Application of MFN to investment dispute settlement: rule of law issues
| Pages | 21-41 |
| DOI | https://doi.org/10.1108/JITLP-05-2020-0031 |
| Date | 27 January 2021 |
| Published date | 27 January 2021 |
| Subject Matter | Strategy,International business,International business law,Economics,International economics,International trade |
| Author | Tanjina Sharmin,Emmanuel Laryea |
Application of MFN to investment
dispute settlement: rule of
law issues
Tanjina Sharmin and Emmanuel Laryea
Faculty of Law, Monash University, Melbourne, Australia
Abstract
Purpose –Over the past two decades, the application of most-favoured-nation (MFN) clauses in
international investment agreements (IIAs) to dispute settlement matters has generated controversy. The
purpose of thispaper is to help resolve some of the controversies by examiningthe rule of law issues that may
arise from suchapplication of MFN.
Design/methodology/approach –The study describescontroversies regarding the application of MFN
to dispute settlement as per the extant literature on the subject. It explores the elements of rule of law in
investor-state arbitration.The paper then analyses the implications of applying MFN to dispute settlement
matters for the elements of rule of law. Basedon such analysis, the study argues that the application of MFN
to disputesettlement matters undermines certain elementsof rule of law.
Findings –The paper has outlinedthe relevant elements of rule of law in investor-state arbitrationas access
to dispute settlement; judicial (or tribunal) independence, fairness and impartiality; consistency and
predictability of law and decisions; transparency; accountability and subjection of dispute forums and
systems to law. It found that the application of MFN undermines various components of rule of law, in
particular of consistencyand predictability and the requirement of tribunalsto adjudicate within the limits of
the law.
Originality/value –The findings of this study willhelp future investor-state arbitral tribunals to decide
on the applicationof MFN to dispute settlement matters.
Keywords Rule of law, Investment dispute settlement, Investment treaty arbitration,
Investor-state arbitration, MFN
Paper type Research paper
1. Introduction
Most favoured nation (MFN) clauses commonly feature in international investment
agreements (IIAs) [1]. Theyare negotiated treaty provisions agreed between state-parties to
IIAs by which a state thatis host to investments (and, or, investors) from the otherstate (the
beneficiary state) promisesto accord those investments (and, or, investors) treatment that is
no less favourable than that accorded to investments from third states [2]. For some time,
MFN was considered to applyto substantive standards only (Douglas, 2011)[
3]. However, in
a 2000 case, Maffezini v Spain [4], an investor-state arbitration (ISA) tribunal applied MFN
to dispute settlement matters. Since then, there have been several cases in which investors
have sought to invoke MFN for dispute settlement processes. Some such invocations have
been successful [5], whilesome have not [6]. That has resulted in inconsistency and a serious
and undesirable uncertainty, in the law (Maupin, 2014) which, arguably, have implications
for the rule of law. Apart from the uncertainty, the applicationof MFN to dispute settlement
raises a number of other rule oflaw issues [7]. These include expansion of the jurisdiction of
arbitral tribunals beyond what the state-parties to the IIA intended and usurpation of
authority and power reserved for the sovereignstate-parties. Also, arbitral tribunals may be
Investment
dispute
settlement
21
Received8 May 2020
Revised6 November 2020
Accepted4 December 2020
Journalof International Trade
Lawand Policy
Vol.20 No. 1, 2021
pp. 21-41
© Emerald Publishing Limited
1477-0024
DOI 10.1108/JITLP-05-2020-0031
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1477-0024.htm
said to have vested interest,and therefore be conflicted, in allowing the application of MFN
to dispute settlement matters(Blyschak, 2009, p. 120). All these may go to the legitimacy of
the particular decision or award and the investor-state arbitration system itself (Franck,
2005, p. 1540, 1571, 1578).
In the context of applying MFN to dispute settlement matters, arbitral tribunals
themselves have recognised the essence of promoting the rule of law [8]. For example, in
Austrian Airlines v Slovakia, the tribunal stressed this point [8]. In this case, the claimant-
investor sought to invoke the MFN clause in the basic IIA (IIA based on which cause of
action arose) to import more favourable arbitration clauses from other IIAs [9]. The
arbitration clause in the basic IIA restrictedthe jurisdiction of arbitral tribunals to disputes
regarding payment of compensationfor expropriation. By invoking the MFN, the claimants
sought to extend the jurisdiction of the tribunal to all disputes arising from their
investments (as provided for in the third treaties). A majority of the tribunal rejected the
claimant’s argument, holding that the specific intent of treaty parties expressed in the
arbitration clause of the basic treaty couldnot be bypassed. It stated that the tribunal had a
duty to maintain rule of law.In its words:
Subject to the specifics of a given treaty and of the circumstances of the actual case, it has a duty
to seek to contribute to the harmonious development of investment law and thereby to meet the
legitimate expectations of the community of states and investors towards the certainty of the rule
of law (Emphasis added) (para. 84).
Intriguingly, however, in his separate opinion, the dissenting arbitrator (Charles Brower),
while also emphasising the significance of observing the rule of law, was in favour of
applying MFN to dispute settlement[10]. He stated:
I believe that this interpretation as regard the MFN clause would better have “contribute[d] to the
harmonious development of investment law and thereby [met] the legitimate expectations of the
community of States and investors towards the certainty of the rule of law”, a goal which we are
united in furthering [11].
Thus, on the one hand, the application of MFN to dispute resolution processes is said to
undermine rule of law (as per the majority in this case), while on the otherhand it is said to
promote the rule of law. So, which position (application or non-application) fosters rule of
law? That is what this article is about. In particular, it examines whether the application of
MFN to dispute settlement mattersundermines the rule of law in ISA and the international
investment systemgenerally.
To achieve its objective, the remainder of this article is divided into four parts. Part II
briefly situates the article in the context of the extant literature on the subject. Part III
discusses the concept of rule of law in international investment law and investor-state
arbitration (ISA). It exploresthe elements of the concept of rule of law for the purpose of this
article. Part IV discusses how the applicationof MFN to dispute settlement undermines rule
of law in international investment law. It does so by analysing the implications of applying
MFN to dispute settlement matters for the elements of rule of law identified in Part III. It
argues that the application of MFN to dispute settlement matters undermines certain
elements of rule of law. PartV concludes the article with some observations.
2. Extant literature and context
It must be stated from the outset that there exists voluminouswork on the application of
MFN in international investment law generally and some on its application to dispute
settlement (Sharmin, 2020;Chaisse and Kirkwood, 2020;Douglas, 2011;Valenti, 2008;
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