Introduction
Disputes between international investors and the host state involve International Bilateral Treaties (“BITs”) which is considered as the standard form of solving disputes. One feature shared by BITs is the ‘Most-Favoured-Nation’ treatment clause (“MFN clause”), which aims to ensure that an investor from one country receives treatment in another country that is no less favourable than what the third country enjoys.
A significant issue arising in the decisions of investment arbitration tribunals pertains to the interpretation of the term ‘treatment’, whether it includes both substantive aspects, such as compensation in expropriation, and procedural aspects, like the provisions exempting investors from the obligation to exhaust local remedies before international arbitration proceedings. This article seeks to analyse the meaning of the term ‘treatment’, taken within the jurisprudence of the International Centre for Settlement of Investment Disputes (“ICSID”). This article will therefore help foster a better recognition of the advantages as well as the disadvantages that may be occasioned by the application of MFN clauses in the realm of international investment law.
Significance of MFN Clause in Investment Treaties
MFN are of utmost importance because it provides equal treatment to investors from any country in the same way it provides investors from the most powerful countries and the host nation where the investment has taken place. While clauses such as MFN provisions can erase distortions and disparities in the functioning of investment laws they are sometimes interpreted broadly by the beneficiaries as well as arbitral tribunals. As a result, it is crucial to carefully examine the term ‘treatment’ used in MFN clauses to better understand the clause itself and how it applies within the context of investment law.
A. Does treatment refer only to ‘favourable’ treatment?
Regarding the question of whether the phrase ‘treatment’ in MFN clauses only refers to beneficial treatment, there are two plausible interpretations to consider. First, one can contend that MFN clauses solely include favourable treatments and not the unfavourable aspects found in treaties with third parties. However, this perspective may present challenges. Consider a scenario in which one treaty, between State A and State B, mandates the resolution of investment disputes through an ad hoc arbitral tribunal following the UNCITRAL Arbitration Rules while another treaty between State A and State C dictates that disputes arising from the treaty must be referred to the International Centre for Settlement of Investment Disputes forum in accordance with the ICSID Convention. A similar situation arose in the Siemens v. Argentina case.
This dispute involved a German investor and the Argentine Republic. According to Article X of the 1991 Argentina-Germany BIT, the process for resolving disputes required the initiation of amicable negotiations lasting six months. If no resolution was reached during this period, the dispute was supposed to be taken to the domestic courts and tribunals of the host State for a duration of eighteen months. Only if the dispute persisted after this period could it then proceed to international arbitration. However, in this particular case, the party making the claim used the MFN clause within the Argentina-Germany BIT to bypass the eighteen-month waiting period required for resorting to domestic courts. Instead, they adopted a more favourable dispute settlement provision from a different third-party BIT, specifically the Argentina-Chile BIT of 1991, which did not impose such a waiting period.
Argentina argued that since the claimant had already initiated a domestic administrative proceeding against the host State, the claimant should be prevented from initiating international arbitration, as per the “fork-in-the-road” provision. Nevertheless, the Tribunal dismissed the argument that the entire dispute resolution clause should be incorporated. The purpose of the MFN clause is to provide the beneficiary of the clause with access to any superior treatment available in a third-party treaty. Consequently, only the favourable aspects should be adopted, without importing corresponding disadvantages or the entire provision.
B. Whether an MFN clause is a ‘claim’ in itself or a ‘right to claim’
A further issue pertaining to the legal temperament of the MFN clause centers on whether it signifies an authentic “claim” or merely a “right to claim”. If it is classified as a “claim”, then the host State is compelled to offer advantageous treatment to the investor covered by the clause as soon as the BIT is created or when the State has already extended such treatment to an investor from a third nation. According to this approach, the host State would be obligated to compensate claimants for failure to provide such treatment from the date of original grant to the date of the claim.
