National Treatment

Under the national treatment standard, the host State is required to accord foreign investors and investments treatment no less favourable than it accords to domestic investors and their investments.

National treatment clauses appear in around 85% of investment protection treaties.¹ Unlike other non-discrimination obligations,² the national treatment obligation is predominantly viewed as a treaty-based standard that is not part of customary international law.³

The significant majority of national treatment provisions concerns solely treatment during the post-establishment period (e.g. management, maintenance, use, enjoyment and sale or disposal of investment). Some treaties broaden the scope of the national treatment standard to cover also pre-establishment phases (establishment, acquisition or expansion).⁴ Treaties covering both pre- and post-establishment periods of investment are predominantly of recent date.⁵

The scope is regularly limited by carve-outs, negative (excluding specific sectors from national treatment application)⁶ or positive lists (identifying specific sectors in which the national treatment applies),⁷ specifying areas of application.

Carve-outs cover specific policies or measures (e.g. subsidies, grants, governmental procurement, protection of minorities, ethnic groups), sectors or industries in which host States wish to preserve special rights or monopolies for domestic investors.

The exclusion of privileges or preferences based on economic integration agreements (regional economic integration organisation, free trade area, customs union, monetary union) and taxation agreements is very common.⁸ 

Recent treaties incorporate exceptions under Article XX of GATT 1994.⁹

The national treatment standard ensures competitive equality and prohibits discriminatory treatment between domestic and foreign investors and investments.¹⁰ In general, it is irrelevant whether the discriminatory treatment is prescribed by law (de jure) or exists only in fact (de facto).¹¹ Tribunals instead considered the adverse discriminatory effect of the treatment.¹² The prohibited “treatment” is understood not merely to cover a regulatory measure but may also include “the manner in which a State concludes an investment contract or exercises its rights.”¹³

National treatment provision requires the same treatment for foreign investors as that accorded to domestic or national investors. Some treaty formulations contain further specifications referring to “like circumstances”¹⁴ or “like situations”,¹⁵ or even narrower “same” or “identical” circumstances,¹⁶ with further elaboration by additional criteria. The application is fact¹⁷ - and context-specific.¹⁸ Some treaties include a list of criteria elaborating on “like circumstances”.¹⁹ Tribunals have come up with various considerations that may help to define the term “like” in the relevant treaties.²⁰

The determination of a proper comparator could lead to divergent outcomes. The comparator in case law ranges from a narrow reference to an investor in the same business,²¹ the same economic sector,²² to a broad reference to all local producers irrespective of the economic sector.²³ See further Similarity / In Like circumstances.

A breach of the national treatment standard is established if the treatment of foreigners is less favourable than the treatment accorded to domestic or national investors.²⁴ De jure discriminatory treatment is set out in the laws and regulations of the host State specifically targeting foreigners compared to national investors.²⁵ More common, however, is de facto discrimination resulting from practices having detrimental effect on investors and their investments.²⁶

Various tests have been deployed by arbitral tribunals to determine a violation of the national treatment standard.²⁷ These tests suggest two common issues that the tribunals often seek to establish: (i) the relevant comparator, and (ii) comparison between the treatment accorded to the foreign investor or investment and the domestic comparator.²⁸

In the context of NAFTA Chapter 11, the tribunals have identified a three-prong test required to prove a violation of the national treatment standard under Article 1102:

1. The “treatment” must be “with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition” of the relevant investments;²⁹
2. The investor or investments must be “in like circumstances” compared to the investor or investment of the respondent State (the “comparator”);³⁰ and
3. The treatment must have been less favourable than that accorded to the comparator.³¹

Intent to discriminate against foreigners is not required,³² with certain exceptions.³³ Proof of intent to discriminate may, however, bolster a claim concerning the breach of the national treatment standard.³⁴

A claimant bears the burden of proof.³⁵ The burden of evidence may, however, shift to respondent in certain circumstances.³⁶ Moreover, depending on the content of the treaty provision, a breach can be refuted by demonstration of legitimate government policy rationally explaining and justifying the different treatment.³⁷ An arbitrator suggested that post-factum rationalization of the disparate treatment may not excuse the government’s actions.³⁸

National treatment provisions, together with most favoured nation provisions and provisions on the prohibition of arbitrary or discriminatory³⁹ measures,⁴⁰ belong to a group of relative standards, requiring a comparator vis-à-vis the treatment of a foreign investor or investment.⁴¹ The fair and equitable treatment standard also includes protection against discriminatory conduct, which in its proper context constitutes a non-contingent obligation.⁴²

Dolzer, R. and Schreuer, C., Principles of International Investment Law, 2nd ed., 2012, pp. 198-206.

Bjorklund, A.K., The National Treatment Obligation, in Yannaca-Small, K. (ed.), Arbitration Under International Investment Agreements: A Guide to the Key Issues, 2nd ed., 2018, pp. 532-561.

McLachlan, C., and Others, International Investment Arbitration: Substantive Principles, 2nd ed., 2017, pp. 336-343.