This article has been written by Sonali, pursuing the Certificate Course in International Commercial Arbitration and Mediation from LawSIkho.
Table of Contents
BITs are the agreement entered between two states to protect and promote the investments made by their nationals and companies in each other’s country, popularly known as Foreign Direct Investments.
MFN stands for the most favoured nation and this clause in the investment treaty ensures that parties to one treaty give treatment not less favourable than the treatment they give to parties under other treaties. The clause can be better understood by referring to one of the initial examples. Article 3 of the 1998 German Model BIT provides that:
- Neither Contracting State shall subject investments in its territory owned or controlled by investors of the other Contracting State to treatments less favourable than it accords to investments of its own investors or to investments of investors of any third State.
- Neither Contracting State shall subject investors of the other Contracting State, as regards their activity in connection with investments in its territory, to treatment less favourable than it accords to its own investors or to investors of any third State.
The MFN clause promises fair and equitable treatment to foreign investors which looks just and much required from a commercial point of view. But is it really so? Do the host states also get equitable benefit by putting this clause in their BIT’s. Here, by lurking into the basic structure and history of MFN clauses, we understand why this clause is controversial in a BIT and need requisite consideration from the policymakers.
The controversy around the scope of MFN clause
The debate around the applicability of this clause started after the decision of the Spanish court in Maffezini V. Spain. An Argentina national, Maffezini brought a claim against a Spanish company in which he had invested under the Argentina-Spain BIT. As per the dispute resolution clause of the BIT, the claimant has to first approach the courts of the host country i.e. Spanish courts before invoking international arbitration. An arbitral tribunal was formed and jurisdiction of the same was contested by Spain because the claim was not submitted to Spanish courts. The claimant on the other hand contended that he need not pursue local remedies owing to the MFN clause in the Argentina-Spain BIT and can go straight to international arbitration. He is thereby invoking more favourable provisions of Chile-Spain BIT which do not require seeking local remedies prior to invoking international arbitration.
The court agreed with Mafezzini and rejected Spain’s challenge to jurisdiction on the premise that Spain’s BIT with Chile allowed the dispute to be submitted directly to ICSID arbitration without first accessing Spanish courts. This decision triggered a debate on the scope of the MFN clause. On what all provisions can this benefit be taken? Whether MFN clauses can undermine the dispute resolution clauses specifically negotiated between two parties? Can an investor custom tailor a treaty and ignore the bilateral character of the commitments made by two states after detailed negotiations?
Classification of MFN in investment treaties
An MFN clause is included in the vast majority of BITs. There are many variations to it but it can be classified into three major sections:
MFN firstly can be classified as a stand-alone clause, as attached to the National Treatment clause and as attached to another clause in BIT. Standalone MFN clauses operate independently and a general example of it is Article 3.2 of China-Benin BIT (2004); “Neither Contracting Party shall subject investments and activities associated with such investments by the investors of the other Contracting Party to treatment less favourable than that accorded to the investments and associated activities by the investors of any third State.”
The clause may also be combined with a National treatment obligation in BIT’s such as Article 3.2 of Netherlands-Burkina Faso BIT (2001); “Each Contracting Party shall grant most particularly to these investments treatment that is not in any way less favourable than that afforded to investments made by its own nationals or by the nationals of any third State, in all cases the treatment that is the most favourable to the nations concerned.”
Secondly, MFN clauses may be defined on the basis of the fact that whether the scope of applicability of MFN or the ‘treatment’ covered is defined or not? Traditionally, BIT’s do not cover the scope of an MFN clause. But there are few which do specify the treatment covered in their scope. The clause may include words like ‘use, enjoyment and disposal of investments’. This narrows down the areas where an investor can substitute his negotiated BIT clause with a more favourable one. Contrarily, in other situations, BITs may directly refer to each of the provisions of the other BIT. They expressly allow the import of any more favourable provision corresponding to those covered by MFN from other BIT.
Lastly, an MFN clause may or may not incorporate a criterion of comparison between foreign investors, most commonly used words are “like circumstances” or “like situations” such as provided in EU Canada-CETA, 2016, Article 8.7.1 states, “Each party shall accord to an investor of the other party and to a covered investment, treatment no less favourable than the treatment it accords in like circumstances, to investors of a third country and to their investors…in its territory.” Some treaties provide guidelines to determine whether like circumstances are present or not, which requires an overall examination of the circumstances of the investments on a case by case basis. This expression of likeness is important from the perspective to determine whether tribunals can compare any foreign investor with any other foreign investor and if not then on what criteria it can do so?
Exception based classification
A classification based on exceptions to the scope of the MFN clause reflects the type of risk considered by the signatory states to prevent the unlimited application of the MFN clause. Traditionally, two MFN specific exceptions exist namely economic integration area and double taxation treaty. Sometimes, BITs also specifically exclude certain sectors such as aviation, fisheries, maritime matters including salvage.
