FairandEquitableTreatmentStandard JHArticle

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The Evolving Nature of the Fair and Equitable Treatment (FET) Standard:
Challenging Its Increasing Pervasiveness in Light of Developing Countries’
Concerns - The Case for Regulator...
Article in The Journal of World Investment & Trade · January 2013

DOI: 10.1163/22119000-01401004
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The Journal of
World
Investment & Trade
Law Economics Politics
The Journal of World Investment & Trade 14 (2013) 114–146 brill.com/jwit
The Evolving Nature of the Fair and Equitable

Treatment (FET) Standard: Challenging Its Increasing
Pervasiveness in Light of Developing Countries’
Concerns - The Case for Regulatory Rebalancing
Jason Haynes*
LL.B (Hons), University of the West Indies; LL.M, University of Nottingham
PhD (Candidate), Durham University
j.k.haynes@durham.ac.uk
Abstract
The fair and equitable treatment (FET) standard is undoubtedly a key feature of most
International Investment Agreements concluded by developing countries today. In practice
however, the standard raises a number of potent concerns which have not gone unnoticed. This
article accordingly attempts to critically analyze the increasing intrusiveness of the FET stand-
ard in light of growing concerns expressed by developing countries following a number of large
arbitral awards which have been handed down against them. In this regard, the article not only
challenges the conceptual underpinnings of the standard but also the substantive elements
which have become synonymous with it. It concludes by providing an approach to regulatory
balancing which would reposition the FET standard in the context of other investment protec-
tion standards as well as the standing of developing countries.
Keywords
fair and equitable treatment; investment; developing countries; legitimate expectations; regu-
latory re-balancing
Introduction
The fair and equitable treatment (FET) standard has been increasingly
invoked (with a success rate of 62 per cent)1 as a substantive ground for chal-
lenging unlawful acts or omissions on the part of host states in a number of
arbitral awards.2 The evolutionary nature of the FET standard, as well as its
*) The author is grateful for the assistance of Professor Mary E. Footer, Professor of International
Economic Law at the University of Nottingham.
1) A Reinisch, Standards of Investment Protection (Oxford University Press, Oxford 2008) 2.
2) United Nations Conference on Trade and Development, Fair and Equitable Treatment,
UNCTAD Series on Issues in International Investment Agreements II (United Nations,
New York 2012) 1.
© Koninklijke Brill NV, Leiden, 2013 DOI 10.1163/22119000-01401004
J. Haynes / The Journal of World Investment & Trade 14 (2013) 114–146 115
increasingly pervasive character have however raised a number of potent

concerns which have not gone unnoticed.3 Indeed, not only are developing
countries particularly concerned about the overly intrusive formal legal under-
pinnings of the standard, but concerns have also been expressed about the
uncertain nature of the standard in practice in light of its overwhelming ability
to expose major policy gaps in the regulatory prospectuses of these countries.4
These gaps, as Argentina,5 for example, has proved, if left unamended, could
potentially signal the opening of the proverbial floodgates, not only to the det-
riment of already vulnerable economies, but more significantly,6 to the well-
being and sustainable livelihoods of taxpayers in these countries.7 In this
regard, this paper seeks to critically examine the increasing pervasiveness of
the FET standard in light of growing concerns being raised by developing
countries. Specifically, Part 1 will examine the historical and conceptual under-
pinnings of the standard, while Part 2 will seek to address the various substan-
tive elements which have become synonymous with it. Part 3 will conclude the
paper by proposing approaches to regulatory rebalancing which will effec-
tively assist in shifting the pendulum to greater reflect both the concerns and
interests of developing countries, though not at the expense of good govern-
ance and adequate investor protection.
Part I
A. Historical Dimensions of the FET Standard
The existence of the FET standard in international investment agreements

(IIAs) is by no means a new phenomenon.8 In fact, the very first citing of the
3) Rudolf Dolzer, ‘The Impact of International Investment Treaties on Domestic Administrative

Law’ (2005) 37 New York University Journal of International Law and Politics 953, 964; See also,
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford
University Press, Oxford 2008) 122.
4) See eg. El Paso Energy International Company v. Argentine Republic, ICSID Case No. ARB/03/15,
Award, 31 October 2011, para 230.
5) Of the 123 cases now pending at ICSID, 33 are against Argentina. The total amount of the
claims is not known, but estimates range from 8 to 80 billion dollars.
6) William Burke-White, ‘The Argentina Financial Crisis: State Liability under BITs and the
Legitimacy of the ICSID System’ (2008) 3 Asian Journal of WTO & International Health Law and
Policy 199.
7) Jose Alvarez & Katherine Khamsi, ‘The Argentine Crisis and Foreign Investors: A Glimpse
into the Heart of the Investment Regime,’ in K.P. Sauvant, ed., Yearbook on International
Investment Law & Policy (Oxford University Press, Oxford 2009).
8) Benedict Kingsbury and Stephan Schill, ‘Investor-State Arbitration as Governance: Fair and
Equitable Treatment, Proportionality and the Emerging Global Administrative Law,’ in Albert
116 J. Haynes / The Journal of World Investment & Trade 14 (2013) 114–146
standard could be gleaned from the 1948 Havana Charter for an International
Trade Organisation,9 which, though it never became fully effective, undoubt-
edly influenced subsequent developments in so far as the evolution of the
standard is concerned. Indeed, this proved to be the case later that very
same year when the Economic Agreement of Bogotà,10 though objected to by
Guatemala and Mexico,11 was signed. In the same vein, the 1950s and 1960s saw
the continued evolution of the FET standard with such clauses appearing with
increasing frequency in investment protection texts such as the Abs-Shawcross
and OECD draft treaties as well as a number of BITs concluded by the United
States around this time.12 Indeed, it appears that from that time onwards,
the FET standard managed to find its way into both draft and formally ratified
international and regional instruments, including the Draft UN Code of Con
duct on Transnational Corporations,13 the 1985 Multilateral Investment Guar
antee Agency Convention,14 Article 1105 of the North American Free Trade
Area (NAFTA) Agreement (1993), the Colonia15 and Buenos Aires Protocols to
the Common Market of the South (MERCOSUR) (1994),16 the Common Market
for Eastern and Southern Africa (COMESA) treaty,17 and the 1995 Energy
Charter Treaty (ECT).18 In short, the standard’s increasing prominence in the
more than 2600 bilateral investment treaties (BITs) as well as regional and
multilateral investment treaties in existence today is indicative of the fact that
both its scope and content have indeed evolved overtime19 and it has certainly
become somewhat of a standard feature of most projects relating to the pro-
tection of foreign investment in developing countries.20
Jan van den Berg, ed., 50 Years of the New York Convention, ICAA Congress Series no 14 (Kluwer
Law International, 2009) 2.
9) See Article 11(2) <http://www.wto.org/English/docs_e/legal_e/havana_e.pdf> accessed 25
June 2012.
10) <http://www.oas.org/juridico/spanish/tratados/a-43.html > accessed 25 June 2012.
11) <http://www.oas.org/juridico/english/Sigs/a-43.html> accessed 25 June 2012.
12) OECD, ‘Fair and Equitable Treatment Standard in International Investment Law’ in
A Companion Volume to International Investment Perspectives (OECD Publishing 2005) 4.
13) UNCTAD, The Draft United Nations Code of Conduct on Transnational Corporations and
the OECD Guidelines for Multinational Enterprises, UN Doc. ST/CTC/SER.A/4, Annex 1; 23
I.L.M. 626 (1984).
14) See Article 12(d) <http://www.miga.org/sitelevel2/level2.cfm?id=1107> accessed 25 June
2012.
15) See Articles 3.1.
16) See Article 2.C.1. See generally, M Haines Ferrari, The MERCOSUR Codes (London 2000).
17) See Article 159 <http://www.comesa.int/attachments/article/28/COMESA_Treaty.pdf>
accessed 25 June 2012.
18) See Article 10.1 <http://www.encharter.org/index.jsp> accessed 25 June 2012.
19) Meg Kinnear, ‘The Continuing Development of the Fair and Equitable Treatment Standard’
(2009) Investment Treaty Law: Current Issues III 209.
20) Stephen Vasciannie, ‘The Fair and Equitable Treatment Standard in International Investment
Law and Practice’ (1999) 70 Brit. Yb. Int’l Law 99.
B. Conceptual Underpinnings
I. The FET Standard as a Pervasive Norm in IIAs

The FET standard is undoubtedly a prominent feature of most IIAs con
cluded by developing countries today.21 Indeed, the standard can be aptly
described as the grund norm of modern foreign direct investment agree-
ments,22 effectively embodying the cardinal principle of the rule of law.23
Viewed as a yardstick for the exercise of developing countries’ administrative,
judicial or legislative powers vis-à-vis foreign investors,24 the FET standard
has taken on a heavyweight life of its own, in effect, redefining acceptable
restraints on state sovereignty25 whilst ringing in changes to the legal frame-
work governing investments in these countries.26 In short, as Dr. Francis Mann
has explained:
The right to fair and equitable treatment goes much further than the right to most-favoured-
nation and to national treatment … So general a provision is likely to be almost sufficient to
cover all conceivable cases …27
Suffice it to say, while the FET standard undoubtedly has far-reaching

implications for governments in developing countries, no effective conceptual
analysis of the standard can be completed without first establishing some pre-
liminary points. In the first instance, one must bear in mind the fact that devel-
oping countries have complete sovereignty over their territorial space, though
they may choose, subject to specific commitments enshrined in investment
agreements, to allow foreign investors / investments to operate in their terri-
tory.28 Once admission has been granted however, the investor becomes sub-
ject to the legal infrastructure of the state in question, while the government,
21) Christoph Schreuer, ‘Fair and Equitable Treatment in Arbitral Practice’ (2005) 6 J. WORLD
INVESTMENT & TRADE 357; see also, Rudolf Dolzer, ‘Fair and Equitable Treatment: A Key
Standard in Investment Treaties’ (2005) 39 INT’L LAW. 87.
22) See n 20, above. See also, Catherine Yannaca-Small, ‘Fair and Equitable Treatment Standard
in International Investment Law’ 3 OECD Working Papers on International Investment (OECD
Publishing 2004) 3. The standard appears prominently in almost all of the approximately 2400
bilateral investment treaties (BITs) as well as regional and multilateral investment treaties.
23) S Schill, ‘Fair and Equitable Treatment under Investment Treaties as an Embodiment of The
Rule of Law’ (2006) 3(5) TDM 4.
24) Ibid.
25) I. Knoll-Tudor, ‘The fair and equitable treatment standard and human rights norms’, in
P.M. Dupuy, F. Francioni & E.U Peters Mann, Human Rights in International Investment Law and
Arbitration (Oxford University Press, Oxford 2009) 323.
26) Rudolf Dolzer, ‘The impact of international investment treaties on domestic administrative
law’ (2006) 37 N.Y.U. J. Int’L L. & Pol. 953.
27) F A Mann, ‘British Treaties for the Promotion and Protection of Investments’ (1981) 52
BYIL 241.
28) M Sornarajah, The International Law on Foreign Investment (3rd edn Cambridge University
Press, Cambridge 2010) 193.
in all of its actions, is bound by rules fixed and announced beforehand29 –

rules which make it possible to ‘foresee with a fair degree of certainty how the
authority will use its coercive powers in given circumstance.’30 Therefore,
the FET standard, with its sharp rule of law characterization, not only refers to
the formal quality of law as a means of providing guidance for the affairs of
foreign investors,31 but also to the ‘institutional aspiration that governments in
developing countries have to use law as a means of exercising power.’32 In
short, procedural requirements must necessarily be complied with, and where
investors’ interests are affected by the decisions of the host state, certain
rights33 and remedies34 must also be afforded.
II. Divergent Perceptions

