Fair and equitable treatment provisions are found in almost all bilateral and multilateral investment treaties and many international investment agreements. Throughout the course of the last decade, this treatment standard has been frequently invoked in investor-State arbitrations. Under its aegis, tribunals have developed a number of vaguely defined sub-categories, or what have been referred to as ‘facets’ or ‘components’ of the standard, such as the obligation of the State to refrain from acting in an arbitrary manner, to afford justice and due process to foreign investors, to act transparently, and to respect the legitimate expectations of the investor (see comment entitled ‘Fools Gold? Legitimate Expectations as Understood in Glamis Gold v USA‘). Despite such attention, the precise application of and relationship between these components remains vague and elusive.
The task of interpreting and applying fair and equitable treatment was made more complex by the following series of events.
In 1999, an American investor brought a claim under NAFTA‘s investor protection provisions. The investor alleged, inter alia, that Canada’s regulations with respect to the importation of softwood lumber violated Article 1105 of NAFTA. Article 1105(1) provides that ‘Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.’ At the time of the arbitration, trends in the decisions of arbitral tribunals favoured interpreting fair and equitable treatment provisions as either an autonomous treaty provision or a standalone principle found in customary international law. The tribunal favoured the former, finding for the investor, but leaving the question of damages to be assessed at later date by a new tribunal.
Following the decision, and in a dramatic twist, the NAFTA parties issued a joint interpretive note clarifying their view of both Article 1105, and fair and equitable treatment and full protection and security. The note read as follows:
B. Minimum Standard of Treatment in Accordance with International Law
1. Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party.
2. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.
Many viewed this as a radical departure from settled practice. The note was likely prompted by the anticipated constraint the international minimum standard might impose on the expansion of fair and equitable treatment. The tribunal constituted to assess damages considered the interpretive statement binding, but nonetheless still found for the investor.
Insofar as the reasoning of subsequent tribunals was concerned, the statement’s effect on the litigation of fair and equitable treatment provisions was not insignificant. A number of tribunals, both within and without NAFTA, began employing the international minimum standard as an additive element of fair and equitable treatment; in determining a fair and equitable treatment claim, not only did the tribunal have to be satisfied that the acts complained of were, for example arbitrary or lacking in transparency, but also that they constituted ‘ … a wilful neglect of duty, an insufficiency of action falling far below international standards, or even subjective bad faith’.
B The Joint Interpretive Statement
Turning to the wording of the note itself, the two provisions seem to operate independently of one another. The first assimilates Article 1105 to the international minimum standard. The purport of the second is less clear. It states that fair and equitable treatment does not require treatment ‘in addition to or beyond’ that provided by the minimum standard. This may suggest one of two things:
(1) fair and equitable treatment and full protection and security are to be equated to the minimum standard; or
(2) fair and equitable treatment and full protection and security are to be limited by the minimum standard.
On the second reading, the acts complained of would need to both fall foul of the international minimum standard and fair and equitable treatment to be actionable.
Either reading may be correct, and for the purposes of this comment the resolution of this question is not crucial. That said, there are good reasons to favour the latter. First, as pointed out by UNCTAD, it seems illogical that States would employ the term fair and equitable treatment when they truly mean the international minimum standard. Second, the jurisprudential trends in interpreting fair and equitable treatment, both before and after the note, seem more generous to investors than the international minimum standard. The latter point will be addressed below in ‘C The Investment Context’.
On either reading the claimant will need to prove that the acts complained of have violated the minimum standard. This raises the question as to what application it might have to international investment. To answer this question, two matters must be addressed. First, a framework of the general standard must be sketched. Second, this general framework’s applicability to the investment context must be considered. These two matters will be dealt with in the next two sections, respectively.
C The International Minimum Standard
Twentieth century commentary on the standard emerged with Sir Elihu Root’s paper entitled ‘The Basis of Protection to Citizens Residing Abroad’. This was shortly followed by enthusiastic (and sometimes disappointed-especially with regards to the failed Hague Conference of 1930) commentary by Borchard in both his 1914 paper on diplomatic protection of citizens abroad and 1940 article focusing on the standard itself. The only monograph written on the topic was published in 1949 by AH Roth, and followed in 1961 by Roha’s vociferous criticism of a truly international minimum standard. Over the course of the 20th Century, judicial and academic commentary all but petered out, with the increasing focus placed on universal human rights following WWII; discourse became more interested in the rights of all as opposed to the rights of foreign aliens to the exclusion of locals.
