The interpretation of Most-Favored-Nation (MFN) clauses in investment treaties has potentially enormous consequences for the scope and extent of states’ obligations concerning the treatment of foreign investors. Yet for nearly two decades, the discussion on MFN has been overwhelmed by the controversy sparked by the Maffezini decision,Footnote 1 regarding whether MFN clauses can be used to “import” dispute settlement provisions from one treaty to another.Footnote 2 Meanwhile, a conventional wisdom has taken hold that MFN clauses generally may be invoked by investors to rely on standards of treatment, such as fair and equitable treatment (FET), full protection and security (FPS), or protection from arbitrary or discriminatory measures, which are absent from the applicable investment treaty or present in an allegedly less attractive form.Footnote 3 In line with that conventional wisdom, most tribunals have treated the use of MFN clauses to import substantive treaty obligations as uncontroversial, or even, in the words of one decision, as “universally agreed” and “the very essence of an MFN provision in a BIT.”Footnote 4
We argue that this conventional wisdom relies on a particularly strong form of “top-down” reasoning, which imposes presumptions as to the nature or essence of MFN clauses in general.Footnote 5 This top-down perspective obscures the variation among MFN clauses in investment agreements and other treaties, and leads interpreters to adopt an unduly uniform approach to the function of MFN provisions. A careful analysis of the text of specific clauses leads to a much more nuanced picture and calls into question the prevailing view that all MFN clauses in investment treaties were designed to import standards of treatment. By bringing our treaty-by-treaty, “bottom-up” approach into contact with the prevailing top-down view of MFN importation, we hope to provoke a new debate—one which drives toward a more balanced approach to the interpretation of MFN clauses.Footnote 6
The stakes of this debate are much higher than simply selecting the proper interpretation of a single clause in a single dispute. For some, the use of MFN to import substantive standards of treatment forms a key legal basis for the “multilateralization” of international investment law.Footnote 7 On this view, MFN provisions in investment treaties “lock States into the most favorable level of investment protection reached at one point of time.”Footnote 8 Thus, it is argued that the use of MFN to import other treaty provisions undermines “the understanding of BITs as an expression of quid pro quo bargains,” and transforms them into “instruments of multilateralism in international investment relations.”Footnote 9
This concept of MFN has significant consequences for the regime of investment protection. According to proponents of multilateralization, the presence of MFN clauses in treaties limits the ability of states, for reasons of domestic or foreign policy, to negotiate different agreements with different treaty partners.Footnote 10 It has also been argued that broad applications of MFN clauses by tribunals could make it difficult for states parties to investment agreements to predict their scope of potential liability, as the “combinations and permutations” of investment protections resulting from MFN importation may be “impossible to foresee or administer.”Footnote 11 And it is suggested that expansive applications of MFN could undermine efforts—now underway in a variety of fora—to “rebalance” investment agreements through renewed attention to the scope and effect of other substantive provisions.Footnote 12
Given these implications, it is important to pause before presuming that generally worded MFN clauses were designed to reorder the matrix of substantive protections that have been afforded in any given treaty. To be sure, some have identified benefits that may be produced by this approach to MFN, such as the simplification of treaty negotiations,Footnote 13 and the furtherance of economic liberalization and equalization of competitive opportunities.Footnote 14 But critics may see these perceived benefits as being offset by the costs to states in terms of predictability and stability in their treaty relations, and the concern is even raised that “a broad MFN obligation might practically ignore the sovereign freedom of States to conclude international obligations as they see fit.”Footnote 15 These risks are compounded if broad effect is given to MFN provisions on the basis of presumptions about the nature of such clauses, rather than on an assessment of the intended meaning of the particular MFN clause at issue.
There is already some movement to qualify or reconsider the prevailing presumptions about MFN clauses as they relate to the importation of standards of treatment. Some authors have pointed out that interpreters should proceed treaty by treaty, with sensitivity to limitations on the scope of particular MFN clauses, while avoiding generalizations about what “the” MFN clause provides.Footnote 16 A more granular approach to the interpretation of MFN provisions is also suggested by the report that the International Law Commission (ILC) recently issued on the topic, which, while expressly reserving judgment on the importation of standards of treatment,Footnote 17 analyzes extensively the potential implications of variations in the text of such clauses.Footnote 18
These nascent shifts in the literature dovetail with recent developments in practice. In 2016, the tribunal in İçkale v. Turkmenistan held, for the first time in a published investment treaty case,Footnote 19 that the claimant could not invoke an MFN clause to import standards of treatment, basing its ruling on the particular (but by no means peculiar) wording of the clause at issue.Footnote 20 In parallel, some states, acting as litigants, non-disputing parties, and treaty drafters, have in several instances taken the position that certain common terms in MFN clauses—such as “treatment” or “like circumstances”—do not necessarily permit the importation of substantive standards from third-party treaties.Footnote 21 Taken together, these developments suggest some discomfort with the use of MFN to rearrange the framework of substantive protection in investment treaties, as well as an effort to steer tribunals away from generalized assumptions about “the” MFN clause and back to a more attentive consideration of the specific provision at issue.
We take the opportunity presented by these developments to examine more broadly the legal foundations of the use of MFN clauses to import standards of treatment, and to critically analyze investment treaty jurisprudence on this issue. We begin in Part I by noting the wide variation among MFN clauses in investment treaties and their precursors, both in terms of their text and their potential uses, and the problems that this variation poses for efforts to develop a unified approach to their interpretation. In Part II, we observe that tribunals on both sides of the post-Maffezini debate have applied a particularly strong form of the top-down approach, which relies on a perceived dichotomy between procedure and substance, to arrive at the conclusion that importation of standards of treatment using MFN is unproblematic. In the following parts, we discuss more recent developments that may mark a turn away from the top-down approach. Part III discusses the award rendered in 2016 in İçkale, which rejected importation of standards of treatment after emphasizing the specific terms of the clause at issue. And Part IV connects the turn in İçkale to trends in the practice of some states—in their roles as litigants, non-disputing parties, and treaty drafters—which likewise emphasize the need for close attention to the details of MFN clauses, in ways that may restrict the ability of investors to import standards of treatment. In Part V, we conclude by suggesting that these developments may provoke a new debate on the scope and effect of MFN clauses in investment treaties, and we briefly sketch the terms of the new MFN debate.
I. “There Is No Such Thing as the Most-Favoured-Nation Clause”
The interpretation of MFN clauses has long been marked by a tension between “bottom-up” and “top-down” approaches. The bottom-up approach is reflected in Lord McNair's axiom that “there is no such thing as the most-favoured-nation clause: every treaty requires independent examination.”Footnote 22 The top-down approach, by contrast, follows from the view that the parties to an agreement have something in mind—a generally understood “MFN standard”—when incorporating these provisions into their agreements.Footnote 23 This tension is arguably built in the contemporary rules on treaty interpretation, which direct drafters to the “ordinary meaning” of the treaty terms in their context and in light of the treaty's object and purpose, but also provide that a “special meaning shall be given to a term if it is established that the parties so intended.”Footnote 24
In the following sections, we draw out this tension between the variation among MFN provisions and the tendency toward top-down approaches to MFN importation of standards of treatment. First, we present a general overview of MFN clauses in investment treaties, noting the variation both in the terms of MFN clauses and in the uses to which they have been put. Second, we turn to key MFN cases and practice from the era preceding contemporary investment arbitration, which influenced the tribunals that first permitted importation of third-party treaty provisions via MFN clauses in investment treaties. We conduct a reexamination of these earlier authorities and argue that they counsel greater caution in the interpretation of MFN clauses than is sometimes appreciated.
