China: Fair and Equitable Treatment (FET) – Should the Standard be Differentiated According to Level of Development, Government Capacity and Resources of Host Countries?

Last Updated: 21 February 2013
Article by Denning Jin


Fair and equitable treatment (FET) originated from the Havana Charter of 1948 and the adoption of the FET standard accelerated in the late 1960s and in the 1970s when it was widely incorporated in bilateral investment treaties. By the end of 2009, 2,750 bilateral investment treaties (BITs) have been concluded, i and the vast majority have incorporated FET together with other standards such as full protection and security, using very similar language, as a safeguard against violations by the host state. ii However, it was not until the early twenty-first century that FET was applied in investor-state arbitral jurisprudence, iii where claimants lodged claims and tribunals found host state liability based on FET.

In particular, arbitral jurisprudence uses FET to restrict the exercise of sovereign powers by host states. FET is not used, by contrast, as a concept to judge the adequateness of contractual arrangements between foreign investors and host states. iv The rule of law as a concept of restricting public power can be understood as an institution that constitutes one of the bases of market economies. v FET has become one of the standard guarantees of protection in international investment treaties and is regularly applied by arbitral tribunals. Restricting the host states' exercise of sovereign power, the scope given to FET in recent jurisprudence is increasingly wide, covering restrictions of domestic courts, domestic administrative bodies, and even the national legislator.

Although the boundaries of FET are not clearly defined, investor-state investment arbitral tribunals have frequently identified and incorporated specific legal principles and concepts into the FET standard, such as arbitrary treatment, legitimate or reasonable expectations and stability, transparency, coercion of foreign investors and denial of justice, vi while disregarding the fact that FET may be interpreted in different treaty contexts. While most of the treaties provide FET in terms of an international standard, or in terms of a minimum standard of treatment, vii some treaties provide for limitations and qualifications on the application of FET, such as the need to maintain public order, viii or its subordination to national laws and regulations. ix Given the different limitations and qualifications provided in treaties, the determination of arbitral tribunals on the meaning of FET should at the outset refer to the treaty language to define the scope of FET.

The question of differential application to different levels of host state development is commented as one of the few FET issues and problems. x Dr. Kreindler further explains that differential application means there may be a presumptive need for consideration of the specific resources and specific investment regulatory experience of the particular host state involved as part of the FET analysis, and such a nuanced analysis appears to have been carried out in Genin v. Estonia, Generation Ukraine v. Ukraine (referring to the "vicissitudes of the economy), Maffezini v. Spain (referring to "bad business judgment"), MTD v. Chile, and CMS v. Argentina (referencing the particular crisis situation). xi

I. The accountability of the conduct of investors in investor-state investment arbitration preempts the speculation of applying differential FET standards.

Although the situations of host countries such as the government capacity, administrative processes, shortcomings of the governmental agencies' policies and practices, and even the vicissitudes of the host state economy has been taken into account by tribunals in evaluating the application of FET, no awards approached their determinations through the employment of a differentiated FET standard. Rather, the most notable hallmark of those awards is that the tribunals placed weight on the accountability of the investors' conduct in evaluating the legitimate expectations of investors who had failed to consciously and highly regard the legal and business risks in particular host states. The Olguin tribunal mentioned the extreme attractiveness of the interest rate as high as 33% applicable to the claimant's investment at the outset. It is manifest that the tribunal deemed the conduct of the investor in this case as "gambling", and decided the case to prevent the unfairness that would result from rewarding "gambling", if it were guaranteed by investment protection. xii The accountability of the conduct of investors in investor-state investment arbitration preempts the speculation of applying differential FET standards. xiii

First, applying the FET standard to the specific case scenario is an inherent requirement of FET as such, as the plain meaning of "fair" and "equitable" requires a balanced scrutiny of both the host state and the investor sides. Indeed, some scholars have already commented that arbitrators tend to agree that the application of FET depends on the facts presented in a particular case, and that there is a point at which the tribunals have generally agreed in developing an objective and concrete meaning of "fairness". xiv The facts presented in a particular case must include the level of development, government capacity and resources of the host countries. In other words, a non-differentiated FET standard itself is able to be invoked to achieve fairness in response to certain situations of the host countries, and it is therefore unnecessary to develodiva set of differentiated FET standards in dealing with the different levels of development, government capacities and resources of the host countries.

Second, numerous investor-state arbitration cases indicate that it is plausible to link to the conduct of the investors when the tribunals consider the specific circumstances of a particular host state, such as the lack of experience and inferior government capacity, and it is primarily the conduct of the investors that should lead to the tribunals' determination on the propriety of the investors' legitimate or reasonable expectations in the given circumstances of the host state, as well as the conclusion on the allocation of liabilities between the investors and the host state. Obviously, the legitimate expectations of investors and their conduct are not in a vacuum regardless of the circumstances in a host state, but should be based on all such surrounding circumstances, which should all inform the investors' expectations. The analyses of the tribunals on the investors' conduct thus naturally preempts the speculation of applying differential FET standards, which would have put weight on the other side of the coin, the situation in the particular host country.

