Executive Summary

National treatment (NT) and most-favoured-nation treatment (MFN) are common provisions in international investment agreements (IIAs), designed to protect foreign investors and their investments from discrimination. National treatment requires foreign investors and their investments to be treated at least as well as domestic investors and their investments, in like circumstances. Most-favoured-nation treatment requires foreign investors and their investments to be treated at least as well as investors and investments from third-party states, also in like circumstances. The scope of both provisions is intended to cover all post-investment activities, including expansion, management, conduct, operation, and sale or other disposition of investments. The scope of certain US-style and other IIAs is broader and extends to pre-establishment activities such as acquisition.

Tribunals use essentially the same three-part test to assess a host state’s obligation under each clause:

  1. Whether the domestic investor or the investor from a third-state party is an appropriate comparator to the disputing investor;
  2. Whether the disputing investor was accorded less favourable treatment than its domestic or third-party state’s comparator, either as a matter of fact or by law; and
  3. Whether the differential treatment can be justified by legitimate policy reasons.

The scope of the MFN clause in investment arbitration has gone beyond direct violation of MFN treatment, as investors have invoked the MFN clause in investment agreements to incorporate more favourable substantive and procedural provisions from treaties between the host state and third-party states.

1.0 Introduction

This Chapter introduces two standards of protection known as national treatment (NT) and most-favoured-nation treatment (MFN). The great majority of modern investment treaties include non-discrimination obligations that require host states to accord a foreign investor and its investments treatment no less favourable than that it accords to its own investors and their investments (NT), and to investors from third-party states and their investments (MFN). These obligations are conceptually similar to national treatment and most-favoured-nation treatment in the international trade context, as discussed in Chapter 2 of Volume 1 of this series (Trade). This Chapter discusses NT and MFN as applied to investment.

1.1 Pre-Investment or Post-Investment

Some IIAs require NT and MFN treatment only after an investment has taken place, i.e, they do not provide that foreign investors have the same right as domestic corporations to make an investment, and IIA rights only apply after an investment has been made. Typically US BITs cover both the pre-establishment and post-

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establishment phases of an investment, while European BITs are usually limited to the post-establishment phase. Compare, for example the post-establishment provision of the Hungary-Ukraine BIT, which provides that the NT and MFN obligation applies to the “management, maintenance, use, enjoyment or disposal of their investment”,1with the pre-establishment provisions of the North American Free Trade Agreement (NAFTA), whose NT and MFN obligations cover the “establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments”.2 Pre-establishment treaties are also based on a broad definition of “investor”. For instance, NAFTA provides that “investor” of a Party means “a national or an enterprise of such Party, that seeks to make, is making or has made an investment”.3 These provisions emphasise that the obligation to respect foreign investors’ rights to NT and MFN are in place from the time the investment is sought, even before the investment is made.

Usually BITs that contain a pre-establishment provision contain exceptions, such as the exclusion of particularly sensitive sectors. For example, Article 1108 of NAFTA permitted the parties to schedule exceptions to Article 1102 which covers preestablishment.

2.0 National Treatment

2.1 Objective and Definition

National treatment provisions are common in IIAs and are intended to protect investors from discrimination on the basis of nationality. For example, NAFTA provides in Article 1102(2) that “Each Party shall accord to investments of investors of another Party treatment no less favourable than that it accords, in like circumstances, to investments of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.”4 Most international investment agreements contain a similar NT provision, though as noted above, some only apply after the investment has been made.

2.2 Relevant Test

Three steps are typically required to demonstrate a violation of an NT obligation:

  1. An investor must identify a domestic comparator; that is, an entity or person “in like circumstances” as the investor;
  2. The investor must show that the host state has treated that domestic comparator more favourably than the investor or its investment; and
  3. The burden then shifts to the state, which may demonstrate that there was a legitimate policy reason for the discrimination.5

2.2.1 “In Like Circumstances”

Investor-state tribunals have increasingly interpreted the phrase “in like circumstances” narrowly, to include only host-state industries in the same business or same sector as the foreign investor.6 Tribunals have also considered whether the investor and the suggested comparator were subject to the same regulatory regime. Other tribunals, however, have preferred a more flexible interpretation based on the particular facts of a case, in order to avoid depriving investors of the intended protection.7

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2.2.2 No Less Favourable Treatment

The second element of the typical “national treatment” inquiry is whether the investor was treated less favourably than the domestic comparator.