A. The Various Terms and Purposes of MFN Clauses
MFN is not a customary international law standard, and it is thus effected only through specific treaty provisions.Footnote 25 Treaty practice has resulted in an impressive variety of MFN clauses in agreements relating to trade, investment, consular relations, and other matters.Footnote 26 The key feature uniting these diverse provisions is an undertaking by one treaty party to accord treatment to the other states parties (or their nationals) that is no less favorable than the treatment accorded to the most favored third-party state (or its nationals).Footnote 27
In investment treaties, this undertaking is sometimes phrased affirmatively and other times in negative terms. For example, the ILC's final 2015 report on the topic refers to the following clauses from the Austria-Czechoslovakia and U.K.-Argentina investment treaties:
Each Contracting Party shall accord investors of the other Contracting Party treatment no less favourable than that accorded to its own investors or investors of a third State and their investments. …
Neither Contracting Party shall in its territory subject investments or returns of investors or companies of the other Contracting Party to treatment less favourable than that which it accords to investments or returns of its own investors or companies or to investments or returns of nationals or companies of any third State.Footnote 28
The ILC identifies six main design elements in MFN clauses.Footnote 29 These are: (1) language that refers “simply to ‘treatment’ accorded to the investor or the investments”;Footnote 30 (2) language “referring to ‘all’ treatment”;Footnote 31 (3) language that relates the term “treatment” to “specific aspects of the investment process, such as ‘management,’ ‘maintenance,’ ‘use,’ and ‘disposal’ of the investment”;Footnote 32 (4) language that connects the MFN obligation to another standard of treatment, such as FET;Footnote 33 (5) express provisions that “MFN treatment is to be provided only to those investors or investments that are ‘in like circumstances’ or ‘in similar situations’ to investors or investments with which a comparison is being made”;Footnote 34 and (6) express territorial limitations.Footnote 35 These elements are not exhaustive, and an MFN clause may include other terms and limitations, such as express carveouts for tax treatment or treatment resulting from participation in a customs union.Footnote 36
Claimants in investment treaty arbitrations have attempted to use MFN clauses for several purposes, which can be grouped in two main categories. First, investors sometimes claim that a state has breached an MFN provision, resulting in damage to the investor, by taking measures that allegedly favor nationals from other foreign countries.Footnote 37 This type of claim was made in Parkerings v. Lithuania, in which the claimant argued that state authorities discriminated against it in favor of another foreign investor involved in the same economic activity—the construction and management of parking garages.Footnote 38 The Parkerings tribunal accepted in principle that the MFN provision at issue could be applied to remedy the alleged discrimination, but ultimately decided that, on the facts, the two foreign investors were not “in like circumstances.”Footnote 39 This application, which has been referred to as the “more traditional” use of MFN,Footnote 40 is akin to a “national treatment” claim, except that the applicable comparators are investors from third-party states rather than the host state.Footnote 41
Second, investors have attempted to use MFN clauses to effectively alter the terms of the applicable investment treaty by referring to treaties between the respondent state and third parties. Investors have relied on MFN provisions to: (1) expand the standards of treatment already present in the basic treaty;Footnote 42 (2) claim the benefit of standards of treatment absent from the basic treaty;Footnote 43 (3) circumvent defenses available to the respondent state under the basic treaty;Footnote 44 (4) circumvent provisions relating to preconditions to international arbitration in the basic treaty;Footnote 45 (5) expand the scope of the state's consent to arbitration;Footnote 46 and (6) expand the treaty's scope ratione materiae Footnote 47 or ratione temporis.Footnote 48 These uses can all be described—admittedly with a degree of imprecision—as “importation.”Footnote 49
The prevailing discourse on the interpretation of MFN clauses in investment treaties has focused on the “importation” category. The terms of this debate largely turn on which of the above forms of importation generally are permitted by the MFN clause, and which generally are excluded. At times, this argument is made from an expressly top-down perspective.Footnote 50 But even where tribunals recognize the need for a “treaty by treaty” (i.e., bottom-up) approach, they may not practice what they preach: one study observed in 2011 that decisions on the scope of MFN clauses depended less on the specific terms or context of the treaty at issue than on the tribunal's presumptions concerning the scope and effect of these clauses.Footnote 51 Indeed, we have found that it is almost always assumed that the importation of substantive standards of treatment (uses (1) and (2), above) is permitted by the MFN clause.Footnote 52 Uses (3)–(6) are more controversial.
The degree of consensus on this point, and the tendency toward top-down interpretative approaches, are striking in light of the significant degree of variation among the text of MFN clauses in investment treaties. This diversity would normally demand caution and sensitivity to variances in meaning—an approach, in other words, that is consistent with the emphasis on “ordinary meaning” and context in the general rules of treaty interpretation.Footnote 53 But the debate on MFN clauses in investment treaties is heavily influenced by the view that “the MFN standard is among the most ancient and venerable in international law,”Footnote 54 and participants in the debate thus frequently turn to “received wisdom” as to “the nature, scope and effect” of the MFN clause.Footnote 55 It therefore serves to turn briefly to earlier disputes over MFN clauses in commercial treaties, culminating in the Ambatielos case, which have been influential in cementing the view that MFN clauses in investment treaties can be presumed to allow the importation of standards of treatment.
B. MFN Importation in the Pre-BIT Era
Prior to the advent of contemporary investment treaties, MFN clauses frequently appeared in bilateral commercial treaties, which regulated a variety of matters between nations, usually relating to trade, consular assistance, and the treatment of aliens.Footnote 56 These MFN clauses were often specifically drafted to endow the beneficiary of the clause with whatever “privileges,” “favors,” “immunities,” or “liberties” were later granted to a third state, within a defined sphere of activity.Footnote 57 It was argued at the time that this type of clause would accord any benefits within the scope of the clause—such as access to new ports—that were later extended under a new treaty to a third-party state.Footnote 58
In the 1950s, the United Kingdom, the United States, and Greece sought to use these earlier forms of MFN clauses to import standards from third-party treaties in three high-profile cases: Anglo-Iranian Oil Co., Rights of U.S. Nationals in Morocco, and Ambatielos.Footnote 59 The lessons of those cases on MFN for the importation of standards of treatment in investment treaties are, to say the least, not clear-cut. First, it is notable that none of these decisions permitted the claimant to obtain via MFN the benefit of a provision in a third-party treaty, although they suggested that this application of MFN could be permissible under those treaties in other circumstances.Footnote 60 Second, and perhaps more importantly, the MFN clauses at issue in these cases differ substantially from those found in most contemporary investment treaties. For example, the clause at issue in Ambatielos stated:
The Contracting Parties agree that, in all matters relating to commerce and navigation, any privilege, favour, or immunity whatever which either Contracting Party has actually granted or may hereafter grant to the subjects or citizens of any other State shall be extended immediately and unconditionally to the subjects or citizens of the other Contracting Party; it being their intention that the trade and navigation of each country shall be placed, in all respects, by the other on the footing of the most favoured nation.Footnote 61
There is no a priori reason to presume that modern investment treaties, which use substantially different language, are meant to mimic in all respects the scope and effect of these distinct treaty provisions. Investment treaties define their scope with terms such as “treatment of investments” and “like circumstances,” and they generally do not contain any express language as to their effect, other than to provide that the parties “shall” provide treatment no less favorable (or, conversely, that they “shall not” provide less favorable treatment).Footnote 62 In contrast, the above-quoted provision refers to “any privilege, favour, or immunity” granted to a third country, and specifically provides that its effect is to “extend[]” those advantages to the beneficiary state “immediately and unconditionally.”Footnote 63 Given these substantial differences in treaty texts, it is open to argument whether the parties to contemporary investment treaties intended to follow in all respects the same path as these earlier agreements.Footnote 64
Third, these earlier cases give careful attention to the particular wording of the MFN clause at issue. This is evident in particular in Ambatielos, which of the three cases noted above addresses the MFN clause in the greatest detail. In that case, Greece contended that it was entitled by virtue of the above-quoted clause to invoke a provision referring to “the principles of international law” and various other treaty provisions relating to the “administration of justice” in treaties between the United Kingdom and third countries.Footnote 65
The Arbitral Commission rejected both of these attempts on the basis of a detailed analysis of the particular MFN clause at issue. As to the “principles of international law” provision, the Commission found that this clause did not constitute the type of “privileges, favours and immunities” referred to in the MFN provision, and therefore could not be invoked by virtue of MFN.Footnote 66 Regarding the “administration of justice” provisions, the Commission determined that in principle the MFN clause was broad enough to reach such provisions, stressing the treaty text manifesting the parties’ “intention that the trade and navigation of each country shall be placed, in all respects, by the other on the footing of the most favoured nation.”Footnote 67 Nevertheless, the Commission found that the treaties invoked by Greece in fact did not contain any “privileges, favours or immunities” more extensive than those set forth in the basic treaty between Greece and the United Kingdom, and therefore the MFN clause had “no bearing on the present dispute.”Footnote 68
The Arbitral Commission reached these conclusions after analyzing the text, context, and purpose of the applicable provisions, in a manner that tracks the ordinary rules of treaty interpretation. In particular, the Commission stated what has become known in MFN cases as the principle of ejusdem generis: “[The MFN clause] can only attract matters belonging to the same category of subject as that to which the clause itself relates.”Footnote 69 Although this principle is often presented as a special rule governing the interpretation of MFN clauses, it is simply an elaboration of the general principle embodied in the Vienna Convention that one must look at the specific terms of a treaty provision to determine its scope and effect.Footnote 70 In the words of one commentator, the ejusdem generis principle “does not in fact provide a rule. … [W]hat it says in effect is that the scope of the MFN clause is what the MFN clause says it is.”Footnote 71
Following the landmark cases of the 1950s, efforts to establish general principles governing the scope and effect of MFN clauses, beyond the ordinary rules of treaty interpretation, have been largely unsuccessful. In 1978, the ILC completed a set of draft articles on MFN clauses, which it commended to the members of the UN General Assembly for conclusion of a treaty.Footnote 72 No conference was ever convened, and no treaty was concluded.Footnote 73 Since 1978, the context in which MFN clauses are used has changed significantly, owing in large part to the rise of international investment agreements.Footnote 74 As one commentator has noted, the 1978 Draft Articles “provide little insight into the questions raised in contemporary arbitrations.”Footnote 75 To the extent that they can be used as an “interpretative aid” or as “general principles” applicable to MFN clauses in investment treaties, as some have argued,Footnote 76 those Draft Articles do not purport to define the specific benefits that are covered by a given MFN clause, other than by reference to the terms of the clause itself.Footnote 77
For advocates of the top-down approach, the foregoing history of MFN clauses supplies examples of a continuing practice of states claiming that MFN clauses entitle them to invoke provisions set forth in third-party treaties, and of adjudicators seeing no conceptual difficulty with such claims. On this view, the MFN clauses incorporated into modern investment treaties—however reformulated from the more ornate language of earlier trade and consular agreements—participate in the same practice of generalizing treaty standards across bilateral relationships.
