Introduction
The standard of fair and equitable treatment is currently the focus of discussions in different podiums. This standard seeks to protect international investors from exploitation and other forms of malpractices by host states. Prior to the establishment of the standard, most intellectual debates on international investment concentrated on possible ways to safeguard alien investors from all forms of exploitation.
Presently, there are many debates are about the elements of the standardand their possible origins. This paper argues that the principle of fair and equitable treatment as found in both customary international law and treaty law brings together the elements of fairness, justice and equity drawn from both municipal law and international law.
Definition of Terms
Customary International Law
Customary international law refers to the common and consistent practice of states, which they pursue from a sense of legal responsibility (Goldsmith and Eric 23). This definition has two components: there must be an extensive and uniform practice of states, and states have to engage in the practice out of a sense of legal compulsion.
This second requirement, often referred to as opinion juris, is the main concept of customary international law. Since opinion juris refers to the reason a state acts in accordance with a behavioral regularity, it is the psychological aspect of customary law (Goldsmith and Eric 23).
Opinio juris is what separates a state acts done out of interest or comity from one that a state conducts because it is obliged to do so by law. Courts say that a practice that is long-standing among states matures or ripens into customary international law when states acknowledge it as legally binding.
Treaty Law
Treaty law derives from international agreements between host states and foreign investors (Goldsmith and Eric 34).
Municipal Law
Municipal law is the scientific name given by global lawyers to the public or internal law of a state (Goldsmith and Eric 65).
International Law
This is law that governs issues that concerns more than one state, or issues that an internal law of a state does not address. States come together when creating these laws (Goldsmith and Eric 43).
Definition of the Standard of Fair and Equitable Treatment
The standard of fair and equitable treatment protects global investment treaties. Scholars and court arbitrators assume that this standard has the potential to penetrate into the deep traditions of host countries, unlike other laws of investment treaties (Schill 2).
Besides, the standard is a central concept of investment law that controls the affairs between host countries and alien businesses. The principle of fair and equitable treatment emerges significantly in all bilateral investment treaties (BITs) together with multilateral and regional investment treaties (Schill 2).
From this definition, it is apparent that the standard contains some aspects of both municipal law and international law. First, we see that the standard has potential to penetrate into the deep traditions of host countries. It is apparent that strange laws cannot have such potential and thus, the standard must contain elements of municipal law.
Second, the standard controls the affairs between host countries and alien businesses. Domestic legislation alone cannot handle issues to do with foreigners and thus, the standard must contain some elements of international laws. Concisely, this definition proves that the principle of fair and equitable treatment draws some aspects from both municipal law and international law.
While the standard was documented in international legal framework long time ago (about 60 years back) (Schill 2), only a few scholars have written literature about fair and equal treatment. At the same time, many international tribunals and courts have not paid much attention to this standard.
Recently, however, the standard on fair and equitable treatment has become popular due to the increasing number of complaints about host nations by alien investors. Whenever such complaints arise, global arbitral tribunals ask host nations to compensate foreign investors where necessary.
Despite the high number of foreigners accusing host countries in arbitral tribunals, the normative content of the standard remains unknown to many.
Fair and equitable treatment standard does not assist tribunals to make rulings, since it is a legal standard (Schill 3). As a result, judges of arbitral courts tend to add other normative rules to the standard when making judgments and rulings.
Different investment treaties can have different languages and, in particular, some treaties only follow the description of a fair and equitable treatment while others interpret this standard in relation to international law.
For instance, “Article 1105(1) of the North American Free Trade Agreement (NAFTA) requires elucidation in light of NAFTA’s Free Trade Commission under Article 1131(2), which conforms to customary international law” (Schill 3). However, it is uncertain whether these dissimilarities happen due to investment tribunals.
A comparative analysis of municipal law unveils some general concepts and norms that are transmittable to the global rank (Schill 3).
Besides, such an analysis helps to recognize the standard aspects that a country must abide by to meet the criteria of “fairness and equitableness” in global investment law (Schill 3). Possibly, a comparative analysis can also aid in establishing an appropriate procedure for interpreting the norm and thus, making the result of international disputes on investment more perceivable.