Despite universal acceptance of the importance of foreign direct investments
to the vulnerable economies of many developing countries,35 there is increas-
ing divergence in perceptions held by investors, on the one hand, and develop-
ing countries, on the other, with regard to both the definitional and normative
content of the FET standard, a basic principle found in most investment agree-
ments. From the perspective of foreign investors, governments in developing
countries must seek to adopt a particular approach to governance which is
encapsulated in the obligations to ‘act in a consistent manner, free from ambi-
guity and in total transparency, without arbitrariness and in accordance with
the principle of good faith.’36 Indeed, as Professor Detlev Vagts has argued, the
FET standard, being the embodiment of these principles, ‘protects against acts
or omissions taken by host states which are designed to make the investor’s
business unprofitable.’37 It is against this backdrop that foreign investors have
demanded of governments in developing countries robust protection of their
29) Andrew T. Guzman, ‘Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of
Bilateral Investment Treaties’ (1998) 38 Virginia Journal of International Law 639-88.
30) F Hayek, The Road to Serfdom (Routledge Publishing, London 1944) 54.
31) Waldon, ‘Is the rule of law an essentially contested concept?’ (2002) 21 Law and
Philosophy 137.
32) R Fallon, ‘The “Rule of Law” as a concept in constitutional discourse’ (1997) 97 Columb. L.
Rev 14.
33) D Dyzenhaus, ‘The rule of law in international law’ (2005) 68 Law and Contemp.
Prob., 127, 129.
34) Katia Yannaca-Small, Fair and Equitable Treatment Standard: Recent Developments’ in
August Reinisch (ed), Standards Of Investment Protection (OUP 2008) 111-30.
35) See generally, UNCTAD, South-South Cooperation in International Investment Agreements
UNCTAD/ITE/IIT/2005/3 (2005) <www.unctad.org/en/docs/iteiit20053_en.pdf> accessed 30
June 2012.
36) Tecmed v Mexico ICSID Case No ARB (AF)/00/2 award of 29 May 2003: 23 ILM 133 (2004)
paras 154-5.
37) Detlev Vagts, ‘Coercion and Foreign Investment Rearrangements’ (1978) 72 AM. J. INT’L L.
17, 34-35.
property rights,38 effectively making claims against unpredictable or arbitrary

outcomes of government actions which chill the overall efficiency of the
investment climate.39 In short therefore, from an investor’s point of view,
maintaining a constitutional and administrative framework that actually func-
tions represents a substantial advancement of the rule of law and the imposi-
tion of the FET standard in a top-down manner is perhaps the most efficient
means of ‘bypassing the powerful practices of local elites and special interests
groups, who are one of the main culprits responsible for the institutional
weaknesses of developing countries.’40
Conversely however, while developing countries have accepted the validity
of at least some of the aforementioned arguments, they have been careful to
underscore that the FET standard should not be understood as an absolute
guarantee but rather as a principle that allows for a balance between invest-
ment protection and their public interest.41 In the same vein, there has been
mounting objection to the conceptual underpinnings of the FET standard
with developing countries fearing that it will be disproportionately applied
against them by developed countries seeking to uphold the rights of foreign
investors at all expense.42 Interestingly, in the estimation of some commenta-
tors, what was once merely a fear has now become the fate of many developing
countries, particularly in light of increasingly large arbitral awards which have
been handed down against Argentina, for example, over the last decade.43
Indeed, as Hoekman and Newfarmer have pointed out, ‘the legal and macroe-
conomic consequences of this development are largely unknown, and are
without precedent.’44
III. An Interpretive Conundrum?

At a conceptual level, developing countries contend that even where an inter-
pretation of the ordinary meaning45 of ‘fair’ and ‘equitable’ treatment replaces
38) R. Posner, ‘Creating a Legal Framework for Economic Development’ (1998) 13 World Bank
Research Observer 1.
39) Schill (n 23).
40) Santiago Montt, State Liability in Investment Treaty Arbitration: Global Constitutional and
Administrative Law in the BIT Generation (Hart Publishing 2009) 40.
41) Mark Kantor, ‘Fair and Equitable Treatment: Echoes of FDR’s Court-Packing Plan in the
International Law Approach Towards Regulatory Expropriation’ (2006) LPICT 231.
42) Brian Tamanaha, ‘The Lessons of Law and Development Studies’ (1995) 89 American
Journal of International Law 478.
43) Luke Peterson, ‘Czech Republic Hit with Massive Compensation Bill in Investment Treaty
Dispute’ (2004) Invest-SD News Bulletin (Geneva: International Institute for Sustainable
Development).
44) B Hoekman and R Newfarmer, ‘Preferential Trade Agreements, Investment Disciplines and
Investment Flows’ (2005) 39 Journal of World Trade 966.
45) See Article 31 of the Vienna Convention on the Law of Treaties (1969) 1155 UNTS 331.
these terms with corresponding terms such as “just”, “even-handed”, “unbiased”

or “legitimate”,46 this does ‘not succeed in clarifying the normative content of
the FET standard nor does it resolve the issue of fundamental vagueness which
has plagued the standard for a number of years.’47 In the same vein, these
countries remain adamant that even a teleological approach to interpreta-
tion48 ‘hardly provides a more specific meaning to the standard.’49 In short,
developing countries take issue with the fact that there is no uniform method-
ology in existence to determine whether certain actions taken by their govern-
ments violate the FET standard in specific circumstances.50
At present, there appears to be a fundamental disparity between the fre-
quency with which the FET standard is invoked by foreign investors against
developing countries in arbitral tribunals and the ‘astonishingly fundamental
lack of conceptual understanding about the principle’s normative content.’51
Indeed, as Schill has noted, arbitral tribunals are seemingly ill-equipped to
tackle the ‘interpretative conundrum posed by the vagueness of the fair and
equitable treatment standard.’52 Specifically, developing countries contend
that far too often, arbitral tribunals unwittingly place onerous conditions upon
them through their interpretive methodologies which have the effect of chill-
ing their regulatory space. Further, even where some attempt has been made
at applying traditional methods of treaty interpretation, developing countries
have maintained that this has proved relatively ineffective in clarifying the
meaning and normative content of the FET standard.53 Indeed, in cases where
tribunals have followed an approach which extensively describes specific con-
duct on the part of host states and simply characterize them as a violation of
46) See Siemens A.G. v. Argentina, ICSID Case No. ARB/02/08, Award, 6 February 2007. Para 290.
47) Porterfield, ‘An International Common Law of Investor Rights?’ (2006) 27 U. Pa. J. Int’l Econ.
L. 79; Carlos Garcia, ‘All the Other Dirty Little Secrets: Investment Treaties, Latin America, and
the Necessary Evil of Investor-State Arbitration’ (2004) 16 Fla. J. Int’l L. 301, 350. See also, Alex
Genin, Eastern Credit Limited, Inc. and A. S. Baltoil v. Republic of Estonia, ICSID Case No
ARB/99/2, Award of June 25, 2001, par. 367; Ronald S. Lauder v. The Czech Republic, UNCITRAL,
Award of Sept. 2, 2001, par. 292; CMS Gas Transmission Company v. The Republic of Argentina,
ICSID Case No. ARB/01/8, Award of May 12, 2005, par. 273.
48) Noble Ventures, Inc. v. Romania, ICSID Case No. ARB/01/11, Final Award of Oct. 12, 2005, par.
52. The tribunal warned that a teleological interpretation should not simply lead to an interpre-
tation of bilateral investment treaties in dubio pro investorem i.e. exclusively in favour of
investors.
49) Dolzer and Stevens, Bilateral Investment Treaties (Martinus Nijuhoff Publishers, 1995) 11.
50) Cf Peter Muchlinski, Multinational Enterprises and the Law (1st edn Oxford University Press,
Oxford 1995) 625 (arguing that FET is a concept that ‘depends on the interpretation of specific
facts for its content.’)
51) Schill (n 23) 5-6.
52) Ibid.
53) Cf Mondev v. United States (supra note 12), par. 118, stressing that “[a] judgment of what is
fair and equitable cannot be reached in the abstract; it must depend on the facts of the particu-
lar case”.
fair and equitable treatment standard, developing countries contend that this
approach still does not clearly explicate the normative content of the FET
standard as it leaves the legal reasoning underlying these decisions obscure. In
the same vein, even where tribunals have sought to place ‘extensive reliance
on prior arbitral practice’,54 developing countries contend that this approach is
problematic in light of the fact that Article. 53(1) ICSID-Convention provides
that ‘the award shall be binding on the parties [to the dispute].’55 In short
therefore, by failing to establish a clear normative or prescriptive content of
the FET standard, developing countries argue that arbitral tribunals should be
reproached for handling the standard as a ‘malleable tool of ex post facto con-
trol of their policy measures based on arbitrators’ personal conviction and
understanding about what is “‘fair and equitable.”’56 In this regard, it can be
argued that the overall conceptual understanding of the FET standard, from
the perspective of developing countries, appears to be that the less guidance
provided to arbitrators, ‘the more discretion is involved and the closer the pro-
cess resembles decisions ex aequo et bono, that is, based on the arbitrators’
notions of “fairness” and “equity”.’57
IV. Focal Points and Questions of Interest

It is submitted that from a conceptual point of view, shifting the responsibility
of concretizing the meaning of the FET standard to arbitral tribunals is prob-
lematic. Similarly, a vague conceptual understanding of the FET standard
would continue to yield inconsistent decisions, thereby fostering the ‘fragmen-
tation of international investment law.’58 There is therefore a need for a clearer
conceptual approach to the normative content of the FET standard which
would help to clarify the conceptual foundations of the standard while gener-
ating a sustainable understanding of the rights and obligations of investors
vis-à-vis developing countries. Indeed, given the FET’s ‘potential to reach fur-
ther into the traditional domaine reserve of developing countries than any one
of the other rules of [investment] treaties’,59 a clearer delineation between
investors’ rights and state sovereignty is urgently needed.60 In short however,
54) See for example Waste Management, Inc. v. The United Mexican States, ICSID Case No.
ARB(AF)/00/3, Award of 30 April 2004, par. 89.
55) C.H. Schreuer, The ICSID Convention: A Commentary (Cambridge, Cambridge University
Press, 2001) Art. 53 para. 15.
56) Schill (n 23) 7.
57) Catherine Yannaca-Small, ‘Fair and Equitable treatment standard in international invest-
ment law (2006) 13 Journal of International Economic Law (China) 3, 22.
58) Aaken, Anne van, ‘Fragmentation of International Law: The Case of International Investment
protection’ (2008) Finnish Yearbook of International Law 38.
59) Dolzer (n 2).
60) Charles Brower & Stephan Schill, ‘Is arbitration a threat or a boon to the legitimacy of inter-
national investment law?’ (2009) 9 Chi. J. Int’l L. 471, 474.
as it stands at present, it appears that developing countries are no longer con-

cerned about whether the FET standard protects foreign investors more than
it does them, but rather, whether, at a conceptual level, the FET standard effec-
tively balances competing interests,61 and to what extent should the standard
be crystallized into a clear, flexible and responsive set of rules which will ena-
ble ‘regulatory rebalancing’.62
C. A Diverse Range of Formulations
While an increasingly diverse range of formulations reflecting the FET stand-

ard can be found to exist in the plethora of international investment agree-
ments concluded by developing countries today, it appears that overtime three
distinct formulations have become most prominent. Indeed, each of these for-
mulations have profound implications, not only in terms of the standard’s con-
tent, but also the types of host state measures which can be challenged, as well
as the required threshold for finding a violation. It is against this backdrop that
it is indeed necessary to critically examine these formulations in light of
mounting concerns being expressed by developing countries.
I. A Fair and Equitable Treatment Clause Linked to International Law

