1. Policy Options for Fair and Equitable Treatment Clauses in IIAs Dr. Roland Kläger10 October 2013

2. Dr. Roland Kläger2 I.Introduction 1.What is Fair and Equitable Treatment? 2.What is the Problem with Fair and Equitable Treamtent? II.Policy Options in the UNCTAD International Policy Framework for Sustainable Development (IPFSD) 1.Unqualified Commitment of Fair and Equitable Treatment 2.Reference to the Minimum Standard or International Law 3.Exhaustive List of Fair and Equitable Treatment Obligations 4.Interpretative Guidance to Arbitral Tribunals 5.Omit Fair and Equitable Treatment Clause III.Concluding Remarks Outline Policy Options for Fair and Equitable Treatment Clauses in IIAs

3. Dr. Roland Kläger3 Fair and equitable treatment (FET) is a core standard in IIAs FET is included in the vast majority of BITs as well as multilateral investment agreements such as NAFTA and the Energy Charter Treaty (ECT) Statistics: out of 365 BITs only 19 do not refer to FET (Tudor) At a general level, there seems to be great consensus that FET is an important element of international investment law I.1.What is Fair and Equitable Treatment? Policy Options for Fair and Equitable Treatment Clauses in IIAs

4. Dr. Roland Kläger4 Different forms of referring to FET in IIAs: German Model BIT: “Each Contracting State shall in its territory in every case accord investments by investors of the other Contracting State fair and equitable treatment as well as full protection under this Treaty.” Art. 1105 (1) 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.” Canadian Model BIT: “(1)… (2) The concepts of "fair and equitable treatment" and "full protection and security" in paragraph 1 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)…”  Increasing variety in FET treaty language  Opposing trends e.g. in America vs. China I.1.What is Fair and Equitable Treatment? Policy Options for Fair and Equitable Treatment Clauses in IIAs

5. Dr. Roland Kläger5 The evolution of certain sub-elements of FET: Due process and non-denial of justice require fair administrative and judicial proceedings Transparency requires a clear communication with the foreign investor Non-discrimination prohibits arbitrariness and harassment Protection of legitimate expectations requires a certain stability with regard to representations towards the investor  FET provides procedural and substantive protection to foreign investors I.1.What is Fair and Equitable Treatment? Policy Options for Fair and Equitable Treatment Clauses in IIAs

6. Dr. Roland Kläger6 FET is inherently vague “Black box”? Expansive interpretation of FET by some arbitral tribunals Definition of FET in the TECMED case: “[Fair and equitable treatment requires] treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment. The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and comply with such regulations. … The foreign investor also expects the host State to act consistently,…”  Potential intrusion into sovereignty of states and potential threat to the implementation of legitimate policies? I.2.What is the Problem with Fair and Equitable Treament? Policy Options for Fair and Equitable Treatment Clauses in IIAs

7. Dr. Roland Kläger7 The IPFSD also recognizes the mentioned problems (p. 43), in particular it refers to: Uncertainty concerning the precise meaning of the concept “Fairness” and “equity” allow for a significant degree of subjective judgment Taxing list of disciplines read into FET by arbitral tribunals Lack of clarity regarding the appropriate threshold of liability The protection of legitimate expectations restricts a host state’s ability to change and introduce investment-related policies for the public good I.2.What is the Problem with Fair and Equitable Treament? Policy Options for Fair and Equitable Treatment Clauses in IIAs

8. Dr. Roland Kläger8 The IPFSD lists and recommends certain policy options for FET clauses in IIAs in order to enhance sustainable development: 1.Unqualified commitment of fair and equitable treatment 2.Reference to the minimum standard or international law 3.Exhaustive list of fair and equitable treatment obligations 4.Interpretative guidance to arbitral tribunals 5.Omit fair and equitable treatment clause II.Policy Options in the IPFSD Policy Options for Fair and Equitable Treatment Clauses in IIAs

9. Dr. Roland Kläger9 The IPFSD adopts a critical view on unqualified FET commitments (p. 51): “Through an unqualified promise to treat investors “fairly and equitably”, a country provides maximum protection for investors but also risks posing limits on its policy space, raising its exposure to foreign investors’ claims and resulting financial liabilities. Some of these implications stem from the fact that there is a great deal of uncertainty concerning the precise meaning of the concept, because the notions of “fairness” and “equity” do not connote a clear set of legal prescriptions and are open to subjective interpretations. A particularly problematic issue concerns the use of the FET standard to protect investors’ “legitimate expectations”, which may restrict the ability of countries to change policies or to introduce new policies that - while pursuing SD objectives - may have a negative impact on foreign investors.” II.1.Unqualified Commitment of FET Policy Options for Fair and Equitable Treatment Clauses in IIAs

