It is a well-known and well settled principle of common law that a contract cannot confer rights and liabilities upon an entity who is not a party to the same.1 However, Bilateral Investment Treaties (hereinafter referred to as BIT/Treaty) often bring in an exception to this principle. A BIT is an international agreement concluded between two states2 for the purpose of providing protection to the investors of the opposite party. However, unlike other agreements, BITs generally have a peculiar provision called the 'Most Favoured Nation' clause (hereinafter referred to as MFN Clause). MFN clause primarily means that an investor from a country party to the BIT would be treated by the other party "no less favourably" than an investor from any third country.3 However, complexities arise when an investor tries to incorporate favourable provisions and clauses from BITs between the foreign state he has invested in and a third state, into the subject BIT.
This article is an attempt at discussing the nature of MFN clauses and the international jurisprudence on the same. It further discusses the liberal interpretations taken by some tribunals which go against the fundamental principles of the law on contracts.
BITS AND MFN CLAUSE
BITs, as a concept, came into existence in the year 1959 with the signing of a treaty between Germany and Pakistan.4 At that time, the world was seeing an increasing demand for such international investment agreements from both developed states, who were most often the investing parties, as well as developing states, who were the ones being invested in. Developing nations were desirous of foreign investments in their country and on the other hand, investors from the developed states was looking for opportunities to invest their idle resources in the developing world which, they felt, could guarantee a sense of security and certainty. Over a period of time, BITs proved to be the strongest mechanism for attracting foreign investments in a country. Ever since, over 2800 BITs have been concluded and their signatories include almost all of the world's principal capital-exporting states.5 Despite the economic benefits, the huge success of BITs also invites attention towards associated irregularities and controversies.
One such controversy is that of the MFN clause which has found itself to be the reason behind differing and unexpected interpretations of a Treaty.6 The clause states that both the countries party to a BIT agree to look upon the other as its "most-favoured" investing partner, thus offering each other a treatment which is no less favourable than what is provided to the investor of a third country.7
Emilio Agustín Maffezini v. Kingdom of Spain8 (hereinafter referred to as "Maffezini case") is one of the most prominent cases which had the opportunity to discuss the complexities of MFN clauses. Maffezini (an Argentinian national) invested in a company incorporated in Spain. A dispute arose between the parties and, as a result, Maffezini invoked the Argentina–Spain BIT to bring his claim before international arbitration. Interestingly, the dispute resolution clause in the aforesaid BIT states that the precondition of approaching international arbitration would be that any such dispute be first referred to the courts of the host state (in this case, Spanish courts). On this very ground Spain objected to the Tribunal's jurisdiction arguing that the investor had not approached the Spanish courts first as required by the Argentina–Spain BIT.
However, the Argentina–Spain BIT has a MFN clause which states that treatment to investors "shall not be less favourable than that extended by each Party to the investments made in its territory by investors of a third country."9 Maffezini, therefore, invoked the dispute resolution clause of the Chile–Spain BIT arguing that Spain provides a more favourable treatment to Chilean investors as their BIT does not include a requirement to seek local remedies prior to taking a recourse to international arbitration. The tribunal found itself agreeing with the argument being forwarded by Maffezini and finally held Spain liable for breaches of the BIT.10
A similar approach was taken by the tribunal in the recent case of White Industries v. India11 (hereinafter referred to as "White Industries Case") wherein the arbitral tribunal awarded AUD 4 million against India by importing provisions from the India–Kuwait BIT into the India–Australia BIT. The tribunal observed that since the India-Australia BIT provides for MFN Clause12, the Australian investor was correct in relying upon the India-Kuwait BIT in seeking "effective means of asserting claims and enforcing rights".13
Such an interpretation of the MFN clauses is in breach of the principle of 'privity of contracts' which mandates that a contract cannot provide rights and obligations for the third party. The same had the effect of imposition of a provision which was directly contrary to the one originally intended by the parties.
