Most-Favoured-Nation (MFN) treatment ensures foreign investors receive treatment no less favorable than investors from other nations. While promoting non-discrimination, its application in dispute resolution and substantive protections remains debated in investment law.
Introduction
The concept of Most-Favoured-Nation (MFN) Treatment is one of the cornerstones of international investment law, enshrined in many investment treaties and free trade agreements. These clauses are designed to ensure that foreign investors receive treatment at least as favourable as the treatment extended to investors from other countries. While seemingly straightforward, the implementation and interpretation of MFN clauses can vary widely, and their legal implications have been the subject of significant discussion among scholars, practitioners, and international tribunals. This write-up provides a comprehensive understanding of MFN treatment, its purpose, general treaty practices, and its application in both dispute settlement and substantive protection under international law.
Definition of MFN Treatment
MFN clauses are typically found in investment treaties and trade agreements, stipulating that investors and their investments should not be treated less favourably than those of investors from other countries. These clauses are not inherently required by customary international law but rather stem from the specific treaty obligations agreed upon by the contracting states.
Under MFN provisions, a host state must ensure that its treatment of foreign investors is at least as favourable as that provided to investors from other states. This provision seeks to prevent discrimination against investors from particular countries, thereby promoting fair and equal treatment for foreign investors regardless of their nationality.[1] However, it’s important to note that the precise wording and interpretation of MFN clauses can vary from treaty to treaty, and these variations have substantial implications for their practical application.
General Treaty Practice
MFN clauses differ significantly in both form and substance. The application and scope of an MFN clause depend largely on its wording and placement within a treaty. Some MFN clauses are broad, covering all matters under the treaty, while others apply only to specific types of treatment or particular provisions. For example, an MFN clause might apply only to the “management, maintenance, use, enjoyment, or disposal” of an investment. Other clauses may specifically address treatment within the host state's territory or restrict the application of MFN treatment to certain situations, such as government procurement or taxation.
These clauses may appear in different parts of a treaty and can be accompanied by other obligations, such as national treatment or fair and equitable treatment (FET) standards. In some instances, MFN provisions are expressly limited by exceptions for certain measures, such as government procurement, customs union arrangements, or taxation measures.
Furthermore, MFN clauses are subject to implicit limitations. For instance, the ejusdem generis principle limits MFN clauses to treatment of the same kind as that specified in the treaty. Similarly, treaties might include principles of interpretation, such as expression unius est exclusion alterius, which preclude the application of MFN clauses to certain aspects of treaty practice.
Given the variability in MFN clause wording and the presence of exceptions, tribunals often face challenges in determining the scope of MFN treatment in specific cases. The lack of consistent jurisprudence is partly due to the divergent nature of MFN clauses and the treaty context in which they are invoked.
The Purpose of MFN Clauses
MFN clauses aim to establish fairness and non-discrimination between foreign investors. The goal is to create a level playing field where all foreign investors, irrespective of their country of origin, are treated equally in the host state. As the Bayindir tribunal noted, MFN clauses ensure that there is no discrimination between foreign investors from different countries. Similarly, the National Grid tribunal emphasized that MFN provisions are essential to ensure parity between foreign and national investors.
The core purpose of an MFN clause is to avoid discriminatory treatment by comparing the treatment of foreign investors from different countries. This relative treatment mechanism prevents the host state from offering less favourable conditions to investors from one country while offering more advantageous conditions to investors from another.
MFN as a Relative Treatment Obligation
An MFN clause may serve as a relative treatment obligation, prohibiting the host state from treating one foreign investor less favourably than another from a different state. This form of MFN treatment functions similarly to the principle of national treatment, which requires states to treat foreign investors no less favourably than domestic investors. As a result, an MFN clause, when invoked, ensures that the host state maintains equal treatment across different foreign investors.
However, it’s important to note that while MFN clauses generally prevent discriminatory practices, they do not require states to offer identical treatment to all foreign investors. The host state retains the right to make reasonable distinctions among investors based on legitimate public policy considerations. Moreover, even when MFN clauses are used, investors must typically demonstrate that they have been treated less favourably than other foreign investors in comparable circumstances.
MFN by Reference to a Comparator Treaty
A more common application of MFN clauses is the invocation of a comparator treaty, where an investor seeks to benefit from more favourable treatment granted in a treaty between the host state and a third country. This form of MFN treatment allows investors to bypass the provisions of their base treaty in favour of more advantageous terms found in other treaties.
This practice has contributed to what some scholars refer to as the multilateralization of investment treaty law, whereby bilateral agreements between two states are effectively harmonized with more favourable provisions from treaties with third countries. This approach prevents states from shielding more favourable provisions contained in agreements with other countries, thereby creating a broader and more uniform framework of international investment protection.
Application of MFN Clauses to Dispute Settlement Provisions
The application of MFN clauses to dispute settlement mechanisms has been the subject of considerable debate. Some tribunals have rejected the idea that MFN clauses can extend to dispute settlement provisions unless there is explicit language to that effect. For example, the Plama tribunal held that MFN clauses could not incorporate dispute settlement provisions from a third-party treaty without clear indication of intent from the contracting parties.[2]
On the other hand, other tribunals, such as the Maffezini tribunal, have accepted that MFN clauses can extend to dispute settlement provisions. This approach enables investors to access more favourable dispute resolution mechanisms, such as a wider range of arbitration forums or more streamlined processes for resolving disputes.[3]
However, tribunals have also identified limits to this principle. For example, investors may not use MFN clauses to bypass procedural requirements such as the exhaustion of local remedies or to alter the arbitration forum designated in the base treaty. These considerations ensure that public policy objectives are not undermined by the invocation of MFN treatment in dispute settlement contexts.
Application of MFN Clauses to Substantive Provisions
MFN clauses have also been invoked to import more favourable substantive protections, such as fair and equitable treatment, full protection and security, and protection against arbitrary or discriminatory measures. Many tribunals have accepted that MFN clauses can be used to enhance substantive protections by referring to the more favourable terms of a comparator treaty.
However, the scope of protections available through MFN clauses may be limited by the specific terms of the base treaty. The ejusdem generis principle, for example, may preclude the application of MFN clauses to protections not already contained within the base treaty. Additionally, expressing exceptions or limitations within the treaty can restrict the ability of investors to invoke more favourable provisions through MFN treatment.
Conclusion
Most-favoured-nation treatment is a powerful tool in international investment law that aims to ensure equality and non-discrimination among foreign investors. While the basic principle behind MFN clauses is clear, ensuring equal treatment between investors of different nationalities, the practical application and interpretation of these clauses can be complex and varied. The effectiveness of an MFN clause depends on its specific wording, the context in which it is invoked, and the tribunal's interpretation of the treaty at issue.
The application of MFN clauses in both dispute settlement and substantive protections has been the subject of considerable legal debate, and tribunals have varied in their acceptance of the use of MFN clauses in these contexts. Nonetheless, MFN provisions remain a fundamental element of international investment treaties, designed to protect the rights of foreign investors by promoting fairness and consistency in the treatment of investments across different states.
In conclusion, MFN clauses serve to protect foreign investors from discriminatory treatment by ensuring that they receive equal treatment compared to investors from other countries, thereby fostering a more stable and predictable environment for international investments.
[1] Douglas, Z., The MFN Clause in Investment Arbitration: Treaty Interpretation Off the Rails, Journal of International Dispute Settlement, 2010, pp. 97-113.
[3] Paparinskis, M., MFN Clauses and International Dispute Settlement: Moving beyond Maffezini and Plama?, ICSID Review – Foreign Investment Law Journal, 2011, pp. 14-58.