We draw a different lesson from these historical examples. The cases of the 1950s stress careful attention to the terms governing the scope and effect of MFN clauses, rather than reliance on preconceived notions of the clause's nature or purpose. And, once we turn to the text, we find significant differences in treaty language across space and time, both among investment treaties and between contemporary investment agreements and their predecessors. In light of this variation, we see little reason to approach MFN provisions in investment treaties with a preconceived notion of the essential purpose or nature of these provisions. There are of course lessons to be learned from the efforts of courts and of the ILC to grapple with MFN clauses. But the most important lesson is that there is no single MFN clause; we must proceed case by case.
II. The Conventional View on MFN Importation of Standards of Treatment
Contemporary investor-state tribunals, however, have tended to apply a strong presumption that MFN clauses may be used to import standards of treatment. This view emerges from the confluence of two factors. The first, as we discussed above, is the longstanding pull toward top-down approaches to MFN clauses, which is fueled by an understandable desire for some degree of uniformity and predictability in a field populated by bilateral rather than multilateral treaties.Footnote 78 The second is a reductive schematic—which has emerged in the particular context of investment treaty arbitration—that imposes a rigid distinction between importation of “procedural” and “substantive” provisions. Together, the top-down approach and the procedure/substance dichotomy have fostered what might be called a “sticky default” view on the use of MFN clauses to import standards of treatment: tribunals and commentators tend to presume that states parties to investment treaties have agreed to this use of MFN, unless the treaty provides otherwise.Footnote 79
This apparent presumption in favor of MFN importation reflects the intuition that it is better—and thus “more favorable”—for a treaty to contain an FET provision, or other protection, than to lack that provision. But this bypasses the question whether the applicable MFN clause allows for this possibility. As we noted above, the clauses at issue in contemporary investment treaty cases do not expressly state that any third-country treaty provision that is considered “more favorable” is automatically imported into the basic treaty and may be invoked by a claimant in an arbitral proceeding. These provisions, instead, use terms such as “treatment” and “in like circumstances,” which must be interpreted and applied to a given case. As we will see, the cases dealing with importation of standards of treatment tend to address these elements in only a cursory way, if they do so at all.
In this section, we explore the development by arbitral tribunals of this apparent presumption favoring MFN importation of standards of treatment. As we demonstrate in Section A below, the cases that set the terms of the debate regarding MFN importation did not even deal directly with substantive provisions, but rather with the different question of importing dispute resolution provisions. These cases were nevertheless influential in consolidating and entrenching the view that MFN clauses, by default and unless otherwise provided, allow for importing standards of treatment. We then show in Section B that the decisions allowing claimants to import standards of treatment have generally relied—implicitly or even explicitly—on this supposed default rule, and generally have not turned to the text of the clause, except to satisfy themselves that the presumption in favor of importation had not been overcome.
A. The Seeds of the Conventional Wisdom: The Dispute Settlement Cases
The conventional wisdom on MFN importation can be traced to the earliest investment tribunal decisions concerning MFN and dispute settlement provisions. In 2000, the tribunal in Maffezini v. Spain famously permitted an investor to use MFN to avoid a local-litigation requirement in the Spain-Argentina BIT.Footnote 80 This was the first published investment treaty case to permit the importation of treaty provisions, whether substantive or procedural, via MFN. In addressing the question of importation, the Maffezini tribunal relied on the Ambatielos case discussed earlier.Footnote 81
Four years later, the Salini v. Jordan tribunal rejected a similar attempt to use MFN to attract more favorable dispute resolution procedures.Footnote 82 With respect to Ambatielos, the tribunal noted that the case did not concern the importation of more favorable dispute resolution provisions, but rather an attempt by Greece to rely via MFN on “substantive provisions” in other treaties concerning the administration of justice.Footnote 83 In other words, the Salini tribunal found this prior case unhelpful because it did not deal with the particular problem of importing procedural or jurisdictional provisions.
Through repetition of this dichotomy between procedure and substance, the post-Maffezini debate “reinforced the notion that investors may invoke substantive right[s] through the MFN clause.”Footnote 84 Indeed, subsequent tribunals have reasoned that, because importation of standards of treatment is permitted, there is no reason to preclude importation of dispute resolution provisions.Footnote 85 At the other end of the spectrum, some tribunals have reasoned that, even though importing standards of treatment is uncontroversial, importing dispute resolution provisions is different in nature and impermissible.Footnote 86 Although these two sets of pronouncements led to diametrically opposite conclusions, they both started from the presumption that the use of MFN clauses to import standards of treatment is unproblematic.Footnote 87
Thus, one of the striking features of the post-Maffezini debate is the adoption by both sides of a top-down approach to MFN clauses. This is particularly clear in the expressed view of tribunals and commentators that the Ambatielos case provides a precedent for importing procedural standards via MFN,Footnote 88 or that it supports only the importation of “substantive provisions.”Footnote 89 Tribunals and commentators rarely grapple with the differences in text, context, and purpose between the MFN provisions in the investment treaties they are applying and the clauses in Ambatielos and other earlier cases,Footnote 90 even though those differences are substantial.Footnote 91 This indifference to variation across texts may seem unusual for a debate that is all about the interpretation of treaty clauses, but it is fully consistent with the top-down view that MFN clauses by default share a common nature and function.
B. The Application of the Conventional Wisdom: The Standards of Treatment Cases
The post-Maffezini debate has thus given rise to a widely shared view that the essential function of MFN clauses in investment treaties is to import treaty standards. This view, consistent with the top-down approach to interpretation, has sometimes been applied without regard to variations in treaty language. Indeed, of the twelve published decisions we have identified that allowed importation of standards of treatment,Footnote 92 most fail to engage with the actual text of the MFN provision. The cases in this area have built on each other, and interacted with the dispute settlement cases, in a manner that perpetuates the conventional view regarding importation of standards of treatment. And the cases that do address the treaty text have generally done so in a manner that reaffirms the conventional view, presuming that importation of standards of treatment is permissible unless otherwise expressly excluded.
