Member Publication

There are various constructions of the ‘Fair and Equitable Treatment’ (FET) clauses in investment treaties. Many of them have combined the FET standard with other investment protection standards in the same clause. A simplistic interpretation of these clauses might lead to an understanding that the FET standard are synonymous with other standards prescribed by the particular investment treaties largely due to the flexibility and generality of the standard. This article will closely scrutinize this interrelation between the FET standard with some other investment protection standards. The demarcation line between and among these interaction is so thin that it becomes difficult to distinguish one standard from another. This article will discuss that the FET is indeed an overarching principle and despite some conceptual similarities with other investment protection standards the FET standard is unique and distinct in its own free standing in the international investment law regime and combining the standard with other investment protection standards is simply a stylistic matter and not a matter of substance to its content.

Despite the lack of a precise meaning of the term, the investment tribunals have developed some broad principles for the application of the Fair and Equitable Treatment (FET) standard. These broad principles include good faith along with other principles. This article focuses on role of good faith as a means to interpret the FET standard. It discusses how the notion of good faith as referred by the arbitral tribunals has at least two distinct functions. Firstly, a more subjective function of good faith requires the parties to a treaty to comply with their obligations in a candid and loyal manner. Secondly a more objective function of good faith rather concerns the process of decision making being committed – while not distinguishable from the concept of equity to general considerations of justice. In the context of FET standard, the later function is especially connected with the approach of balancing the interests between host states and foreign investors. The article concludes with an analysis of the arbitral awards that shows that in interpreting and applying the FET standard they have identified among many other elements, the principle of good faith which singly or in combination have been encompassed in the standard. Finally it is stated that, the arbitral tribunals have found that FET standard encompasses the general obligation to act in good faith. This would include protection against the use of legal instruments for uses other than their intended purpose and any conspiracy by government authorities to destroy the investment. At the same time, it is clear that, action in bad faith is not a prerequisite for finding that the FET standard has been breached.

In international investment law disputes the fair and equitable treatment (FET) standard has now become an indispensable tool for the foreign investors. The alleged breach of FET standard involves some actions or denials by the host state. Not all actions taken by the host state which affects investor’s interests and investment can amount to breach of FET standard, if such actions can be justified as reasonable on grounds of state necessity. This raises an issue of conflicting arguments between state’s obligation to protect the foreign investors and the state’s sovereign power to regulate its own affairs. In this context the principle of proportionality can play a significant role. The principle of proportionality in this context functions as a tool to examine whether any action taken by the host state affecting the foreign investment is based on reasonable and traceable rational. It also examines whether the investor’s investment is not put under any threat by the host state which is unnecessary and disproportionate in response to its state necessity. Thereby the principle of proportionality can operate as a balancing tool to make a proportionate balance between the investor’s legitimate expectations and the host state’s regulatory powers. This article will focus on to what extent the principle of proportionality is acknowledged by the arbitral tribunals in interpreting the FET standard and how far it can be used as a tool for mitigating the conflicting interests between the parties in investment dispute i.e. the foreign investors and the host state.