The Application of Most-Favoured-Nation Clause to the Dispute Settlement Clause in Investor-State Arbitration Disputes
Enes Suheyl KARATAS
International Trade and Investment Law Supervisor: Dr. Hege Elisabeth Kjos Date of Submission: 27/07/2018
Abstract
The issue of deriving procedural protection by virtue of a most-favoured-nation (MFN) clause is a long-standing debate. Such protection is to be imported from a TIP signed between the Host State and a state other than the Home State through the MFN clause which is provided in a treaty with investment protection (TIP) signed by the Host State and the Home State of the investor. This thesis reviews the possibility of applying the most-favoured-nation treatment to the dispute settlement provision of the basic TIP which is the treaty to be applied to the dispute. The issue continues to cause controversy in practice and yet, it bears no definitive answer. The problem arises out of the discussion on the nature of the most-favoured-nation treatment as it is, according to one approach, only applicable to substantive treatments in general circumstances. This approach argues that additional exclusive acknowledgment of further application is necessary such as procedural protection. Contrarily, the other approach does not limit MFN treatment to this restriction, therefore, if the MFN clause is embodied with a broad enough sphere of application, then a procedural treatment may be rendered. In order to solve this dilemma, various cases have been analysed to determine whether there is a common ground to these different opinions and if any, to identify these grounds in order to find a constructive solution. The finding of this research deduced a positive basis for the application of MFN clause to dispute settlement clause to acquire procedural protection for an investor. This seemed possible in case of applying MFN treatment to pre-existing rights embodied in a dispute settlement provision where the limit of this application is drawn at creating a new procedural right i.e. importing consent to arbitration when there is none in the basic treaty.
1. Introduction...4
2. Most-favoured-nation Treatment...6
2.1 Definition and Origins...6
2.2 The Scope of the MFN Clause...6
2.3 Examples of MFN Clauses...7
3. Consent...9
4. The Application of the MFN Clause to the Dispute Settlement Clause...10
4.1 Comparison of Cases Regarding the Application of Most-Favoured-Nation Clause....11
4.2 Determining the Scope of MFN Clause...21
4.3 Explicit Inclusion or Exclusion Within the Provisions of the Basic Treaty?...23
4.4 The Limits to the MFN Clause within the Context of the Issue...24
5. Conclusion...25
1. INTRODUCTION
The issue of applying the most-favoured-nation treatment to the dispute settlement clause within the basic treaty or, to put it in a larger span, providing procedural protection along with substantive protection with the help of MFN clause is a long-standing debate. Generally, an MFN clause includes a wording as in ‘Each Contracting Party shall accord to investments and investors of the other Contracting Party treatment no less favourable than that accorded to investments and investors of any third State.’ This broad articulation of the provision should gather almost all kinds of treatments under its scope and bring the investors a more favourable treatment from other TIPs signed by the Host State, yet; the placement of a provision that requires exclusive addressing such as a dispute settlement clause under this broad scope is uncertain. In an example of this heavily disputed practice, an investor brings the dispute before an ICSID tribunal while only the option of UNCITRAL or another dispute settlement facility is envisaged in the basic treaty, yet, attempted by the investor to be imported from a third-party treaty by means of MFN treatment. This attempt of modifying the dispute settlement provision is criticized due to its effect on the consent of the Host State that it is thereby changed without agreement between the Contracting Parties.
The controversy is illustrated by the different positions taken by investor-state arbitration tribunals as well as in scholarship. In this respect, quite a few matters need addressing and more elaboration considering scopes and limitations of various MFN provisions. This research focuses on the question of whether it is possible to apply an MFN clause to dispute settlement provision of a treaty with investment protection.
The raison d’être of this thesis arose from the need of creating a possible structure to be followed in case of a request of MFN treatment addressing the dispute settlement clause in the basic treaty when there is a reasonable possibility of such conduct. The solution to the applicability problem is significant given its massive influence on the jurisdictional phase of investor-state arbitration disputes and treaty practice in general. This is because the problem arises out of the objections directed to the jurisdiction of an arbitral tribunal. Additionally, the reaction of the states towards the issue is visible in newly negotiated TIPs as they include further explanation to the scope of the MFN clause whether it applies to the dispute settlement provision of the basic treaty.
The topic involved a discussion which was pulled, in most circumstances, to opposite poles. This fact gave the idea of focusing on the arguments from both sides of the dispute where there is an acknowledgement of applicability. From this point of view, it seemed plausible to conceive a more perceptible contribution to the investment community which is neither pro-state nor pro-investor. The finding of this research is provided through a comparison of opposite views and procurement of shared grounds. These shared grounds created a possibility of a solution together with bringing questions. Such questions were answered with a collective analysis of treaty practice, precedent and relevant scholarship.
In the second and third section, the necessary background on two major concepts regarding the issue, MFN treatment and consent. Because they are relevant to a considerable extent as the answer of the question lies inside the relation between MFN and consent.
The fourth section provides a vast analysis of some cases has been given together with the remarks of the tribunals of these disputes. Since there are no binding rules and the issue revolves around the case law, this analysis was more than necessary to distinguish the uncontroversial and disputed parts of the problem in order to create research questions and find, if possible, answers to them in the following sections. Two cases have been examined in terms of their standing on the issue, Garanti Koza v. Turkmenistan and Plama v. Bulgaria. After an initial research, the reason to use Garanti Koza arose due to the two-step analysis of the Tribunal on the dispute settlement clause in which the distinction between the pre-existing rights and the less favourable ‘treatment’ can be observed clearly. Plama is utilized due to its significance as it is the flagship of its own line of cases and changed the atmosphere of international investment arbitration after Maffezini v. Spain.
The analysis gave rise to questions on the scope of MFN and further submission supported by research is given in order to give a demonstration on how to determine the scope of MFN to be able to measure the possibility of conducting an operation on the dispute settlement provision. This led to a vital further question mark as to show the necessity of either an exclusive inclusion or exclusion within the wording of the MFN clause under which the parties from opposing views carried a weighty split in opinion. Thereafter, the limits of this controversial utilization are discussed to set some necessary restrictive standards which are derived from the examination on case law as well for the application of MFN. Finally, in the fifth section, a general analysis over the findings of the research was made to concretise a terminal answer to the dispute.
2. MOST-FAVOURED-NATION TREATMENT
MFN treatment is the essential matter in this dilemma of applicability. It’s in the centre of the whole discussion, therefore, an insight is necessary for a better understanding of the concept. Despite it’s not new in the terminology, problems may still be derived from its fundamental essence. This is also because it has no identified boundaries and can be quite broad.