Two aspects account for possible disparities between customary international law and treaty law. First, there are courts, which hold that the standard of fair and equitable treatment belongs to the customary international law since it was included in international investment law.
Second, some courts hold that the standard of fair and equitable treatment evolves from the international minimum standard. Therefore, they see this standard as an evolutionary idea related to the customary international law regarding relationship between a host country and foreign investors.
The fact that different investment treaties can have different languages confirms that the elements of this standard come from municipal laws. Municipal laws govern specific areas, depending on their culture and environment and thus, may have such differences in language.
Besides, if the standard of fair and equitable treatment evolved from the international minimum standard, then the latter standard borrowed elements of fairness, justice and equity from the former.
This specific point confirms that the principle of fair and equitable treatment as found in customary international law brings together the elements of fairness, justice and equity drawn from international law. International law in this case refers to the international minimum standard.
Development of the Principle of Fair and Equitable Treatment
In this section, we examine the environment and setting that existed during the establishment of the Fair and Equality Treatment Standard and its historical development up to date.
There have been developments in the nature of treatment that a host country gives to alien investors. This has taken the form of “human entitlements, property rights and common investments rights” (Bronfman 613).
Years back, host countries provided security to investors in a discriminatory way. Investors from countries that had good relations with the host country received security while other investors lacked protection.
“A country has the independence to select the treatment that it will accord all investors in its land, as well as investments belonging to foreigners. Nevertheless, commercial associations between nations have heightened, because of the growing aspect of globalization. Countries have known that their economies obtain more gains from doing business with other states than just relying on their own ventures” (Bronfman 614).
The nations recognized that they needed to encourage alien investments, as they were valuable to them. This led to the introduction of international law. One way that states could inspire foreigners to invest in their territories was through guaranteeing a secure environment and good protection to alien investors.
These states realized the need to protect alien investors in the same way that they protected their own citizens. They realized this goal through establishing agreements in form of treaties among different nations. In view of some scholars and tribunals, standards acknowledged in the treaties developed into customary international law, thus obliging the entire community of nations (Bronfman 614).
The standard of fair and equitable treatment, which has much significance in international investment law, obtained much attention during 1940’s. The Havana Charter introduced the earliest description of the standard in 1948. Article 11(2) of the Charter sought to offer “just and equitable treatment” to alien investors (Bronfman 614).
Immediately after the introduction of this Charter, a regional initiative called “the Economic Agreement of Bogota” surfaced (Bronfman 614). This agreement assumed many stipulations related to protection of foreign investors.
The accord emphasized on the need to give “equitable treatment” to alien investors in order to obtain alien capital. These two initiatives (Havana Charter and Economic Agreement of Bogota) did not succeed because they lacked support. Nevertheless, they contributed to practices of other bilateral investment accords.
These two initiatives did not influence the description of fair and equal treatment standard as they lacked endorsement from states. They, however, represented the views of involved parties.
The “US treaties on Friendship, Commerce and Navigation (FCN) were significant BIT’s that preceded the fair and equitable standard” (Bronfman 641).
These BIT’s came into being after World War I. However, the FCNs incorporated the terms “equitable” and “fair and equitable treatment” as a preserve against contraventions of the host country subsequent to the World War II. These treaties borrowed most of their ideas from the Havana Charter.
Despite most FCNs including the fair and equitable standard, the treaty between China and the United States deviated from this norm. The US formed FCN pacts with “Luxembourg, Belgium, Greece, Israel, Pakistan and Ireland” (Bronfman 641) and all of these US treaties described the standard as equitable treatment.
Conversely, the US formed pacts with “Germany, Ethiopia, Netherlands and Oman and these states recognized the standard as fair and equitable treatment (Bronfman 642).
Later, the fair and equitable treatment standard received integration into the “Draft Convention on Investment Abroad, also called the Lord Shawcross” (Bronfman 642). Alongside this draft was the “Draft Convention on the Protection of Foreign Property (OECD Convention), which obtained convolution in 1967” (Bronfman 643). These two drafts showed that the standard dominated in capital-exporting nations.
By then, no entity or state seemed to propose the idea of executing the fair and equitable standard as customary international law. This was because this was a multilateral accord endorsed by most of the countries, especially developing countries. “Developing countries were the majority and their consent to the standard was significant in construing the elements of customary international law” (Bronfman 642).