Third, as FET encompasses various subordinate legal principles and concepts, a hypothesis of a differential FET would likewise encompass these differential subordinate standards, principles and concepts. For example, to certain less developed countries, investors' legitimate expectations should be limited as the government may lack capacity to provide a stable and predictable legal and business environment, or the transparency or availability of justice could not be expected as the host state government may lack resources. Such a hypothesis warns that the differential standard will exacerbate inconsistency and capriciousness of applying the FET in arbitration and ultimately lead to the evisceration or destruction of the FET, not to mention the inherently vague and inconsistent interpretation of FET. The wisdom shown by the foregoing cases is to assess the investor's conduct in the specific context of the host state, rather than to excuse a host state's measure in light of a loosened or differentiated FET standard, which may result in the dislocation of the arbitration practice.

In a nutshell, the arbitration practice illuminates a balanced approach in treating the investors' interests and the interests of the host states. FET should not be a one-sided standard that is always in favor of investors at any cost of the host state. In applying FET, the tribunals must take into account all the surrounding circumstances and strike a balance between protection of foreign investments and accountability to the public interests of the host state. For example, in Waste Management II, the award stated that "evidently the standard is to some extent a flexible one which must be adapted to the circumstances of each case." xv However, this does not mean that it would be necessary for the tribunals to go beyond the generally accepted notion of FET to apply differential standards. Flexibility of the broad terms with which the FET standard has been formulated is taken as a virtue, and the tribunals may well manage to achieve appropriate result of arbitration based on such flexibility, as commented by the award of Waste Management v. Mexico. xvi

II. Interpretation of the FET standard under new challenges requires a uniform FET standard

The flourishing of investment protection treaties such as BITs is largely because the traditionally developed countries (capital exporting countries) wanted to cure the weaknesses and ambiguities of customary international law as applied to investments by international firms in countries at low levels of development. xvii In this sense, the developed countries contemplated that the regulatory powers, such as those to carry out expropriation measures on the investments by international firms, should be scrutinized by investor-state arbitration. However, the arbitration practice in the last two decades demonstrates that investor-state arbitration has become a "double edged sword" in the sense that the regulatory powers of developed countries may also be reviewed and criticized by international tribunals and the establishment of criticism may give rise to huge damages payable by the developed countries.

In addition, as reported by the United Nations Conference on Trade and Development (UNCTAD) in 2005, in the investor-state investment arbitration practice in the past decade or more, arbitration cases have involved the full range of investment activities and all kinds of investments, including privatization contracts and state concessions. Measures that have been challenged include emergency laws put in place during a financial crisis, value-added taxes, rezoning of land from agricultural use to commercial use, measures on hazardous waste facilities, issues related to the intent to divest shareholdings of public enterprises to a foreign investor, and treatment at the hands of media regulators. xviii The FET standard was broadly invoked by the claimants and tribunals in those arbitration cases. Globalization of the issues such as environment, human rights and the health and welfare of citizens, and even the financial crisis underpins the claims of both the developed and developing countries for regulatory space. For example, the successive economic crises in Asia and Latin America raised concerns about the impediments in investment treaties placed in controlling the economy during such crises. xix

To meet the above challenges, the FET standard should remain uniform for the reasons discussed below:

First, developed and developing countries have found more consonance in their movement to the breadth of regulatory powers. A hypothesis of differential FET standards would accord differentiated regulatory spaces to host countries with different levels of development, government capacities and resources. However, this will not be agreed to by the developed countries, as developed countries are facing the same problems that need to be regulated, varying from environmental problems to international financial crisis problems. Therefore, the role that FET plays to restrain the host states' regulatory powers will be constrained and FET will be interpreted in a more abstract and stringent way.

Second, as the expansion of state regulatory powers may challenge certain parts of the FET standard, the FET standard will have to be distilled to a more uniform one to remain as a restriction on state regulatory powers for investment protection. Not every disappointment and harm suffered by foreign investors at the hands of the regulatory state can constitute an international wrongful act. xx As an appropriate reaction of arbitral tribunals to the exercise of state regulatory powers, FET must become more refined and uniform, either as part of the international minimum standard or to other rational standards of review.

Third, host states can negotiate with each other in investment protection treaties for any mechanisms as those discussed above to circumscribe FET; therefore it is unnecessary for host countries to strive for regulatory powers under a lenient (differentiated) FET standard. The recent treaty practice reflects that countries have noticed that the vagueness of FET leaves to arbitral tribunals much room to articulate its meaning in a subjective fashion, and countries need to take the power back from such tribunals. Under these circumstances, the treaties are becoming more and more complex, and various norms are incorporated into the treaties such as equation of FET with international minimum standards, xxi establishment of subjective standards in determination of host states' regulatory measures, xxii and safeguard and exception provisions. xxiii

Under the new challenges to strike an appropriate balance between investment protection and maintenance of host states' regulatory powers, and to be acceptable by more countries (including both developed and developing countries), the FET standards should be distilled and refined to a uniform level, and it is therefore not necessary that differential FET standards should be developed.