A review of this literature is revealing. It paints a picture of an international norm that operates somewhat differently to that of traditional legal norms. AH Roth states:
The law of the treatment of aliens, as part of international law, lacks uniformity, not only with regard to the rules of positive law but still to a greater extent as regards the fundamental concepts underlying its structure. (p 61) (emphasis added)
Through the fact that this standard has evolved on the legal conscience of civilized nations and is more or less identical with what is considered a normal situation in an organic community, its precise limits are necessarily ill-defined. It appears to be useful therefore to interpret its fundamental idea in the light of the ‘general principles of law recognized by civilized nations. Consequently, in case of doubt, the content of the fundamental idea must be determined by the principles which the civilized nations recognize in general in their municipal organization.
The minimum standard is the expression of the common standard of conduct which civilized States have observed and still are willing to observe with regard to aliens … (p 87) (emphasis added)
Borchard, in his 1914 work states:
[T]he standard of a duty of the State towards aliens and its international responsibility for violation of its obligations may be considered the result of a gradual evolution in practice, States having in their mutual intercourse recognized certain duties incumbent upon them. (p 177) (emphasis added)
On the basis of these passages, it seems that a determination of the minimum standard might be characterised by two stages. First, as was famously laid down in Commissioner Neilson’s oft-quoted passage in the Neer decision, the acts ‘… should amount to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.’ Second, the treatment should be reflected in the practice of States.
A few observations might be made about this process.
First, looked at in isolation, it seems unlikely that mere shock or outrage on the part of a tribunal can ground a finding that the international minimum standard has been breached; it can only give context to the practice of States. This is best illustrated by way of example. For over a century States have paid compensation for outrages committed against foreigners in the context of mob violence; to do so is to satisfy a legal obligation, and is not merely a diplomatic nicety. Permitting such violence does not conform to the ‘established standard of civilization’. This, fact, in combination with the practice of States in satisfying such claims, permits us to conclude that it constitutes a positive principle of customary international law binding on all States. The suggestion of some that an international delinquency can be based solely on the general statement in Neer seems unpersuasive. It should be noted that a majority of the cases drawn on in support of this proposition (such as Neer) deal with denials of justice-a manifestation of the international minimum standard that had an established pedigree, even in the 1920s.
Second, as has likely become obvious by this point, the international minimum standard is not a substantive norm. It is instead a means by which substantive norms might emerge. Thus, in the beginning of the 20th Century, much of the commentary dealing with the standard contained chapters on expropriation and denial of justice. Since that time these norms have become somewhat disassociated with the minimum standard.
The understanding laid out above is confirmed by other sources as well. The Encyclopedia of Public International Law defines the international minimum standards as a:
‘… concept (sometimes called the international standard of justice) [which] affirms that there are rights created and defined by international law that may be asserted against States by or on behalf of aliens [that includes] … the rights of aliens to fair civil or criminal judicial proceedings (i.e. not to be subject to denial of justice), to decent treatment if imprisoned, and to protection against disorders, violence, and against deportation in abusive ways, and to the enjoyment of their property unless taken for a public purpose with fair compensation. (vol 3 p 408-9) (emphasis added)
The understanding of the minimum standard outlined above accords with common sense, and a consent-based theory of international law. Identifying what shocks or outrages the sense of justice of every reasonable man allows us to put into context the practice of States, especially in the case of acquiescence. Thus, when we face situations in which a State has refrained from denying access to courts for foreigners, we might say, based on principles of civilized justice, that this has become a positive obligation under customary international law.
C The Investment Context
With this general understanding of the international minimum standard in hand, the task then begins of understanding what application it might have in the international investment context, especially in light of the interpretive note outlined above. Three observations might be made.