2.1 Definition and Origins
MFN treatment entitles foreign investors to receive from the host state treatment which is no less favourable than the treatment given to investors from a third state. This standard of protection is generally made accessible through treaties by placing an MFN clause in the agreement. Most of the international investment agreements provide an MFN clause, though, its scope differs from treaty to treaty. The MFN clause is utilized to promote and protect the investors’ interests by expanding their rights unto the ‘most favourable’ treatment available. There would be no room for an MFN clause to operate if there is no more favourable treatment, however, the benefits of this treatment will automatically be transmitted in case of an availability of a new more favourable treatment.1
The International Law Commission defines MFN clauses in its 1978 Draft Articles on MFN Clauses: “An MFN clause is a treaty provision whereby a State undertakes an obligation towards another State to accord MFN treatment in an agreed sphere of relations.”2 The MFN treatment was used, first, as a method to avert discrimination in international trade. It has been transferred to international investment law through bilateral investment treaties following friendship, commerce and navigation treaties that date back to the 18th Century.3 One example is the 1778 Treaty of Amity and Commerce between the United States and France which stipulates that the parties agree upon ‘any other or greater Duties or Imposts […] which the most favoured Nations are or shall be obliged to pay’.4
1 Rudolph Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd edn, Google Play Books, Oxford University Press 2012) 316
2 International Law Commission (ILC), ‘Draft Articles on most-favoured-nation clauses with commentaries’ (1 March 1978) A/CN4/SERA/1978/Add1 (Part 2) Article 4
3 Yannick Radi, 'The Application of the MFN Clause to the Dispute Settlement Provisions of Bilateral Investment Treaties: Domesticating the ‘Trojan Horse’' [2007] 18(4) European Journal of International Law 2 4 Treaty of Amity and Commerce between the United States and France (6 February 1778) Article 4
2.2 The Scope of the MFN Clause
The wording of the MFN clause in international investment agreements is shaped through negotiations in accordance with the parties’ intentions. Through these treaties, the effects and breadth of the clause is drawn. Since there is no standard MFN clause, there is no standard application. At this point, the question arises towards the extent of alteration of MFN clause on the other provisions in an agreement.5 The subject matter and substantive elements of an MFN clause are significant for the application of its scope. Subject matter coverage embodies the investors and their investments, and it is possible to restrict its embodiment by the clause itself. The substantive element is implemented through the text by outlining what is to be accorded and to be excepted.6 The application of the MFN clause can extend to the same subject matter or to the same category of subjects to which the clause pertains to. This is because the MFN clause is governed by the ejusdem generis principle.7
2.3 Examples of MFN Clauses
As was stated each MFN clause should be interpreted on a case-by-case basis depending on its precise wording. However, this does not necessarily mean that arbitral tribunals do not consider how other MFN clauses have been interpreted before. Furthermore, although a large variety of MFN clauses appears in TIPs, they have a resemblance due to the basic standards of MFN clause that more favourable treatment would be accorded. For this reason, a few examples of MFN clauses will be provided to give a better insight into the scope and the application of the MFN clause in investment law.
Article 4 of the US Model BIT of 2012 so provides:
1. Each Party shall accord to investors of the other Party treatment no less favorable than that it accords, in like circumstances, to investors of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.
2. Each Party shall accord to covered investments treatment no less favorable than that it accords, in like circumstances, to investments in its territory of investors of any
non-5 Dolzer and Schreuer (n 1) 317
6 United Nations Conference on Trade and Development, 'Most-Favoured-Nation Treatment’' (United Nations 2010) UNCTAD/DIAE/IA/2010/1 p 19.
Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. 8
According to the MFN clause of the US Model BIT, the subject matter coverage is the investors of the Parties and their covered investments. The substantive coverage is not applicable to any type of activity related to investments or investors, rather, directed only to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.
The German Model BIT of 2008 covers the MFN treatment in Article 3(2) and differs from the US Model BIT with regards to its substantive coverage:
2. Neither Contracting State shall in its territory subject investors of the other Contracting State, as regards their activity in connection with investments, to treatment less favourable than it accords to its own investors or to investors of any third State. The following shall, in particular, be deemed treatment less favourable within the meaning of this Article:
1. Different treatment in the event of restrictions on the procurement of raw or auxiliary materials, of energy and fuels, and of all types of means of production and operation;
2. Different treatment in the event of impediments to the sale of products at home and abroad; and
3. Other measures of similar effect.
Measures that have to be taken for reasons of public security and order shall not be deemed treatment less favourable within the meaning of this Article.9
8 ‘2012 United States Model Bilateral Investment Treaty’
<http://investmentpolicyhub.unctad.org/Download/TreatyFile/2870> 9 ‘2008 Germany Model Bilateral Investment Treaty’
The list of limitations pertains mostly to the treatments that will primarily influence the financial aspect of an investment. Additionally, ‘public security and order' might operate as a defence mechanism for a host State as the scope of this expression is quite open-ended.
In the 2004 Model BIT of the Netherlands, the MFN clause is broad and combined with the treaty standard of national treatment in Article 3(2): ‘More particularly, each Contracting Party shall accord to such investments treatment which in any case shall not be less favourable than that accorded either to investments of its own nationals or to investments of nationals of any third State, whichever is more favourable to the national concerned.’10
Another type of MFN clause which draws more attention to a specific subclause of its MFN clause is the UK Model BIT. The MFN clause of the BIT provides in Article 3 that:
(1) Neither Contracting Party shall in its territory subject investments or returns of nationals or companies of the other Contracting Party to treatment less favourable than that which it accords to investments or returns of its own nationals or companies or to investments or returns of nationals or companies of any third State.
(2) Neither Contracting Party shall in its territory subject nationals or companies of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their investments, to treatment less favourable than that which it accords to its own nationals or companies or to nationals or companies of any third State. 11
The first two subclauses resemble the US and German Model BIT with regards to its substantive coverage, however: “(3) For the avoidance of doubt it is confirmed that the treatment provided for in paragraphs (1) and (2) above shall apply to the provisions of Articles 1 to 12 of this Agreement.”
Article 3(3) brings forth the probability of applying the MFN clause even to the dispute settlement clause in the BIT which is Article 8. Article 3(1) does not mention any
10 ‘2004 Netherlands Model Bilateral Investment Treaty’
<http://investmentpolicyhub.unctad.org/Download/TreatyFile/2859> 11 ‘2008 United Kingdom Model Bilateral Investment Treaty’ <http://investmentpolicyhub.unctad.org/Download/TreatyFile/2847>
limitations for the subject matter, the investments and the companies of the other Contracting Party. And the word ‘enjoyment’ of an investment for the investors in Article 3(2) has the capacity to be interpreted in a broad way.
In the light of the examples above, it is safe to say that creating a uniform application of the MFN clause in investment arbitration, considering their wide-ranging structure, is far from possible. Therefore, a diversity is very well expected in the awards of different tribunals. The question occurs when a tribunal is to give a decision with regards to the MFN clause whether it affects the other elements which are part of the BIT itself and the most controversial of these questions is the one about dispute settlement clauses. To be able to discuss this issue, the significance of consent and its scope will be dealt with because the controversy originates from the result of a modification on the dispute settlement clause that the consent is lost thereafter.
