A prohibition on the taking of measures that are arbitrary or unreasonable is commonly included in the non-impairment standard (see Protection against arbitrary and discriminatory measures), and appears in more than 60% of investment protection treaties.1 This standard is most often drafted either as a separate clause,2 or together with the fair and equitable treatment (FET) standard.3 The issue of the relationship between non-impairment and FET standards is not straightforward and case law lacks consistency.4 See also Discrimination in FET.
In the absence of an express clause that sets out a non-impairment standard, actions that are arbitrary or unreasonable could nonetheless be caught by the FET standard5 and minimum standard of treatment.6
In any case, the assessment of the unreasonable character of a measure for the purpose of an FET breach requires to “consider all the facts and circumstances of an individual case”.13
Another approach considers the measure’s effect and rationale. A governmental measure will be considered 'arbitrary' if there is no relationship between the measure adopted and a legitimate governmental policy. The measure will be considered 'unreasonable' if a justification or a rationale has in fact been provided, but there is no reasonable (or rational) relationship between the purported justification and a legitimate governmental policy.17
Tribunals assess the measure’s effect or rationale based on its merits. It is not enough for the respondent to justify an action by relying on a source of authority, but, rather, it must “also overcome the Claimant’s contention that the authority was exercised in an unreasonable and arbitrary fashion”.18
A more elaborate test for what counts as an arbitrary measure was adopted in EDF (Services) which is as follows:
All those approaches require more than mere illegality but something akin to manifest disregard of law22 or even bad faith,23 (although tribunals regularly noted that bad faith is not required to find a breach of the FET standard, (see Fair and Equitable Treatment, Section IV), rising “to the level which is unacceptable from the international perspective”.24
Dumberry P., The Fair and Equitable Treatment Standard: A Guide to NAFTA Case Law on Article 1105, Kluwer Law International, 2013, pp. 127-274.
Heiskanen, V., Arbitrary and unreasonable measures, in Reinisch A. (ed.), Standards of Investment Protection, Oxford University Press, 2008, pp. 87-110.
Levashova, Y., The Right of States to Regulate in International Investment Law: The Search for Balance Between Public Interest and Fair and Equitable Treatment, International Arbitration Law Library, Vol. 50, Kluwer Law International, 2019, pp. 173-276.
Lowe, V., Arbitrary and Discriminatory Treatment, in Kinnear, M., Fischer, G.R. et al (eds.), Building International Investment Law: The First 50 Years of ICSID, Kluwer Law International, 2015, pp. 307-318.
Newcombe, A. and Paradell, L., Law and Practice of Investment Treaties: Standards of Treatment, Kluwer Law International, 2009, pp. 233-298.
Rajput, A., Protection of Foreign Investment in India and Investment Treaty Arbitration, Kluwer Law International, 2017, pp. 87-126.
Reisman, W. M., Crawford, J.R. et al. (eds.), Foreign Investment Disputes: Cases, Materials and Commentary, 2nd ed., Kluwer Law International 2014, pp. 583-752.
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