Considering the intricate network of numerous international investment agreements, it becomes exceedingly challenging for any host State to discern which treatments are more favourable. For instance, “consider a case where ‘State A’ has entered into more than fifty BITs with various States and each of the treaties would include a number of different and distinct MFN clauses. Thus, if the provision in question is disadvantageous to an investor from ‘State B’, this investor could refer to an MFN clause and choose a more helpful provision specified in the BIT of ‘State A’ with ‘State C’. In this case, legal uncertainty arises, and State A can hardly prepare for the possible consequences of the given BIT as well as its interaction with other treaties, which complicates the process of claims resolution”. This kind of ‘treaty shopping’ is debatable especially in the case of Maffezini v. Spain, where the claimant was able to invoke the MFN clause to avoid the domestic court rules much to the disadvantage of Spain which has not considered this kind of usage of the clause.
Conversely, the “right to claim” perspective restricts the host State’s responsibility to offer the most advantageous treatment to an investor governed by an MFN clause solely when the investor lodges an actual claim. This perspective ensures a greater degree of certainty regarding MFN obligations and diminishes the impact of these clauses on the policymaking discretion of host States and the resulting legal responsibilities.
MFN Clause and Dispute Settlement Provision
The MFN clause is crucial in BITs since it offers reasonable and fair protection and has relative complexity. The controversy to do with the meaning of the word “treatment” and how the MFN clause operates as a “claim” or a “right to claim”, shows how these clauses affect the systems of dispute resolution. Despite the MFN clause being adopted to eliminate any form of discrimination and ensure parity, where this clause is incorporated in the establishment of the dispute settlement provisions it creates confusion and operational complexities to the host states.
Many BITs incorporate an alternative dispute resolution mechanism, enabling investors whose rights under the BIT have been violated to seek remedies through international arbitration, which is referred to as “Investor-State Dispute Settlement”. Within the ICSID tribunals, two distinct groups have emerged. Each with its approach and outcomes regarding the connection between the MFN clause and dispute resolution provisions in BITs. Examining the rulings in specific cases is crucial to understanding the perspective of these groups.
A. Argument in favour of adding Dispute Resolution Provisions and the MFN clause
In Maffezini v. Spain, Maffezini embarked on an investment venture involving the establishment of a chemical product factory in Spain. Unfortunately, financial difficulties beset the project, prompting Maffezini to initiate arbitration proceedings under the “Argentina-Spain BIT” (AS-BIT). Spain asserted that Maffezini had not exhausted available remedies through domestic courts before initiating international arbitration proceedings, as mandated by Article X of the AS-BIT. Conversely, Maffezini utilized the MFN clause, as stipulated in Article IV (2) of the AS-BIT, to avoid the Article X requirement for domestic courts. This was achieved by integrating more favourable dispute resolution mechanisms from the 1991 Spain-Chile BIT, which did not impose a similar requirement prior to initiating international arbitration.
The central issue addressed by the ICSID Tribunal concerned whether the term “all matters” in the MFN clause solely pertained to substantive elements or if it also included procedural aspects like dispute resolution. Spain argued that the use of “all matters” in Article IV(2) of the BIT was limited to substantive matters or significant elements of the treatment afforded to investors, excluding procedural or jurisdictional aspects. ICSID rejected this restriction, arguing that in the present setting, dispute resolution methods are inextricably linked to defending foreign investors’ and merchants’ rights under commercial treaties. ICSID further stated that to preserve the investor’s rights and interests, such terms may be broadened in accordance with the ejusdem generis principle if another party’s treaty includes dispute settlement mechanisms that are more favourable than the base treaty.
B. Argument rejecting the addition of MFN clause and Dispute Settlement Provisions
ICSID in Salini v. Jordan held that the term “treatment” specifically pertains to the ICSID, given that the MFN clause applies to provisions related to substantive protection, like addressing instances of judicial injustice within domestic courts, but not to the inclusion of dispute resolution provisions from another treaty into the base treaty. ICSID acknowledged that the approach taken in the Maffezini case could pose practical challenges in implementation and introduce more uncertainties related to the concept of “treaty shopping”. As a result, ICSID concluded that the MFN clause has a limited scope and is only applicable to substantive matters, excluding arrangements for dispute resolution.
