Should MFNT exclude dispute resolution? An evaluation of the Australian approach.

• Author: Sharmin, Tanjina
• Position: Most-Favoured-Nation Treatment

I Introduction

Most-Favoured-Nation Treatment (MFNT) is frequently included in Internationa! Investment Agreements (IIAs). (1) In an investment relationship, it is a promise by the granting State to the beneficiary State to accord a treatment which is not less favourable than that granted to any third State. (2) Most treaties within the IIA network are bilateral. Therefore, in this area, the main function of MFNT is to multilateralise the treatment standards agreed within IIAs.

The traditional jurisprudence supported the application of MFNT only to the Substantive Treatment Standards (STS)s. However, the Arbitral Decision in Maffezini v Spain established the principle that the clauses can apply to the Dispute Settlement Provisions (DSPs) as well, unless explicitly excluded in the text of the treaty. (3) The International Law Commission (ILC) also undertook research on this topic and came out with its final report in 2015. The report also confirmed the possibility of the extension of MFNT to DSPs in light of the Post-Maffezini jurisprudence. (4) While the application of MFNT to DSPs may benefit the investors, it may limit the regulatory power of the host State to a significant extent. Such a consequence may arise in various ways. Arbitral Tribunals may extend their jurisdiction by using MFNT to bypass various procedural prerequisites to arbitration. One of the prerequisites which is bypassed by MFNT in many cases is the requirement to litigate in the domestic forum of the host State for a specific length of time before availing arbitration. The use of MFNT to bypass the prerequisite may curtail the power of the domestic courts of host States over foreign investments. Taking the issue into account, some States have recently changed their IIA drafting styles to exclude DSPs from MFNT explicitly in the treaty text. Globally, most IIAs signed during 2014-2016 followed the trend. In the context mentioned above, this Article examines the current approach of Australia on the issue, compares it with the global trends, and evaluates whether the approach is most suitable for the country.

The Article has five sections. Section I introduces the topic. Section II will examine the implications of the use of MFNT to DSPs, and the recent global reactions. Section III will map the MFNT clauses within Australian IIAs to identify the current approach, and will compare it with the global trends. Section IV will identify the factors which have possibly shaped the current approach of Australia. The section will discuss the experience of the country on the issue in the White Industries case. (5) It will further discuss Australian foreign investment policy which supports a case-by-case approach, and the concern of the country of the Investor-State Arbitration (ISA). Finally, section V will conclude the Article by answering, whether the current Australian approach is most suitable for the country or not.

II The Extension of MFNT to DSPS and Global Reaction

1. The traditional and emerging jurisprudence on the application of MFNT

   MFNT multilateralises IIAs. (6) The existence of a relationship of at least three States, a granting State, a beneficiary State and a third State is a precondition of the application of MFNT within IIAs. (7) The following illustration may clarify the implication of an MFNT provision in an IIA. (8) If State A has an IIA with State B containing an MFN provision, State B (or investors from State B) may claim all the more favourable treatments (if any) accorded by State A to State C or other States. It does not matter whether State A extended those privileges to State C by a different IIA to which State B is not a party. Nor is it relevant if those privileges are extended to State C by any unique State practice between State A and State C. In both situations, based on the MFN clause in the IIA between State A and State B, the latter State may claim the favourable treatments accorded to State C. Thus, MFN clauses have the capacity to multilateralise IIAs.

   MFNT clauses contest the possibility for the host State to grant any more favourable treatment to any other State by domestic laws, regulations, administrative practice or 'third-country investment treaties.' (9) The clauses thus create a level playing field for the foreign investors by harmonising the legal frameworks of host States which govern their economic activities. (10) The application of MFNT prevents bilateral economic alliances. (11) Bilateral Investment Treaties (BIT)s dominate the IIA network. The application of MFNT in this network, ultimately compels the States to promote a more transparent multilateral investment framework. (12)

   According to the traditional jurisprudence, MFNT could only apply to the Substantive Treatment Standards (STS)s within IIAs. (13) At several occasions, foreign investors have invoked the clause to import more favourable STSs from other IIAs. (14) They have invoked the clause to import more favourable Fair, and Equitable Treatment (FET) standards, (15) umbrella clauses, and other significant STSs included in other investment treaties. (16) Thus, the application of MFNT to protect STSs within IIAs is well established, and remains unchallenged in principle. (17)