3. CONSENT
Consent plays a key role in creating legal obligations for States since they are sovereign equals and any rule that generates an obligation ‘must emanate from their own free will’.12 From this perspective, consent stands out as a concession or a compromise from the sovereignty of a State. Thus, the legitimacy of international law derives mainly from this basic requirement.13 According to Article 11 of Vienna Convention on the Law of Treaties (VCLT) ‘The consent of a State to be bound by a treaty may be expressed by signature, exchange of instruments constituting a treaty, ratification, acceptance, approval or accession, or by any other means if so agreed.’14 There are simplified forms of consent and consents that require more detailed and complex steps depending on the type of the international agreement. Generally, bilateral treaties include simplified forms of consent, for instance, States may agree to treat their signatures or exchange of instruments as consent. More complex forms of consent are used in multilateral treaties as a sequence of steps might be stipulated to follow; signing the treaty after negotiations and finally adopting it.15
Consent in international investment law is not as mild as in public international law when it comes to jurisdictional requirements of a tribunal. Because in investment arbitration,
12 The Case of the S.S. Lotus (France v Turkey) (Judgment) [1927] PCIJ para 44
13 Jutta Brunnée, ‘Consent’, Max Planck Encyclopedia of Public International Law (October 2010) 14 Vienna Convention on the Law of Treaties (VCLT) (23 May 1969) Article 11
for a tribunal to have jurisdiction, the Parties must give their consent explicitly16. Although signing or adopting the TIP is also a type of consent, arguments are mostly discussed over the existence of explicit consent of a host state and without such explicit wording the result will be the dismissal of the dispute due to lack of consent to arbitration.
In practice, there are three different methods to give consent; first, putting a consent clause in a direct agreement, second, including consent in national legislation, and third, giving consent to arbitration through a treaty.17 The last technique is observed in investment arbitration quite often as States provide their consent to investment arbitration through BITs most of the time.
Many BITs utilize the phrase ‘all disputes concerning investments’ or ‘any legal dispute concerning an investment’ to define their scope of consent to arbitration.18 In fact, this type of dispute settlement clause is the broadest expression in investment arbitration due to its general approach reflecting the intention of the Parties. There are four prototype provisions regarding the consent of the Parties in an international investment agreement. The first prototype is the one mentioned above, the dispute settlement clauses that permit ‘all’ or ‘any’ disputes concerning an investment. The second prototype restricts the scope of consent to three different cause of action under the subject matter of the dispute; disputes arising out of or relating to an investment authorization, an investment agreement, or an alleged violation of the treaty. This prototype is originated from the US Model BIT. The third prototype restricts the jurisdiction ratione materiae to the alleged violation of the treaty itself. And the last prototype confines jurisdiction ratione materiae to disputes on the quantum payable in case of a valid expropriation.19
4. THE APPLICATION OF THE MFN CLAUSE TO THE DISPUTE SETTLEMENT CLAUSE
It has been mentioned before that there is no uniform application of the MFN clause as it varies on a large spectrum. In order to provide protection for the investors in a general context, MFN clauses are utilized in three main ways: first, to bring in standards of treatment which do not exist in the basic treaty or to extend the existent scope of the standards of
16 Ibid
17 Dolzer and Schreuer, (n 1), 370-371 18 Ibid, 377
treatment; second, for the elimination of adverse provisions with regard to the Claimant; and third, to implement the more favourable treatments offered to third parties.20 It is widely accepted that MFN treatment provides substantive treatment as the Tribunal in Moïse Berschader v The Russian Federation concluded ‘It is universally agreed that the very essence of an MFN provision in a BIT is to afford to investors all material protection provided by subsequent treaties’21; on the contrary, rendering procedural protection is heavily disputed as it usually pertains to jurisdictional matters.
4.1 Comparison of Cases Regarding the Application of Most-Favoured-Nation Clause
Since, it is the focal spot of this analysis, importing procedural protection through MFN more specifically its application to a dispute settlement clause becomes prominent. The concept is rather controversial to be invoked before an arbitral tribunal because a State’s consent is at stake. Considering the MFN clauses which possess a broad scope, many tribunals have adopted an approach that allows the application to dispute settlement clauses. One example of this is the Garanti Koza v. Turkmenistan case, which will be discussed in the following22.
Garanti Koza was an English limited liability partnership that had signed a $100 million investment contract with Turkmenistan to plan and build 28 highway bridges and overpasses in Turkmenistan. The claims in the dispute arose out of measures taken by Turkmenistan concerning the Claimant’s obligations under the contract between Garanti Koza and Turkmenistan’s State Concern ‘Turkmenavtoyollary’ (TAY) and out of the Presidential Decree which was to award the Claimant a sum of $100 million for the fulfilment of the contract. Having started arbitration proceedings pursuant to the UK-Turkmenistan BIT, Garanti Koza asserted that the host state’s treatment of the company and its investment was contrary to the substantive provisions of the BIT. On its part, the Respondent claimed that the Tribunal had no jurisdiction over the dispute; that the claims were inadmissible; that the alleged acts were not attributable to the State of Turkmenistan; that the substantive claims had no merit; and that the requested damages were unsupported and overstated.23
20 David D Caron and Esme Shirlow, 'Most Favoured Nation Treatment – Substantive Protection in Investment Law' [2015], King's College London Law School Research Paper No 2015-23 8-10
21 Vladimir Berschader and Moïse Berschader v. The Russian Federation, SCC Case No 080/2004, Award (21 April 2006) para 179.
22 Garanti Koza LLP v Turkmenistan, ICSID Case No ARB/11/20, Award (19 December 2016). 23 Ibid, paras 4-6.
The Claimant asserted that the Respondent has used state powers not to comply with its obligations such as refusing to make payments, undertaking an attempt to stop the operation of the project and to make changes on the contract.
According to Turkmenistan, it had avoided to make payments because the application for the payment was not made in compliance with ‘CMETA’24 which is ‘a Russian standard unit pricing structure under which the work is valued by applying fixed prices or rates to the quantities of work done (for instance labour and material), as well as overheads and the profit margin.’25 With further ‘harassments’ and ‘threats’ to cancel the contract, the Claimant has withdrawn its investment from Turkmenistan.
The Claimant alleged that the Respondent has violated its obligations under the BIT in five ways; first, the Respondent had conducted an unlawful expropriation; second, the Claimant was treated against fair and equitable standard; third, the Responded had violated its duty to observe its obligations with regards to its relations with the Claimant (umbrella clause);fourth, “Turkmenistan’s unreasonable, unjustified, and arbitrary measures impaired the management, maintenance, use, enjoyment, and disposal of the Claimant’s investment”; and lastly, that the Respondent had failed to comply with its obligation to provide full protection and security.26
For our purposes, the main issue in this dispute was the objection by the Respondent for lack of consent. The provision subject to the dispute is Article 8 of the UK – Turkmenistan BIT:
(1) Disputes between a national or company of one Contracting Party and the other Contracting Party concerning an obligation of the latter under this Agreement in relation to an investment of the former which have not been amicably settled shall, after a period of four from written notification of a claim, be submitted to international arbitration if the national or company concerned so wishes.
