Author

Mr Pablo Nilo Donoso

Legal Advisor - Defense Program on Investor-State Arbitration, Ministry of Foreign Affairs of Chile

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Discrimination in FET

I. Non-discrimination as part of the fair and equitable treatment

1.

Due to the flexible nature of this clause, fair and equitable treatment (“FET”) has become the most often invoked treaty standard in investor-State arbitration,1 giving rise to extensive discussions of its relevant components.2 Along with vigilance and protection, due process, transparency and stability, some tribunals have considered that one of its key elements is the lack of arbitrary and discriminatory treatment.3 These last components derive from the general international law principle of good faith expressed in the doctrine of abuse of rights broadly understood as the “arbitrary or unreasonable exercise of rights or powers within the exclusive jurisdiction of States”.4

II. Definition

2.

Discrimination exists when there is unequal treatment of equal circumstances without any justified5 motive (i.e. arbitrary, grossly unfair, unjust or idiosyncratic). Thus, discriminatory measures: (i) inflict damage on the investor without serving any apparent legitimate purpose and are not based in legal standards but on discretion, prejudice or personal preference; (ii) are applied for reasons different from those put forward by the decision maker; or (iii) are in wilful disregard of due process and proper procedure.6

III. General treaty practice

3.

Although some international investment agreements incorporate a separate provision on protection against arbitrary and discriminatory treatment7 (“ADT provisions”)8 and most contain clauses proscribing treatment not less favourable than nationals or other foreigners (“TNLF provisions”),9 “some tribunals have interpreted lack of arbitrariness and non-discrimination as elements of the fair and equitable treatment standard.”10

4.

While most international investment treaties use the conjunction “or” to separate the concept “arbitrary” from the term “discriminatory” in arbitrary and discriminatory treatment provisions, some treaties use the disjunctive “and”.11 Tribunals have followed divergent approaches in establishing whether a breach of the standard requires the violation of both12 “arbitrary” and “discriminatory” elements or only one them.13

A. Discriminatory conduct amounts to a breach of ADT/TNLF and fair and equitable treatment standards 

5.

It has been argued that conduct that violates arbitrary and discriminatory treatment provisions amounts to a breach of fair and equitable treatment14 or, at least, certain case law has found an overlapping nature between the prohibition of discriminatory treatment and fair and equitable treatment.15 For example, “a number of tribunals […] have acknowledged how the fair and equitable treatment standard prohibits discrimination against foreign investor on the basis of nationality”16 or have interpreted that “Fair and equitable treatment is infringed […] if the conduct […] is discriminatory and exposes the claimant to sectional or racial prejudice,”17 hence equating its purposes with those of treatment not less favourable than nationals or other foreigners or arbitrary and discriminatory treatment provisions by arguing that there is no reason to differentiate between the notion of discrimination in the TNLF and ADT provisions.18 Some tribunals have established that the intention to discriminate is not required to breach the fair and equitable treatment standard and “it is sufficient that the host State’s action or omission to be discriminatory in effect.19 

B. Discriminatory conduct requires a distinctive threshold to breach the fair and equitable treatment standard

6.

On the other hand, tribunals have traced a line to differentiate between fair and equitable treatment and the prohibition of discrimination, especially in the NAFTA context20 (but not exclusively).21 Part of this group has advocated for a differentiation between the non-discrimination standard that forms part of the fair and equitable treatment and its corresponding obligation under thetreatment not less favourable than nationals or other foreigners provisions of national treatment (“NT”)22 and most favoured nation (“MFN”)23 Whereas national treatment and most favoured nation treatment are relative standards that apply a nationality-based test comparing treatment granted to nationals and foreigners in order to ensure a level playing field, according to this line of case law, the autonomous nature of the fair and equitable treatment standard does not include a non-discrimination obligation24 or, at least, presents a different criterion to determine the breach of its non-discrimination component.25 Following this latter approach, tribunals have determined that discrimination must specifically target the foreign investor26 on “other manifestly wrongful grounds such as gender, race or religious belief”,27 or the type of conduct that amount to a “deliberate conspiracy […] to destroy or frustrate the investment by improper means”.28

7.

Therefore, “[i]n addition to the requirement of a differential treatment, the presentation of a discriminatory intention of the host state contributes to the finding of a violation of fair and equitable treatment”.29 Along these lines it has become clear that when there is a well-defined intention30 to deprive a foreign investor through arbitrary and discriminatory interference31 or when the measures “can only be seen as a vindictive exercise of sovereign power aimed at punishing [the investor and its shareholders]”32 the conduct would likely amount to a breach of fair and equitable treatment. This explains that there are two different types of discrimination: “nationality-based discrimination and discrimination that is founded on the targeting of a particular investor”.33

8.

Most of these cases follow the interpretation of the International Court of Justice in the ELSI case regarding the content of the “arbitrary or discriminatory” standard.34 In developing this threshold, tribunals have taken divergent positions on whether the differentiated treatment must be based on bad faith35 or if such requirement has no relevance on the determination of breach of fair and equitable treatment.36 

Bibliography

Dumberry, P., The Prohibition against Arbitrary Conduct and the Fair and Equitable Treatment Standard under NAFTA Article 1105, Journal of World Investment & Trade, Vol. 15, No. 1-2, 2014, pp. 117-151.

Heri, H., A Tale of Two Standards: 'Fair and Equitable Treatment' and the Minimum Standard in International Law, Arbitration International, Vol. 27, Issue 1, 2011, pp. 27-46.

Kläger, R., Fair and Equitable Treatment: A Look at the Theoretical Underpinnings of Legitimacy and Fairness, Journal of World Investment & Trade, 2010, pp. 435-455

Kriebaum, U., Arbitrary/Unreasonable or Discriminatory Measures, in Bugenberg, M. et al. (eds.), International Investment Law, Baden-Baden: Hart/Nomos, 2015, pp. 790-817

OECD, Fair and Equitable Treatment Standard in International Investment Law, OECD Working Papers on International Investment, 2004/03

Ortino, F. et al., eds., Investment Treaty Law, Current Issues II, Nationality and Investment Treaty Claims, Fair and Equitable Treatment in Investment Treaty Law, British Institute of International and Comparative Law, 2007.

Schill, S., International Investment Law and Comparative Public Law, Oxford, 2010.

Schreuer, C., Protection against Arbitraty or Discriminatory Measures, in Alford, R.P. and Rogers, C.A. (eds.), The Future of Investment Arbitration, Oxford University Press, 2009, pp. 183-198

Stone, J., Arbitrariness, the Fair and Equitable Treatment Standard, and the International Law of Investment, Leiden Journal of International Law, Vol. 25, No. 1, 2012, pp. 77-108

UNCTAD Series on Issues in International Investment Agreements II, Fair and Equitable Treatment, 2012

Vierdag, E.W., The Concept of Discrimination in International Law with Special Reference to Human Rights, Martinus Nijhof, 1973

Weiler, T., Interpretation of International Investment Law: Equality, Discrimination and Minimum Standards of Treatment in Historical Context, 2013

Yannaca-Small, K., Fair and Equitable Treatment Standard: Recent Developments, in Reinisch, A. (ed.), Standards of Investment Protection, 2008, pp. 111-130.

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