Fair and Equitable Treatment (FET) ensures stability, transparency, and non-discrimination in investment law. It protects investors' legitimate expectations and prevents arbitrary actions. Its evolving interpretation impacts global investment disputes and treaty practices.
Introduction
The concept of fair and equitable treatment (FET) plays a crucial role in investment relations between States and foreign investors. It provides a benchmark for assessing the relationship between foreign direct investors and host governments, offering assurances to investors regarding the treatment they can expect. As international investments become more complex and critical for economic growth, particularly in capital-importing countries, the FET standard has gained prominence as a signal of stability and protection for foreign investments.
The importance of FET can be observed in the context of India's ambitious national monetization pipeline. The success of this initiative heavily depends on attracting foreign investment, which in turn necessitates adherence to FET principles. The Permanent Court of Arbitration’s rulings in cases involving Vodafone[1] and Cairn Energy[2] highlight the importance of the FET clause in bilateral investment treaties (BITs) and underline the need for stable, transparent, and predictable investment environments.
This writeup explores the evolution of the FET standard, its core components such as legitimate expectations, manifest arbitrariness, denial of justice, and due process, as well as the role of investor conduct and its relationship with other investment protection standards.
Meaning of Fair and Equitable Treatment
FET has evolved as a replacement for the traditional expropriation-based protection of foreign investments. As a legal standard, FET encompasses principles such as consistency, accountability, non-discrimination, fairness, and due process. Procedural propriety and good faith are essential elements of FET, and violations can occur in cases involving coercion, harassment, or arbitrary actions by the host state.
However, FET remains a flexible and evolving concept, which has led to challenges in its practical application. Tribunals have defined FET broadly, relying on the investor’s legitimate expectations and the host state's obligation to act in a consistent and transparent manner.
The Evolving Standard
Over time, the FET standard has expanded to encompass a wide range of administrative and legislative decisions. The scope of FET now includes conduct attributable to the state, even if carried out by non-state entities. As international trade and investment continue to develop, tribunals have shifted their focus from the relationship between FET and the minimum standard of treatment to identifying specific elements of FET that are context-dependent.
Legitimate Expectations
One of the essential elements of FET is the protection of investors' legitimate expectations. Investors form these expectations based on the regulatory environment at the time of investment. When state measures adversely affect these expectations, investors may claim a breach of FET.
The landmark case of Tecmed v. Mexico[3] highlighted the importance of stable legal and business frameworks. The tribunal held that the Mexican authorities had acted in a manner that infringed the claimant's legitimate expectations by not renewing a license. Similarly, in BayWa r.e. Renewable Energy GmbH v. Spain[4], the tribunal emphasized that regulatory modifications should not be unreasonable or arbitrary and must not eliminate the essential features of the regulatory framework.
Manifest Arbitrariness
Arbitrariness, which refers to actions based on prejudice or preference rather than reason, constitutes a violation of FET. Manifest arbitrariness involves blatant disregard for due process and established rules. For example, in the case involving Odyssey Marine Exploration, Inc. and the United Mexican States, the tribunal found that the state’s deliberate disregard for evidence and technical analysis amounted to manifest arbitrariness.[5]
Denial of Justice and Due Process
Denial of justice occurs when there is a gross misadministration of justice by domestic courts, leading to a breakdown of the judicial system. It includes unreasonable delays, refusal to decide cases, corruption of judges, and lack of judicial independence. In Lion Mexico Consolidated L.P.A v. United Mexican States[6], the tribunal emphasized that denial of justice arises when a state's judiciary engages in notoriously unjust practices.
Discrimination
FET also prohibits discriminatory treatment of foreign investors based on wrongful grounds such as race, gender, or religion. Deliberate actions aimed at frustrating or destroying investments can also constitute discriminatory conduct.
Role of Investor Conduct
The conduct of investors plays a critical role in FET claims. Host states may justify their actions if investors engage in misconduct or poor management. In Noble Ventures Inc. v. Romania[7], the tribunal concluded that the claimant could not establish a violation of the FET standard due to its own management failures.