Tribunals have generally held that to satisfy this element of the national treatment inquiry, it is sufficient to prove discrimination or the practical impact of disproportionate treatment in general, without needing to prove that the government intended to discriminate based on nationality. 10

Differential treatment can be based on a law or regulation (de jure) or simply as a result of State acts or omissions — in other words based on the relevant facts in a dispute (de facto).11

2.2.3 No Legitimate Policy Reasons

Discriminatory state conduct has been justified where the state successfully demonstrated that there were legitimate policy reasons behind it.

Investors should be aware that tribunals have determined that governmental regulations that treat foreigners and locals differently may nonetheless be justified if the purpose is to protect the public interest. Legitimate policy reasons have included granting certain types of subsidies to a state’s local industry and ensuring that a state’s local industry remains solvent.

3.0 Most-Favoured-Nation Treatment

3.1 Objective and Definition

The objective of most-favoured-nation provisions is to protect foreign investors from discrimination vis-a-vis investors from third countries.

Under MFN provisions, the host state must accord nationals of the other state party to the applicable investment treaty and their investments the most favourable treatment the host state accords to investors of other states and their investments.

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The great majority of modern investment treaties contain MFN provisions. For instance, the Germany-India BIT (1995) provides that “[e]ach Contracting Party shall accord to investments of investors of the other Contracting Party, including their operation, management, maintenance, use, enjoyment or disposal by such investors, treatment which shall not be less favourable than that accorded […] to investments of investors of any third State.”17 Similarly, the Dominican Republic-CAFTA Free Trade Agreement with the United States (DR-CAFTA), in line with NAFTA18 and the 2012 US Model Bilateral Investment Treaty,19 provides that “[e]ach Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to investors […] of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.”20

3.2 Application to Substantive Protections

Like the NT test, the test for application of MFN generally requires examination of three issues:21

  1. Is the foreign investor of a third-party state identified by the foreign investor party to the dispute an appropriate comparator; that is, are the investors in like circumstances?
  2. Is the treatment accorded to the foreign investor less favourable than that accorded to the foreign investor comparator?
  3. If so, is the differential treatment justified by legitimate policy reasons?

In practice, the analysis and application of these tests, may not be as clear cut and sometimes tribunals conflate the tests, particularly like circumstances and legitimate policy reasons, as in the Parkerings case discussed below.

3.2.1. “In Like Circumstances”

Arbitral tribunals generally apply the test of “like circumstances” in cases involving allegations of breach of MFN or NT — even if this term is not in the treaty.22 As explained by the tribunal in Total v Argentina, which relied on an MFN clause lacking the “like circumstances” language:23 “Mere differences of treatment do not necessarily constitute discrimination … discrimination may in general be said to arise where those who are in all material respects the same are treated differently.”24

Tribunals apply the MFN test in the same manner as the NT test. They consider whether the foreign investors that are being compared are in the same business or economic sector,25 and whether they are competitors.26

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3.2.2 Differential Treatment

Claimants alleging a direct violation of MFN treatment must also substantiate that the host state subjected them to different de jure or de facto treatment from that accorded to other foreign investors.

3.2.3. Legitimate Policy Reason

Even if a tribunal concludes that the host state treated a claimant differently than an appropriate comparator, a legitimate policy reason may justify that difference, so that the claimant’s right to MFN treatment is not infringed.

As the Parkerings Tribunal explained: “an objective justification may justify differentiated treatments of similar cases. It would be necessary, in each case, to evaluate the exact circumstances and the context.”32

3.3 Importation of Provisions from Other Treaties through MFN

In a number of cases complainants have been able to use an MFN clause to import provisions from investment treaties between the host country and other countries. These provisions may relate to substantive obligations, such as fair and equitable treatment, or to procedural provisions relating to dispute settlement, such as shorter waiting periods.

3.3.1 Substantive Provisions36

Investment arbitration tribunals have consistently held — with one recent exception37 — that parties may rely upon a broadly constructed MFN clause to import substantive provisions from third-party treaties.

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If the investment treaty governing the dispute (the “basic treaty”) contains an MFN clause but lacks any one of the substantive obligations typically found in a BIT — e.g., fair and equitable treatment, expropriation — an investor can attempt to invoke the MFN clause of the basic treaty to import those obligations from other investment treaties to which the host state is a party (the third-party treaties). Even if the basic treaty contains some version of those typical obligations, the investor may seek to invoke the MFN clause to upgrade or enhance those obligations by importing potentially more favourable provisions from other treaties.

The particular language of the MFN clause in the basic treaty naturally plays an important role in determining its scope.

If the scope of an MFN clause is limited to a particular obligation or subject matter, the possibility of importing substantive obligations from third-party treaties would be limited to the particular obligation or subject matter.

