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Application of the MFN-clause in investment treaties: Replies to two questions
Question 1: To what extent would a UK investor be able to claim the better treatment granted to US investors (by the US BIT) by invoking the MFN clause contained in the UK BIT
a. in the area of pre-establishment
b. with regard to performance requirements
1.a. The UK investor will NOT be able to claim the better treatment granted to US investors (by the US BIT) by invoking the MFN clause contained in the UK BIT in the area of pre-establishment for two main reasons.
First, MFN clauses in most non-US BITs, by their own terms, do not apply to pre-establishment. Most European and other non-US BITs do not cover pre-establishment. While US BITs specifically cover pre-establishment (referring to “acquisition”, “making,” “entry” of an investment), other BITs explicitly provide that pre-establishment is subject to the domestic law of the host country. The MFN clause cannot be used to incorporate from the US BITs into other BITs the treatment in the pre-establishment stage because, in the majority of those other BITs, the scope of the MFN clause itself is restricted to post-establishment.
While I cannot presume I have reviewed the majority of non-US BITs, those that I have reviewed have an MFN clause that is restricted in scope to post-establishment. A typical MFN clause would state that MFN treatment applies to “operation, management, maintenance, use, enjoyment, or disposal” of investments. By contrast, the MFN clause in a US BIT covers specifically “establishment, acquisition, expansion” along with “operation” etc. Thus, the typical MFN clause in a non-US BIT, by its own terms, does not apply to pre-establishment and cannot be relied on to extend the scope of that BIT to pre-establishment protections.
Second, there is precedent in international arbitration that limits the application of the MFN clause. There have been several cases brought before the International Centre for Settlement of Investment Disputes (ICSID) and the International Court of Justice (ICJ) that have addressed the application of MFN treatment.[1] These cases have not – with few exceptions – examined the MFN clause beyond the scope of its application to post-establishment rights. A recent case however – Emilio Agustìn Maffezini v. the Kingdom of Spain (Maffezini) – involved the application of the MFN clause to the BIT dispute settlement mechanism. Such an application of the MFN clause is not obvious, but neither is it unreasonable or illogical. The Maffezini Tribunal found that the MFN clause at issue did cover procedural protections relevant to dispute settlement. However – and more relevant here – the Tribunal also concluded that the MFN clause could not be interpreted to apply to terms that the parties understood to be fundamental conditions of their consent to be bound by the BIT.
In Maffezini an Argentine investor submitted his claims to arbitration before the 18-month waiting period required by the Spanish-Argentine BIT expired. However, he claimed that because the Spanish-Argentine BIT provides for MFN treatment and because the BIT between Chile and Spain requires only a six-month waiting period, the six-month period applied in this case as “more favorable treatment” that Spain had extended to the investors of Chile. The more favorable treatment in question thus related to a procedural (i.e. dispute resolution) right rather than a substantive right such as pre-establishment. In addressing the question of whether MFN treatment applied to the procedural rights of dispute resolution, the Tribunal examined all three of the following: (i) the Treaty language;[2] (ii) the policies that motivated the parties during the negotiation of the BIT;[3] and (iii) the practice of the respondent government in concluding its BITs.[4] After finding that the scope of the Spain-Argentine BIT’s MFN coverage extended to rights in dispute resolution, the Tribunal concluded that the Argentine investor was entitled to the more favorable dispute resolution terms of the Spain-Chile BIT. [5]
The case however, is even more notable for the restrictions to the application of the MFN clause determined by the Tribunal. The Tribunal noted that as long as applying the MFN clause to the right in question should not “override public policy considerations that the contracting parties might have envisaged as fundamental conditions for their acceptance of the agreement in question.”[6] The example that the Maffezini Tribunal gave of what might constitute a fundamental condition of a state’s acceptance of a BIT was the principle of the exhaustion of local remedies. According to the Tribunal:
