In the realm of Foreign Investment Law, the significance of treatment standards in international treaties cannot be overstated. Within this context, the Fair and Equitable Treatment (FET) standard holds particular importance, yet its boundaries still remain subject to interpretation. To gain insight into the scope of FET standard, as well as its formulation under North American Free Trade Agreement (NAFTA) and United States–Mexico–Canada Agreement (USMCA), Shahina Azeezdeen and Sadesh Pietersz from the Moot Court Bench International Trade Law Program, interviewed Mr. Zahid Omarzai. Mr. Omarzai has significant experience in commercial dispute resolution and managing financial transactions in Afghanistan. He has gained experience at policy level for developing and regulating Alternative Dispute Resolution (ADR) in Afghanistan. As former Executive Director of Afghanistan Center for Commercial Dispute Resolution, his efforts in development of ADR have resulted in the establishment of institutional arbitration in Afghanistan. In addition, he designed the dispute resolution mechanism of Government of Islamic Republic of Afghanistan’s domestic procurement contracts through arbitration. In his capacity as a practicing attorney in Afghanistan, his primary area of practice was commercial law and advising international organizations and working with multiple stakeholders on funding infrastructure projects in Afghanistan.
By Shahina Azeezdeen and Sadesh Pietersz
Q: Mr. Omarzai, can you explain what is the historical background for the development of foreign investment treatment standards? How did it then lead to the formation of an international minimum standard of treatment?
A: I believe the topic we are going to talk about today is an important one particularly given the importance of foreign investment for economic development and integration of states. Before going into substantive details of answering your question, I would like to have a humble request from those who would be reading this blog article not to consider these statements and remarks as conclusive given their limited scope for this blog, but also consult the work of other scholars in this field.
Coming back to answering your question, foreign investment treatment or protection standards have gone through various historical shifts. To begin with the historical changes, there was direct expropriation of foreign investments without providing any compensation. The reason for host states to do so was that they maintained a view that they have complete sovereignty over foreign investments, and therefore they could expropriate those investments without providing any compensation. Moving further to diplomatic protection or gunboat diplomacy. Under this theory, the investment of home state citizens was considered the wealth of home state. In effect if there was any harm to foreign investment of their citizens, the home states would resort to economic, political, and even military actions against the concerned host states. This method would include interstate conflict because the home state would engage with host states regarding foreign investments. Another reason for states to extend diplomatic protection for foreign investments of their citizens was that there was a lack of legal mechanism for individuals and companies to charge claims directly against host states for violating their rights or expropriating their investments. Last but not least, diplomatic protection was also used in history as a tool by states to further their economic and political goals abroad. Nevertheless, diplomatic protection did not receive international recognition as states, particularly those referred to as capital importing or developing states, considered diplomatic protection as a tool by stronger states to undermine their national sovereignty. But the question is, what was the view of the states opposing diplomatic protection? Such states resorted to the Calvo Doctrine. The Calvo Doctrine was formed and presented as a theory of international law by an Argentinian jurist named Carlos Calvo in 1868. The Calvo Doctrine was a theory that was founded on one basic premise. The premise was that foreigners who invested in a state should have the same rights to protection as nationals of that state and cannot claim broader protection; meaning that if they suffered a loss, they may only complain to the courts of the host state. As long as the national courts are accessible to them, foreigners have no international recourse. In summary, according to the Calvo Doctrine, disputes arising from the presence of foreigners or foreign investments are removed from the realm of diplomatic protection.
Moving further, what happened historically was that most states began to form a consensus that what they are doing with foreign investments is according to them a treatment under their national laws. The question is what is the logic of states being bound by international law and according treatment to foreign investments under their national law? That is why states began to accept that there should be an international minimum standard of treatment for foreign investments. That is how there was a movement towards formation of an international minimum standard of treatment as a result of the Gunboat diplomacy, the Calvo doctrine, and expropriation without compensation by some states. The result of all these developments and preference of treatment in accordance with international law—not domestic law—is known as international minimum standard of treatment, which covers not just the foreign investments but foreign investors as well.