In addition, developing states had a central role in provision of natural resources and thus, there opinion juris had to be sought before establishing a custom. By then, capital-importing states and capital-exporting nations had not reached an agreement about a specific multilateral accord, which would contain the standard.
In 1970’s, “capital-exporting and capital-importing nations signed a bilateral investment agreement” (Bronfman 643). OECD draft played a great role in this agreement. By then, the fair and equitable treatment standard had obtained a central position in BIT’s.
The “Multilateral Investment Guarantee Agency (MIGA) Convention” (Bronfman 643) declared that they necessitated fair and equitable treatment standard before they could guarantee any investment. Where a nation failed to provide for the standard, no liability occurred. Nevertheless, MIGA required the inclusion of the standard in treaties to encourage more states to embrace the norm.
MIGA only directed its services to states that embraced the fair and equitable treatment standard. The “Draft United Nations code of Conduct on Transnational Corporation” (Bronfman 643) was another significant effort on the issue.
All states involved in investment including those importing and those exporting capital reached a consensus that host nations ought to adapt the equitable treatment standard. After some years, “the MAI (Multilateral Agreement on Investment) stressed on the fairness element in addition to most-favored nation and national treatment principle” (Bronfman 644).
It is crucial to note that only OECD members participated in making these drafts. However, if both drafts received implementation, they would have incorporated non-members.
More regional efforts focused on developing the standard, and this meant that most capital-importing nations embraced fair and equal treatment as a standard. Twelve industrialized nations in Europe and about 70 nations in developing world endorsed Lome IV.
“These nations accepted the possibility of according the obligation of each contracting party to guarantee fair and equitable treatment to nationals of other states that were parties to the convention” (Bronfman 617).
In addition, the ASEAN treaty included fair and equitable treatment in its contracts among members. ASEAN treaty members included “Indonesia, Philippine, Malaysia, Thailand and Singapore” (Bronfman 644).
Of all the regional accords that came into force, NAFTA played the most significant role in the definition of the fair and equality treatment standard. NAFTA participated in promoting the standard through the Free Trade Commission. NAFTA specializes in standards related to businesses among different nations, and especially among emerging states.
Along with NAFTA, the “Colonia Protocol on Reciprocal Promotion and Protection of Investments” (Bronfman 617) is another regional treaty that is worth considering. Member states of Mercosur signed this treaty. According to the agreement, each member state of Mercosur is entitled to fair and equitable treatment.
Lastly, the energy Charter treaty makes sure there is strict conformity to the standards of fair and equitable treatment (Bronfman 617)).
The abovementioned historic sequence demonstrates that some elements of international laws led to establishment of the fair and equal standard. The Havana Charter, which represents international law, introduced the earliest description of the standard in 1948. Different BITs such as NAFTA and other treaties were international in nature and they contributed to the development of the standard.
At present, the structure of BITs has tended to create an integrated structure of law for alien investments. Customary international law directing the conduct of alien investment has gone through restructuring to represent the standards of law present in over two thousand bilateral investment treaties.
Following the end of such a flow of parallel treaties, the global society has arched over the customary segregation between capital-importing and capital-exporting nations and created a fundamentally integrated law of alien investment. Nevertheless, this process is simply because of the bilateral treaty system. Among multilateral agreements, only NAFTA and Energy Charter have joined the force in this respect.
However, these are local agreements and thus, do not add broadly to a global organization of investment law for alien investors. Hence, the principle of fair and equitable treatment borrowed the elements of international laws from the BIT’s treaties.
There is a sense of restructuring of customary law by these BIT’s via which nations have continually obliged themselves to pact alien investment the conduct usually offered by these treaties(whole fortification and security , fair and equitable treatment, and damages for expropriation).
A global convention institutes rules obliging the contracting nations only and depending on reciprocity. However, we should keep in mind that these rules become universal through the conclusion of other analogous conventions with the same or related provisions.
The latter hypothesis, which argues that the key elements enclosed in these accords may have developed into customary international law, however faces confrontation from the claims of some who think that if this were correct, there would be no call for states to keep incorporating them in the accords they make.