A growing number of IIAs concluded by developing countries today contain
FET clauses which are expressly linked to international law.63 It is submitted
that a clause of this nature requires a review of all applicable sources64 of
international law so as to ascertain whether the conduct of a host state in any
particular case breaches the FET standard. Indeed, where this formulation is
used, it appears that international law will set the floor (minimum level) of
protection which can be claimed by an investor.65 Importantly, as the tribunal
in Vivendi has indicated, an FET clause linked to international law cannot be
regarded as equating to the minimum standard of treatment provided for
under customary international law as it supports a broader reading that invites
consideration of ‘contemporary principles of international law, not only
61) Peter Muchlinski, Multinational Enterprises and the Law (2nd end Oxford University Press,
Oxford 2007) 635-637.
62) Vaughan Lowe, ‘Changing Dimensions of Internatio nal Investment Law’ (2007) Oxford
Legal Studies Research Paper No. 4, 53.
63) See eg. Article 4(1) of the BIT between France and Mexico (1988).
64) These sources, in accordance with Article 38 (1) of the ICJ statute include (a) international
conventions (b) customary international law (c) general principles of international law and (d)
judicial decisions and the teachings of the most highly qualified publicists. See Mondev (n 53)
para 119 cited in ADF Group Inc. v. United States of America (ICSID Case No. ARB (AF)/00/1)
(NAFTA), Award 9 January 2003, para 184; Waste Management (n 53) para 96.
65) See eg. Article 2(3)(a) of the BIT between Bahrain and United States (1999).
principles from almost a century ago.’66 It is however submitted that while the
evolutionary nature of international law, and indeed the principles prescribed
therein, is undeniable, the problem with this approach, from a developing
country perspective, is that it gives too much leeway for interpreting an already
overly intrusive FET standard, effectively rendering it no different from an
unqualified FET standard. It is submitted that this is indeed an unfortunate,
and perhaps unintended, result which has been achieved mainly through arbi-
tral awards, with sitting adjudicators seemingly being unconcerned about the
practical implications which rulings of this magnitude have on the regulatory
and policy space of developing countries, the majority of whom having already
been disadvantaged from the outset as a result of inequitable bargaining posi-
tions vis-à-vis powerful foreign investors from developed countries. Further,
arbitral practice appears to be quite divergent on the issue of what exactly
constitutes the threshold of liability under which developing countries, who
are primarily host states, will incur liability for a breach of the FET standard.
Against this backdrop and in light of the increasingly pervasive nature of the
FET standard when linked to international law,67 it is submitted that develop-
ing countries are better off preemptively cutting their losses by using the alter-
native of qualified FET clauses when negotiating IIAs.
II. An FET Clause Linked to the Minimum Standard of Treatment of Aliens

under Customary International Law
Mexico, in the context of NAFTA, as well as a number of other developing
countries (outside of NAFTA)68 have entered into a diverse range of IIAs which
expressly link the FET standard to the minimum standard of treatment pro-
vided for under customary international law. While it appears that the NAFTA
Free Trade Commission69 might have signaled the death knell for any interpre-
tation which renders the FET standard “additive”70 to the international mini-
mum standard,71 tribunals outside of the context of NAFTA, even accepting
66) Compañiá de Aguas del Aconquija S.A. and Vivendi Universal v. Argentine Republic, ICSID
Case No. ARB/97/3, Award, 20 August 2007, para. 7.4.7.
67) Rudolf Dolzer, ‘Fair and Equitable Treatment: A Key Standard in Investment Treaties’ (2005)
39 International Lawyer 87.
68) See eg. Article 5 of the BIT between the United States and Uruguay (2005). See also, The
Agreement Establishing the ASEAN-Australia-New Zealand Free Trade Area (2009); The Japan-
Philippines FTA (2006); The China-Peru FTA (2009); The Malaysia-New Zealand FTA (2009);
and the India-Republic of Korea Comprehensive Economic Partnership Agreement (2009).
69) NAFTA Free Trade Commission: Notes of interpretation of certain Chapter 11 provisions,
31 July 2001.
70) Pope and Talbot v. Canada, UNCITRAL Case, Award on the Merits (April 10, 2001).
71) Tribunals following the NAFTA FTC Note have taken the view that the international mini-
mum standard of treatment equates to the standard afforded under customary international
law. See eg. Mondev (n 53) para 122; United Parcel Service of America Inc. v. Government of
Canada, Decision on Jurisdiction, 22 November 2002, para 97; ADF Group (n 60) para 199.
this interpretation as persuasive authority, have continued to grapple with

the issue of what is the appropriate threshold necessary for finding a host state
liable for having breached the FET standard. Indeed, it has been widely
acknowledged that despite the plethora of references to a ‘minimum standard
for the treatment of aliens’, such a concept remains relatively underdeveloped,
at least in relation to investors, who are primarily economic actors, and their
property. Apart from the indeterminate content of this so called ‘minimum
standard’, it also appears that developing countries are continuously mystified
by the vastly divergent ways in which tribunals have sought to interpret the
minimum standard of treatment applicable to foreign investors. Indeed, while
some tribunals have set a rather high threshold, thereby giving some leeway
and regulatory space to developing countries, others have sought to set an
indeterminately low threshold for incurring liability.
The Threshold of Liability: A Shifting Pendulum

The starting point for any discussion on the issue of what constitutes the
threshold of liability under customary international law is the Neer Claims
case. In that case, which involved the failure of Mexican authorities to appre-
hend and prosecute the perpetrator of a homicide, rather than injury to an
economic entity, the General Claims Commission explained that liability for
falling below the international minimum standard arises where the treatment
meted out by the state ‘amounts to an outrage, to bad faith, to willful 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.’72 It is submitted that this threshold is undeniably high and, if
applied today in investor-state disputes, may effectively serve to better ensure
that developing countries are afforded the necessary regulatory space to effect
measures in the interests of their economies, potentially so even where foreign
investors might be treated harshly. However, while this approach has gained
growing support on some fronts,73 the preponderance of authority seems to
point in the direction of an evolving minimum standard.74 Indeed, it might
72) Neer v. Mexico, US-Mexican Claims Commission 1927.

73) See eg. Waste Management (n 54) in which an equally high threshold for incurring liability
was espoused. The tribunal stated that, “[T]he minimum standard of treatment of fair and
equitable treatment is infringed by conduct attributable to the State and harmful to the claim-
ant 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.”
74) ADF Group Inc (n 60) para 179. The tribunal explained that “what customary international
law projects is not a static photograph of the minimum standard of treatment of aliens
as it stood in 1927 when the Award in the Neer case was rendered. For both customary
even be argued that the Neer standard has been abandoned since the Mondev
case,75 which ruled that there has been considerable development in both sub-
stantive and procedural rights under customary international law and that,
therefore, ‘what is unfair and inequitable need not be equated with the outra-
geous or egregious.’76
Suffice it to say, it is submitted that while in theory linking the FET standard
to the minimum standard of treatment under customary international law,
ought to rein in the discretion of tribunals when considering the standard’s
content, the difficulty with this approach, at least from the perspective of
developing countries, is that it ‘presupposes the existence of a general consen-
sus as to what constitutes the minimum standard of treatment of aliens under
customary international law.’77 In reality however, the minimum standard
itself is ‘highly indeterminate, lacks a clearly defined content and requires
interpretation.’78 Furthermore, the question of whether the Neer standard has
been abandoned in favour of a lower threshold for incurring state liability has
not been definitively resolved, and is unlikely to be in the near future, since
arbitral tribunals are not bound to apply recent precedent on this point.79
Moreover, even where it is accepted that the FET standard is in a state of devel-
opment, the process of actually establishing the content of an FET customary
international law standard applicable across the board, based on state practice
and opinio juris, is ‘methodologically difficult.’80 As awards of arbitral tribu-
nals do not share a common approach to the interpretation of clauses relating
to fair and equitable treatment, developing countries continue to face a high
degree of unpredictability and uncertainty in determining what sort of treat-
ment they should mete out to foreign investors when attempting to effectuate
reform. In short therefore, it is submitted that, for as long as the minimum
standard of treatment remains largely underdeveloped and indeterminate, at
international law and the minimum standard of treatment of aliens it incorporates, are con-
stantly in a process of development.” See also, Azurix Corp. v. The Argentine Republic (ICSID
Case No. ARB/01/12), Award 14 July 2006, para 368; Siemens AG v. Argentina (ICSID Case No.
ARB/02/8) (Germany/Argentina BIT) Award 6 February 2007 para 295.
75) Mondev (n 53) para 116, 117, 125.
76) MTD Equity v. Chile, ICSID 2004. The tribunal stated that, “[fair and equitable treatment]
should be understood to be treatment in an evenhanded and just manner, conducive to foster-
ing the promotion of foreign investment. Its terms are framed as a pro-active statement – ‘to
promote’, ‘to create’, ‘to stimulate’- rather than prescriptions for a passive behavior of the State
or avoidance of prejudicial conduct to the investors.”
77) UNCTAD (n 2) 28.
78) Ibid.
79) G. Guillaume, ‘The Use of Precedents by International Judges and Arbitrators’ (2011) 2
Journal of International Dispute Settlement 5.
80) I. Tudor, The Fair and Equitable Standard in International Foreign Investment Law (Oxford
University Press, Oxford 2008) 73–85.
least with respect to economic actors (as opposed to natural persons), devel-
oping countries should rightly continue to resist any interpretation which
seeks to further perpetuate the intrusiveness of an already pervasive FET
standard.
III. An Unqualified, Autonomous or Self-Standing FET Standard