Some IIAs specifically prohibit use of an MFN clause to import substantive obligations from other treaties. For example, the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union provides that:

Substantive obligations in other international investment treaties and other trade agreements do not in themselves constitute ‘treatment’, and thus cannot give rise to a breach of this Article, absent measures adopted or maintained by a Party pursuant to those obligations.45

3.3.2 Procedural Provisions

MFN provisions in modern investment arbitration not only have been used to import substantive protection standards, such as fair and equitable treatment, from other BITs, but also to import more favourable procedural rights, such as shorter waiting periods and even consent to arbitration. This practice has been controversial and tribunals and scholars are divided as to its legitimacy. At one end of the spectrum, some decisions hold that more favourable dispute settlement provisions of third-party BITs may be imported via the MFN clause of the basic treaty.46 The other end of the spectrum includes decisions holding that a claimant may not apply dispute settlement provisions of a third-party BIT via an MFN clause unless the basic treaty leaves no doubt that the parties intended such incorporation 47.

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Even when an investment treaty provides that an MFN clause covers all matters in the basic treaty (i.e., it contains such distinctive language), it is not certain that every tribunal would conclude that more favourable dispute settlement provisions may be imported into the basic treaty. There is a lack of consensus among tribunals on whether an MFN clause may constitute a basis to incorporate more favourable dispute settlement provisions from third-Party treaties — unless the basic treaty expressly provides that the MFN clause is applicable to dispute settlement provisions.

Since the odds that a tribunal may rule favourably for the investor on the incorporation of more favourable dispute settlement provisions are approximately 50:50,56 it may be worth considering all other BITs of the host state, accompanied by a close reading of the language in the MFN clause.

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Notes

1
1.See http://arbitration.kiev.ua/uploads/kucher/30.%20Hungary%20-%20ENG.pdf, Art. 3.

2
2. NAFTA, Articles 1102, 1103 (emphasis added).

3
3. NAFTA, Articles 1139 (emphasis added).

4
4. North American Free Trade Agreement, U.S.-Can.-Mex., 17 December 1992, 32 ILM 289 (1993) (emphasis added).

5
5. See, e.g., S.D. Myers, Inc. v Government of Canada, UNCITRAL, Partial Award, para. 250 (13 November 2000) (“S.D. Myers”).

6
6. See, e.g., S.D. Myers; Pope & Talbot Inc. v Government of Canada, NAFTA, Award on the Merits of Phase 2 (10 April 2010).

7
7. Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v Islamic Republic of Pakistan, ICSID Case No. ARB/03/29, Award, para. 389 (27 August 2009) (“Bayindir”); S.D. Myers, para. 250.

8
8. See Marvin Roy Feldman Karpa v United Mexican States, ICSID Case No. ARB/AF/99/1, Award, para. 171 (16 December 2002) (emphasis added) (“Feldman”).

9
9. Bayindir, at paras. 400, 408-411.

10
10. See Feldman, paras. 181, 183; S.D. Myers, para. 254; Bayindir, para. 390.

11
11. Feldman, para. 166.

12
12. S.D. Myers, para. 252 (emphasis added); see also Feldman, para. 169 (Given that there likely was a de facto discrimination, it did not matter for the tribunal’s NT analysis whether in fact Mexican law authorised the Mexican government to treat the foreign investor and its domestic comparators differently; the de facto difference in treatment was sufficient to establish a denial of national treatment).

13
13. Id.

14
14. See S.D. Myers, para. 255.

15
15. Id.

16
16. Id.

17
17. Germany-India BIT (1995) http://investmentpolicyhub.unctad.org/Download/TreatyFile/1340 Article 4(1).

18
18. See NAFTA, Articles 1102, 1103.

19
19. See 2012 U.S. Model Bilateral Investment Treaty, http://www.state.gov/documents/organization.188371.pdf, Article 4.

20
20. Central America-Dominican Republic-United States Free Trade Agreement, Article 10.4 (5 August 2004) http://www.sice.oas.org/trade/cafta/caftadr_e/caftadrin_e.asp#PDF(emphasis added).

21
21. See Parkerings-Compagniet AS v Republic of Lithuania, ICSID Case No. ARB/05/8, Award, para. 371 (11 September 2007) (“Parkerings”) [listing the following conditions and comparing the Norwegian claimant’s subsidiary in Lithuania called Baltijos Parkingas UAB (“BP”), and Pinus Propius, a Dutch-owned company investing in Lithuania: (1) The comparator “must be a foreign investor”; (2) The comparator and the claimant “must be in the same economic or business sector”; (3) “The two investors must be treated differently”; and (4) ”No policy or purpose behind the said measure must apply to the investment that justifies the different treatments accorded.”]