The most important debate revolving around the international minimum standard of treatment, is on its scope, meaning, whether or not it has a limited scope and what is the threshold for its violation. Some scholars of international law perceive that the Neer case, which was a case in 1926, has significantly impacted the international minimum standard of treatment under customary international law. In other terms, some scholars perceive that the Neer case established an international minimum standard of treatment under customary international law, which is also often relied on by parties to various investment treaties. The case involved a U.S. citizen, Paul Neer, who was murdered in State of Durango of Mexico. The claim against Mexican government was brought under the 1923 Convention between United States and Mexico on behalf of the widow and daughter of Paul Neer. The claim was that Mexico failed to do what it was required to do; meaning that Mexico did not diligently investigate the murder. But the Claims Commission deciding the issue upheld that to hold a state accountable for a wrongful act, that act should amount to “an outrage, to bad faith, to willful neglect of duty, or to an insufficiency of a state action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.” If you consider the wordings or the terms of this decision such as bad faith, willful neglect of duty, insufficiency of state action, the obvious understanding is that it has set a very high threshold for the breach of minimum standard of treatment, which some scholars derive from the Neer case.
In summary, the historical developments led to the formation of the international minimum standard of treatment. Then there were certain cases, for instance, the Neer case, which gave meaning to what the international minimum standard of treatment under customary international law should be.
Q: In this context, what is FET standard, its connection with international minimum standard of treatment, and is there a threshold for proving a violation of this FET standard?
A: The Fair and Equitable Treatment Standard is a standard of protection in context of foreign investment, which is included in most bilateral investment treaties (BITs) as well as multilateral investment treaties (MITs). FET is also referred to as the golden rule because you can find it virtually in all investment treaties. However, FET has not been given an exact definition in most of the treaties in which it appears. For this reason, the definition or the understanding of FET has mostly been subject to interpretation of international investment arbitration tribunals.
United States is considered the first country to adopt the FET principle in its treaty practice. The main reason for the United States to do so is considered to be due to the expansion of American investments across the world after the Second World War. But if we attempt to define what FET is, we can look at the decision of the tribunal in Saluka v Czech Republic, in which the tribunal described the requirements of the FET standard in terms of (1) consistency of host state’s actions, (2) transparency in the host state’s action, and also the (3) reasonableness of host state’s actions as far as the foreign investment is concerned. However, the meaning of FET largely depends on whether it reflects the international minimum standard of treatment under customary international law also referred to as the traditional view or is it a standalone standard in addition to the international law, which is also known as the modern view.
Under the traditional view, the proposition which suggests that FET is part of customary international law, the FET merely reflects the minimum international standard of treatment and does not give any additional rights to investors. One prominent view is that the Neer case has established the threshold for FET standard, which is obviously very high. The other view is that the FET is an independent standard. Under this modern view, the FET standard includes a higher standard of treatment required from host states, not merely a treatment in accordance with international minimum standard of treatment. In summary, if you accord the traditional view to FET standard, you are favouring the position of host states. If you are according the modern view to the FET standard, you are favouring the position of the foreign investors, because under the latter view, you can provide further protection to foreign investors.
Q: Is it a defense to what would otherwise be a violation of FET, that state measures resulting in the investment included no specific commitments to continue with the system that had led to the investment?
A: This is a good question because it involves the practical aspects of the topic. I would like to relate this question to what we call the legitimate expectations of foreign investors; meaning for instance, if I am a foreign investor, what are my expectations when I am investing in a foreign country, in a host state, and whether or not those expectations should be protected. Scholars have considered protecting the legitimate expectations of investors by the application of the principle of estoppel and they have also laid out some rules regarding which category of expectations are protected (and those which are not). In “General Principles of Law and International Due Process” by Professor Charles Kotuby and Luke A. Sobota, the authors mention that perhaps the most vibrant modern affirmation of principle of estoppel lies in protection of legitimate expectations through the FET standard in modern investment law. The book includes explanation of two main elements which have been accorded under the principle of estoppel in relation to the FET standard. The first element is that the reliance of an investor should be on clear representation of government. In other terms, the actual reliance of an investor on a statement, position, or action of a host state which actually induces reliance; meaning that a foreign investor is induced by that representation or statement of the government, and as a result, that foreign investor goes in to the host country and invests. It is also recommended that reliance on specific and official undertakings are more likely to generate legitimate expectations than general and informal ones. Secondly, only those expectations which are legitimate, meaning which are based on clear and specific representations or commitments of host states will be upheld under the principle of estoppel, and that unjustified expectations are neither protected under FET standard, nor is it sufficient to invoke the principle of estoppel.
In order to summarize the answer, I would say that yes, without a clear commitment, no investor can reasonably expect a state’s regulatory regime to remain static and frozen, merely because to protect the expectations of the foreign investors. There should therefore be clear commitments of the government, otherwise it would be difficult for foreign investors to prove a claim under the FET standard. There are alternative solutions, for instance, stabilization clauses in investment agreements which would require additional explanation.