The main reason for viewing the fair and equitable treatment norm as customary international law is that it resembles the international minimum standard. Yet, other people will claim that the reason why nations still embrace these standards in investment accords is that the norm has a solid meaning rather than the international minimum standard.
Foreigners in general were secured by the international minimum standard before the birth of Fair and Equitable Treatment, (a tenet of customary international law which controls the treatment of foreigners (Bronfman 617), presenting them with a group of basic rights which countries must grant them, in spite of their local laws and procedures). Infringement of this rule caused international blame.
Elements of Fairness, Justice and Equity in Municipal Law and International Law
Nearly all municipal legal systems accommodated themselves to principles of fairness only slowly, in a process involving three phases. First, the state issued exemptions to subjects exposed to excessive hardship in a certain situation.
Second, precedents accrued, evolving into a system of equitable norms equivalent to the main body of the law and dislodging the system of royal dispensation. In the final stage, equitable principles became a part of the law.
After the victorious powers instituted the Permanent court of International Justice PCIJ in the end of World War 1, the major municipal systems of the world had barely completed this revolution. This evolution, also, had left these systems with a common set of principles of law-as-fairness, most prominently, “unjust enrichment,” “estopell,” and “acquiescence” (Jasentuliyana 105).
Given the universality of these elements, the victorious powers thought it suitable to embed them into international law. Hence, article 38 (1) of the statute of the PCIJ, which later came to direct the sources of law to be applied by the International court of Justice, permitted the court to refer to “general principles of law as acknowledged by civilized nations” as a supplementary source of international law (Jasentuliyana 105).
While the PCIJ and the court of International Justice (ICJ) have avoided making open reference to the authority conferred on them by this article, they have had regular resort to general principles of law-as-fairness. These principles also have a long history as a subject in international arbitration.
Unjust Enrichment
Unjust enrichment stands for the proposition that a party should not enrich itself, without legal cause, at the expense of another (Jasentuliyana 105). Courts and arbitral tribunals have invoked the principle chiefly in the context of the calculation of damages resulting from expropriation of the property of foreign nationals. The Chorzow Factory case is one example.
After determining in 1926 that Poland’s expropriation of a German-owned nitrate concern violated the terms of a convention on Upper Silesia, the PCIJ in 1928 turned to the principle of unjust enrichment for guidance in calculating damages. Under general international law, the measure of damages in cases of expropriation would have relied on the book value of the property at the time of its dispossession, plus interest.
The court held that, while this standard might be appropriate to a legal expropriation, it did not adequately remedy an illegal one. Since the value of the property as a going-concern could well have exceeded its book value, the general standard would have left Poland with a gain to which it was not entitled.
The true measure of damages, the court continued, should thus reflect not merely the value of the property at the time of dispossession, but the loss sustained because of the expropriation.
The arbitral tribunal that decided the 1932 Norwegian claims case also departed from strict la, applying a standard similar to “unjust enrichment” for its calculation of damages.
The case arose from the United States decision, after its entry into World War 1, to expropriate ships under construction in US shipyards for foreign parties. After Norwegian nationals whose contracts had faced expropriation, they referred the matter to the Permanent court of International Arbitration.
After determining the fair market value of each contract, the court turned to a claim brought on behalf of an American firm, which had acted as a broker between a Norwegian purchaser and an American shipyard.
After the requisition of the ship, the US failed to pay the remainder of the commission, in violation of the terms of the contract. The firm sought to blame the Norwegians for this lapse, arguing that the purchaser’s assignee was contractually bound to pay the remainder.
Although the court rejected the firm’s claim for fulfillment of a contractual obligation because the expropriation had terminated any contractual relationship between the firm and the Norwegian purchaser, it reasoned that, had the US paid the amount due to the broker, that amount would have experienced deduction from the fair market value of the contract.
“In these circumstances,” the court wrote, “it appears to be equitable…to give the US the right to retain (the amount due the firm) out of the amount awarded” (Jasentuliyana 105) on the condition that the US pays that sum to the broker. The reasoning did not rely on actual costs incurred by the US, but on the unjust enrichment of Norway, which would have been possible if the loss to the US broker did not face offsetting.
