The Fair and Equitable Treatment Clause in International Investment Agreements A negotiation perspective; a practical approach ALEJANDRO FAYA-RODRÍGUEZ Singapore, October 2007

Meaning???Meaning???  The clause has to be interpreted! As opposed other clauses, it has a meaning no so clear from the mere reading of the text…..  We have three possibilities: 1.Subjective assessment of “fairness” and “equity” 2.Other conventional obligations and/or “principles” 3.Customary international law minimum standard (CILMS)

 It equals to an “ex at equo bono” clause  The arbitrators perform a highly subjective function  No need to make references to international law  Low degree predictability; high degree of uncertainty  No jurisprudence backing this approach, although some “suggestions” (Pope & Talbot v Canada, Tecmed v Mexico) Subjective assessment of “fairness” and “equity”

Other conventional obligations and/or “principles”  A breach of a different obligation may be a breach of the FET standard (Metalclad v Mexico, SD Myers v Canada)  Legitimate expectations, stable regulatory framework, “good governance”, treatment in an “even-handed manner” conducive to promotion of FDI (Tecmed v Mexico, Eureko v Poland, MTD Equity v Chile, Enron v Argentina, Azurix v Argentina)  Transparency (Metalclad v Mexico, Maffezini v Spain, CME v Czech Republic)  Good faith (Tecmed v Mexico)

ImplicationsImplications  A “principle” is not a source of international law  Low degree predictability; high degree of uncertainty  Burdensome obligations upon States (how to assure fulfillment of “legitimate expectations” or “good governance”?)  Importation of legal concepts

Customary International Law Minimum Standard  Wilful neglect of duty, insufficiency of action falling so far below international standards (Neers Claim, Alex Genin v Estonia)  An arbitrary, grossly unfair, unjust or idiosyncratic conduct… a lack of due process that offends judicial propriety…a clearly improper and discreditable decision (Waste Management v Mexico, Mondev v USA, Loewen v USA)  No CILMS implicated by anticompetitive practices (UPS v Canada)  An “outright and unjustified repudiation” (Gami v Mexico)  Governmental differentiation as between nationals and aliens does not violate the CILMS (Methanex v USA)

ImplicationsImplications High degree of predictability, because the CILMS represents general practice of States and opinio juris Basic content defined (e.g. denial of justice, due process) Even though the content of the CILMS may be subject of discussion, the fact is that: It requires evidence It sets forth a high threshold; much more than a simple illegality at the domestic level is required The failure comes not from one entity, but from the entire system CILMS does not cover all areas It evolves gradually and slowly

Best Practice  Expressly link the “fair and equitable treatment” obligation to the CILMS  See NAFTA Interpretation (July 2001) on Article 1105 (FET) 1. Article 1105 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party. 2. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens. 3. A determination that there has been a breach of another provision of the NAFTA, or of a separate international agreement, does not establish that there has been a breach of Article 1105(1).

Has the interpretation worked in practice?  FIRST GENERATION (Before the interpretation): Erroneous decisions of Metalclad v Mexico (2000), SD Myers v Canada (2000) and Pope & Talbot v Canada (2001)  SECOND GENERATION (After the interpretation): Mondev v USA (2002), UPS v Canada (2002), ADF v USA (2003), Loewen v USA (2003), Waste Management v Mexico (2004), Gami v Mexico (2004), Methanex v USA (2005)  No violation to article 1105 found in any of these cases

Thank you!!! ALEJANDRO FAYA-RODRIGUEZ Deputy Director-General of International Affairs Ministry of Economy, Government ofMexico