10. Dr. Roland Kläger10 An unqualified Commitment of FET is status quo in many IIAs Considering the huge number of existing IIAs, it is likely that unqualified FET provision will continue to be the main reference point Unqualified FET provisions are to be found in many European BITs but also, e.g., in more recent Chinese BITs EU seems to favour unqualified FET provisions in future IIAs Most-favoured-nation (MFN) clauses may lead to unqualified commitment of FET even if the language in a particular IIA is qualified  Does an unqualified FET clause mean that there is necessarily a threat to sustainable development or a low threshold of liability? II.1.Unqualified Commitment of FET Policy Options for Fair and Equitable Treatment Clauses in IIAs

11. Dr. Roland Kläger11  No, but why? Tribunals increasingly recognize further sub-elements (or principles) to be relevant for FET, such as sovereignty and sustainable development The aim of FET is not to provide “maximum protection” “Fairness” and “equity” clearly indicate the need for balancing Saluka case concerned an unqualified FET clause: “The protection of foreign investment is not the sole aim of the treaty, but rather a necessary element alongside the overall aim of encouraging foreign investment and intensifying the parties’ economic relations. That in turn calls for a balanced approach to the interpretation of the treaty’s substantive provisions for the protection of investments, …” Article 31 (3) (c) Vienna Convention allows for systemic integration of sustainable development law principles into FET II.1.Unqualified Commitment of FET Policy Options for Fair and Equitable Treatment Clauses in IIAs

12. Dr. Roland Kläger12 As a first policy option to enhance the sustainable development perspective, the IPFSD recommends to qualify FET by reference to (principles) of international law or, more specifically, to the minimum standard for the treatment of aliens under customary international law. The IPFSD states (p. 51): “The reference to customary international law may raise the threshold of State liability and help to preserve States’ ability to adapt public policies in light of changing objectives (except when these measures constitute manifestly arbitrary conduct that amounts to egregious mistreatment of foreign investors), but the exact contours of MST/CIL remain elusive.” II.2.Reference to the Minimum Standard or International Law Policy Options for Fair and Equitable Treatment Clauses in IIAs

13. Dr. Roland Kläger13 Many IIAs already include such references (e.g. NAFTA) This reference tries to define FET by another “black box” The customary international law minimum standard is usually defined by reference to the 1926 Neer case: “The treatment of an alien, in order to constitute an international delinquency should amount to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.” Many NAFTA tribunals held that the customary international law minimum standard has evolved since the Neer case, but up to what extent? It seems that a reference to international law or to the minimum standard cannot clarify the meaning of FET. II.2.Reference to the Minimum Standard or International Law Policy Options for Fair and Equitable Treatment Clauses in IIAs

14. Dr. Roland Kläger14  Does the reference to the minimum standard imply the application of a higher threshold of state liability? PRO: Glamis Gold v. United States Emphasized that level of scrutiny is the same as in the Neer case Placed burden of proof on investor to show that the minimum standard evolved since Neer (question of fact or law?) CON: Merrill & Ring v. Canada Emphasized that FET became part of customary law and that there is no difference between FET and the minimum standard Requires a reasonable justification for a state measure II.2.Reference to the Minimum Standard or International Law Policy Options for Fair and Equitable Treatment Clauses in IIAs

15. Dr. Roland Kläger15 Another policy option is to incorporate an exhaustive list of state obligations under FET. The IPFSD provides the following examples: Deny justice in judicial and administrative proceedings Treat investors in a manifestly arbitrary manner Flagrantly violate due process Engage in manifestly abusive treatment involving continuous, unjustified coercion or harassment Infringe investor’s legitimate expectations based on investment- inducing representations or measures II.3.Exhaustive List of FET Obligations Policy Options for Fair and Equitable Treatment Clauses in IIAs

16. Dr. Roland Kläger16 The list of FET obligations reflects the more recent developments regarding FET and the evolution of the sub-elements in arbitral jurisprudence Omitting established elements from an exhaustive FET clause will be a difficult task in treaty negotiations If no elements are omitted, is there a difference to an unqualified fair and equitable treatment obligation? It is likely that tribunals will refer to the already existing lines of jurisprudence of FET Uncertainty remains with regard to the interpretation of the individual obligations: what is the meaning of “due process”, “denial of justice”, “harassment”, “manifestly arbitrary treatment” etc? II.3.Exhaustive List of FET Obligations Policy Options for Fair and Equitable Treatment Clauses in IIAs