24 Also spelled as SMETA 25 Ibid, para 89.
(2) Where the dispute is referred to international arbitration, the national or company and the Contracting Party concerned in the dispute may agree to refer the dispute either to:
(a) the International Centre for the Settlement of Investment Disputes (having regard to the provisions, where applicable, of the Convention on the Settlement of Investment Disputes between States and Nationals of other States, opened for signature at Washington DC on 18 March 19651 and the Additional Facility for the Administration of Conciliation, Arbitration and Fact-Finding Proceedings); or
(b) the Court of Arbitration of the International Chamber of Commerce; or (c) an international arbitrator or ad hoc arbitration tribunal to be appointed by a special agreement or established under the Arbitration Rules of the United Nations Commission on International Trade Law.
If after a period of four months from written notification of the claim there is no agreement to one of the above alternative procedures, the dispute shall at the request in writing of the national or company concerned be submitted to arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law
The Respondent argued that the BIT requires an agreement between the investor and the Contracting Party over where to submit the dispute. In the absence of an agreement, the Claimant can only submit its claims to an arbitral tribunal set up pursuant to the UNCITRAL Arbitration Rules. Since there was no agreement and the Claimant submitted its claim to ICSID arbitration rather than an UNCITRAL tribunal, there Respondent opined that consent to arbitration was lacking, thus, the Tribunal would not have jurisdiction to hear the claims. A participation in ICSID arbitration cannot be provided by attempting to import Turkmenistan’s consent through the MFN clause in UK – Turkmenistan BIT27.
Contrariwise, the Claimant asserted that the UK-Turkmenistan BIT guarantees that investors of each party shall not be subjected to a less favourable treatment than the investors of third parties with which Turkmenistan has entered into a BIT. Since Turkmenistan has
27 Garanti Koza LLP v Turkmenistan, ICSID Case No ARB/11/20, Decision on the Objection to Jurisdiction for Lack of Consent (3 July 2013) para 14.
consented in various investment agreements to a greater number of choices in dispute settlement mechanism where ICSID arbitration is also included; the Claimant therefore reasoned that such choices should be regarded as more favourable and Turkmenistan’s consent to ICSID arbitration should be constructed with the help of the MFN clause.28
The Tribunal held that issues related to consent in the jurisdictional phase of a dispute are governed by international law, therefore, consent should be established expressly in whatever form necessary. However, according to the Tribunal, this does not necessarily mean that State’s consent must be ‘clear and unambiguous’ because Vienna Convention on the Law of Treaties (VCLT) offers no such interpretation and requiring a ‘clear and unambiguous’ consent is impracticable on this dispute as both parties agreed on the application of Article 3129 of the VCLT. The article suggests that ‘the UK-Turkmenistan BIT is to be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.’30 On this point, the Tribunal shared the view of the Tribunal in Suez and Interaguas v. Argentina ‘that that dispute resolution provisions are subject to interpretation like any other provisions of a treaty, neither more restrictive nor more liberal’.31
In Suez and Interaguas v. Argentina32, the Claimants participated in the privatization
program launched by the federal government of Argentina at the beginning of 1989. The Claimants entered into a concession contract which gave it the opportunity to operate the water distribution and wastewater services in the Province of Santa Fe under a consortium which were to be formed as an Argentine company by the Claimants and three Argentine companies. After concluding a thirty-year concession contract for the control and the management of the water distribution and wastewater systems in the fifteen most important urban areas in the Province of Santa Fe in 1995, the federal government promulgated a law in 2002 to abrogate the currency board which linked the Argentine Peso to U.S. Dollars following other measures to tackle the effects of the serious economic and financial crisis erupted in 1999. The Claimants submitted that their investment suffered greatly from the
28 Ibid, para 15.
29 VCLT (n 14) Article 31
30 Garanti Koza, Decision on the Objection to Jurisdiction (n 27) para 20. 31 Ibid, para 22.
32 Suez, Sociedad General de Aguas de Barcelona S.A., and InterAguas Servicios Integrales del Agua S.A. v. The Argentine Republic, ICSID Case No ARB/03/17, Decision on Jurisdiction (16 May 2006).
consequences of these measures and filed for ICSID arbitration after multiple attempts for an amicable solution.
Among the Respondent’s jurisdictional objections was the alleged incompliance with the dispute settlement clause in the BIT at hand. According to Article 10 of Argentina-Spain BIT, the investor must first negotiate for six months and then seek a remedy before domestic courts before starting arbitration proceedings. The Claimants had not resorted to local remedies and asserted that the MFN clause in the BIT allowed them to benefit from the Argentina-France BIT which does not require investors to go to local courts. The relevant provision of the Argentina-Spain BIT provides as follows:
1. Each Party shall guarantee in its territory fair and equitable treatment of investments made by investors of the other Party.
2. In all matters governed by this Agreement, such treatment shall be no less favourable than that accorded by each Party to investment made in its territory by investors of a third country.
3. Such treatment shall not, however, extend to the privileges which either Party may grant to investors of a third State by virtue of its participation in: - A free trade area;
- A customs union: - A common market;
- A regional integration agreement; or
- An organization of mutual economic assistance by virtue of an agreement concluded prior to the entry into force of this Agreement, containing terms similar to those accorded by that Party to participants of said organization.’33
The Tribunal interpreted this provision in accordance with its ordinary meaning as stipulated in Article 31 VCLT. The Tribunal found that the clause expressly covers ‘all matters’ and the settlement of disputes is without a doubt a ‘matter’ under Argentina – Spain
BIT. For the Tribunal, the word ‘treatment’ is not defined in the BIT, the ordinary meaning should be taken into consideration. Within the context of investment, the term ‘includes the rights and privileges granted and the obligations and burdens imposed by a Contracting State on investments made by investors covered by the treaty.’ Given that French investors are not obligated to submit their claims to local courts before international arbitration, they receive a more favourable treatment than the Spanish investors. Since the MFN clause in Argentina – Spain BIT does not allow to investors of the Parties to receive less favourable treatment than the investors of third parties, the Claimants have the right to go to international arbitration under the same conditions as the French investors.34
Returning to the analysis of the Tribunal in Garanti Koza v. Turkmenistan, the Tribunal gave the opinion that although Article 25 of Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) requires ‘consent in writing’, there is no certain form of consent determined to give consent to arbitration. The Tribunal had the Article 8 of the UK-Turkmenistan BIT examined in two steps as Article 8(1) covering consent to arbitration and Article 8(2) giving the available arbitration systems to be resorted in case that the conditions of Article 8(1) are met.35
According to the Tribunal, Article 8(1) contains three conditions, provided that these conditions are satisfied, there is consent to arbitration:
a) The investor ‘so wishes’ to submit a claim to “international arbitration”.
b) Concerning the disputes which are not settled within four months of written notification of the claim.
c) The dispute must arise out of an obligation under the UK-Turkmenistan BIT.