Some suggested that a provision cannot be applied because the provisions are politically constructed, meaning that no change weakens their original intent unless it is obvious that a new interpretation was not intended by the parties. However, it is pertinent to note that treaty shopping is inherent in each of the MFN clauses as a whole and not only limited to the provisions related to dispute resolution. Hence it should not be a basis for excluding the extension of the MFN clause to dispute settlement provisions.
Dispute resolution constitutes an integral component of how a state ‘treats’ foreign investors and, therefore, is a crucial facet of the MFN clause. The argument presented in Plama v. Bulgaria, which states that it is not reasonable to assume that the Contracting States agreed with the provisions that could be expanded by adding dispute settlement clauses from other treaties negotiated in completely different context, does not contradict this finding because the primary goal of the MFN clause is to identify the most favourable clauses from treaties.
Conclusion
In the article, much concern has been devoted to the analysis of the meaning of the term “treatment” in the MFN clauses between Investors and Host States. The approach to these clauses’ meanings is not homogeneous and differs from treaty to treaty. On one hand, several cases belonging to the ICSID created a solid base of findings on the inclusion of MFN clauses in dispute resolution, both as for the substantive and procedural aspects. On the other hand, there are cases which do not support such extension. The implication of construing these MFN clauses broadly, particularly for the aspects regarding the resolution of the disputes is very massive. These could result in enhanced uncertainty in investment arbitration since broad interpretations may allow investors to “treaty shop” in other more favourable procedural provisions in third-party BITs. This may threaten the legal risk certainty that host States rely on while engaging in negotiations of treaties, hence putting them in a disadvantageous position. It would be less desirable for investing countries as it would give host states more leverage in providing more suitable mechanisms for dispute resolution which would reduce the sovereignty of the latter over domestic laws. This is an important issue given the historical evolution of the treaty process where the developing nations end up being at the short end of the stick with the terms being set by the developed nations.
The inclusion of dispute resolution in MFN clauses raises further questions such as, if MFN clauses by themselves mean that investors receive agreed procedural rights that are more favourable than those stipulated in the base treaty – let alone those which are more favourable than domestic courts, then a kind of expansion of the meaning of these clauses can be considered to be feasible and secondly, what are the general principles of the states’ policy-making independence and their opportunity to control the foreign investment within their territories? The various approaches to the analysis of MFN clauses are not without real and tangible difficulties for the construction of coherence and equity in international investment law. On one hand, this may entail a more liberal construction which may promote the equalisation of treatment whereby the foreign investors are given the very best treatment and on the other, it is disadvantageous in a way that it breeds uncertainty and legal arbitrariness in the management of investment disputes. Conversely, the supposed confining of the MFN clauses to substantive provisions may be the best way of ensuring that the letter and spirit of the negotiating BITs are upheld, but this approach also undermines the degree of protection afforded to the investors in the foreign countries.
According to me, the second interpretation is more logical since it aligns with the principle of pacta sunt servanda which aims at preserving the sovereignty of the states by prohibiting investors from invoking more beneficial procedures in the same investment treaty from any other treaty entered by the state with other investors. The risk of choosing more favourable mechanisms of the treaty may unbalance the protection of the investor and state sovereignty which is the primary goal of the BITs. The restriction of MFN clauses to substantive treatment is less arbitrary and better reflects the given intentions of the contracting states than the currently existing approach. Thus, it could be summed up that MFN clauses serve significant purposes to render fairness and minimize discrimination, however, their ambit needs to be rightly delimitated and should not be subjected to broad interpretation. This paper therefore holds the view that as international investment law grows, it must remain the course of striking a balance between the investors and sovereignty of states when it comes to the interpretation of MFN clauses in BITs.
Siddhant Saroj is a final year law student at National Law University Odisha.
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