In the following discussion, we trace in roughly chronological fashion the development of this jurisprudence through four main cases—MTD v. Chile, Bayindir v. Pakistan, White Industries v. India, and Al-Warraq v. Indonesia—noting other relevant cases along the way.
1. MTD v. Chile
The first published investment treaty decision in which an MFN clause was used to import substantive standards of treatment was the 2004 award in MTD v. Chile.Footnote 93 In that case, the claimant relied on the MFN clause to import provisions from two third-party treaties relating to the observance of undertakings and to the grant of permits.Footnote 94 The MFN and the FET provisions were both contained in the same clause, which stated:
Investments made by investors of either Contracting Party in the territory of the other Contracting Party shall receive treatment which is fair and equitable, and not less favourable than that accorded to investments made by investors of any third State.Footnote 95
Chile did not object to the claimant's importation argument, but the tribunal nonetheless decided to “satisfy itself” that the MFN clause could be used in this way.Footnote 96 The tribunal framed the issue as “whether the provisions of the Croatia BIT and the Denmark BIT … can be considered to be part of fair and equitable treatment.”Footnote 97 In a single paragraph, the tribunal answered this question in the affirmative, stating that importation of the requested standards was “in consonance” with the FET standard as interpreted “in the manner most conducive to fulfill the objective of the BIT to protect investments and create conditions favorable to investments.”Footnote 98 That puzzling interpretation came under scrutiny when Chile applied for annulment of the award, with Chile arguing that the tribunal's reasoning on the point was “incomprehensible.”Footnote 99 The ad hoc committee agreed with Chile that the tribunal's reasoning was flawed, noting that the tribunal “appears to confuse” FET and MFN.Footnote 100
Despite the perfunctory analysis and apparent confusion in that case, commentators and practitioners writing in the years that followed frequently suggested, citing MTD, that importation of substantive standards via MFN was unproblematic.Footnote 101 This perception was reinforced by the continued dispute over incorporation via MFN of more favorable jurisdictional provisions, which appeared to be the locus of all the MFN-related action.
The few tribunals in the years after MTD to address importation of substantive provisions did so with little analysis, or with none at all. In the LESI case, for instance, the tribunal permitted importation of an FET clause based on perfunctory analysis of the term “treatment” in the applicable MFN provision, finding that the term extended to “all aspects of the ‘treatment’ of foreign investments, including their promotion and their protection.”Footnote 102 In another series of cases, tribunals limited their analysis to noting that the respondents’ counsel did not object to the use of MFN to import standards of treatment.Footnote 103
2. Bayindir v. Pakistan
The next decision after MTD to address at any length the importation of substantive standards, the 2009 Bayindir v. Pakistan award, reflects the influence of the growing conventional wisdom. By that time, numerous decisions had been rendered on the issue of importation of dispute settlement provisions through MFN, crystallizing the procedure/substance dichotomy.Footnote 104
In Bayindir, the claimant invoked the MFN clause in the Turkey-Pakistan BIT for two distinct purposes: (1) to claim that Pakistan's allegedly more favorable treatment of other contractors involved in the same economic sector as the claimant breached the MFN clause—the first category of MFN uses referred to earlier;Footnote 105 and (2) to import an FET clause that was absent from the basic treaty.Footnote 106 In a demonstration of the reflexive approach taken by tribunals when addressing importation of substantive standards, the tribunal applied two very different interpretive methods for each of the claimant's MFN claims.
In addressing the first of these two MFN claims, which was based on the actual conduct of Pakistan toward other contractors, the tribunal closely analyzed the terms of the MFN clause and grounded its decision in those terms, in line with a bottom-up approach. The MFN clause in the Turkey-Pakistan BIT is a common formulation, providing that each party shall accord treatment to established investments that is “no less favourable than that accorded in similar situations … to investments of investors of any third country.”Footnote 107 The tribunal accordingly stated that it “must first assess whether Bayindir was in a ‘similar situation’ to that of other investors”; this was a “fact specific” inquiry, which “must be examined at the level of the contractual terms and circumstances.”Footnote 108 The tribunal went on to reject this MFN claim, finding that it was in “no position to proceed to any meaningful comparison between the different situations at issue” because it did not have “sufficiently specific data on the terms and the performance of the different contracts involved.”Footnote 109 The claimant, therefore, had failed to demonstrate one of the “necessary requirements” of MFN.Footnote 110
When it turned to the question of importation of an FET provision via MFN, however, the Bayindir tribunal departed from this close textual analysis. The tribunal asserted, without discussion, that the “ordinary meaning of the words” of the MFN clause “show that the parties to the Treaty did not intend to exclude the importation of a more favourable substantive standard of treatment,”Footnote 111 and supported its conclusion with a reference to the MTD case.Footnote 112 The tribunal appeared to suggest that importation was further supported by the absence of any reference to this practice in the express limitations on the MFN clause, which consisted only of widely used exceptions for taxation and treatment arising out of participation in a customs union.Footnote 113
This analysis reflects the application of the “sticky default,” conventional approach to MFN. Although the tribunal referred to the “ordinary meaning” of the text, it did not attempt to follow the kind of textual analysis that it applied to the claimant's disparate-treatment claim.Footnote 114 For example, the tribunal made no visible effort to apply the “in similar situations” element of the MFN clause in the context of the incorporation claim, which the tribunal had elsewhere deemed a “necessary requirement” that entailed a “fact specific” inquiry.Footnote 115 Instead, the tribunal appeared to turn to the text only to satisfy itself that there was no express language excluding the possibility of importation. Thus, the tribunal appears to have presumed that the MFN clause was intended to permit importation in the first place.
3. White Industries v. India
The White Industries case, decided two years after Bayindir, reflects the consolidation of this approach. The claimant in that case sought to incorporate an “effective means” clause from a third-party treaty via the MFN clause in the India-Australia BIT, which provided that a party “shall at all times treat investments in its own territory on a basis no less favourable than that accorded to investments or investors of any third country.”Footnote 116 India resisted this attempt, arguing, inter alia, that to do so would subvert “the carefully negotiated balance of the BIT.”Footnote 117
The tribunal's rejection of India's argument reflects just how entrenched the conventional view of MFN had become. The award in White Industries provided no analysis of the particular terms of the applicable MFN clause.Footnote 118 Instead, the tribunal relied upon the distinction between procedure and substance that grew out of the post-Maffezini cases, and it married this distinction to a seemingly inflexible top-down conception of what the MFN clause was designed to do. In a passage remarkable for its breadth, the tribunal stated:
Here, White is not seeking to put in issue the dispute resolution provisions of the BIT, but is instead availing itself of the right to rely on more favourable substantive provisions in the third-party treaty.