Increasingly, more and more developing countries are signing onto IIAs which
use an unqualified formulation which does no more than state the obligation
of a host State to accord fair and equitable treatment to foreign direct invest-
ments. In this context however, an interesting question has arisen: should arbi-
tral tribunals construe such a clause81 as equating to the minimum standard of
treatment afforded aliens under customary international law? The views on
this issue appear to be vastly divergent. On the one hand, foreign investors
have been vociferous in championing the idea that where unqualified formu-
lations are used, arbitral tribunals should interpret the FET standard on a case-
by-case basis by reference to general notions of “fairness” and “equity”,82 while
on the other, policy makers in developing countries are concerned that such
an overly expansive reading of the formula could potentially retard important
changes to their legal and economic infrastructure.
Suffice it to say, it is important to note that the former position, that is, that
tribunals should seek to interpret an unqualified FET standard as delinked
from customary international law, thereby focusing on the plain meaning
of the terms “fair” and “equitable” treatment,83 has gained increasing momen-
tum with growing support from key commentators in the field of interna
tional investment law.84 Indeed, from Dr. F.A. Mann85 in the 1980s to Professor
81) See eg. Article II (2) of the 2001 BIT between Cambodia and Cuba (2001). See also, Article 4
of the 2001 BIT between China and Switzerland BIT (2009).
82) National Grid PLC v Argentina (Award of 3 November 2008) UNCITRAL Arbitration,
Para 167.
83) S. Nesbitt in L. Paradell, ‘The BIT Experience of the Fair and Equitable Treatment Standard’,
in F. Ortino, L. Liberti, and A. Sheppard (eds), Investment Treaty Law: Current Issues II (2007)
140.
84) See eg. Klein Bronfman, ‘Fair and Equitable Treatment: An Evolving Standard] Max Planck
(2006) UNYB 10; G. Aguilar and W. Park, ‘The New Face of Investment Arbitration: NAFTA
Chapter 11’ (2003) 28 Yale J. Int’l L. 365; Kirkman, ‘Fair and Equitable Treatment: Methanex vs.
United States and the Narrowing Scope of NAFTA article 1105’ (2002) 34 Law and Policy in
International Business Review 343, 390; P.G. Foy and R.J.C. Deane, ‘Foreign Investment
Protection under Investment Treaties: Recent Developments under Chapter 11 of the North
American Free Trade Agreement’ (2001) ICSID Review – FIJL 16.
85) F.A. Mann (n 27). The author explained that “…the terms ‘fair and equitable treatment’
envisage conduct which goes far beyond the minimum standard and afford protection to a
greater extent and according to a much more objective standard than any previously employed
form of words.” A Tribunal would not be concerned with a minimum, maximum or average
standard. It will have to decide whether in all circumstances the conduct in issue is fair and
Schreuer in the late 2000s, most authors contend that, as a matter of textual
interpretation, it is ‘inherently implausible that a treaty would use an expres-
sion such as “fair and equitable treatment” to denote a well known concept
like the minimum standard of treatment in customary international law.’86 In
the same vein, as Dolzer and Steven have concluded, if the parties to a treaty
want to refer to customary international law it must be presumed that they
will refer to it as such rather than using an unqualified FET clause.87 As a back-
drop of this analysis, it appears that Muchlinski88 and Vasciannie89 might also
be correct in contending that the standard of fair and equitable treatment, as
provided for under an unqualified clause, is autonomous and should therefore
be read independently of the minimum standard under international law.
Indeed, the preponderance of arbitral practice also seems to support this
contention.90
It is however submitted that, at least from the standpoint of developing
countries, the difference between the FET standard and the customary mini-
mum standard, when applied to the specific facts of a case, may well be ‘more
apparent than real.’91 Indeed, it appears that the Tribunal in CMS v. Argentina
might have in fact endorsed this conclusion when it explained that ‘the
required stability and predictability of the business environment, founded
on solemn legal and contractual commitments, is not different from the inter-
national law minimum standard and its evolution under customary law.’92
Should this approach be accepted as correct, developing countries could
equitable or unfair and inequitable....” His view was shared by the tribunals in CMS Gas
Transmission Company (n 47) para 284; Azurix (n 74) para 361; Vivendi (n 66) para 7.4.8.
86) Christoph Schreuer, ‘Fair and Equitable Treatment (FET): Interactions with other Standards’
(2007) 4(5) Transnational Dispute Management 68, 77- 8.
87) Dolzer and Stevens (n 49).
88) P. Muchlinski (n 61).
89) S. Vasciannie (n 20) 139-44.
90) MTD v. Republic of Chile (n 76) paras 110-112; Occidental Exploration and Production Co. v.
Ecuador, Award, 1 July 2004, paras 188-190; CMS Gas (n 47) paras 282-284; Saluka v. Czech
Republic, Partial Award, 17 March 2006, paras 286-29 LG&E v. Argentina, Decision on Liability,
3 October 2006; PSEG v. Turkey, Award, 19 January 2007, para. 239; Siemens v. Argentina (n 45)
para 29.
91) Rumeli Telekom AS and Telsim Mobil Telekomikasyon Hizmetleri AS v Kazakhstan, Award,
ICSID Case no ARB/05/16; IIC 344 (2008). The tribunal found that the distinction between the
treaty standard and the minimum customary international law standard was “theoretical,” and
that the two were not materially different in content (para. 611). See also, Biwater Gauff
(Tanzania) Ltd v Tanzania (Award of 24 July 2008) ICSID Case No ARB/05/22, at para 592. The
tribunal considered that ‘the actual content of the treaty standard of fair and equitable treat-
ment is not materially different from the content of the minimum standard of treatment in
customary international law’.
92) CMS Gas (n 47) paras. 282-84.
potentially make a case that a particularly high threshold,93 as discussed above

in relation to the Neer Claims case, must be met for a finding of state liability
resulting from a breach of the FET standard.94 By contrast, an unqualified FET
clause gives no indication of what threshold must be met to establish a breach,
and in any event, such an ‘open-textured’ approach might never have been
intended when policy makers in developing countries were negotiating appli-
cable IIAs.95 Indeed, it would be remiss of policy makers to wittingly sign on to
a system which resembles a process ex aequo et bono, that is, decisions based
solely on arbitrators’ subjective view of “fairness” and “equity”.96 In short, it is
submitted that any interpretation to the contrary would leave too much of a
wide margin of discretion to arbitrators, thereby leading to ‘an overbroad and
surprising extension of the FET standard towards the review of wide catego-
ries of governmental action previously regarded as being outside the remit of
international law review.’97 Indeed, from a practical standpoint, an unqualified
FET clause, bearing no link to a minimum standard, to the dismay of develop-
ing countries, might very well result in the unintended consequence of ‘a low
liability threshold and [would] bring with it a risk of [most] state regulatory
action [being] in breach of it.’98
Part II – Constitutive Elements of the Fet Standard
In Part I, we carefully examined the historical as well as legal underpinnings of

the FET standard in light of growing concerns being expressed by developing
countries with respect to its increasing pervasiveness. In Part II, we will seek to
address the various constitutive elements of the FET standard.99 While there
93) Barnali Choudhury, ‘Evolution or Devolution?. Defining Fair and Equitable Treatment in
International Investment Law’ (2005) 6 JWIT 297.
94) Mo, ‘Some Aspects of the Australia-China Investment Protection Treaty’ (1991) 25 Journal of
World Trade Law, 3, 43-80.
95) Robinson, ‘Guidelines for the Organisation of Eastern Caribbean States in Negotiating
Bilateral Investment Treaties’ (undated). See also, Robinson, “The Question of a reference to
International Law in the United Nations Code of Conduct on Transnational Corporations”
(1986) UNCTC Current Studies, Series A, Number I, 2.
96) Abhijit Pandya, ‘Interpretations and Coherence of the Fair and Equitable Treatment
Standard in Investment Treaty Arbitration’ (2011) Ph.D thesis Submission, London School of
Economics <http://etheses.lse.ac.uk/338/1/Pandya_Interpretations%20and%20Coherence%20
of%20the.pdf> accessed 3 July 2012.
97) UNCTAD (n 2) 22.
98) Ibid.
99) See Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Republic of
Kazakhstan, ICSID Case No. ARB/05/16, Award, 29 July 2008. para. 609. Note also, some tribu-
nals have made reference to the principle of good faith as a substantive element of the FET
standard: Tecmed v Mexico (n 36) para 154; Vivendi v Argentina (n 66) para 7.4.24.
are indeed many variations of these elements, those expressly examined here-
after are most prominently referred to in arbitral awards100 involving develop-
ing countries as respondents.101
I. Transparency and Respect for Legitimate Expectations
The requirement of transparency appears to be an important element in creat-

ing a stable, predictable and secure climate102 for foreign direct investments in
developing countries.103 Indeed, while not an end in and of itself, transparency
is certainly a means to achieving better governance104 and greater accounta-
bility105 whilst avoiding arbitrary and discriminatory conduct.106 In this sense,
transparency can thus be regarded as requiring that the ‘legal framework for
the investor’s operations [be] readily apparent and that any decisions affecting
the investor [be traceable] back to [this] framework.’107 Accordingly, a viola-
tion of the obligation to afford transparency will be found to exist where the
host state: does not act in accordance with the outcome of discussions previ-
ously held with the investor;108 does not engage in forthright communications
with the investor;109 does not ensure that there is consistency between the rep-
resentations made by the different arms of government with respect to the
same investment;110 does not allow access to information needed by the inves-
tor to prosecute an appeal;111 does not disclose, at the time of negotiating the
terms of admission, that the investment project would violate local law;112
does not discuss with the investor its reason for treating the investment in a
100) Christoph Schreuer (n 21); See also, Peter Behrens, ‘Towards the Constitutionalization of
International Investment Protection’ (2007) 45 Archiv des Völkerrechts 153, 175; Todd Grierson
Weiler and Ian A. Laird, ‘Standards of Treatment’ in Peter Muchlinski, Federico Ortino and
Christoph Schreuer (eds.) The Oxford Handbook of International Investment Law (Oxford
University Press, Oxford 2008) 258, 272-90.
101) See S Schill, International Investment Law and Comparative Public Law (Oxford University
Press, Oxford 2010).
102) OECD, ‘Public Sector Transparency and the International Investor’ (OECD Publishing
2003) 23.
103) C.S Zoellner, ‘Transparency: An analysis of an Evolving Fundamental Principle of
International Economic Law’ (2006) 27 MJIL 569.
104) D. Held, ‘Democracy and the global order: From modern state to cosmopolitan govern-
ance’ (1995) Polity 6-12.
105) P.S. Kim and Others, ‘Towards Participatory and Transparent Governance: Report on the
Sixth Global Forum on Reinventing Government’ (2005) 65(6) Pub. Admin. Rev. 646, 649.
106) UNCTAD (n 2) 72.
107) Dolzer and Schreuer (n 3) 133-4.
108) See eg Tecmed (n 36) para 154.
109) See eg Pope and Talbot (n 70) para 177 -79.
110) See eg Metaclad v Mexico ICSID Case No. ARB (AF)/97/1 (NAFTA) 3 April 2000, para 76, 88.
111) Siemens (n 45).
112) MTD Equity (n 76) para 163.
discriminatory manner;113 does not disclose points of disagreement or respond

to important communications;114 and does not refrain from making transfers
from the investor’s bank account without his prior knowledge or approval.115
Conversely however, arbitral practice appears to suggest that the host state
would not violate the requirement of transparency where the investor should
have known that the legal situation is changing because of the transitional
nature of the economy, and should therefore have retained local counsel to
advise it about the amendment process to local laws,116 nor would a violation
be found where the relevant rules and regulations are made public and the
investor is therefore in a position ‘to know beforehand [those] rules and regu-
lations that govern their investments.’117
Suffice it to say, it is submitted that while it is undoubtedly the case that
transparency on the part of host states is integral to the adequate protection of
investments, it must also be borne in mind that not many developing coun-
tries have the regulatory or institutional framework in place to allow for full
transparency and investor participation. Indeed, to interpret the transparency
requirement, a constitutive element of the FET standard, in a manner which
does not take account of this is both ‘inflexible and unrealistic.’118 Moreover, it
appears that the very legal foundation of the transparency requirement, as a
norm of international investment law, has been questioned,119 with some
authors even arguing that it has ‘not materialized into the content of fair
and equitable treatment with a sufficient degree of support.’120 But even if it is
accepted that transparency is indeed an important constitutive element of the
FET standard, developing countries are adamant that it remains an ambiguous
concept, one which is exacting in scope, in that while they may very well be
required to publish their laws, it is not clear whether they are under an obliga-
tion of specifically notifying investors of laws which might affect them, or
changes to such laws, and whether they should, in all circumstances, afford
investors the opportunity to comment on such laws or changes made thereto.121
113) Saluka (n 90).