Estoppel
Equitable estoppel imposes a duty on States to refrain from engaging in inconsistent conduct vis-à-vis other states (Jasentuliyana 105). This norm figured prominently in the River Meuse case. The Netherlands had complained that Belgium’s construction of a lock to take water from the Meuse River violated a conventional regime governing access to the river’s waters.
A few years earlier, however, the Netherlands had constructed a lock remarkably similar to the one about which it complained. After concluding that the Belgian lock did not violate any of the terms of the convention, the court suggested that, even had it found the lock in violation, a principle closely akin to estoppels would have impelled it to reject the Dutch claim.
The court finds it difficult to admit, “it wrote, “that the Netherlands are now warranted in complaining of the construction and operation of a lock of which they themselves set an example in the past” (Jasentuliyana 105).
Historically, a party invoking equitable estoppels had to demonstrate detrimental reliance on the other party’s conduct. As the PCIJ noted in the River Meuse case, the Dutch, having set an example through the construction of their lock, ought not to have been surprised when the Belgians followed suit. The earlier Tinoco claims arbitration had similarly illustrated the importance of this element of reliance.
In 1917, Tinoco, the Costa Rican minister of war, overthrew the government. Two years later, his government fell, after which the new Cost Rican Congress nullified all contracts made, and all currency issued by the Tinoco regime. Costa Rica responded that Britain’s failure to recognize the Tinoco government during its incumbency should estop it from championing such a claim by its nationals.
United States chief justice tact, the sole arbitrator rejected Costa Rica’s Defense on the ground that it had not relied to its detriment on Britain’s failure to recognize Tinoco’s regime.
“An equitable estoppels to prove the truth must rest on previous conduct of the person to be stopped, which has led the person claiming the estoppels into a position in which the truth will injure him” (Jasentuliyana 105). He wrote. “There is no such claim here” (Jasentuliyana 105).
Such a narrow requirement of detrimental reliance on the part of those seeking to invoke equitable estoppels may be easing. Even in the absence of detrimental reliance, a nation may be etopped, by an implied principle of “good faith,” from contesting the legally binding effect of its promises (Jasentuliyana 105).
In the 1974 nuclear test cases, Australia and New Zealand asked the ICJ to order France to cease atmospheric testing in the South Pacific. Before the court issued its judgment, French officials announced that the 1974 set of tests would be the last.
These declarations, the court held, were legally cognizable as a promissory commitment, rendering the case moot. The principle of good faith, the court explained, can confer a binding character on unilateral declarations.
Detrimental reliance, at least in the traditional sense, was not part of this decision, since Australia had dismissed the French declaration as inconclusive and persevered with the litigation.
To overcome this lack of reliance, the court wrote that it “would form its own view of the meaning and scope” of the declaration. In effect, this suggested that what mattered was not the promisee’s reliance, but the court. Thus, the court, relying on France’s promise, declared the case moot.
Acquiescence
Acquiescence or prescription is another form of equitable estoppel recognized as a general principle of law-as-fairness (Jasentuliyana 105. Thus, silence or absence of protest may preclude a state from later challenging another state’s claim. To succeed in a defense of acquiescence, a state must prove that the second state had knowledge of its claim.
To succeed in a defense of acquiescence, a state must prove that the second state had knowledge of its claim. As the 1951 Fisheries case demonstrates, this knowledge usually is inferable from the circumstances. That case arose out of a dispute over the boundary of Norway’s continental shelf.
To erase the irregularities that would arise from its fjord-indented coast, Norway for decades had used straight base lines to delimit its fisheries zone, rejecting the general practice of using a line based on a coastal low-water mark.
Holding in Norway’s favor partly on grounds of acquiescence, the ICJ rejected Britain’s argument that it had not known of this system of delimitation (Jasentuliyana 105). Since Britain was a maritime power with a strong interest in Norwegian waters, the court reasoned, it must have known of Norway’s practice and thus could not excuse its failure to protest.
The principle of acquiescence, as the 1962 Temple of Preah Vihear case illustrates, relies on the notion that finality has an equitable dimension. The case had its origins in a border dispute between Cambodia and Thailand. Shortly after the turn of the century, two Franco-Siamese commissions delimited the frontier between French Indochina and Siam (Thailand).