This does not “subvert” the negotiated balance of the BIT. Instead, it achieves exactly the result which the parties intended by the incorporation in the BIT of an MFN clause.Footnote 119
In the absence of any express analysis of the particular MFN clause at issue, the tribunal appears to have determined what the parties “intended by the incorporation … of an MFN clause” by applying a presumption that all parties mean the same thing when they write MFN clauses into their treaties, regardless of the specific wording.Footnote 120
Following White Industries, two other tribunals appeared to apply a similar presumption with respect to the importation of substantive standards via MFN. In EDF International v. Argentina, the tribunal permitted importation of an “umbrella” clause via an MFN provision that referred to “treatment” accorded by the state “[w]ithin its territory and in its maritime zone,”Footnote 121 without explaining how the presence of an “umbrella” clause in another treaty constituted such treatment.Footnote 122 The tribunal stated that the MFN clause “by its terms, incorporates some provisions from other conventions” and that “[t]o interpret the BIT otherwise would effectively read the MFN language out of the treaty.”Footnote 123 In Arif v. Moldova, the tribunal likewise allowed importation of an “umbrella” clause via MFN, referring to the then widely accepted distinction between MFN importation of procedural and substantive provisions.Footnote 124 The tribunal simply noted that MFN clauses apply to “substantive obligations” (this was undisputed), that the clause in this case is “broadly drafted,” and that an umbrella clause is “substantive” in nature.Footnote 125
4. Al-Warraq v. Indonesia
A similar presumption appears to be at work in the Al-Warraq v. Indonesia award.Footnote 126 The claimant sought to use the MFN clause in the Organization of the Islamic Conference Agreement on Investment (OIC Agreement) to attract an FET provision from the U.K.-Indonesia BIT.Footnote 127 The MFN clause of that treaty provides:
The Investors of any contracting party shall enjoy, within the context of economic activity in which they have employed their investments in the territories of another contracting party, a treatment not less favourable than the treatment accorded to investors belonging to another State not party to this Agreement, in the context of that activity and in respect of rights and privileges accorded to those investors.Footnote 128
This clause is notable because it is limited to treatment “within the context of economic activity in which [investors] have employed their investments”—a limitation that does not often appear in these precise terms in other MFN clauses. The respondent argued that this language made clear that the MFN clause applied only to discrimination among nationalities in the context of a particular economic activity, and did not provide “carte blanche to selectively import obligations from the universe of treaties signed by Indonesia.”Footnote 129
The tribunal rejected this argument. It first noted that “a number of contemporary arbitral decisions” had recognized the ability of MFN clauses to import third-treaty FET standards.Footnote 130 The tribunal then stated its view “that the MFN clause applies to import other clauses as long as the ejusdem generis rule applies.”Footnote 131 The ejusdem generis principle was satisfied in this instance, the tribunal reasoned, because both the OIC Agreement and the U.K-Indonesia BIT shared the same purpose of protecting foreign investment, as reflected in each treaty's preamble.Footnote 132 Once satisfied in principle that the treaty allowed for MFN importation, the tribunal dispensed with the clause's “economic activity” limitation, reasoning that, since both the basic and target treaties governed investments in the banking sector, this language was not an obstacle to importation.Footnote 133 This analysis is in line with a strong presumption that MFN clauses are designed to import standards of treatment unless specific treaty text expresses a clear intent to specifically restrict that practice.
The tribunal's approach, however, is not necessarily in line with the interpretive tools that the tribunal purported to apply, which might have counseled a bottom-up, rather than top-down, approach. As originally formulated, the ejusdem generis principle, which the Al-Warraq tribunal applied, is not satisfied simply by noting that the third-party treaty is of the same kind as the basic treaty. Instead, as discussed earlier, the principle of ejusdem generis focuses on whether the benefit invoked is of the same kind as that contemplated in the MFN clause.Footnote 134 Applied in this way, the ejusdem generis principle directs the interpreter not to the broad purposes of the basic and target treaties, but rather to the specific terms of the MFN clause at issue. This approach would have led the Al-Warraq tribunal to grapple with the “economic activity” language before reaching a conclusion in principle on the ability of the MFN clause to import other treaty standards. By tinkering with the formulation of the ejusdem generis principle, the Al-Warraq tribunal effectively converted that principle into a method for harmonizing interpretations and minimizing differences across MFN clauses.
It should be noted that not all decisions apply an entirely top-down approach to MFN treaties, and there may be a growing counter-trend toward recognizing at least some limitations on MFN importation, even where such limitations are not stated as an express carveout. For example, in Paushok, the tribunal allowed importation of an FET provision because the scope of the MFN clause was defined by reference to a clause in the basic treaty referring to FET,Footnote 135 but it rejected an attempt to import “completely new substantive rights” unrelated to FET.Footnote 136 And in Teinver, the tribunal found that an MFN clause applying to “all matters governed by this Agreement” covered “the various rights or forms of protection contained in the individual provisions of the Treaty.”Footnote 137 The tribunal allowed importation of a “full protection and security” clause because the basic treaty already contained a clause relating to the “protection” of investments, but rejected an attempt to import an “umbrella” clause given the absence of such a clause in any form in the basic treaty.Footnote 138 Nevertheless, these decisions did not expressly challenge the conventional view that, as a matter of principle, MFN clauses are designed to import standards of treatment from third-party treaties.
In sum, as demonstrated in this Part, most tribunals have relied on a presumption concerning the use of MFN clauses to import standards of treatment. The MTD award, which was the first to adopt this practice, did not appear to provide a complete rationale for MFN importation, either in terms of the specific clause at issue or more generally. In the years that followed, tribunals generally rendered decisions based on simplified distinctions between “procedural” and “substantive” provisions, or on generic conceptions of what “the” MFN clause is for, at the expense of any sustained consideration of the treaty text.
III. İçkale v. Turkmenistan: A Turn to the Bottom-Up Approach?
The award in İçkale, which for the first time refused to import any substantive standard of treatment via an MFN clause on the ground that the clause did not permit such importation, provides an opportunity to rethink the prevailing approach to MFN clauses in investment treaties.
This case arose under the Turkey-Turkmenistan BIT, and concerned alleged state conduct vis-à-vis several construction contracts concluded between the claimant and various state entities and state-owned companies.Footnote 139 Most of the claimant's arguments depended on invoking a minimum standard of investment protection, such as FET or FPS, or an “umbrella” clause, all of which were absent from the Turkey-Turkmenistan BIT.Footnote 140 The substantive protections in the Turkey-Turkmenistan BIT concern only expropriation and national and MFN treatment, along with provisions relating to entry and presence in the country, and free transfers of funds.Footnote 141 The national and MFN treatment obligations in that treaty are phrased in familiar terms:
Each Party shall accord to these investments, once established, treatment no less favourable than that accorded in similar situations to investments of its investors or to investors of any third country, whichever is the most favourable.Footnote 142
The claimant sought to use this provision as a vehicle for importing other standards of treatment from treaties concluded between Turkmenistan and third parties.Footnote 143 The claimant invoked the prevailing presumption on MFN importation, relying on some of the tribunal decisions discussed earlier to argue that the term “treatment” in an MFN clause covers “at least the substantive protections provided to other foreign investors,” and that such protections could thus be “imported from another bilateral investment treaty.”Footnote 144 Accordingly, the claimant asserted, it was entitled to invoke FET and other provisions contained in treaties concluded between Turkmenistan and Egypt, Bahrain, and the United Kingdom.Footnote 145
Turkmenistan objected to the claimant's attempt to use the MFN provision to obtain the benefit of those standards of treatment. That clause, it argued, was a guarantee of non-discrimination on the basis of nationality, analogous to a national treatment provision, and not a vehicle for importation. The provision, in the state's view, implied a comparative, fact-based analysis, which considered, inter alia, whether the investors were similarly situated and “whether the treatment accorded to the host State's national or third State's national was in fact more favorable than that of the claimant.”Footnote 146 In other words, Turkmenistan argued, the claimant invoking this provision must identify “an actual investment of an actual investor, in an actual ‘similar situation,’ who is actually receiving the allegedly more favorable treatment.”Footnote 147
The tribunal sided with Turkmenistan, finding that the MFN provision “cannot be read, in good faith, to refer to standards of investment protection included in other investment treaties … .”Footnote 148 Instead, the tribunal determined, the provision guaranteed non-discrimination, which “requires a comparison of the factual situation” of home-state investors and third-state investors.Footnote 149 Because the claimant was not alleging that it received unfavorable treatment vis-à-vis similarly situated investors of third states, its effort to invoke the MFN provision was dismissed in its entirety.
The tribunal based this holding on a parsing of the treaty text.Footnote 150 In particular, the tribunal determined that it was bound to give effect to the comparative language in the MFN provision, which limited the clause's application to cases in which at least two investors of differing nationality were “in similar situations.”Footnote 151 This language limited the provision's application to differences in actual treatment among investors, rather than to mere theoretical differences created by the presence or absence of provisions in different treaties. The tribunal explained:
The standards of protection included in other investment treaties create legal rights for the investors concerned, which may be more favorable in the sense of being additional to the standards included in the basic treaty, but such differences between applicable legal standards cannot be said to amount to “treatment accorded in similar situations,” without effectively denying any meaning to the terms “similar situations.” Investors cannot be said to be in a “similar situation” merely because they have invested in a particular State; indeed, if the terms “in similar situations” were to be read to coincide with the territorial scope of application of the treaty, they would not be given any meaning and would effectively become redundant … . Such a reading would not be consistent with the generally accepted rules of treaty interpretation, including the principle of effectiveness, or effet utile, which requires that each term of a treaty provision should be given meaning and effect.Footnote 152
The tribunal's analysis is unique in its approach to the treaty text. Indeed, as we have noted above, MFN clauses drafted like the one at issue in İçkale had already been relied upon to import standards of treatment in three prior cases—two of which apparently did not even draw the respondent's objection.Footnote 153 And, unlike earlier cases where tribunals have denied importation of some standards based on the wording of the MFN clause (such as Paushok and Teinver),Footnote 154 the İçkale award is the first to categorically state that a common formulation of the clause, by its very terms, does not permit the importation of standards of treatment.