114) PSEG Global (n 90) para 174.
115) Maffezini v. Kingdom of Spain, ICSID Case No. ARB/97/7, Award (Nov. 13, 2000), 5 ICSID
Rep. 419 (2002), para 83.
116) Parkerings-Compagniet v. Lithuania ICSID Case No. ARB/05/8, para 331.
117) Champion Trading v Egypt ICSID Case No. ARB/02/9 - Decision on Jurisdiction, 21 October
2003, para 164.
118) UNCTAD (n 2) 72.
119) Graham Mayeda, ‘Playing Fair: The Meaning of Fair and Equitable Treatment in Bilateral
Investment Treaties’ (2007) 41 Journal of World Trade 2, 273-91, 286. The author contends that ‘it
seems clear that [transparency] is not a recognized principle of customary international law.’
120) A Newcombe and L Paradell, Law and Practice of Investment Treaties: Standards of
Treatment (Kluwer Law International 2009) 291–94.
121) Abhijit Pandya (n 96) 292.
In addition, arbitral tribunals, such as the one in Metaclad, have seemingly

been satisfied with espousing broad statements122 as to the scope of the trans-
parency requirement, though there is little consensus on its scope, with the
result being that administrative agencies in developing countries have had to
redefine their position and function, effectively now acting as ‘consultative
units and even as de facto insurers’123 for foreign direct investors. It is also sub-
mitted that while a high threshold124 for establishing a breach of the transpar-
ency requirement might be appropriate in light of the peculiar circumstances
facing developing countries, a low threshold, framed in a manner as to require
these countries to provide ‘certain minimum standards for transparency and
procedural fairness’125 is wholly unacceptable. Indeed, it is quite evident that
the former position is much less onerous for developing countries and a much
harder threshold for investors to satisfy, as it relates to openness of administra-
tive procedure when carrying out decisions, as opposed to imposing a positive
obligation of notifying investors of laws enacted or changed during the life-
time of their investments.126
In short therefore, given the grave concerns identified above, developing
countries are adamant that a position similar to that provided for under
English law127 should be adopted, as it is more coherent and responsive to the
individual circumstances faced by these countries, who often struggle to meet
their existing international obligations, though many have been proactive in
adopting legislation in an attempt to ‘hasten changes to their bureaucratic cul-
ture and the practical processes of making information available to foreign
investors.’128
In any event, indispensably linked to the requirement of transparency is the
obligation on the part of developing countries to respect investors’ legitimate
122) Metalclad (n 110) para 76. The tribunal stated that the host state is required ‘to ensure that
the correct position is promptly determined and clearly stated so that investors can proceed
with all appropriate expedition in the confident belief that they are acting in accordance with
all relevant laws.’
123) Schill, ‘Revisiting a Landmark: Indirect Expropriation and Fair and Equitable Treatment in
the ICSID Case Tecmed’ TDM 3 (2006) 15.
124) Waste management (n 54) para 98. The tribunal stated that ‘the minimum standard of
treatment of fair and equitable treatment is infringed by…a complete lack of transparency and
candour in an administrative process.
125) S.D. Myers v. Canada (NAFTA) (UNCITRAL) (12/11/00), Separate Opinion, para 249.
126) S Schill and others ‘International Investment Law and General Public International Law’ in
Jurgen Bering and others (eds), General Public International Law and International Investment
Law: A Research Sketch on Selected Issues (ILA German Branch 2009) 9.
127) J. Pierre, Bureaucracy in the Modern State: Introduction to comparative public administra-
tion (Edward Elgar 1995) 100-01. By contrast to the onerous transparency requirement under the
FET standard, English law offers a cost-effective solution to transparency deficiencies by requir-
ing participation in state processes that affect the investor.
128) Benedict Kingsbury and Stephan Schill (n 8) 15.
expectations.129 Indeed, it has been recognized that transparency clearly

affects an investor’s legitimate expectations in that the latter will often be
based on the host state’s legal framework and on any undertakings or repre-
sentations made by it explicitly or implicitly at admission or anytime thereaf-
ter.130 Legitimate expectations, as a constitutive element of the FET standard,
refers to reasonable expectations arising from the ‘foreign investor’s reliance
on specific host state conduct, usually oral or written representations, in rela-
tion to an investment.’131 Indeed, this general understanding of the concept
appears to find consensus among the leading commentators132 in this field,
and is reflective of the tribunal’s ruling in Tecmed SA v. Mexico, the first arbitral
award to explicitly outline the scope of the doctrine of legitimate expectations
under international investment law. Now regarded as the ‘most far-reaching’133
expositor of the principle, the tribunal in Tecmed explained that, in relation to
a dispute over the replacement of a license of indefinite duration for the oper-
ation of a landfill with a license of limited duration, foreign investors expect
the host state ‘to act in a consistent manner, free from ambiguity and totally
transparently in its relations with the foreign investor …’134 In other words, as
far as foreign investors are concerned, while the principle is not an absolute
one which amounts to a freezing of the host state’s legal system, where assur-
ances are made, reversal of such assurances by the host state would violate the
FET standard, provided that they have been reasonably relied upon.135 This
approach has been reaffirmed in a number of arbitral awards following Tecmed,
relating to: the revocation of assurances to reimburse a certain amount of
VAT from purchases made by the investor with respect to business-related
activities;136 legislative changes and the passing of a law which removed the
possibility of obtaining a guarantee for the construction of a coal-fired power
129) Thomas Walde, ‘Energy Charter Treaty-based Investment Arbitration’ (2004) 5 JWIT 3, 387.
130) J Salacuse. The Law of Investment Treaties (Oxford University Press, Oxford 2010) 237–38.
131) A Newcombe and L Paradell (n 120) 279.
132) M. Waibel, ‘Opening Pandora’s Box: Sovereign Bonds in International Arbitration’ (2007)
101 American Journal of International Law 711, 750.
133) Campbell McLachlan and Others, International Investment Arbitration: Substantive
Principles (New York, Oxford University Press, Oxford 2007) 235. See also, Francisco Orrego
Vicuna, ‘From Preston to Prescott: Globalizing Legitimate Expectation’ in Steve Charnovitz,
Debra P. Steger, Peter van den Bossche, Florentino P. Feliciano (eds) Law in the Service of Human
Dignity (Cambridge University Press, 2005) 301, 311.
134) Tecmed (36) para 154. The tribunal explained that the investor expects to ‘know before-
hand any and all rules and regulations that will govern its investments, as well as the goals of
the relevant policies and administrative practices or directives, to be able to plan its investment
and comply with such regulations.’
135) International Thunderbird Gaming Corporation v. Mexico, NAFTA/ UNCITRAL (Award,
26 January 2006) para. 147. See also, C. Schreuer, (n 21) 374.
136) Occidental (n 90) para 184, 186.
plant;137 and the passing of emergency laws and regulations following a mon-
etary crisis which significantly altered the method used for calculating appli-
cable tariffs.138 Importantly however, it appears that a breach of legitimate
expectations would not arise where mere contractual undertakings are in
issue, such as a failure on the part of government agencies to pay their water
bills promptly.139 In the same vein, it appears that before finding a host state
liable, arbitral tribunals will make a detailed assessment of the reasonableness
and legitimacy of the alleged expectations, taking into account ‘all circum-
stances, including not only the facts surrounding the investment, but also the
political, socioeconomic, cultural and historical conditions prevailing in the
host State.’140 In other words, there must be a ‘weighing of the investor’s rea-
sonable and legitimate expectations on the one hand and the Respondent’s
legitimate regulatory interest on the other.’141
Suffice it to say, from a developing country perspective, a number of con-
cerns arise with respect to the operation of the doctrine of legitimate expecta-
tions. In the first instance, the onerous standard espoused by the decision of
Tecmed, is actually not a standard at all, but ‘rather a description of perfect
public regulation in a perfect world, to which all states should aspire but very
few, if any, will ever attain.’142 Indeed, it can be argued that the effect of the
interpretation of legitimate expectations as rendered by the Tecmed Tribunal
effectively ‘constitutes an act of delegated law making which is directly
opposed to principles of ‘deductive legal reasoning.’143 The approach adopted
by Tecmed is ‘staggering and could not have been agreed to by the states con-
cluding the treaties.’144 Similarly, the decision of Occidental can equally be
challenged for trespassing on the area of domestic taxation policy, something
which is generally precluded from review by international tribunals. Overall,
it is submitted that such an overly intrusive approach to legitimate expecta-
tions is problematic given that it is often impossible for developing countries
to be clear and consistent in every circumstance. This is coupled with the fact
that ‘adopting such a strict standard could have adverse effects on states
whose regulatory regime affords officials broad discretionary powers.’145
137) PSEG Global (n 90) para 248.

138) CMS Gas (n 47).
139) Biwater Gauff (n 91).
140) Duke Energy et al. v. Ecuador ICSID Case No. ARB/04/19 (2004) para 320.
141) Saluka (n 90) para 126.
142) Stephan W. Schill, The Multi-lateralization of International Investment Law (Cambridge,
Cambridge University Press, 2009) 334.
143) Campbell McLachlan, ‘Investment Treaties and General International Law’ (2008) 57 INT.
COMP. L. Q.361, 377.
144) Sornarajah (n 28) 355.
145) Susan Franck, ‘International Decisions: Occidental Exploration and Production Company
v. The Republic of Ecuador’ (2005) 99 Am. J. Int’l L. 675, 679.
Indeed, developing countries remain adamant that construing the principle to

include substantive expectations is problematic, particularly for those coun-
tries which merely recognize the doctrine of legitimate expectations as being
limited to procedural protection. This dissonance, as between the evaluative
methods used by arbitral tribunals and those used by the host state in ensuring
its regulatory actions are legal, renders this area of the law both uncertain and
unpredictable as privately contracted adjudicators are left to determine the
legality of sovereign acts and to award public funds to business that sustain
loss as a result of government regulation. This indeed ‘undermines the basic
hallmarks of judicial accountability, openness and independence.’146
In short, it is submitted that awards of the pervasive nature as Tecmed and
Occidental ought not to be followed in the future given that such hard-line
approach could have a chilling effect on the regulatory environment in devel-
oping countries.147 Instead, tribunals should survey the various domestic
approaches to the doctrine of legitimate expectations which will reveal in an
overwhelming way that the principle ought to be applied procedurally and not
substantively.148 Indeed, as one author contends, accurately depicting legiti-
mate expectations as only applying on a procedural basis is ‘essential if pre-
dictability and stability are the goals of the investment treaty regime,’149 and as
far as developing countries are concerned, this is can be best effected by stipu-
lating a ‘common core content’150 in the form of binding interpretive state-
ments which will give tribunals adequate guidance.
II. Stability, Predictability and Consistency
Undoubtedly, a stable legal and business environment is an essential

component of the FET standard.151 Indeed, while by no means an unexacting
146) GusVan Harten, Investment Treaty Arbitration and Public Law (Oxford University Press,
Oxford 2007) 5.
147) Soren Schonberg, Legitimate Expectations in Administrative Law (Oxford University Press,
Oxford 2000) 18. Regulatory chill refers to situations where, due to impending investment
claims and the possibility of having to pay huge sums of damages, states re-evaluate their policy
positions to avoid the potential payout.
148) Giancinto della Cananea, ‘Equivalent Standards under Domestic Administrative Law:
A Comparative Perspective’ (2007) Investment Treaty Law: Current Issues II 149, 159. See also,
Sornarajah, (n 28) 400.
149) Charles N. Brower & Stephan W. Schill, ‘Is arbitration a threat or a boon to the legitimacy
of international investment law?’(2009) 9 Chi. J. Int’l L. 471, 490.
150) Meg Kinnear, ‘The Continuing Development of the Fair and Equitable Treatment Standard’
(2009) Investment Treaty Law: Current Issues III 209. 236.
151) Occidental Exploration (n 90) para. 183; CMS (n 47) para 274. The Tribunal found that
the Argentine emergency legislation in 2001/2002 entirely and permanently transformed the
legal framework of the privatized gas sector and therefore violated the fair and equitable
treatment standard. See also, Schill, ‘From Calvo to CMS: Burying an International Law
requirement in scope, the obligation to afford a stable regulatory environment

