Most Favoured Nation Treatment

Most-favoured-nation (“MFN”) clauses are included in many investment treaties, and in investment chapters in free trade agreements.¹ Such clauses vary in wording. They will typically require that States party to the investment treaty not subject investors and/or their investments to treatment less favourable than that which they accord to the investors and/or investments of other States.² The obligation to accord investors and/or their investments most-favoured-nation treatment is a treaty-based requirement; MFN treatment is not required under customary law.³ 

The wording and placement of MFN clauses, as well as express and/or implied exceptions or limitations, will impact their interpretation and effect. As such, the effect of an MFN provision will turn on an interpretation of the specific MFN clause at issue and the treaty of which it forms part.⁴

MFN clauses differ in wording. Some MFN clauses apply to “all matters” governed by a treaty, whereas others apply only to particular types of “treatment” (for example, treatment in a State’s “territory”), or to particular treaty provisions.⁵ MFN clauses may also be limited to particular types of treatment such as, for example, treatment related to the “management, maintenance, use, enjoyment or disposal” of the investment.⁶

MFN clauses may also appear in different parts of a treaty. MFN clauses may appear alone or otherwise alongside other obligations, including national treatment⁷ or fair and equitable treatment⁸ obligations.

MFN clauses will often be accompanied by express exceptions which provide that MFN treatment is not required in relation to certain treatment including, for instance, government procurement measures, taxation measures, or benefits accorded under agreements establishing customs unions or common market or free trade areas.⁹ MFN clauses may also limit the requirement of comparable treatment to investors and/or investments in “like circumstances” or “similar situations”.¹⁰ See further: Similarity/Like circumstances

MFN clauses may also be subject to implied limitations. The ejusdem generis principle, for example, limits MFN clauses to treatment of the same category as that to which the clause relates.¹¹ Express exclusions may also be interpreted to impliedly preclude implied exclusions, including through maxims of treaty interpretation such as, for instance, the principle of expression unius est exclusion alterius.¹²

The above elements explain in part – albeit not fully¹³ – the oft-noted absence of a jurisprudence constante as to the reach of MFN clauses and the inconsistent decisions rendered by tribunals faced with differently formulated treaties and MFN provisions.¹⁴

MFN clauses are designed to ensure equality and non-discrimination in the treatment of protected investors vis-à-vis other foreign investors in the host State.¹⁵ As noted by the Bayindir tribunal, MFN clauses are designed to “provide a level playing field…between foreign investors from different countries”.¹⁶ The National Grid tribunal similarly noted that MFN clauses are “an important element to ensure that foreign investors are treated on a basis of parity with other foreign investors and with national investors when they invest abroad”.¹⁷ MFN clauses may operate as a relative treatment obligation, or by reference to a comparator treaty.

An MFN clause may operate as a relative treatment obligation to preclude the host State from treating a protected investor and/or their investment in a manner less favourable than investors and/or investments from third States.¹⁸ Where the MFN clause is used as a relative treatment obligation, it will function similarly to the national treatment¹⁹ As a relative treatment obligation, MFN clauses prohibit the host State from discriminating against the protected investor vis-à-vis other foreign investors.²⁰

The precise requirements to establish a breach of the MFN clause as a relative treatment obligation will depend upon the terms of the clause. Typically, it will entail analysis of whether the host State accorded different, less favourable, treatment to the protected investor vis-à-vis a comparable foreign investor.²¹ Under MFN clauses, States will usually retain the capacity to make reasonable distinctions between investors and/or investments, including for public purposes.²² While the MFN clause can be used as a substantive protection standard in its own right, there have been few instances in which investors have succeeded in such claims.²³

More common is the invocation of MFN treatment by reference to treaties between the host State and a third State (‘comparator treaties’) which provide protection more favourable than that accorded under the treaty containing the MFN clause (‘base treaty’). The use of MFN clauses by reference to a comparator treaty has been linked to a de facto “multilateralization” of investment treaty law.²⁴ As Schill notes, allowing MFN clauses to take effect by reference to comparator treaties turns MFN clauses into “multilateralization devices cast in bilateral form that prevent the states granting MFN treatment from shielding more favorable bilateral bargains contained in international treaties with third states from multilateralization”.²⁵

MFN clauses have been used to invoke more favourable treatment in comparator treaties concerning both dispute settlement and substantive protection.