Q: Are there any other standards that relates to FET standard?
A: Yes, there are many different standards which arbitrators would view together when they are deciding a question of the FET standard. The first main consideration that an arbitral tribunal would see is whether or not there was stability and consistency in the host state’s regulatory regime and actions. For instance, in the context of a tax incentive to a foreign investor under an investment agreement, the expectation is that the host state would continue giving the similar tax incentive that has been agreed. If the host state changes its regulatory regime without having any justifiable public policy reason, the view of some arbitral tribunals or the precedent that has developed in the international investment law field, would be leaning towards such action to be a violation of FET. But then it also depends on what treaty you are looking at.
The other standard which is viewed together is the legitimate expectations of foreign investors, which I described previously.
Additionally, the other standard which is viewed closely with the FET standard is that foreign investors should not be deprived or should not be subject to arbitrary actions or discriminatory actions of host states; meaning that even if the foreign investors are deprived of their right(s), they should still have the right to refer to the courts in the host state. They should not be denied access to justice. The actions of the host state should not be arbitrary.
Therefore, stability and consistency, legitimate expectations of foreign investors, and protection from arbitrary and discriminatory actions are some of the standards which are viewed together in relation with the FET standard.
Q: If we focus on NAFTA and USMCA, are there any differences between the FET standards mentioned in NAFTA and USMCA? And if there are any differences, what are they?
A: The United States-Mexico-Canada Agreement (USMCA) replaced the North American Free Trade Agreement (NAFTA). In order to answer this question, it is important to look at the text or the language of the treaties. The FET standard is incorporated under Article 1105 of NAFTA, which provides that “[e]ach party shall accord to investments of investors of another party, treatment in accordance with international law, including fair and equitable treatment…”. In other terms, it does not provide a full definition of what FET is. It also only says treatment in accordance with international law, including fair and equitable treatment. The challenge that it created was that the arbitral tribunals deciding under NAFTA were going in different ways when they were defining the FET standard under Article 1105 of NAFTA. In order to overcome that challenge, the Free Trade Commission (FTC) of NAFTA issued an interpretation of Article 1105. In that interpretation, the Commission explicitly said that Article 1105, which incorporates the FET standard, prescribes the customary international law minimum standard of treatment of foreign investors. The Commission added that if there is a determination that whether or not there is a breach of another provision of NAFTA or a separate international agreement, it does not establish that there is a breach of FET standard; meaning that the NAFTA has accorded the traditional view to the FET standard. The Commission’s interpretations are binding under Article 1131 of NAFTA.
Therefore, the discussion is on the interpretation of a treaty. It is not an amendment of the treaty. In this context what is the importance of interpretation of a treaty versus amendment of the treaty in international law? Why did not the parties to NAFTA amend this Article? Questions for your blog readers to think about.
The USMCA, came into effect on July 1st, 2020 replacing NAFTA after its twenty-six and a half years of existence. USMCA is a very recent treaty. It is yet to observe the precedent which will be developed under it. However, its Article 14.6 is titled ‘Minimum Standard of Treatment’ and the language of that Article also appears to adopt the FTC interpretation of Article 1105 of NAFTA. USMCA 14.6 states, “each party shall accord to covered investment treatment in accordance with customary international law, including fair and equitable treatment…” Then in the second section, it says that “[f]or greater certainty, paragraph 1 (as mentioned above) prescribes the customary international law minimum standard of treatment..” of foreign investments. It can be observed that both Articles are similar in their approach to FET standard. But there is yet to be precedent under USMCA to observe and to have a conclusive answer on this.
Q: What is the overall impact of the FET standard on foreign investments?
A: There are again two views on the impact of the FET standard. that the first view is that FET does not have any tangible impact because it depends on how the arbitral tribunals interpret what FET is and their understanding of FET. The prominent view is that it accords a higher protection to foreign investments. The most significant impact is that host states are prohibited under FET or by the FET standard to act arbitrarily or discriminatorily against foreign investments and investors. The FET standard also allows foreign investors in host states to have access to justice. In other terms, if they are deprived from access to justice, such a deprivation would usually lead to a violation of FET. To summarize it in one sentence, it can be stated that the FET standard protects foreign investors and investments from abuse of power by host states.
The views and opinions expressed by experts in the In-Discussion Series of the Comparative Advantage Blog are those of the experts and do not necessarily reflect the views of the Moot Court Bench.