would appear to be violated where the host state enters into a contract with
the investor and then unlawfully repudiates that contract152 or where it indis
criminately procures legislative changes which have a negative impact on the
contractual or administrative law governing the investment in question.153
Predictability, not unlike stability, places a similar obligation on host states to
ensure that the investor knows beforehand ‘any and all rules and regulations
that will govern its investments, as well as the goals of the relevant policies
and administrative practices and directives, so that it is able to plan its invest-
ment and effectively comply with such regulations.’154 Accordingly, excessively
vague rules will not be regarded as complying with this relatively high thresh-
old and would therefore fall foul of the fair and equitable treatment stand-
ard.155 In the same vein, the obligation of consistency requires that the different
arms of the same government, vis-à-vis the same investor, refrain from acting
inconsistently when making regulatory decisions156 or applying domestic
legislation which affect the investment in question.157 In short, when taken
together, stability, predictability and consistency are indispensable compo-
nents of the FET standard in that they afford investors the opportunity to both
plan and execute their investments and adjust to the legal framework in host
countries.
Suffice it to say, developing countries remain adamant that despite there
being some merit in affording these prescriptions, these elements should not
be misunderstood as a guarantee that the legal framework will never change
nor should they serve as a business guarantee to investment projects.158 Indeed,
arbitral tribunals must bear in mind the fact that domestic regulatory frame-
works in developing countries are logically never completely free of inconsist-
encies,159 and as such, when examining disputes of this nature, must take
Legacy – Argentina’s Currency Reform in the Face of Investment Protection: The ICSID Case
CMS v. Argentina’ (2005) 3 SchiedsVZ/German Arb. J. 285.
152) Occidental v. Ecuado (n 90). In relation to the respondent’s changing the tax policy, the
tribunal held that Ecuador failed to provide the claimant with the requisite stability.
153) PSEG (n 90) para 250. The tribunal stated that ‘stability cannot exist in a situation where
the law kept changing continuously and endlessly’.
154) Tecmed (n 36) para 154.
155) Occidental (n 90) para 184. The tribunal criticized the vagueness of a change in the domes-
tic tax law that did not ‘provide any clarity about its meaning and extent.’
156) MTD (n 76) para 163; Tecmed (n 36) par. 154, 162.
157) Lauder v. Czech Republic (n 47) para 292. The Tribunal pointed out that inconsistent con-
duct of domestic agencies could not be assumed if the conduct consisted in enforcing domestic
law, unless there was a specific undertaking to refrain from doing so.
158) Maffezini (n 115) para 64; Feldman v The United Mexican States, ICSID Case No.
ARB(AF)/99/1, Award of Dec. 16, 2002, para 112.
159) Franck (n 144) 678.
special account of the peculiar circumstances which these countries face from
time to time, including, but not limited to financial crises.160 Indeed, an other-
wise expansive reading of these prescriptions could expose developing coun-
tries to undue liability where measures are taken to protect essential public
interests.161 Nevertheless, overly disconcerting in this regard is the fact that a
series of awards against Argentina in the wake of its 2001‐2002 economic crisis
have taken the approach that the obligations of stability and consistency arise
even in the absence of specific commitments made to investors162 or, alterna-
tively, these are absolute obligations from which there can be no departure
regardless of the circumstances.163 It is however submitted that, at least from
the perspective of developing countries, both of these approaches give little or
no space for considering whether the conduct of these countries is justifiable,
taking into account countervailing factors such as the public interest embod-
ied in a new initiative or extenuating circumstances.164 This is indeed an
unfortunate state of affairs since the very concept of fairness which underlies
the fair and equitable treatment standard implies a balancing of interests.165
In this regard, it is submitted that the principles of stability, predictability
and consistency should be reconceptualized so as to be flexible enough to
accommodate a proportionality analysis, that is, an efficacious balancing of
interests.166
III. The Due Process Obligation
The fair and equitable treatment standard places an obligation on host states
to afford foreign investors due process in relation to criminal, civil, and admin-
istrative adjudicatory proceedings.167 Typically manifested in arbitral awards
as a duty not to deny justice, the due process obligation seemingly implicates
a high threshold,168 in the sense that the outcome of proceedings involving the
160) Stephan Schill and Others (n 126) 17–8.

161) Kate Miles, ‘International Investment Law and Climate Change: Issues in the Transition to
a Low Carbon World’ (Society of International Economic Law Conference, Geneva, 2008) 20, 21.
162) TECMED (n 36) para154; Occidental (n 90) para 191, 196; Duke Energy (139) para 338-40.
163) CMS (n 47); LG&E (n 90); Enron v. Argentina, ICSID Case No. ARB/01/3; Sempra v.
Argentina, Case No. ARB/02/16.
164) P. Muchlinski (n 61) 635-37.
165) Thomas Franck, Fairness in International Law and Institutions (Oxford: Oxford University
Press, Oxford 1995).
166) S Schill, ‘Law Concepts to Balance Investors’ Rights with State Regulatory Actions in the
Public Interest – The Concept of Proportionality’ in Schill (ed.), International Investment Law
and Comparative Public Law (Oxford University Press, Oxford 2010) 75.
167) Francioni, ‘Access to Justice, Denial of Justice and International Investment Law’ (2009) 20
EJIL 729.
168) International Thunderbird Gaming (n 134) para 200. The due process requirement is higher
for a judicial decision than for an administrative decision.
investor must “offend judicial propriety”; represent a “manifest failure of natu-

ral justice”169 or a “complete lack of transparency and candour”170 in order to
be classified as a breach of the FET standard. Factually however, it appears that
a denial of justice claim would be successfully pleaded where domestic courts
refuse to entertain a suit brought by the investor, if they subject it to undue
delay, if they administer justice in a seriously inadequate way or where there is
a clear and malicious application of the law.171 In this sense, it is arguable that
a violation of the obligation will only arise where the system of justice, as
opposed to an individual decision in the course of proceedings, has been tried
and has failed.172
Nevertheless, despite the somewhat universal acceptance of the obligation
not to deny foreign investors the justice which they seek, developing countries
are particularly concerned about the lack of clarity and guidance provided by
tribunals with respect to the appropriate length of delay which will constitute
a violation of the obligation. Indeed, while one tribunal has held that a delay
of 15 years will certainly violate the fair and equitable treatment standard,173
other tribunals have considered that, although a delay of 10 years is ‘certainly
unsatisfactory’, such will not rise to the level of a denial of justice.174 The diver-
gent nature of these approaches and the sheer indifference of tribunals to
definitively stating the outer periodic limits which will most certainly give rise
to a successful denial of justice claim remains an area of concern for develop-
ing countries. Moreover, it is submitted that countenancing every foreign
investor in an alleged denial of justice claim, in circumstances which are less
than clear-cut, effectively amounts to allowing them to exit the domestic insti-
tutional regime (through arbitration), without exhausting all available domes-
tic remedies. In this regard, arbitral tribunals are said to be acting as substitutes
rather than complements to domestic legal systems in developing countries.
Indeed, institutional reform, a public good for many developing states, is
increasingly being adversely affected by the lessening of incentives on the part
169) Loewen v. United States (ICSID Case No. ARB (AF)/98/3) para 132. The Tribunal was espe-
cially scathing of the fairness of the methods employed by the American plaintiff’s attorney
and countenanced by the trial judge ‘as the antithesis of due process’ by allowing the jury to be
influenced by ‘persistent appeals to local favouritism against a foreign litigant’.
170) Waste Management (n 54) para 98.
171) Azinian v Mexico (ICSID Case No. ARB(AF)/97/2), para 102-03. Cf GAMI v. Mexico Final
Award, 15 November 2004, para. 97. “Proof of a good faith effort by the Government to achieve
the objectives of its laws and regulations may counterbalance instances of disregard of legal or
regulatory requirements”.
172) Pantechniki v. Albania, ICSID Case No. ARB/07/21, Award, 30 July 2009, paras. 96-7; Jan de
Nul v Egypt, Award, 6 November 2008, paras. 255–59.
173) Chevron Corporation (USA) and Texaco Petroleum Company (USA) v. The Republic of
Ecuador, UNCITRAL, PCA Case No. 34877.
174) Jan de Nul (n 171).
of foreign investors to coordinate with, and ‘lobby domestic actors for improve-
ments in their judicial and administrative systems.’175 In short therefore, it is
submitted that this outcome is indeed at odds with the objectives of interna-
tional law commitments on civil and political rights and, if not tampered, will
effectively lead to a slow process of ‘decline in the quality of domestic judicial
processes available to citizens’176 in developing countries.
IV. Prohibition Against Arbitrary & Discriminatory Treatment
While some commentators have regarded the terms “arbitrary”177 and “dis-
criminatory”178 treatment, as found in various international investment
agreements, as being wholly distinct from the fair and equitable treatment
standard,179 the majority of awards involving developing countries as respond-
ents180 have treated both standards in a singular manner, that is, ‘inherent to
the concept of unfair and inequitable treatment.’181 Accepting this view as cor-
rect, it becomes readily apparent that host states will violate the obligation
against arbitrary or discriminatory treatment: where, through an act of collu-
sion, it creates a legal situation which enables the investor’s local partner
to terminate the contract on which the investment depends;182 where it
changes its position, from allowing the investor’s direct participation in the
company that was the license holder, to requiring the creation of a third
175) Ginsburg, ‘International Substitutes for Domestic Institutions: Bilateral Investment

Treaties and Governance’ (2005) 25 Int’l Rev Law and Economics 107, 119.
176) Jürgen Kurtz, ‘Access to Justice, Denial of Justice and International Investment Law:
A Reply to Francesco Francioni’ (2009) 20 EJIL 1077–85, 1079.
177) Siemens v Argentina (n 45) para 318. The tribunal quoted from Black’s Law Dictionary
(2004), noting that, in its ordinary meaning, “arbitrary” means “derived from mere opinion”,
“capricious”, “unrestrained”, “despotic”; “fixed or done capriciously or at pleasure; without ade-
quate determining principle”, “depending on the will alone”, “without cause based upon the
law.”
178) Glamis v. United States, Award, 8 June 2009, para. 542. The tribunal noted that the non-
discrimination requirement, as a constitutive element of FET standard, appears to prohibit
discrimination in the sense of specific targeting of a foreign investor on other manifestly
wrongful grounds such as gender, race or religious belief, or the types of conduct that amount
to a “deliberate conspiracy […] to destroy or frustrate the investment”.
179) S. Schill (n 23) 19–20. The author contends that while arbitrariness violates the fair and
equitable treatment standard, what constitutes unfair and inequitable is not always arbitrary,
one commentator submits that ‘arbitrary conduct therefore can be seen as a sufficient but not
as a necessary requirement for the violation of fair and equitable treatment’.
180) CMS Gas (n 47) para. 29; LG&E v Argentina (n 90) para. 162; Tecmed (n 36); Genin (n 47);
MTD (n 76) para 196.
181) J.W. Salacuse (n 129) 238, 240; S. Vasciannie (n 20) 133; Newcombe and Paradell (n 120) 300;
Dolzer and Schreuer (n 2) 173.
182) See eg CME v The Czech Republic Partial. Award, 13 September 2001, 9 ICSID Reports 121,
para 612.
company;183 where it unilaterally withdraws a tax exemption;184 and where

judicial reorganization proceedings lead to the loss of control by the investor
over the investment project,185 amongst a non-exhaustive list of other acts and
omissions.
Suffice it to say, while the obligation to desist from discriminatory and arbi-
trary treatment has a relatively uncontroversial place among the various obli-
gations that constitute the fair and equitable treatment standard,186 developing
countries remain adamant that the practical application of these principles is
in a state of flux in that the thresholds applied by arbitral tribunals in order
to classify conduct as arbitrary range from high to low to medium or vague.
Indeed, in some instances, tribunals have sought to apply the ELSI standard
which implicates a particularly high threshold; that is, the conduct of the host
state must ‘shock or surprise the tribunal’s sense of judicial propriety.’187
Conversely however, other tribunals have opted for a relatively low threshold
by resorting exclusively to dictionary definitions,188 while others tribunals
have set forth a rather subjective, if not vague, threshold requiring ‘treatment
in such an unjust or arbitrary manner that the treatment rises to the level that
is unacceptable from the international perspective.’189 It is submitted that,
from a developing country perspective, the latter two thresholds represent not
only the increasingly pervasive nature of the FET obligation, but more so, arbi-
tral tribunals threading on dangerous grounds by introducing subjectively
vague formulations which can potentially expose serious gaps in the regula-
tory prospectuses of developing countries. Indeed, evidence of this unwar-
ranted development could be gleaned from a commentator’s empirical
assessment which found that violations of the ELSI standard was established
in only 22 per cent of the cases in which arbitrariness was alleged, whereas
75 per cent violations were established where tribunals applied a lower thresh-
old.190 It is submitted that these findings appear to affirm the fear held by
many developing countries that as tribunals endeavour to lower the threshold
for a finding of arbitrariness, more violations, and hence, greater potential
183) See eg Lauder (n 47) para 222, 230.