Some tribunals, arbitrators and commentators reject that MFN clauses can apply to dispute settlement provisions absent express wording to such effect.²⁶ In Plama, for example, the tribunal held that “an MFN provision in a basic treaty does not incorporate by reference dispute settlement provisions in whole or in part set forth in another treaty, unless the MFN provision in the basic treaty leaves no doubt that the Contracting Parties intended to incorporate them”.²⁷ That tribunal held that the MFN clause at issue could not be interpreted to apply to dispute settlement, basing this decision upon an analysis of the wording of the clause and exceptions to MFN treatment contained therein;²⁸ the context of the clause;²⁹ the object and purpose of the treaty;³⁰ the States parties’ treaty practice;³¹ and the circumstances surrounding the conclusion of the treaty,³² alongside other considerations.³³

Using similar principles of treaty interpretation, tribunals, arbitrators and commentators have rejected uses of MFN clauses that would expand a treaty’s scope or the scope of consent to dispute settlement as provided in the basic treaty.³⁴ Several tribunals, for example, have held that an “investor” and “investment” within the meaning of the base treaty must exist for an MFN clause in that treaty to be enlivened.³⁵ As such, MFN clauses may not be relied upon to import more favourable, broader definitions of “investment” or “investors”³⁶ or to extend the temporal scope of application of a treaty.³⁷

Other tribunals and commentators accept that MFN clauses can apply to dispute settlement provisions, at least in principle.³⁸ As the Maffezini tribunal held: “if a third-party treaty contains provisions for the settlement of disputes that are more favorable to the protection of the investor’s rights and interests than those in the basic treaty, such provisions may be extended to the beneficiary of the most favored nation clause.”³⁹

The Maffezini tribunal nonetheless accepted that there were limits to this principle; notably, the investor should “not be able to override public policy considerations that the contracting parties might have envisaged as fundamental conditions for their acceptance of the agreement in question”.⁴⁰ For that tribunal, a range of considerations (albeit not present on the facts before it) could restrict the capacity for an investor to invoke an MFN clause in relation to matters of dispute settlement:

1. Investors may not use MFN provisions to bypass exhaustion of local remedies requirements by invoking the most favored nation clause in relation to a third-party agreement that does not contain this requirement;
2. Investors may not use MFN provisions to bypass fork in the road clauses;
3. Investors may not change the choice of a particular arbitration forum (such as ICSID) made in the arbitration agreement, in order to refer the dispute to a different arbitration forum; and
4. Investors may not alter the choice of a highly institutionalised system of arbitration incorporating precise rules of procedure (for example, NAFTA).⁴¹

The Maffezini tribunal further noted that “other elements of public policy limiting the operation of the clause will no doubt be identified by the parties or tribunals”.⁴²

Even where a tribunal permits an investor to make use of an MFN clause in relation to matters of dispute settlement, therefore, such use may be impacted by the terms of the treaty, including any express or implied limitations to the scope of the MFN clause contained therein.⁴³ It may also be informed by whether a tribunal characterises particular preconditions to dispute settlement as matters of admissibility or jurisdiction.⁴⁴

Some MFN clauses address the issues raised above, to expressly stipulate when an MFN provision can be applied to dispute settlement provisions.⁴⁵ Some States, for instance, expressly exclude the application of MFN clauses to matters of dispute settlement. Article 8.5 of the free trade agreement between Peru and Australia, for example, provides that MFN treatment “does not encompass international dispute resolution procedures or mechanisms”. Other treaties contain similar clauses.⁴⁶

Conversely, other States expressly provide that the MFN clause may operate with respect to matters of dispute settlement.⁴⁷ The MFN clause in the United Kingdom-Sierra Leone BIT, for example, specifies that “[f]or the avoidance of doubt it is confirmed that [MFN treatment] shall apply to the provisions of Articles 1 to 11 of this Agreement”, such that the MFN provision of that BIT would apply also to the Article 8 investor-State dispute settlement clause.

The application of MFN clauses to matters of dispute settlement will thus depend in each case upon the interpretation of the treaty, including any express directions contained therein vis-à-vis the application of the MFN clause to matters of dispute settlement. Tribunals adopting the Plama line of analysis will nonetheless require clear support to accept such a use of the MFN clause, adopting what might be in effect a presumption in the treaty interpretation process against the extension of MFN treatment to matters of dispute settlement.

MFN clauses may also be invoked by investors seeking to benefit from more favourable substantive provisions in comparator treaties. In such cases, the host State is alleged to breach the MFN clause by failing to accord the investor the more favourable protections that it has accorded to other investors under a comparator treaty.⁴⁸

Many tribunals have accepted the application of MFN clauses to substantive provisions, which has allowed investors to import more favourable provisions with respect notably to:

1. Fair and equitable treatment;⁴⁹
2. Full protection and security;⁵⁰
3. Umbrella clauses;⁵¹ (see also Note on Umbrella clauses, Section IX)
4. Protection against discriminatory and arbitrary measures;⁵²
5. Effective means of asserting claims;⁵³
6. A compensation standard of fair market value.⁵⁴

The capacity for investors to use MFN clauses in this manner is generally accepted by commentators and tribunals, but more recent cases have indicated potential limitations on the use of MFN clauses in this way.⁵⁵

The scope of the more favourable treatment that may be invoked may in any case be further limited by the terms of the base treaty. The wording of MFN clauses and the ejusdem generis principle, in particular, have been used to preclude investors from invoking MFN clauses to benefit from substantive protections that are not already contained in the base treaty.⁵⁶ So, too, express exceptions may impact such uses of MFN provisions.⁵⁷