Time-based classification: Post establishment v. Pre establishment
When BITs of states provide rights to foreign investors only after they enter into the territorial jurisdiction of the state, that phenomenon is known as the Post-Establishment phase. Thereby host countries create specific entry requirements for foreign investors. Their national legislation may include discriminatory rules with regard to entry and admission of foreign investments. Once, admitted, no such discrimination may occur. Thus admission does not happen according to the BIT because it is applicable only post-establishment and a separate clause is given to specify admission procedure such as provided by Article 2 of Belgium-Côte d’Ivoire BIT (1999); “Each of the contracting parties shall encourage on its territory investments by investors of the other contracting party and shall admit such investments in accordance with its legislation”. Additionally, states going a step forward may specify clearly that MFN is applicable only to post-establishment phases by using words like: “management, maintenance, use, enjoyment or disposal of their interests”. A host state may want to keep the benefits of their treaty limited to investors established in their country and using such phraseology clarifies their intent that the rights under BIT shall be given to foreign parties only after entering into the country and not beforehand.
This is a minority trend which was kick-started by Canada and the United States in chapter 11 of the North American Free Trade Agreement (NAFTA), Article 1103, which states that; “Each party shall accord to investors of another Party treatment no less favourable than that it accords, in like circumstances, to investors of any other party or of a non-party with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other dispositions of investments”.
Simultaneously, the investment treaties granting this clause systematically provides for restrictions for its economic sectors because undoubtedly no country would allow foreign investments without safeguards. Also, this is not an absolute right to access the host state’s territory and foreign investors can invest only on the same terms as their foreign counterparts. The important consideration here is that no state is under compulsion to grant this clause in their BIT because this type of commitment is final and there is no turning back except parties renegotiate terms.
Applicability of MFN clause: substantive and procedural rules
Meaning of ‘Treatment’ in MFN clause
Treatment in the MFN clause means and provides for the competitive opportunities between the nations in respect to the matters of investment (in BITs), trade or other economic cooperation. But it is not simply the rights and preferences granted to investors. The principal cause of concern that arises is whether the rights granted by host countries to third parties in their BITs also constitute ‘treatment’? Meaning that whether it is necessary for the basic BIT to have a similar clause before adopting it from other BIT’s (to call it “treatment”) or this jurisdiction is not required at all? Eg. Is it required for an investment treaty to include a clause of expropriation to invoke a similar clause of any other BIT? The Arbitral Tribunals have given differing opinions and interpretations regarding this.
Importing substantive rules
- Replacing own provision with a less restrictive one: This particularly happens in FET (Fair and Equitable Treatment) clauses. In ADF v. the United States, the only completed claim of NAFTA, the investor invoked the benefit of FET clauses given in old BITs between the US, Albania and Estonia. The investor’s claim was rejected on reasoning by the Arbitral Tribunal that the investor failed to prove that FET clauses under treaties with Albania and Estonia are less favourable than those in Chapter 11 of NAFTA. But the fact that such provision can be imported is impliedly accepted by the tribunal.
- Importing a provision where none exists: The investors can ask the tribunal to add a new provision in their BIT which they can invoke in case of breach by the host state. In White Industries v. India, for almost nine years, White Industries tried to enforce an ICC arbitral award against India in Indian courts. They had won a claim in a contractual dispute against Coal India. After unsuccessfully pursuing litigation for eight years in Indian courts, White initiated UNCITRAL arbitration proceedings against India under the treaty. They claimed that India has not fulfilled its obligation to provide White with an effective means of asserting claims and enforcing rights. Therefore, White invoked its Treaty’s MFN clause and borrowed a clause of similar obligation from India/Kuwait Bilateral Treaty. After invoking this clause, White Industries was able to prove a breach of the Treaty by India. The tribunal held that India’s failure to resolve this claim over a period of nine years is a breach of condition to provide effective means of asserting claims and enforcing rights.
- Removing an existing provision: Investors happened to have invoked the MFN clause to remove a provision from their BIT which is ‘less favourable’ to them. In CMS v. Argentina, CMS brought a claim against Argentina that the measure of tariff rates in issue was in violation of several of their obligations under the Argentina-US BIT. Argentina relied upon its necessity clause which allowed measures “necessary for the maintenance of public order, the fulfilment of its obligation with respect to the maintenance and restoration of international peace or security or the protection of its own essential security interests”. While CMS invoked other Argentinian BITs where such clause was absent. The tribunal upheld the arguments of Argentina: “the mere absence of such provision in other treaties does not lend support to this argument, which would, in any event, fail under the ejusdem generis rule”.
- Extending scope of the treaty: Scope of a BIT means its temporal scope and material scope. In cases such as Tecmad v. Argentina and MCI v. Ecuador, plaintiffs tried to cover events in their basic BIT that occurred before they entered into force i.e a retroactive application. In both cases, tribunals refused to recognize the effect of the MFN clause. As held in CMS v. Argentina, the temporal scope of a BIT is a matter of core and it cannot be impaired by the principle contained in the MFN clause. The intent of the tribunal is clear that before invoking a provision through the MFN clause, it is necessary for the basic treaty to have that jurisdiction.
