Report No. 260

Chapter III

Obligations of Parties

A. Article 3: Standard of Treatment

(i) Analysis and comment:

3.1.1 Fair and equitable treatment (FET) has emerged as the most important standard of treatment in BITs,29 and FET provisions occur in most BITs, but with little guidance about meaning and content.30 This has made the interpretation of FET provision expandable, evidenced by the fact that tribunals have made legitimate expectations an integral part of this provision,31 often without providing much doctrinal basis. Michele Potesta, 'Legitimate Expectations in Investment Treaty Law:

Understanding the Roots and Limits of a Controversial Concept', ICSID Review, Volume 28, Issue 1, pp 88-122. Also see Separate Opinion of Arbitrator Pedro Nikken in AWG v Argentina, ICSID Case No ARB/03/19, available at: http://www.italaw.com/sites/default/files/case-documents/ita0056.pdf Further, tribunals are inconsistent in what constitutes legitimate expectations of investors under FET.33

As a result, the content of the FET provision, to a great extent, depends on the individual approach of a tribunal entrusted with the task of finding its content. Indeed, FET has become a catch-all provision capable of sanctioning many legislative, regulatory and administrative actions of the Host State.34 In other words, the broad and undefined content of the FET provision has proved to be problematic for countries exercising their right to regulate.

29 FET is the grundnorm or basic norm of the investment treaty system, according to J Salacuse, The Law of Investment Treaties, Oxford University Press, 2010.

30 Scholars have described FET as wide, tenuous and imprecise. See M. Sornarajah, The International Law on Foreign Investment (2nd edn), Cambridge University Press, 2004, p 332; V. Lowe, 'Regulation or Expropriation', Current Legal Problems, 2002, volume 55, p 447.

31 Newcombe and Paradell, The Law and Practice of Investment Treaties, Kluwer, 2009, p 279.

33 For example, see the approach of tribunals in CMS v Argentina and LG&E v Argentina with the approach of tribunals in Total v Argentina and El Paso v Argentina.

34 J.R. Picherack, 'Expanding Scope of the Fair and Equitable Treatment Standard: Have Recent Tribunals Gone Too Far?', Journal of World Investment and Trade, 2008, Volume 9, Issue 4, p 255; G. Mayeda, 'Playing Fair: The Meaning of Fair and Equitable Treatment in Bilateral Investment Treaties', Journal of World Trade, 2007, Volume 41, p 273, 291.

3.1.2 The 2015 Model does not contain an FET provision. Instead, it contains a 'Standard of Treatment' (Article 3) which puts the Host State under an obligation not to subject foreign investment to measures which constitute denial of justice under customary international law, unremedied and egregious violations of due process, or 'manifestly abusive treatment involving continuous, unjustified and outrageous coercion or harassment'.

3.1.3 The absence of the FET provision will safeguard India's right to regulate by minimising the possibilities of unexpected restrictions on its regulatory power that broad interpretations of an undefined FET may bring. At the same time, by providing that foreign investors can challenge a State's regulatory measures when it amounts to denial of justice or violation of due process or harassment, the 2015 Model ensures that foreign investment continues to get protection from abusive regulatory behaviour of the Host State.

This provision aims at balancing investment protection with regulation. It takes care of concerns that have often been expressed about the expansive interpretation of the FET provision.

3.1.4 However, the threshold to prove violation of due process and harassment by State has been set at very high levels, indicated by words like 'egregious', 'manifestly abusive', 'outrageous', reminiscent of the Neer standard laid down in 1926. India could consider lowering this threshold by deleting words such as 'outrageous' or 'manifestly abusive'. Also Article 3.1(iii) recognises the possibility of coercion being 'justified'. A society that adheres to the rule of law cannot have something like 'justified' coercion. It is suggested that Articles 3.1(ii) and (iii) be redrafted appropriately.

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