The arbitration clause in the base treaty might further limit the use that may be made of comparator treaties through the MFN clause.⁵⁸

Thus, although MFN clauses may act as a potential “potent ratchet”⁵⁹ for substantive protection, their operation in practice has been “narrower than generally assumed to be the case”.⁶⁰

Banifatemi, Y., The Emerging Jurisprudence on the Most-Favoured-Nation Treatment in Investment Arbitration, in Andrea Bjorklund, A., Laird, I., and Ripinsky, S., (eds.), Investment Treaty Law: Current Issues III, British Institute of International and Comparative Law, 2009 pp. 241-273 

Batifort, S. and Heath, J.B., The New Debate on the Interpretation of MFN Clauses in Investment Treaties: Putting the Brakes on Multilateralization, American Journal of International Law, 2018, pp. 873-913

Caron, D. D. and Shirlow, E., Most Favoured Nation Treatment – Substantive Protection in Investment Law, in Kinnear, M., Fischer G.R., Almeida J.M., Torres L.F., Bidegain, M.U., Building International Investment Law: The First 50 Years of ICSID, 2015

Chukwumerije, O., Interpreting Most-Favoured-Nation Clauses in Investment Treaty Arbitrations, The Journal of World Investment & Trade, 2007, p. 597

Cole, T., The Boundaries of Most Favored Nation Treatment in International Investment Law, Michigan Journal of International Law, 2012, pp. 537-586 

DiMascio, N., and Pauwelyn, J., Nondiscrimination in Trade and Investment Treaties: Worlds Apart or Two Sides of the Same Coin?, American Journal of International Law, 2008, pp. 48-89

Douglas, Z., The MFN Clause in Investment Arbitration: Treaty Interpretation Off the Rails, Journal of International Dispute Settlement, 2010, pp. 97-113

Fietta, S., Most Favoured Nation Treatment and Dispute Resolution under Bilateral Investment Treaties: A Turning Point?”, International Arbitration Law Review, 2005, pp. 131-138 

Greenwood, C., Most Favoured Nations Clauses in BITs – What is their Real Purpose (and their Real Effect)? – Third Annual EFILA Lecture, in Mistelis, L., and Lavranos, N., European Investment Law and Arbitration Review, 2018, pp. 343-356

Report of International Law Commission, Final Report of the Study Group on the ‘Most-Favoured Nation Clause’, 2015

Kurtz, J., The MFN Standard and Foreign Investment: An Uneasy Fit?, Journal of World Investment & Trade, 2004, pp. 861-886

Maupin, J. A., MFN-Based Jurisdiction in Investor-State Arbitration: Is There Any Hope for a Consistent Approach?, Journal of International Economic Law, 2011, pp. 157-190

Paparinskis, M., MFN Clauses and International Dispute Settlement: Moving beyond Maffezini and Plama?, ICSID Review – Foreign Investment Law Journal, 2011, pp. 14-58

Pérez-Aznar, F., The Use of Most-Favoured-Nation Clauses to Import Substantive Treaty Provisions in International Investment Agreements, Journal of International Economic Law, 2018, pp. 777-805

Radi, Y., The Application of the Most-Favoured-Nation Clause to the Dispute Settlement provisions of Bilateral Investment Treaties: Domesticating the ‘Trojan Horse’, European Journal of International Law, 2007, pp. 757-774

Schill, S. W., MFN Clauses as Bilateral Commitments to Multilateralism: A Reply to Simon Batifort and J. Benton Heath, American Journal of International Law, 2018, p. 914

Schill, S. W., Multilateralizing Investment Treaties through Most-Favored-Nation Clauses, Berkeley Journal of International Law, 2009, p. 496

Sharmin, T., Application of Most-Favoured-Nation Clauses by Investor-State Arbitral Tribunals: Implications for the Developing Countries, 2020

Teitelbaum, R., Who’s Afraid of Maffezini – Recent Developments in the Interpretation of Most Favored Nation Clauses, Journal of International Arbitration, 2005, pp. 225-238

Thulasidhass, P.R., Most-Favoured-Nation Treatment in International Investment Law: Ascertaining the Limits through Interpretative Principles, Amsterdam Law Forum, 2015, pp. 3-24

Valenti, M., The Most Favoured Nation Clause in BITs as a Basis for Jurisdiction in Foreign Investor-Host State Arbitration, Arbitration International, 2008, pp. 447-466

Waibel, M., Putting the MFN Genie Back in the Bottle, AJIL Unbound, 2018, pp. 60-63

Wong, J., The Application of Most-Favored-Nation Clauses to Dispute Resolution Provisions in Bilateral Investment Treaties, Asian Journal of WTO & International Health Law and Policy, 2008, pp. 171-198