There are arguably two ways to read the İçkale award as it relates to the interpretation of MFN clauses. The first sees the award as a significant but perhaps predictable outgrowth of the trend in awards like Paushok and Teinver to temper the top-down approach to MFN clauses with a margin of sensitivity to detail and variation in texts. A second reading is that İçkale reflects a readiness among some arbitrators to reconsider more fundamentally the top-down approach to MFN, bracketing broad notions as to the “essence” of MFN provisions and choosing instead to proceed with the goal of giving effect to the specific provisions of individual MFN clauses. Either reading would suggest a recalibration away from the conventional view of MFN and a greater role for bottom-up methods of interpretation.
IV. Resistance to the Use of MFN Clauses to Import Standards of Treatment
Once we widen the lens beyond published investment arbitral awards, we find that the shift taken by the İçkale tribunal toward a bottom-up approach dovetails with certain trends in the practice of states. In their capacities as litigants, non-disputing parties, and treaty drafters, states have in several instances taken steps to encourage sensitivity to the particular terms of MFN clauses, and to discourage the application of broad presumptions as to the nature and effect of “the” MFN clause. As we discuss in detail below, the three states parties to the NAFTA have repeatedly challenged the use of MFN to borrow standards of treatment from third-party treaties by emphasizing the particular terms of the MFN clause in the NAFTA. And the treaty practice in new investment agreements further indicates that some states have become uncomfortable with the liberal use of MFN to import substantive standards, and have sought to reassert control over the interpretation of basic terms in MFN clauses.
A. The NAFTA Cases
The states parties to the NAFTA—Canada, Mexico, and the United States—have opposed the importation of standards of treatment via MFN in the context of specific investment disputes over the interpretation of Article 1105 (Minimum Standard of Treatment). They have done so both in their pleadings and in submissions filed under NAFTA Article 1128, which permits non-disputing states to make submissions to an investment tribunal on questions of interpretation. Article 1128 of the NAFTA, allowing for submissions in arbitral proceedings by non-disputing parties, “helps ensure that the treaty is interpreted in a manner consistent with the views of all treaty parties, not just the claimant and respondent state.”Footnote 155 It has been argued that the parties’ concordant submissions and pleadings can evidence “subsequent practice,” or “subsequent agreement,” which must be taken into account pursuant to the ordinary rules of treaty interpretation.Footnote 156
Article 1103 of the NAFTA supplies two similarly worded MFN provisions, one relating to “investors” and the other to “investments.” As an example, the latter provision states, in full:
Each Party shall accord to investments of investors of another Party treatment no less favorable than that it accords, in like circumstances, to investments of investors of any other Party or of a non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.Footnote 157
In several cases, claimants have sought to rely on this provision to borrow substantive standards of treatment in treaties between a NAFTA party and a third country. These efforts have met with resistance from the three states parties to the NAFTA, either in their role as respondent or as non-disputing parties in arbitration proceedings, and the claimants’ attempts have never proven successful.Footnote 158
1. Pope & Talbot v. Canada and Methanex v. United States
The issue of whether Article 1103 can be used to import standards of treatment from third-party treaties arose relatively early in the history of NAFTA arbitration, in Pope & Talbot v. Canada. In its 2001 award on liability, the tribunal referred to the MFN clause as evidence that Article 1105, on the minimum standard of treatment, supplied an “autonomous” standard rather than the standard of treatment under customary international law.Footnote 159 If it were otherwise, the tribunal stated, then investors could “simply” turn to the MFN clause in NAFTA Article 1103 “for relief.”Footnote 160 A few months later, the NAFTA Free Trade Commission (FTC), composed of the three states parties, issued a note of interpretation clarifying that Article 1105 prescribes the minimum standard of treatment of aliens under customary international law.Footnote 161
Following an invitation by the tribunal to comment specifically on the effect of the MFN clause,Footnote 162 Canada and the two non-disputing parties stated their view that the MFN clause could not override or alter the meaning of Article 1105. For its part, Canada answered that the FTC interpretation was binding and that NAFTA Article 1103 could not undo that interpretation.Footnote 163 The same day, the United States and Mexico filed non-party submissions under NAFTA Article 1128 agreeing that “Article 1103 cannot be relevant to, or constitute an issue with respect to, the interpretation of Article 1105.”Footnote 164
The United States subsequently sent to the Pope & Talbot tribunal another non-disputing party submission, which attached a letter it had recently filed in its capacity as respondent in the Methanex case.Footnote 165 The Methanex letter stated, with respect to Article 1103:
Methanex fundamentally misconstrues the nature of Article 1103's provision for most-favored-nation treatment in any event. Contrary to Methanex's suggestion, Article 1103 addresses not the law applicable in investor-state disputes, but the actual “treatment” accorded with respect to an investment of another Party as compared to that accorded to other foreign-owned investments. Article 1103 is not a choice-of-law clause. Instead, it provides that each NAFTA Party shall accord to investors and their investments of other NAFTA Parties “treatment no less favorable than that it accords, in like circumstances” to investors or their investments of any other NAFTA Party or non-NAFTA Party “with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.” Thus, Methanex errs in relying on Article 1103 because it offers neither evidence nor argument to show that a foreign-owned investment allegedly in like circumstances was treated by the United States more favorably than it or its U.S. investments. … At bottom, Methanex urges this Tribunal to disregard the NAFTA Parties’ binding interpretation and, instead, by virtue of Article 1103, interpret Article 1105(1) in accordance with its own view of BIT language, which has never been accepted by any arbitral tribunal and is contrary to the United States’ contemporaneous statements regarding the BITs. Such a position is not consistent with the most-favored-nation treatment obligation of Article 1103.Footnote 166
Canada also filed a non-disputing party submission in the Methanex case, stating that “[n]othing in the language of NAFTA Chapter Eleven permits a Chapter Eleven tribunal to import into Article 1105 separate and distinct obligations found in other agreements.”Footnote 167 The final award in Methanex did not address this issue.
In its subsequent award on damages, the Pope & Talbot tribunal also declined to finally rule on the issue. Instead, the tribunal determined that Canada would have breached NAFTA Article 1105 even if the FTC's interpretation were to be given effect.Footnote 168 But the position of the United States and Canada was clear: the MFN clause in Article 1103 could not be used to circumvent the parties’ binding interpretation of the standards of treatment set forth in Article 1105.
2. Chemtura v. Canada
The issue arose again in Chemtura v. Canada. In that case, all three NAFTA states objected to the claimant's attempt to import “free-standing” FET clauses contained in Canada's BITs to supplement the minimum standard of treatment set forth in NAFTA Article 1105(1).