   However, the arbitral decision in the Maffezini allowed an application of MFNT to DSPs for the first time. (18) In this case, the basic treaty contained a requirement for the investors to litigate in the domestic forum of the host State for at least 18 months before availing international arbitration. (19) The Claimant investor argued that the requirement resulted in a less favourable treatment. They referred a third-country treaty in which the host State allowed the third investor to avail arbitration only after a negotiation period of 6 months. The Maffezini Tribunal found merit in the argument and allowed the investors to import the more favourable dispute settlement provision from the third treaty.

   After Maffezini, MFNT clauses have been sought on various occasions to import more favourable DSPs and Procedural Treatment Standards (PTS)s granted by the host State to other States. Some tribunals have supported Maffezini. They have applied MFNT to bypass various procedural prerequisites to arbitration, and to extend their jurisdiction ratione materiae, all by importing more favourable dispute settlement mechanisms from other treaties. (20) On the other hand, some tribunals have rejected the Maffezini stance. (2) ' The present jurisprudence on the issue is still evolving. However, the most persistent view in this regard is, unless otherwise excluded in the text of the treaty, DSPs and PTSs remain exposed to the multilateralising power of MFNT within IIAs. (22)

2. Implications of the application of MFNT to DSPS

   The application of MFNT to DSPs empower the investors, while it may curtail the regulatory power of the host State over foreign investments. MFNT within IIAs has economic and political implications. The implications of extending MFNT to DSPs are as follows.

   1. Empowers ISA Over the Negotiation of the Treaty Parties

      The use of MFNT to DSPs may dismantle the balance of IIAs as negotiated instruments. (23) Within an IIA, the treaty parties include a range of STSs, DSPs, PTSs and other provisions to determine the scope and functions of the treaty. In the DSPs within IIAs, the treaty parties agree on the mechanisms of dispute settlement between the investor and host State, and between the host State and investor-State. The dispute settlement mechanisms (DSMs) agreed within IIAs may vary from treaty to treaty. For example, some IIAs may require the investors to litigate in the domestic forum of the host State before arbitration for a specific period. Some IIAs allow arbitration only after a negotiation between the parties. Some IIAs may exclude contractual matters from the jurisdiction of the Arbitral Tribunals, while some IIAs may preserve the application of domestic laws of the host States. Some IIAs may exclude ISA completely from their scope, and may require the treaty parties to settle their disputes in the domestic court of the host State. Most IIAs which provide for IIAs, they also provide for the jurisdiction of Arbitral Tribunals. The jurisdiction may be of three types: subject matter jurisdiction, temporal jurisdiction, and jurisdiction over specific persons. Some IIAs may exclude certain matters from the jurisdiction of the tribunal, while some may allow the tribunals to try all matters included in the treaty. Every IIA is negotiated differently between the treaty parties. Most IIAs are bilateral. While negotiating BITs, the treaty parties therefore carefully set the DSPs keeping various factors in their mind. For example, if one of the treaty parties has the weaker rule of law situation in its territory, the other party may emphasise on the easier access to the ISA. In that situation, the treaty may include fewer procedural prerequisites to arbitration, and broader jurisdiction for the Arbitral Tribunal. The arrangement may be different between the States who have an equally strong rule of law situation. They may emphasise on the domestic courts instead. Thus, IIAs may differ from each other regarding the DSMs agreed in the treaty.

      An unrestrained MFNT may apply to the DSPs within IIAs. Investors can use the standard to import more favourable DSMs from other treaties. However, all IIA parties may not desire such consequence. MFNT clauses within IIAs are drafted in a broad range of forms. The problem arises when the MFN provisions are drafted in a broad language without clearly excluding PTSs and DSMs from their scope. For example, in Mafezzini, the MFNT clause explicitly extended to 'all matters' included in the basic treaty. (24) The Tribunal relied on the plain reading of the text, and concluded that 'all matters' included DSMs since they were areas covered by the basic treaty. The Maffezini and other tribunals subsequently facing the issue...