Due diligence is another crucial aspect of FET, requiring states to take reasonable measures to protect foreign investments. However, this obligation is not absolute and depends on the state’s capacity and resources. In Pantechniki v. Albania[8], the tribunal held that Albania’s lack of resources justified its failure to protect an investment.
Relationship Between FET and Full Protection and Security (FPS) Standards
The distinction between FET and FPS is not always clear-cut. FPS focuses on the state’s obligation to protect investments from physical harm and provide sufficient legal mechanisms, while FET addresses the state’s conduct concerning investments. Some tribunals have applied these standards in a similar manner, while others have treated them differently based on the circumstances of each case.
Due Diligence, Strict Liability, and State Capacity
The application of due diligence in FET cases requires consideration of the state’s capacity, resources, and stability. In some cases, tribunals have found that strict liability does not apply, and states are only required to exercise due diligence. For example, in AAPL v. Sri Lanka[9], the tribunal rejected the application of strict liability and emphasized the due diligence standard.
Recent Developments and Practical Applications
The practical implications of FET violations have gained significance in light of India's experience with investment disputes such as Vodafone[10] and Cairn Energy[11]. These cases illustrate the importance of transparent and predictable tax policies in maintaining investor confidence.
India's tax regime changes led to disputes where foreign investors claimed a breach of the FET standard. The Vodafone and Cairn cases[12] underscore the need for India to reassess its policy framework and BIT commitments. Recent amendments to BITs in India show a shift towards emphasizing regulatory space for the state while attempting to balance investor protection.
The FET standard’s application has evolved with contemporary legal and political developments, and India’s BIT practice highlights the move towards clearer definitions and more detailed treaty provisions.
Suggestions and Conclusion
The FET and FPS standards are inherently complex and have been applied inconsistently by tribunals. To address these challenges, several measures can be considered:
- Clear and Specific BIT Provisions: BITs should contain specific clauses defining FET and FPS standards to avoid ambiguity and ensure consistent application.
- Regulatory Mechanisms: Establishing regulatory institutions to monitor compliance with FET and FPS standards can help maintain checks and balances.
- Investor-Friendly Environment: Creating a stable and transparent business environment can attract foreign investments and reduce disputes.
- Improved Dispute Resolution Mechanisms: India and other host states should develop clear and efficient dispute resolution frameworks to prevent international arbitration and save time and resources.
- Transparent and Predictable Tax Regime: Ensuring that tax policies are transparent, predictable, and in line with international best practices can reduce FET-related disputes.
An investment-friendly environment is crucial for economic growth and revenue generation. By adhering to FET principles and adopting a balanced approach, states can foster investor confidence and promote sustainable development. Collaborative efforts between states and investors can further enhance the protection of foreign investments and ensure inclusive economic development.
[1] Vodafone International Holdings BV v. Government of India [I], PCA Case No. 2016-35.
[2] Cairn Energy PLC and Cairn UK Holdings Limited v. The Republic of India (PCA Case No. 2016-7).
[3] Tecmed v. Mexico, ICSID Case No ARB (AF)/00/2.
[4] BayWa r.e. Renewable Energy GmbH and BayWa r.e. Asset Holding GmbH and Kingdom of Spain (ICSID CASE No. ARB/15/16).
[5] Odyssey Marine Exploration, Inc. v. United Mexican States, ICSID Case No. UNCT/20/1.
[6] Lion Mexico Consolidated L.P.A V. United Mexican States ICSID CASE NO. ARB(AF)/15/2, (2019).
[7] Noble Ventures v. Romania, ICSID Case No. ARB/01/11.
[8] Pantechniki Contactor & Engineers v Albania, ICSID Case No. ARB/07/21.
[9] Asian Agricultural Products Ltd. v. Republic of Sri Lanka, ICSID Case No ARB/87/3.
[10] Supra at 1.
[11] Supra at 2.
[12] Ibid.