184) See eg Biwater Gauff (n 91) para 502.
185) See eg Noble Ventures (n 48) para 176, 177.
186) K. J. Hamrock, ‘The ELSI Case: Toward an International Definition of “Arbitrary” Conduct’
(1992) 27 TILJ 837; V. Heiskanen, ‘Arbitrary and Unreasonable Measures’ in A. Reinisch (ed.),
Standards of Investment Protection (2008) 87–110.
187) Elettronica Sicula SpA (ELSI) (United States of America v. Italy), ICJ Reports. 1989; Sempra
Energy (n 162) para. 318; Enron (n 162) para. 281.
188) CMS Gas (n 47); Lauder (n 47); Occidental (n 90) para. 163; Siemens (n 45).
189) Saluka (n 90) paras. 297.
190) Jacob Stone, ‘Arbitrariness, the Fair and Equitable Treatment Standard, and the
International Law of Investment’ (2012) Leiden Journal of International Law 25, 97.
for regulatory chill will occur in these countries. In short, developing countries
are therefore understandably adamant that tribunals should refrain from
espousing subjectively vague thresholds, and should instead resort to the
high threshold as established by ELSI. Otherwise, it would appear that the crit-
icism that, absent any formal evaluative criteria in making findings of arbi-
trariness, ‘arbitral tribunals themselves are partaking in an exercise of arbitrary
conduct.’191
V. The Obligation of Vigilance and Protection
The obligation to accord vigilance and protection to investments within the

territory of the host state is again another important constitutive element of
the fair and equitable treatment standard.192 While not a strict liability obliga-
tion,193 the duty to accord vigilance and protection does however require that
the host state exercises due diligence, not only in response to conduct on the
part of its officials which might adversely affect the investment, but also in its
exercise of any preventative measure aimed at protecting the investment from
damage.194 In this regard, it can be argued that the obligation to accord vigi-
lance and protection places a clear premium on political stability, and this is
indeed reflected in the approach taken by the various tribunals which have
had to grapple with the issue over the years.195
Suffice it to say, as far as developing countries are concerned, it is particu-
larly disheartening to see the inexplicably contradictory manner in which
arbitral tribunals have sought to interpret two overlapping, though very dis-
tinct standards, that is, full protection and security (FPS), on the one hand, and
fair and equitable treatment, on the other. Indeed, in a number of awards,
despite clear textual references to the aforementioned standards as being dis-
similar,196 tribunals have blatantly failed to give specific elaboration on what
191) Ibid.
192) Anzilotti, ‘La responsabilité internationale des États – À raison des dommages soufferts
par les étrangers’ (1906) Revue Générale de Droit International Public 291.
193) Asian Agricultural Products Ltd. (AAPL) v. Republic of Sri Lanka (ICSID/ARB/87/3) 612.
194) Alfred Verdross, ‘“Les Règles Internationales concernant le Traitement des Étrangers’ (1931)
37 R.C.A.D.I. 325, 388.
195) AAPL (n 192) ‘insurrection and civil unrest’; AMT v Congo (Zaire) ICSD Case No ARB
‘Attack and Seizure of Hotels’; Wena Hotels v Egypt ICSID Case No ARB/98/4 ‘exclusion from
management from the hotel and failure of police to respond in an appropriate manne’.
196) Christoph Schreuer, ‘Full Protection and Security’ (2010) 1 Journal of International Dispute
Settlement 2, 353–69. The author argues that the view that the two standards, FET and protec-
tion and security, are to be seen as different obligations ‘strikes me as the better one. As a matter
of interpretation, it appears unconvincing to assume that two standards, listed separately in
the same document, have the same meaning. An interpretation that deprives a treaty provision
of its independent meaning is implausible to say the least.’
exactly distinguishes one standard from the other,197 and worst yet, have failed
to specifically indicate what actions or omissions constitute a violation thereof
on an independent basis.198 Given the grave uncertainty which arises as a
result of this undesirable practice, a number of key, and perhaps rhetorical,
questions arise: have developing countries consented to giving arbitral tribu-
nals such a wide discretion to regard the standard of FPS and the FET obliga-
tion as synonymous, despite clear textual references to the contrary? And, if
not, should the vigilance and protection obligation, as a constitutive element
of the FET standard, be construed as applying beyond physical protection to
include a hopelessly uncertain199 and wholly intrusive requirement of legal
protection? It is submitted that until these fundamental questions are satisfac-
torily answered, it would be redundant to regard the standard of FPS as equat-
ing to FET. Instead, a clearer conceptual understanding would be that the
former essentially refers to the physical protection of the investor and his
investments, whereas the latter is ‘connected more to the environment in which
the foreign investment takes place and to its treatment.’200 Any other con-
struction is wholly unacceptable.
Part III – The Case for Regulatory Rebalancing
Thus far, we have carefully examined the conceptual underpinnings, as well as

the substantive elements which constitute the fair and equitable treatment
197) Siemens (n 45) para 308, 309; PSEG v Turkey (n 90) paras 257–9; Occidental (n 90) para 183;
Azurix v Argentina (n 74) para 407. Despite the fact that the respective treaties explicitly pro-
vided for two separate standards, the respective tribunals were insistent that both were synony-
mous and thus failed to elaborate on the distinction between the two standards.
198) G Cordero Moss, ‘Full Protection and Security’ in A Reinisch (ed) Standards of Investment
Protection (Oxford University Press, Oxford 2008) 146–9, 149.
199) The awards in Saluka and Azurix are instructive in representing the degree to which tribu-
nals have taken divergent views. In Saluka (n 90) para. 483, 484, the tribunal stated that “the ‘full
security and protection’ clause it not meant to cover just any kind of impairment of an inves-
tor’s investment, but to protect more specifically the physical integrity of an investment against
interference by use of force.” While in Azurix (n 74) (para 408), the tribunal held that “it is not
only a matter of physical security; the stability afforded by a secure investment environment is
as important from an investor’s point of view;” Moreover, despite there being a common arbitra-
tor who sat on the panels in both Biwater and Rumeli, each decision had different holdings with
respect to the scope of the full protection and security standard. In Biwater Gauff (n 91) para.
729, the tribunal followed the holding in Azurix, stating that “when the terms ‘protection’ and
‘security’ are qualified by ‘full’, the content of the standard may extend to matters other than
physical security.” Cf Rumeli (n 91) para. 668, the tribunal held that the standard ‘obliges the
State to provide a certain level of protection to foreign investment from physical damage.’
200) Ioana Tudor, The Fair and Equitable Treatment Standard in the International Law of Foreign
Investment (Oxford University Press, Oxford 2008) 182-84.
standard. In Part III, we will turn our attention to possible methods of effectu-
ating regulatory rebalancing in an effort to stem the increasingly pervasive
nature of the FET obligation, whilst ensuring a balance is struck between
investors’ interests, on the one hand, and the right of developing countries to
effect important regulatory changes which might affect investments in their
territory, on the other.
I. Clearer, Qualified and More Specific FET Clauses
In light of increasing discontent among developing countries with respect to

the overly intrusive manner in which arbitral tribunals have sought to con-
strue the fair and equitable treatment standard, it is submitted that the time is
ripe for clearer, qualified, and more specific FET clauses to feature more prom-
inently in international investment agreements concluded by developing
countries. The starting point in this rebalancing effort might very well be to
link the FET standard to the minimum standard of treatment under customary
international law, with the caveat being that, though an evolutionary standard,
only conduct which falls to be considered as “gross”, “manifest”, “evident”, “fla-
grant”, “continuous” and “unjustified” will violate the FET standard.201 More
over, a closed or illustrative list202 should be provided to assist tribunals in
their assessment of the legitimacy of host states’ conduct. In the same vein,
another option might simply be to replace the general FET provision with a
closed list of more specific obligations.203 In addition to clearly stating that
this list is exhaustive, where BITs are already in effect, it might also be neces-
sary to issue additional protocols or annexes to these BITs, as well as interpre-
tative instruments, such as notes of interpretation,204 so as to convey a message
that the standard of review for governmental conduct is deferential and that
the threshold for finding a violation is unmistakably high.205 At the same time
however, serious incidents of state misconduct should clearly be viewed as
compensable.
201) See generally, UNCTAD (n 2) 82.

202) This list should specifically include conduct which amounts to a “gross denial of justice,
manifest arbitrariness, a complete lack of due process, evident discrimination or a manifest
lack of reasons or infringement of legitimate expectations based on investment-inducing rep-
resentations or measures, on which the investor has relied”.
203) UNCTAD (n 2) 82.
204) Trevor J. Zeyl, ‘Charting the Wrong Course: The Doctrine of Legitimate Expectations in
Investment Treaty Law’ (2011) Alberta Law Review 41-2.
205) Yuval Shany, ‘Towards a General Margin of Appreciation Doctrine in International Law?’
(2005) 16:5 E.J.I.L. 907, 919.
II. A More Vigorous Proportionality Analysis
Despite having being touted as an indispensably important methodological

tool in the assessment of the legitimacy of developing countries’ regulatory
conduct,206 on the one hand, and the interests of the investor, on the other,
arbitral tribunals, quite strikingly, have failed to embrace a rigorous propor-
tionality analysis,207 relying instead on a ‘string of rather vague, subjective
and abstract quotations from prior arbitral awards.’208 For this reason, it is
submitted that the time is ripe for a rigorous proportionality209 analysis to fea-
ture more prominently in arbitral awards involving developing countries as
respondents, based primarily on a comparative approach that draws on both
domestic and international law.210 The starting point for such an approach
might very well be to determine whether the measure adopted by the host
state serves a legitimate objective, and whether, in light of all the circum-
stances of the case, such a measure is suitable to achieve the stated objec-
tive.211 The second step in this process is to then determine whether there are
other, less intrusive means, which might equally achieve the stated objective
without infringing upon the investor’s interests.212 Finally, the arbitrator
should then engage in a rigorous balancing act, effectively taking account of
the effects of the host state’s measure on the investment as well as the impor-
tance of the objective pursued.213
206) UNCTAD (n 2) 77.

