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.

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

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

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 Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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