… if one contracting party has conditioned its consent to arbitration on the exhaustion of local remedies … this requirement could not be bypassed by invoking the most favored nation clause in relation to a third-party agreement that does not contain this element since the stipulated condition reflects a fundamental rule of international law… This conclusion is compelled by the consideration that it would upset the finality of arrangements that many countries deem important as a matter of public policy… [A] distinction has to be made between the legitimate extension of rights and benefits by means of the operation of the clause, on the one hand, and disruptive treaty-shopping that would play havoc with the policy objectives of underlying specific treaty provisions, on the other hand.[7]
In my view, the application of the MFN clause to pre-establishment must be considered on a level of importance comparable to the exhaustion of local remedies requirement. (Or, to put it differently, a state’s consent to extend the MFN clause to pre-establishment should be considered of equal importance to the state’s consent to abandon the exhaustion of local remedies requirement). Restricting the scope of MFN treatment to post-establishment only is a “public policy consideration” that the parties clearly “envisaged as a fundamental condition” of their acceptance of those five BITs. Therefore, if the contracting parties to a BIT have conditioned their consent to the BIT on excluding pre-establishment from the scope of MFN treatment, this exclusion cannot and should not be overridden by invoking the MFN clause. As the Maffezini Tribunal pointed out, allowing a party to bypass the specific agreement contained in its BIT by operation of the MFN clause would offend the important public policy consideration of the finality of arrangements; it would betray the precise will of the contracting parties reflected in the scope of the national treatment obligation.
1.b. The UK investor WILL be able to claim the better treatment granted to US investors (by the US BIT) by invoking the MFN clause contained in the UK BIT with regard to performance requirements.
The response to that question follows from the logic of the response to the previous question. Country A (presumably a Member of the WTO) and the UK have already agreed to some performance requirements covered by the TRIMs Agreement. The prohibition of performance requirements is accepted as a concept and as a substantive protection granted to foreign investors by WTO Members. Therefore extending the application of the MFN clause to cover performance requirements will not “override public policy considerations that the contracting parties might have envisaged as fundamental conditions for their acceptance of the agreement in question.” The role of the application of the MFN clause will be limited to identifying specific performance requirements that may be covered by the general prohibition. The list of the performance requirements in the TRIMs Agreement is illustrative rather than exhaustive. So is the list of performance requirements in US BITs. Therefore, the MFN clause will be no more than an interpretative tool to identify the scope of the general prohibition of performance requirements. It will fulfill that role by extending to the UK investor the more favorable treatment that is available to US investors.
Question 2: If the MFN clause is not applicable, what would be required from a UK investor’s perspective to be covered by the US BIT provisions?
a. in the area of pre-establishment
b. with regard to performance requirements
2.a. The UK investor must lobby its own government to enter into BITs that cover pre-establishment.
2.b. The UK investor must invoke the MFN clause in the event of a dispute with country A.
[1] See Asian Agricultural Products Limited v. Republic of Sri Lanka, ICSID Case No. Arb/87/3, Award of June 27, 1990, ICSID Reports, Vol. 4, p. 246; Emilio Agustìn Maffezini v. Kingdom of Spain, ICSID Case No. ARB/97/7, Decision of the Tribunal on Objections to Jurisdiction, January 25, 2000, ICSID Review—Foreign Investment Law Journal Volume 16, No. 1 (2001) [hereinafter Maffezini]; Anglo-Iranian Oil Company Case (Jurisdiction), International Court of Justice, Reports, 1952, p. 93; Case concerning the rights of nationals of the United States of America in Morocco, International Court of Justice, Reports, 1952, p. 176; Ambatielos case, International Court of Justice, Reports, 1953, p. 10.
[2] Maffezini paras. 52-53.
[3] Maffezini, para. 57.
[4] Maffezini, paras. 58-61.
[5] See Maffezini, para. 64.
[6] Maffezini, para. 62.
[7] Maffezini, at para. 63.