Fulfilment of Article 8(1) is not disputed between the parties and the majority of the Tribunal considered this as an establishment of unequivocal and undoubtful consent, though, the Article does not refer to any kind of dispute settlement method where the investors of the parties shall submit their claims. This is given under Article 8(2) so provides:
34 Ibid, para 55.
(2) Where the dispute is referred to international arbitration, the national or company and the Contracting Party concerned in the dispute may agree to refer the dispute either to:
(a) the International Centre for the Settlement of Investment Disputes (having regard to the provisions, where applicable, of the Convention on the Settlement of Investment Disputes between States and Nationals of other States, opened for signature at Washington DC on 18 March 1965 and the Additional Facility for the Administration of Conciliation, Arbitration and Fact-Finding Proceedings); or
(b) the Court of Arbitration of the International Chamber of Commerce; or (c) an international arbitrator or ad hoc arbitration tribunal to be appointed by a special agreement or established under the Arbitration Rules of the United Nations Commission on International Trade Law.
At this point, the wording of the Article 8(2) illustrates a further step where there is an application for arbitration, though, the institution is not yet set. This can be derived from the wording ‘[w]here the dispute is referred to international arbitration’, as the Tribunal shares the same approach towards this expression. Article 8(2) gives the meaning that the requirements for the consent of the Host State is fulfilled and the ‘national or company concerned’ wished so to bring the dispute before an arbitral tribunal. The Parties to the dispute shall hereby negotiate and reach an agreement on where to submit their claims. They ‘may agree’ to refer the dispute to the following options in the provision. The wording ‘may agree’ refers to a bivious solution that they may also not agree on one of the given dispute settlements. This interpretation is strengthened by the last paragraph of Article 8:
“If after a period of four months from written notification of the claim there is no agreement to one of the above alternative procedures, the dispute shall at the request in writing of the national or company concerned be submitted to arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law as then in force. The parties to the dispute may agree in writing to modify these Rules.”
The last paragraph demonstrates that if the Parties do not choose to voluntarily agree on the options in Article 8(2) in four months, then alternatively, at the request of the ‘national or company concerned’ has the liberty to file for UNCITRAL arbitration. The general meaning inferred from Article 8(2) and the last paragraph of the Article is that the Parties are allowed to agree on arbitration methods mentioned in (a), (b) and (c). Otherwise, if the Claimant still wishes and there is no agreement between the Parties, the only choice left is an UNCITRAL arbitration. The ordinary meaning of Article 8 gives rise to reach an understanding that Article 8(1) contains the consent and its requirements. Following subclauses determine the method of the arbitration and its prerequisites. Given that the path to arbitration is open for the Claimant regardless of coming to an agreement as prescribed in Article 8(2), the only drawback remains for the Claimant to be lodged in UNCITRAL arbitration in the absence of a consensus.
In this dispute, the Tribunal made an analysis which divides the dispute settlement clause into two parts, namely the first part provides consent to arbitration and the second part concerns methods of arbitration. The dissenting opinion of the Tribunal’s decision on its jurisdiction argues that Article 31 of the VCLT does not encompass an interpretation that could break apart a provision from its entirety. Rather; the article suggests an interpretation towards the whole text of the provision.36 It seems that is the main breakpoint of the discussion between the majority and the dissent. Notwithstanding the decision of the Tribunal, the dissenting opinion is not accurate in such regard that the provision is to be interpreted as a whole. Because Article 31 of the VCLT does not articulate this type of interpretation as it focuses on the ‘ordinary meaning to be given to the terms of the treaty’. Clearly, the Article specifically mentions the ‘terms’ and the ‘treaty’ to put out a meaning that does not limit the interpreter to narrow verges as advocated in the dissenting opinion.
In accordance with the award of Maffezini v. Spain in which it is concluded that although the treaty has not explicitly envisaged the procedural protection deriving from the MFN treatment, this intention can be deduced from the wide scope of the MFN provision which was to cover ‘all matters’ under that agreement. Furthermore, and while there is no legitimate ground for the term ‘matters’ to include only matters related to substantive protection37, it is not possible to create new rights through an MFN clause. However, the
36 Garanti Koza LLP v Turkmenistan, ICSID Case No ARB/11/20, Dissenting Opinion of the Decision on the Objection to Jurisdiction for Lack of Consent (03 July 2013) para 12.
37 Emilio Agustín Maffezini v. The Kingdom of Spain, ICSID Case No ARB/97/7, Decision of the Tribunal on Objections to Jurisdiction (25 January 2000) paras 41-53.
Tribunal in Garanti Koza did not find it necessary to discuss this further as it considered that the UK – Turkmenistan BIT had already given this right of bringing a case before an international arbitral tribunal through the consent contained in Article 8(1). In this case, there is room for the improvement of this right which is the purpose of most favoured nation treatment in its essence.38 Where there is a possibility of applying the MFN clause, it becomes necessary to analyse its scope to decide whether this is suitable to put into practice. Article 3 of the UK – Turkmenistan BIT contains the MFN clause:
(1) Neither Contracting Party shall in its territory subject investments or returns of nationals or companies of the other Contracting Pary to treatment less favourable than that which it accords to investments or returns of its own nationals or companies or to investments or returns of nationals or companies of any third State.
(2) Neither Contracting Party shall in its territory subject nationals or companies of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their investments, to treatment less favourable than that which it accords to its own nationals or companies or to nationals or companies of any third State.
(3) For the avoidance of doubt it is confirmed that the treatment provided for in paragraphs (1) and (2) above shall apply to the provisions of Articles 1 to 11 of this Agreement.
Article 3 envisages a broad definition for a more favourable treatment. It is striking inside the article is the subclause (3) where there is an express statement for the scope of the MFN clause. ‘For the avoidance of doubt’, the Parties to the BIT confirmed the further application of the MFN clause to the specific provisions of the Agreement. The dispute settlement clause is among these specific provisions, and the Tribunal find the power in itself to be able to apply the MFN clause to the dispute settlement clause of the BIT. While the Respondent opined against this as it regarded the MFN clause as broad, though the Tribunal disagreed with the Respondent on that and even if the MFN clause is broad, it is in nature of the MFN clause to be broad and the MFN treatment exists to rule out the negative effects of the Treaty for the investors. The Tribunal shared the holding of the Tribunal in Siemens v.
Argentina that ‘the purpose of the MFN clause is to eliminate the effect of specially negotiated provisions unless they have been excepted.’ According to the Tribunal in Siemens v. Argentina, if there is no exception for the application of the MFN clause to the provisions of the basic treaty, then there is no reason to prevent its main function. 39 If so, why is this matter disputed heavily? Regarding the awards that were given oppositely to the abovementioned, Plama v. Bulgaria will be examined in order to get a better view of the imbroglio in the investment arbitration world.
