Fair and equitable treatment: an evolving standard *.

• Author: Klein Bronfman, Marcela

The growing concern of States in order to attract foreign investment into their territories has led to the formulation of a legal structure aimed at encouraging investment through the granting of a secure and stable environment for the investor in the host State. In the core of this structure is the Fair and Equitable Treatment standard which, as a non--contingent standard, constitutes an independent and reliable system for the protection of the investor: However. the application of the true fairness concept underlying the standard seems at times in jeopardy, due to a serious lack of precision regarding its true meaning. Arbitrators and scholars have wandered from one interpretation to another, trying in occasions to fit the standard in existing legal concepts such as the international minimum standard of customary international law or simply creating a whole new meaning by means of self-contained legal figure. The article examines the latest and most decisive attempts to define the standard within modern international law, all of which have contributed to a dynamic but controversial discussion around the topic.

INTRODUCTION

As a result of globalization, States have realized that the attraction of foreign investment into their territories is a decisive element in their economic growth. States alone are not capable of generating sufficient economic activity to sustain a steady growth in their economy. This is true mainly among developing countries or capital-importing countries.

There is concern among States as to the method of stimulating these investment flows into their countries. On the other hand, the investor's decision to make an investment depends on a secure and stable environment in the host State. On this basis, States have agreed upon a set of basic standards for the purpose of granting the investor the security he expects and assuring its continuance over time.

Classical standards such as national treatment or non-discrimination have become insufficient. The reason is based on the concern of investors that because those standards are contingent in nature, the protection granted to them may not reach their basic expectations as the treatment provided by the State to its own nationals--which is the basis of the latter standards--is deficient. Thus, although treated in a non-discriminatory way in relation to the host State's nationals, that treatment violates basic rights that are considered essential for an investment to develop effectively. Therefore, the latter protection is not only a concern of capital-importing countries, but also of capital-exporting countries that desire to protect their investors worldwide.

In order to grant non-contingent protection to the foreign investor, States have, since the 1960's, agreed on bilateral initiatives to assure this protection, constituting a worldwide network of investment agreements. These agreements established a set of standards to grant the foreign investor a safety net for his investment. Some of these standards of protection are the Most-Favored Nation, No Expropriation without due compensation and Fair and Equitable Treatment, the latter being the object of the present analysis.

The fair and equitable treatment standard has become the center of discussion in various forums, and most of all among arbitrators who have applied it. It constitutes one of the most important elements available to a foreign investor to protect his investment in a foreign country because it provides him with a certain treatment that the host State must grant regardless of the treatment given to its own nationals.

It is the discussion regarding the true meaning of the standard that has become a main focus in international investment law. Although most investment agreements grant this standard, they do not provide an indication as to what its exact meaning is and what the criterion is by which it must be applied.

Developed countries have become concerned about the real effect this protection will have on their nationals that invest in capital-importing countries. Their worry is based on the fact that the standard has been given many different interpretations in arbitral cases (more prolifically within the scope of Nafta), which is acknowledged in many studies, such as those of the OECD. However, this is not good news, considering that instead of promoting stability and certainty among investors, this situation produces exactly the opposite effect.

There have been, however, some initiatives from States to define the meaning of the standard through an interpretation of the agreements they have signed. Such is the case of Nafta, where the Free Trade Commission issued an interpretation equating the standard to the minimum standard of customary international law. Although an important initiative, it did not contribute to clarifying the meaning of the standard and, moreover, lowered the protection granted to the investor.

THE SEARCH FOR A MEANING

The manner in which a treaty structures the standard and its association with other standards will be decisive in defining its meaning.

The latter structure differs from one treaty to another. And due to the vagueness of this structure, which provides no enlightenment in resolving the true meaning of the standard, different treaties and investment agreements have evolved throughout the years with the aim of handing over a greater set of tools for the purpose of using this standard in a more uniform way. It is not clear whether the idea of the parties is to completely elucidate the standard's definition. The fact is that "The attempts to clarify the normative content of the standard itself have, until recently, been relatively few. There is a view that the vagueness of the phrase is intentional to give arbitrators the possibility to articulate the range of principles necessary to achieve the treaty's purpose in particular disputes. However, a number of governments seem to be concerned that the less guidance is provided for arbitrators, the more discretion is involved, and the closer the process resembles decisions ex aequo et bono,, i.e. based on the arbitrators notions of 'fairness' and 'equity' (1).

Different formulations in different investment agreements and different interpretations by arbitrators have led to a variety of expressions in relation to its true meaning, which ultimately do not contribute to a secure environment for investment.

Recent treaties, such as Nafta (particularly in light of the Free Trade Commission's interpretation that narrowed its meaning) and the United States-Chile Free Trade Agreement, have made important progress in narrowing the scope of the definition of its meaning in their investment Chapters. Nonetheless, this latest tendency has not sufficed for Tribunals to develop a uniform jurisprudence on the meaning of the term. Although Tribunals increasingly rely on other Tribunals' findings, there are still important differences in the approach.

Of particular interest are the views of investors with regard to the standard, as well as that of host States. Investors generally argue the more expansive view, that is, conceiving the standard as a self-contained concept, which will extend far beyond the minimum standard approach that limits it to outrageous behavior by the host State, as was established in the Neer case (2) in the 1920% On the other hand, the host State's argument will tend to limit its liability precisely to the Neer case understanding.

The main approaches that have been formulated regarding the meaning of the standard are (i) equating it to the international mínimum standard that is present in international customary law, (ii) measuring it against international law, including all sources; (iii) considering it as an independent standard based on the plain-meaning approach; or (iv) considering it as an independent rule of customary international law.

THE INTERNATIONAL MINIMUM STANDARD APPROXIMATION: A DOOR TO CUSTOMARY LAW

When States agree upon the fair and equitable treatment standard and include it in an investment agreement, they are dealing with the fairness and equity concept that is already present in their own legal systems, which they view as a common standard. However, and for the purpose of attaining the status of a common standard at the level of international obligations, an important deal of uniformity in relation to its significance is decisive, which will be achieved through the determination of its main elements.

One of the main theories that exists to define the Fair and Equitable Treatment standard is the one that considers the standard to be a part of the international minimum standard required by international law, which, for many States, is a part of customary international law.

The latter conclusion derives from a set of sources in which there is a capital-exporting State perspective on the issue. And although at the doctrinal level this is an approximation on which there is important literature, it is salient to point out that "it cannot readily be argued that most States and investors believe fair and equitable treatment is implicitly the same as the international minimum standard." (3) That is, at the empirical level there is not a general acknowledgment of countries in relation to this approach, as we will establish.

The International Minimum Standard

The international minimum standard is a rule of customary international law which governs the treatment of aliens, by providing for a minimum set of principles which States, regardless of their domestic legislation and practices, must respect when dealing with foreign nationals and their property (4). Moreover, "the international minimum standard sets a number of basic rights established by international law that States must grant to aliens, independent of the treatment accorded to their own citizens"...