22
22. For investment treaties with clauses on most-favoured-nation treatment and national treatment clauses without language on “similar circumstances” or similar language see Lithuania-Norway BIT (1992), http://investmentpolicyhub.unctad.org/Download/TreatyFile/1917ArticleIV see also Argentina-Chile BIT (1991), http://investmentpolicyhub.unctad.org/Download/TreatyFile/78,ArticleIII.

23
23. See Argentina-France BIT (1991), http://investmentpolicyhub.unctad.org/Download/TreatyFile/91,Article4.

24
24. See Total S.A. v Argentina, ICSID Case No. ARB/04/01, Decision on Liability, para. 210 (27 December 2010) [applying the “similar circumstances” test though those terms were absent from the applicable treaty, the Argentina-France BIT (1991), and citing R. Jennings, A. Watts (eds.), Oppenheim’s International Law, 9th ed. (Longman, 1992), Vol. I, p. 378]; see Parkerings, para. 369 [explaining: “The essential condition of the violation of a MFN clause is the existence of a different treatment accorded to another foreign investor in a similar situation. Therefore, a comparison is necessary with an investor in like circumstances”; and applying the “similar circumstances” test though those terms were absent from the applicable treaty, the Lithuania-Norway BIT (1992)]; see also Metalpar S.A. and Buen Aire S.A. v Argentina, ICSID Case No. ARB/03/5, Award, paras. 162-164 (6 June 2008) [applying the “similar circumstances” test though those terms were absent from the applicable treaty, the Argentina-Chile BIT (1991)].

25
25. See Parkerings, para. 371.

26
26. Id. para. 373.

27
27. Id.

28
28. Id. paras. 386-389.

29
29. Apotex Holdings Inc. v United States of America, ICSID Case No. ARB(AF)/12/1, Award, para. 8.61 (25 August 2014) (“Apotex”).

30
30. Apotex, para. 8.77.

31
31. Apotex, paras. 8.27, 8.28, 8.62.

32
32. See Parkerings, para. 368.

33
33. Id. para. 388.

34
34. Id. paras. 396, 465.

35
35. Apotex, para. 8.71.

36
36. See J.A. Rivas, “Application of Most-Favoured-Nation Treatment Clause”, Revolution in the International Rule of Law: Essays in Honor of Don Wallace, Jr. (ed. B. Sabahi, N. Birch, I. Laird, J.A. Rivas,) Juris November 2014), pp. 433-54.

37
37. See İçkale İnşaat Limited Şirketi v Turkmenistan, ICSID Case No. ARB/10/24, Award, paras. 326-330, 384-388 (8 March 2016).

38
38. Bayindir, paras. 157, 165-67.

39
39. Id. paras. 165-67 (incorporating the clause on fair and equitable treatment of the Pakistan-Switzerland BIT, Art.4, into the applicable treaty).

40
40. Umbrella clauses are explained in Chapter 8.

41
41. EDF International S.A. v Argentina, ICSID Case No. ARB/03/23, Award, paras. 934, 937 (11 June 2012); see also Franck Charles Arif v Republic of Moldova, ICSID Case No. ARB/11/23, Award, paras. 396-397 (8 April 2013).

42
42. Sergei Paushok v Government of Mongolia, Award on Jurisdiction and Liability, paras. 254, 570-573, 596, 602, 609 (28 April 2011) (“Paushok”).

43
Paushok, paras. 562, 563. Russia-Mongolia BIT, Article 3: “1. Each Contracting Party shall, in its territory, accord investments of investors of the other Contracting Party and activities associated with investments fair and equitable treatment excluding the application of measures that might impair the operation and disposal with investments; 2. The treatment mentioned under paragraph 1 of this Article, shall not be less favourable than treatment accorded to investments and activities associated with investments of its own investors or investors of any third State.”

44
Paushok, para. 570.

45
45. See CETA, Article 8.7(4) (26 September 2014), http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1467909007204&uri=COM:2016:443:FIN#document2.

46
46. See, e.g., Emilio Agustín Maffezini v Kingdom of Spain, ICSID Case No ARB/97/7, Decision on Objections to Jurisdiction, paras. 63, 64 (27 January 2000) paras. 54, 55, 63, 64 and line of cases following it. Most recently Garanti Koza LLP v Turkmenistan, ICSID Case No. ARB/11/20, Decision on the Objection to Jurisdiction for Lack of Consent, paras. 95-96 (3 July 2013).