Plama Consortium Limited, the Claimant, was a company established in Cyprus purchased the EuroEnergy Holding OOD (EEH)’s 49,837,849 shares of Plama AD which is a Bulgarian company owning an oil refinery in Bulgaria. The shares represented the 96.78% of Nova Plama’s (the company changed its name to Nova Plama AD later on) capital. In 2002, Plama Consortium Limited (PCL) filed for arbitration over claims around US$300 million against Bulgaria, arguing that it had violated its obligations under the BIT between Bulgaria and Cyprus and under the Energy Charter Treaty (ECT).40
The relevant component of this case to this work is that the Claimant argued that there was consent to ICSID arbitration with the help of the MFN clause in the Cyprus-Romania BIT. The Claimant reasoned that it qualified as an investor under the BIT which contains an MFN clause that applies to all aspects of ‘treatment’ and that ‘treatment’ covers settlement of disputes provisions in other BITs to which Bulgaria is a Contracting Party.41 The Claimant attempted to utilize the MFN clause in the BIT due to the narrow scope of the dispute settlement clause in Article 4: “Each Contracting Party cannot expropriate investments made under the present Agreement except for a purpose which is to the public interest in accordance with the general law for compulsory acquisition and upon the payment in cash of a just and equitable compensation.”
Article 4 of the Cyprus – Bulgaria BIT allows arbitration only with regards to expropriation. Article 4.1 restricts the investors even more:
The legality of the expropriation shall be checked at the request of the concerned investor through the regular administrative and legal procedure
39 Siemens A.G. v. The Argentine Republic, ICSID Case No ARB/02/8, Decision on Jurisdiction (English) (3 August 2004) para 106.
40 Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction (8 February 2005) para 21.
of the Contracting Party that had taken the expropriation steps. In cases of dispute with regard to the amount of the compensation, which disputes were not settled in an administrative order, the concerned investor and the legal representatives of the other Contracting Party shall hold consultations for fixing this value. If within 3 months after the beginning of the consultations no agreement is reached, the amount of the compensation at the request of the concerned investor shall be checked either in a legal regular procedure of the Contracting Party which had taken the measure on expropriation or by an international "Ad Hoc' Arbitration Court.
Article 4.1 of the BIT requires the investor to apply to administrative remedies prior to arbitration. After this stage, representatives of the Contracting Parties are required to hold consultations. Then, the investor is given a choice between an international ad hoc arbitral tribunal. This arbitral tribunal can be classified as an UNCITRAL tribunal considering Articles 4.2 – 4.5. However, the Claimant attempted to undertake a different arbitral tribunal.42 The Claimant deemed it necessary to invoke the MFN clause in the BIT to unfold more selections for the dispute settlement clause. The MFN clause reads as follows in Article 3 of the BIT:
1. Each Contracting Party shall apply to the investments in its territory by investors of the other Contracting Party a treatment which is not less favourable than that accorded to investments by investors of third states. 2. This treatment shall not be applied to the privileges which either Contracting Party accords to investors from third countries in virtue of their participation in economic communities and unions, a customs union or a free trade area.
The Claimant contested that the MFN is a broad provision and gave an example from Free Trade of the Americas (FTAA) draft of November 2003, Footnote 13 which explicitly excludes the application of MFN to dispute settlement clauses and mentions the decision in Maffezini v. Spain:
‘The Parties note the recent decision of the arbitral tribunal in the Maffezini (Arg.) v. Kingdom of Spain, which found an unusually broad most favored
nation clause in an Argentina-Spain agreement to encompass international dispute resolution procedures.[…] The Parties share the understanding and intent that this clause does not encompass international dispute resolution mechanisms such as those contained in Section C.2.b (Dispute Settlement between a Party and an Investor of Another Party) of this Chapter, and therefore could not reasonably lead to a conclusion similar to that of the Maffezini case.’
The Tribunal did not recognize this type of reasoning which indicated to comprise dispute settlement clauses under the scope of MFN clause by virtue of an a contrario interpretation.43 The Tribunal required an explicit incorporation to apply MFN treatment in such respect as in U.K. Model BIT Article 3(3) which is mentioned above.
The Tribunal saw doubt in determining a more favourable treatment in dispute resolution provisions due to the lack of an objective test to apply in this issue. The Claimant claimed that it was quite clear to decide that bringing the dispute to multiple available arbitration platforms should be more favourable than to be restricted by a single ad hoc tribunal which is only allowed to decide on the quantum payable.44 The dispute settlement clause of Bulgaria-Finland BIT which the Claimant strived to incorporate requires the investors to settle the dispute amicably at first and if there is no settlement to be reached within 3 months, then, the investors are given three choices for the settlement of their disputes: ‘to submit the dispute to the competent court of the Contracting Party in whose territory the investment was made, to the International Center for Settlement of Investment Disputes (ICSID) […] in case both Contracting Parties are parties to the Convention, to an ad-hoc arbitral tribunal to be established under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL).’ Unlike the Cyprus – Bulgaria BIT, this BIT does not obligate the Claimant to follow certain procedures and gives the preferential right to choose one of the dispute settlement methods regardless of the order except for amicable settlement of the dispute.
As pointed out above, multiple choices of methods of dispute settlement available for the Claimant is regarded as more favourable in which the BIT hereby contains so. Contrarily, the Cyprus – Bulgaria BIT is quite restrictive for the Claimant. There should be no doubt that
43 Ibid, para 203. 44 Ibid, para 208.
settling an investment dispute is easier and less gruelling, thus, it should be contemplated as more favourable.
The Tribunal held that ‘[i]t is one thing to add to the treatment provided in one treaty more favorable treatment provided elsewhere. It is quite another thing to replace a procedure specifically negotiated by parties with an entirely different mechanism.’45
It is quite difficult to follow the reasoning of the Tribunal at this point because both BITs have the same options as to settling the dispute at the local courts or at an UNCITRAL tribunal. In accordance with the nature of the MFN treatment which is, in this context, to extend the existing rights, considering adding new options and easement facilities on the dispute settlement clause at hand as replacing the negotiated mechanism with an entirely different mechanism is not a correct way of interpreting the situation. In this case, one is able to question incorporating all kinds of more favourable treatments including the ones that are consistently accepted to be used as well.
The Claimant submitted multiple cases to support its claim on MFN and one of them was the Ambatielos case. In that case46, the Commission of Arbitration supported the view that MFN clause applies to jurisdictional provisions of a third treaty. The Parties in Ambatielos diverged on their views as to whether ‘administration of justice’ shelters ‘commerce and navigation’ which was embedded in the MFN clause of Treaty of Commerce and Navigation of 1886 between Greece and Great Britain. Although the Commission of Arbitration decided that it did; the Tribunal resolved that this ruling pertained to a substantive protection concerning a denial of justice in domestic courts. However, the Commission of Arbitration expressly mentioned the application of MFN clause on jurisdictional provisions and no further explanation on this issue is given by the Tribunal. The fact that a contemporary issue of the time of the Plama case might not fit to a decision which was given fifty years ago, though, more elaboration rather than a mere opinion is needed to clarify the disagreement.
The Tribunal in Plama criticized the Tribunal in Maffezini on its opinion on projected benefits of such application of MFN: “The fact that the application of the most favoured nation clause to dispute settlement arrangements in the context of investment treaties might result in the harmonization and enlargement of the scope of such arrangements.”. The
45 Ibid, para 209.
Tribunal opined that this type of application of MFN would lead to a chaotic situation and be counterproductive to harmonization because it would cause numerous probabilities of dispute settlement provisions which the host state has not exclusively agreed to. Notwithstanding the discord on this opinion, it should be safe to say that the host state has also not agreed ‘a large number of permutations’ of substantive treatments which are generally allowed to be imported by the Tribunals.