207) See CMS (n 47); Enron (n 162); Sempra (n 162); LG&E (n 90). In these cases, the first four
awards rendered against Argentina in the wake of its financial crisis, the respective tribunals
did not engage in any serious proportionality analysis of the Argentina’s response to the crisis,
though the LG&E tribunal briefly referred to proportionality, but only in a sentence, and in the
negative (para. 195). Cf The Glamis (n 177) decision which is the most fully reasoned articula-
tion of a proportionality‐based approach to determining breaches of the FET standard to date.
The tribunal took a deferential approach to the standard of review in the context of regulatory
changes taken in good faith to address a pressing issue of public interest. The Saluka (n 90)
para. 304, 305 Tribunal also called for a balanced approach when determining whether a FET
violation has occurred.
208) Benedict Kingsbury and Stephan Schill (n 8) 48.
209) Ronald Dworkin, Takings Rights Seriously (Harvard University Press 1978) 24.
Proportionality recognizes that rules do not operate in an “all-or-nothing fashion”, but allow for
“more or less.” As such, a decision maker, in situations involving conflicting interests, must
engage in a balancing act.
210) Ronald Dworkin (n 208) 22.
211) Jan H. Jans, ‘Proportionality Revisited’ (2000) 27 Legal Issues of Econ. Integration 239, 240.
212) Craig, ‘Unreasonableness and Proportionality in UK Law’ in Evelyn Ellis, (ed.), The Principle
of Proportionality in the Laws of Europe (Hart, Oxford 1999) 85, 99-100.
213) Moshe Cohen Eliya and Iddo Porat, ‘American Balancing and German Proportionality: The
Historical Origins’ (2010) 8 International Journal of Constitutional Law 263, 263-64. See also, TI
Harbo, ‘The Function of the Proportionality Principle in EU Law’ (2010) 16 European Law
Journal 158, 172.
While such a rigorous proportionality analysis does raise some concerns,

particularly the fact that this balancing act might be subject to a variety of
influences, including the biases of the arbitral panel,214 it is submitted that
such an approach is by far more robust than most, if not all, of the alternative
methods currently employed by arbitral tribunals. Indeed, such a vigorous pro-
portionality analysis better takes account of all relevant factors, including, ‘the
importance of the right affected, the importance of the right or interest pro-
tected, the degree of interference, the length of interference as well as the
availability of alternative measures that might be less effective.’215 It is submit-
ted that this approach will be particularly advantageous to developing coun-
tries in light of the fact that it will afford these countries greater autonomy
over measures taken in the public interest,216 whilst at the same time provid-
ing sufficient scrutiny to control misuse of public power. Indeed, in light of the
current state of the law, a strategic approach of this nature is not only neces-
sary, but urgently demanded of arbitral tribunals.
III. A Greater Role for Investors’ Conduct in the Calculation of Compensation
While the majority of international investment agreements concluded by

developing countries typically state the standard of compensation which must
be applied by arbitral tribunals in the event of an expropriation of investors’
property,217 similar references, with regard to violations of the FET standard,
are generally absent from such agreements. This has however not prevented
arbitral tribunals from adopting an approach, based on the Chorzow Factory
case,218 of requiring “full compensation”219 in cases where the FET standard has
214) Santiago Montt, (n 40) 1-17. See also, Jürgen Habermas in Between Facts and Norms:
Contributions to a Discourse Theory of Law and Democracy (Cambridge: The MIT Press, 1996)
256-60.
215) Jasper Krommendijk and John Morijn, ‘“Proportional” by What Measure(s)? Balancing
Investor Interests and Human Rights by Way of Applying the Proportionality Principle in
Investor-State Arbitration’ in Pierre Marie Dupuy, Ernst-Ulrich Petersmann and Francesco
Francioni (eds.), Human Rights in International Investment Law and Arbitration (Oxford
University Press, Oxford 2009) 422.
216) Alec Stone Sweet, The Judicial Construction of Europe (Oxford: Oxford University Press,
Oxford 2004) 119.
217) UNCTAD (n 2) 88–9. Most frequently, international investment agreements require
‘prompt, adequate and effective compensation’ equal to the fair market value of the expropri-
ated investment.
218) Factory at Chorzów, 1928, P.C.I.J., Series A, No. 17, p. 47. The PCIJ explained that compensa-
tion should ‘wipe out all the consequences of the illegal act and re-establish the situation
which would, in all probability, have existed if that had not been committed.’
219) Article 31 of the International Law Commission’s Articles which stipulate that the standard
of “full reparation” should be applied where there has been an international wrong has been
committed.
been breached.220 Suffice it to say, although there appears to be some consen-

sus on the point that the method chosen for calculating the amount of com-
pensation due varies with the circumstances of each case,221 one important
question which has provoked the concern of many developing countries is, to
what extent should the conduct of investors feature in the calculation of the
amount of compensation due. The most profound ruling on this point appears
to be the decision of MTD v Chile, in which the tribunal held that Chile was not
responsible for the consequences of unwise business decisions or for the lack
of diligence of the investor. In short, the tribunal rightly explained that BITs
are not an insurance against business risks, and that the Claimants, as experi-
enced businessmen, had to bear the consequences of their own actions.222
Accordingly, the Tribunal awarded only 50 percent of the compensation which
would have otherwise been payable.223
It is however submitted that, despite the far-reaching implications of this
ruling, and the much talked about evolutionary nature of the FET standard, it
remains fundamentally unclear as to what weight should generally be given to
the conduct of the investor in the process of calculating compensation in the
future.224 Indeed, while it is accepted that such a determination should vary
with the circumstances of each case, tribunals must be careful not to adopt
an unbalanced approach which has the effect of enriching an investor ‘who,
rightly or wrongly, has chosen to invest in a country, believing that by so doing
[it] is constructing a castle in Spain or a Swiss chalet in Germany without
any risk, political or even economic or financial or any risk whatsoever.’225 In
short, as ‘fairness’ and ‘equity’, inherent characteristics of the FET standard,226
require a weighing up of what is right in all the circumstances,227 it is submit-
ted that the nature of investors’ conduct must be given a greater role in the
assessment of compensation by arbitral tribunals in the future.228 This is
indeed integral to the process of regulatory rebalancing.
220) See eg MTD v Chile (n 76); CMS Gas v Argentina (n 47) para. 402; Azurix (n 74) para 420;
Pope & Talbot Inc. v. Canada (n 70).
221) Kaj Hobér, ‘Fair and Equitable Treatment – Determining Compensation’ in R Hofmann
and C Tams (eds), The International Convention on the Settlement of Investment Disputes
(ICSID): Taking Stock after 40 Years (2007) 101.
222) MTD v Chile (n 76) paras 167, 242.
223) MTD (n 76) para 246.
224) Peter Muchlinski, ‘Caveat Investor? The Relevance of the conduct of the investor under the
fair and equitable treatment standard’ (2006) ICLQ 55, 556-57.
225) AMT v Zaire (n 194) para 7.14–15.
226) Biwater (n 91) para 567. The tribunal affirmed that ‘determining what fair and equitable
treatment consists of in any particular case requires a proper assessment of investment risk at
the outset of the investment process.’
227) Ian Brownlie Principles of Public International Law (6th edn OUP Oxford 2003) 25.
228) Ioana Tudor (n 199) 207.
Conclusion
The FET standard is undoubtedly a prominent and evolutionary feature of

most international investment agreements concluded by developing countries
today. Although it is a seemingly straightforward standard which imposes
requirements on host states to act in a manner reflective of good governance,
the FET standard has however been increasingly construed in ways which are
not only intrusive, but perhaps antithetical, to the developmental and regula-
tory interests of developing countries. From an interpretive conundrum caused
by the various interpretations employed by arbitral tribunals with regard to
the issue of whether the FET clause is reflective of the international minimum
standard, to the perceived regulatory chill caused by the many pervasive ways
in which tribunals have applied the FET standard’s substantive elements, the
standard is indeed a prime concern for many developing countries. Accordingly,
and as a result of the plethora of concerns which have been highlighted over
the course of this paper, it is indeed arguable that the time is ripe for rebalanc-
ing at both the conceptual and practical level, so as to better reflect the devel-
opmental needs of developing countries, whilst at the same time, preserving
the economic interests of foreign investors.
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Article in The Journal of World Investment & Trade · January 2013

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The Journal of World Investment & Trade 14 (2013) 114–146 brill.com/jwit

The Evolving Nature of the Fair and Equitable

increasingly pervasive character have however raised a number of potent

A. Historical Dimensions of the FET Standard

The existence of the FET standard in international investment agreements

3) Rudolf Dolzer, ‘The Impact of International Investment Treaties on Domestic Administrative

I. The FET Standard as a Pervasive Norm in IIAs

Suffice it to say, while the FET standard undoubtedly has far-reaching

in all of its actions, is bound by rules fixed and announced beforehand29 –

II. Divergent Perceptions

property rights,38 effectively making claims against unpredictable or arbitrary

III. An Interpretive Conundrum?

these terms with corresponding terms such as “just”, “even-handed”, “unbiased”

IV. Focal Points and Questions of Interest

as it stands at present, it appears that developing countries are no longer con-

C. A Diverse Range of Formulations

While an increasingly diverse range of formulations reflecting the FET stand-

I. A Fair and Equitable Treatment Clause Linked to International Law

II. An FET Clause Linked to the Minimum Standard of Treatment of Aliens

this interpretation as persuasive authority, have continued to grapple with

The Threshold of Liability: A Shifting Pendulum

72) Neer v. Mexico, US-Mexican Claims Commission 1927.

III. An Unqualified, Autonomous or Self-Standing FET Standard

potentially make a case that a particularly high threshold,93 as discussed above

Part II – Constitutive Elements of the Fet Standard

In Part I, we carefully examined the historical as well as legal underpinnings of

I. Transparency and Respect for Legitimate Expectations

The requirement of transparency appears to be an important element in creat-

discriminatory manner;113 does not disclose points of disagreement or respond

113) Saluka (n 90).

In addition, arbitral tribunals, such as the one in Metaclad, have seemingly

expectations.129 Indeed, it has been recognized that transparency clearly

137) PSEG Global (n 90) para 248.

Indeed, developing countries remain adamant that construing the principle to

II. Stability, Predictability and Consistency

Undoubtedly, a stable legal and business environment is an essential

requirement in scope, the obligation to afford a stable regulatory environment

III. The Due Process Obligation

160) Stephan Schill and Others (n 126) 17–8.

investor must “offend judicial propriety”; represent a “manifest failure of natu-

IV. Prohibition Against Arbitrary & Discriminatory Treatment

175) Ginsburg, ‘International Substitutes for Domestic Institutions: Bilateral Investment

company;183 where it unilaterally withdraws a tax exemption;184 and where

183) See eg Lauder (n 47) para 222, 230.

V. The Obligation of Vigilance and Protection

The obligation to accord vigilance and protection to investments within the

Part III – The Case for Regulatory Rebalancing

Thus far, we have carefully examined the conceptual underpinnings, as well as

I. Clearer, Qualified and More Specific FET Clauses

In light of increasing discontent among developing countries with respect to

201) See generally, UNCTAD (n 2) 82.

II. A More Vigorous Proportionality Analysis

Despite having being touted as an indispensably important methodological

206) UNCTAD (n 2) 77.

While such a rigorous proportionality analysis does raise some concerns,

III. A Greater Role for Investors’ Conduct in the Calculation of Compensation

While the majority of international investment agreements concluded by

been breached.220 Suffice it to say, although there appears to be some consen-

The FET standard is undoubtedly a prominent and evolutionary feature of

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