First, the international minimum standard knows no ‘investor’. It knows aliens and their property. As such, it is somewhat meaningless to talk of the international minimum standard with respect to the investor’s investment in the host State. Instead, any claim brought under the minimum standard would need to be asserted with respect to foreign aliens and their property within the host State. It seems fair to assume that most investment claims that arise will be primarily concerned with the foreign alien’s property, with some limited exceptions (such as in the case of Biwater v Tanzania, where the tribunal applied investor protections with respect to the persons of employees of the investor ). It is important to note that this might make some difference with respect to certain investment claims. Because of the focus on alien rather than investor, the international minimum standard may exclude cases such as Tokios Tokelés v Ukraine, in which a shell company had been incorporated in a foreign jurisdiction by a local investor (mentioned in comment entitled ‘International Investment: Poisoned at the Root?‘).
Second, it seems bullish to suggest, in light of both the statement in Neer and the existing established components of the international minimum standard, that in the absence of a treaty obligation, most investor protections would constitute a violation of customary international law. Turning first to Commissioner Neilson’s statement in Neer, it seems speculative to suggest that ‘… every reasonable and impartial man would readily recognise …’ most of the facets of fair and equitable treatment as amounting to ‘an outrage, to bad faith, to wilful neglect of duty or an insufficiency of governmental action … far short of international standards.’ Such a suggestion becomes even more unsustainable upon examination of the types of established norms the minimum standard already provides for. They tend to resonate with very basic conceptions of justice, such as the right to a fair trial, decent treatment if imprisoned, protection from mob violence, treatment during deportation, and enjoyment of property unless taken for a public purpose with fair compensation. Considered alongside investment protections such as ‘respect for the investor’s legitimate expectations’ or ‘freedom from arbitrary State conduct’ it becomes immediately apparent that the two categories are not of the same ilk.
Third, even when one considers the status of expropriation as a component of the standard, the conclusion remains somewhat unclear, with the Encyclopedia of Public International Law stating:
The question of property rights of aliens has become rather separated from that of the minimum standard as a whole, being involved in the economic stresses that run between the industrialized States and the developing countries. The case for the survival of the classical prompt, adequate and effective compensation rule on expropriation of foreign property has been eroded to a degree. However, the case for the proposition that there is still some minimum standard remains strong. Few States have asserted that they are not obliged to justify their compensation programmes as in keeping with international law, even though they have sought to broaden the list of factors to be taken into account in assessing the adequacy of that compensation. (p 410)
The hesitation expressed with respect to the existence of expropriation as a component of the international minimum standard does not bode well for its extension to other property rights. Whilst a tribunal might readily say that the confiscation of property without any sort of justification by the State would seriously outrage notions of justice of civilized nations, and that such outrage is reflected in the practice of States, and as such constitutes a component of the internationals minimum standard of treatment to be accorded to the property of foreign aliens, the suggestion that it would identify another property-related norm so basic that it would also constitute a component of the international minimum standard seems sanguine.
It is, therefore, unlikely that the minimum standard has much to offer in terms of substantive investor protection, above and beyond expropriation and denial of justice.
It seems fair to conclude that the interpretive note imposes the international minimum standard upon the determination of fair and equitable treatment, whatever reading one might take of the s B(2). The application of this provision to general international law is not considered here. It suffices to say that for the purposes of the NAFTA parties, either the equation to or circumscription by the international minimum standard holds the potential to severely curtail investment protection. We might be fortified in this view if we consider a hypothetical. The minimum standard is, by definition, a principle of general international law, and as such binding on all States irrespective of their bilateral or multilateral treaty obligations. It would seem unlikely that in the absence of treaty obligations States would feel entitled to exercise diplomatic protection on behalf of one of their citizens for the failure of a host State to treat that foreign citizen’s property fairly and equitably. Admittedly, the international minimum standard has been characterised as ‘evolutionary’, and as such represents the ability to respond to developments both within and outside of the law. However, it seems overly optimistic to suggest that the protection of private enterprise operating in foreign countries has so permeated the consciences of the reasonable man so as to form a positive legal principle of the minimum standard.