47
47. See Salini Costruttori S.p.A. and Italstrade S.p.A. v Hashemite Kingdom of Jordan, ICSID Case No. ARB/02/13, Decision on Jurisdiction, paras. 118-119 (9 November 2004) (“Salini”); Plama Consortium Limited v Republic of Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, para. 223 (8 February 2005) (“Plama”); Vladimir Berschader and Moïse Berschader v Russian Federation, Case No. 080/2004, Award, para. 181 (21 April 2006) (“Berschader”); Wintershall Aktiengesellschaft v Argentina, ICSID Case No. ARB/04/14, Award, para. 176 (8 December 2008) (“Wintershall”); Austrian Airlines v Slovak Republic, UNCITRAL, Award, paras. 129-131, 138 (9 October 2009) [redacted]; ICS Inspection and Control Services Limited v Argentina, PCA Case No. 2010-9, Award on Jurisdiction, paras. 318, 326 (10 February 2012) (“ICS Inspection”); Kilic Insaat Ithalat Ihracat Sanayi ve Ticaret Anonim Sirketi v Turkmenistan, ICSID Case No. ARB/10/1, Award, paras.7.4.3-7.4.4, 7.9.1 (2 July 2013)(“Kilic”); Daimler Financial Services AG v Argentina, ICSID Case No. ARB/05/1, Award, paras. 236, 244 (22 August 2012) (“Daimler”); T-AD GmbH v Republic of Bulgaria, UNCITRAL, PCA Case No. 2011-06, Award on Jurisdiction, paras. 376, 403 (18 July 2013).

48
48. Argentina-Spain BIT, Article IV(2), 3 October 1991, 1669 U.N.T.S. 2002 (“In all matters governed by this treaty, such treatment shall be no less favourable than that accorded by each Party to investments made in its territory by investors of a third country.”)

49
49. See Maffezini, paras. 54, 55, 64; see Gas Natural SDG, S.A. v Argentina, ICSID Case No. ARB/03/10, Decision of the Tribunal on Preliminary Questions on Jurisdiction, paras. 26, 29-31, 49 (17 June 2005); see Camuzzi International S.A. v Argentina [II], ICSID Case No. ARB/03/7, Decision on Objections to Jurisdiction, paras. 28, 34 (10 June 2005) (Spanish original); see Suez, Sociedad General de Aguas de Barcelona S.A. v Argentina, ICSID Case No. ARB/03/17, Decision on Jurisdiction, paras. 55, 60-66 (16 May 2006); see Teinver S.A. v Argentina, ICSID Case No. ARB/09/1, Decision on Jurisdiction, para. 186 (21 December 2012).

50
50. See Garanti Koza LLP v Turkmenistan, ICSID Case No. ARB/11/20, Decision on the Objection to Jurisdiction for Lack of Consent, paras. 93, 95-96 (3 July 2013).

51
51. See Siemens A.G. v Argentina, ICSID Case No. ARB/02/8, Decision on Jurisdiction, paras. 86, 103 (3 August 2004); see Hochtief Aktiengesellschaft v Argentina, ICSID Case No. ARB/07/31, Decision on Jurisdiction, paras. 59-76 (24 October 2011); See National Grid P.L.C. v Argentina, UNCITRAL, Decision on Jurisdiction, paras. 84-89 (20 June 2006).

52
52. See Salini, paras.118-119; see also Kilic, paras. 7.4.3-7.4.4, 7.9.1 (refusing to incorporate dispute settlement provisions from a third-party treaty after noting that the Turkey-Turkmenistan BIT contains no language specifying that all the matters or rights of the BIT are covered by the MFN clause; and that the dispute settlement clause of the basic treaty mandating recourse to local courts prior to international arbitration would become ineffective, if the proposed importation of more favourable dispute settlement provisions was allowed).

53
53. See Plama, para. 223; see ICS Inspection, paras. 318, 326 (finding that it was not sufficiently clear that the Parties had the intention of incorporating dispute settlement clauses from third-Party BITs via the MFN clause, because the latter was silent “about extending its application to dispute settlement provisions”).

54
54. See Wintershall, para. 176.

55
55. See Daimler, paras. 236, 244; see also Berschader, para. 181.

56
56. See Inna Uchkunova, Oleg Temnikov; “Toss out the Baby and Put the Water to Bed: On MFN Clauses and the Significance of Treaty Interpretation”, ICSID Review 2015; 30 (2): 414-436. doi: 10.1093/icsidreview/siv006. On the question of whether an MFN clause applies to dispute settlement provisions, among the 25 ICSID and UNCITRAL tribunals that have addressed the issue through 2015, 52% (13 cases) decided that dispute settlement provisions could be imported via the MFN clause, while the remaining 48% (12 cases) decided that such importation could not take place.