Importing procedural rules
The question here is whether the dispute resolution mechanism is covered under the terminology “treatment” or not? Probably, as discussed above in Maffezini v. Spain, this is the most controversial part of MFN clauses. Can an arbitral tribunal that has no jurisdiction without MFN clause, interpret that clause to identify whether it has jurisdiction or not? The various interpretations by tribunals are given below:
- Favourable Positions: The position in Maffezini v. Spain is the first of its type and holds that it is possible to import a more favourable dispute settlement mechanism of third party BIT. The ICSID Tribunal explained that: “If a third party treaty contains provisions for the settlement of disputes that are more favourable to the protection of the investor’s rights and interests than those in the basic treaty such provisions may be extended to the beneficiary of most favoured nation clause as they are fully compatible with the ejusdem generis principle.”
But it did put on some limitations on the application of the MFN clause;
- a party cannot override public policy considerations which are fundamental for their acceptance of the treaty and
- treaty-shopping would not be allowed.” Several other tribunals have followed the same course even after a lot of criticism on a justification that consent of other parties has been imported by virtue of the MFN clause.
- Unfavourable Positions: Contrarily, there are several other tribunals that have not followed the above-mentioned ratio of the ICSID Tribunal. In Daimler v. Argentina, due to the absence of clear evidence of the intention of signatory countries to apply MFN clauses to procedural provisions in their basic treaty, the tribunal denied the application of MFN clauses to procedural rules. They also challenged the interpretation of the term ‘treatment’ which should mean the direct treatment of the investor and not to any international arbitration arising from this treatment.
- Extending mandate of the arbitral tribunal: Investors invoked the MFN clause to extend the arbitral tribunal’s mandate to matters excluded from the scope of the basic BIT. Thus, in Plama v. Bulgaria, the tribunal held that “When concluding a BIT with specific dispute resolution provisions, states cannot be expected to leave those provisions to future replacement by different dispute resolution provisions through MFN unless states agreed expressly thereto.
- The question for consideration here is whether an investor can import a favourable clause from a third party treaty without importing the drawbacks or limitations attached to it or not? Many tribunals have accepted the selective import of provisions from third country treaties. In RosInvest v. Russia, the tribunal accepted its jurisdiction based on Russia-Denmark BIT but excluded the fiscal matters from the scope of the settlement mechanism. Also in Siemens v. Argentina’s dispute resolution provision was imported from Chile-Argentina BIT which allowed the investor to go straight to the International Arbitration on a condition that the investor had to make a final choice between domestic courts and international arbitration. The investor in the present case had already initiated proceedings in Argentine courts but the tribunal accepted its jurisdiction on the ground that a treaty is negotiated as a package and limitations of provision should follow while importing it. But the meaning of the MFN clause is different and relates only to favourable treatment.
- One contrary position that the entire provision should be imported was taken by a tribunal in Hochtief v. Argentina. The tribunal held that the MFN provision does not permit selective picking of components so as to manufacture a synthetic set of conditions to which no States’s nationals would be entitled.
- Accordingly, these different opinions by tribunals show that the approach of selective import is controversial.
The reaction of states: importing relevant changes in their investment treaty
To counter the above mentioned controversial interpretations of the application of an MFN clause by various tribunals have forced the nations to renegotiate the MFN clause and their inclusion in their BITs.
Excluding procedural provisions
Teachings of the Maffezini case have led many states to avoid or exclude the dispute resolution mechanism from the scope MFN clause in the basic treaty between the host country and investor. E.g. Article 3.2 of the Columbia-United Kingdom BIT (2010); “The most favourable treatment to be granted in like circumstances referred to in this agreement does not encompass mechanisms for the settlement of investment disputes, such as those contained in Articles IX and X of this agreement, which is provided for on treaties or international investment agreement.” But this approach leaves a door open to import substantive rules via MFN route.
Excluding past treaties
Exclusion of agreements signed before the creation of BIT between host state and investor or the whole of the contents of other treaties i.e. both substantive and procedural rules is recently growing as a trend. For example, CETA between Canada and European Union states that: “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.”
Non-inclusion of MFN treatment clause
Even after putting much consideration into the language of MFN clauses, specifically excluding controversial parts, their broad interpretations by investment tribunals challenges host countries to limit their scope. Thereupon, the non-inclusion of MFN clauses in Investment treaties is now considered by many host states. Thus, the Indian 2015 BIT does not contain one because MFN clauses are not traditional or part of customary international law but only an obligation that is created by law i.e. if the parties agree upon that.
Model BIT 2016 – India
The new Model BIT of India specifically excludes the Fair and Equitable treatment clause. It rather included a new “Treatment of Investments” clause in Article 3 Chapter II. Also, Most Favoured Nations treatment is excluded. Under, new dispute resolution mechanism, an investor has to fully exhaust the local remedies before approaching international tribunals. Now, the investors cannot borrow more favourable rules and treatment from other country BITs.
The controversies and vague interpretations of clauses in the BITs can be avoided by absorbing the above-mentioned difficulties arising due to the ambiguous language used in those clauses and the respective reaction of states to those problems. The parties to the investment treaties should renegotiate their terms in case of any collision and try to arrive at a unilateral interpretation of the terms of the agreement.
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