Towards reforming the fair and equitable treatment standard in International Investment Agreements - By Dr. Yulia Levashova & Prof. Tineke Lambooy (Nyenrode Business University)


One of the most important pillars of investment protection under international law is the understanding that a foreign investor investing in a host state should be treated ‘fairly and equitably.’ The importance of this notion is supported by the inclusion of the fair and equitable treatment (FET) standard in most of the International Investment Agreements (IIAs), as well as its invocation in the vast majority of investment disputes. However, the concern has been expressed frequently that a broad interpretation of this usually openly formulated provision has an adverse impact on the host state’s ‘right to regulate’ in the public interest. These concerns have been voiced particularly as a result of FET claims in which investors have challenged a variety of state decisions in publicly sensitive areas, e.g. renewable energy, waste management, public health issues, and access to water. In this regard, tribunals have often been criticised for attaching insufficient weight in their assessment of the FET standard to a host state’s right to regulate and its duty to fulfil its obligations under other international treaties, such as human rights and environmental treaties.

In the last five years the balance has gradually shifted from an approach of a broad interpretation of investor protection under the FET standard to an approach in which the state’s right to regulate is also recognised, and in particular when this right is exercised to benefit the public interest and/or to fulfil obligations in the field of human rights, health, and environmental protection, derived from international treaties.[1]

However, there are still gaps in clarifying the scope of the FET standard in the IIAs, including the new generation of treaties.  The following proposals made in the context of the 2018 UN Forum on Business and Human Rights are aimed at harmonising treaty practice – both treaty drafting and treaty interpretation practice. In the proposals, a host state is allowed to maintain adequate policy space to exercise its right to regulate in the public interest and, on the other hand, is obliged to observe its obligations under FET standards in IIAs:

  • Exhaustive list of the state’s obligations complemented by a provision on the state’s right to regulate

For example, in the IIAs concluded between the EU and Canada (CETA), the EU and Vietnam, and the EU and Singapore the obligation to provide fair and equitable treatment has been clarified through an exhaustive, but expandable, list of the state’s obligations in relation to foreign investors. Furthermore, these agreements include provisions on the state’s right to regulate in the public interest. What is important in reforming the FET standard in future treaties is to continue to include such a list. The exhaustive list of obligations provides some certainty and predictability to host states and investors about those types of state conduct that might lead to a breach of the FET standard.

Also important is the explicit codification of the host state’s right to regulate in some recent IIAs. See examples hereof in CETA, the EU-Singapore FTA and the Dutch Model BIT. Explicating the right to regulate in the body of an IIA constitutes a strong sign that, in the opinion of the contracting states, the role of tribunals is to balance the state’s public interests and the interests of the investor when interpreting and applying the FET standard.

  • Direct obligations towards investors

Further, retaining adequate domestic policy space, while providing the FET standard to investors, can be attained by including a provision on Corporate Social Responsibility (CSR) in the IIA (see our article). Such a provision should be addressed directly to foreign investors rather than to the contracting states. Examples hereof are the 2016 Morocco-Nigeria Bilateral Investment Agreement (BIT), the 2016 Argentina-Qatar BIT, the 2016 Pan-African Investment Code, and the 2012 South African Development Community (SADC) Model Bilateral Investment Treaty Template.

Also, it is essential to specify in the CSR provisions to which CSR norms an investor should adhere while operating in a host state. It is not sufficient to merely refer to the ‘internationally recognized standards of corporate social responsibility’ that often can be traced in CSR provisions. In the absence of a definition of CSR norms, tribunals may face difficulty in interpreting these norms, as it will remain unclear as to what investor obligations flow from such CSR provisions. A concrete specification of the CSR norms that foreign investors are expected to comply with when investing in the host state provides more concrete guidance to such investors, as well as to arbitrators. For example, the Dutch Model BIT refers to the OECD Guidelines for Multinational Enterprises, the United Nations Guiding Principles on Business and Human Rights, and the Recommendation CM/REC(2016) of the Committee of Ministers to Member States on human rights and business. The Morocco-Nigeria BIT refers to the ILO Tripartite Declaration.

Such CSR obligations of investors - stipulated in an IIA - can be even more effective, if the same treaty also contains a provision that allows a tribunal to reduce the protection under the substantive investment protection clauses, e.g. the FET standard, in a situation where an investor has breached one or more of the CSR provisions contained in the IIA. For example, in Article 23 ‘Behavior of the investor’ of the Dutch Model BIT such a provision has been included. It provides that ‘a Tribunal may, in deciding on the amount of compensation, take into account non-compliance by the investor with its commitments under the UN Guiding Principles on Business and Human Rights, and the OECD Guidelines for Multinational Enterprises.’

  • The investor’s due diligence efforts

The inclusion of the investor’s duty to conduct due diligence, is another aspect that can help to create a better balance between the rights and obligations of states and investors under the FET standard. For example, in Article 7 of Dutch Model BIT, the contracting parties are encouraged to reaffirm the importance of due diligence conducted by investors ‘to identify, prevent, mitigate and account for the environmental and social risks and impacts of its investment.’

The due diligence conducted by foreign investors in assessing the socio-political risks in a host state has been growing in importance in tribunals’ assessments of the FET standard. Some FET tribunals (see, for example: Charanne v. Spain, Isolux Netherlands, BV v. Kingdom of Spain, Mamidoil v. Albania) have underlined that an investor bears the responsibility of appraising the reality and the context of the state, in which the investment is/will be made, by performing a due diligence investigation and conducting risk assessments. The investor has to be aware and to take into account the relevant regulations, policies and decisions concerning its investment in order to anticipate the possible risks. This aspect played a role in cases in which the investor’s claim was based on a claim to protect his ‘legitimate expectations’ in the context of regulatory changes applied to a general regulatory framework. The extent of an investor’s due diligence investigation can operate as a yardstick in judging whether an investor could have predicted the contested changes. As was pointed out in Isolux Netherlands, BV v. Kingdom of Spain, if the changes were not foreseeable by a prudent investor, despite visible efforts to collect the information about the future of the regulatory framework, the legitimate expectations of the investor may be protected under the applicable IIA.

Therefore, it would be advisable to specify in a IIA that an investor has the duty to conduct adequate due diligence comprising an investigation of the environmental, human rights, and social risks, and that this constitutes a condition for receiving fair and equitable treatment. An explicit reference in IIAs to an investor’s duty to conduct due diligence also strengthens the importance of investors’ responsibilities under international investment law.

General Conclusion

In this contribution, several proposals have been made in the context of the 2018 UN Forum on Business and Human Rights to further clarify the right of investors to receive the FET standard under an applicable IIA and to assure the adequate policy space for host states to regulate in the public interest. We have suggested to include (or to continue to include) an exhaustive list of the state’s obligations under the FET standard into the text of IIAs with the aim to provide a certain degree of predictability to foreign investors as well as host states regarding the types of state conduct that might lead to a violation of the FET standard. Also, the provision on the right to regulate should continue to be included in the operative part of IIAs. The function of the aforementioned provision is not to exempt the state from liability under the FET standard. Rather, it requires tribunals to balance the state’s public interests and the interests of the investor, while interpreting and applying the FET standard. Finally the proposal further argues that by incorporating the direct CSR obligations imposed on foreign investors, as well as the inclusion of the investor’s due diligence duty into the text of IIAs will further assure the balance of the rights of the investor under the FET standard and the state’s right to regulate.

[1] This is based on the study of Y. Levashova, ‘The Right of States to Regulate in the Public Interest and the Right of Investors to Receive Fair and Equitable Treatment,’ Kluwer International Arbitration Law Library, forthcoming in 2019. 

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