It is fair to find the Tribunal’s confusion on the Maffezini Tribunal’s approach to the limit of the application of MFN:
[T]here are some important limits that ought to be kept in mind. As a matter of principle, the beneficiary of the clause should not be able to override public policy considerations that the [C]ontracting [P]arties might have envisaged as fundamental conditions for their acceptance of the agreement in question, particularly if the beneficiary is a private investor, as will often be the case. The scope of the clause might thus be narrower than it appears at first sight.47
The Tribunal in Maffezini was not clear to determine what ‘public policy considerations’ might concern with regard to this issue. A few examples are given; however, they lack the necessary explanation and legal basis as to their incompatibility to whichever aspect of public policy considerations of the host state. Consequently, the subsequent tribunals had difficulty perceiving the outline of the public policy considerations.
Considering the analyses made in the awards, the result comes out as it is not impossible to utilize an MFN clause on the dispute settlement clause, though, according to some decisions it is quite difficult to do so with regard to strict and high demanding requirements. Thus, a great deal of the issue depends on the wording of the MFN and the scope of the clause. Only some of the BITs provide a clarification whether an MFN applies to the dispute settlement clauses. Non-presence of this further remark will lead to additional investigation towards the breadth of the MFN clause.
4.2 Determining the Scope of MFN Clause
The tribunals on different line of cases usually dealt with the scope of an MFN clause. As the wording of the clause stands out due to its significant effect unto the issue, additional materials were useful as well. While interpreting the MFN clause, different methods are used by various tribunals.
The Tribunal in Austrian Airlines v. Slovak Republic contemplated the MFN clause as to be subjected to neither restrictive nor expansive interpretation but as to be interpreted with good faith and objectively in line with the Tribunal’s approach in Suez and Interaguas v. Argentina on interpreting the dispute settlement clause. The Tribunal made reference to the decision Middle East Limited v. Egypt48 at this point and stated that it must interpret in such a
way which is ‘in accordance with the usual rules of treaty interpretation set forth in Articles 31 and 32 of the VCLT, taking into account inter alia the wording of Article 3 of the Treaty, its context, the object and purpose of the Treaty, as well as the relevant supplementary means of interpretation.’49
In ordinary and undisputed circumstances, a clause that contains a broad expression such as ‘concerning all matters’ should be able to apply to all matters due to Article 31 of the VCLT which requires the ordinary meaning of the expression to be used while interpreting the clause. However, the issue is disputed because the Parties mostly dispute on the very issue discussed above due to the disagreement on the object and purpose of the MFN clause in its essence. The Tribunal in Accession Mezzanine v. Hungary demonstrated that ‘MFN clauses are not and should not be interpreted or applied to create new causes of action beyond those to which consent to arbitrate has been given by the Parties’50. The Tribunal considers a creation such as this would be contrary to the object and purpose of the treaty which naturally reflects the will of the Contracting Parties. It is further reckoned by the Tribunal that ‘an investor may properly rely only on rights set forth in the basic treaty, meaning the BIT to which the investor’s home state and the host state of the investment are directly parties, but not more than that.’51.
48 Southern Pacific Properties (Middle East) and Southern Pacific Properties Ltd v. the Arab Republic of Egypt, ICSID Case No ARB/84/3, Decision of Jurisdiction (14 April 1988) 3 ICSID Reports 142/4.
49 Austrian Airlines v. Slovak Republic, UNCITRAL, Award, (20 October 2009) (redacted) para 121.
50 Accession Mezzanine Capital L.P. and Danubius Kereskedohaz Vagyonkezelo v. Hungary, ICSID Case No ARB/12/3, Decision on Respondents Objection Under Arbitration Rule 41(5), (16 January 2013) para 73. 51 Ibid, para 74.
This view is in accordance with the nature of the MFN treatment pursuant to which extending the rights of the investor unto the more favourably treated investor of a third party. One can also observe a far stretched view on the scope of the MFN treatment by Schreuer. He does not find the argument convincing which suggests that MFN is inapplicable when the basic treaty does not permit or restricts granting consent. Because, an MFN clause is not a rule of interpretation which is only included to this process when the wording of the basic treaty is ambiguous. Rather, MFN ‘is intended to endow its beneficiary with rights that are additional to the rights contained in the basic treaty'52. It would be exceedingly burdensome to accept approach such as Schreuer’s because it collides the importance and the role of MFN and the object and purpose of the Treaty, the title-holder in this clash should be the creator of the basic treaty pursuant to VCLT Article 31. As MFN is not a standard qualifying as jus cogens, the agreement of the Parties forms a lex specialis over the significance of MFN standard.
In the Plama v. Bulgaria line of cases, it has been strictly put forward in the awards that the MFN clause must contain an explicit inclusion illustrating a possibility of application to a dispute settlement clause. On the contrary, the cases that follow the reasoning in Maffezini state that the dispute settlement provisions are very well within the scope of the MFN treatment when it is broad enough to shelter. The difference between Plama line of cases and Maffezini line of cases is not related to the question whether the scope of the MFN is ample or not; rather, Plama rationalization pertains to the explicit nature of the wording where it lacks that preciseness, then, there is no margin to apply the MFN treatment. Over this argument, Brower gives his dissenting opinion on the Tribunal’s finding in Austrian Airlines v. Slovak Republic that there is no ambiguity deriving from the meaning of treatment concerning the inclusiveness of MFN towards procedural rights as well as substantive rights. Although the provision is not specific, it leaves no vagueness by means of Article 32(a) of the VCLT. For that reason, obviating the use of travaux préparatoires is necessary. Brower expresses that the conclusive question on the issue is not the scope of the dispute settlement clause but of the MFN clause. It is interesting that Brower herein gives insight on the Slovak Republic’s policy in investment.53 This might constitute a solution-oriented proposal to determine the public policy consideration limitation of the MFN clause mentioned in Maffezini. Because when interpreting the provisions of the BIT, Article 31 of the VCLT
52 Christoph Schreuer, The ICSID Convention: A Commentary (Cambridge University Press 2009) 248 53 Austrian Airlines v. Slovak Republic, UNCITRAL, Separate Opinion of Charles N. Brower, (20 October 2009) para 4.
requires to consider the object and purpose of the treaty. This also leads to analysing the general behaviour of the Contracting Parties on the issue, including an examination on travaux préparatoires in case that the wording of the MFN clause is broad, and the object and purpose of the treaty requires an expansive investigation such as this to determine the intention of the drafters.
It is demonstrated by the tribunals of numerous cases that a balanced interpretation should be conducted while determining the scope of the MFN clause. As it might be formulated quite extensively, it should not be able to create new rights which would require further acknowledgement such as an express wording of consent in dispute settlement provision. The crucial point where tribunals lack a consensus is the exclusiveness of the MFN clause. Should it explicitly include that it applies to, for example, dispute settlement clause or should it apply in any case unless there is an explicit exclusion from its scope that it doesn’t apply?