As the Siamese lacked the necessary technical expertise, the French took the task of preparing maps of the frontier. Those pertaining to the area in which the temple was located placed it on the French side of the border. During the fifty-year period following its reception of the map, the Siamese government registered no objection.
The court held that Siam’s failure to object to the contents of the maps amounted to acquiescence. In so doing, it discounted evidence that this acquiescence was out of coercion. Rather, the court emphasized the importance of stability.
‘When two countries establish a frontier between them, one of the primary objects is to achieve stability and finality” (Jasentuliyana 106). The court also wrote, “This is impossible to achieve if the line so established can, at any moment…..be called in question…” (Jasentuliyana108).
In conclusion, the standard of fair and equitable treatment is evolutionary. As discussed above, this standard evolves from international laws such as the international minimum standard as well as municipal laws. As such, the elements of fairness, justice and equity found in the standard evolved from both international and municipal laws.
Therefore, this standard is an evolutionary idea related to the customary international law on relationship between a host country and foreign investors. The FCN treaties incorporated the terms “equitable” and “fair and equitable treatment” as a preserve against contraventions of the host country subsequent to the World War II. These treaties represented international law as they borrowed most of their ideas from the Havana Charter.
The international minimum standard in general secured foreigners before the birth of fair and equitable treatment, presenting them with a group of basic rights which countries were obliged to give, in spite of their local laws and procedures. Infringement of this rule caused international blame.
It is apparent that the fair and equitable treatment standard borrowed the elements of fairness, justice and equity from the international minimum standard because seemingly, the fair and equitable treatment standard occupied the place of the international minimum standard.
A comparative analysis of municipal law unveils some general concepts and norms that are transmittable to the global rank. Besides, such an analysis helps to recognize the standard aspects that a country must abide by to meet the criteria of “fairness and equitableness” in global investment law.
Possibly, a comparative analysis can also aid in establishing an appropriate procedure for interpreting the norm and thus, making the result of international disputes on investment more perceivable.
Two aspects account for possible disparities between customary international law and treaty law. First, there are courts, which hold that the standard of fair and equitable treatment belongs to the customary international law since it was included in international investment law.
Second, some courts hold that the standard of fair and equitable treatment evolves from the international minimum standard. Therefore, they see this standard as an evolutionary idea related to the customary international law regarding relationship between a host country and foreign investors.
Different investment treaties can have different languages and, in particular, some treaties only follow the description of a fair and equitable treatment while others interpret this standard in relation to international law. This confirms that the elements of this standard come from municipal laws. Municipal laws govern specific areas, depending on their culture and environment and thus, may have such differences in language.
Besides, if the standard of fair and equitable treatment evolved from the international minimum standard, then the latter standard borrowed elements of fairness, justice and equity from the former.
This specific point confirms that the principle of fair and equitable treatment as found in customary international law brings together the elements of fairness, justice and equity drawn from international law. International law in this case refers to the international minimum standard.
In addition, the historic sequence demonstrates that some elements of international laws led to establishment of the fair and equal standard. The Havana Charter, which represents international law, introduced the earliest description of the standard in 1948. Different BITs such as NAFTA and other treaties were international in nature and they contributed to the development of the standard.
Lastly, early municipal systems shared a set of principles of law-as-fairness, most prominently, “unjust enrichment,” “estopell,” and “acquiescence.” Given the universality of these principles, the victorious powers thought it appropriate to graft them into international law.
These aspects are all present in the fair and equitable treatment standard, though indirectly, and this implies that the fair and equitable treatment standard has aspects of fairness, equity and justice from municipal laws.
Works Cited
Bronfman, Marcela. Fair and Equitable Treatment: An Evolving Standard, Heildelberg, Netherlands:University of Heildelberg, 2005. Print.
Goldsmith, Jack, and Eric Posner. The Limits of International Law, New York, NY: Oxford University Press, 2005. Print.
Jasentuliyana, Nandasiri. Perspectives on International Law: A Publication on the Occasion of the Fiftieth Anniversary of the United Nations and a Contribution to the Decade of International Law, London, England: Kluwer Law International, 1995. Print.
Schill, Stephan. Fair and Equitable Treatment Under Investment Treaties as an Embodiment of the rule of Law, New York, NY: Institute for International Law and Justice. Print.