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Mr Vsevolod Mazurenko

Associate in International Arbitration - Vasil Kisil and Partners

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Unreasonable and/or Arbitrary Measures in Fair and Equitable Treatment

I. Origin

1.

A prohibition on the taking of measures that are arbitrary or unreasonable is commonly included in the non-impairment standard, 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

2.

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

3.

Some tribunals have considered that where the relevant clause prohibits conduct that is “unreasonable and discriminatory”, the conjunctive “ and ”means that both elements must be satisfied to render the State liable.7

II. Definition

4.

A “measure” is understood to be any act, step or proceeding attributable to the State.8

5.

The terms “unreasonable” and “arbitrary” are not defined in investment treaties. Due to their open-ended nature, they do not lend themselves to a clear-cut definition. Tribunals assess whether a measure is arbitrary or unreasonable based on substantive and procedural factors. Substantive factors relate to the measures’ rationality and proportionality, while procedural factors overlap with denial of justice, lack of due process or lack of due diligence.

6.

In Elsi the term “arbitrary” was defined as wilful disregard of due process, an act that shocks or surprises a sense of judicial propriety.9 This approach has been adopted by many tribunals who preferred to decide on a case by case basis instead of laying down definitive criteria.10 However, it has been criticized by scholars for its excessive flexibility and limited precedent value.11

7.

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.

8.

A more elaborate test for what counts as an arbitrary measure was adopted in EDF (Services) which is as follows: (i) a measure that inflicts damages on the investor without serving any apparent legitimate purpose; (ii) a measure that is not based on legal standards but on discretion, prejudice or personal preference, (iii) a measure taken for reasons that are different from those put forward by the decision maker, or (iv) a measure taken in wilful disregard of due process and proper procedure.12 This test has been endorsed in subsequent case law.13

9.

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.14

III. Breach

10.

Both approaches require more than mere illegality but something akin to manifest disregard of law and bad faith.15

Bibliography

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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