4.3 Explicit Inclusion or Exclusion Within the Provisions of the Basic Treaty?
The reason for the necessity of the analysis made above is that it reflects a practically visible articulation of the issue by the states themselves. They react to the main question of this debate whether the necessary step to take to open the way for the MFN clause to apply to the dispute settlement clause is conducting an explicit inclusion or an exclusion on the article. For example, The U.K. Model BIT is the least controversial of all with respect to the application of MFN because it has a further inclusion of the provisions of the basic treaty. An attempt to prevent the use of MFN treatment on the conditions of dispute settlement can be seen in Article 3.2 of the U.K. – Colombia BIT of 2010:
‘The most favourable treatment to be granted in like circumstances referred to in this Agreement does not encompass mechanisms for the settlement of investment disputes, such as those contained in Articles IX and X of this Agreement, which are provided for in treaties or international investment agreements.’
Similar practice is also available in Article 5.4 of the Switzerland – Georgia BIT of 2014: ‘It is understood that the most-favoured nation treatment referred to in paragraphs (2)
and (3) does not apply to investment dispute resolution mechanisms provided by this agreement or by other international agreements made by the Contracting Party concerned.’54
States also conclude BITs that prevent recourse to other treaties altogether. For instance, in Annex III.1 of the Canada – Burkina Faso FIPA of 2015 reads: ‘Article 5 (MFN Treatment) does not apply to treatment accorded by a Party under a bilateral or multilateral international agreement in force on or signed prior to the date on which this Agreement came into effect.’ While this provision forbids the MFN treatment prior to the treaty’s entry into force date, it has no limitations for subsequent treaties.
In another example, the Comprehensive Economic and Trade agreement (CETA) signed between Canada and the European Union excludes even substantive rules along with the procedural rules from the scope of the MFN treatment:
‘For greater certainty, the “treatment” referred to in paragraphs 1 and 2 does not include procedures for the resolution of investment disputes between investors and states provided for in other international investment treaties and other trade agreements. Substantive obligations in other international investment treaties and other trade agreements do not in themselves constitute “treatment”, and thus cannot give rise to a breach of this Article, absent measures adopted or maintained by a Party pursuant to those obligations.’55
These recent conducts show that states deemed it necessary to add explicit exclusions instead of relying on the viewpoint of the Plama line of cases that the application of MFN should exclusively utter its sphere of application. In the words of Radi, “[s]tates bear the responsibility of dealing with the legal consequences of the inclusion of the clause. If they are unwilling to drive away the ‘Trojan Horse’, it is incumbent upon them to prevent the soldiers from destroying the city, by adopting, for example, conditional MFN clauses.”56
54 Suzy H. Nikièma, IISD Best Practices Series: The MFN Clause in Investment Treaties, (February 2017), p 26
55 Ibid, p 27 56 Supra (n 3), p 18
4.4 The Limits to the MFN Clause within the Context of the Issue
The risk of the MFN treatment is comprised of bearing the possibility of providing a treatment to the investor of a Contracting Party which was not assured in the basic treaty. From a different view, this is the object of an MFN clause, in its essence, this treatment is given to the ‘most-favoured’ interlocutor of the Contracting Party. A basic approach would expect MFN clauses not to exist in the majority of the treaties because it has a massive effect of importing treatments and states should be extra careful when integrating an MFN clause into a treaty, though, many BITs contain an MFN clause. However, this does not necessarily mean that a clause with no limits and a broad scope has no boundaries for its application. Otherwise, a tremendously powerful clause would carry a potential to amend all the provisions of a treaty or replace from its entirety without any restrictions.57
In Austrian Airlines v. Slovak Republic, it was ruled that there is no conceptual reason as to preclude MFN treatment to provide only substantive treatment and to rule out any procedural protections. The Tribunal noted that application of MFN to procedural protections is widely accepted by other arbitral tribunals.58 The question arises herein to what extent the MFN treatment is applicable to dispute settlement clause as it is a part of the ‘procedural protection’.
In the light of the Ambatielos decision, MFN clauses are applied in such circumstances where they share the same subject-matter guided by the ejusdem generis principle. The Ambatielos judgment puts a restrictive annotation on the MFN treatment with respect to ejusdem generis principle. This limitation concerns not the subject matter of the treaty but of the clause itself. When the subject matter of the article is not determined specifically under ejusdem generis, then the nature of the treaty or object and purpose of the treaty shall be able to provide the subject matter for the clause.59 This can be the case with broad MFN clauses that span ‘all matters’. Since the investment agreements generally seek to protect and promote the investments of the investors of the Contracting Parties, the outline of the interpretation should be within this context, definitely not ‘all matters’.
57 Tony Cole, 'The Boundaries of Most Favored Nation Treatment in International Investment Law' [2012] 33(3) Michigan Journal of International Law 560
58 Supra (n 49) para 124
59 Marie-France Houde, MFN Treatment in International Investment Law, Organization for Economic Co-operation & Development (OECD), International Investment Law: A Changing Landscape (2005) p 142-143
The issue hereof is firmly connected to the ‘public policy considerations’ mentioned in Maffezini case because the dispute settlement clause contains the voluntas of the host state and one should be cautious when making changes on this provision even the power to do it is derived from another provision in the same treaty. The nature of the MFN treatment provides a more favourable treatment which does not exist in the basic treaty or to extend the scope of the pre-existing treatments under the same subject matter.60 However, creating new rights with the help of the MFN clause would be contrary to the ejusdem generis principle. The reason is that a different right relates to a different subject matter because a different subject matter decomposes the relevancy of MFN from the dispute settlement clause due to their projectile coverage of dissimilar subjects and MFN treatment cannot stretch up to this as it is operated by this principle under which is obligatory to stay within the same subject matter. Whether a requested treatment creates a new right or not will require a case by case analysis by reason of the issue’s dependency on the scope of the MFN clause where there is no existing unity.
5. CONCLUSION
The issue of application of MFN treatment to dispute settlement clauses is rather delicate especially because the clause contains the consent of the host state and modifying it usually results in assertations that the consent to arbitration would be removed in case of such operation in international arbitration cases. The debate was followed in this research within the light of two relatively major cases in international investment law within the context of the problem at hand; Garanti Koza v. Turkmenistan and Plama v. Bulgaria.
It was observed by the analyses of the tribunals in both cases that they are aware of the sensitivity of the subject and there was much effort to remain impartial as not to be seen pro-investor or pro-state. However, the dissociation has mostly been framed around these two elements of dispute settlement mechanisms. The main objective of this research was to disintegrate the subject from the ongoing brush of favouritism. For this reason, the outline of the MFN treatment is highly important.
As it is largely disputed to provide procedural protection through MFN treatment, various examples are shown to illustrate that it depends on the tribunal’s approach to the issue. In Garanti Koza, the Tribunal followed a two-step analysis on the dispute settlement
