Don't cross the streams: past and present overstatement of customary international law in connection with conventional fair and equitable treatment obligations.

• Author: Kill, Theodore

The obligation to provide fair and equitable treatment to foreign investors and investments has existed as a concept of international economic law at least since the 1919 Covenant of the League of Nations. The fair and equitable treatment provision is a key protection contained in the vast majority of modern bilateral investment treaties. Tribunals adjudicating alleged breaches of these fair and equitable treatment provisions have not arrived at a uniform interpretation of the term. As a threshold issue, however, each tribunal must address the question of whether a state's obligations under a given treaty's fair and equitable treatment provision will be additive or equal to the state's preexisting obligations toward all aliens under the minimum standard required by customary international law. Some tribunals have responded to this question by announcing that the protections afforded under fair and equitable treatment provisions and customary international law have converged such that a state's obligations under either standard are coextensive. This Note contends that tribunals adopting the convergence approach overstate the protections afforded to investors under customary international law. By subsuming the obligation to provide fair and equitable treatment within customary international law, these tribunals also ignore the historical development of fair and equitable treatment as a solely treaty-based obligation that did not bind states as a matter of customary international law.

TABLE OF CONTENTS INTRODUCTION I. CLARIFYING THE CURRENT CONFUSION REGARDING FAIR AND EQUITABLE TREATMENT A. The Roles of Equity in International Law B. Differentiating the Additive from the Restrictive Interpretation of Fair and Equitable Treatment Provisions C. Converging on a Bad Idea II. THE EVOLUTION OF FAIR AND EQUITABLE TREATMENT AS AN INDEPENDENT STANDARD OF INTERNATIONAL LAW A. The Birth of Fair and Equitable Treatment as an Independent Standard of International Law B. The OECD Draft Convention and the Status of Fair and Equitable Treatment under International Law CONCLUSION INTRODUCTION

Modern bilateral investment treaties ("BITs") almost uniformly feature a provision that requires the host state to provide "fair and equitable treatment" to the investors and investments of the other treaty party. (1) The provision has become the focal point of modern investor protection, emerging as "the outcome-decisive right, eclipsing even the more established protection against expropriation" in terms of importance. (2) The standard of treatment required of a host state under such provisions has been defined differently by tribunals and academics alike. Nevertheless, a consensus of commentators and adjudicators agree that whatever the substantive content of the standard, unlike the applicable standards under national-treatment (3) or most-favored-nation clauses, (4) the fair and equitable treatment requirement is noncontingent. (5) As a noncontingent requirement, the determination of what is fair and equitable in a given context does not depend on a state's domestic laws or on the treatment of its own nationals or commitments to third states. In interpreting a state's compliance with its obligation to provide fair and equitable treatment, adjudicators--in most cases international tribunals convened pursuant to BITs or multilateral investment treaty dispute resolution clauses--must therefore consider the actions of the state and investor in light of an objective international standard of fair and equitable treatment.

In addition to the inherent difficulty in developing a justiciable standard based on notions as broad as fairness and equity, (6) institutional and doctrinal factors frustrate the enunciation of a clear and reliable standard. Because the provisions appear in bilateral agreements, the rules of treaty interpretation subject the term "fair and equitable" to a multiplicity of discreet, substantive meanings. Customary international law regarding the interpretation of treaties, as codified in Articles 31 and 32 of the Vienna Convention on the Law of Treaties ("VCLT"), instructs adjudicators to give terms their ordinary meaning in light of each treaty's context, object, and purpose, with reference to the circumstances of the treaty's conclusion and preparatory work as appropriate. (7) But because these contextual and teleological factors differ for each treaty, this rule permits, and may even require, tribunals to arrive at different conclusions regarding the proper standard of state behavior required to comply with identically worded fair and equitable treatment provisions. (8) Furthermore, the nature of international investment dispute resolution contributes to the uncertainty regarding the standard of treatment. (9) Despite the fact that hundreds, if not thousands, of BITs include the provision, the lack of a system of formal precedent or stare decisis leaves each tribunal free to construct its own definition of the applicable standard in a given dispute. While tribunals certainly take into account the findings of previous adjudicators, the precise scope of a host state's substantive obligations under a fair and equitable treatment provision is in fact determined on a case-by-case basis.

Despite the diversity and uniqueness of factors inherent to any articulation of the applicable standard, almost all adjudicators called upon to interpret a fair and equitable treatment provision must answer the same question: under the terms of the particular treaty, does the term "fair and equitable treatment" impose an obligation over and above a state's duty under customary international law to provide a minimum standard of treatment to aliens within their jurisdiction, (10) or are the obligations under fair and equitable treatment provisions coextensive with this minimum standard? (11) Put another way, each tribunal must determine whether obligations under a fair and equitable treatment provision are additive or equal to a state's generally applicable obligations towards aliens under customary international law. (12) Under an additive or plain meaning approach, tribunals may take into account the underlying equities of the investor-state relationship in resolving a dispute. By contrast, under an approach that equates fair and equitable treatment with customary international law, the role of equity is limited to that of a background norm.

In large part, an interpretive note issued by the Federal Trade Commission ("FTC") to the North American Free Trade Agreement ("NAFTA") sparked the debate regarding the relationship of fair and equitable treatment and the customary minimum standard. The note specified that for purposes of the NAFTA, "[t]he 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." (13) In light of the interpretive note, NAFTA tribunals have articulated a restrictive approach to the interpretation of NAFTA's fair and equitable treatment language. Under the restrictive approach, tribunals have found that obligations under the NAFTA article requiring fair and equitable treatment apply only within the scope of a state's obligations toward aliens under customary international law.

While adjudicators and commentators continue to disagree with regard to the delineation of the proper relation between fair and equitable treatment and the minimum standard, (14) this Note argues that at least one view may be discounted. Specifically, the holdings of tribunals finding that the two standards have "converged" such that the protections afforded under an additive interpretation of the fair and equitable treatment standard are equal to those under the minimum standard of treatment of aliens under customary international law overstate the substance of the latter standard and should not be considered to represent an accurate depiction of customary law in subsequent disputes. (15) In implementing their convergence approach, these tribunals have looked to the jurisprudence of tribunals that interpret fair and equitable treatment clauses to require a higher standard of treatment than that imposed by the minimum standard to inform the standard of treatment in the cases before them. Having defined the applicable standard with reference to the jurisprudence of the tribunals adopting an additive approach, the convergence tribunals then simply announce that the standard articulated is in fact equal to the minimum standard required under customary international law. This "crossing of the streams" is pernicious because it blurs the line between conventional and customary international law, provides inconsistent jurisprudence to future tribunals, and decreases the ability of potential parties to an investment dispute to predict whether or not a claim for violation of fair and equitable treatment is valid. (16) The effects of convergence are particularly infelicitous for governments that may find many previously legitimate policy options are now deemed to violate customary international law as well as for those developing countries whose public administration may be incapable of meeting the stringent standard developed under the additive interpretation. (17)

The convergence approach is also inconsistent with the historical evolution of fair and equitable treatment as a concept within international law. The consistent practice of multilateral treaties and international organizations up to the Havana Charter of the abortive International Trade Organization ("ITO") reveals that states did not view the obligation to provide fair and equitable treatment as deriving from customary international law. The assertion of the Organization for Economic Cooperation and Development ("OECD") in its 1962 and 1967 Draft Conventions on the Protection of Foreign Property that the fair and...