Canada's submissions in this case featured an extensive discussion of the elements of the NAFTA’s MFN provision.Footnote 169 This discussion came in reaction to what Canada perceived as an attempt by the claimant to “set[] aside the text of Article 1103” and instead to rely “on a broad purposive interpretation of MFN clauses generally.”Footnote 170 Canada disagreed with that top-down approach, emphasizing that “[t]he general purpose of MFN provisions cannot serve to get around the specific terms of the MFN provision” agreed by the parties, and it set out to interpret those specific terms.Footnote 171 First, Canada argued that the term “treatment,” as ordinarily understood, referred to “behaviour in respect of an entity or a person,” and that this definition did not encompass general treaty standards such as FET.Footnote 172 Canada distinguished such “treatment,” which was covered by the clause, from “standards of treatment,” which “may potentially or theoretically result in a more favourable treatment of an investor from another Party or of a non-Party.”Footnote 173 Canada continued:
There must be evidence of actual, not merely hypothetical, more favourable treatment. This does not render the MFN provision meaningless as the Claimant suggests. The NAFTA MFN provision does not simply allow the investor to choose the language it prefers from Canada's various investment agreements. The Claimant's MFN case relies on a purely theoretical argument that there exists a different more favourable standard in Canada's post-NAFTA investment agreements that would apply in like circumstances to certain other foreign investors. In reality, no national from a third country received better treatment.Footnote 174
Canada also referred to the other textual elements of Article 1103, which it argued had also not been met. It argued that the claimant had failed to identify any investor “in like circumstances,” relying instead on a mere comparison of treaty provisions.Footnote 175 Canada also pointed to the specific wording of Article 1103—which applied to management, acquisition, sale, and other specified activities—and noted that this language made the clause narrower than the provisions addressed in MTD and other arbitral decisions.Footnote 176
Moreover, Canada argued that the term “treatment” in Article 1103 had to be read in the context of Article 1101(1), which states that Chapter 11 of the NAFTA applies to “measures adopted or maintained by a Party,” and Article 201, which defines “measure” as including a “law, regulation, procedure, requirement or practice.”Footnote 177 In Canada's view, this meant that the scope of the MFN clause was limited to an “action taken by a single NAFTA government in its domestic jurisdiction,” and that a treaty between two or more states “does not fall within the definition of measure and is not treatment for the purposes of Chapter 11.”Footnote 178
Both the United States and Mexico filed non-disputing party submissions in that case. Mexico expressed agreement with Canada's arguments on this issue and concluded that “the MFN obligation under Article 1103 cannot alter the substantive content of the fair and equitable treatment obligation under Article 1105(1).”Footnote 179 The United States emphasized the agreement between all three NAFTA parties on the application of the MFN clause in this context, stating:
[A]ll three Parties later confirmed, through subsequent submissions commenting on that interpretation, that the MFN obligation under Article 1103 did not alter the substantive content of the fair and equitable treatment obligation under Article 1105(1).Footnote 180
In its award, the Chemtura tribunal noted that the NAFTA states “firmly oppose” this use of MFN but declined to rule on the issue.Footnote 181
3. Subsequent Cases
Following Chemtura, the NAFTA parties’ views were recorded in Bilcon v. Canada,Footnote 182 Apotex v. United States,Footnote 183 and Mesa Power v. Canada,Footnote 184 though again none of the tribunals in those cases directly ruled on the issue.Footnote 185
In Mesa Power, for instance, Canada argued as follows:
Article 1103 is not a tool through which an investor can choose the language it prefers from Canada's various investment agreements. To prove a breach of Article 1103, the Claimant has the burden of providing evidence of actual—not hypothetical—treatment of an investor of a third party to the dispute. Otherwise, it would be impossible for the Tribunal to answer the necessary factual questions, such as whether the treatment was in fact “more favourable” and whether it was accorded in “like circumstances.”Footnote 186
In the same arbitration, Mexico took a similar position in a submission that echoed Canada's arguments in Chemtura on the meaning of “treatment”:
Article 1103 applies to actual instances of treatment accorded to one or more investors of a third State, or their investments, which is more favorable than the treatment accorded, in like circumstances, to the claimant or its investment. The fact that another treaty theoretically offers different treatment is insufficient to establish a violation of Article 1103.Footnote 187
For its part, the United States argued in Apotex that the NAFTA parties’ repeated resistance to the use of the MFN clause in Article 1103 to “alter the substantive content of the fair and equitable treatment obligation under Article 1105(1)” had by this point come to reflect the “common, concordant views of all of the States Parties.”Footnote 188 As such, this position “may be deemed the authentic interpretation of the treaty,” which must be taken into account by NAFTA tribunals.Footnote 189
B. Limitations on MFN Clauses in Recent Investment Treaties
Beyond arbitral disputes, some states have sought to curtail the use of MFN provisions to import standards of treatment in recently concluded treaties, drafts, and model clauses. This is frequently accomplished by introducing language that is clearly designed to overcome any presumption in favor of importation, or by clarifying certain basic terms of the MFN clause—such as “treatment” and “like circumstances”—in ways that expressly or implicitly preclude importation.
For example, the MFN clause in the investment chapter of the EU-Canada Comprehensive Economic and Trade Agreement (CETA) expressly provides that the clause may not be used to import either dispute settlement provisions or standards of treatment:
For greater certainty, the “treatment” referred to in paragraphs 1 and 2 does not include procedures for the resolution of investment disputes between investors and states provided for in other international investment treaties and other trade agreements. 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.Footnote 190
Similar clarifications can be found in the MFN clause of the draft EU-Japan Economic Partnership Agreement,Footnote 191 the draft Pan-African Investment Code,Footnote 192 and the Protocol of Cooperation and Intra-Mercosur Investment Facilitation signed in 2017.Footnote 193
It is not yet clear what effect these new clauses will have on the prevailing approach to MFN. One leading treatise, seemingly playing down the new CETA provision, states:
In Article X.7(4) of CETA, Canada and the European Union agree that “[s]ubstantive 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 by a Party pursuant to such obligations.” This provision must be taken to be lex specialis. As a matter of general international law, a treaty obligation assumed towards a third State may constitute treatment for the purpose of the MFN clause.Footnote 194
The reference to lex specialis in this passage is imprecise, as there is no MFN standard applicable “as a matter of general international law” from which the CETA seeks to derogate.Footnote 195 It is likely that the authors instead meant to suggest a variation of the top-down approach discussed above: that is, that the CETA provision is a specialized formulation, which, outside the context of this specific treaty, does not alter the essential nature of the MFN standard.Footnote 196
So restated, this view raises the further question of how states would go about altering the general presumptions about the nature of MFN treatment in investment treaties. The answer to this question would seem to depend on whether these developments in treaty drafting are understood as specialized deviations from standard practice or as attempts at clarification. Some commentators have taken the latter view, referring to these recent clauses as attempts to avoid “unintended consequences” arising from tribunal interpretations of earlier clauses.Footnote 197 For instance, the commentary to the new Southern African Development Community Model BIT Template states:
The Drafting Committee noted that these should be bilateral treaties and that, as such, they should not establish unintended multilateralization through the MFN provision. … The Committee also noted that the MFN provision has been very broadly, and on several occasions unexpectedly, interpreted in arbitrations, making it very unpredictable in practice. This poses unnecessary risks for States, especially developing countries.Footnote 198
The new clarification in CETA and other treaties, moreover, is only one possible reaction to what states see as overbroad or troubling interpretations of MFN clauses. For example, certain states have imposed other temporal or substantive limitations on MFN clauses in their recent treaties.Footnote 199 For its part, India has simply omitted MFN from its most recent model investment treaty.Footnote 200 India has also sent a draft joint interpretative statement to twenty-five BIT partners in which it proposed to clarify that “the MFN obligation is not intended to alter the Agreement's substantive content by, for example, permitting piecemeal incorporation of and reliance on provisions found in other treaties, investment or otherwise.”Footnote 201 The draft interpretative statement also states that a breach of the MFN clause “requires a comparison between investors and investments that are in ‘like circumstances’” and sets forth an extensive list of factors to be used for a “fact-specific” assessment of whether the requirement of “like circumstances” has been met.Footnote 202
By widening the frame beyond published investment arbitral awards, the foregoing discussion places the MFN debate in a new light. In response to the above trends, it is not so easy to accept, as many arbitral awards have done, the conventional wisdom that an MFN clause may always be used to import substantive standards of treatment from other treaties. To be sure, the parties may conclude MFN clauses that have this effect if they wish to do so. But it is incumbent on practitioners and tribunals to be more careful in determining whether and to what extent states have agreed to such a use of MFN in any given treaty.
V. Concluding Remarks on the Terms of the New MFN Debate
The time has come to engage in a serious debate regarding the use of MFN clauses to import standards of treatment from one investment treaty to another. For too long, arbitral tribunals have simply assumed that this practice was permitted under the MFN clause at issue, or have paid only limited attention to the treaty text.Footnote 203 This debate will be best served if we bracket, for the time being, presumptions about the essential nature and function of MFN clauses in this respect, and turn instead to the specific terms of the treaties in which these clauses appear.
In these concluding remarks, we do not purport to offer our own general theory of MFN clauses, except perhaps to recommend greater caution in the face of such theories. Rather, we highlight some issues which should be central to the new MFN debate, and which have until recently been obscured by the conventional wisdom. These issues include the extent to which emerging trends in drafting should affect the interpretation of earlier treaties, the meaning of common terms in investment treaties (such as “treatment” and “similar situations”), and the reconsideration of the relationship between MFN clauses and the purposes of investment treaties.