Even if MFN clauses are interpreted in their most liberal sense, it has to be noted that the tribunals in both Maffezini and White Industries cases overlooked the intention of the parties in incorporating such MFN clauses. Generally, the MFN clauses are intended to cover only the substantive rules for the protection of investments (for example, fair and equitable treatment or protection from expropriation). An interpretation which extends the same to procedural protections, like dispute resolution, brings in provisions which were not originally intended by the parties to be part of the agreement between them. This observation is substantiated by the case of Plama Consortium Ltd v Republic of Bulgaria14 in which the tribunal held that an MFN provision in a treaty does not incorporate dispute settlement provisions, unless the MFN provision in the basic treaty leaves no doubt that the Contracting Parties intended to incorporate them.15
The tribunals in the cases of Maffezini and White Industries limited their focus to the specific text of the treaty instead of interpreting the provisions in light of the broader object and purpose of BITs to protect international investors and their investments.
Despite numerous cases examining the scope and application of MFN clauses, the issue still remains unsettled. This is, firstly, because of the existence of legal precedents like Maffezini and White Industries cases and secondly, as most of the MFN clauses are unconditional, reciprocal, and indeterminate, the parties are provided with considerable scope to argue competing interpretations. If one sticks to the precedent set by Maffezini and White Industries, it becomes plausible that a party may argue to completely rewrite the BIT in question by invoking the MFN clause.
In order to avoid such uncertainty and ambiguity, India, in its model BIT 2016 has completely excluded the MFN clause. This exclusion is also to prevent 'treaty shopping' by prospective parties, whereby foreign investors take advantage of provisions in other BITs by 'borrowing' them through the MFN clause. Prior to this Indian intervention, the Southern African Development Community had also recommended against including an MFN provision in BITs16 in 2012.
Even though providing MFN treatment is not an obligation under international investment laws, there is no denying that such treatment provides an assurance to the foreign investor that there will not be adverse discrimination which puts them at a competitive disadvantage.17 Increased confidence of investors results in greater investment. It would therefore be more appropriate if, instead of taking the extreme position of altogether excluding MFN clauses, nations would negotiate and draft the clause to be as specific as possible and thus avoid multiple or competing interpretations.
1 Halsbury's Laws of England, Contract (Volume 22 (2019))
2 Article 2(a), Vienna Convention on the Law of Treaties, United Nations, Treaty Series, vol. 1155, p. 331.
3 Article 5 of the Draft articles on most-favoured-nation clauses (ILC Draft), in Yearbook of the international Law Commission, 1978, Vol. II, Part Two, p. 21.
4 Germany - Pakistan BIT (1959), available at, https://investmentpolicy.unctad.org/international-investment-agreements/treaties/bilateral-investment-treaties/1732/germany---pakistan-bit-1959-. (Last accessed on 03.08.2021 at 17:00 hours)
5 International Investment Agreements Navigator, UNCTAD, available at, https://investmentpolicy.unctad.org/international-investment-agreements. (Last accessed on 03.08.2021 at 17:02 hours)
6 Suzy H. Nikièma, The Most-Favoured Nation Clause in Investment Treaties, February 2017 International Institute for Sustainable Development, at ¶1.0.
7 Article 4, Draft Articles on most-favoured-nation clauses, Yearbook of the International Law Commission, 1978, vol. II, Part Two.
8 ICSID Case No. ARB/97/7 (Decision on Jurisdiction).
9 Article IV, Argentina – Spain BIT, 1991.
10 ICSID Case No. ARB/97/7 (Decision on Merits), available at, https://www.italaw.com/sites/default/files/case-documents/ita0481.pdf.
11 White Industries Australia Limited v. Republic of India, UNCITRAL, award of November 30, 2011. Available at, http://www.italaw.com/sites/default/files/case-documents/ita0906.pdf
12 Article 4.2, India–Australia BIT.
13 Article 4.5, India–Kuwait BIT
14 ICSID Case No.ARB/03/24, decision of February 8, 2005, available at, https://www.italaw.com/sites/default/files/case-documents/ita0669.pdf.
15 Ibid at ¶223.
16 SADC. (2012, July). SADC model bilateral investment treaty template with commentary, (article 28.4). Available at http://www.iisd.org/itn/wp-content/uploads/2012/10/SADC-Model-BIT-Template-Final.pdf.
17 UNCTAD (2010), Most-Favoured Nation Treatment, United Nations, New York and Geneva, available at, https://unctad.org/system/files/official-document/diaeia20101_en.pdf.
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