17. Dr. Roland Kläger17 The IPFSD proposes to guide tribunals in their interpretation of FET by clarifying in the text of an IIA that: the FET clause does not preclude states from adopting good faith regulatory or other measures that pursue legitimate policy objectives, the investor’s conduct (including the observance of universally recognized standards) is relevant in determining a breach of FET, the country’s level of development is relevant in determining whether the FET standard has been breached, a breach of another provision of the IIA or of another international agreement cannot establish a claim for breach of the clause. II.4.Interpretative Guidance to Arbitral Tribunals Policy Options for Fair and Equitable Treatment Clauses in IIAs

18. Dr. Roland Kläger18 Is there a difference to the way tribunals are currently interpreting FET? Tribunals are already enquiring whether there is a legitimate objective for a state measure (Genin case) The legitimate objective of a state measure is crucial in balancing the different competing interests under FET The investor’s own conduct may lead to a reduction of the claimed compensation (MTD Equity case) The country’s level of development is rarely considered explicitly by an arbitral tribunal II.4.Interpretative Guidance to Arbitral Tribunals Policy Options for Fair and Equitable Treatment Clauses in IIAs

19. Dr. Roland Kläger19 Interpretative guidance is a soft tool to influence the balancing of interests by arbitral tribunals Interpretative guidance in the text of an IIA may influence the weight of arguments Level of uncertainty and subjective judgment can hardly be avoided by interpretative guidelines What are the legal consequences of infringing the interpretative guidelines? II.4.Interpretative Guidance to Arbitral Tribunals Policy Options for Fair and Equitable Treatment Clauses in IIAs

20. Dr. Roland Kläger20 The IPFSD’s most radical policy option is to completely omit any reference to FET in the text of an IIA: “An omission of the FET clause would reduce States’ exposure to investor claims, but foreign investors may perceive the country as not offering a sound and reliable investment climate.” There are only few examples of IIAs in which a FET clause is omitted: Some early BITs of Germany in the 1960s Some BITs concluded by Turkey More recently, e.g., 2001 New Zealand-Singapore FTA, 2003 Australia- Singapore FTA II.5.Omit FET Clause Policy Options for Fair and Equitable Treatment Clauses in IIAs

21. Dr. Roland Kläger21 Uncertain policy implications as FET is deemed a core element of IIAs Reduction of exposure to investor claims heavily depends on the interpretation and scope of other substantive investment protection provisions in IIAs The principles behind FET are usually similarly relevant under other provisions, in particular with regard to indirect expropriation (legitimate expectations), full protection and security and national treatment Many FET principles are probably part of customary international law FET provision of other IIAs may be incorporated through MFN clause (Bayindir v. Pakistan, Rumeli Telekom v. Kazakhstan) II.5.Omit FET Clause Policy Options for Fair and Equitable Treatment Clauses in IIAs

22. Dr. Roland Kläger22 The policy options of the IPFSD aim at: Reducing uncertainty Reducing discretion of arbitrators Enlarging policy space Raising the threshold to find a breach of FET  Irrespective of whether one views this as a positive aim, the IPFSD options are able to achieve the goals only to a relatively limited extent, because FET is only replaced by other vague terms Principles behind FET are part of other investment protection standards or of customary international law Variation of FET language will lead to increased fragmentation in arbitral jurisprudence III.Conclusion Policy Options for Fair and Equitable Treatment Clauses in IIAs

23. Dr. Roland Kläger23 The IPFSD provides no guidance on how to enhance sustainable development with regard to existing FET clauses Even under unqualified FET clauses it is possible to adequately balance principles of sustainable development and sovereignty against principles of investment protection (“systemic integration”) “Proportionality” is an important tool to structure the balancing process of tribunals and to address issues on the threshold of liability (1)Suitability to pursue a legitimate goal (2)Necessity (3)Proportionality stricto sensu  Is there a common law / civil law divide on whether FET should be rather specific or general? III.Conclusion Policy Options for Fair and Equitable Treatment Clauses in IIAs

24. Dr. Roland Kläger24 Dr. Roland Kläger HAVER & MAILÄNDER Rechtsanwälte Lenzhalde 83-85 70192 Stuttgart (Germany) Phone+49 711 22744-0 Fax +49 711 2991935 rk@haver-mailaender.de www.haver-mailaender.de Contact Details

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