality following its denial of the municipal

[5] Newcombe and Paradell, supra note 1, pp. 264-265.

[6] Islam, supra note 4, p. 53.

[7] Newcombe and Paradell, supra note 1, p. 236.

[10] Islam, supra note 4 p. 58.

[11] UNCTAD Series on the Issues in International Investment Agreements

[12] Newcombe and Paradell, supra note 1, p. 265.

[14] Islam, supra note 4, p. 68.

[15] UNCTAD, supra note 16, p. 22.

[18] Newcombe and Paradell, supra note 1, p. 279.

[19] Newcombe and Paradell, supra note 1, p. 280.

[22] Newcombe and Paradell, supra note 1, p. 286.

[25] Ibid, para. 261.

[26] Diehl, supra note 3, p. 369.

[29] See, e.g., Dumberry, supra note 2, p. 231.

[31] Dumberry, supra note 2, p. 232.

© 2014-2022 · ACERIS LAW LLC (HTTPS://WWW.ACERISLAW.COM/) · LEGAL NOTICE