A. Treaty Drafting and Treaty Interpretation
As states continue to develop more precise language on MFN in their newer treaties, tribunals will have to consider to what extent these developments may affect their interpretations of earlier treaties. As noted above, it may be debated in any particular case whether the “new generation” MFN provisions represent departures from earlier negotiating positions or clarifications of what was always intended by earlier MFN clauses.
This debate must take into account both general arguments about the nature of iterative treaty practice and specific arguments about individual treaty clauses. At a general level, tribunals and commentators have already begun to grapple with the implications of the clarifying language that has been adopted in some, but not all, more recent treaties.Footnote 204 For instance, in the context of the “old” MFN debate, the Plama tribunal found that the insertion in post-Maffezini treaties of language excluding the importation of dispute settlement provisions via MFN reflects “a reaction by States to the expansive interpretation made in the Maffezini case” and that “[i]f such language is lacking in an MFN provision, one cannot reason a contrario that the dispute resolution provisions must be deemed to be incorporated.”Footnote 205 Likewise, the tribunal in Daimler viewed such language as “signaling that the specified MFN clauses do not, and were never intended to, reach the international dispute resolution provisions of the respectively mentioned investment agreements.”Footnote 206
At a more granular level, tribunals may also have to address provisions in subsequent treaties that purport to clarify preexisting agreements. For example, it has been contended that language such as “for greater certainty” is included in later treaties to signal that the provision is meant to clarify established meanings, rather than signal a change in direction.Footnote 207
The weight that tribunals give to these recent developments in treaty-making may impact not only the outcome of individual cases, but also the ability of states to affect and reshape overarching views of “the MFN standard.” This debate will therefore be particularly important if tribunals continue to apply any kind of top-down approach to the interpretation of MFN clauses.
B. Renewed Attention to Specific Treaty Terms
If interpreters bracket their presumptions and intuitions about the nature of MFN clauses and MFN importation, they will need to pay closer attention than they have in the past to particular terms in MFN clauses.
This reconsideration of treaty terms must begin with the scope of the term “treatment.” Some states have expressed the view that “treatment,” as it is used in at least some investment treaties, refers to actual measures taken vis-à-vis investors or investments, and not to “standards of treatment” afforded in other investment treaties.Footnote 208 It has been suggested that states, when drafting the earlier-generation investment treaties, did not envision that these provisions would apply to import standards of treatment but rather that they would forbid actual discrimination through conduct by the host state—what has been described as the “traditional” use of MFN clauses.Footnote 209 One investment treaty negotiator defended a similar position in a 2008 article, and argued that MFN clauses generally “should not be used for treaty shopping purposes.”Footnote 210
This approach would have tribunals draw a distinction between “treatment” and “standards of treatment.” As a conceptual matter, this view is consistent with a growing body of literature that identifies general treaty standards such as FET as “standards of review” against which certain state measures are assessed.Footnote 211 On this view, it might be argued, “treatment” refers to the state measure under review in an FET claim, rather than the FET provision itself. This argument remains under-explored, and there is little discussion on how the distinction between treatment and standards might be applied to other provisions in investment treaties.Footnote 212
Tribunals will also have to consider more closely the other elements of MFN clauses. As suggested by the İçkale award, one critical element for further examination will be the requirement that the investor be “in like circumstances” or “in similar situations” with a suitable comparator.Footnote 213 Other terms may include territorial limitations,Footnote 214 as well as clauses directing the application of MFN provisions to specific activities, such as the maintenance, management, use, and acquisition of investments.Footnote 215
These terms may be usefully treated as individual elements of a given MFN clause, but it also will be important to understand how they operate in concert to define the clause's scope. The İçkale award, for its part, focused on the phrase “treatment in similar situations,” finding that this phrase did not extend to standards of treatment in other investment treaties.Footnote 216 Thus the terms “in similar situations” could be said to operate not only as an element that must be satisfied in an MFN claim, but also as part of the context guiding the interpretation of the scope of the clause as a whole.
C. MFN and the Nature of Nationality-Based Discrimination in Investment Treaties
The new MFN debate also provides an opportunity to reconsider prevailing theories about the purpose of these clauses in investment treaties. Greater emphasis on the specific terms of MFN clauses—such as “like circumstances” and “similar situations”—will naturally bring the MFN analysis into closer contact with the analysis under similarly worded “national treatment” provisions.Footnote 217 The interplay between these two standards may inform arguments as to the overall role of “non-discrimination” provisions in investment treaties, and the type of discrimination to which these provisions are addressed.
There are at least two potential approaches to understanding “discrimination” in the context of these provisions. The view of MFN clauses as instruments of multilateralization comes with a built-in understanding of the purpose of investment treaties as a means to impose “uniform standards of investment protection which, in turn, allow investors from different national origins to compete under equal competitive conditions.”Footnote 218 On this view, “discrimination” is potentially anything that imposes unequal transaction costs for investors based on their nationality.Footnote 219 The focus of the multilateralization view on competition aligns, in this sense, with areas of international trade jurisprudence, which emphasize “equal competitive opportunities” without regard to the actual effects of state measures.Footnote 220
A second view of discrimination, which is arguably more prevalent in the context of national treatment claims under investment treaties, is concerned with repairing the effects of actual discrimination on specific investments, not equalizing abstract competitive opportunities.Footnote 221 Investment tribunals dealing with national treatment claims have thus adopted an approach that generally rejects “the trade law emphasis on alteration of the conditions of competition” and instead favors “a test that focuses on whether an alleged discrimination is effectively based upon nationality rather than some other policy reason.”Footnote 222
These two views of discrimination suggest different understandings of the purpose of MFN clauses in investment treaties, and hence raise different questions regarding MFN importation. For the multilateralization view, the key question may be whether variations among treaty standards do, as a general matter, impact competitive opportunities.Footnote 223 For the latter view, however, the question arguably is whether a variance in applicable standards of treatment is capable, on its own, of having an “actual impact on, or harm to, a specific investor or investment.”Footnote 224 A closer consideration of individual MFN clauses, read in context with accompanying national treatment provisions, could provoke a debate as to which of these conceptions of discrimination applies, and what consequences that has for MFN importation.
D. Between Formalism and Ideology
The new MFN debate echoes broader shifts with respect to the interpretation of investment treaties. The presumption in favor of MFN importation is consistent with a teleological view that investment treaties are designed solely to maximize investor protection,Footnote 225 a view that is now undergoing a sustained backlash.Footnote 226 Efforts are underway in some fora to substitute the narrow focus on investment protection for a broader conception of the goals served by investment treaties.Footnote 227 These counter-narratives are advanced to spark a reconsideration of the specific provisions of investment treaties, including the substantive standards of treatment afforded therein.
By insisting on renewed attention to the specific terms of MFN clauses, we suggest it is helpful to approach this debate from a new direction. The debate over grand narratives, as a general matter, hopes to proceed from a consideration of broad purposes to the interpretation of specific terms. The debate we have outlined here, by contrast, focuses on the details of MFN clauses. A turn to bottom-up approaches, to the treaty text, and to the formal rules of treaty interpretation may be particularly appropriate in times of deep ideological contestation. This approach frees the interpreter from having to rely on presumptions and received wisdom, without necessarily forcing him or her to embrace a competing ideology.Footnote 228 By proceeding through case-by-case analysis of MFN clauses and of their role in the overall scheme of investment protection, tribunals and commentators may ultimately contribute to a richer and more nuanced understanding of investment treaties than could be achieved through top-down approaches.
Target article
The New Debate on the Interpretation of MFN Clauses in Investment Treaties: Putting the Brakes on Multilateralization
Related commentaries (5)
Introduction to the Symposium on Simon Batifort and J. Benton Heath, “The New Debate on the Interpretation of MFN Clauses in Investment Treaties: Putting the Brakes on Multilateralization”
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Putting the MFN Genie Back in the Bottle
The Enduring but Unwelcome Role of Party Intent in Treaty Interpretation
The Fictions and Realities of MFN Clauses in International Investment Agreements