Analysis on arbitral jurisprudence elucidates that differentiated FET standards are not necessary, as the accountability of host states' situation is an inherent requirement of the FET standard. Such a situation in a host state normally informs the legitimate expectation of a qualified investor. It has been a trend as reflected in recent treaty practice that host states expand their regulatory powers to address various domestic public needs, and sometimes, emergencies. Arbitral tribunal's discretionary power, if any, in interpreting and applying the FET standard should adhere to the treaties, which nowadays tend to limit the FET standard or subordinate FET to certain regimes articulated by the contracting states. This practice will not encourage differentiated FET standards.

Editor's Note: This article is an excerpt from "Fair and Equitable Treatment – Should the Standard be Differentiated According to Level of Development, Government Capacity, and Resources of Host Countries? How to Establish Criteria for It?", the author's dissertation paper for Investor-State Arbitration, while he was a candidate for his LL.M. degree at Georgetown University Law Center in Spring 2011.


i UNCTAD, World Investment Report 2010 Invesitng in a Low-Carbon Economy 118, available at (2010).

ii Marcela Klein Bronfman, Fair and Equitable Treatment: An Evolving Standard, Max Planck UNYB, Vol. 10 609-680, available at (2006).

iii Stephan W. Schill, Fair and Equitable Treatment, the Rule of Law, and Comparative Public Law, in International Investment Law and Comparative Public Law 155 (Stephan W. Schill ed., 2010). The article describes that arbitral tribunals first started to apply fair and equitable treatment provisions in investment treaty arbitrations in the following cases: Alex Genin, Eastern Credit Ltd, Inc and AS Baltoil v. Republic of Estonia ICSID Case No ARB/99/2, Award, 25 June 2001, Consortium RFCC V Royaume du Maroc ICSID Case No ARB/00/6, Sentence Arbitrale, 22 December 2003, Ronald S Lauder v Czech Republic UNCITRAL, Final Award, 2 September 2001, CMS Gas Transmission Co v Argentine Republic ICSID Case No ARB/01/8, Award, 12 May 2005.

iv Id. at 159.

v Id. at 178.

vi Christopher F. Dugan, Don Wallace, Jr. Noah D. Rubins, Borzu Sabahi, Investor-State Arbitration 504 (2008), at 506-533.

vii Article 1105 (1) of NAFTA: "Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security."

viii See, e.g., Article 2 (2), Morocco-Pakistan (2001).

ix See, e.g., Article IV, Caribbean Common Market-Cuba (1997).

x Richard H. Kreindler, Fair and Equitable Treatment–A Comparative International Law Approach, Transnational Dispute Management Vol. 3 Issue 3 (2006), available at

xi Id.

xii Olguín v. Paraguay, ICSID Case No. ARB/98/5, Award ¶ 66 (b) (July 26, 2001). English translation for reference available at

xiii Editor's Note: Cases the author analyzed in his dissertation paper also include: Genin v. Estonia, Generation Ukraine v. Ukraine, Maffezini v. Spain, MTD v. Chile, CMS v. Argentina.

xiv Dugan et al, supra note 8, at 506.

xv See, e.g., Waste Management, Inc. v. United Mexican States (Number 2), ICSID Case No. ARB(AF)/00/3 (NAFTA), Award, ¶ 99 (Apr. 30, 2004), 11 ICSID Rep. 361.

xvi Id.

xvii Jennifer Tobin, Susan Rose-Ackerman, Foreign Direct Investment and the Business Environment in Developing Countries: The Impact of Bilateral Investment Treaties, Yale Law & Economics Research Paper No. 293 (2004), available at

xviii UNCTAD Report: Investor-state Disputes Arising from Investment Treaties, a Review, available at (2005).

xix Susan Rose-Ackerman, Foreword to Santiago Montt, State Liability in Investment Treaty Arbitration vii, ix (Oxford and Portland, Oregon) (2009).

xx Santiago Montt, State Liability in Investment Treat Arbitration 5 (2009).

xxi See, e.g., 2004 U.S. Model Bilateral Investment Treaty (BIT), available at

xxii Id.

xxiii See, e.g., E.V.K. FitzGerald, R. Cubero-Brealey, A. Lehmann, The Development Implications of the Multilateral Agreement on Investment (1998), available at; see also Kevin P. Gallagher, U.S. BIT and Financial Stability, COLUM. FDI PERSP., No. 19 (Feb. 23, 2010), available at

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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