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

Introduction

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.

Conclusion

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.

Footnotes

i UNCTAD, World Investment Report 2010 Invesitng in a Low-Carbon Economy 118, available at http://www.scribd.com/doc/46965070/World-Investment-Report-2010-UNCTAD (2010).

ii Marcela Klein Bronfman, Fair and Equitable Treatment: An Evolving Standard, Max Planck UNYB, Vol. 10 609-680, available at www.mpil.de/shared/data/pdf/pdfmpunyb/15_marcela_iii.pdf (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 http://www.shearman.com/files/Publication/fbba03e4-5af6-47f9-912a-25caf4dab342/Presentation/PublicationAttachment/2baa1c0c-9447-4b0c-95ab-6a57f88becd7/Fair%20and%20Equitable%20Treatment%20-%20277.pdf.

xi Id.

xii Olguín v. Paraguay, ICSID Case No. ARB/98/5, Award ¶ 66 (b) (July 26, 2001). English translation for reference available at http://ita.law.uvic.ca/documents/Olgun-award-en.pdf.

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 http://papers.ssrn.com/s013/papers.cfm?abstract_id=557121.

xviii UNCTAD Report: Investor-state Disputes Arising from Investment Treaties, a Review, available at http://www.unctad.org/en/docs/iteiit20054_en.pdf (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 http://www.state.gov/documents/organization/117601.pdf.

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 http://www.oecd.org/dataoecd/45/27/1922690.pdf; see also Kevin P. Gallagher, U.S. BIT and Financial Stability, COLUM. FDI PERSP., No. 19 (Feb. 23, 2010), available at http://www.vcc.columbia.edu/content/us-bits-and-financial-stability.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions